As filed with the Securities and Exchange Commission on September 28, 2006
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2006
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-15002
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ICICI BANK LIMITED
(Exact name of registrant as specified in its charter)
Vadodara, Gujarat, India
(Jurisdiction of incorporation or organization)
ICICI Bank Towers
Bandra-Kurla Complex
Mumbai 400051, India
(Address of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Equity Shares of ICICI Bank Limited(1)............... New York Stock Exchange
American Depositary Shares, each representing
two Equity Shares of ICICI Bank Limited,
par value Rs. 10 per share........................... New York Stock Exchange
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(1) Not for trading, but only in connection with the registration of American
Depositary Shares representing such Equity Shares pursuant to the
requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
The number of outstanding Equity Shares of ICICI Bank Limited as of March 31,
2006 was 892,399,231.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [X] No [_]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes [X] No [_]
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer [_]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [_] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
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TABLE OF CONTENTS
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Page
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Cross Reference Sheet.....................................................ii
Certain Definitions........................................................1
Forward-Looking Statements.................................................2
Exchange Rates.............................................................3
Risk Factors...............................................................4
Business..................................................................17
Overview.............................................................17
History..............................................................18
Shareholding Structure and Relationship with the
Government of India .................................................18
Strategy.............................................................20
Overview of ICICI Bank's Products and Services.......................20
Funding..............................................................29
Risk Management......................................................32
Loan Portfolio.......................................................45
Classification of Loans..............................................50
Subsidiaries and Joint Ventures......................................56
Technology...........................................................58
Competition..........................................................60
Employees............................................................62
Properties...........................................................63
Legal and Regulatory Proceedings.....................................64
Selected Consolidated Financial and Operating Data........................67
Operating and Financial Review and Prospects..............................72
Management...............................................................107
Overview of the Indian Financial Sector..................................125
Supervision And Regulation...............................................136
Exchange Controls........................................................158
Market Price Information.................................................161
Restriction on Foreign Ownership of Indian Securities....................163
Dividends................................................................165
Taxation.................................................................167
Presentation of Financial Information....................................172
Additional Information...................................................174
Index to Consolidated Financial Statements...............................F-1
Exhibit Index..........................................................Exh-1
i
CROSS REFERENCE SHEET
Form 20-F Item Number and Caption Location Page
--------- ----------------------- -------- ----
Part - I
1 Identity of Directors, Senior
Management and Advisers Not applicable
2 Offer Statistics and Expected
Timetable Not applicable
3 Key Information Selected Consolidated Financial and Operating Data.. 67
Exchange Rates...................................... 3
Risk Factors........................................ 4
4 Information on the Company Business............................................ 17
Operating and Financial Review and
Prospects--Capital Expenditure...................... 96
Operating and Financial Review and Prospects--Effect
of Other Acquisitions............................... 74
Operating and Financial Review and
Prospects--Segment Revenues and Assets.............. 97
Overview of the Indian Financial Sector.............125
Supervision and Regulation..........................136
5 Operating and Financial
Review and Prospects Operating and Financial Review and Prospects........ 72
Business--Risk Management........................... 32
Business--Funding................................... 29
6 Directors, Senior Management and
Employees Management..........................................107
Business--Employees................................. 62
7 Major Shareholders and Business--Shareholding Structure and Relationship
Related Party Transactions with the Government of India........................ 18
Operating and Financial Review and
Prospects--Related Party Transactions............... 99
Management--Compensation and Benefits to Directors
and Officers--Interest of Management in Certain
Transactions........................................124
Management--Compensation and Benefits to Directors
and Officers--Loans.................................123
Market Price Information............................161
Note B.2 in Notes to Consolidated Financial
Statements..........................................F-35
ii
8 Financial Information Report of Independent Registered Public Accounting
Firm................................................F-2
Consolidated Financial Statements and the notes
thereto.............................................F-3
Operating and Financial Review and Prospects-- Major
Events Affecting Results and Financial Condition.... 73
Business--Legal and Regulatory Proceedings.......... 64
Dividends...........................................165
9 The Offer and Listing Market Price Information............................161
Restriction on Foreign Ownership of Indian
Securities..........................................163
10 Additional Information Additional Information..............................174
Exchange Controls...................................158
Taxation............................................167
Restriction on Foreign Ownership of Indian
Securities..........................................163
Dividends...........................................165
Subsidiaries and Joint Ventures..................... 56
11 Quantitative and Qualitative Business--Risk Management--Quantitative and
Disclosures About Market Risk Qualitative Disclosures About Market Risk........... 36
12 Description of Securities Other
than Equity Securities Not applicable
Part II-
13 Defaults, Dividend Arrearages and
Delinquencies Not applicable
14 Material Modifications to the
Rights of Security Holders and Use
of Proceeds Not applicable
15 Controls and Procedures Business--Risk Management--Controls and
Procedures...........................................45
16 [Reserved] Not applicable
16A Audit Committee Financial Expert Management--Corporate Governance--Audit Committee...116
16B Code of Ethics Management--Corporate Governance--Code of Ethics....118
16C Principal Accountant Fees and Management--Corporate Governance--Principal
Services Accountant Fees and Services........................118
16D Exemptions from the Listing
Standards for Audit Committees Not applicable
16E Purchases of Equity Securities by Business--Shareholding Structure and Relationship
the Issuer and Affiliated with the Government of India.........................18
Purchasers
iii
Part III-
17 Financial Statements See Item 18
18 Financial Statements Report of Independent Registered Public Accounting
Firm.................................................F-2
Consolidated Financial Statements and the notes
thereto..............................................F-3
19 Exhibits Exhibit index and attached exhibits..................Exh-1
iv
CERTAIN DEFINITIONS
ICICI Limited, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited amalgamated with and into ICICI Bank Limited, effective March
30, 2002 for accounting purposes under generally accepted accounting principles
in India ("Indian GAAP"). In this annual report, all references to "we", "our"
and "us" are to ICICI Bank Limited and its consolidated subsidiaries and other
consolidated entities under Indian GAAP subsequent to the amalgamation.
References to specific data applicable to particular subsidiaries or other
consolidated entities are made by reference to the name of that particular
entity. References to "ICICI Bank" are, as the context requires, to ICICI Bank
Limited on an unconsolidated basis subsequent to the amalgamation, to ICICI
Bank Limited on an unconsolidated basis prior to the amalgamation, or to both.
References to "ICICI" are to ICICI Limited and its consolidated subsidiaries
and other consolidated entities under Indian GAAP prior to the amalgamation.
References to "ICICI Personal Financial Services" are to ICICI Personal
Financial Services Limited. References to "ICICI Capital Services" are to ICICI
Capital Services Limited. References to the "amalgamation" are to the
amalgamation of ICICI, ICICI Personal Financial Services and ICICI Capital
Services with and into ICICI Bank. References to "the Scheme of Amalgamation"
are to the Scheme of Amalgamation of ICICI, ICICI Personal Financial Services
and ICICI Capital Services with ICICI Bank sanctioned by the High Court of
Gujarat at Ahmedabad on March 7, 2002 and by the High Court of Judicature at
Bombay on April 11, 2002 and approved by the Reserve Bank of India on April 26,
2002.
The amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with us was accounted for using the purchase method of
accounting under Indian GAAP. The date of the amalgamation for accounting
purposes under Indian GAAP was the Appointed Date under the Scheme of
Amalgamation approved by the High Courts of Bombay and Gujarat and the Reserve
Bank of India, which was March 30, 2002. Accordingly, our profit and loss
account prepared in accordance with Indian GAAP for fiscal 2002 includes the
results of operations of ICICI, ICICI Personal Financial Services and ICICI
Capital Services for only two days, i.e., March 30 and 31, 2002, although our
balance sheet for fiscal 2002 reflects the full impact of the amalgamation. As
a result of the above, the profit and loss account for fiscal 2003 is not
comparable with the profit and loss accounts for fiscal 2002 and prior years.
In the financial statements contained in this annual report and the notes
thereto, all references to "the Company" are to ICICI Bank Limited and its
consolidated subsidiaries and other consolidated entities under Indian GAAP
subsequent to the amalgamation, all references to the "acquiree" are to ICICI
Limited prior to the amalgamation and all references to the "acquirer" are to
ICICI Bank Limited prior to the amalgamation.
All references to the "Companies Act" and the "Banking Regulation Act" are
to the Companies Act, 1956 and the Banking Regulation Act, 1949 as passed by
the Indian Parliament and subsequently amended
Pursuant to the issuance and listing of our securities in the United
States under registration statements filed with the United States Securities
Exchange Commission, we file annual reports on Form 20-F which must include
financial statements prepared under generally accepted accounting principles in
the United States (US GAAP) or financial statements prepared according to a
comprehensive body of accounting principles with a reconciliation of net income
and stockholders' equity to US GAAP. When we first listed our securities in the
United States, Indian GAAP was not considered a comprehensive body of
accounting principles under US securities laws and regulations. Accordingly,
our annual reports on Form 20-F for fiscal years 2000 through 2005 have
included US GAAP financial statements. However, pursuant to a significant
expansion of Indian accounting standards, Indian GAAP constitutes a
comprehensive body of accounting principles. Accordingly, we have included in
this annual report consolidated financial statements prepared according to
Indian GAAP, with a reconciliation of net income and stockholders' equity to US
GAAP and a description of significant differences between Indian GAAP and US
GAAP.
FORWARD-LOOKING STATEMENTS
We have included statements in this annual report which contain words or
phrases such as "will", "would", "aim", "aimed", "will likely result", "is
likely", "are likely", "believe", "expect", "expected to", "will continue",
"will achieve", "anticipate", "estimate", "estimating", "intend", "plan",
"contemplate", "seek to", "seeking to", "trying to", "target", "propose to",
"future", "objective", "goal", "project", "should", "can", "could", "may",
"will pursue", "our judgment" and similar expressions or variations of such
expressions, that are "forward-looking statements". Actual results may differ
materially from those suggested by the forward-looking statements due to
certain risks or uncertainties associated with our expectations with respect
to, but not limited to, the actual growth in demand for banking and other
financial products and services, our ability to successfully implement our
strategy, including our use of the Internet and other technology, our rural
expansion, our ability to integrate recent or future mergers or acquisitions
into our operations, our ability to manage the increased complexity of the
risks we face following our rapid international growth, future levels of
non-performing and restructured loans, our growth and expansion in domestic and
overseas markets, the adequacy of our provisions for credit and investment
losses, technological changes, investment income, our ability to market new
products, cash flow projections, the outcome of any legal, tax or regulatory
proceedings in India and in other jurisdictions we are or become a party to,
the future impact of new accounting standards, our ability to pay dividends,
the impact of changes in banking regulations and other regulatory changes in
India and other jurisdictions on us, including on the assets and liabilities of
ICICI, a former financial institution not subject to Indian banking
regulations, our ability to roll over our short-term funding sources and our
exposure to credit, market and liquidity risks. By their nature, certain of the
market risk disclosures are only estimates and could be materially different
from what actually occurs in the future. As a result, actual future gains,
losses or impact on net interest income and net income could materially differ
from those that have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this annual report include, but are not limited to, the monetary and interest
rate policies of India and the other markets in which we operate, natural
calamities, general economic, financial or political conditions, instability or
uncertainty in India, southeast Asia, or any other country which have a direct
or indirect impact on our business activities or investments, caused by any
factor including terrorist attacks in India, the United States or elsewhere,
anti-terrorist or other attacks by the United States, a United States-led
coalition or any other country, tensions between India and Pakistan related to
the Kashmir region, military armament or social unrest in any part of India,
inflation, deflation, unanticipated turbulence in interest rates, changes or
volatility in the value of the rupee, foreign exchange rates, equity prices or
other market rates or prices, the performance of the financial markets in
general, changes in domestic and foreign laws, regulations and taxes, changes
in the competitive and pricing environment in India, and general or regional
changes in asset valuations. For a further discussion on the factors that could
cause actual results to differ, see the discussion under "Risk Factors"
included elsewhere in this annual report.
2
EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of our
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of our ADSs in the United States. These fluctuations will also
affect the conversion into US dollars by the depositary of any cash dividends
paid in Indian rupees on our equity shares represented by ADSs.
In early July 1991, the government adjusted the Indian rupee downward by
an aggregate of approximately 20.0% against the dollar. The adjustment was
effected as part of an economic package designed to overcome economic and
foreign exchange problems. After the Indian rupee was made convertible on the
current account in March 1993, it depreciated on an average annual basis at a
rate of approximately 5-6%. During fiscal 2003 and fiscal 2004, however, the
rupee appreciated against the US dollar, from Rs. 49.06 per US$ 1.00 at May 31,
2002 to Rs. 43.40 per US$ 1.00 at March 31, 2004. The rupee depreciated against
the dollar by 0.5% during fiscal 2005 and by 2.0% during fiscal 2006. During
fiscal 2007 (through September 22, 2006) the rupee depreciated against the
dollar by 2.9%, moving from Rs. 44.48 per US$ 1.00 at March 31, 2006 to Rs.
45.77 per US$ 1.00 at September 22, 2006. The following table sets forth, for
the periods indicated, certain information concerning the exchange rates
between Indian rupees and US dollars based on the noon buying rate.
Fiscal Year Period End(1) Average(1) (2)
------------------------------------------------- ------------- --------------
2002............................................. 48.83 47.81
2003............................................. 47.53 48.36
2004............................................. 43.40 45.78
2005............................................. 43.62 44.87
2006............................................. 44.48 44.20
2007 (through September 22, 2006)................ 45.77 45.95
Month High Low
------------------------------------------------- ----- ----
March 2006....................................... 44.58 44.09
April 2006....................................... 45.09 44.39
May 2006......................................... 46.22 44.69
June 2006........................................ 46.25 45.50
July 2006........................................ 46.83 45.84
August 2006...................................... 46.61 46.32
September 2006 (through September 22, 2006)...... 46.38 45.74
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(1) The noon buying rate at each period end and the average rate for each
period differed from the exchange rates used in the preparation of our
financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although certain rupee amounts in this annual report have been translated
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be, converted into dollars at any
particular rate, the rates stated below, or at all. Except in the section on
"Market Price Information", all translations from rupees to dollars are based
on the noon buying rate in the City of New York for cable transfers in rupees
at March 31, 2006. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate at March
31, 2006 was Rs. 44.48 per US$ 1.00 and at September 22, 2006 was Rs. 45.77 per
US$ 1.00.
3
RISK FACTORS
You should carefully consider the following risk factors as well as the
other information contained in this annual report in evaluating us and our
business.
Risks Relating to India
A slowdown in economic growth or rise in interest rates in India could
cause our business to suffer.
Any slowdown in the Indian economy or volatility of global commodity
prices, in particular oil and steel prices, could adversely affect our
borrowers and contractual counterparties. Because of the importance of our
commercial banking operations for retail customers and the increasing
importance of our agricultural loan portfolio to our business, any slowdown in
the growth of the housing, automobiles and agricultural sectors could adversely
impact our business. Since 2004, interest rates in the Indian economy have
increased significantly. Slowdown in demand for loans from corporate customers,
retail customers and customers in the agricultural sector, including due to
higher interest rates, could adversely impact our business, including our
ability to grow our asset portfolio, the quality of our assets, our financial
performance, our stockholders' equity, our ability to implement our strategy
and the price of our equity shares and ADSs.
A significant increase in the price of crude oil could adversely affect
the Indian economy, which could adversely affect our business.
India imports approximately 70.0% of its requirements of crude oil, which
were approximately 31.3% of total imports in fiscal 2006. For example, the
sharp increase in global crude oil prices during fiscal 2001 adversely affected
the Indian economy in terms of volatile interest and exchange rates. This
adversely affected the overall state of liquidity in the banking system leading
to intervention by the Reserve Bank of India. Since 2004, there has been a
sharp increase in global crude oil prices which was due to both increased
demand and pressure on production and refinery capacity, and political and
military tensions in key oil-producing regions. The full burden of the oil
price increase has not yet been passed through to Indian consumers and has been
substantially absorbed by the government and government-owned oil marketing
companies. Sustained high levels, further increases or volatility of oil prices
and the pass-through of increases to Indian consumers could have a material
negative impact on the Indian economy and the Indian banking and financial
system in particular, including through a rise in inflation and market interest
rates and a higher trade deficit. This could adversely affect our business
including our liquidity, our ability to grow, the quality of our assets, our
financial performance, our stockholders' equity, our ability to implement our
strategy and the price of our equity shares and ADSs.
A significant change in the Indian government's economic liberalization
and deregulation policies could adversely affect our business and the
price of our equity shares and ADSs.
Our assets and customers are predominantly located in India. The Indian
government has traditionally exercised and continues to exercise a dominant
influence over many aspects of the economy. Government policies could adversely
affect business and economic conditions in India, our future financial
performance, our stockholders' equity and the price of our equity shares and
ADSs.
Financial instability in other countries, particularly emerging market
countries and countries where we have established operations, could
adversely affect our business and the price of our equity shares and ADSs.
The Indian economy is influenced by economic and market conditions in
other countries, particularly emerging market countries in Asia. We have also
established operations in several other countries. A loss of investor
confidence in the financial systems of other emerging markets and countries
where we have established operations or any worldwide financial instability may
cause increased volatility in the Indian financial markets and, directly or
indirectly, adversely affect the Indian economy and financial sector, our
business, our future financial performance, our stockholders' equity and the
price of our equity shares and ADSs.
4
If regional hostilities, terrorist attacks or social unrest in some parts
of the country increase, our business and the price of our equity shares
and ADSs could be adversely affected.
India has from time to time experienced social and civil unrest and
hostilities both internally and with neighboring countries. In the past, there
have been military confrontations between India and Pakistan. India has also
experienced terrorist attacks in some parts of the country. These hostilities
and tensions could lead to political or economic instability in India and
adversely affect our business, our future financial performance and the price
of our equity shares and ADSs.
Trade deficits could adversely affect our business and the price of our
equity shares and ADSs.
India's trade relationships with other countries and its trade deficit,
driven to a major extent by global crude oil prices, may adversely affect
Indian economic conditions. If trade deficits increase or are no longer
manageable because of the rise in global crude oil prices or otherwise, the
Indian economy, and therefore our business, our financial performance, our
stockholders' equity and the price of our equity shares and our ADSs could be
adversely affected.
Natural calamities could adversely affect the Indian economy, our business
and the price of our equity shares and ADSs.
India has experienced natural calamities like earthquakes, floods and
drought in the past few years. The extent and severity of these natural
disasters determine their impact on the Indian economy. For example, in fiscal
2003, many parts of India received significantly less than normal rainfall. As
a result of the drought conditions in the economy during fiscal 2003, the
agricultural sector recorded a negative growth of 7.0%. Also, the erratic
progress of the monsoon in fiscal 2005 adversely affected sowing operations for
certain crops and resulted in a decline in the growth rate of the agricultural
sector from 10.0% in fiscal 2004 to 0.7% in fiscal 2005. The agricultural
sector grew by 3.9% in fiscal 2006. Further prolonged spells of below or above
normal rainfall or other natural calamities could adversely affect the Indian
economy and our business, especially in view of our strategy of increasing our
exposure to rural India.
Financial difficulty and other problems in certain financial institutions in
India could adversely affect our business and the price of our equity shares
and ADSs.
As an Indian bank, we are exposed to the risks of the Indian financial
system which may be affected by the financial difficulties faced by certain
Indian financial institutions because the commercial soundness of many
financial institutions may be closely related as a result of credit, trading,
clearing or other relationships. This risk, which is sometimes referred to as
"systemic risk", may adversely affect financial intermediaries, such as
clearing agencies, banks, securities firms and exchanges with whom we interact
on a daily basis. Any such difficulties or instability of the Indian financial
system in general could create an adverse market perception about Indian
financial institutions and banks and adversely affect our business. See also
"Overview of the Indian Financial Sector". As the Indian financial system
operates within an emerging market, it faces risks of a nature and extent not
typically faced in more developed economies, including the risk of deposit runs
notwithstanding the existence of a national deposit insurance scheme. For
example, in April 2003, unsubstantiated rumors, believed to have originated in
Gujarat, a state in India, alleged that we were facing liquidity problems.
Although our liquidity position was sound, we witnessed higher than normal
deposit withdrawals on account of these unsubstantiated rumors for several days
in April 2003. We successfully controlled the situation in this instance, but
any failure to control such situations in the future could result in high
volumes of deposit withdrawals which could adversely impact our liquidity
position.
A decline in India's foreign exchange reserves may affect liquidity and
interest rates in the Indian economy which could adversely impact us.
A decline in India's foreign exchange reserves could result in reduced
liquidity and higher interest rates in the Indian economy, which could
adversely affect our business, our future financial performance, our
stockholders' equity and the price of our equity shares and ADSs. See also "--
Risks Relating to Our Business".
5
Any downgrading of India's debt rating by an international rating agency
could adversely affect our business, our liquidity and the price of our
equity shares and ADSs.
Any adverse revisions to India's credit ratings for domestic and
international debt by international rating agencies may adversely affect our
business and limit our access to capital markets and decrease our liquidity.
Risks Relating to Our Business
Our business is particularly vulnerable to interest rate risk and volatility
in interest rates could adversely affect our net interest margin, the value
of our fixed income portfolio, our income from treasury operations, the
quality of our loan portfolio and our financial performance.
As a result of certain reserve requirements of the Reserve Bank of India,
we are more structurally exposed to interest rate risk than banks in many other
countries. See "Supervision and Regulation -- Legal Reserve Requirements".
These requirements result in our maintaining a large portfolio of fixed income
government of India securities, and we could be materially adversely impacted
by a rise in interest rates, especially if the rise were sudden or sharp. These
requirements also have a negative impact on our net interest income and net
interest margin because we earn interest on a portion of our assets at rates
that are generally less favorable than those typically received on our other
interest-earning assets. If the yield on our interest-earning assets does not
increase at the same time or to the same extent as our cost of funds, or if our
cost of funds does not decline at the same time or to the same extent as the
yield on our interest-earning assets, our net interest income and net interest
margin would be adversely impacted. We are also exposed to interest rate risk
through our treasury operations and our subsidiary, ICICI Securities Limited,
which is a primary dealer in government of India securities. A rise in interest
rates or greater interest rate volatility could adversely affect our income
from treasury operations or the value of our fixed income securities trading
portfolio. Sharp and sustained increases in the rates of interest charged on
floating rate home loans, which are a material proportion of our loan
portfolio, would result in extension of loan maturities and higher monthly
installments due from borrowers, which could result in higher rates of default
in this portfolio.
ICICI's loans included project finance assistance, a substantial portion of
which is particularly vulnerable to completion and other risks.
Long-term project finance assistance was a significant proportion of
ICICI's asset portfolio and continues to be a part of our loan portfolio. The
viability of these projects depends upon a number of factors, including market
demand, government policies and the overall economic environment in India and
the international markets. These projects are particularly vulnerable to a
variety of risks, including completion risk and counterparty risk, which could
adversely impact their ability to generate revenues. We cannot be sure that
these projects will perform as anticipated. In the past, we experienced a high
level of default and restructuring in our project finance loan portfolio as a
result of the downturn in certain global commodity markets and increased
competition in India. Future project finance losses or high levels of loan
restructuring could have a materially adverse effect on our profitability and
the quality of our loan portfolio.
We have a high concentration of loans to certain customers and sectors and
if a substantial portion of these loans become non-performing, the overall
quality of our loan portfolio, our business and the price of our securities
could be adversely affected.
Our loan portfolio and non-performing asset portfolio have a high
concentration in certain customers and sectors. See "Business -- Loan Portfolio
-- Loan Concentration". In the past, certain of these borrowers and sectors
have been adversely affected by economic conditions in varying degrees. Credit
losses or financial difficulties of these borrowers and sectors in the future
could adversely affect our business, our financial performance, our
stockholders' equity and the price of our equity shares and ADSs.
If we are not able to control the level of non-performing assets in our
portfolio, our business will suffer.
We have experienced rapid growth in our retail loan portfolio. See
"Business -- Loan Portfolio -- Loan Concentration". Various factors, including
a rise in unemployment, prolonged recessionary conditions, a sharp and
sustained rise in interest rates, developments in the Indian economy, movements
in global
6
commodity markets and exchange rates and global competition could cause an
increase in the level of non-performing assets and have a material adverse
impact on the quality of our loan portfolio. In addition, under the directed
lending norms of the Reserve Bank of India, we are required to extend 50.0% of
our residual domestic net bank credit (excluding the advances of ICICI) to
certain eligible sectors, which are categorized as "priority sectors". See
"Business -- Loan Portfolio -- Loan Concentration -- Directed Lending". We may
experience a significant increase in non-performing assets in our directed
lending portfolio, particularly loans to the agricultural sector and small-scale
industries, where we are less able to control the portfolio quality and where
economic difficulties are likely to affect our borrowers more severely. Any
change by the Reserve Bank of India in the directed lending norms may result in
our inability to meet the priority sector lending requirements as well as
require us to increase our lending to relatively riskier segments and may result
in an increase in non-performing assets in the directed lending portfolio. We
may not be able to control or reduce the level of non-performing assets in our
project and corporate finance portfolio. We may not be successful in our efforts
to improve collections and foreclose on non-performing assets. We also have
investments in security receipts arising out of the sale of non-performing
assets by us to Asset Reconstruction Company (India) Limited, a reconstruction
company registered with the Reserve Bank of India. See "Business --
Classification of Loans". There can be no assurance that Asset Reconstruction
Company (India) Limited will be able to recover these assets and redeem our
investments in security receipts and that there will be no reduction in the
value of these investments.
If we are not able to control or reduce the level of non-performing
assets, the overall quality of our loan portfolio may deteriorate and our
business may be adversely affected.
Further deterioration of our non-performing asset portfolio and an inability
to improve our provisioning coverage as a percentage of gross non-performing
assets could adversely affect the price of our equity shares and ADSs.
Although we believe that our total provisions will be adequate to cover all
known losses in our asset portfolio, there can be no assurance that there will
be no deterioration in the provisioning coverage as a percentage of gross
non-performing assets or otherwise or that the percentage of non-performing
assets that we will be able to recover will be similar to our and ICICI's past
experience of recoveries of non-performing assets. In the event of any further
deterioration in our non-performing asset portfolio, there could be an adverse
impact on our business, our future financial performance, our stockholders'
equity and the price of our equity shares and ADSs.
The value of our collateral may decrease or we may experience delays in
enforcing our collateral when borrowers default on their obligations to us
which may result in failure to recover the expected value of collateral
security exposing us to a potential loss.
A substantial portion of our loans to corporate and retail customers are
secured by collateral. See "Business -- Classification of Loans --
Non-Performing Asset Strategy". Changes in asset prices may cause the value of
our collateral to decline and we may not be able to realize the full value of
our collateral as a result of delays in bankruptcy and foreclosure proceedings,
defects in the perfection of collateral, fraudulent transfers by borrowers and
other factors, including legislative changes and judicial pronouncements.
Failure to recover the expected value of collateral could expose us to
potential losses, which could adversely affect our business, our future
financial performance, our stockholders' equity and the price of our equity
shares and ADSs.
The failure of our restructured loans to perform as expected or a
significant increase in the level of restructured loans in our portfolio
could affect our business.
Our standard assets include restructured standard loans. See "Business -
Classification of Loans - Restructured Loans" Our borrowers' requirements to
restructure their loans can be attributed to several factors, including
increased competition arising from economic liberalization in India, variable
industrial growth, a sharp decline in commodity prices, the high level of debt
in the financing of projects and capital structures of companies in India and
the high interest rates in the Indian economy during the period in which a
large number of projects contracted their borrowings. These factors reduced
profitability for certain of our borrowers and also resulted in the
restructuring of certain Indian companies in sectors including iron and steel,
textiles and cement. The failure of these borrowers to perform as expected or a
significant increase in the level of restructured loans in our portfolio could
adversely affect
7
our business, our future financial performance, our stockholders' equity and
the price of our equity shares and ADSs.
We face greater credit risks than banks in developed economies.
Our credit risk is higher because most of our borrowers are based in
India. Unlike several developed economies, a nationwide credit bureau has
become operational in India only recently. This may affect the quality of
information available to us about the credit history of our borrowers,
especially individuals and small businesses. In addition, the credit risk of
our borrowers, particularly small and middle market companies, is higher than
borrowers in more developed economies due to the greater uncertainty in the
Indian regulatory, political, economic and industrial environment and the
difficulties of many of our corporate borrowers to adapt to global
technological advances. Also, several of our corporate borrowers suffered from
low profitability because of increased competition from economic
liberalization, a sharp decline in commodity prices, a high debt burden and
high interest rates in the Indian economy at the time of their financing, and
other factors. The above factors may lead to an increase in the level of our
non-performing and restructured assets and there could be an adverse impact on
our business, our future financial performance, our stockholders' equity and
the price of our equity shares and ADSs.
Our funding is primarily short-term and if depositors do not roll over
deposited funds upon maturity, our business could be adversely affected.
Most of our incremental funding requirements, including replacement of
maturing liabilities of ICICI (which generally had longer maturities), are met
through short-term funding sources, primarily in the form of deposits including
inter-bank deposits. Our customer deposits generally have a maturity of less
than one year. However, a large portion of our assets, primarily the assets of
ICICI and our home loan portfolio, have medium or long-term maturities,
creating the potential for funding mismatches. Our ability to raise fresh
deposits and grow our deposit base depends in part on our ability to expand our
network of branches, which requires the approval of the Reserve Bank of India.
In September 2005, the Reserve Bank of India replaced the existing system of
granting authorizations for opening individual branches with a system of giving
aggregated approvals covering both branches and existing non-branch channels
like ATMs, on an annual basis. The Reserve Bank of India has thus far not
granted us authorizations pursuant to this new system. High volumes of deposit
withdrawals or failure of a substantial number of our depositors to roll over
deposited funds upon maturity or to replace deposited funds with fresh deposits
as well as our inability to grow our deposit base, could have an adverse effect
on our liquidity position, our business, our future financial performance, our
stockholders' equity and the price of our equity shares and ADSs. See also "--
Financial difficulty and other problems in certain financial institutions in
India could adversely affect our business and the price of our equity shares
and ADSs".
We are subject to legal and regulatory risk which may adversely affect our
business and the price of our equity shares and ADSs.
We are subject to a wide variety of banking and financial services laws
and regulations and a large number of regulatory and enforcement authorities in
each of the jurisdictions in which we operate. The laws and regulations
governing the banking and financial services industry have become increasingly
complex governing a wide variety of issues, including interest rates,
liquidity, capital adequacy, securitization, investments, ethical issues, money
laundering, privacy, record keeping, outsourcing and marketing and selling
practices, with sometimes overlapping jurisdictional or enforcement
authorities.
Failure to comply with applicable regulations in various jurisdictions,
including unauthorized actions by employees, representatives, agents and third
parties, suspected or perceived failures and media reports, and ensuing
inquiries or investigations by regulatory and enforcement authorities, has
resulted, and may result in regulatory action including financial penalties and
restrictions on or suspension of the related business operations. For example,
in fiscal 2006, the Reserve Bank of India imposed a penalty of Rs. 0.5 million
(US$ 10,900) on us in connection with our role as collecting bankers in certain
public offerings of equity by companies in India.
In addition, a failure to comply with the applicable regulations in
various jurisdictions by our employees, representatives, agents and third party
service providers, either in or outside the course of their services, or
suspected or perceived failures by them, may result in inquiries or
investigations by regulatory and enforcement authorities, in
8
regulatory or enforcement action against either us or such employees,
representatives, agents and third party service providers or both and such
actions may, amongst other consequences, impact our reputation, result in
adverse media reports, lead to increased or enhanced regulatory or supervisory
concerns, lead to additional costs, penalties, claims and expenses being
incurred by us or impact adversely our ability to conduct business owing to
implications on business continuity, possible distraction, lack of proper
attention or time by such employees, representatives, agents and third party
service providers to their official roles and duties, or suspension or
termination by us of their services and having to find suitable replacements
apart from personal liability, financial or other penalties and restrictions
that may be imposed on or suffered by them including personal liability for
criminal violation.
If we fail to manage our legal and regulatory risk in the many
jurisdictions in which we operate, including some or all of the compliance
failures, our business could suffer, our reputation could be harmed and we
would be subject to additional legal risk. This could, in turn, increase the
size and number of claims and damages asserted against us or subject us to
regulatory investigations, enforcement actions or other proceedings, or lead to
increased regulatory or supervisory concerns. We may also be required to spend
additional time and resources on any remedial measures which could have an
adverse effect on our business.
Despite our best efforts to comply with all applicable regulations, there
are a number of risks that cannot be completely controlled. Our rapid
international expansion has led to increased risk in this respect. Regulators
in every jurisdiction in which we operate or have listed our securities have
the power to bring administrative or judicial proceedings against us (or our
employees, representatives, agents and third party service providers), which
could result, among other things, in suspension or revocation of one or more of
our licenses, cease and desist orders, fines, civil penalties, criminal
penalties or other disciplinary action which could materially harm our results
of operations and financial condition.
We cannot predict the timing or form of any current or future regulatory
or law enforcement initiatives, which we note are increasingly common for
international banks, but we would expect to cooperate with any such regulatory
investigation or proceeding.
Regulatory changes or enforcement initiatives in India or other jurisdictions
in which we operate could adversely affect our business and the price of our
equity shares and ADSs.
The laws and regulations or the regulatory or enforcement environment in
any of those jurisdictions in which we operate may change at any time and may
have an adverse effect on the products or services we offer, the value of our
assets or our business in general. In its mid-term review of the annual policy
statement for fiscal 2005, the Reserve Bank of India increased the risk weight
for the computation of capital adequacy from 50% to 75% in the case of housing
loans and from 100% to 125% in the case of consumer credit (including personal
loans and credit cards) as a temporary counter-cyclical measure. In July 2005,
the Reserve Bank of India increased the risk weight for capital market exposure
and exposure to commercial real estate from 100% to 125%. In October 2005, in
its mid-term review of the annual policy statement for fiscal 2005, the Reserve
Bank of India increased the requirement of general provisioning for standard
advances from 0.25% to 0.40% except direct advances to agriculture and small
and medium enterprise sectors. In February 2006, the Reserve Bank of India
issued its final guidelines on securitization of standard assets under which we
are, in respect of transactions after February 1, 2006, required to maintain
higher capital for credit enhancements and also amortize the gains on sale of
loans through securitizations over the life of the securities issued. Effective
April 1, 2006, the Reserve Bank of India increased the requirement of general
provisioning for certain categories of advances from 0.40% to 1.00% and also
increased the risk weight on exposures to commercial real estate from 125.0% to
150.0%. Pursuant to the recent amendment to the Reserve Bank of India Act, no
interest is payable on cash reserve ratio balances, on which interest was
hitherto paid by the Reserve Bank of India. In August 2006, the Reserve Bank of
India revised its guidelines on investments by banks in other financial
services entities and venture capital funds, which may restrict our ability to
make further investments in our insurance and international subsidiaries.
Similar changes in the future could have an adverse impact on our growth,
capital adequacy and profitability. Any change by the Reserve Bank of India in
the directed lending norms may result in our inability to meet the priority
sector lending requirements as well as require us to increase our lending to
relatively riskier segments and may result in an increase in non-performing
assets in the directed lending portfolio.
9
We have experienced rapid international growth in the last three years
which has increased the complexity of the risks that we face.
Until very recently, we operated only in India. Beginning in fiscal 2004,
we began a rapid international expansion opening banking subsidiaries in the
United Kingdom, Canada and Russia, branches in Hong Kong, Bahrain, Singapore,
Sri Lanka and Dubai International Finance Centre and representative offices in
the United States, United Arab Emirates, China, South Africa and Bangladesh. As
of the year ended March 31, 2006, the assets of these banking subsidiaries and
branches were about 14% of the consolidated assets of ICICI Bank and its
banking subsidiaries. In addition, we have substantially expanded, in a number
of jurisdictions, our services to non-resident Indians for the remittance of
funds to India.
This rapid international expansion into banking in multiple jurisdictions
exposes us to a new variety of regulatory and business challenges and risks,
including cross-cultural risk and has increased the complexity of our risks in
a number of areas including currency risks, interest rate risks, compliance
risk, regulatory and reputational risk and operational risk. See also "We are
subject to legal and regulatory risk which may adversely affect our business
and the price of our equity shares and ADSs". The skills required for this
business could be different from those required for our Indian business and we
may not be able to attract the required talented professionals. If we are
unable to manage these risks, our business and the price of our equity shares
and ADSs could be adversely affected.
A determination against us in respect of disputed tax assessments may
adversely impact our financial performance.
We have been assessed a significant amount in additional taxes by the
government of India's tax authorities in excess of our provisions. See
"Business -- Legal and Regulatory Proceedings". We have appealed all of these
demands. While we expect that no additional liability will arise out of these
disputed demands, there can be no assurance that these matters will be settled
in our favor or that no further liability will arise out of these demands. Any
additional tax liability may adversely impact our financial performance,
stockholders' equity and the price of our equity shares and ADSs.
We are involved in various litigations and any final judgment awarding
material damages against us could have a material adverse impact on our
future financial performance, our stockholders' equity and the price of our
equity shares and ADSs.
We are often involved in litigations for a variety of reasons, which
generally arise because we seek to recover our dues from borrowers or because
customers seek claims against us. The majority of these cases arise in the
normal course and we believe, based on the facts of the cases and consultation
with counsel, that these cases generally do not involve the risk of a material
adverse impact on our financial performance or stockholders' equity. Where we
assess that there is a probable risk of loss, it is our policy to make
provisions for the loss. However, we do not make provisions or disclosures in
our financial statements where our assessment is that the risk is
insignificant. See "Business -- Legal and Regulatory Proceedings". We cannot
guarantee that the judgments in any of the litigations in which we are involved
would be favorable to us. If our assessment of the risk changes, our view on
provisions will also change.
Our rapid retail expansion in India, our rural initiative and our insurance
ventures expose us to increased risk that may adversely affect our business.
We are a relatively new entrant in the retail and insurance businesses and
have experienced rapid growth in our retail loan portfolio. Our joint ventures
in life insurance and general insurance have experienced rapid growth in their
business volumes. Our branch network has also significantly expanded and we are
entering into new, smaller second tier cities within India as part of this
growth strategy. In addition, we are now beginning a rural initiative designed
to bring our products and services into many rural areas. This rapid growth of
the retail loan business and the insurance businesses as well as the rural
initiative exposes us to increased risks within India including the risk that
our impaired loans may grow faster than anticipated, the risk that we may not be
able to raise the substantial capital required for these businesses, increased
operational risk, increased fraud risk and increased regulatory and legal risk.
See also "We are subject to legal and regulatory risk which may adversely affect
our business and the price of our equity shares and ADSs".
10
If we are not able to integrate any future acquisitions, our business could
be disrupted.
We may seek opportunities for growth through acquisitions and mergers or
may be required to undertake mergers mandated by the Reserve Bank of India. Any
future acquisitions or mergers may involve a number of risks, including
deterioration of asset quality, diversion of our management's attention
required to integrate the acquired business and the failure to retain key
acquired personnel and clients, leverage synergies or rationalise operations,
or develop the skills required for new businesses and markets, or unknown and
known liabilities, some or all of which could have an adverse effect on our
business.
We are exposed to fluctuations in foreign exchange rates.
As a financial intermediary we are exposed to exchange rate risk. See
"Risk Management -- Quantitative and Qualitative Disclosures About Market Risk
-- Exchange Rate Risk". Adverse movements and volatility in foreign exchange
rates may adversely affect our borrowers, the quality of our exposure to our
borrowers and our business.
Our business is very competitive and our growth strategy depends on our
ability to compete effectively.
Within the Indian market, we face intense competition from Indian and
foreign commercial banks in all our products and services. Foreign banks also
operate in India through non-banking finance companies. Further liberalization
of the Indian financial sector could lead to a greater presence or new entries
of foreign banks offering a wider range of products and services, which would
significantly toughen our competitive environment. In addition, the Indian
financial sector may experience further consolidation, resulting in fewer banks
and financial institutions, some of which may have greater resources than us.
The government of India has indicated its support for consolidation among
government-owned banks. The Reserve Bank of India has announced a road map for
the presence of foreign banks in India that would, after a review in 2009,
allow foreign banks to acquire up to a 74.0% shareholding in an Indian private
sector bank. See "Business -- Competition" and "Overview of the Indian
Financial Sector -- Commercial Banks -- Foreign Banks". Due to competitive
pressures, we may be unable to successfully execute our growth strategy and
offer products and services at reasonable returns and this may adversely impact
our business.
In our international operations we face intense competition from the full
range of competitors in the financial services industry, both banks and
non-banks and both Indian and foreign banks. We remain a small to mid-size
player in the international markets and many of our competitors have resources
much greater than our own.
Fraud and significant security breaches in our computer system and network
infrastructure could adversely impact our business.
Our business operations are based on a high volume of transactions.
Although we take adequate measures to safeguard against system-related and
other fraud, there can be no assurance that we would be able to prevent fraud.
Our reputation could be adversely affected by fraud committed by employees,
customers or outsiders. Physical or electronic break-ins, security breaches,
other disruptive problems caused by our increased use of the Internet or power
disruptions could also affect the security of information stored in and
transmitted through our computer systems and network infrastructure. Although
we have implemented security technology and operational procedures to prevent
such occurrences, there can be no assurance that these security measures will
be successful. A significant failure in security measures could have a material
adverse effect on our business, our future financial performance and the price
of our equity shares and ADSs.
System failures could adversely impact our business.
Given the increasing share of retail products and services and transaction
banking services in our total business, the importance of systems technology to
our business has increased significantly. Our principal delivery channels
include ATMs, call centers and the Internet. Any failure in our systems,
particularly for retail products and services and transaction banking, could
significantly affect our operations and the quality of our customer service and
could result in business and financial losses and adversely affect the price of
our equity shares and ADSs.
11
There is operational risk associated with our industry which, when realized,
may have an adverse impact on our business.
We, like all financial institutions, are exposed to many types of
operational risk, including the risk of fraud or other misconduct by employees
or outsiders, unauthorized transactions by employees and third parties
(including violation of regulations for prevention of corrupt practices, and
other regulations governing our business activities), or operational errors,
including clerical or recordkeeping errors or errors resulting from faulty
computer or telecommunications systems. We use direct marketing associates for
marketing our retail credit products. We also outsource some functions to other
agencies. Given our high volume of transactions, certain errors may be repeated
or compounded before they are discovered and successfully rectified. In
addition, our dependence upon automated systems to record and process
transactions may further increase the risk that technical system flaws or
employee tampering or manipulation of those systems will result in losses that
are difficult to detect. We may also be subject to disruptions of our operating
systems, arising from events that are wholly or partially beyond our control
(including, for example, computer viruses or electrical or telecommunication
outages), which may give rise to a deterioration in customer service and to
loss or liability to us. We are further exposed to the risk that external
vendors may be unable to fulfill their contractual obligations to us (or will
be subject to the same risk of fraud or operational errors by their respective
employees as are we), and to the risk that our (or our vendors') business
continuity and data security systems prove not to be sufficiently adequate. We
also face the risk that the design of our controls and procedures prove
inadequate, or are circumvented, thereby causing delays in detection or errors
in information. Although we maintain a system of controls designed to keep
operational risk at appropriate levels, like all banks we have suffered losses
from operational risk and there can be no assurance that we will not suffer
losses from operational risks in the future that may be material in amount, and
our reputation could be adversely affected by the occurrence of any such events
involving our employees, customers or third parties. For a discussion of how
operational risk is managed, see "Business -- Risk Management -- Operational
Risk".
We are subject to credit, market and liquidity risk which may have an
adverse effect on our credit ratings and our cost of funds.
To the extent any of the instruments and strategies we use to hedge or
otherwise manage our exposure to market or credit risk are not effective, we
may not be able to mitigate effectively our risk exposures in particular market
environments or against particular types of risk. Our balance sheet growth will
be dependent upon economic conditions, as well as upon our determination to
securitize, sell, purchase or syndicate particular loans or loan portfolios.
Our trading revenues and interest rate risk are dependent upon our ability to
properly identify, and mark to market, changes in the value of financial
instruments caused by changes in market prices or rates. Our earnings are
dependent upon the effectiveness of our management of migrations in credit
quality and risk concentrations, the accuracy of our valuation models and our
critical accounting estimates and the adequacy of our allowances for loan
losses. To the extent our assessments, assumptions or estimates prove
inaccurate or not predictive of actual results, we could suffer higher than
anticipated losses. See also "-- Further deterioration of our non-performing
asset portfolio and an inability to improve our provisioning coverage as a
percentage of gross non-performing assets, could adversely affect the price of
our equity shares and ADSs". The successful management of credit, market and
operational risk is an important consideration in managing our liquidity risk
because it affects the evaluation of our credit ratings by rating agencies.
Rating agencies may reduce or indicate their intention to reduce the ratings at
any time. See also "--Any downgrading of India's debt rating by an
international rating agency could adversely affect our business, our liquidity
and the price of our equity shares and ADSs". The rating agencies can also
decide to withdraw their ratings altogether, which may have the same effect as
a reduction in our ratings. Any reduction in our ratings (or withdrawal of
ratings) may increase our borrowing costs, limit our access to capital markets
and adversely affect our ability to sell or market our products, engage in
business transactions, particularly longer-term and derivatives transactions,
or retain our customers. This, in turn, could reduce our liquidity and
negatively impact our operating results and financial condition. For more
information relating to our ratings, see "Business -- Quantitative and
Qualitative Disclosures About Market Risk -- Liquidity Risk".
We depend on the accuracy and completeness of information about customers
and counterparties.
In deciding whether to extend credit or enter into other transactions with
customers and counterparties, we may rely on information furnished to us by or
on behalf of customers and counterparties, including financial statements and
other financial information. We may also rely on certain representations as to
the accuracy and completeness of
12
that information and, with respect to financial statements, on reports of
independent auditors. For example, in deciding whether to extend credit, we may
assume that a customer's audited financial statements conform with generally
accepted accounting principles and present fairly, in all material respects,
the financial condition, results of operations and cash flows of the customer.
Our financial condition and results of operations could be negatively affected
by relying on financial statements that do not comply with generally accepted
accounting principles or other information that is materially misleading.
Any inability to attract and retain talented professionals may adversely
impact our business.
Attracting and retaining talented professionals is a key element of our
strategy and we believe it to be a significant source of competitive advantage.
See "Business -- Employees". Our inability to attract and retain talented
professionals or the loss of key management personnel could have an adverse
impact on our business.
If we are required to change our accounting policies with respect to the
expensing of stock options, our earnings could be adversely affected.
We currently deduct the expense of employee stock option grants from our
income based on the intrinsic value method and not on the fair value method.
Had compensation costs for our employee stock options been determined in a
manner consistent with the fair value approach, our profit after tax for fiscal
2006 would have been reduced to the pro forma amount of Rs. 23.7 billion (US$
532 million) from Rs. 24.2 billion (US$ 544 million).
Risks Relating to the ADSs and Equity Shares
You will not be able to vote your ADSs and your ability to withdraw equity
shares from the depositary facility is uncertain and may be subject to
delays.
Our ADS holders have no voting rights unlike holders of our equity shares
who have voting rights. For certain information regarding the voting rights of
the equity shares underlying our ADSs, see "Business - Shareholding Structure
and Relationship with the Government of India". If you wish, you may withdraw
the equity shares underlying your ADSs and seek to vote the equity shares you
obtain from the withdrawal. However, for foreign investors, this withdrawal
process may be subject to delays and is subject to a cap of 49% on the total
shareholding of foreign institutional investors and non-resident Indians in us.
For a discussion of the legal restrictions triggered by a withdrawal of the
equity shares from the depositary facility upon surrender of ADSs, see
"Restriction on Foreign Ownership of Indian Securities".
US investors will be subject to special tax rules, including the possible
imposition of interest charges, if we are considered to be a passive foreign
investment company.
Based upon certain proposed US Treasury regulations which are to be
effective for taxable years beginning after December 31, 1994 and upon certain
management estimates, we do not expect to be a Passive Foreign Investment
Company (a "PFIC"). However, since there can be no assurance that such proposed
Treasury regulations will be finalized in their current form, and since the
composition of our income and assets will vary over time, there can be no
assurance that we will not be considered a PFIC for any taxable year. If we are
a PFIC for any taxable year during which a US investor holds any of our equity
shares or ADSs, the US investor would be subject to special adverse tax rules,
including the possible imposition of interest charges (see "Taxation - United
States Tax - Passive Foreign Investment Company Rules").
Your ability to sell in India any equity shares withdrawn from the
depositary facility, the conversion of rupee proceeds from such sale into a
foreign currency and the repatriation of such foreign currency may be
subject to delays if specific approval of the Reserve Bank of India is
required.
ADS holders seeking to sell in India any equity shares withdrawn upon
surrender of ADSs, convert the rupee proceeds from such sale into a foreign
currency or repatriate such foreign currency may need the Reserve Bank of
India's approval for each such transaction. See "Restriction on Foreign
Ownership of Indian Securities". We cannot guarantee that any such approval
will be obtained in a timely manner or at terms favorable to the investor.
Because of possible delays in obtaining the requisite approvals, investors in
equity shares may be prevented from realizing gains during periods of price
increases or limiting losses during periods of price declines.
13
Restrictions on deposit of equity shares in the depositary facility could
adversely affect the price of our ADSs.
Under current Indian regulations, an ADS holder who surrenders ADSs and
withdraws equity shares may deposit those equity shares again in the depositary
facility in exchange for ADSs. An investor who has purchased equity shares in
the Indian market may also deposit those equity shares in the ADS program.
However, the deposit of equity shares may be subject to securities law
restrictions and the restriction that the cumulative aggregate number of equity
shares that can be deposited as of any time cannot exceed the cumulative
aggregate number represented by ADSs converted into underlying equity shares as
of such time. These restrictions increase the risk that the market price of our
ADSs will be below that of the equity shares.
Certain shareholders own a large percentage of our equity shares and their
actions could adversely affect the price of our equity shares and ADSs.
Life Insurance Corporation of India and General Insurance Corporation of
India, each of which is directly or indirectly controlled by the Indian
government, and other government-owned general insurance companies are among
our principal shareholders. Our other large shareholders include Allamanda
Investments Pte. Limited, a subsidiary of Temasek Holdings Pte. Limited, Crown
Capital Limited and Bajaj Auto Limited, an Indian private sector company. See
"Business - Shareholding Structure and Relationship with the Government of
India". Any substantial sale of our equity shares by these or other large
shareholders could adversely affect the price of our equity shares and ADSs.
Conditions in the Indian securities market may adversely affect the price or
liquidity of our equity shares and ADSs.
The Indian securities markets are smaller and more volatile than
securities markets in developed economies. In the past, the Indian stock
exchanges have experienced high volatility and other problems that have
affected the market price and liquidity of the listed securities, including
temporary exchange closures, broker defaults, settlement delays and strikes by
brokers. In March 1995, the Bombay Stock Exchange (the "BSE"), was closed for
three days following a default by a broker. In March 2001, the BSE dropped 667
points or 15.6% and there were also rumors of insider trading in the BSE
leading to the resignation of the BSE president and several other members of
the governing board. In the same month, the Kolkata Stock Exchange suffered a
payment crisis when several brokers defaulted and the exchange invoked
guarantees provided by various Indian banks. In April 2003, the decline in the
price of the equity shares of a leading Indian software company created
volatility in the Indian stock markets and created temporary concerns regarding
our exposure to the equity markets. On May 17, 2004, the BSE Sensex fell by 565
points from 5,070 to 4,505, creating temporary concerns regarding our exposure
to the equity markets. Both the BSE and the National Stock Exchange (the "NSE")
halted trading on the exchanges on May 17, 2004 in view of the sharp fall in
prices of securities. The Indian securities markets experienced rapid
appreciation during fiscal 2006 but underwent a sharp correction in May 2006.
The securities markets have recovered partially since then but have exhibited
relatively higher volatility. Further, from time to time, disputes have arisen
between listed companies and stock exchanges and other regulatory bodies, which
in some cases had a negative effect on market sentiment. In recent years, there
have been changes in laws and regulations for the taxation of dividend income,
which have impacted the Indian equity capital markets. See "Dividends". Similar
problems or changes in the future could adversely affect the market price and
liquidity of our equity shares and ADSs.
An active or liquid trading market for our ADSs is not assured.
Although our ADSs are listed and traded on the New York Stock Exchange, we
cannot be certain that an active, liquid market for our ADSs will be sustained.
Indian legal restrictions may limit the supply of ADSs and a loss of liquidity
could increase the price volatility of our ADSs.
Settlement of trades of equity shares on Indian stock exchanges may be
subject to delays.
The equity shares represented by the ADSs are currently listed on the BSE
and the NSE. Settlement on those stock exchanges may be subject to delays and
an investor in equity shares withdrawn from the depositary facility upon
surrender of ADSs may not be able to settle trades on such stock exchanges in a
timely manner.
14
Changes in Indian regulations on foreign ownership, a change in investor
preferences or an increase in the number of ADSs outstanding could adversely
affect the price of our ADSs.
ADSs issued by companies in certain emerging markets, including India, may
trade at a discount or a premium to the underlying equity shares, in part
because of the restrictions on foreign ownership of the underlying equity
shares. See "Restriction on Foreign Ownership of Indian Securities".
Historically, our ADSs have generally traded at a premium to the trading price
of our underlying equity shares on the Indian stock exchanges. See "Market
Price Information". We believe that this price premium resulted from the
limited portion of our market capitalization represented by ADSs, restrictions
imposed by Indian law on the conversion of equity shares into ADSs and an
apparent preference among some investors to trade dollar-denominated
securities. In fiscal 2006, we conducted a US$ 498 million offering of ADSs
which increased the number of outstanding ADSs and we may conduct similar
offerings in the future. Also, over time, some of the restrictions on the
issuance of ADSs imposed by Indian law have been relaxed and other restrictions
may also be relaxed in the future though the timing is uncertain. As a result,
any premium enjoyed by the ADSs as compared to the equity shares may be reduced
or eliminated as a result of offerings made or sponsored by us, changes in
Indian law permitting further conversion of equity shares into ADSs or a change
in investor preferences.
Your holdings may be diluted by additional issuances of equity and any
dilution may adversely affect the market price of our equity shares and
ADSs.
We may conduct additional equity offerings to fund the growth of our
business, including our international operations, our insurance business or our
other subsidiaries. Any future issuance of equity shares would dilute the
positions of investors in equity shares and ADSs and could adversely affect the
market price of our equity shares and ADSs.
You may be unable to exercise preemptive rights available to other
shareholders.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75.0% of the
company's shareholders present and voting at a shareholders' general meeting.
US investors in ADSs may be unable to exercise these preemptive rights for
equity shares underlying ADSs unless a registration statement under the
Securities Act of 1933, as amended (the "Securities Act") is effective with
respect to such rights or an exemption from the registration requirements of
the Securities Act is available. Our decision to file a registration statement
will depend on the costs and potential liabilities associated with any such
registration as well as the perceived benefits of enabling US investors in ADSs
to exercise their preemptive rights and any other factors we consider
appropriate at such time. To the extent that investors in ADSs are unable to
exercise preemptive rights, their proportional ownership interests in us would
be reduced.
Because the equity shares underlying the ADSs are quoted in rupees in India,
you may be subject to potential losses arising out of exchange rate risk on
the Indian rupee.
Investors who purchase ADSs are required to pay for the ADSs in US dollars
and are subject to currency fluctuation risk and convertibility risks since the
equity shares underlying the ADSs are quoted in rupees on the Indian stock
exchanges on which they are listed. Dividends on the equity shares will also be
paid in rupees and then converted into US dollars for distribution to ADS
investors. Investors who seek to convert the rupee proceeds of a sale of equity
shares withdrawn upon surrender of ADSs into foreign currency and repatriate
the foreign currency may need to obtain the approval of the Reserve Bank of
India for each such transaction. See also "- Your ability to sell in India any
equity shares withdrawn from the depositary facility, the conversion of the
rupee proceeds from such sale into a foreign currency and the repatriation of
such foreign currency may be subject to delays if specific approval of the
Reserve Bank of India is required" and "Exchange Rates".
15
You may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. Investors are advised to consult their own tax advisers and to
carefully consider the potential tax consequences of an investment in the ADSs.
See "Taxation - Indian Tax".
There may be less company information available in Indian securities markets
than in securities markets in the United States.
There is a difference between India and the United States in the level of
regulation and monitoring of the securities markets and the activities of
investors, brokers and other market participants. The Securities and Exchange
Board of India is responsible for improving disclosure and regulating insider
trading and other matters for the Indian securities markets. There may,
however, be less publicly available information about Indian companies than is
regularly made available by public companies in the United States.
16
BUSINESS
Overview
We offer a wide range of banking products and services to corporate and
retail customers through a variety of delivery channels. In fiscal 2006, we
made a net profit of Rs. 24.20 billion (US$ 544 million) compared to a net
profit of Rs. 18.52 billion (US$ 416 million) in fiscal 2005. At year-end
fiscal 2006, we had assets of Rs. 2,772.30 billion (US$ 62.33 billion) and a
net worth of Rs. 219.98 billion (US$ 4.9 billion). At year-end fiscal 2006,
ICICI Bank was the second-largest bank in India and the largest bank in the
private sector in terms of total assets and net profit.
Our commercial banking operations for retail customers consist of retail
lending and deposits, private banking, distribution of third party investment
products and other fee-based products and services, as well as issuance of
unsecured redeemable bonds. We provide a range of commercial banking and
project finance products and services to India's leading corporations,
growth-oriented middle market companies and small and medium enterprises,
including loan products, fee and commission-based products and services,
deposits and foreign exchange and derivatives products. We also offer
agricultural and rural banking products. We offer investment banking services
through our subsidiary, ICICI Securities Limited, including corporate advisory
services, primary dealership in government securities and equity underwriting
and brokerage. In addition, we provide venture capital funding to start-up
companies and private equity to a range of companies through our venture
capital and private equity fund management subsidiary ICICI Venture Funds
Management Company. We provide a wide range of life and general insurance and
asset management products and services, respectively, through our subsidiaries
ICICI Prudential Life Insurance Company Limited, ICICI Lombard General
Insurance Company Limited and Prudential ICICI Asset Management Company
Limited. ICICI Prudential Life Insurance Company Limited had a retail market
share of about 32% in new business written (on weighted received premium basis)
by private sector life insurance companies and about 12% in new business
written (on weighted received premium basis) by all life insurance companies in
India, during April-June 2006. ICICI Lombard General Insurance Company Limited
had a market share of about 35% among the private sector general insurance
companies and about 12% among all general insurance companies in India, during
April-June 2006. Prudential ICICI Asset Management Company Limited was the
largest player in the Indian mutual fund industry at June 30, 2006 with a
market share of about 11% in terms of funds under management. We cross-sell the
products of our insurance and asset management subsidiaries to our corporate
and retail customers.
We believe that international markets present a major growth opportunity,
and therefore, we have expanded the range of our commercial banking products
to international customers. We currently have banking subsidiaries in the
United Kingdom, Canada and Russia, branches in Singapore, Dubai International
Finance Centre, Sri Lanka, Hong Kong, offshore banking units in Mumbai and
Bahrain and representative offices in the United States, China, United Arab
Emirates, Bangladesh and South Africa. Our subsidiary in the United Kingdom has
established a branch in Antwerp, Belgium. We have received approvals to
establish representative offices in Thailand, Indonesia and Kenya.
We deliver our products and services through a variety of channels,
ranging from bank branches and ATMs to call centers and the Internet. At March
31, 2006, we had a network of 563 branches, 51 extension counters and 2,200
ATMs in 352 locations across several Indian states.
Our legal name is ICICI Bank Limited but we are known commercially as
ICICI Bank. We were incorporated on January 5, 1994 under the laws of India as
a limited liability corporation. The duration of ICICI Bank is unlimited. Our
principal corporate office is located at ICICI Bank Towers, Bandra-Kurla
Complex, Mumbai 400 051, India, our telephone number is +91 22 2653 1414 and
our web site address is www.icicibank.com. Our agent for service of process in
the United States is Mr. G.V.S. Ramesh, Joint General Manager, ICICI Bank
Limited, New York Representative Office, 500 Fifth Avenue, Suite 2830, New
York, New York 10110.
17
History
ICICI was formed in 1955 at the initiative of the World Bank, the
government of India and Indian industry representatives. The principal
objective was to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses. Until the
late 1980s, ICICI primarily focused its activities on project finance,
providing long-term funds to a variety of industrial projects. With the
liberalization of the financial sector in India in the 1990s, ICICI transformed
its business from a development financial institution offering only project
finance to a diversified financial services provider that, along with its
subsidiaries and other group companies, offered a wide variety of products and
services. As India's economy became more market-oriented and integrated with
the world economy, ICICI capitalized on the new opportunities to provide a
wider range of financial products and services to a broader spectrum of
clients.
ICICI Bank was incorporated in 1994 as a part of the ICICI group. ICICI
Bank's initial equity capital was contributed 75.0% by ICICI and 25.0% by SCICI
Limited, a diversified finance and shipping finance lender of which ICICI owned
19.9% at December 1996. Pursuant to the merger of SCICI into ICICI, ICICI Bank
became a wholly-owned subsidiary of ICICI. Effective March 10, 2001, ICICI Bank
acquired Bank of Madura, an old private sector bank, in an all-stock merger.
The issue of universal banking, which in the Indian context means
conversion of long-term lending institutions such as ICICI into commercial
banks, had been discussed at length over the past few years. Conversion into a
bank offered ICICI the ability to accept low-cost demand deposits and offer a
wider range of products and services, and greater opportunities for earning
non-fund based income in the form of banking fees and commissions. ICICI Bank
also considered various strategic alternatives in the context of the emerging
competitive scenario in the Indian banking industry. ICICI Bank identified a
large capital base and size and scale of operations as key success factors in
the Indian banking industry. In view of the benefits of transformation into a
bank and the Reserve Bank of India's pronouncements on universal banking, ICICI
and ICICI Bank decided to merge.
At the time of the merger, both ICICI Bank and ICICI were publicly listed
in India and on the New York Stock Exchange. The amalgamation was approved by
each of the boards of directors of ICICI, ICICI Personal Financial Services,
ICICI Capital Services and ICICI Bank at their respective board meetings held
on October 25, 2001. The amalgamation was approved by ICICI Bank's and ICICI's
shareholders at their extraordinary general meetings held on January 25, 2002
and January 30, 2002, respectively. The amalgamation was sanctioned by the High
Court of Gujarat at Ahmedabad on March 7, 2002 and by the High Court of
Judicature at Bombay on April 11, 2002. The amalgamation was approved by the
Reserve Bank of India on April 26, 2002. The date of the amalgamation for
accounting purposes under Indian GAAP was March 30, 2002.
Shareholding Structure and Relationship with the Government of India
The following table sets forth, at September 23, 2006, certain information
regarding the ownership of our equity shares.
Percentage of
total
equity shares Number of equity
outstanding shares held
-------------- ----------------
Government-controlled shareholders:
Life Insurance Corporation of India....................................... 7.99 71,294,544
General Insurance Corporation of India and government-owned general
insurance companies..................................................... 4.19 37,436,760
Other government-controlled institutions, corporations and banks.......... 0.57 5,160,734
----------- -----------
Total government-controlled shareholders....................................... 12.76 113,892,038
----------- -----------
Other Indian investors:
Individual domestic investors (1) (2)..................................... 6.10 54,442,324
Bajaj Auto Limited........................................................ 4.33 38,612,181
18
Percentage of
total
equity shares Number of equity
outstanding shares held
------------- ----------------
Indian corporates and others (excluding Bajaj Auto Limited)............... 1.14 10,156,162
Mutual funds and banks (other than government-controlled banks)........... 2.56 22,827,052
----------- -----------
Total other Indian investors................................................... 14.12 126,037,719
----------- -----------
Total Indian investors......................................................... 26.88 239,929,757
----------- -----------
Foreign investors:
Deutsche Bank Trust Company Americas, as depositary....................... 26.73 238,604,478
Allamanda Investments Pte Limited......................................... 7.42 66,234,627
Crown Capital Limited..................................................... 4.95 44,148,827
Government of Singapore................................................... 2.30 20,538,096
Foreign institutional investors, foreign banks, overseas corporate bodies
and non-resident Indians (excluding Allamanda Investments Pte Limited,
Crown Capital Limited and Government of Singapore)(1)(2)................ 31.73 283,245,216
----------- -----------
Total foreign investors........................................................ 73.12 652,771,244
----------- -----------
Total.......................................................................... 100.00 892,701,001
=========== ===========
---------
(1) Executive officers and directors as a group held around 0.5% of the equity
shares as of this date.
(2) No single shareholder in this group owned 5.0% or more of ICICI Bank's
equity shares as of this date.
In April 2004, we issued 115,920,758 equity shares to foreign and domestic
institutional investors and domestic retail investors at a price of Rs. 280
(US$ 6.29) per share, totaling Rs. 32.46 billion (US$ 730 million). In March
2005, we sponsored an offering of ADSs by our shareholders, resulting in the
issuance of 20,685,750 ADSs representing 41,371,500 equity shares sold by our
equity shareholders, at a price of US$ 21.11 per ADS, aggregating approximately
US$ 437 million. The proceeds of the offering, net of expenses, were
distributed to the selling shareholders. In fiscal 2006, we concluded a capital
raising exercise issuing 148,204,556 equity shares, raising a total of Rs.
80.01 billion (US$ 1.8 billion) through the first simultaneous public issue in
India and ADS issue in the United States, with a Public Offering Without
Listing of ADSs in Japan. The issue was priced at Rs. 498.75 (US$ 11.21) per
share for retail investors in India, Rs. 525 (US$ 11.80) per share for other
investors in the Indian offering and US$ 26.75 per ADS.
The holding of government-controlled shareholders was 12.76% at September
23, 2006 against 15.63% at June 30, 2005 and 17.08% at June 30, 2004. The
holding of Life Insurance Corporation of India was 7.99% at September 23, 2006
against 9.75% at June 30, 2005 and 10.09% at June 30, 2004.
We operate as an autonomous and commercial enterprise, making decisions
and pursuing strategies that are designed to maximize shareholder value, and
the Indian government has never directly held any of our shares. There is no
shareholders' agreement or voting trust relating to the ownership of the shares
held by the government-controlled shareholders. We do not have any agreement
with our government-controlled shareholders regarding management control,
voting rights, anti-dilution or any other matter. The government of India has
guaranteed certain of our domestic and multilateral borrowings. Under the terms
of these loan and guarantee facilities provided by the government of India to
us, the government of India is entitled to appoint and has appointed one
representative to our board. We invite a representative of each of the
government-controlled insurance companies that are among our principal
institutional shareholders, Life Insurance Corporation of India and General
Insurance Corporation of India to join our board. Mr. T. S. Vijayan, Chairman
of Life Insurance Corporation of India was appointed as a director effective
April 30, 2005. Mr. R. K. Joshi, Chairman-cum-Managing Director of General
Insurance Corporation of India was appointed as a director effective October
13, 2005. See "Management--Directors and Executive Officers" for a discussion
of the composition of our Board of Directors.
The holding of other Indian investors was 14.12% at September 23, 2006
against 11.33% at June 30, 2005 and 13.11% at June 30, 2004. The total holding
of Indian investors was 26.88% at September 23, 2006 against 26.96% at June 30,
2005 and 30.19% at June 30, 2004. The holding of foreign investors was 73.12%
at September 23, 2006
19
against 73.04% at June 30, 2005 and 69.81% at June 30, 2004. See "Supervision
and Regulation -- Reserve Bank of India Regulations -- Ownership Restrictions".
Deutsche Bank Trust Company Americas holds the equity shares represented
by 119.30 million ADSs outstanding as depositary on behalf of the holders of
the ADSs. The ADSs are listed on the New York Stock Exchange. The depository
has the right to vote on the equity shares represented by the ADSs, as directed
by our Board of Directors. Under the Indian Banking Regulation Act, no person
holding shares in a banking company can exercise more than 10.0% of the total
voting power. This means that Deutsche Bank Trust Company Americas (as
depositary), which held of record approximately 26.73% of our equity shares as
of September 23, 2006 against 27.25% as of June 30, 2005 and 21.79% at June 30,
2004, could only vote 10.0% of our equity shares, in accordance with the
directions of our Board of Directors. See "Overview of the Indian Financial
Sector -- Recent Structural Reforms -- Proposed Amendments to the Banking
Regulation Act". Except as stated above, no shareholder has differential voting
rights.
In fiscal 2006, neither we nor any subsidiary made any repurchases of our
equity securities or ADSs, nor were any such repurchases made on our behalf or
on behalf of a subsidiary.
Strategy
Our objective is to enhance our position as a premier provider of banking
and other financial services in India and to leverage our competencies in
financial services and technology to develop an international business
franchise.
The key elements of our business strategy are to:
o focus on quality growth opportunities by:
o maintaining and enhancing our strong retail and corporate
franchise;
o building an international presence;
o strengthening our insurance and asset management businesses; and
o building a rural banking franchise.
o emphasize risk management practices and enhance asset quality;
o use technology for competitive advantage; and
o attract and retain talented professionals.
Overview of ICICI Bank's Products and Services
We offer a variety of financial products and services in the areas of
commercial banking, investment banking and insurance.
Commercial Banking for Retail Customers
We believe that the Indian retail financial services market is likely to
continue to experience sustained growth in the future. With upward migration of
household income levels, affordability and availability of retail finance and
the acceptance of the use of credit to finance purchases, retail credit has
emerged as a rapidly growing opportunity for banks that have the necessary
skills and infrastructure to succeed in this business. We have capitalized on
the growing retail opportunity in India and believe that we have emerged as a
market leader in retail credit. The key dimensions of our retail strategy are
innovative products, parity pricing, customer convenience, wide distribution,
strong processes, prudent risk management and customer focus. Cross-selling of
the entire range of credit and investment products and banking services to our
customers is a critical aspect of our retail strategy.
20
Our commercial banking operations for retail customers consist of retail
lending and deposits, credit cards, depositary share accounts, distribution of
third-party investment and insurance products, other fee-based products and
services and issuance of unsecured redeemable bonds.
Retail Lending Activities
We offer a range of retail asset products, including home loans,
automobile loans, commercial vehicle loans, two wheeler loans, personal loans,
credit cards, loans against time deposits and loans against shares. We also
fund dealers who sell automobiles, two wheelers, consumer durables and
commercial vehicles. We have capitalized on the growing retail opportunity in
India and believe that we have emerged as a market leader in retail credit,
with an outstanding gross retail finance portfolio of Rs. 981.6 billion (US$
22.1 billion) at year-end fiscal 2006. Our retail asset products are generally
fixed rate products repayable in equal monthly installments with the exception
of our floating rate home loan portfolio, where any change in the benchmark
rate to which the rate of interest on the loan is referenced is passed on to
the borrower on the first day of the succeeding quarter. In general, any
increase in the rate of interest payable on floating rate home loans is
effected by an elongation of the repayment schedule and/or by changing the
monthly installment amount. We have recently, based on the age of the borrower
and the extended tenure of the loan, effected a part of the increase by an
increase in the monthly installment amount. See also "Risk Factors -- Risks
Relating to Our Business -- Our business is particularly vulnerable to interest
rate risk and volatility in interest rates could adversely affect our net
interest margin, the value of our fixed income portfolio, our income from
treasury operations, the quality of our loan portfolio and our financial
performance".
The following table sets forth, at the dates indicated, the composition of
our gross (net of write-offs) retail finance portfolio.
At year-end fiscal 2006
------------------------------
Rs. US$
(in billions) (in millions)
-------------- --------------
Home loans(1).................................... 505.1 11,356
Automobile loans................................. 188.7 4,243
Commercial vehicle and related loans............. 120.5 2,709
Personal loans................................... 61.1 1,374
Credit card receivables.......................... 35.4 797
Two wheeler loans................................ 21.0 472
Others(2)........................................ 49.7 1,116
-------------- --------------
Total............................................ 981.6 22,067
============== ==============
(1) Includes developer financing
(2) Includes dealer funding
Lending to small and medium enterprises
We are seeking to extend our reach to the small and medium enterprises
sector. We provide supply chain financing, including the financing of selected
customers of our corporate clients. We also provide financing on a
cluster-based approach, that is financing of small enterprises that have a
homogeneous profile such as apparel manufacturers and manufacturers of
pharmaceuticals. We recently launched small business loans to meet the emerging
opportunity of providing unsecured credit facilities to small businesses to
meet their working capital needs. Funding under this facility is restricted to
a maximum of Rs. 2.5 mn (US$ 56,205) per customer.
Retail Deposits
Our retail deposit products include time deposits and savings accounts. We
also offer targeted products to specific customer segments such as high net
worth individuals, defense personnel, trusts and businessmen, and have
corporate salary account products. Further, we offer an international debit
card in association with VISA International. At year-end fiscal 2006, we had a
debit card base of about 8.1 million cards. We offer current account products
to our small and medium enterprise customers.
For a description of the Reserve Bank of India's regulations applicable to
deposits in India and required deposit insurance, see "Supervision and
Regulation -- Reserve Bank of Indian Regulations -- Regulations Relating to
21
Deposits" and "Supervision and Regulation -- Deposit Insurance". For more
information on the type, cost and maturity profile of our deposits, see "--
Funding".
Bond Issues
We offer retail liability products in the form of a variety of unsecured
redeemable bonds. The Reserve Bank of India has prescribed limits on issuance
of bonds by banks. During fiscal 2006, we did not issue any bonds to retail
investors. While we expect that deposits will continue to be our primary source
of funding, we may conduct bond issues in the future.
Other Fee-Based Products and Services
Through our distribution network, we offer government of India relief
bonds, insurance policies from ICICI Prudential Life Insurance Company Limited
and ICICI Lombard General Insurance Company Limited and distribute public
offerings of equity shares by Indian companies. We also offer a variety of
mutual fund products from Prudential ICICI Asset Management Company Limited and
other select mutual funds. We also levy service charges on deposit accounts. We
offer fee-based products and services including documentary credits and
guarantees to small and medium enterprises.
As a depositary participant of the National Securities Depository Limited
and Central Depository Services (India) Limited, we offer depositary share
accounts to settle securities transactions in a dematerialized mode. Further,
we are one of the banks designated by the Reserve Bank of India for issuing
approvals to non-resident Indians and overseas corporate bodies to trade in
shares and convertible debentures on the Indian stock exchanges.
ICICI Web Trade Limited, a company owned by a private equity fund managed
by ICICI Venture Funds Management Company Limited, provides web and
telephone-based brokering services. The amalgamation of ICICI Web Trade Limited
with ICICI Brokerage Services Limited, a subsidiary of ICICI Securities Limited
providing brokerage services to institutional clients has been approved by the
Bombay High Court on August 25, 2006.
Commercial Banking for Corporate Customers
We provide a range of commercial banking products and services to India's
leading corporations and growth-oriented middle market companies, including
loan products, fee and commission-based products and services, deposit products
and foreign exchange and derivatives products.
Corporate Loan Portfolio
Our corporate loan portfolio consists of project and corporate finance and
working capital. For further details on our loan portfolio, see "-- Loan
Portfolio -- Loan Concentration". For a description of our credit rating and
approval system, see "-- Risk Management -- Credit Risk -- Credit Risk
Assessment Procedures for Corporate Loans".
Our project finance business consists principally of extending medium-term
and long-term rupee loans to the manufacturing sector.
Our working capital financing consists of cash credit facilities and bill
discounting. For more details on our credit risk procedures, see "-- Risk
Management -- Credit Risk".
Fee and Commission-Based Activities
We generate fee income from our syndication, securitization and project
financing activities. We seek to leverage our project financing and structuring
skills and our relationships with companies and financial institutions and
banks to earn fee incomes from structuring and syndication. We also seek to
leverage our international presence to earn fee income from structuring and
financing of overseas acquisitions by Indian companies.
We offer our corporate customers a wide variety of fee and
commission-based products and services including documentary credits and
standby letters of credit (called guarantees in India).
22
We also offer cash management services (such as collection, payment and
remittance services), escrow, trust and retention account facilities, online
payment facilities, custodial services and tax collection services on behalf of
the government of India and the governments of Indian states. We also offer
custodial services to clients. At year-end fiscal 2006, total assets held in
custody on behalf of our clients (mainly foreign institutional investors,
offshore funds, overseas corporate bodies and depositary banks for GDR
investors) was approximately Rs. 1,382.6 billion (US $31.1 billion). As a
registered depositary participant of National Securities Depository Limited and
Central Depository Services (India) Limited, the two securities depositaries
operating in India, we also provide electronic depositary facilities to
investors.
Corporate Deposits
We offer a variety of deposit products to our corporate customers
including current accounts, time deposits and certificates of deposits. For
more information on the type, cost and maturity profile of our deposits, see
"-- Funding".
Foreign Exchange and Derivatives
We provide customer specific products and services and risk hedging
solutions in several currencies to meet the trade and service-related
requirements of our corporate clients. The products and services offered
include:
o spot foreign exchange for the conversion of foreign currencies
without any value restrictions; and
o foreign exchange and interest rate derivatives.
We earn commissions on these products and services from our corporate
customers.
We provide forward contracts to our customers for hedging their short-term
exchange rate risk on foreign currency denominated receivables and payables. We
generally provide this facility for a term of up to six months and occasionally
up to 12 months. We also offer interest rate and currency swaps to our
customers for hedging their medium and long-term risks due to interest rate and
currency exchange rate movements. We offer these swaps for a period ranging
from three to 10 years. Our customers pay a commission for this product that is
included in the price of the product and is dependent upon market conditions.
The risk positions arising out of these products are, if not offset by other
positions taken by us, covered in the inter-bank market. Our risk management
products are currently limited to foreign currency forward transactions and
currency and interest rate swaps for selected approved clients. We believe,
however, that the demand for risk management products will grow, and we are
building the capabilities to grow these products. We are focusing particularly
on setting up sophisticated infrastructure and internal control procedures that
are critical to these products.
Commercial Banking for Rural and Agricultural Customers
We believe that rural India offers a major growth opportunity for
financial services and have identified this as a key focus area. The Reserve
Bank of India's directed lending norms require us to lend 18.0% of our net bank
credit on the residual domestic net bank credit (i.e., our total advances
excluding the advances of ICICI) to the agricultural sector. However, rural
banking presents significant challenges in terms of geographical coverage and
high unit transaction costs. Our rural banking strategy seeks to adopt a
holistic approach to the financial needs of various segments of the rural
population, by delivering a comprehensive product suite encompassing credit,
transaction banking, savings, investment and insurance. We provide corporate
banking products and services to corporate clients engaged in
agriculture-linked businesses. We are seeking to grow our rural individual and
household lending portfolio by developing and scaling up credit products to
various segments of the rural population, whether engaged in agriculture or
other economic activity. Our rural credit products for individuals and
households include loans to farmers for cultivation, post-harvest financing
against warehouse receipts, loans for purchase of tractors, working capital for
trading and small enterprises, loans against jewellery and micro-finance loans
for various purposes. We are seeking to roll-out our rural strategy and reach
out to rural customers through partnerships with micro-finance institutions and
companies active in rural areas. Our rural delivery channels include branches,
micro-finance institutions, third-party kiosks and franchisees. See also
"Competition".
23
For details of our directed lending portfolio, see "-- Loan Portfolio --
Loan Concentration -- Directed Lending".
Commercial Banking for International Customers
We believe that the international markets present a major growth
opportunity and have, therefore, expanded the range of our commercial banking
products to international customers. Our strategy for growth in international
markets is based on leveraging home country links, technology and
infrastructure for international expansion by capturing market share in select
international markets. The initial focus areas are supporting Indian companies
in raising corporate and project finance for their investments abroad, trade
finance, personal financial services for non-resident Indians and international
alliances to support domestic businesses. We have over the last few years built
a large network of correspondent relationships with international banks across
all major countries. Most of these countries have significant trade and other
relationships with India.
Many of the commercial banking products that we offer to international
customers, such as trade finance and letters of credit, are similar to the
products offered to our corporate customers in India. Some of the products and
services that are unique to international customers are:
o Money2India: an Internet-based wire transfer remittance facility.
o TradeWay: an Internet-based documentary collection product to provide
correspondent banks access to real-time on line information on the
status of their export bills collections routed through us.
o Remittance Tracker: an Internet-based application that allows a
correspondent bank to query on the status of their payment
instructions and also to get various information reports online.
o Offshore banking deposits: multi-currency deposit products in US
dollar, pound sterling and euro.
o Foreign currency non-resident deposits: foreign currency deposits
offered in four main currencies -- US dollar, pound sterling, euro
and yen.
o Non-resident external fixed deposits: deposits maintained in Indian
rupees.
o Non-resident external savings account: savings accounts maintained in
Indian rupees.
o Non-resident ordinary savings accounts and non-resident ordinary
fixed deposits.
We currently have subsidiaries in the United Kingdom, Canada and Russia,
branches in Singapore, Dubai International Finance Centre, Sri Lanka, Hong
Kong, offshore banking units in Mumbai and Bahrain and representative offices in
the United States, China, United Arab Emirates, Bangladesh and South Africa. We
have received approvals to establish representative offices in Thailand,
Indonesia and Kenya from the respective regulatory authorities. Our
subsidiaries in the United Kingdom, Canada and Russia offer local banking
products and services in those countries. Our subsidiary in United Kingdom has
also opened a branch in Antwerp, Belgium in May 2006. In Canada and the United
Kingdom, we have also launched direct banking offerings using the Internet as
the access channel.
We also access the international debt markets for funding the assets of
our overseas branches. We issued US$ 500 million senior notes in November 2005.
We also have an existing Medium Term Note Program and US$ Commercial Paper
program which we use from time to time.
Delivery Channels
We deliver our products and services through a variety of channels,
ranging from traditional bank branches to ATMs, call centers and the Internet.
We also have direct marketing agents or associates, who deliver our retail
credit products. These agents help us achieve deeper penetration by offering
door-step service to the customer.
24
At March 31, 2006, we had a network of 563 branches and 51 extension
counters in 352 centers across several Indian states. Extension counters are
small offices linked to a branch and are primarily within office buildings or
on factory premises that provide commercial banking services.
As a part of its branch licensing conditions, the Reserve Bank of India
has stipulated that at least 25.0% of our branches must be located in
semi-urban and rural areas. The following table sets forth the number of
branches broken down by area at March 31, 2006.
At March 31, 2006
-----------------------
Number of
branches % of total
--------- ----------
Metropolitan/urban................................... 366 65.01%
Semi-urban/rural..................................... 197 34.99%
Total................................................ 563 100.00%
At March 31, 2006, we had 2,200 ATMs, of which 698 were located at our
branches and extension counters. Through our website www.icicibank.com, we
offer our customers online access to account information and payment and fund
transfer facilities. We provide internet banking services to our corporate
clients through ICICI e-business, a finance portal which is the single point
web-based interface for all our corporate clients. We provide telephone banking
services through our call center. At March 31, 2006, our call center had 2,586
service workstations in India. We offer mobile phone banking services to our
customers using any cellular telephone service operator in India.
Investment Banking
Our investment banking operations principally consist of our treasury
operations and the operations of ICICI Securities Limited, our subsidiary.
Treasury
Through our treasury operations, we seek to manage our balance sheet
including the maintenance of required regulatory reserves and to optimize
profits from our trading portfolio by taking advantage of market opportunities.
Our trading and investments portfolio includes our regulatory portfolio, as
there is no restriction on active management of our regulatory portfolio.
Our treasury undertakes liquidity management by seeking to maintain an
optimum level of liquidity and complying with the cash reserve ratio
requirement. The objective is to ensure the smooth functioning of all our
branches and at the same time avoid the holding of excessive cash. We maintain
a balance between interest-earning liquid assets and cash to optimize earnings
and undertake reserve management by maintaining statutory reserves, including
the cash reserve ratio and the statutory liquidity ratio. Further, we engage in
domestic and foreign exchange operations. As part of our treasury activities,
we also maintain proprietary trading portfolios in domestic debt and equity
securities and in foreign currency assets. Our treasury manages our foreign
currency exposures and the foreign exchange and risk hedging derivative
products offered to our customers and engages in proprietary trading of
currencies. Our investment and market risk policies are approved by our Board
of Directors.
Our investments portfolio is classified into three categories - held to
maturity, available for sale and held for trading. Investments acquired with
the intention to hold them up to maturity are classified as held to maturity.
Investments acquired by us with the intention to trade by taking advantage of
the short-term price/interest rate movements are classified as trading. The
investments which do not fall in the above two categories are classified as
available for sale. Investments under the held for trading category should be
sold within 90 days; in the event of inability to sell due to adverse factors
including tight liquidity, extreme volatility or a unidirectional movement in
the market, the unsold securities should be shifted to the available for sale
category. Under each category the investments are further classified under (a)
government securities (b) other approved securities (c) shares (d) bonds and
debentures (e) subsidiaries and joint ventures and (f) others. Investments
classified under held to maturity category are not marked to market and are
carried at acquisition cost, unless it is more than the face value, in which
case the premium is amortized over the period remaining to maturity. A
provision is made for other than temporary diminution on such securities. The
individual scrips in the available for sale category are marked to market.
Investments under this category are valued scrip-wise and depreciation/
appreciation is aggregated for each classification. Net depreciation, if any,
is provided for. Net appreciation, if any, is ignored. The individual scrips in
the held for trading category are marked to market as in the case of those in
the available for sale category.
The following table sets forth, at the dates indicated, certain
information related to our trading portfolio.
At March 31(1),
---------------------------------------------------------------
2004 2005 2006 2006
----------- ---------- ---------- -------
(in millions)
Government securities......................... Rs. 28,440 Rs.13,691 Rs. 16,806 US$ 378
Securities purchased under agreement to resell 34,974 24,000 40,000 899
Bonds and debentures.......................... 8,178 5,556 18,247 410
Equity shares................................. 1,732 4,783 6,232 140
25
At March 31(1),
----------------------------------------------------------
2004 2005 2006 2006
--------- --------- ---------- ----------
(in millions)
Mutual funds.................................. 1,143 37,957 35,624 801
--------- --------- ---------- ---------
Total......................................... Rs.74,468 Rs.85,987 Rs 116,909 US$ 2,628
========= ========= ========== =========
---------
(1) Excludes assets held to cover linked liabilities of our life insurance
business amounting to Rs. 70,788 million (US$ 1.6 billion) for fiscal 2006
(fiscal 2005: Rs. 26,541 million, fiscal 2004: to Rs. 6,401 million).
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on our trading portfolio, net
gain from the sale of these investments and gross unrealized gain/(loss) on
these securities.
Year ended March 31,
---------------------------------------------------------
2004 2005 2006 2006
--------- --------- ---------- ---------
(in millions)
Interest and dividends on trading portfolio... Rs. 2,864 Rs. 1,904 Rs. 3,137 US$ 71
Gain on sale of trading portfolio............. 3,782 1,239 1,979 44
Unrealized gain/(loss) on trading portfolio... (365) (85) (162) (4)
--------- --------- ---------- ---------
Total......................................... Rs.6,281 3,058 Rs 4,954 US$ 111
========= ========= ========== =========
In addition to trading portfolio, we also hold available for sale
investments. The following tables set forth, at the dates indicated, certain
information related to our available for sale investments portfolio.
At March 31, 2004
------------------------------------------------------------------
Gross Gross
Amortized cost unrealized gain unrealized loss Fair value
--------------- --------------- ---------------- -----------
(in millions)
Corporate debt securities..................... Rs. 31,939 Rs. 1,902 Rs. (248) Rs. 33,593
Government securities......................... 200,973 2,925 (86) 203,812
Total debt securities......................... 232,912 4,827 (334) 237,405
Equity shares................................. 21,111 3,018 (1,335) 22,794
Other investments(1).......................... 32,085 123 (235) 31,973
----------- ---------- ----------- -----------
Total......................................... Rs. 286,108 Rs. 7,968 Rs.(1,904) Rs. 292,172
=========== ========== =========== ===========
---------
(1) Includes preference shares, mutual fund units, venture funds, security
receipts and pass through certificates.
At March 31, 2005
-----------------------------------------------------------------
Gross Gross
Amortized cost unrealized gain unrealized loss Fair value
--------------- --------------- ---------------- -----------
(in millions)
Corporate debt securities..................... Rs. 19,203 Rs. 1,342 Rs. (177) Rs. 20,368
Government securities......................... 34,005 - (1) 34,004
Other securities(1) ............................ 6,562 52 (3) 6,611
---------- ---------- ---------- -----------
Total debt investments........................ 59,770 1,394 (181) 60,983
Equity shares................................. 19,802 5,619 (990) 24,431
Other investments(2).......................... 34,766 3,109 (539) 37,336
---------- ---------- ---------- -----------
Total......................................... Rs.114,338 Rs. 10,122 Rs. (1,710) Rs. 122,750
========== ========== ========== -==========
---------
(1) Includes credit linked notes.
(2) Includes preference shares, mutual fund units, venture funds, security
receipts and pass through certificates.
26
At March 31, 2006
----------------------------------------------------------------
Gross Gross
unrealized unrealized
Amortized cost gain loss Fair value
-------------- ---------- ---------- -----------
(in millions)
Corporate debt securities..................... Rs. 34,424 Rs. 238 Rs. (502) Rs. 34,160
Government securities......................... 116,024 - - 116,024
Other securities(1)........................... 12,947 22 (19) 12,950
----------- ---------- ---------- -----------
Total debt securities......................... 163,395 260 (521) 163,134
Equity shares................................. 23,056 7,024 (1,191) 28,889
Other investments(2).......................... 63,460 3,833 (1,090) 66,203
----------- ---------- ---------- -----------
Total......................................... Rs. 249,911 Rs. 11,117 Rs (2,802) Rs. 258,226
=========== ========== ========== ===========
---------
(1) Includes credit linked notes.
(2) Includes preference shares, mutual fund units, venture funds, security
receipts and pass through certificates.
The following table sets forth, for the period indicated, income from
available for sale securities.
Year ended March 31,
-------------------------------------------------------------
2004 2005 2006 2006
----------- ---------- ---------- -----------
(in millions)
Interest...................................... Rs. 13,831 Rs. 8,901 Rs. 6,970 US$ 157
Dividend...................................... 1,061 925 1,746 39
----------- ---------- ---------- -----------
Total......................................... Rs. 14,892 Rs. 9,826 Rs. 8,716 US$ 196
=========== ========== ========== ===========
Gross realized gain........................... Rs. 5,313 Rs. 5,815 Rs. 9,509 214
Gross realized loss........................... (3,317) (1,838) (1,258) (28)
----------- ---------- ---------- -----------
Total......................................... Rs. 1,996 Rs. 3,977 Rs. 8,251 US$ 186
=========== ========== ========== ===========
The following table sets forth, at the date indicated, an analysis of the
maturity profile of our investments in debt securities classified as available
for sale investments and the yields thereon. This maturity profile is based on
repayment dates and does not reflect re-pricing dates of floating rate
investments.
At March 31, 2006
---------------------------------------------------------------------------------------
Up to one year One to five years Five to 10 years More than 10 years
-------------------- -------------------- ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------- ----- ---------- ----- ---------- ----- ---------- -----
(in millions)
Corporate debt
securities........... Rs. 7,235 5.51% Rs. 12,113 7.09% Rs. 11,576 6.91% Rs. 3,236 7.14%
Government of India
securities........... 113,649 6.69 1,358 11.09 874 8.45 143 7.58
Other securities........ - - 8,481 6.47 4,469 6.57 - -
----------- ---------- ---------- ----------
Total interest-earning
securities Rs. 120,884 6.62 Rs. 21,952 7.10% Rs. 16,919 6.90% Rs. 3,379 7.16%
=========== ========== ========== ==========
Total amortized cost.... Rs. 120,438 Rs. 22,310 Rs. 17,128 Rs. 3,519
The amortized cost of our held to maturity portfolio amounted to Rs. 417.5
billion (US$ 9.4 billion) as on March 31, 2006 (March 31, 2005: Rs. 335.0
billion (US$ 7.5 billion), March 31, 2004: Rs. 107.3 billion (US$ 2.4 billion)).
The gross unrealized gain on this portfolio was Rs. 7.9 billion (US$ 180
million) as on March 31, 2006 (March 31, 2005: Rs. 5.9 billion (US$ 133
million), March 31, 2004: Rs. 8.1 billion (US$ 181 million)). The gross
unrealized loss on this portfolio was Rs. 8.0 billion (US$ 180 million) as on
March 31, 2006 (March 31, 2005: Rs. 6.9 billion (US$ 156 million), March 31,
2004: Rs. 1.8 billion (US$ 41 million)).
We have a limited equity portfolio because the Reserve Bank of India
restricts investments by a bank in equity securities, convertible debentures,
units of equity oriented mutual funds and loans to brokers to 5.0% of its total
27
outstanding domestic loan portfolio as at March 31 of the previous year. See
also "Supervision and Regulation - Reserve Bank of India Regulations -
Regulations relating to Investments and Capital Market Exposure Limits".
Under the Reserve Bank of India's statutory liquidity ratio requirement,
we are required to maintain a minimum of 25.0% of our net demand and time
liabilities by way of approved securities, such as government of India
securities and state government securities. See "Supervision and Regulation --
Legal Reserve Requirements -- Statutory Liquidity Ratio." We maintain the
statutory liquidity ratio through a portfolio of government of India securities
that we actively manage to optimize the yield and benefit from price movements.
In general, we pursue a strategy of active management of our long-term
equity portfolio to maximize return on investment. To ensure compliance with the
Securities and Exchange Board of India's insider trading regulations, all
dealings in our equity investments in listed companies are undertaken by the
equity and corporate bonds dealing desks of our treasury, which are segregated
from our other business groups as well as the other groups and desks in the
treasury, and which do not have access to unpublished price sensitive
information about these companies that may be available to us as a lender.
We deal in several major foreign currencies and take deposits from
non-resident Indians in four major foreign currencies. We also manage onshore
accounts in foreign currencies. The foreign exchange treasury manages its
portfolio through money market and foreign exchange instruments to optimize
yield and liquidity.
We provide a variety of risk management products to our corporate and small
and medium enterprise clients, including foreign currency forward contracts and
currency and interest rate swaps, and are expanding our capabilities in this
area. We control market risk and credit risk on our foreign exchange trading
portfolio through an internal model which sets counterparty limits, stop-loss
limits and limits on the loss of the entire foreign exchange trading operations
and exception reporting. See also "Risk Management - Quantitative and
Qualitative Disclosures About Market Risk - Exchange Rate Risk".
ICICI Securities Limited
We provide investment banking services through our subsidiary, ICICI
Securities Limited, which provides investment banking services through three
main business lines: corporate advisory, fixed income and equities. The clients
of ICICI Securities Limited include a range of Indian and foreign corporations
and institutional investors. ICICI Securities is a non-bank finance company.
For a description of non-bank finance companies, see "Overview of the Indian
Financial Sector - Non-Bank Finance Companies".
Corporate advisory services include business valuations, pricing and
structuring of transactions, and financial and corporate restructuring for
large and mid-market Indian corporate clients and private equity syndication
and privatization services for public sector companies. ICICI Securities
Limited is also one of the market leaders in the Indian debt market and was
named the "Best Domestic Bond House" by Finance Asia and Asia Money for the
second year in a row. ICICI Securities Limited is a primary dealer appointed and
authorized by the Reserve Bank of India to trade in
28
government securities. In equities, ICICI Securities Limited offers a range of
products including underwriting of equity offerings, public and private
placement of corporate equity, assistance in buyback programs and equity
brokering and research, primarily for institutional investor clients. ICICI Web
Trade Limited, a company owned by a private equity fund managed by ICICI Venture
Funds Management Company Limited, provides web and telephone-based brokering
services. The amalgamation of ICICI Web Trade Limited with ICICI Brokerage
Services Limited, a subsidiary of ICICI Securities Limited providing brokerage
services to institutional clients was approved by the Bombay High Court on
August 25, 2006.
Venture capital and private equity
We also provide venture capital funding to start-up companies and private
equity to a range of companies through funds managed by our subsidiary ICICI
Venture Funds Management Company Limited. At year-end fiscal 2006, ICICI Venture
managed or advised funds of approximately Rs.63.90 billion (US$1.4 billion).
Insurance
We provide a wide range of insurance products and services through our
subsidiaries ICICI Prudential Life Insurance Company Limited and ICICI Lombard
General Insurance Company Limited. ICICI Prudential Life Insurance Company
Limited and ICICI Lombard General Insurance Company Limited are joint ventures
with Prudential plc of UK and Fairfax Financial Holdings Limited of Canada,
respectively. We have a 74.0% interest in both these entities. We collect fees
from these subsidiaries for generating leads and providing referrals that are
converted into policies. ICICI Prudential Life Insurance Company Limited
incurred a net loss of Rs.1.88 billion (US$42 million) in fiscal 2006. As would
be typical for life insurance companies in their initial years of operation,
the loss was due to business set-up and customer acquisition costs as well as
reserving for actuarial liability. ICICI Lombard General Insurance Company
Limited made a net profit of Rs.503.1 million (US$11 million) in fiscal 2006.
We expect our insurance joint ventures to experience significant growth and to
require additional investments by us.
Funding
Our funding operations are designed to ensure stability of funding,
minimize funding costs and effectively manage liquidity. Since the amalgamation
of ICICI with us, our primary source of funding has been deposits raised from
both retail and corporate customers. We also raise funds through short-term
rupee borrowings and domestic or overseas bond offerings pursuant to specific
regulatory approvals. Because ICICI was not allowed to raise banking deposits as
a financial institution, its primary sources of funding prior to the
amalgamation were retail bonds and rupee borrowings from a wide range of
institutional investors. ICICI also raised funds through foreign currency
borrowings from commercial banks and other multilateral institutions like the
Asian Development Bank and the World Bank, which were guaranteed by the
government of India.
Our deposits were 62.2% of our total liabilities at year-end fiscal 2006
compared to 56.7% of our total liabilities at year-end fiscal 2005. Our
borrowings were 16.2% of our total liabilities at year-end fiscal 2006 compared
to 21.5% of our total liabilities at year-end fiscal 2005. Our deposits
increased 70.6% to Rs.1,724.5 billion (US$38.8 billion) at year-end fiscal 2006
compared to Rs.1,011.1 billion (US$22.7 billion) at year-end fiscal 2005. This
significant growth in deposits was achieved primarily through increased focus on
retail and corporate customers by offering a wide range of products designed to
meet varied individual and corporate needs and leveraging on our network of
branches, extension counters and ATMs. Our borrowings increased to Rs.450.0
billion (US$10.1 billion) at year-end fiscal 2006 compared to Rs.383.7 billion
(US$8.6 billion) at year-end fiscal 2005.
The following table sets forth, for the periods indicated, the average
volume and average cost of deposits by type of deposit.
29
Year ended March 31,(1)
------------------------------------------------------------------------------------
2004 2005 2006
--------------------- --------------------- -----------------------------------
Amount Cost(2) Amount Cost(2) Amount Amount Cost(2)
---------- ------- ---------- ------- ------------ --------- ------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits..... Rs. 56,916 2.37% Rs. 98,111 2.25% Rs. 171,658 US$ 3,859 2.63%
Time deposits........ 453,364 6.36 583,332 5.21 940,272 21,139 5.86
Non-interest-bearing
deposits:
Other demand deposits 53,932 - 87,082 - 142,849 3,212 -
---------- ---------- ------------ ---------
Total deposits............ Rs.564,512 5.35% Rs.768,525 4.24% Rs.1,254,779 US$28,210 4.75%
========== ========== ============ =========
---------
(1) Average of quarterly balances at the end of March of the previous fiscal
year and June, September, December and March of that fiscal year.
(2) Represents interest expense divided by the average of quarterly balances.
Our average deposits in fiscal 2006 were Rs.1,254.8 billion (US$28.2
billion) at an average cost of 4.8% compared to average deposits of Rs.768.5
billion (US$17.3 billion) at an average cost of 4.2% in fiscal 2005. Our average
time deposits in fiscal 2006 were Rs.940.3 billion (US$21.1 billion) at an
average cost of 5.9% compared to average time deposits of Rs.583.3 billion
(US$13.1 billion) in fiscal 2005 at an average cost of 5.2%.
The following table sets forth, at the date indicated, the maturity profile
of deposits by type of deposit.
At March 31, 2006
-------------------------------------------------------------
After one
year
and within After
Up to one year three years three years Total
-------------- ----------- ----------- ------------
(in millions)
Interest-bearing deposits:
Savings deposits......................... Rs. 242,572 Rs. - Rs. - Rs. 242,572
Time deposits............................ 1,182,789 91,438 43,856 1,318,083
Non-interest-bearing deposits:
Other demand deposits.................... 163,855 - - 163,855
------------ ----------- ---------- ------------
Total deposits................................ Rs.1,589,216 Rs. 91,438 Rs. 43,856 Rs.1,724,510
============ =========== ========== ============
The following table sets forth, for the periods indicated, average
outstanding rupee borrowings based on quarterly balance sheets and by category
of borrowing and the percentage composition by category of borrowing. The
average cost (interest expense divided by average of quarterly balances) for
each category of borrowings is provided in the footnotes.
Year ended March 31,(1)
-----------------------------------------------------------------------------------------
2004 2005 2006
-----------------------------------------------------------------------------------------
Amount % to total Amount % to total Amount Amount % to total
---------- ---------- ---------- ---------- ---------- --------- ----------
(in millions, except percentages)
SLR bonds(2)............ Rs. 14,815 4.0% Rs. 14,815 4.3% Rs. 14,815 US$ 333 4.2%
Borrowings from Indian
government(3)........ 5,735 1.5 4,689 1.4 3,581 81 1.0
Other borrowings(4)(5).. 355,052 94.5 321,307 94.3 331,511 7,453 94.8
-----------------------------------------------------------------------------------------
Total................... Rs.375,602 100.0% Rs.340,811 100.0% Rs. 34,856 US$ 7,867 100.0%
=========================================================================================
---------
(1) Average of quarterly balances at the end of March of the previous fiscal
year and June, September, December and March of that fiscal year for each
of fiscal 2004, 2005 and 2006.
(2) With an average cost of 11.43% in fiscal 2004, 11.57% in fiscal 2005 and
11.60% in fiscal 2006.
(3) With an average cost of 10.07% in fiscal 2004, 10.27% in fiscal 2005 and
10.82% in fiscal 2006.
(4) With an average cost of 10.38% in fiscal 2004, 9.09% in fiscal 2005 and
9.28% in fiscal 2006.
(5) Includes publicly and privately placed bonds, borrowings from institutions
and wholesale deposits such as inter-corporate deposits, certificate of
deposits and call borrowings.
30
The following table sets forth, at the date indicated, the maturity profile
of our rupee term deposits of Rs.10 million (US$224,820) or more.
At March 31,
------------------------------------
% of total
2006 deposits
------------------------ ----------
(in millions, except percentages)
Less than three months..................... Rs.352,453 US$ 7,924 20.4%
Above three months and less
than six months.......................... 184,750 4,153 10.7%
Above six months and less than 12 months... 351,576 7,904 20.4%
More than 12 months........................ 69,998 1,574 4.1%
---------- ----------
Total deposits of Rs.10 million and more... Rs.958,777 US$ 21,555 55.6%
========== ==========
The following table sets forth, at the dates indicated, certain information
related to short-term rupee borrowings, which consist of certificates of
deposits, borrowings from government-owned companies and inter-bank borrowings.
At March 31,(1)
------------------------------------
2004 2005 2006
---------- ---------- -----------
(in millions, except percentages)
Year-end balance......................... Rs. 45,330 Rs. 80,711 Rs. 106,542
Average balance during the year(2)....... 45,368 50,150 84,910
Maximum quarter-end balance.............. 60,718 80,711 106,542
Average interest rate during the year(3). 5.80% 5.76% 7.80%
Average interest rate at year-end(4)..... 5.20% 5.85% 7.34%
---------
(1) Short-term borrowings includes borrowings in the call market and repurchase
agreements.
(2) Average of quarterly balances at the end of March of the previous fiscal
year, June, September, December and March of that fiscal year for each of
fiscal 2004, 2005 and 2006.
(3) Represents the ratio of interest expense on short-term borrowings to the
average of quarterly balances of short-term borrowings.
(4) Represents the weighted average rate of the short-term borrowings
outstanding at fiscal year-end.
The following table sets forth, at the dates indicated, average outstanding
volume of foreign currency borrowings based on quarterly balance sheets by
source and the percentage composition by source. The average cost (interest
expense divided by average of quarterly balances) for each source of borrowings
is provided in the footnotes.
At March 31, (1)
-----------------------------------------------------------------------------------------
2004 2005 2006
-----------------------------------------------------------------------------------------
Amount % to total Amount % to total Amount Amount % to total
---------- ---------- ---------- ---------- ---------- --------- ----------
(in millions, except percentages)
Commercial borrowings (2) Rs. 47,417 65.4% Rs.86,886 77.6% Rs.166,524 US$ 3,744 87.4%
Multilateral borrowings
(3)................... 25,073 34.6 25,080 22.4 24,034 540 12.6
---------- ---------- ---------- ---------- ---------- --------- ----------
Total.................... Rs. 72,490 100.0% Rs.111,966 100.0% Rs.190,558 US$ 4,284 100.0%
========== ========== ========== ========== ========== ========= ==========
---------
(1) Average of quarterly balances at the end of March of the previous fiscal
year, June, September, December and March of that fiscal year for each of
fiscal 2004, 2005 and 2006.
(2) With an average cost of 3.36% in fiscal 2004, 3.70% in fiscal 2005 and
4.55% in fiscal 2006.
(3) With an average cost of 3.03% in fiscal 2004, 3.22% in fiscal 2005 and
4.01% in fiscal 2006.
At year-end fiscal 2006, our outstanding subordinated debt was Rs.107.4
billion (US$2.4 billion). This debt is classified as Tier 2 capital in
calculating the capital adequacy ratio in accordance with the Reserve Bank
of India's regulations on capital adequacy. See "Supervision and Regulation
- Reserve Bank of India Regulations".
31
Risk Management
As a financial intermediary, we are exposed to risks that are particular to
our lending, transaction banking and trading businesses and the environment
within which we operate. Our goal in risk management is to ensure that we
understand, measure and monitor the various risks that arise and that the
organization adheres strictly to the policies and procedures which are
established to address these risks.
ICICI Bank is primarily exposed to credit risk, market risk, liquidity
risk, operational risk and legal risk. ICICI Bank has centralized Risk
Management, Compliance and Audit Groups with a mandate to identify, assess and
monitor all of ICICI Bank's principal risks in accordance with well-defined
policies and procedures. The Risk Management Group reports to the Chief
Financial Officer and Treasurer and through her to a Joint Managing Director.
The Compliance and Audit Groups report directly to a Joint Managing Director and
to the Managing Director and CEO in respect of internal audit of other groups
that report to the Joint Managing Director. The internal audit function is also
responsible to the Audit Committee of ICICI Bank's Board of Directors. All these
groups are independent of the business units and coordinate with representatives
of the business units to implement ICICI Bank's risk management methodologies.
Committees of the Board of Directors have been constituted to oversee the
various risk management activities. The Audit Committee provides direction to
and also monitors the quality of the internal audit function. The Risk Committee
reviews risk management policies in relation to various risks including
portfolio, liquidity, interest rate, investment policies and strategy, and
regulatory and compliance issues in relation thereto. The Credit Committee
reviews developments in key industrial sectors and ICICI Bank's exposure to
these sectors as well as to large borrower accounts. The Asset Liability
Management Committee is responsible for managing the balance sheet and reviewing
the asset-liability position to manage our liquidity and market risk exposure.
For a discussion of these and other committees, see "Management".
The Risk Management Group is further organized into the Credit Risk
Management Group, Market Risk Management Group, Retail Risk Management Group and
Operational Risk Management Group. The Risk Management Group has a separate team
for risk management in respect of small and medium enterprises. The Compliance
Group is responsible for the regulatory and anti money laundering compliance of
ICICI Bank.
Credit Risk
ICICI Bank's credit policy is approved by our Board of Directors. In its
lending operations, ICICI Bank is principally exposed to credit risk. Credit
risk is the risk of loss that may occur from the failure of any party to abide
by the terms and conditions of any financial contract with ICICI Bank,
principally the failure to make required payments on loans due to ICICI Bank.
ICICI Bank currently measures, monitors and manages credit risk for each
borrower and at the portfolio level. ICICI Bank has a structured and
standardized credit approval process, which includes a well-established
procedure of comprehensive credit appraisal.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal,
ICICI Bank assess a variety of risks relating to the borrower and the relevant
industry. Borrower risk is evaluated by considering:
o the financial position of the borrower by analyzing the quality of its
financial statements, its past financial performance, its financial
flexibility in terms of ability to raise capital, and its cash flow
adequacy;
o the borrower's relative market position and operating efficiency; and
o the quality of management by analyzing its track record, payment
record and financial conservatism.
Industry risk is evaluated by considering:
o certain industry characteristics, such as the importance of the
industry to the economy, its growth outlook, cyclicality and
government policies relating to the industry;
o the competitiveness of the industry; and
32
o certain industry financials, including return on capital employed,
operating margins and earnings stability.
After conducting an analysis of a specific borrower's risk, the Credit Risk
Management Group assigns a credit rating to the borrower. ICICI Bank has a scale
of 10 ratings ranging from AAA to B, an additional default rating of D and
short-term ratings from S1 to S8. Credit rating is a critical input for the
credit approval process. We determine the desired credit risk spread over its
cost of funds by considering the borrower's credit rating and the default
pattern corresponding to the credit rating. Every proposal for a financing
facility is prepared by the relevant business unit and reviewed by the
appropriate industry specialists in the Credit Risk Management Group before
being submitted for approval to the appropriate approval authority. The approval
process for non-fund facilities is similar to that for fund-based facilities.
The credit rating for every borrower is reviewed at least annually. ICICI Bank
also reviews the ratings of all borrowers in a particular industry upon the
occurrence of any significant event impacting that industry.
Working capital loans are generally approved for a period of 12 months. At
the end of the 12 months validity period (18 months in the case of borrowers
rated AA- and above), ICICI Bank reviews the loan arrangement and the credit
rating of the borrower and take a decision on continuation of the arrangement
and changes in the loan covenants as may be necessary.
Project Finance Procedures
We have a strong framework for the appraisal and execution of project
finance transactions. We believe that this framework creates optimal risk
identification, allocation and mitigation, and helps minimize residual risk.
The project finance approval process begins with a detailed evaluation of
technical, commercial, financial, marketing and management factors and the
sponsor's financial strength and experience. Once this review is completed, an
appraisal memorandum is prepared for credit approval purposes. As part of the
appraisal process, a risk matrix is generated, which identifies each of the
project risks, mitigating factors and residual risks associated with the
project. The appraisal memorandum analyzes the risk matrix and establishes the
viability of the project. Typical risk mitigating factors include the commitment
of stand-by funds from the sponsors to meet any cost over-runs and a
conservative collateral position. After credit approval, a letter of intent is
issued to the borrower, which outlines the principal financial terms of the
proposed facility, sponsor obligations, conditions precedent to disbursement,
undertakings from and covenants on the borrower. After completion of all
formalities by the borrower, a loan agreement is entered into with the borrower.
In addition to the above, in the case of structured project finance in
areas such as infrastructure, oil, gas and petrochemicals, as a part of the due
diligence process, ICICI Bank appoints consultants, wherever considered
necessary, to advise the lenders, including technical advisors, business
analysts, legal counsel and insurance consultants. These consultants are
typically internationally recognized and experienced in their respective fields.
Risk mitigating factors in these financings generally also include creation of
debt service reserves by borrowers and channeling project revenues through a
trust and retention account.
ICICI Bank's project finance credits are generally fully secured and have
full recourse to the borrower. In most cases, we have a security interest and
first lien on all the fixed assets and a second lien on all the current assets
of the borrower. Security interests typically include property, plant and
equipment as well as other tangible assets of the borrower, both present and
future. ICICI Bank's borrowers are required to maintain comprehensive insurance
on their assets where ICICI Bank is recognized as payee in the event of loss. In
some cases, ICICI Bank also takes additional collateral in the form of corporate
or personal guarantees from one or more sponsors of the project and a pledge of
the sponsors' equity holding in the project company. In certain industry
segments, ICICI Bank also takes security interest in relevant project contracts
such as concession agreements, off-take agreements and construction contracts as
part of the security package. In limited cases, loans are also guaranteed by
commercial banks and, in the past, have also been guaranteed by Indian state
governments or the Government of India.
It is ICICI Bank's current practice to normally disburse funds after the
entire project funding is committed and all necessary contractual arrangements
have been entered into. Funds are disbursed in tranches to pay for approved
project costs as the project progresses. When ICICI Bank appoints technical and
market consultants, they are required to monitor the project's progress and
certify all disbursements. ICICI Bank also requires the borrower to submit
periodic reports on project implementation, including orders for machinery and
equipment as well as
33
expenses incurred. Project completion is contingent upon
satisfactory operation of the project for a certain minimum period and, in
certain cases, the establishment of debt service reserves. ICICI Bank continues
to monitor the credit exposure until its loans are fully repaid.
Corporate Finance Procedures
As part of the corporate loan approval procedures, ICICI Bank carries out a
detailed analysis of funding requirements, including normal capital expenses,
long-term working capital requirements and temporary imbalances in liquidity.
ICICI Bank's funding of long-term core working capital requirements is assessed
on the basis, among other things, of the borrower's present and proposed level
of inventory and receivables. In case of corporate loans for other funding
requirements, ICICI Bank undertakes a detailed review of those requirements and
an analysis of cash flows. A substantial portion of our corporate finance loans
are secured by a lien on appropriate assets of the borrower.
The focus of our structured corporate finance products is on cash flow
based financing. ICICI Bank has a set of distinct approval procedures to
evaluate and mitigate the risks associated with such products. These procedures
include:
o carrying out a detailed analysis of cash flows to accurately forecast
the amounts that will be paid and the timing of the payments based on
an exhaustive analysis of historical data;
o conducting due diligence on the underlying business systems, including
a detailed evaluation of the servicing and collection procedures and
the underlying contractual arrangements; and
o paying particular attention to the legal, accounting and tax issues
that may impact any structure.
ICICI Bank's analysis enables it to identify risks in these transactions.
To mitigate risks, ICICI Bank uses various credit enhancement techniques, such
as over-collateralization, cash collateralization, creation of escrow accounts
and debt service reserves and performance guarantees. The residual risk is
typically managed by complete or partial recourse to the borrowing company whose
credit risk is evaluated as described above. ICICI Bank also has a monitoring
framework to enable continuous review of the performance of such transactions.
Working Capital Finance Procedures
ICICI Bank carries out a detailed analysis of its borrowers' working
capital requirements. Credit limits are established in accordance with the
approval authorized by ICICI Bank's Board of Directors. Once credit limits are
approved, ICICI Bank calculates the amounts that can be lent on the basis of
monthly statements provided by the borrower and the margins stipulated.
Quarterly information statements are also obtained from borrowers to monitor the
performance on a regular basis. Monthly cash flow statements are obtained where
considered necessary. Any irregularity in the conduct of the account is reported
to the appropriate authority on a monthly basis. Credit limits are reviewed on a
periodic basis.
Working capital facilities are primarily secured by inventories and
receivables. Additionally, in certain cases, these credit facilities are secured
by personal guarantees of directors, or subordinated security interests in the
tangible assets of the borrower including plant and machinery.
Credit Monitoring Procedures for Corporate Loans
The Credit Middle Office Group monitors compliance with the terms and
conditions for credit facilities prior to disbursement. It also reviews the
completeness of documentation, creation of security and insurance policies for
assets financed. All borrower accounts are reviewed at least once a year.
Retail Loan Procedures
Our customers for retail loans are typically middle and high-income,
salaried or self-employed individuals, and, in some cases, partnerships and
corporations. Except for personal loans and credit cards, we require a
contribution from the borrower and our loans are secured by the asset financed.
34
Our retail credit product operations are sub-divided into various product
lines. Each product line is further sub-divided into separate sales and credit
groups. The Risk Management Group, which is independent of the business groups,
approves all new retail products and product policies and credit approval
authorizations. All products and policies require the approval of the Retail
Credit Forum comprised of senior managers. All credit approval authorizations
require the approval of our Board of Directors.
ICICI Bank uses direct marketing associates as well as its own branch
network and employees for marketing retail credit products. However, credit
approval authority lies only with ICICI Bank's credit officers who are distinct
from the business teams. The delegation of credit approval authority is linked,
among other factors, to the size of the credit and the authority delegated to
credit officers varies across different products.
ICICI Bank's credit officers evaluate credit proposals on the basis of the
product policy approved by the Retail Credit Forum and the risk assessment
criteria defined by the Risk Management Group. These criteria vary across
product segments but typically include factors such as the borrower's income,
the loan-to-value ratio, demographic parameters and certain stability factors.
In the case of credit cards, in order to limit the scope of individual
discretion, ICICI Bank has implemented a credit-scoring program that is an
automated credit approval system that assigns a credit score to each applicant
based on certain demographic attributes like income, educational background and
age. The credit score then forms the basis of loan evaluation. External agencies
such as field investigation agencies and credit processing agencies are used to
facilitate a comprehensive due diligence process including visits to offices and
homes in the case of loans to individual borrowers. Before disbursements are
made, the credit officer checks a centralized delinquent database and reviews
the borrower's profile. ICICI Bank avails of the services of certain private
agencies operating in India to check applications before disbursement, as a
formal national credit bureau has only recently become operational in India. A
centralized retail credit team undertakes review and audit of credit quality and
processes across each credit approval team.
ICICI Bank has established centralized operations to manage operating risk
in the various back office processes of ICICI Bank's retail loan business except
for a few operations which are decentralized to improve turnaround time for
customers.
ICICI Bank has a collections unit structured along various product lines
and geographical locations, to manage delinquency levels. The collections unit
operates under the guidelines of a standardized recovery process. ICICI Bank
also makes use of external collection agencies to aid it in collection efforts,
including collateral repossession in accounts that are overdue for more than 90
days. External agencies for collections are governed by standardized process
guidelines.
A fraud prevention and control department has been set up to manage levels
of fraud, primarily through fraud prevention in the form of forensic audits and
also through recovery of fraud losses. The fraud control department is aided by
specialized agencies involved in verification of income documents. The fraud
control department also evaluates the various external agencies involved in the
retail finance operations, including direct marketing associates, external
verification associates and collection agencies.
Small Enterprises Loan Procedures
The Small and Medium Enterprises Group finances dealers and vendors of
companies by implementing structures to enhance the base credit quality of the
vendor/dealer, that involve an analysis of the base credit quality of the
vendor/dealer pool and an analysis of the linkages that exist between the
vendor/dealer and the company.
The group is also involved in financing based on a cluster-based approach,
that is, financing of small enterprises that have a homogeneous profile such as
apparel manufacturers and manufacturers of pharmaceuticals. The risk assessment
of such cluster involves identification of appropriate credit norms for target
market, use of scoring models for enterprises that satisfy these norms and
applying pre-determined exposure limits to enterprises that are awarded a
minimum required score in the scoring model. The assessment also involves
setting up of portfolio control norms, individual borrower approval norms and
stringent exit triggers to be followed while financing such clusters or
communities.
35
Rural and agricultural loan procedures
The rural and agricultural loan portfolio comprises corporates in the rural
sector, small and medium enterprises, dealers and vendors linked to these
entities and farmers. ICICI Bank has designed appropriate risk assessment
methodologies for each of the segments. For corporates, borrower risk is
evaluated by analyzing the industry risk, the borrower's market position,
financial performance, cash flow adequacy and the quality of management. The
credit risk of dealers, vendors and farmers is evaluated by analyzing the base
credit quality of the borrowers or the pool and also the linkages between the
borrowers and the companies to which they are dealers, vendors or farmers
supplying their produce. ICICI Bank attempts to enhance the credit quality of
the pool of dealers, vendors and farmers by strengthening the structure of the
transaction.
For some segments, ICICI Bank uses a cluster-based approach wherein a
lending program is implemented for a homogeneous group of individuals or
business entities that comply with certain laid down parameterized norms. To be
eligible for funding under the programs, the borrowers need to meet the
stipulated credit norms and obtain a minimum score on the scoring model. ICICI
Bank has incorporated control norms, borrower approval norms and review triggers
in all the programs.
Credit Approval Authorities
ICICI Bank's credit approval authorisation framework is laid down by our
Board of Directors. ICICI Bank has established several levels of credit approval
authorities for its corporate banking activities - the Credit Committee of the
Board of Directors, the Committee of Directors, the Committee of Executives
(Credit) and the Regional Committee (Credit). Retail Credit Forums, Small
Enterprise Group Forums and Agri Credit Forums have been created for approval of
retail loans, credit facilities to small enterprises and agri-based enterprises
respectively.
ICICI Bank's Board of Directors has delegated the authority to the Credit
Committee, consisting of a majority of independent directors, to the Committee
of Directors, consisting of ICICI Bank's wholetime directors, to the Committee
of Executives (Credit), to the Regional Committee (Credit), Retail Credit
Forums, Small Enterprise Group Forums and Agri Credit Forums, all consisting of
designated executives of ICICI Bank, and to individual executives in the case of
retail, small enterprise and agricultural loans and loans against securities, to
approve financial assistance within certain individual and group exposure limits
set by the Board of Directors.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the possibility of loss arising from changes in the value of
a financial instrument as a result of changes in market variables such as
interest rates, exchange rates and other asset prices. The prime source of
market risk for us is the interest rate risk we are exposed to as a financial
intermediary. In addition to interest rate risk, we are exposed to other
elements of market risk such as liquidity or funding risk, price risk on trading
portfolios, and exchange rate risk on foreign currency positions.
Market Risk Management Procedures
Our Board of Directors reviews and approves the policies for the management
of market risk. The board has delegated the responsibility for market risk
management on the banking book to the Asset Liability Management Committee and
for the trading book to the Committee of Directors, within the broad parameters
laid down by policies approved by the board. The Asset Liability Management
Committee is responsible for managing interest rate risk on the banking book and
liquidity risks reflected in the balance sheet. The Committee of Directors is
responsible for formulating policies and risk controls for the trading book.
The Asset Liability Management Committee is chaired by a Joint Managing
Director. The other Joint Managing Director and the Deputy Managing Directors
are the other members of the Committee. The Committee generally meets on a
monthly basis and reviews the interest rate and liquidity gap positions on the
banking book, formulates a view on interest rates, sets deposit and benchmark
lending rates, reviews the business profile and its impact on asset liability
management and determines the asset liability management strategy, as deemed
fit, in light of the current and expected business environment. The Structural
Rate Risk Management Group and Balance Sheet Management
36
Group are responsible for managing interest rate risk and liquidity risk, under
the supervision of the Asset Liability Management Committee, on a day to day
basis.
The Risk Management Group recommends changes in risk policies and controls
and the processes and methodologies for quantifying and assessing market risks.
Risk limits including position limits and stop loss limits for the trading book
are monitored on a daily basis by the Treasury Middle Office Group and reviewed
periodically.
Interest Rate Risk
Since our balance sheet consists predominantly of rupee assets and
liabilities, movements in domestic interest rates constitute the main source of
interest rate risk. The value of our portfolio of traded and other debt
securities is negatively impacted by an increase in interest rates, while our
net interest income is generally positively impacted by an increase in interest
rates. Exposure to fluctuations in interest rates is measured primarily by way
of gap analysis, providing a static view of the maturity and re-pricing
characteristics of balance sheet positions. An interest rate gap report is
prepared by classifying all assets and liabilities into various time period
categories according to contracted maturities or anticipated re-pricing date.
The difference in the amount of assets and liabilities maturing or being
re-priced in any time period category, would then give an indication of the
extent of exposure to the risk of potential changes in the margins on new or
re-priced assets and liabilities. ICICI Bank prepares interest rate risk reports
on a fortnightly basis. These reports are submitted to the Reserve Bank of India
on a monthly basis. Interest rate risk is further monitored through interest
rate risk limits approved by the Asset Liability Management Committee.
Our core business is deposit taking and lending in both rupees and foreign
currencies, as permitted by the Reserve Bank of India. These activities expose
us to interest rate risk. As the rupee market is significantly different from
the international currency markets, gap positions in these markets differ
significantly.
Our primary source of funding is deposits and to a smaller extent,
borrowings. In the rupee market, most of our deposit taking is at fixed rates of
interest for fixed periods, except for savings deposits and current deposits,
which do not have any specified maturity and can be withdrawn on demand. We
usually borrow for a fixed period with a one-time repayment on maturity, with
some borrowings having European call/put options, exercisable only on specified
dates, attached to them. However, we have a mix of floating and fixed interest
rate assets. Our loans generally are repaid more gradually, with principal
repayments being made over the life of the loan. Our housing loans at year-end
fiscal 2006 were primarily floating rate loans where the rates are reset every
quarter. Until December 31, 2003, we followed a four-tier prime rate structure,
namely, a short-term prime rate for one-year loans or loans that re-price at the
end of one year, a medium-term prime rate for one to three year loans, a
long-term prime rate for loans with maturities greater than three years and a
prime rate for cash credit products. Effective January 1, 2004, we have moved to
a single benchmark prime rate structure for all loans other than specific
categories of loans advised by the Indian Banks' Association (which include,
among others, loans to individuals for acquiring residential properties, loans
for purchase of consumer durables, non-priority sector personal loans and loans
to individuals against shares, debentures, bonds and other securities), with
lending rates comprising the benchmark prime rate, term premia and
transaction-specific credit and other charges. Interest rates on loans
outstanding at December 31, 2003 continue to be based on the four-tier prime
rate structure. We seek to eliminate interest rate risk on undisbursed
commitments by fixing interest rates on rupee loans at the time of loan
disbursement.
In contrast to our rupee loans, a large proportion of our foreign currency
loans are floating rate loans. These loans are generally funded with floating
rate foreign currency funds. Our fixed rate foreign currency loans are generally
funded with fixed rate foreign currency funds. We generally convert all our
foreign currency borrowings and deposits into floating rate dollar liabilities
through the use of interest rate and currency swaps with leading international
banks. The foreign currency gaps are generally significantly lower than rupee
gaps, representing a considerably lower exposure to fluctuations in foreign
currency interest rates.
We use the duration of our government securities portfolio as a key
variable for interest rate risk management. We increase or decrease the duration
of government securities portfolio to increase or decrease our interest rate
risk exposure. In addition, we also use interest rate derivatives to manage
asset and liability positions. We are an active participant in the interest rate
swap market and are one of the largest counterparties in India.
37
The following table sets forth, at the date indicated, our asset-liability
gap position.
At March 31, 2006(1)
-------------------------------------------------------------
Greater than
Less than or one year
equal to one to and up Greater than
year five years five years Total
------------- ------------ ------------ ------------
(in millions)
Loans, net.................................... Rs. 1,059,866 Rs. 382,536 Rs. 120,201 Rs.1,562,603
Investments................................... 395,973 258,998 185,168 840,139
Fixed assets.................................. 2,386 11,448 27,595 41,429
Other assets(2)............................... 137,588 27,434 163,103 328,125
------------- ------------ ------------ ------------
Total assets.................................. 1,595,813 680,416 496,067 2,772,296
Stockholders' equity and preference share
capital.................................... - - 225,918 225,918
Borrowings(2)................................. 198,626 167,462 83,911 449,999
Deposits...................................... 1,357,219 113,053 254,238 1,724,510
Other liabilities............................. 23,306 97,435 251,128 371,869
------------- ------------ ------------ ------------
Total liabilities............................. 1,579,151 377,950 815,195 2,772,296
Total gap before risk management positions.... 16,662 302,466 (319,128) -
Risk management positions(3).................. (26,458) 61,054 (32,833) 1,763
------------- ------------ ------------ ------------
Total gap after risk management positions..... Rs. (9,796) Rs. 363,520 Rs.(351,961) Rs. 1,763
============= ============ ============ ============
---------
(1) Assets and liabilities are classified into the applicable categories, based
on residual maturity or re-pricing whichever is earlier. Classification
methodologies are generally based on Asset Liability Management Guidelines
issued by the Reserve Bank of India, effective from April 1, 2000. Items
that neither mature nor re-price are included in the "greater than five
years" category. This includes equity share capital and a substantial part
of fixed assets. Impaired loans of residual maturity less than three years
are classified in the "greater than one year and up to five years" category
and impaired loans of residual maturity between three to five years are
classified in the "greater than five years" category.
(2) The categorization for these items is different from that reported in the
financial statements.
(3) The risk management positions comprise foreign currency and rupee swaps.
The following table sets forth, at the date indicated, the amount of our
loans with residual maturities greater than one year that had fixed and variable
interest rates.
At March 31, 2006
------------------------------------------
Fixed Variable
rate loans rate loans Total
----------- ---------- ------------
(in millions)
Loans............................. Rs. 622,416 Rs.444,743 Rs.1,067,159
-----------
The following table sets forth, using the balance sheet at year-end fiscal
2006 as the base, one possible prediction of the impact of adverse changes in
interest rates on net interest income for fiscal 2007, assuming a parallel shift
in the yield curve at year-end fiscal 2006.
At March 31, 2006
------------------------------------------------------------
Change in interest rates
(in basis points)
------------------------------------------------------------
(100) (50) 50 100
------------- ------------ ----------- ------------
(in millions, except percentages)
Rupee portfolio................................ Rs.(1,750) Rs. (875) Rs. 875 Rs.1,750
Foreign currency portfolio..................... (293) (146) 146 293
Total.......................................... Rs.(2,043) Rs.(1,021) Rs.1,021 Rs.2,043
Based on our asset and liability position at year-end fiscal 2006, the
sensitivity model shows that net interest income from the banking book for
fiscal 2007 would rise by Rs.2.0 billion (US$46 million) if interest rates
increased by 100 basis points during fiscal 2007. Conversely, the sensitivity
model shows that if interest rates
38
decreased by 100 basis points during fiscal 2007, net interest income for fiscal
2007 would fall by an equivalent amount of Rs.2.0 billion (US$46 million). Based
on our asset and liability position at year-end fiscal 2005, the sensitivity
model shows that net interest income from the banking book for fiscal 2006 would
have risen by Rs. 785 million (US$ 18 million) if interest rates increased by
100 basis points during fiscal 2006. Conversely, the sensitivity model shows
that if interest rates decreased by 100 basis points during fiscal 2006, net
interest income for fiscal 2006 would have fallen by an equivalent amount of Rs.
785 million (US$ 18 million).
Sensitivity analysis, which is based upon a static interest rate risk
profile of assets and liabilities, is used for risk management purposes only and
the model above assumes that during the course of the year no other changes are
made in the respective portfolios. Actual changes in net interest income will
vary from the model.
Price Risk (Trading book)
We undertake trading activities to enhance earnings through profitable
trading for our own account. ICICI Securities Limited, our investment banking
subsidiary, is a primary dealer in government of India securities, and a
significant proportion of its portfolio consists of government of India
securities.
The following tables sets forth, using the fixed income portfolio at
year-end fiscal 2006 as the base, one possible prediction of the impact of
changes in interest rates on the value of our rupee fixed income trading
portfolio for fiscal 2007, assuming a parallel shift in yield curve.
At March 31, 2006
------------------------------------------------------
Change in interest rates
(in basis points)
------------------------------------------------------
Portfolio
Size (100) (50) 50 100
--------- ------ ------- ------- ------
(in millions)
Government of India securities...... 15,701 733 377 (377) (733)
Corporate debt securities........... 6,972 85 102 (102) (85)
--------- ------ ------- ------- ------
Total............................... 22,673 818 479 (479) (818)
--------- ------ ------- ------- -------
At year-end fiscal 2006, the total value of our rupee fixed income trading
portfolio was Rs. 22.7 billion (US$ 510 million). The sensitivity model shows
that if interest rates increase by 100 basis points during fiscal 2007, the
value of the trading portfolio would fall by Rs. 818 million (US$ 18 million).
Conversely, if interest rates fell by 100 basis points during fiscal 2007,
under the model, the value of this portfolio would rise by Rs. 818 million (US$
18 million). At year-end fiscal 2005, the total value of our rupee fixed income
trading portfolio was Rs. 19.3 billion (US$ 433 million). The sensitivity model
shows that if interest rates increased by 100 basis points during fiscal 2006,
the value of the trading portfolio would have fallen by Rs. 523 million (US$ 12
million). Conversely, if interest rates fell by 100 basis points during fiscal
2006, under the model, the value of this portfolio would have risen by Rs. 523
million (US$ 12 million).
As noted above, sensitivity analysis is used for risk management purposes
only and the model used above assumes that during the course of the year no
other changes are made in the respective portfolios. Actual changes in the value
of the fixed income portfolio will vary from the model above.
We revalue our trading portfolio on a regular basis and recognize aggregate
re-valuation losses in our profit and loss account. The asset liability
management policy stipulates an interest rate risk limit which seeks to cap the
risk on account of the mark-to-market impact on the mark-to-market book (under
the Indian GAAP classification - see "Supervision and Regulation - Reserve Bank
of India Regulations - Banks' Investment Classification and Valuation Norms")
and the earnings at risk on the banking book, based on a sensitivity analysis of
a 100 basis points parallel and immediate shift in interest rates.
In addition, the Risk Management Group stipulates risk limits including
position limits and stop loss limits for the trading book. These limits are
monitored on a daily basis and reviewed periodically. In addition to risk
limits, we also have risk monitoring tools such as Value-at-Risk models for
measuring market risk in our trading portfolio.
39
ICICI Bank is required to invest a specified percentage, currently 25.0%,
of its net demand and time liabilities in government of India securities to
meet the statutory liquidity ratio requirement prescribed by the Reserve Bank
of India. As a result, we have a very large portfolio of government of India
securities classified as either available for sale or held to maturity
securities. These are not included in the trading book analysis presented
above.
Equity Risk
We assume equity risk both as part of our investment book and our trading
book. On the investment book, investments in equity shares and preference shares
are essentially long-term in nature. Nearly all the investment in equity
securities have been driven by our project financing activities. The decision to
invest in equity shares during project financing activities has been a conscious
decision to participate in the equity of the company with the intention of
realizing capital gains arising from the expected increases in market prices,
and is separate from the lending decision. For further information on our
trading and available for sale investments, see "Overview of ICICI Bank's
Products and Services - Investment Banking - Treasury."
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps, forwards, and
currency options to clients, which are primarily banks and highly rated
corporate customers. We actively use cross currency swaps, forwards, and options
to economically hedge against exchange risks arising out of these transactions.
Trading activities in the foreign currency markets expose us to exchange rate
risks. This risk is mitigated by setting counterparty limits, stipulating daily
and cumulative stop-loss limits, and engaging in exception reporting.
The Reserve Bank of India has authorized the dealing of foreign
currency-rupee options by banks for hedging foreign currency exposures including
hedging of balance sheet exposures. We have been offering such products to
corporate clients and other inter-bank counterparties and are one of the largest
participants in the currency options market accounting for a significant share
of daily trading volume. All the options are maintained within the specified
limits.
In addition, foreign currency loans are made on terms that are similar to
foreign currency borrowings, thereby transferring the foreign exchange risk to
the borrower. In addition, there is an open foreign exchange position limit to
minimize exchange rate risk.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the risk
of unexpected increases in the cost of funding an asset portfolio at appropriate
maturities and the risk of being unable to liquidate a position in a timely
manner at a reasonable price. The goal of liquidity management is to be able,
even under adverse conditions, to meet all liability repayments on time and fund
all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. Incremental operations are principally funded by
accepting deposits from retail and corporate depositors. The deposits are
augmented by borrowings in the short-term inter-bank market and through the
issuance of bonds. Loan maturities and sale of investments also provide
liquidity. Most of the funds raised are used to extend loans or purchase
securities. Generally, deposits have a shorter average maturity than loans or
investments. For further information on liquidity risk, see "Operating and
Financial Review of Prospects - Liquidity Risk."
Operational Risk
We are exposed to many types of operational risk. Operational risk is the
risk of loss that can result from a variety of factors, including failure to
obtain proper internal authorizations, improperly documented transactions,
failure of operational and information security procedures, computer systems,
software or equipment, fraud, inadequate training and employee errors or from
external causes. Our exposure to operational risk has increased following our
rapid international expansion in recent years. For a discussion on our
vulnerability to operational risk, see "Risk Factors -- Risks Relating to Our
Business -- There is operational risk associated with our industry which, when
realized, may have an adverse impact on our business and the price of our equity
shares and ADSs.", "Risk
40
Factors -- Risks Relating to Our Business -- We have experienced rapid
international growth in the last three years which has increased the complexity
of the risks that we face." and "Risk Factors -- Risks Relating to Our Business
-- We are subject to legal and regulatory risk which may adversely affect our
business and the price of our equity shares and ADSs." Our operational risk
management policy aims at minimizing losses and customer dissatisfaction due to
failure in processes, focusing on flaws in products and their design that can
expose the Bank to losses due to fraud, etc., analyzing the impact of failures
in technology/systems and developing mitigants to minimize the impact and
developing plans for external shocks that can adversely impact the continuity in
the Bank's operations. Our approach to operational risk management is designed
to mitigate operational risk by maintaining a comprehensive system of internal
controls, establishing systems and procedures to monitor transactions,
maintaining key back-up procedures and undertaking regular contingency planning.
New products and processes of ICICI Bank are approved by the Product and Process
Committee before launch. The committee consists of representatives of legal,
accounting, compliance and risk management groups. We follow a policy of
centralizing a substantial portion of our operations related to various
categories of products and services.
Operational Controls and Procedures in Branches
We have operating manuals detailing the procedures for the processing of
various banking transactions and the operation of the application software.
Amendments to these manuals are implemented through circulars sent to all
offices.
We have a scheme of delegation of financial powers that sets out the
monetary limit for each employee with respect to the processing of transactions
in a customer's account. Withdrawals from customer accounts are controlled by
dual authorization. Senior officers have been delegated power to authorize
larger withdrawals. Our operating system validates the check number and balance
before permitting withdrawals. Cash transactions over Rs.1 million (US$21,801)
are subject to special scrutiny to avoid money laundering. Our banking software
has multiple security features to protect the integrity of applications and
data.
Operational Controls and Procedures for Internet Banking
In order to open an Internet banking account, the customer must provide us
with documentation to prove the customer's identity, such as a copy of the
customer's passport, a photograph and specimen signature of the customer. After
verification of this documentation, we open the Internet banking account and
issue the customer a user ID and password to access his account online.
Operational Controls and Procedures in Regional Processing Centers &
Central Processing Centers
To improve customer service at our physical locations, we handle
transaction processing centrally by taking away such operations from branches.
We have centralized operations at regional processing centers located at 15
cities in the country. These regional processing centers process clearing checks
and inter-branch transactions, make inter-city check collections, and engage in
back-office activities for account opening, standing instructions and
auto-renewal of deposits.
In Mumbai, we have centralized transaction processing on a nation wide
basis for transactions like the issue of ATM cards and PIN mailers,
reconciliation of ATM transactions, monitoring of ATM functioning, issue of
passwords to Internet banking customers, depositing postdated checks received
from retail loan customers and credit card transaction processing. Centralized
processing has been extended to the issuance of personalized check books,
back-office activities of non-resident Indian accounts, opening of new bank
accounts for customers who seek web brokering services and recovery of service
charges for accounts for holding shares in book-entry form.
Operational Controls and Procedures in Treasury
We use technology to monitor risk limits and exposures. Our front office,
back office and accounting and reconciliation functions are fully segregated in
both the domestic treasury and foreign exchange treasury. The respective middle
offices use various risk monitoring tools such as counterparty limits, position
limits, exposure limits and individual dealer limits. Procedures for reporting
breaches in limits are also in place.
41
Our front office treasury operations for rupee transactions consist of
operations in fixed income securities, equity securities and inter-bank money
markets. Our dealers analyze the market conditions and take views on price
movements. Thereafter, they strike deals in conformity with various limits
relating to counterparties, securities and brokers. The deals are then forwarded
to the back office for settlement.
Trade strategies are discussed frequently and decisions are taken based on
market forecasts, information and liquidity considerations. Trading operations
are conducted in conformity with the code of conduct prescribed by internal and
regulatory guidelines.
The Treasury Middle Office Group monitors counterparty limits, evaluates
the mark-to-market impact on various positions taken by dealers and monitors
market risk exposure of the investment portfolio and adherence to various market
risk limits.
Our back office undertakes the settlement of funds and securities. The back
office has procedures and controls for minimizing operational risks, including
procedures with respect to deal confirmations with counterparties, verifying the
authenticity of counterparty checks and securities, ensuring receipt of contract
notes from brokers, monitoring receipt of interest and principal amounts on due
dates, ensuring transfer of title in the case of purchases of securities,
reconciling actual security holdings with the holdings pursuant to the records
and reports any irregularity or shortcoming observed.
Operational Controls and Procedures in Retail Asset Operations
A majority of ICICI Bank's retail asset operations are centralized at
Mumbai, Delhi and Chennai. The central operations unit is located in Mumbai and
the regional operations units at Delhi and Chennai. These central and regional
units support operations relating to retail asset products across the country.
The central operations unit carries out accounting, reconciliation and
repayment management activities for all retail asset products. The regional
operations units manage disbursement of approved credit facilities. There are no
manual issuances of disbursement cheques thus reducing any operational risk on
account of manual intervention in the processes. No single team has the full
authority to complete a transaction and carry out financial reconciliation. Each
activity is segregated and carried out by an independent team.
All processes are hosted and controlled through a central process site. At
the design stage of the process, all operational and other risks are identified,
mitigants designed and measures of performance specified to ensure adherence.
The retail asset operations group has regional audit managers across the
country. These audit managers monitor adherence to controls and procedures and
record and report deviations to facilitate corrective action.
Operational Controls and Procedures for Corporate Banking
Our operations in respect of corporate banking products and services are
centralised at Mumbai. This centralised operations comprise separate operations
teams for trade finance, cash management and general banking operations. The
centralised operations teams process transactions after verification of credit
authorisations, as well as applicable regulations, particularly in respect of
international trade finance transactions. This unit also processes transactions
for small enterprise customers.
Anti-money Laundering Controls
The Indian Parliament passed the Prevention of Money Laundering Act in 2002
and the Government of India notified the rules for implementation of the
provisions of the Act in July 2005. Effective July 1, 2005, the provisions of
this Act (as subsequently amended) and the rules notified thereunder by the
Government have come into force. The Reserve Bank of India issued detailed
guidelines to the banks on Know Your Customer and Anti-Money Laundering in
November 2004 which superseded their prior instructions and were based on the
recommendations of the Financial Action Task Force and the paper issued on
Customer Due Diligence for banks by the Basel Committee on Banking Supervision.
Banks were required to comply with these Reserve Bank of India guidelines by
December 31, 2005. The Reserve Bank of India had also issued guidelines, on
February 15, 2006, on the obligations of the banks under the provisions of
Prevention of Money Laundering Act, 2002.
42
Our Board of Directors approved a group anti-money laundering policy in
January 2004, which established the standards of anti-money laundering
compliance. The group anti-money laundering policy was revised in December 2004
and in April 2006 in view of the requirements of the Reserve Bank of India
guidelines, which are issued from time to time. The group anti-money laundering
policy is applicable to all our activities. The unique anti-money laundering
regulatory requirements for overseas units are provided separately as an
addendum to the group anti-money laundering policy. Our anti-money laundering
standards are primarily based on two pillars, namely, know your customer and
monitoring/reporting of suspicious transactions. The group anti-money laundering
policy specifies a risk-based approach in implementing the anti-money laundering
framework. The strategic business units are required to undertake risk profiling
of various customer segments and products, and to classify them into high,
medium and low-risk categories. The anti-money laundering framework seeks to
institute a process of customer identification and verification depending on the
nature or status of the customer and the type of transaction. In respect of
unusual or suspicious transactions or when the customer moves from a low-risk to
high-risk profile, appropriate enhanced due-diligence measures are required to
be adopted. The anti money laundering framework also requires that reports of
specified cash transactions and suspicious transactions be submitted to the
Financial Intelligence Unit, India (FIU-IND) constituted under the Prevention of
Money Laundering Act, 2002 and the rules notified thereunder (to the respective
Financial Intelligence Unit or its equivalent in the overseas jurisdiction, in
respect of our overseas offices). The Audit Committee of our Board of Directors
supervises the implementation of the anti-money laundering framework. A money
laundering reporting officer for ICICI Bank and anti money laundering compliance
officers for the overseas offices have been designated to monitor the day-to-day
implementation of the anti-money laundering policy and procedures. Our committee
of directors has also approved a customer acceptance policy, product and
customer-specific Know Your Customer procedures and appropriate transaction
monitoring procedures. Suitable training programs on awareness of anti-money
laundering are organized for the employees on a periodic basis.
Global Risk Management Framework
We have adopted a global risk management framework for our international
banking operations, including overseas branches, offshore banking units and
subsidiaries. Under this framework, our credit, investment, asset liability
management and anti-money laundering policies apply to all our overseas branches
and offshore banking units, with modifications to meet local regulatory or
business requirements. These modifications may be made only with the approval of
our Board of Directors. All overseas banking subsidiaries are required to adopt
risk management policy frameworks to be approved by their Board of Directors or
an appropriate committee of their Board of Directors, based on applicable laws
and regulations as well as our corporate governance and risk management
framework. The overseas banking subsidiaries are required to adopt a process for
formulation of policies which involves seeking the guidance and recommendations
of the related groups in ICICI Bank.
The Compliance Group plays an oversight role in respect of regulatory
compliance at the overseas branches and offshore banking units. Key risk
indicators pertaining to our international banking operations are presented to
the Risk Committee of our Board of Directors on a quarterly basis.
Audit
The Internal Audit Group undertakes a comprehensive audit of all business
groups and other functions including international branches, representative
offices and subsidiaries, in accordance with a risk-based audit plan. This plan
allocates audit resources based on an assessment of the operational risks in the
various businesses. The audit plan for every fiscal year is approved by the
Audit Committee of our Board of Directors.
The Internal Audit Group also has a dedicated team responsible for
information technology security audits. The annual audit plan covers various
components of information technology including applications, databases, networks
and operating systems.
The Reserve Bank of India requires banks to have a process of concurrent
audits at branches handling large volumes, to cover a minimum of 50.0% of
business volumes. We have a process of concurrent audits, using external
accounting firms. Concurrent audits are also carried out at centralized and
regional processing centers operations to ensure existence of and adherence to
internal controls.
43
Legal and Regulatory Risk
We are involved in various litigations and are subject to a wide variety
of banking and financial services laws and regulations in each of the
jurisdictions in which we operate. We are also subject to a large number of
regulatory and enforcement authorities in each of these jurisdictions. See " --
Legal and Regulatory Proceedings", "Risk Factors -- Risks Relating to Our
Business -- We are involved in various litigations and any final judgment
awarding material damages against us could have a material adverse impact on
our future financial performance, our stockholders' equity and the price of our
equity shares and ADSs", "- We have experienced rapid international growth in
the last three years which has increased the complexity of the risks that we
face", "-- We are subject to legal and regulatory risk which may adversely
affect our business and the price of our equity shares and ADSs" and "--
Regulatory changes or enforcement initiatives in India or other jurisdictions
in which we operate could adversely affect our business and the price of our
equity shares and ADSs".
Derivative Instruments Risk
We enter into interest rate and currency derivative transactions primarily
for the purpose of covering interest rate and foreign exchange mismatches and
also engage in trading of derivative instruments on our own account. We provide
derivative services to selected major corporate customers and other domestic and
international financial institutions, including foreign currency forward
transactions and foreign currency and interest rate swaps. Our derivative
transactions are subject to counterparty risk to the extent particular obligors
are unable to make payment on contracts when due.
Risk Management in Key Subsidiaries
ICICI Securities Limited provides investment banking services, including
corporate advisory, fixed income and equity services, to corporate customers.
All investment banking mandates, including underwriting commitments, are
approved by the Commitments Committee comprising the Managing Director and CEO
and relevant group heads, of ICICI Securities Limited. ICICI Securities Limited
is a primary dealer and has Government of India securities as a significant
proportion of its portfolio. The Corporate Risk Management Group at ICICI
Securities Limited develops the risk management policies for the organization.
The main objective of the group is to ensure adherence to best risk management
practices to mitigate the risks, primarily credit and market risks, involved in
the various businesses of the company. The group continuously develops and
enhances its risk management and control procedures. Further, the Risk
Management Committee is responsible for analyzing and monitoring the risks
associated with the different business activities of ICICI Securities Limited
and ensuring adherence to the risk and investment limits approved by the Board
of Directors.
ICICI Prudential Life Insurance Company Limited is exposed to business
risks arising out of the nature of products and underwriting, and market risk
arising out of the investments made out of the corpus of premiums collected and
the returns guaranteed to policyholders. The Risk Management and Audit
Committee of its Board of Directors is responsible for oversight of the risk
management and internal control functions. For managing investment risk, the
company has a prudent investment strategy to optimize risk adjusted returns.
Its asset-liability management framework is designed to cushion and mitigate
the investment related risks of assets. The assets under management for the
linked portfolio, in respect of which there is minimal asset-liability mismatch
risk, amounts to over 84% of the policyholders' funds. As part of
asset-liability management for the non-linked portfolio, ICICI Prudential Life
Insurance Company Limited has covered the single premium non-participating
portfolio by duration matching, rebalanced monthly. On the participating
portfolio, the asset allocation strategy, which includes investments in
equities, is designed to achieve the twin objectives of managing base
guarantees and maximizing returns. The equity portfolio is benchmarked against
a market index. In addition, there are exposure limits to companies, groups and
industries. For mitigating operational risks, management assesses and rates the
various operational risks and prepares a mitigation plan. The internal audit
department performs risk-based audit and reports the findings to the Audit
Committee.
ICICI Lombard General Insurance Company Limited is principally exposed to
risks arising out of the nature of business underwritten and credit risk on its
investment portfolio. In respect of business risk, ICICI Lombard General
Insurance Company Limited seeks to diversify its insurance portfolio across
industry sectors and geographical regions. It focuses
44
on corporate product segments that have historically experienced low loss ratios
and retail product segments where risks are widely distributed. It also has the
ability to reduce the risk retained on its own balance sheet by re-insuring a
part of the risks underwritten. Its investments are governed by the investment
policy approved by its Board of Directors within the norms stipulated by the
Insurance Regulatory and Development Authority. The Investment Committee
oversees the implementation of this policy and reviews it periodically. Exposure
to any single entity is normally restricted to 5.0% of the portfolio and to any
industry to 10.0% of the portfolio. Investments in debt instruments are
generally restricted to instruments with a domestic credit rating of AA or
higher.
Controls and Procedures
ICICI Bank's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of ICICI Bank's "disclosure controls and procedures"
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended) as of March 31, 2006 and concluded that, as of the date of their
evaluation, ICICI Bank's disclosure controls and procedures were effective to
ensure that information required to be disclosed by ICICI Bank in the reports
that it files or submits under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There has been no change in ICICI Bank's internal control over financial
reporting that has occurred during the fiscal year ended March 31, 2006, that
has materially affected, or is reasonably likely to materially affect, ICICI
Bank's internal control over financial reporting.
Loan Portfolio
Our gross loan portfolio was Rs.1,577.1 billion (US$35.5 billion) at
year-end fiscal 2006, an increase of 60.9 % over the gross loan portfolio of
Rs.980.4 billion (US$22.0 billion) at year-end fiscal 2005. At year-end fiscal
2005, the gross loan portfolio increased 44.8 % to Rs.980.4 billion (US$22.0
billion) as compared to the gross loan portfolio of Rs.677.0 billion (US$15.2
billion) at year-end fiscal 2004. At year-end fiscal 2006, approximately 85.4 %
of our gross loans were rupee loans.
Loan Portfolio by Categories
The following table sets forth, at the dates indicated, our gross rupee and
foreign currency loans by business category.
At March 31,
--------------------------------------------------------------------------------
2002 2003 2004 2005 2006
----------- ---------- ---------- ---------- -------------------------
(in millions)
Consumer loans and
credit card receivables(1)...... Rs. 62,116 Rs.179,646 Rs.281,946 Rs.532,138 Rs. 910,871 US$20,478
Rupee ........................... 62,116 179,646 281,494 526,541 895,116 20,124
Foreign currency ................ - - 452 5,597 15,755 354
Commercial, financial,
agricultural and others......... 443,087 397,609 393,642 447,359 665,549 14,962
Rupee............................ 369,527 310,876 300,985 301,800 449,160 10,097
Foreign currency................. 73,560 86,733 92,657 145,559 216,389 4,865
Leasing and related activities (2) 1,068 1,046 1,401 885 736 17
Rupee.............................. 1,068 1,046 1,401 885 695 16
Foreign currency .................. - - - - 41 1
Gross loans........................ 506,271 578,301 676,989 980,382 1,577,156 35,457
Rupee............................ 432,711 491,568 583,880 829,226 1,344,971 30,237
Foreign currency ................ 73,560 86,733 93,109 151,156 232,185 5,220
----------- ---------- ---------- ---------- ------------ ---------
Total gross loans.................. 506,271 578,301 676,989 980,382 1,577,156 35,457
Allowance for loan losses.......... (27,199) (39,212) ( 27,510) (16,282) (14,553) (327)
----------- ---------- ---------- ---------- ------------ ---------
Net loans.......................... Rs. 479,072 Rs.539,089 Rs.649,479 Rs.964,100 Rs.1,562,603 US$35,130
=========== ========== ========== ========== ============ =========
---------
(1) Includes installment loans and credit card receivables.
(2) Leasing and related activities includes leasing and hire purchase.
45
Our gross consumer loans and credit card receivables increased to Rs.910.9
billion (US$20.5 billion), constituting 57.8 % of our gross loans at year-end
fiscal 2006 from Rs.532.1 billion (US$12.0 billion), constituting 54.3 % of our
gross loans at year-end fiscal 2005. Our gross foreign currency loans increased
from Rs.151.1 billion (US$3.4 billion), constituting 15.4 % of our total gross
loans at year-end fiscal 2005 to Rs.232.2 billion (US$5.2 billion), constituting
14.7 % of our total gross loans at year-end fiscal 2006.
Collateral -- Completion, Perfection and Enforcement
Our loan portfolio consists largely of loans to retail customers, including
home loans, automobile loans, two wheeler loans, commercial business loans,
personal loans and credit card receivables, project and corporate finance and
working capital loans to corporate borrowers and agricultural financing. In
general, our loans (other than personal loans, credit card receivables and some
forms of corporate and agricultural financing, which are unsecured) are
over-collateralized. In India, there are no regulations stipulating
loan-to-collateral limits.
Corporate finance and project finance loans are typically secured by a
first lien on fixed assets, which normally consists of property, plant and
equipment. These security interests are perfected by the registration of these
interests within 30 days with the Registrar of Companies pursuant to the
provisions of the Companies Act when our clients are constituted as companies.
This registration amounts to a constructive public notice to other business
entities. We may also take security of a pledge of financial assets like
marketable securities, and obtain corporate guarantees and personal guarantees
wherever appropriate.
Working capital loans are typically secured by a first lien on current
assets, which normally consist of inventory and receivables. Additionally, in
some cases, we may take further security of a first or second lien on fixed
assets, a pledge of financial assets like marketable securities, or obtain
corporate guarantees and personal guarantees wherever appropriate.
A substantial portion of our loans to retail customers is also secured by a
first and exclusive lien on the assets financed (predominantly property and
vehicles).
We are entitled in terms of our security documents to repossess security
comprising assets such as plant, equipment and vehicles without reference to the
courts or tribunals unless a client makes a reference to such courts or
tribunals to stay our actions.
Separately, in India, foreclosure on collateral of property generally
requires a written petition to an Indian court or tribunal based on amounts
sought to be recovered. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a decrease in
the value of the collateral. These delays can last for several years leading to
deterioration in the physical condition and market value of the collateral. In
the event a corporate borrower makes an application for relief to a specialized
authority called the Board for Industrial and Financial Reconstruction,
foreclosure and enforceability of collateral is stayed. In fiscal 2003, the
Indian Parliament passed the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, as amended, which
strengthened the ability of lenders to resolve non-performing assets by granting
them greater rights as to enforcement of security including over immovable
property and recovery of dues, without reference to the courts or tribunals. See
"Overview of the Indian Financial Sector - Recent Structural Reforms -
Legislative Framework for Recovery of Debts due to Banks".
In case of consumer loans, we obtain post-dated checks towards repayment on
pre-specified dates, which if dishonored entitle us to initiate criminal
proceedings against the issuer of the checks.
We recognize that our ability to realize the full value of the collateral
in respect of current assets is difficult, due to, among other things, delays on
our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers by
borrowers. However, cash credit facilities are so structured that we are able to
capture the cash flows of our customers for recovery of past due amounts. In
addition, we have a right of set-off for amounts due to us on these facilities.
Also, we regularly monitor the cash flows of our
46
working capital loan customers so that we can take any actions required before
the loan becomes impaired. On a case-by-case basis, we may also stop or limit
the borrower from drawing further credit from its facility.
Loan Concentration
We follow a policy of portfolio diversification and evaluate our total
financing exposure in a particular industry in light of our forecasts of growth
and profitability for that industry. ICICI Bank's Risk Management Group monitors
all major sectors of the economy and specifically follows industries in which
ICICI Bank has credit exposures. We seek to respond to any economic weakness in
an industrial segment by restricting new credits to that industry segment and
any growth in an industrial segment by increasing new credits to that industry
segment, resulting in active portfolio management. ICICI Bank's policy is to
limit its loan portfolio to any particular industry (other than retail loans) to
15.0% of total exposure.
Pursuant to the guidelines of the Reserve Bank of India, ICICI Bank's
credit exposure to individual borrowers must not exceed 15.0% of its capital
funds, comprising Tier 1 and Tier 2 capital calculated pursuant to the
guidelines of the Reserve Bank of India, under Indian GAAP. Credit exposure to
individual borrowers may exceed the exposure norm of 15.0% of a bank's capital
funds by an additional 5.0% (i.e. up to 20.0%) provided the additional credit
exposure is on account of infrastructure financing. ICICI Bank's exposure to a
group of companies under the same management control must not exceed 40.0% of
its capital funds unless the exposure is in respect of an infrastructure
project. The exposure to a group of companies under the same management control
, including exposure to infrastructure projects, may be up to 50.0% of ICICI
Bank's capital funds. With effect from June 1, 2004, banks may, in exceptional
circumstances, with the approval of their boards, enhance the exposure by 5.0%
of capital funds (i.e., 20.0% of capital funds for an individual borrower and
45.0% of capital funds for a group of companies under same management), making
appropriate disclosures in their annual reports. Exposure for funded facilities
is calculated as the total committed credit and investment sanctions or the
outstanding funded amount, whichever is higher (for term loans, as undisbursed
commitments plus the outstanding amount). Exposure for non-funded facilities is
calculated as 100.0% of the committed amount or the outstanding non-funded
amount whichever is higher. At year-end fiscal 2006, ICICI Bank was in
compliance with these guidelines.
The following table sets forth, at the dates indicated, the composition of
our gross advances (net of write-offs).
At March 31,
-----------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
------------------ ------------------- ------------------ ----------------- --------------------------------
(in millions, except percentages)
Retail finance(1). Rs. 85,975 16.5% Rs.202,320 34.9% Rs.360,228 53.2% Rs.596,027 60.8% Rs. 981,549 US$22,067 62.2%
Services.......... 34,427 6.6% 28,748 5.0% 21,069 3.1% 36,080 3.7% 99,566 2,238 6.3%
Iron and steel.... 63,437 12.2% 62,842 10.8% 49,331 7.3% 49,005 5.0% 46,826 1,053 3.0%
Crude petroleum/
refining....... 31,520 6.1% 23,001 4.0% 19,720 2.9% 44,268 4.5% 42,138 947 2.7%
Chemicals......... 37,292 7.2% 42,145 7.3% 33,578 5.0% 28,403 2.9% 43,467 977 2.8%
Road/ port/
railways/
telecom........ 18,139 3.5% 19,209 3.3% 27,961 4.1% 36,416 3.7% 29,907 672 1.9%
Power............. 45,280 8.7% 37,974 6.6% 23,761 3.5% 18,577 1.9% 28,466 640 1.8%
Engineering....... 35,248 6.8% 32,394 5.6% 23,997 3.5% 17,327 1.8% 24,481 550 1.6%
Metal and
metal products. 12,520 2.4% 11,609 2.0% 15,660 2.3% 18,110 1.8% 22,974 516 1.5%
Food processing... 54 0.0% 4,464 0.8% 1,216 0.2% 6,806 0.7% 11,915 268 0.8%
Other (2)......... 155,842 30.0% 114,981 19.8% 100,964 14.9% 129,598 13.2% 246,093 5,533 15.6%
---------- ------ ---------- ------ ---------- ------ ---------- ----- ------------ --------- ------
Gross loans....... Rs.519,736 100.0% Rs.579,686 100.0% Rs.677,485 100.0% Rs.980,617 100.0% Rs.1,577,382 US$35,463 100.0%
Allowance for
loan losses
and interest
suspense....... (40,663) (40,596) (28,005) (16,517) (14,778) (332)
---------- ---------- ---------- ---------- ------------ ---------
Net loans......... Rs.479,073 Rs.539,090 Rs.649,479 Rs.964,100 Rs.1,562,603 US$35,130
========== ========== ========== ========== ============ =========
---------
(1) Includes home loans, automobile loans, commercial business loans, two
wheeler loans, personal loans, credit cards, dealer funding and developer
financing.
(2) Others primarily include transportation, paper and paper products, food
products, petrochemicals, man-made fibres, machinery, sugar, plastics,
mining, rubber and rubber products, shipping, agriculture, construction,
printing, mineral products, glass and glass products, watches, healthcare,
gems and jewelry, leather, cement and wood products industries.
47
Our gross loan portfolio at year-end fiscal 2006 increased by 60.8%
compared to the gross loan portfolio at year-end fiscal 2005. The largest
increase was in retail finance, which was 62.2% of gross loans at year-end
fiscal 2006 compared to 60.8% at year-end fiscal 2005 and 53.2% at year-end
fiscal 2004. Our gross loans to the services sector as a percentage of gross
loans increased to 6.3% at year-end fiscal 2006 compared to 3.7% at year-end
fiscal 2005. Our gross loans to the iron and steel sector as a percentage of
gross loans decreased to 3.0% at year-end fiscal 2006 compared to 5.0% at
year-end fiscal 2005.
At year-end fiscal 2006, our 20 largest borrowers accounted for
approximately 11.1% of our gross loan portfolio, with the largest borrower
accounting for approximately 1.9% of our gross loan portfolio. The largest group
of companies under the same management control accounted for approximately 2.5%
of our gross loan portfolio.
Geographic Diversity
Our portfolios were geographically diversified throughout India. The state
of Maharashtra, which is one of the most industrialized states in India,
accounted for the largest proportion of our gross loans outstanding at year-end
fiscal 2006.
Directed Lending
The Reserve Bank of India requires banks to lend to certain sectors of the
economy. Such directed lending is comprised of priority sector lending, export
credit and housing finance.
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend 40.0% of their net bank credit (total domestic loans less marketable debt
instruments and certain exempted categories permitted by the Reserve Bank of
India from time to time) to certain specified sectors called priority sectors.
Priority sectors include small-scale industries, the agricultural sector, food
and agri-based industries, small businesses and housing finance up to certain
limits. The agricultural sector is further bifurcated into direct finance to
agriculture which mainly includes short-term crop loans and medium and long
term loans provided directly to farmers for financing production and
development needs and indirect finance to agriculture which mainly includes
financing the distribution of fertilisers, pesticides and seeds, financing
distribution of inputs for the allied activities such as cattle feed and
poultry feed. and various other specified categories. Out of the 40.0%, banks
are required to lend a minimum of 18.0% of their net bank credit to the
agriculture sector (including direct agriculture and indirect agriculture) and
the balance to certain specified sectors, including small scale industries
(defined as manufacturing, processing and services businesses with a limit of
Rs.10 million on investment in plant and machinery, and an investment limit of
Rs.50 million in respect of certain specified items), small businesses,
including retail merchants, professional and other self employed persons and
road and water transport operators, housing loans up to Rs. 1.5 million and to
specified state financial corporations and state industrial development
corporations. To ensure focus of banks on direct agricultural advances, the
Reserve Bank of India has stipulated that lending under the indirect category
should not exceed one-fourth of the agricultural sub-target of 18%. Therefore,
banks are necessarily required to lend 13.5% of their net bank credit to the
direct agricultural sector. While granting its approval for the amalgamation,
the Reserve Bank of India stipulated that since ICICI's loans transferred to
ICICI Bank were not subject to the priority sector lending requirement, the
Bank is required to maintain priority sector lending of 50.0% of its domestic
net bank credit on the residual portion of its advances (i.e., the portion of
total advances excluding advances of ICICI, henceforth referred to as residual
net bank credit). This additional 10.0% priority sector lending requirement
will apply until such time as the Bank's aggregate priority sector advances
reach a level of 40.0% of its total net bank credit. The Reserve Bank of
India's existing instructions on sub-targets under priority sector lending and
eligibility of certain types of investments/ funds for qualification as
priority sector advances apply to the Bank.
The Bank is required to comply with the priority sector lending
requirements at the end of each fiscal year. Any shortfall in the amount
required to be lent to the priority sectors may be required to be deposited with
government sponsored Indian development banks like the National Bank for
Agriculture and Rural Development and the Small Industries Development Bank of
India. These deposits have a maturity of up to five years and carry interest
rates lower than market rates.
48
At year-end fiscal 2006, our priority sector loans were Rs.432.29 billion
(US$9.7 billion), constituting 49.7% of our residual net bank credit against the
requirement of 50.0%. The following table sets forth our priority sector loans,
classified by the type of borrower, at year-end fiscal 2006.
% of residual
net bank credit
At March 31, at March 31,
------------------------ -------------
2006 2006 2006
---------- -------- -------------
(in millions, except percentages)
Small scale industries.......... Rs. 3,513 US$ 79 0.4%
Others including residential
mortgage less than
Rs.1.5 million and small
businesses................... 282,199 6,344 32.4
Agricultural sector (1)......... 146,582 3,295 16.8
---------- -------- ---------
Total........................... Rs.432,295 US$9,719 49.7%
========== ======== =========
---------
(1) Includes direct agriculture Rs.101.11 billion constituting 11.6% of our
residual net bank credit against the requirement of 13.5%.
Export Credit
As part of directed lending, the Reserve Bank of India also requires banks
to make loans to exporters at concessional rates of interest. Export credit is
provided for pre-shipment and post-shipment requirements of exporter borrowers
in rupees and foreign currencies. At the end of the fiscal year, 12.0% of a
bank's net bank credit is required to be in the form of export credit. This
requirement is in addition to the priority sector lending requirement but
credits extended to exporters that are small scale industries or small
businesses may also meet part of the priority sector lending requirement. The
Reserve Bank of India provides export refinancing for an eligible portion of
total outstanding export loans at the bank rate prevailing in India from time to
time. The interest income earned on export credits is supplemented through fees
and commissions earned from these exporter customers from other fee-based
products and services taken by them from us, such as foreign exchange products
and bill handling. At year-end fiscal 2006, our export credit was Rs.11.5
billion (US$259 million), constituting 1.3% of our residual net bank credit.
Housing Finance
The Reserve Bank of India requires banks to lend up to 3.0% of their
incremental deposits in the previous fiscal year for housing finance. This can
be in the form of home loans to individuals or investments in the debentures and
bonds of the National Housing Bank and housing development institutions
recognized by the government of India. Housing finance also qualifies as
priority sector lending. At year-end fiscal 2006, our housing finance qualifying
as priority sector advances was Rs.234.27 billion (US$5.3 billion) and was well
above the minimum requirement prescribed by the Reserve Bank of India.
Loan Pricing
As required by the Reserve Bank of India guidelines and the advice issued
by the Indian Banks' Association, effective January 1, 2004, we price our loans
(other than fixed rate loans and certain categories of loans to individuals and
agencies specified by the Indian Banks' Association, including among others,
loans to individuals for acquiring residential properties, loans for purchase of
consumer durables, non-priority sector personal loans and loans to individuals
against shares, debentures, bonds and other securities) with reference to a
benchmark prime lending rate, called the ICICI Bank Benchmark Advance Rate. The
Asset Liability Management Committee of our Board of Directors fixes the ICICI
Bank Benchmark Advance Rate based on cost of funds, cost of operations and
credit charge as well as yield curve factors, such as interest rate and
inflation expectations, as well as market demand for loans of a certain term and
our cost of funds. The ICICI Benchmark Advance Rate is 13.75% p.a. payable
monthly, effective June 12, 2006. The lending rates comprise ICICI Benchmark
Advance Rate, term premium and transaction-specific credit and other charges.
49
Classification of Loans
We classify our assets as performing and non-performing in accordance with
the Reserve Bank of India's guidelines except in the case of ICICI Home Finance
Company and ICICI Bank Canada. ICICI Home Finance Company classifies loans and
other credit facilities as per the National Housing Bank guidelines into
performing and non-performing assets. Loans of our Canadian subsidiary are
classified as impaired when there is no longer a reasonable assurance of the
timely collection of the full amount of principal or interest. Under the
Reserve Bank of India guidelines, an asset is classified as non-performing if
any amount of interest or principal remains overdue for more than 90 days (180
days until fiscal 2003), in respect of term loans. In respect of overdraft or
cash credit, an asset is classified as non-performing if the account remains
out of order for a period of 90 days (180 days until fiscal 2003) and in
respect of bills, if the account remains overdue for more than 90 days (180
days until fiscal 2003). Further, non-performing assets are classified into
sub-standard, doubtful and loss assets based on the criteria stipulated by the
Reserve Bank of India. The Reserve Bank of India has separate guidelines for
restructured loans. See below " - Restructured Loans."
Asset Classification
The classification of assets as per Reserve Bank of India guidelines is
detailed below:
Performing assets:
Standard assets Assets that do not disclose any problems or which do not carry more than normal risk
attached to the business are classified as standard assets.
Non-performing assets:
Sub-standard assets Sub-standard assets comprise assets that are non-performing for a period not exceeding
12 months (18 months until fiscal 2003).
Doubtful assets Doubtful assets comprise assets that are non-performing for more than 12 months (18
months until fiscal 2003).
Loss assets Loss assets comprise assets (i) the losses on which are identified or (ii) that are
considered uncollectible.
Our non-performing assets, described in this annual report, include loans
and advances as well as credit substitutes, which are funded credit exposures
like debentures and preference shares. In compliance with regulations governing
the presentation of financial information by banks, we report only
non-performing loans and advances in our financial statements.
See also "Supervision and Regulation - Reserve Bank of India Regulations -
Loan Loss Provisions and Non-Performing Assets - Asset Classification."
Restructured Loans
The Reserve Bank of India has separate guidelines for restructured loans. A
fully secured standard loan can be restructured by reschedulement of principal
repayments and/or the interest element, but must be separately disclosed as a
restructured loan in the year of restructuring. The amount of sacrifice, if any,
in the element of interest, measured in present value terms, is either written
off or a provision is made to the extent of the sacrifice involved. Similar
guidelines apply to sub-standard assets. The sub-standard accounts which have
been subjected to restructuring, whether in respect of principal installment or
interest amount are eligible to be upgraded to the standard category only after
the specified period, i.e., a period of one year after the date when first
payment of interest or of principal, whichever is earlier, falls due, subject to
satisfactory performance during the period.
50
Provisioning and write-offs
We make provisions and write-offs in accordance with the Reserve Bank of
India's guidelines; see "Supervision and Regulation - Reserve Bank of India
Regulations - Loan Loss Provisions and Non-Performing Assets - Provisioning and
write-offs." The Reserve Bank of India guidelines on provisioning and
write-offs are as described below:
Standard assets As per the Reserve Bank of India's guidelines issued
in September 2005, banks are required to make
general provisions at 0.40% on standard loans
(excluding loans to agriculture sector and to small
and medium enterprises). As per the Reserve Bank of
India's guidelines issued in May 2006, the general
provisions for personal loans, loans and advances
qualifying as capital market exposure, residential
housing loans beyond Rs.2.0 million and commercial
real estate were increased to 1.00% from 0.40%.
Further, in its guidelines issued in July 2006,
Reserve Bank of India has allowed banks to create
the above additional provision in a phased manner as
given below.
a) 0.55% for the three months ending June 2006;
b) 0.70% for the six months ending September 2006;
c) 0.85% for the nine months ending December 2006; and
d) 1.00% for the year ending March 2007.
Sub-standard assets A general provision of 10% is required for all
sub-standard assets. An additional provision of 10%
is required for accounts that are unsecured,
ab-initio.
Doubtful assets A 100% provision is required in respect of the
unsecured portion of the doubtful asset. Until
year-end fiscal 2004, a 20% to 50% provision was
required for the secured portion as follows:
Up to one year: 20% provision;
One to three years: 30% provision; and
More than three years: 50% provision.
Effective year-end fiscal 2005, a 100% provision is
required for assets classified as doubtful for more
than three years on or after April 1, 2004. In
respect of assets classified as doubtful for more
than three years up to March 31, 2004, 60% to 100%
provision on such secured portion is required as
follows:
By March 31, 2005: 60% provision;
By March 31, 2006: 75% provision; and
By March 31, 2007: 100% provision.
Loss assets The entire asset is required to be written off or
provided for.
Restructured loans A provision equal to the difference between the
present value of the future interest as per the
original loan agreement and the present value of the
future interest on the basis of rescheduled terms at
the time of restructuring, is required to be made.
There are separate guidelines for projects under implementation which are
based on the achievement of financial closure and the date of approval of the
project financing.
Our policy
Until fiscal 2004, the Bank made provisions aggregating 50% of the secured
portion of corporate non-performing assets over a three-year period instead of
the five-and-a-half year period prescribed by the Reserve Bank of India.
Effective the quarter ended June 30, 2004, the Bank provides for corporate
non-performing assets in line with the revised Reserve Bank of India guidelines
requiring 100% provision over a five-year period. Loss assets and the unsecured
portion of doubtful assets are fully provided for or written off. Additional
provisions are made against
51
specific non-performing assets if considered necessary by the management. We
make provisions and write-offs for retail non-performing loans in excess of the
provisions required by the Reserve Bank of India guidelines. Non-performing
assets acquired from ICICI in the amalgamation were fair valued and additional
provisions were recorded to reflect the fair valuation. We do not distinguish
between provisions and write-offs while assessing the adequacy of our loan loss
coverage, as both provisions and write-offs represent a reduction of the
principal amount of a non-performing asset. In compliance with regulations
governing the presentation of financial information by banks, we report
non-performing assets net of cumulative write-offs in our financial statements.
For restructured loans, provisions are made in accordance with the
guidelines issued by the Reserve Bank of India, which require that the
difference between the present values of the future interest as per the original
loan agreement and the present values of future interest on the basis of
rescheduled terms be provided at the time of restructuring.
The following table sets forth, at the dates indicated, our gross
restructured rupee and foreign currency loan portfolio by business category.
At March 31,
-----------------------------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----------------------
(in millions, except percentages)
Commercial, financial,
agricultural and others (1)... Rs.50,431 Rs.90,018 Rs.72,599 Rs.64,524 Rs.54,806 US$1,232
Rupee........................... 35,534 48,582 57,941 51,146 48,925 1,100
Foreign currency................ 14,897 41,436 14,658 13,378 5,881 132
Working capital finance.......... - 2,857 2,855 1,099 657 15
Rupee........................... - 2,857 2,855 1,099 657 15
Foreign currency................ - - - - - -
Total restructured loans......... 50,431 92,875 75,454 65,623 55,463 1,247
Rupee........................... 35,534 51,439 60,796 52,245 49,582 1,115
Foreign currency................ 14,897 41,436 14,658 13,378 5,881 132
--------- --------- --------- --------- --------- --------
Gross restructured loans......... 50,431 92,875 75,454 65,623 55,463 1,247
Provision for loan losses........ (3,453) (3,443) (9,169) (2,991) (2,305) (52)
--------- --------- --------- --------- --------- --------
Net restructured loans........... Rs.46,978 Rs.89,432 Rs.66,285 Rs.62,632 Rs.53,158 Rs.1,195
========= ========= ========= ========= ========= ========
Gross customer assets............ Rs.621,140 Rs.702,331 Rs.772,986 Rs.1,049,431 Rs.1,638,552 US$36,838
Net customer assets.............. 591,207 651,885 736,297 1,029,299 1,622,675 36,481
Gross restructured loans as a
percentage of gross customer
assets........................ 8.12% 13.22% 9.76% 6.25% 3.38%
Net restructured loans as a
percentage of net customer
assets........................ 7.95% 13.72% 9.00% 6.08% 3.28%
----------
(1) Excludes working capital finance.
The following table sets forth, at the dates indicated, our gross
non-performing rupee and foreign currency customer asset portfolio by business
category.
At March 31,
-----------------------------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----------------------
(in millions, except percentages)
Consumer loans & credit card
receivables................... Rs.201 Rs.1,121 Rs.3,544 Rs.8,428 Rs.14,395 US$324
Rupee........................... 201 1,121 3,544 8,426 14,388 323
Foreign currency................ - - - 2 7 1
Commercial, financial,
agricultural and others (1)... 48,936 52,704 32,617 23,653 5,684 128
Rupee........................... 32,933 37,769 25,632 20,098 3,675 83
Foreign currency................ 16,003 14,935 6,985 3,555 2,009 45
Working capital finance.......... 3,998 4,779 4,541 2,808 2,943 66
Rupee........................... 3,998 4,779 4,541 2,808 2,943 66
Foreign currency................ - - - - - -
Leasing and related activities... 616 459 119 84 63 1
52
At March 31,
-----------------------------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----------------------
(in millions, except percentages)
Rupee........................... 616 459 119 84 63 1
Foreign currency................ - - - - - -
Total non-performing assets...... 53,751 59,063 40,821 34,973 23,085 519
Rupee........................... 37,748 44,128 33,836 31,416 21,069 473
Foreign currency................ 16,003 14,935 6,985 3,557 2,016 46
--------- --------- --------- --------- --------- --------
Gross non-performing assets...... 53,751 59,063 40,821 34,973 23,086 519
Provision for loan losses........ (26,010) (26,922) (19,829) (14,606) (12,009) (270)
Interest suspended & ECGC
claims(2)..................... (477) (490) (502) (284) (271) (6)
--------- --------- --------- --------- --------- --------
Net non-performing assets........ Rs.27,264 Rs.31,651 Rs.20,490 Rs.20,083 Rs.10,806 US$243
========= ========= ========= ========= ========= ========
Gross customer assets............ Rs.621,140 Rs.702,331 Rs.772,986 Rs.1,049,431 Rs.1,638,552 US$36,838
Net customer assets.............. 591,207 651,885 736,297 1,029,299 1,622,675 36,481
Gross non-performing assets as a
percentage of gross customer
assets........................ 8.65% 8.41% 5.28% 3.33% 1.41%
Net non-performing assets as a
percentage of net customer
assets........................ 4.61% 4.86% 2.78% 1.95% 0.67%
----------
(1) Excludes working capital finance.
(2) Including amounts claimed as recoverable from Export Credit Guarantee
Corporation of India
The ratio of net non-performing assets to net customer assets was 0.67% at
March 31, 2006 as compared to 1.95% at March 31, 2005. At March 31, 2006, the
gross non-performing assets (net of write-offs) were Rs.23.1 billion (US$ 519
million) compared to Rs.35.0 billion (US$ 786 million) at March 31, 2005. Gross
of technical write-offs, the gross non-performing assets at March 31, 2006 were
Rs.29.8 billon (US$ 670 million) compared to Rs.51.8 billion (US$ 1.2 billion)
at March 31, 2005. The coverage ratio (i.e. total provisions and technical
write-offs made against non-performing assets as a percentage of gross
non-performing assets) at March 31, 2006 was 63.7% compared to 61.2% at March
31, 2005.
In 1991, India commenced a program of industrial liberalization involving,
among other things, the abolition of industrial licensing, reduction in import
tariff barriers and greater access for foreign companies to the Indian markets.
In the period following the opening up of the economy, a number of Indian
companies commenced large projects in expectation of growth in demand in India.
These projects had in general relatively high levels of debt relative to
equity, given the inadequate depth in the equity capital markets in India at
that time. During the 1990s, the Indian economy was impacted by negative trends
in the global marketplace, particularly in the commodities markets, and
recessionary conditions in various economies, which have impaired the operating
environment for the industrial sector in India. The manufacturing sector was
also impacted by several other factors, including increased competition arising
from economic liberalisation in India and volatility in industrial growth and
commodity prices. This has led to stress on the operating performance of Indian
companies and an increase in the level of non-performing assets in the Indian
financial system, including ICICI and us.
Certain Indian corporations have come to terms with this new competitive
reality through a process of restructuring and repositioning, including
rationalization of capital structures and production capacities. The increase in
commodity prices since fiscal 2003 has had a favorable impact on the operations
of corporations in several sectors. To create an institutional mechanism for the
restructuring of corporate debt, the Reserve Bank of India has devised a
corporate debt restructuring system. The objective of this framework is to
ensure a timely and transparent mechanism for the restructuring of corporate
debts of viable entities facing problems. The operation of this system led to
the approval of restructuring programs for a large number of companies, which
led to an increase in the level of restructured loans in the Indian financial
system, including us. The restructured loans continue to be classified as such
until they complete one year of payment in accordance with the restructured
terms. Our net restructured standard loans were Rs.53.16 billion at March 31,
2006 compared to Rs.62.63 billion at March 31, 2005.
53
Non-Performing Asset Strategy
In respect of unviable non-performing assets, where companies have lost
financial viability, we adopt an aggressive approach aimed at out-of-court
settlements, enforcing collateral and driving consolidation. Our focus is on
time value of recovery and a pragmatic approach towards settlements. The strong
collateral against our loan assets is the critical factor towards the success
of our recovery efforts. In addition, we continually focus on proactive
management of accounts under supervision. Our strategy constitutes a proactive
approach towards identification, aimed at early stage solutions to incipient
problems.
The Securitisation Act has strengthened the ability of lenders to resolve
non-performing assets by granting them greater rights as to enforcement of
security and recovery of dues from corporate borrowers. The Securitisation Act
and guidelines issued by the Reserve Bank of India have permitted the setting up
of asset reconstruction companies to acquire financial assets by banks and
financial institutions. The Reserve Bank of India has issued guidelines to banks
on the process to be followed for sales of financial assets to asset
reconstruction companies. These guidelines provide that a bank may sell
financial assets to an asset reconstruction company provided the asset is a
non-performing asset. (See "Supervision and Regulation -- Reserve Bank of India
Regulations -- Regulations relating to Sale of Assets to Asset Reconstruction
Companies"). We sold Rs.4.79 billion of our net non-performing assets during
fiscal 2006 and Rs.13.28 billion of our net non-performing assets during fiscal
2005 to Asset Reconstruction Company (India) Limited, a reconstruction company
registered with the Reserve Bank of India.
We monitor migration of the credit ratings of our borrowers to enable us to
take proactive remedial measures to prevent loans from becoming non-performing.
We review the industry outlook and analyse the impact of changes in the
regulatory and fiscal environment. Our periodic review system helps us to
monitor the health of accounts and to take prompt remedial measures.
A substantial portion of our loans to retail customers is also secured by
a first and exclusive lien on the assets financed (predominantly property and
vehicles). We are entitled in terms of our security documents to repossess
security comprising assets such as plant, equipment and vehicles without
reference to the courts or tribunals unless a client makes a reference to such
courts or tribunals to stay our actions. In respect of our retail loans, we
adopt a standardised collection process to ensure prompt action for follow-up
on overdues and recovery of defaulted amounts. Our loans have historically been
sufficiently over-collateralized so that once collateral is realized we recover
a substantial amount of our loan outstanding. However, recoveries may be
subject to delays of up to several years, due to the long legal process in
India. This leads to delay in enforcement and realization of collateral. We
maintain the non-performing assets on our books for as long as the enforcement
process is ongoing. Accordingly, a non-performing asset may continue for a long
time in our portfolio until the settlement of loan account or realization of
collateral, which may be longer than US banks under similar circumstances.
See also "Loan portfolio -- Collateral -- Completion, Perfection and
Enforcement".
The following table sets forth, at the dates indicated, gross restructured
loans by borrowers' industry or economic activity and as a percentage of total
gross restructured loans.
At March 31,
----------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
-------------- ------------- -------------- ------------- ----------------------
(in millions, except percentages)
Rs. % Rs. % Rs. % Rs. % Rs. US$ %
Crude petroleum/
refining............ - - - - 7,448 23.1 18,340 27.9 19,169 431 34.6
Road/port/railways/telecom
& other infrastructure - - 2,277 2.5 10,276 13.6 15,255 23.2 18,733 421 33.8
Iron and steel......... 9,870 19.6 43,226 46.5 8,488 11.2 10,501 16.0 4,834 109 8.7
Other metal & metal
products............ 1,542 3.1 1,456 1.6 3,377 4.5 3,143 4.8 3,528 79 6.3
Chemicals (including
fertilizers &
pesticides)......... 4,346 8.6 5,997 6.5 8,442 11.2 6,912 10.5 2,345 53 4.2
Power.................. 2,496 4.9 1,155 1.2 1,202 1.6 2,694 4.1 1,703 38 3.1
Paper and paper
products............ 991 2.0 725 0.8 1,159 1.5 920 1.4 920 21 1.7
Engineering............ 1,601 3.2 2,399 2.6 4,022 5.3 509 0.8 565 13 1.0
Cement................. 1,263 2.5 6,044 6.5 2,765 3.7 1,143 1.8 485 11 0.9
Automobiles
(including trucks).. 5,869 11.6 6,609 7.1 6,584 8.7 2,409 3.7 391 9 0.7
Textiles............... 11,427 22.7 5,873 6.3 2,346 3.1 418 0.6 345 8 0.6
Services (excluding
finance)............ 513 1.0 2,320 2.5 852 1.2 417 0.6 - - -
Food processing........ - - 176 0.2 - - - - - - -
Others................. 10,513 20.8 14,618 15.7 8,493 11.3 2,962 4.6 2,445 54 4.4
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- -----
54
At March 31,
----------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
------------ -------------- ------------- ------------- ----------------------
(in millions, except percentages)
Rs. % Rs. % Rs. % Rs. % Rs. US$ %
Gross restructured
loans.............. 50,431 100.0 92,875 100.0 75,454 100.0 65,623 100.0 55,463 1,247 100.0
===== ===== ===== ===== =====
Aggregate provision
for loan losses..... (3,453) (3,443) (9,169) (2,991) (2,305) (52)
------ ------ ------ ------ ------ ---
Net restructured loans 46,978 89,432 66,285 62,632 53,158 1,195
====== ====== ====== ====== ====== =====
The following table sets forth, at the dates indicated, gross
non-performing assets by borrowers' industry or economic activity and as a
percentage of total gross non-performing assets.
At March 31,
----------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
--------------- ------------- ------------- ------------ -----------------------
(in millions, except percentages)
Rs. % Rs. % Rs. % Rs. % Rs. US$ %
Chemicals (including
fertilisers &
pesticides)........ 13,043 24.4 15,127 25.6 8,494 20.8 4,026 11.5 1,990 45 8.6
Textiles.............. 8,191 15.3 9,811 16.6 4,261 10.4 3,239 9.3 1,264 28 5.5
Services (excluding
finance) .......... 1,027 1.9 798 1.4 828 2.0 670 1.9 806 18 3.5
Agriculture........... 200 0.4 237 0.4 219 0.5 271 0.8 795 18 3.4
Automobiles
(including trucks) 278 0.5 734 1.2 686 1.7 678 1.9 740 17 3.2
Electronics........... 969 1.8 1,046 1.8 1,019 2.5 1,414 4.0 386 9 1.7
Food processing....... 2,386 4.4 1,501 2.5 994 2.4 722 2.1 336 8 1.5
Iron and steel........ 9,146 17.0 7,672 13.0 1,663 4.1 670 1.9 191 4 0.8
Engineering........... 4,224 7.9 4,113 7.0 2,136 5.2 1,420 4.1 144 3 0.6
Other metal & metal
products........... 2,705 5.0 3,213 5.4 1,981 4.9 379 1.1 37 1 0.2
Paper and paper
products........... 2,069 3.9 1,734 2.9 598 1.5 350 1.0 52 1 0.2
Road/port/railways &
other
infrastructure..... 180 0.3 180 0.3 - - 2,141 6.1 - - -
Power................. 338 0.6 623 1.1 6,200 15.2 7,373 21.1 - - -
Services -- finance.... 345 0.6 1,542 2.6 836 2.0 762 2.2 - - -
Cement................ 1,406 2.6 1,623 2.7 1,545 3.8 196 0.6 - - -
Retail finance(1)..... 233 0.4 1,137 1.9 3,593 8.8 8,452 24.2 14,449 324 62.6
Others................ 7,011 13.0 7,972 13.6 5,768 14.2 2,210 6.2 1,896 43 8.2
------- ----- ------ ----- ------ ----- ------ ----- ------ ---- -----
Gross non-performing
assets............ 53,751 100.0 59,063 100.0 40,821 100.0 34,973 100.0 23,086 519 100.0
Aggregate provision
for loan losses.... (26,010) (26,922) (19,829) (14,606) (12,009) (270)
Interest suspended &
ECGC claims(2)..... (477) (490) (502) (284) (271) (6)
------ ------ ------ ------ ------ ---
Net non-performing
assets............. 27,264 31,651 20,490 20,083 10,806 243
====== ====== ====== ====== ====== ===
----------
(1) Includes dealer funding and developer financing.
(2) Includes amounts claimed as recoverable from Export Credit Guarantee
Corporation of India.
Gross retail non-performing loans increased from Rs.8.45 billion (US$190
million) at year-end fiscal 2005 to Rs.14.45 billion (US$325 million) at
year-end fiscal 2006, primarily due to the growth of the retail portfolio. The
net non-performing assets in the retail portfolio at March 31, 2006 were 0.73%
of net retail assets. Retail non-performing loans constituted 62.6% of total
non-performing assets at March 31, 2006 compared to 24.2% at year-end fiscal
2005, due to a reduction in non-performing loans excluding retail loans, and an
increase in retail non-performing loans in line with the growth in the retail
portfolio.
55
Provision for Loan Losses
The following table sets forth, at the dates indicated, movement in our
provisions for loan losses for non-performing customer assets.
At March 31,
-------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006
---- ---- ---- ---- ---- ----
(in millions)
Aggregate provision for loan
losses at the beginning of
the year.................... Rs. 2,519 Rs. 26,010 Rs. 26,922 Rs.19,829 Rs.14,606 US$328
Add: Provisions for loan losses
Retail finance(1)............ 100 241 597 4,360 1,880 43
Commercial, financial,
agricultural and others(2) 24,717 5,423 3,438 (1,106) 896 20
Working capital finance...... 2,462 1,336 (351) 963 615 14
Leasing & related activities. 141 10 (68) (11) (18) (1)
Total provisions for loan
losses, net of releases of
provisions Rs.29,939 Rs.33,020 Rs. 30,538 Rs.24,035 Rs.17,978 404
Loans charged-off.............. (3,929) (6,098) (10,709) (9,429) (5,970) (134)
Aggregate provision for loan
losses at the end of the
year........................ Rs.26,010 Rs.26,922 Rs. 19,829 Rs.14,606 Rs.12,009 US$270
----------
(1) Includes dealer funding and developer financing.
(2) Includes project finance, corporate finance and receivables financing,
excluding leasing and related activities.
Subsidiaries and Joint Ventures
Prior to the amalgamation, ICICI Bank had no subsidiaries. Subsequent to
the amalgamation, the subsidiaries and joint ventures of ICICI have become our
subsidiaries and joint ventures.
The following table sets forth, certain information relating to our direct
subsidiaries and joint ventures for the year ended March 31, 2006.
Year of Ownership Total Net Total
Name formation Activity interest income(1) worth(2) Assets(3)
---- --------- -------- -------- --------- --------- ---------
(in millions, except percentages)
ICICI Securities Limited.......... February,1993 Investment banking 99.90% Rs. 4,059 Rs. 4,108 Rs. 16,422
ICICI Brokerage Services Limited.. March, 1995 Securities broking 99.90% 713 485 1,666
ICICI Securities Inc.............. June, 2000 Investment banking 99.90% 288 516 992
ICICI Securities Holdings Inc..... June, 2000 Investment banking 99.90% 35 519 523
ICICI Prudential Life Insurance
Company Limited(7).............. July, 2000 Life insurance 74.00% 56,982 4,936 92,255
ICICI Lombard General Insurance
Company Limited(7).............. October, 2000 General insurance 74.00% 7,860 4,168 16,391
Asset management
company for
Prudential ICICI Asset Management Prudential ICICI
Company Limited(6).............. June, 1993 Mutual Fund 50.99% 1,415 572 1,186
Trustee company for
Prudential ICICI
Prudential ICICI Trust Limited(6). June, 1993 Mutual Fund 50.80% 4 8 12
ICICI Venture Funds Management Venture fund
Company Limited................. January, 1988 management 100.00% 1,146 206 718
ICICI Home Finance Company
Limited(4)...................... May, 1999 Housing finance 100.00% 3,135 3,514 40,812
ICICI Trusteeship Services Limited April, 1999 Trusteeship services 100.00% 0.3 2 2
56
Year of Ownership Total Net Total
Name formation Activity interest income(1) worth(2) Assets(3)
---- --------- -------- -------- --------- --------- ---------
(in millions, except percentages)
ICICI Investment Management
Company Limited................. March, 2000 Investment management 100.00% 8 121 125
Offshore fund
ICICI International Limited....... January, 1996 management 100.00% 0.3 45 46
February,
ICICI Bank UK Limited............. 2003 Banking 100.00% 3,647 8,892 90,888
ICICI Bank September,
Canada.......................... 2003 Banking 100.00% 997 2,751 39,416
ICICI Bank Eurasia L.L.C(5)....... May, 1998 Banking 100.00% 156 719 3,947
Assets and
ICICI Property Trust.............. June, 2001 investments management 100.00% Nil 0.3 0.3
TCW/ICICI Investment Partners Asset and fund
LLC(8).......................... April, 1995 management company 50.00% 4 23 22
TSI Ventures (India)
Private Limited(9).............. May, 2005 Real estate consultant 50.00% Nil 12 17
----------
(1) Total income represents gross income from operations and other income.
(2) Net worth represents share capital/unit capital and reserves and surplus.
(3) Total assets represents fixed assets, advances, investments and gross
current assets (including cash and bank balances).
(4) Effective August 11, 2005, ICICI Distribution Finance Private Limited has
merged with ICICI Home Finance Company Limited. Post its merger; ICICI
Distribution Finance Private Limited ceased to be a subsidiary of the Bank.
(5) ICICI Bank Eurasia Limited Liability Company has become a subsidiary of
ICICI Bank Limited with effect from May 19, 2005, being the date of its
acquisition.
(6) Effective August 26, 2005, Prudential ICICI Asset Management Company
Limited and Prudential ICICI Trust Limited have become subsidiaries of the
Bank. Therefore these jointly controlled entities have been consolidated as
per the principles of Accounting Standard 21 on Preparation of Consolidated
Financial Statements (AS 21) in line with the limited revision made to AS
27 on Financial Reporting of Interests in Joint Ventures in Consolidated
Financial Statements (AS 27).
(7) As per the limited revision made to Accounting Standard 27 (AS 27) on
"Financial Reporting of Interests in Joint Ventures" issued by the
Institute of Chartered Accountants of India, these jointly controlled
entities are consolidated as per the principles of Accounting Standard 21
(AS 21) on "Consolidated Financial Statements". According to this limited
revision, if a jointly controlled entity qualifies as a subsidiary as per
AS 21, then that entity should be fully consolidated as per the principles
of AS 21 and not proportionately consolidated as per the principles of AS
27.
(8) This investment is accounted as per the proportionate consolidation method
as defined in AS 27 in the Consolidated Financial Statements.
(9) During fiscal 2006, ICICI Bank entered into a 50:50 joint venture with
Tishman Speyers Properties through its subsidiary ICICI Venture Funds
Management Company Limited. The joint venture called TSI Ventures (India)
Private Limited is a real estate consultant, which offers advisory services
in relation to commercial, residential and retail properties throughout
India. This investment is accounted as per the proportionate consolidation
method as defined in AS 27 in the Consolidated Financial Statements.
The following table sets forth certain information on other significant
entities required to be consolidated in our financial statements under Indian
GAAP for the year ended March 31, 2006.
Year of Ownership Total Net Total
Name formation Activity interest income(1) worth(2) Assets(3)
---- --------- -------- --------- --------- -------- ---------
(in millions, except percentages)
ICICI Eco-net Internet &
Technology Fund................. October, 2000 Venture capital fund 92.03% Rs. 45 Rs. 613 Rs. 613
ICICI Equity Fund................. March, 2000 Venture capital fund 100.00% 1,680 3,734 3,740
ICICI Emerging Sectors Fund....... March, 2002 Venture capital fund 98.85% 595 3,861 3,886
February,
ICICI Strategic Investments Fund.. 2003 Venture capital fund 100.00% 101 7,866 7,866
----------
(1) Total income represents gross income from operations and other income.
(2) Net worth represents share capital/unit capital (in case of venture capital
funds) and reserves and surplus.
(3) Total assets represents fixed assets, advances, investments and gross
current assets (including cash and bank balances).
At year-end fiscal 2006, all of our subsidiaries and joint ventures, were
incorporated in India, except the following seven companies:
o ICICI Securities Holdings Inc., incorporated in the US;
o ICICI Securities Inc., incorporated in the US;
57
o ICICI Bank UK Limited, incorporated in the United Kingdom;
o ICICI Bank Canada, incorporated in Canada;
o ICICI Bank Eurasia Limited Liability Company, incorporated in Russia;
o ICICI International Limited, incorporated in place Mauritius; and
o TCW/ICICI Investment Partners Limited Liability Company, incorporated
in Mauritius
ICICI Securities Holdings Inc. is a wholly owned subsidiary of ICICI Securities
and ICICI Securities Inc. is a wholly owned subsidiary of ICICI Securities
Holdings Inc. ICICI Securities Holdings Inc. and ICICI Securities Inc. are
consolidated in ICICI Securities' financial statements.
ICICI Bank Canada is in the process of incorporating a subsidiary to be known
as ICICI Wealth Management Inc. This company would be engaged in the business
of distribution of funds and other securities in Canada.
Technology
We continue to endeavor to be at the forefront of usage of technology in
the financial services sector. We strive to use information technology as a
strategic tool for our business operations, to gain a competitive advantage and
to improve our overall productivity and efficiency. Our technology initiatives
are aimed at enhancing value, offering customers enhanced convenience and
improved service while optimizing costs. Our focus on technology emphasizes:
o Electronic and online channels to:
o offer easy access to our products and services;
o reduce distribution and transaction costs;
o reach new target customers;
o enhance existing customer relationships; and
o reduce time to market.
o Application of information systems to:
o manage our large scale of operations efficiently;
o effectively market to our target customers;
o monitor and control risks;
o identify, assess and capitalize on market opportunities; and
o assist in offering improved products to customers.
We also seek to leverage our domestic technology capabilities in our
international operations.
Technology Organization
We have dedicated technology groups for our products and services for
retail, corporate, international and rural customers. The Technology Management
Group coordinates our enterprise-wide technology initiatives. Our shared
services technology group provides the technology infrastructure platform across
all business technology groups to gain synergies in operation. The business
technology groups review the individual requirements of the various
58
business groups while the technology management group aggregates the
requirements of various business groups to ensure enterprise-wide consistency.
Banking Application Software
We use banking applications like a core banking system, loan management
system and credit card management system that are flexible and scaleable and
allow us to serve our growing customer base. A central stand-in server provides
services all days of the week, throughout the year, to delivery channels. The
server stores the latest customer account balances, which are continuously
streamed from the core-banking database. We have a data center in Mumbai for
centralized data base management, data storage and retrieval.
Electronic and Online Channels
We use a combination of physical and electronic delivery channels to
maximize customer choice and convenience, which has helped the differentiation
of our products in the marketplace. Our branch banking software is flexible and
scaleable and integrates well with its electronic delivery channels. Our ATMs
are sourced from some of the world's leading vendors. These ATMs work with the
branch banking software. At June 30, 2006, we had 2,275 ATMs across India. We
were one of the first banks to offer online banking facilities to our
customers. We now offer a number of online banking services to our customers
for both corporate and retail products and services. Our telephone banking call
centers employ approximately 4,150 phone banking officers, across locations, at
Mumbai, Thane and Hyderabad, which are operational round the clock. These
telephone banking call centers use an Interactive Voice Response System. The
call centers are based on the latest technology and provide an integrated
customer database that allows the call agents to get a complete overview of the
customer's relationship with us. The database enables customer segmentation and
assists the call agent in identifying cross-selling opportunities.
We offer mobile banking services in India in line with our strategy to
offer multi-channel access to our customers. This service has now been extended
to all mobile telephone service providers across India and non-resident Indian
customers in certain other countries where we have presence.
High-Speed Electronic Communications Infrastructure
We have a nationwide data communications network linking all our channels
and offices. The network design is based on a mix of dedicated leased lines and
satellite links to provide for reach and redundancy, which is imperative in a
vast country like India. The communications network is monitored 24 hours a day
using advanced network management software. We are moving towards multi protocol
label switching (MPLS) as an alternative to lease lines, thus ensuring
redundancy.
Operations relating to Commercial Banking for Corporate Customers
We have successfully centralized our corporate banking back office
operations and rolled out a business process management solution to automate our
activities in the areas of trade services and general banking operations.
Through integration of the workflow system with the imaging and document
management system, we have achieved substantial savings and practically
eliminated the use of paper for these processes.
We have centralized the systems of the treasuries of all our international
branches and subsidiaries. As a result, the processing of transactions as well
as the applications used for deal entry are now centrally located and maintained
out of India.
Customer Relationship Management
We have implemented a customer relationship management solution for
automation of customer handling in all key retail products. The solution helps
in tracking and timely resolution of various customer queries and issues. The
solution has been deployed at the telephone banking call centers as well as a
large number of branches.
59
Data Warehousing and Data Mining
We have a data warehouse for customer data aggregation. This data warehouse
also provides a platform for data mining initiatives. We have implemented an
Enterprise Application Integration initiative across our retail and corporate
products and services, to link various products, delivery and channel systems.
This initiative underpins our multi-channel customer service strategy and seeks
to deliver customer related information consistently across access points. It is
also aimed to provide us with the valuable information to compile a unified
customer view and creates various opportunities associated with cross-selling
other financial products.
Data center and disaster recovery system
While our primary data center is located in Mumbai, a separate disaster
recovery data center has been set up in another city and is connected to the
main data center in Mumbai. The disaster recovery data center can host critical
banking applications in the event of a disaster at the primary site.
Competition
We face competition in all our principal areas of business from Indian and
foreign commercial banks, housing finance companies, mutual funds and investment
banks. ICICI Bank is the largest private sector bank in India and the second
largest bank among all banks in the country, in terms of total assets, with
total assets of Rs. 2,513.9 billion (US$ 56.5 billion) at March 31, 2006. We
seek to gain competitive advantage over our competitors by offering innovative
products and services, the use of technology, building customer relationships
and developing a team of highly motivated and skilled employees. We evaluate our
competitive position separately in respect of our products and services for
retail and corporate customers.
Commercial banking products and services for retail customers
In the retail markets, competition is primarily from foreign and Indian
commercial banks and housing finance companies. Foreign banks have product and
delivery capabilities but are likely to focus on limited customer segments and
geographical locations since they have a smaller branch network than Indian
commercial banks. Foreign banks in aggregate had only 236 branches in India at
year-end fiscal 2006. Indian commercial banks have wide distribution networks
but relatively less strong technological and marketing capabilities. We seek to
compete in this market through a full product portfolio, effective distribution
channels, which include agents, robust credit processes and collection
mechanisms, experienced professionals and superior technology.
Commercial banks attract the majority of retail bank deposits, historically
the preferred retail savings product in India. We have sought to capitalize on
our corporate relationships to gain individual customer accounts through payroll
management products and will continue to pursue a multi-channel distribution
strategy utilizing physical branches, ATMs, telephone banking call centers and
the Internet to reach customers. Further, following a strategy focused on
customer profiles and product segmentation, we offer differentiated liability
products to customers of various ages and income profiles. Mutual funds are
another source of competition to us. Mutual funds offer tax advantages and have
the capacity to earn competitive returns and hence, have increasingly become a
viable alternative to bank deposits.
Commercial banking products and services for corporate customers
In products and services for corporate customers, we face strong
competition primarily from public sector banks, foreign banks and other new
private sector banks. Our principal competition in these products and services
comes from public sector banks, which have built extensive branch networks that
have enabled them to raise low-cost deposits and, as a result, price their loans
and fee-based services very competitively. Their wide geographical reach
facilitates the delivery of banking products to their corporate customers
located in most parts of the country. We have been able, however, to compete
effectively because of our efficient service and prompt turnaround times that we
believe are significantly faster than public sector banks. We seek to compete
with the large branch networks of the public sector banks through our
multi-channel distribution approach and technology-driven delivery capabilities.
60
Traditionally, foreign banks have been active in providing treasury-related
products and services, trade finance, fee-based services and other short-term
financing products to top tier Indian corporates. We effectively compete with
foreign banks in cross-border trade finance as a result of our wider
geographical reach relative to foreign banks and our customized trade financing
solutions. We have established strong fee-based cash management services and
compete with foreign banks due to our technological edge and competitive pricing
strategies. We leverage our balance sheet size, technology and our international
presence to compete in treasury-related products and services.
Other new private sector banks also compete in the corporate banking market
on the basis of efficiency, service delivery and technology. However, we believe
our size, capital base, strong corporate relationships, wider geographical reach
and ability to use technology to provide innovative, value-added products and
services provide us with a competitive edge.
In project finance, ICICI's primary competitors were established long-term
lending institutions. In recent years, Indian and foreign commercial banks have
sought to expand their presence in this market. We believe that we have a
competitive advantage due to our strong market reputation and expertise in risk
evaluation and mitigation. We believe that our in-depth sector specific
knowledge and capabilities in understanding risks and policy related issues as
well as our advisory, structuring and syndication services have allowed us to
gain credibility with project sponsors, overseas lenders and policy makers.
Other business areas
Our international strategy is focused on India-linked opportunities in the
initial stages. In our international operations, we face competition from Indian
public sector banks with overseas operations, foreign banks with products and
services targeted at non-resident Indians and Indian businesses and other
service providers like remittance services. We are seeking to position ourselves
as an Indian bank offering globally-benchmarked products and services with an
extensive distribution network in India to gain a competitive advantage. We seek
to leverage our technology capabilities developed in our domestic business to
offer convenient and efficient services to our international customers. We also
seek to leverage our strong relationships with Indian corporates in our
international business.
In our commercial banking operations for agricultural and rural customers,
we face competition from the public sector banks that have large branch networks
in rural India. Other private sector banks and non-bank finance companies also
provide products and services in rural areas. We seek to compete in this
business based on our comprehensive product strategy and multiple channels.
Our insurance and asset management joint ventures face competition from
existing dominant public sector players as well as new private sector players.
We believe that the key competitive strength of our insurance joint ventures is
the combination of our experience in the Indian financial services industry
with the global experience and skills of our joint venture partners. We believe
that ICICI Prudential Life Insurance Company Limited, ICICI Lombard General
Insurance Company Limited and Prudential ICICI Asset Management Company Limited
have built strong product, distribution and risk management capabilities,
achieving market leadership positions in their respective businesses. ICICI
Prudential Life Insurance Company Limited had a retail market share of about
32% in new business written (on weighted received premium basis) by private
sector life insurance companies from April to June 2006. ICICI Lombard General
Insurance Company Limited had a market share of about 35% among the private
sector general insurance companies from April to June 2006. Prudential ICICI
Asset Management Company was the largest player in the Indian mutual fund
industry at June 30, 2006 with a market share of about 11% in terms of assets
under management.
61
Employees
At year-end fiscal 2006, we had 41,871 employees, compared to 29,374
employees at year-end fiscal 2005 and 17,830 employees at year-end fiscal 2004.
Of these, 25,384 employees at year-end fiscal 2006 were employed by ICICI Bank,
an increase from 18,029 at year-end fiscal 2005 and 13,549 at year-end fiscal
2004. Of our 41,871 employees at year-end fiscal 2006, 15,476 were
professionally qualified, holding degrees in management, accountancy,
engineering, law, computer science, economics or banking.
Management believes that it has good relationships with its employees.
The financial services industry in India is undergoing unprecedented change
as deregulation gains momentum. Moreover, changing customer needs and rapid
advances in technology are continually re-defining the lines of innovation and
competition, thereby providing us with new challenges and opportunities. To meet
these challenges, we have relied extensively on our human capital, which we
believe comprises some of the best talent in the industry.
We continue to attract graduates from the premier business schools of the
country. We dedicate a significant amount of senior management time to ensure
that employees remain highly motivated and perceive the organization as a place
where opportunities abound, innovation is fuelled, teamwork is valued and
success is rewarded. Employee compensation is clearly tied to performance and we
encourage the involvement of our employees in our overall performance and
profitability through profit sharing incentive schemes based on the financial
results. A revised performance appraisal system has been implemented to assist
management in career development and succession planning.
ICICI Bank has an employee stock option scheme to encourage and retain high
performing employees. Pursuant to the employee stock option scheme as amended by
the Scheme of Amalgamation and further amended in September 2004, up to 5.0% of
the aggregate of our issued equity shares at the time of grant of the stock
options can be allocated under the employee stock option scheme. The stock
option entitles eligible employees to apply for equity shares. The grant of
stock options is approved by ICICI Bank's Board of Directors on the
recommendations of the Board Governance and Remuneration Committee. The
eligibility of each employee is determined based on an evaluation of the
employee including employee's work performance, technical knowledge and
leadership qualities. Moreover, ICICI Bank places considerable emphasis and
value on its policy of encouraging internal communication and consultation
between employees and management. See also "Management - Compensation and
Benefits to Directors and Officers - Employee Stock Option Scheme."
ICICI Bank has training centers, where various training programs designed
to meet the changing skill requirements of its employees are conducted. These
training programs include orientation sessions for new employees and management
development programs for mid-level and senior executives. The training centers
regularly offer courses conducted by faculty, both national and international,
drawn from industry, academia and ICICI Bank's own organization. Training
programs are also conducted for developing functional as well as managerial
skills. Products and operations training is also conducted through web-based
training modules.
In addition to basic compensation, employees of ICICI Bank are eligible to
receive loans from ICICI Bank at subsidized rates and to participate in its
provident fund and other employee benefit plans. The provident fund, to which
both ICICI Bank and its employees contribute a defined amount, is a savings
scheme, required by government regulation, under which ICICI Bank at present is
required to pay to employees a minimum annual return as specified from time to
time which is currently 8.5%. If such return is not generated internally by the
fund, ICICI Bank is liable for the difference. ICICI Bank's provident fund has
generated sufficient funds internally to meet the minimum annual return
requirement since inception of the funds. ICICI Bank has also set up a
superannuation fund to which it contributes defined amounts. In addition, ICICI
Bank contributes specified amounts to a gratuity fund set up pursuant to Indian
statutory requirements.
The following table sets forth, at the dates indicated, the approximate
number of employees in ICICI Bank and its consolidated subsidiaries and other
consolidated entities.
62
At March 31,
-------------------------------------------------------------------
2004 2005 2006
-------------------- -------------------- --------------------
Number % to total Number % to total Number % to total
------ ---------- ------ ---------- ------ ----------
ICICI Bank Limited........................ 13,549 75.9% 18,029 61.4% 25,384 60.6%
ICICI Prudential Life Insurance Company
Limited................................ 3,298 18.5 5,186 17.7 7,704 18.4
ICICI Lombard General Insurance Company
Limited................................ 555 3.1 1,249 4.25 2,283 5.4
ICICI Home Finance Company Limited........ - - 4,324(1) 14.7 5,605 13.4
Prudential ICICI Asset Management Company
Limited................................ 181 1.0 236 0.8 316 0.7
At March 31,
-------------------------------------------------------------------
2004 2005 2006
-------------------- -------------------- --------------------
Number % to total Number % to total Number % to total
------ ---------- ------ ---------- ------ ----------
ICICI Securities Limited.................. 146 0.8 172 0.6 188 0.4
Others.................................... 101 0.7 178 0.6 391 0.9
------ ---------- ------ ---------- ------ ----------
Total number of employees................. 17,830 100.0% 29,374 100.0% 41,871 100.0%
====== ========== ====== ========== ====== ==========
----------
(1) All employees of ICICI Home Finance Company Limited became employees of
ICICI Bank Limited in August 2003.
The increase in number of employees in fiscal 2006 was primarily in ICICI
Bank, ICICI Prudential Life Insurance Company Limited and ICICI Home Finance
Company Limited, which have grown their distribution and operations
capabilities.
The following table sets forth, the approximate number of employees in
ICICI Bank and its consolidated subsidiaries and other consolidated entities at
August 31, 2006.
Number % to total
------- ----------
ICICI Bank.............................................. 29,689 55.2%
ICICI Prudential Life Insurance Company Limited......... 13,836 25.7
ICICI Lombard General Insurance Company Limited......... 3,363 6.2
ICICI Home Finance Company Limited...................... 5,932 11.0
Prudential ICICI Asset Management Company Limited....... 349 0.6
ICICI Securities Limited................................ 215 0.4
Others.................................................. 427 0.8
------- ----------
53,811 100.0
======= ==========
The increase in number of employees during the period April 1 to August 31,
2006 was primarily on account of an increase in recruitment of employees by
ICICI Bank and ICICI Prudential Limited Life Insurance Company Limited.
Properties
Our registered office is located at Landmark, Race Course Circle, Vadodara
390 007, Gujarat, India. Our corporate headquarters are located at ICICI Bank
Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
ICICI Bank had a principal network consisting of 575 branches, 49 extension
counters and 2,275 ATMs at June 30, 2006. These facilities are located
throughout India. 40 of these facilities are located on properties owned by us,
while the remaining facilities are located on leased properties. In addition to
the branches, extension counters and ATMs, ICICI Bank has 18
controlling/administrative offices including the registered office at Vadodara
and the corporate headquarters at Mumbai, 22 regional processing centers in
various cities and one central processing center at Mumbai. It also has a branch
each in Singapore, Dubai International Finance Centre, Sri Lanka, Hong Kong and
cBahrain and one representative office each in the United States, China, United
Arab Emirates, Bangladesh and South Africa. It also provides residential and
holiday home facilities to employees at subsidized rates. ICICI Bank has 850
apartments for its employees.
63
Legal and Regulatory Proceedings
We are involved in various litigations and are subject to a wide variety of
banking and financial services laws and regulations in each of the jurisdictions
in which we operate. We are also subject to a large number of regulatory and
enforcement authorities in each of these jurisdictions. We are involved in a
number of legal proceedings and regulatory relationships in the ordinary course
of our business. However, excluding the legal proceedings discussed below, we
are not a party to any proceedings and no proceedings are known by us to be
contemplated by governmental authorities or third parties, which, if adversely
determined, may have a material adverse effect on our financial condition or
results of operations.
See also "Risk Factors - Risks Relating to Our Business - We are subject
to legal and regulatory risk which may adversely affect our business and the
price of our equity shares and ADSs", "-We have experienced rapid international
growth in the last three years which has increased the complexity of the risks
that we face," "-There is operational risk associated with our industry which,
when realized, may have an adverse impact on our business," "-We are involved
in various litigations and any final judgment awarding material damages against
us could have a material adverse impact on our future financial performance,
our stockholders' equity and the price of our equity shares and ADSs" and
"-Regulatory changes or enforcement initiatives in India or other jurisdictions
in which we operate could aversely affect our business and the price of our
equity shares and ADSs."
At year-end fiscal 2006, we had been assessed an aggregate of Rs. 30.3
billion (US$ 682 million) in excess of the provision made in our accounts, in
income tax, interest tax, wealth tax and sales tax demands by the government
of India's tax authorities for past years. We have appealed each of these tax
demands. The effect of enquiries initiated by the authorities cannot be
quantified as we believe that the proceedings so initiated are likely to be
dropped. Based on consultation with counsel and favourable decisions in our own
or other cases as set out below, management believes that the tax authorities
are not likely to be able to substantiate their income tax, interest tax, wealth
tax and sales tax assessment and accordingly has not provided for these tax
demands at year-end fiscal 2006.
o We have received favorable decisions from the appellate authorities
with respect to Rs. 1.4 billion (US$ 31.5 million) of the assessment.
The income tax authorities have appealed these decisions to higher
appellate authorities and the same are pending adjudication.
o In our appeal of the assessment of sales tax aggregating to Rs. 447.5
million (US$ 10.1 million), we are relying on a favorable decision of
the Supreme Court of India in respect of a writ petition filed by us
and facts of the cases.
o In our appeal of the assessments of income tax, interest tax and
wealth tax aggregating to Rs. 28.2 billion (US$ 634.0 million), we are
relying on favorable precedents of the appellate court and expert
opinions.
Of the Rs. 30.3 billion (US$ 682 million), Rs. 11.0 billion (US$ 247
million) relates to the disallowance of depreciation claim on leased assets.
This is an industry-wide issue involving multiple litigations across the
country. In respect of depreciation claimed by us for fiscal 1993 on two sale
and lease back transactions, the Income Tax Appellate Tribunal, Mumbai held in
August 2003 that these transactions were tax planning tools and no depreciation
was allowable. As the Income Tax Appellate Tribunal's decision is based on the
facts of two specific transactions, we believe that the Income Tax Appellate
Tribunal's decision will not have an adverse tax impact on other sale and lease
back transactions entered into by us. The tax impact of this decision is Rs.
189.0 million (US$ 4.2 million). After the Tribunal decision, the Supreme Court
has held in another matter not involving us that tax planning is valid if within
the four corners of the law. Following the decision of Supreme Court, two High
Courts have held that depreciation should be allowed to the lessor on sale and
lease back transactions. We have filed an appeal before the High Court against
the adverse Tribunal judgment which has been admitted. Moreover, the lease
agreements provide for variation in the lease rental to offset any loss of
depreciation benefit to us. Accordingly, we have not provided for this tax
demand but have disclosed it as a contingent liability in the financial
statements.
At August 31, 2006, there were 19 litigations (each involving a claim of
Rs. 10.0 million (US$ 224,820 and more) against us, in the aggregate amount of
approximately Rs. 93.71 billion (US$ 2.1 billion) (to the extent quantifiable
and including amounts claimed jointly and severally from us and other parties).
At August 31, 2006, two litigations were pending against our directors in an
aggregate amount of approximately Rs. 56.31 billion (US$ 1.3 billion) (to the
64
extent quantifiable). There were five litigations where amounts claimed from us
are Rs. 1.00 billion (US$ 22.5 million) or higher:
o In 1999, ICICI filed a suit before the High Court of Judicature at
Bombay against Mardia Chemicals Limited for recovery of amounts
totaling Rs. 1.4 billion (US$ 31.5 million) due from Mardia Chemicals.
The suit was subsequently transferred to the Debt Recovery Tribunal,
Mumbai. In 2002, we issued a notice to Mardia Chemicals Limited under
the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Ordinance, 2002 (subsequently passed
as an Act by the Indian Parliament) demanding payment of the
outstanding dues. Subsequently, Mardia Chemicals filed a suit in the
city civil court at Ahmedabad against us, Mr. K.V. Kamath, Managing
Director & CEO and Ms. Lalita D. Gupte, Joint Managing Director, for
an amount of Rs. 56.3 billion (US$ 1.3 billion) on the grounds that
Mardia Chemicals had allegedly suffered financial losses on account of
ICICI's failure to provide adequate financial facilities, ICICI's
recall of the advanced amount and ICICI's filing of a recovery action
against it. The city civil court held that the suit should have been
filed in the pending proceedings before the Debt Recovery Tribunal,
Mumbai. Mardia Chemicals filed an appeal before the High Court of
Gujarat, which dismissed the appeal and ordered that the claim against
us be filed before the Debt Recovery Tribunal, Mumbai and the claim
against Mr. K.V. Kamath and Ms. Lalita D. Gupte be continued before
the city civil court at Ahmedabad. The Debt Recovery Tribunal has
admitted the counterclaim filed by Mardia Chemicals Limited.
o In 2003, the promoters of Mardia Chemicals in their capacity as
guarantors of loans given by ICICI to Mardia Chemicals filed a civil
suit in the city civil court at Ahmedabad against us for an amount of
Rs. 20.8 billion (US$ 467.6 million) on the grounds of loss of
investment and loss of profit on investment. Pleadings under the above
applications have concluded. The matter is posted for final hearing.
o In 2002, we filed a suit before the Debt Recovery Tribunal, Ahmedabad
against Gujarat Telephone Cables Limited for recovery of term loans,
debentures and working capital finance provided by us. We sold our
exposure to Asset Reconstruction Company (India) Limited in 2004. The
borrower has filed a suit in the Civil Court claiming damages of Rs.
10.02 billion (US$ 225.3 million) jointly and severally from State
Bank of India, Bank of Baroda, United Western Bank, UTI Bank, Bank of
India, Asset Reconstruction Company (India) Limited and us. We have
filed an application for rejection of the plaint.
o In 1998, Industrial Finance Corporation India along with ICICI and
Life Insurance Corporation of India filed a suit in the Debt Recovery
Tribunal, Delhi against Foremost Ceramics Limited and its guarantors
for recovery of amounts owed. In 2001, a guarantor for the loan filed
a counter-claim for an amount of Rs. 4.50 billion (US$ 101.2 million)
against all lenders who had extended financial assistance to Foremost
Ceramics Limited, on various grounds including that timely
disbursements were not effected. Industrial Finance Corporation of
India has filed its reply, which has been adopted by Life Insurance
Corporation of India and us, denying these averments and stating that
the counter-claim does not deny the fact of the guarantee and that
the guarantor is merely trying to escape liability. The matter is
posted for further arguments.
o In 1999, ICICI filed a suit in the Debt Recovery Tribunal, Delhi
against Esslon Synthetics Limited and its Managing Director (in his
capacity as guarantor) for recovery of amounts totaling Rs. 169
million (US$ 3.8 million) due from Esslon Synthetics. In May 2001, the
guarantor filed a counter-claim for an amount of Rs. 1.0 billion (US$
22.5 million) against ICICI and other lenders who had extended
financial assistance to Esslon Synthetics on the grounds that he had
been coerced by officers of the lenders into signing an agreement
between LML Limited, Esslon Synthetics and the lenders on account of
which he suffered, among other things, loss of business. Esslon
Synthetics Limited has filed an application to amend the counterclaim
in January 2004. We have filed our reply to the application for
amendment. The application has been partly heard and is listed for
further arguments.
Management believes, based on consultation with counsel, that the legal
proceedings instituted by each of Mardia Chemicals Limited, Guarantors of Mardia
Chemicals, Gujarat Telephone Cables Limited, Foremost Ceramics Limited and
Esslon Synthetics Limited against us are frivolous and untenable and their
ultimate resolution will not have a material adverse effect on our results of
operations, financial condition or liquidity. Based on a
65
review of other litigations with legal counsel, management also believes that
the outcome of such other matters will also not have a material adverse effect
on our financial position, results of operations or cashflows.
The Reserve Bank of India has issued a show-cause notice to us for
non-compliance with extant foreign exchange regulations in relation to an
External Commercial Borrowing facility advanced to a customer by our Singapore
branch, on the grounds that such a facility could be provided only to companies
engaged in activities classified as "real sector", while the company concerned
was in the retail sector. We have submitted our response to the show-cause
notice stating that we understood that "retail sector" was within the definition
of "real sector". We were given a personal hearing from the Reserve Bank of
India wherein we explained our earlier submissions in detail. We are awaiting
further communication from the Reserve Bank of India in this regard.
In addition, we have experienced rapid international expansion into banking
in multiple jurisdictions which exposes us to a new variety of regulatory and
business challenges and risks, including cross-cultural risk, and which
increased the complexity of our risks in a number of areas including currency
risks, interest rate risks, compliance risk, regulatory risk, reputational risk
and operational risk. As a result of this rapid growth and increased complexity,
we or our employees may be subject to regulatory investigations or enforcement
proceedings in multiple jurisdictions in a variety of contexts. Despite our best
efforts at regulatory compliance and internal controls, we, or our employees,
may from time to time, and as is common in the financial services industry, be
the subject of confidential examinations or investigations that might, or might
not, lead to proceedings against the Bank or its employees. In any such
situation it would be our policy to conduct an internal investigation, cooperate
with the regulatory authorities and, where appropriate suspend or discipline
employees including termination of their services.
We cannot predict the timing or form of any future regulatory or law
enforcement initiatives, which we note are increasingly common for international
banks, but we would expect to cooperate with any such regulatory investigation
or proceeding.
66
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Pursuant to the issuance and listing of our securities in the United
States under registration statements filed with the United States Securities
Exchange Commission, we file annual reports on Form 20-F which must include
financial statements prepared under generally accepted accounting principles in
the United States (US GAAP) or financial statements prepared according to a
comprehensive body of accounting principles with a reconciliation of net income
and stockholders' equity to US GAAP. When we first listed our securities in the
United States, Indian GAAP was not considered a comprehensive body of
accounting principles under US securities laws and regulations. Accordingly,
our annual reports on Form 20-F for fiscal years 2000 through 2005 have
included US GAAP financial statements. However, pursuant to a significant
expansion of Indian accounting standards, Indian GAAP constitutes a
comprehensive body of accounting principles. Accordingly, we have included in
this annual report consolidated financial statements prepared according to
Indian GAAP, which varies in certain respects from US GAAP. For a
reconciliation of net income and stockholders' equity to US GAAP, a description
of significant differences between Indian GAAP and US GAAP and certain
additional information required under US GAAP, see notes 22 and 23 to our
consolidated financial statements herein. For selected financial data in
accordance with US GAAP see "Selected Financial Data in accordance with US
GAAP."
The following tables set forth our summary financial and operating data on
a consolidated basis. The summary data for fiscal 2002 through fiscal 2006 have
been derived from our consolidated financial statements. The accounting and
reporting policies used in the preparation of our financial statements reflect
general industry practices and conform with Indian GAAP, including the
Accounting Standards issued by the Institute of Chartered Accountants of India,
guidelines issued by the Reserve Bank of India, the Insurance Regulatory and
Development Authority and the National Housing Bank as applicable to relevant
companies. The following discussion is based on our audited consolidated
financial statements and accompanying notes prepared in accordance with Indian
GAAP.
The consolidated financial statements for fiscal 2002 were audited by S.B.
Billimoria & Co., Chartered Accountants, under auditing standards issued by the
Institute of Chartered Accountants of India (ICAI), for fiscal 2003 jointly by
N.M. Raiji & Co., Chartered Accountants and S.R. Batliboi & Co., Chartered
Accountants, under auditing standards issued by ICAI and for fiscal 2004, 2005
and 2006 by S.R. Batliboi & Co., Chartered Accountants, under auditing
standards issued by ICAI. The financial position as of March 31, 2005 and 2006
and the related consolidated profit and loss account and the consolidated cash
flows for each of the years in the three-year period ended March 31, 2006 have
also been audited by KPMG India, an independent registered public accounting
firm, in accordance with the standards of the U.S. Public Company Accounting
Oversight Board.
The amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with us in 2002 was accounted for using the purchase method of
accounting. The date of the amalgamation for accounting purposes under Indian
GAAP was the appointed date under the Scheme of Amalgamation approved by the
High Court of Bombay and Gujarat and the Reserve Bank of India, which was March
30, 2002. Accordingly, our profit and loss account (hereinafter referred to as
income statement) for fiscal 2002 includes the results of operations of ICICI,
ICICI Personal Financial Services and ICICI Capital Services for only two days,
i.e., March 30 and 31, 2002, although our balance sheet for fiscal 2002 reflects
the full impact of the amalgamation. As a result of the above, the income
statement for fiscal 2003 and subsequent years is not comparable with the income
statement for fiscal 2002.
You should read the following data with the more detailed information
contained in "Operating and Financial Review and Prospects" and our consolidated
financial statements. Historical results do not necessarily predict our results
in the future.
Operating Results Data
The operating results data for the fiscal years 2003, 2004, 2005 and 2006
are not comparable with the operating results data for fiscal 2002 due to the
amalgamation.
67
Year ended March 31,
-------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006(1)
---- ---- ---- ---- ---- -------
(in millions, except per common share data)
Selected income statement data:
Interest income(2)(3)................ Rs.21,539 Rs.96,908 Rs.93,526 Rs.98,338 Rs.146,142 US$3,286
Interest expense..................... (15,603) (81,268) (71,677) (68,044) (101,015) (2,271)
--------- --------- --------- --------- ---------- --------
Net interest income.................. 5,936 15,640 21,849 30,294 45,127 1,015
Non-interest income.................. 5,791 25,239 45,530 70,976 111,469 2,505
Profit on sale of shares of ICICI
Bank held by ICICI................ - 11,911 - - - -
--------- --------- --------- --------- ---------- --------
Total income......................... 11,727 52,790 67,379 101,270 156,596 3,520
--------- --------- --------- --------- ---------- --------
Non-interest expenses:
Operating expenses(4)(5)............. (4,126) (18,442) (24,149) (32,776) (47,626) (1,071)
Direct marketing agency expenses..... (136) (1,663) (3,091) (5,064) (6,696) (151)
Depreciation on leased assets........ (115) (3,167) (2,805) (2,975) (2,771) (62)
Expenses pertaining to insurance
business.......................... (1,878) (4,211) (11,889) (32,042) (52,038) (1,170)
--------- --------- --------- --------- ---------- --------
Total non-interest expenses.......... (6,255) (27,483) (41,934) (72,857) (109,131) (2,454)
--------- --------- --------- --------- ---------- --------
Operating profit before provisions... 5,472 25,307 25,445 28,413 47,465 1,066
Provisions and contingencies......... (2,572) (17,330) (6,251) (4,629) (16,477) (370)
--------- --------- --------- --------- ---------- --------
Profit before tax.................... 2,900 7,977 19,194 23,784 30,988 696
Provision for tax.................... (315) 3,539 (3,398) (5,684) (6,998) (157)
--------- --------- --------- --------- ---------- --------
Profit after tax..................... 2,585 11,516 15,796 18,100 23,990 539
Minority interest.................... - 4 8 423 211 5
--------- --------- --------- --------- ---------- --------
Net profit........................... 2,585 11,520 15,804 18,523 24,201 544
--------- --------- --------- --------- ---------- --------
Per common share:
Earnings per share-basic(6).......... Rs.11.61 Rs.18.79 Rs.25.73 Rs.25.45 Rs.30.96 US$0.70
Earnings per share-diluted(7)........ 11.61 18.77 25.52 25.25 30.64 0.69
Dividends per share(8)............... 2.00 7.50 7.50 8.50 8.50 0.19
Book value........................... 100.75 100.58 115.16 162.63 242.75 5.46
Equity shares outstanding at the end
of the period (in millions of
equity shares).................... 613 613 616 737 890
Weighted average equity shares
outstanding - basic (in millions
of equity shares)................. 223 613 614 728 782
Weighted average equity shares
outstanding - diluted (in
millions of equity shares)........ 223 614 619 734 790
----------
(1) Rupee amounts for fiscal 2006 have been translated into US dollars using
the noon buying rate of Rs.44.48 = US$1.00 in effect on March 31, 2006.
(2) Direct marketing agency expenses incurred in connection with sourcing our
automobile loans have been reduced on an upfront basis from interest
income. Interest income is net of Rs.0.01 billion (US$0.2 million) for
fiscal 2002, Rs.1.6 billion (US$35 million) for fiscal 2003, Rs.3.1 billion
(US$69 million) for fiscal 2004, Rs.3.7 billion (US$83 million) for fiscal
2005 and Rs.5.2 billion (US$117 million) for fiscal 2006 on account of
commissions paid to direct marketing agencies or associates in connection
with sourcing our automobile loans.
(3) Interest income includes gains on the sell-down of loans. In February 2006,
the Reserve Bank of India issued guidelines on accounting for
securitization of standard assets. In accordance with these guidelines,
with effect from February 1, 2006, we account for any loss arising on
securitization immediately at the time of sale and the profit/premium
arising on account of securitization is amortised over the life of the
asset. Prior to February 1, 2006, profit arising on account of
securitization was recorded at the time of sale.
(4) With effect from fiscal 2002, consequent to the amalgamation, the useful
lives of certain categories of fixed assets were reviewed to align the
depreciation rates previously used by ICICI and us. Accordingly, the rates
of depreciation on certain categories of fixed assets were changed from
fiscal 2002.
(5) Operating expenses for fiscal 2003 includes Rs.256 million (US$6 million)
on account of amortization of expenses related to our early retirement
option scheme over a period of five years as approved by the Reserve Bank
of India. Operating expenses for fiscal years 2004, 2005 and 2006 includes
Rs.384 million (US$9 million) in each year on account of amortization of
expenses related to our early retirement option scheme over a period of
five years as approved by the Reserve Bank of India.
(6) Represents net profit/(loss) before dilutive impact.
(7) Represents net profit/(loss) adjusted for full dilution. Options to
purchase 7,015,800, 12,610,275, 1,098,225 and 5,000 equity shares granted
to employees at a weighted average exercise price of Rs.81.3, Rs.154.7,
Rs.266.6 and Rs.569.6 were outstanding in fiscal 2002, 2003, 2004 and 2006
respectively, but were not included in the computation of diluted earnings
per share because the exercise price of the options was greater than the
average market price of the equity shares during the period.
(8) In India, dividends for a fiscal year are normally declared and paid in the
following year. The interim dividend for fiscal 2002 was paid by ICICI Bank
in 2002. We declared a dividend of Rs.7.50 per equity share for each of
fiscal 2003 and fiscal 2004, which was paid out in August 2003 and in
September 2004, i.e., in fiscal 2004 and in fiscal 2005 respectively. We
declared a dividend of Rs.8.50 per equity share for each of fiscal 2005 and
fiscal 2006, which was paid out in
68
August 2005 and in July 2006 respectively i.e., in fiscal 2006 and in
fiscal 2007. The dividend per equity share shown above is based on the
total amount of dividends declared for the year. In US dollars, the
dividend was US$0.19 per equity share for fiscal 2006.
(9) Certain reclassifications have been made in the financial statements of
prior years to conform to classifications used in the current year. These
changes have no impact on previously reported results of operations or
stockholders' equity.
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of average total assets for the
respective period.
Year ended March 31,
---------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
Selected income statement data:
Interest income................................ 8.53% 9.24% 7.96% 6.69% 6.74%
Interest expense............................... (6.18) (7.75) (6.10) (4.63) (4.66)
---- ---- ---- ---- ----
Net interest income............................ 2.35 1.49 1.86 2.06 2.08
Non-interest income............................ 2.30 3.54(1) 3.88 4.83 5.14
---- ---- ---- ---- ----
Total income................................... 4.65 5.03 5.74 6.89 7.22
---- ---- ---- ---- ----
Operating expenses............................. (1.64) (1.76) (2.06) (2.24) (2.20)
Direct marketing agency expenses............... (0.05) (0.16) (0.26) (0.34) (0.31)
Depreciation on leased assets.................. (0.05) (0.30) (0.24) (0.20) (0.13)
Expenses pertaining to insurance business...... (0.74) (0.40) (1.01) (2.18) (2.40)
---- ---- ---- ---- ----
Non-interest expenses.......................... (2.48) (2.62) (3.57) (4.96) (5.04)
---- ---- ---- ---- ----
Operating profit before provisions............. 2.17 2.41 2.17 1.93 2.18
Provisions and contingencies................... (1.02) (1.65) (0.53) (0.32) (0.76)
---- ---- ---- ---- ----
Profit before tax.............................. 1.15 0.76 1.64 1.61 1.42
Provision for tax.............................. (0.13) 0.34 (0.29) (0.39) (0.32)
---- ---- ---- ---- ----
Profit after tax............................... 1.02 1.10 1.35 1.22 1.10
Minority interest.............................. 0.00 0.00 0.00 0.03 0.01
---- ---- ---- ---- ----
Net profit..................................... 1.02% 1.10% 1.35% 1.25% 1.11%
----------
(1) Includes profit on sale of shares of ICICI Bank held by ICICI.
At or for the year ended March 31,
---------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006(1)
---- ---- ---- ---- ---- -------
(in millions, except percentages)
Selected balance sheet data:
Total assets.................. Rs.1,068,171 Rs.1,094,332 Rs.1,307,476 Rs.1,784,337 Rs.2,772,296 US$62,327
Investments................... 372,748 377,754 462,675 546,516 840,139 18,888
Advances, net................. 479,073 539,090 649,479 964,100 1,562,603 35,130
Non-performing customer
assets (gross)(2).......... 53,751 59,063 40,821 34,973 23,086 519
Total liabilities............. 1,004,382 1,024,110 1,226,417 1,658,095 2,546,378 57,248
Deposits...................... 322,171 479,507 680,787 1,011,086 1,724,510 38,770
Borrowings.................... 516,140 367,216 349,581 383,690 450,000 10,117
Preference share capital(3)... 3,500 3,500 3,500 3,500 3,500 79
Equity share capital.......... 6,126 6,127 6,164 7,368 8,898 200
Reserves and surplus.......... 54,164 60,595 71,395 115,374 213,520 4,800
Period average(4)
Total assets.................. 252,370 1,048,825 1,174,541 1,469,378 2,166,897 48,716
Interest-earning assets....... 225,405 882,342 985,744 1,217,707 1,806,601 40,616
Advances, net................. 59,012 501,306 577,138 763,729 1,200,315 26,985
Total liabilities(5).......... 238,079 980,259 1,097,546 1,355,468 2,001,177 44,990
Interest-bearing liabilities.. 228,149 904,499 1,012,604 1,221,303 1,795,244 40,361
Borrowings.................... 16,298 530,552 448,092 452,777 540,465 12,151
Stockholders' equity.......... 14,291 65,066 73,495 110,410 162,220 3,647
Profitability:
Net profit as a percentage of:
Average total assets.......... 1.02% 1.10% 1.35% 1.25% 1.11%
Average stockholder's equity.. 18.09 17.71 21.50 16.78 14.92
Dividend payout ratio(6)...... 17.05 39.92 34.85 33.97 31.33
69
At or for the year ended March 31,
---------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006(1)
---- ---- ---- ---- ---- -------
(in millions, except percentages)
Spread(7)..................... 2.72 2.00 2.41 2.50 2.46
Net interest margin(8)........ 2.63 1.77 2.22 2.49 2.50
Cost-to-income ratio(9)....... 35.53 48.90 37.38 32.74 30.96
At or for the year ended March 31,
--------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006(1)
---- ---- ---- ---- ---- -------
(in millions, except percentages)
Cost-to-average assets
ratio(10).................. 1.63 1.76 2.06 2.23 2.20
Capital(11):
Average stockholders' equity
as a percentage of average
total assets............... 5.66 6.20 6.26 7.51 7.49
Average stockholders' equity
(including preference
share capital) as a
percentage of average
total assets............... 5.66 6.54 6.56 7.75 7.65
Asset quality:
Net restructured assets as a 7.95% 13.72% 9.00% 6.08% 3.28%
percentage of net customer
assets.....................
Net non-performing assets as 4.61 4.86 2.78 1.95 0.67
a percentage of net
customer assets............
Provision on restructured 6.85 3.71 12.15 4.56 4.16
assets as a percentage of
gross restructured assets..
Provision on non-performing 49.28 46.41 49.81 42.58 53.19
assets as a percentage of
gross non-performing assets
Provision as a percentage of 5.07 7.63 5.25 2.14 1.32
gross customer assets(12)..
----------
(1) Rupee amounts at March 31, 2006 have been translated into US dollars using
the noon buying rate of Rs.44.48 = US$1.00 in effect at March 31, 2006.
(2) Includes suspended interest and claims received from Export Credit
Guarantee Corporation of India/Deposit Insurance Credit Guarantee
Corporation on working capital loans.
(3) ICICI had issued preference share capital redeemable at face value after 20
years
(4) For fiscal years 2002 through 2006, the average balances are the average of
quarterly balances outstanding at the end of March of the previous fiscal
year and the end of June, September, December and March of that fiscal
year. The averages for 2002 are based on outstanding quarterly balances of
ICICI Bank Limited. ICICI Limited balances for March 2002 have not been
considered.
(5) Represents the average of the quarterly balance of total liabilities and
minority interest.
(6) Represents the ratio of total dividends paid on equity share capital,
exclusive of dividend distribution tax, as a percentage of net income.
(7) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(8) Represents the ratio of net interest income to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(9) Represents the ratio of non-interest expense (excluding direct marketing
agency expenses, lease depreciation and expenses pertaining to insurance
business) to the sum of net interest income and non-interest income (net of
lease depreciation).
(10) Represents the ratio of non-interest expense (excluding direct marketing
agency expenses, lease depreciation and expenses pertaining to insurance
business) to average total assets.
(11) ICICI Bank's capital adequacy is computed in accordance with the Reserve
Bank of India's guidelines and is based on unconsolidated financial
statements prepared in accordance with Indian GAAP. At March 31, 2006,
ICICI Bank's total capital adequacy ratio was 13.35% with a Tier 1 capital
adequacy ratio of 9.20% and a Tier 2 capital adequacy ratio of 4.15%.
(12) Includes general provision on standard assets.
Selected Financial Data in accordance with US GAAP
The following table sets forth, certain selected financial data under
generally accepted accounting principles adopted in the United States.
70
At or for the year ended March 31,
---------------------------------------------------------------------------
2002 2003 2004 2005 2006 2006(1)
---- ---- ---- ---- ---- -------
(in millions)
Net income/(loss)................ Rs.1,547 Rs.(7,983) Rs.5,219 Rs.8,530 Rs.20,040 US$451
Total assets..................... 743,362 1,180,263 1,409,131 1,863,447 2,817,328 63,339
Stockholders' equity............. 71,348 92,313 94,525 127,996 218,647 4,916
Other comprehensive income (832) 2,977 4,741 3,289 522 12
Per equity share(2)
Net income/(loss) from
continuing operation-basic(3). 3.94 (14.18) 8.50 11.72 25.64 0.58
58Net income/(loss) from
continuing
operation-diluted(4).......... 3.94 (14.18) 8.43 11.60 25.34 0.57
Dividend(5)...................... Rs.22.00 Rs.- Rs.7.50 Rs.7.50 Rs.8.50 US$0.19
----------
(1) Rupee amounts for fiscal 2006 have been translated into US dollars using
the noon buying rate of Rs.44.48 = US$1.00 in effect on March 31, 2006.
(2) The stockholders of ICICI were issued shares of ICICI Bank at an exchange
ratio of 1:2. The number of shares for fiscal year 2002 has been adjusted
by dividing by two and is different from the number reported in the annual
report on Form 20-F for fiscal 2002.
(3) Represents net income/(loss) before dilutive impact.
(4) Represents net income/(loss) adjusted for full dilution. Options to
purchase 7,015,800, 12,610,275, 1,098,225 and 5,000 equity shares granted
to employees at a weighted average exercise price of Rs.81.3, Rs.154.7,
Rs.266.6 and Rs.569.6 were outstanding in fiscal 2002, 2003, 2004 and 2006
respectively, but were not included in the computation of diluted earnings
per share because the exercise price of the options was greater than the
average market price of the equity shares during the period. In fiscal
2003, we reported a net loss and accordingly all outstanding options at
year-end fiscal 2003 are anti-dilutive.
(5) In India, dividends for a fiscal year are normally declared and paid in the
following year. The interim dividend for fiscal 2002 was paid by ICICI
during fiscal 2002. We declared a dividend of Rs.7.50 per equity share for
each of fiscal 2003 and fiscal 2004, which was paid out in August 2003 and
in September 2004, i.e., in fiscal 2004 and in fiscal 2005 respectively. We
declared a dividend of Rs.8.50 per equity share for each of fiscal 2005 and
fiscal 2006, which was paid out in August 2005 and in July 2006
respectively i.e., in fiscal 2006 and in fiscal 2007 respectively. The
dividend per equity share shown above is based on the total amount of
dividends paid out on the equity shares during the year, exclusive of
dividend tax. In US dollars, the dividend was US$0.19 per equity share for
fiscal 2006.
71
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial
condition and results of operations together with our audited consolidated
financial statements. The following discussion is based on our audited
consolidated financial statements and accompanying notes prepared in accordance
with Indian GAAP, which varies in certain significant respects from US GAAP.
For a reconciliation of net income and stockholders' equity to US GAAP, a
description of significant differences between Indian GAAP and US GAAP and
certain additional information required under US GAAP, see notes 22 and 23 to
our consolidated financial statements included herein.
Introduction
Our loan portfolio, financial condition and results of operations have
been, and in the future, are expected to be influenced by economic conditions in
India and certain global developments, particularly in commodity prices relating
to the business activities of our corporate customers and by economic conditions
in the United States and other countries influencing inflation and interest
rates in India. For ease of understanding the discussion of our results of
operations that follows, you should consider the introductory discussion of
these macroeconomic factors, the description of certain major events affecting
our results and financial condition and other key factors.
Indian Economy
The rate of growth of India's gross domestic product, or GDP, was 8.5% in
fiscal 2004, 7.5% in fiscal 2005 and 8.4% in fiscal 2006. The agricultural
sector grew by 10.0% in fiscal 2004. In fiscal 2005, the growth of the
agricultural sector declined to 0.7% because of insufficient rainfall in many
parts of the country. However, agricultural growth recovered to 3.9% in fiscal
2006 due to normal monsoons. The industrial sector grew by 6.6% in fiscal 2004,
7.4% in fiscal 2005 and 7.6% in fiscal 2006. The services sector grew by 8.5% in
fiscal 2004, 10.2% in fiscal 2005 and 10.3% in fiscal 2006.
The growth trends were accompanied by continued macro-economic stability,
despite a sharp increase in global oil prices, concerns over global imbalances
and rising interest rates globally and in India. During the first half of fiscal
2005, there was an increase in inflationary trends in India, primarily due to
the increase in oil prices as well as prices of certain commodities. The full
burden of the oil price increase has not yet been passed on to Indian consumers
and has been substantially absorbed by the government and government-owned oil
marketing companies. See also "Risk Factors -- Risks Relating to India -- A
significant increase in the price of crude oil could adversely affect the Indian
economy, which could adversely affect our business". The average annual rate of
inflation as measured by the Wholesale Price Index was 6.4% for fiscal 2005 and
declined to 4.5% for fiscal 2006 remaining at comfortable levels largely due to
policy interventions. The rate of inflation was 4.9% in fiscal 2007 (through
August 19, 2006), the same as in the corresponding period in the previous year.
The Indian rupee depreciated by 2.0% against the US dollar in fiscal 2006 from
Rs. 43.62 per US$ 1.00 at year-end fiscal 2005 to Rs. 44.48 per US $1.00 at
year-end fiscal 2006. It depreciated by 3.0% against the US dollar in fiscal
2007 (through September 20, 2006) moving from Rs. 44.48 per US$ 1.00 to Rs.
45.83 per US$ 1.00. It also depreciated against the pound sterling and the euro
but appreciated against the Japanese yen. India's foreign exchange reserves were
US$ 165.33 billion at August 25, 2006.
The impact of these and other factors and the anticipated overall growth in
industry, agriculture and services in fiscal 2007 and in future years will
influence the performance of the banking sector as it will affect the level of
credit disbursed by banks, and the overall growth prospects of our business,
including our ability to grow, the quality of our assets, the value of our
investment portfolio and our ability to implement our strategy.
Banking Sector
According to the Reserve Bank of India's data, total deposits of all
scheduled commercial banks increased by 17.8% in fiscal 2004, 13.9% in fiscal
2005 and 17.6% in fiscal 2006. In the first quarter of fiscal 2007 deposits grew
by 14.0% on an annualized basis and 21.7% on a year-on-year basis. Bank credit
of scheduled commercial banks grew by 15.3% in fiscal 2004, 30.9% in fiscal 2005
and 30.8% in fiscal 2006. In the first quarter of fiscal 2007 bank credit grew
by 10.0% on an annualized basis and by 33.1% on a year-on-year basis. The
increase in credit growth in fiscal 2005 was driven by the continued growth in
retail credit as well as credit to the industrial and agricultural sectors.
Further, Industrial Development Bank of India Limited's credit was included in
total banking sector credit at
72
year-end fiscal 2005 after its conversion into a scheduled commercial bank with
effect from October 11, 2004. Excluding Industrial Development Bank of India
Limited's credit, bank credit of scheduled commercial banks grew at 27.0% in
fiscal 2005. In fiscal 2006 growth in credit was driven by demand from the
industrial and agricultural sectors and continued robust credit flow to the
retail segment.
For several years until fiscal 2005, India experienced a downward movement
in interest rates, barring intra-year periods when interest rates were higher
temporarily due to extraneous circumstances. This movement was principally due
to the Reserve Bank of India's policy of assuring adequate liquidity in the
banking system and generally lowering the rate at which it would lend to Indian
banks to ensure that borrowers had access to funding at competitive rates. Banks
generally followed the direction of interest rates set by the Reserve Bank of
India and adjusted both their deposit rates and lending rates downwards until
fiscal 2005. The inflationary trends in fiscal 2005 resulted in an increase in
benchmark secondary market yields on government securities. Between October 2004
and July 2006, the Reserve Bank of India increased the reverse repo rate (i.e.,
the annualized interest earned by the lender in a repurchase transaction between
a bank and the Reserve Bank of India) six times by 25 basis points each time
resulting in the reverse repo rate increasing from 4.5% to 6.0%. The Reserve
Bank of India also increased the cash reserve ratio from 4.5% to 5.0% effective
October 2, 2004. As a result of these increases, banks have also raised their
deposit and lending rates. The following table sets forth the bank rate, reverse
repo rate and average prime lending rates of five major public sector banks for
the last six fiscal years.
Average prime
lending rate
Fiscal year Bank rate Reverse repo rate (range)
----------- --------- ----------------- -------------
2001.................................. 7.00% 7.00% 11.00-12.00%
2002.................................. 6.50 6.00 11.00-12.00
2003.................................. 6.25 5.00 10.75-12.00
2004.................................. 6.00 4.50 10.50-11.50
2005.................................. 6.00 4.75 10.25-11.00
2006.................................. 6.00 5.50 10.25-10.75
2007 (through September 1, 2006)...... 6.00 6.00 10.25-10.75
----------
Source: Reserve Bank of India: Handbook of Statistics on Indian
Economy, 2005, and Weekly Statistical Supplements and Annual Policy
Statement 2006-07, First quarter review of Annual Policy statement
2006-07.
Major Events Affecting Results and Financial Condition
Since 2002, we have experienced major changes and developments in our
business and strategy. An understanding of these events and developments is
necessary for an understanding of the periods under review and the discussion
and analysis which follows. These changes are reflected in our financial
statements in connection with or since the amalgamation of ICICI Limited into
ICICI Bank. The first change reflects the impact of our history upon our average
cost of funds. Consequent to the amalgamation, the businesses formerly conducted
by ICICI became subject to the various regulations applicable to banks. These
include the statutory liquidity ratio, which is required to be maintained in the
form of government of India securities and other approved securities. The
minimum statutory liquidity ratio is currently 25.0% of our net demand and time
liabilities excluding inter-bank deposits. While we have benefited from the
lower cost of funding as a bank as compared to ICICI as a non-bank financial
institution, the imposition of the statutory liquidity ratio and the cash
reserve ratio on the liabilities taken over from ICICI have impacted our spread.
As the average yield on investments in government of India securities and cash
balances maintained with the Reserve Bank of India is typically lower than the
yield on other interest-earning securities, our net interest margin has been
adversely impacted. Further, interest payments on balances held under the cash
reserve ratio have been discontinued pursuant to amendments to the Reserve Bank
of India Act, which became effective on June 22, 2006. This is expected to
adversely impact our net interest margin. Additionally, our net interest margin
has been and is expected to continue to be lower than other banks in India until
we repay the borrowings of ICICI. We are expanding our deposit base and changing
the mix of our liabilities away from the legacy ICICI liabilities towards the
lower average cost deposit liabilities. The increase in investment in government
securities has substantially increased our exposure to market risk. A rise in
interest rates would cause the value of our fixed income portfolio to decline
and adversely affect the income from our treasury operations. See also "Risk
Factors-Risks Relating to Our Business-Our business is particularly vulnerable
to interest rate risk and volatility in
73
interest rates could adversely affect our net interest margin, the value of our
fixed income portfolio, our income from treasury operations, the quality of our
loan portfolio and our financial performance."
The second key change reflects the implementation of our strategy to grow
our retail loan portfolio. The results of our implementation of this strategy
can be seen in the rapid growth in the retail loan portfolio. While we cannot
guarantee that growth will continue at the same rate, we see continued
significant demand for retail loans.
Third, in connection with the amalgamation, we recorded the loans and
investments acquired from ICICI at fair values which represented a substantial
write down of the value of those assets as compared to their value on the
balance sheet of ICICI. The fair value of the assets was determined based on our
judgment which we made with the assistance of independent valuation specialists.
The key areas of fair valuation included loans and all credit substitutes which
were fair valued by valuation specialists and investments (including investments
in venture capital funds) which were marked to market in accordance with the
Reserve Bank of India guidelines applicable to banks. The assets of ICICI were
first reflected on our balance sheet at March 31, 2002 after taking into account
these fair value write downs.
Fourth, since the amalgamation we have established operations outside
India, with subsidiaries in the United Kingdom, Canada and Russia, branches in
Singapore, Hongkong, Dubai, Sri Lanka and Bahrain and representative offices in
the United States, Dubai, Bangladesh, South Africa and China. We have invested
in the equity capital of our international banking subsidiaries to support
their growth.
Fifth, since the amalgamation, our subsidiaries engaged in the insurance
business, ICICI Prudential life Insurance Company Limited and ICICI Lombard
General Insurance Company Limited , have experienced rapid growth in business.
We have invested in the equity capital of our insurance subsidiaries to support
their growth. Our life insurance subsidiary continues to report losses in its
financial statements, which are reflected in our consolidated financial
statements.
All of these changes or developments have had a major impact upon our
results of operations and financial condition and are critical to an
understanding of our discussion which follows.
Other key factors
Under Indian GAAP, we have not consolidated certain entities (primarily 3i
Infotech Limited and ICICI OneSource Limited) in which control is intended to be
temporary. However under US GAAP, these entities would have been consolidated as
SFAS No. 94 on "Consolidation of majority owned subsidiaries" requires
consolidation of such entities. See also "Business-Subsidiaries and Joint
Ventures."
For fiscal 2004, ICICI Prudential Life Insurance Company Limited and ICICI
Lombard General Insurance Company Limited have been accounted as joint ventures
using the proportionate consolidation method as prescribed by Accounting
Standard 27 (AS 27) on "Financial Reporting of Interests in Joint Ventures".
Therefore, our consolidated financial statements include only a 74% share
(i.e., ICICI Bank's share in each of the two joint ventures) of each line item
reflected in the financial statements of these two entities for fiscal 2004.
From fiscal 2005 onwards, these two entities have been accounted as per the
principles of Accounting Standard 21 (AS 21) on "Consolidated Financial
Statements", as required by the revision in AS 27. Therefore, from fiscal 2005
our consolidated financial statements include 100% of each line item reflected
in the financial statements of these two entities with a separate disclosure
for minority interest. Hence, the income statement and balance sheet for fiscal
2005 and fiscal 2006 are not comparable with the income statement and balance
sheet for fiscal 2004 and prior years with respect to the incorporation of the
income statement and balance sheet of our insurance subsidiaries in our
financial statements.
Effect of Other Acquisitions
In fiscal 2004, we acquired 100.0% ownership interest in Transamerica Apple
Distribution Finance Private Limited for a cash consideration of Rs.757 million
(US$17 million). In fiscal 2006, we acquired 100.0% ownership interest in
Investitsionno-Kreditny Bank, a Russian bank with total assets of approximately
US$4 million at year-end fiscal 2005. The values of these transactions were not
material to our overall operations. During fiscal 2006 we
74
also acquired an additional stake of 6% in Prudential ICICI Asset Management
Company Limited as well as Prudential ICICI Trust Limited. Subsequent to these
acquisitions both companies have become our subsidiaries.
Average Balance Sheet
The average balances for a fiscal year are the average of quarterly
balances outstanding at the end of March of the previous fiscal year and June,
September, December and March of that year. The average yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. The average cost of average interest-bearing
liabilities is the ratio of interest expense to average interest-bearing
liabilities. The average balances of advances include non-performing advances
and are net of allowance for loan losses. We have not recalculated tax-exempt
income on a tax-equivalent basis because we believed that the effect of doing so
would not be significant.
The following table sets forth, for the periods indicated, the average
balances of the assets and liabilities outstanding, which are major components
of interest income, interest expense and net interest income.
Year ended March 31,
-----------------------------------------------------------------------------------------------
2004 2005 2006
----------------------------- ----------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense cost balance expense cost balance expense cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(in millions, except percentages)
Assets:
Advances:
Rupee............. Rs.486,630 Rs.57,540 11.82% Rs.646,108 Rs.63,007 9.75% Rs.1,008,153 Rs.90,325 8.96%
Foreign currency.. 90,508 4,448 4.91 117,621 6,804 5.78 192,162 10,817 5.63
---------- --------- ---------- --------- ------------ ---------
Total advances..... 577,138 61,988 10.74 763,729 69,811 9.14 1,200,315 101,142 8.43
Investments:
Rupee............. 357,842 27,535 7.69 371,713 23,468 6.31 474,395 38,554 8.13
Foreign currency.. 109 3 2.75 10,689 454 4.25 39,499 2,054 5.20
---------- --------- ---------- --------- ------------ ---------
Total investments.. 357,951 27,538 7.69 382,402 23,922 6.26 513,894 40,608 7.90
Balances with
Reserve Bank of
Indiaand other banks:
Rupee............. 41,555 2,027 4.88 47,329 1,853 3.92 48,713 1,478 3.03
Foreign currency.. 9,100 167 1.84 24,247 482 1.99 43,679 1,956 4.48
---------- --------- ---------- --------- ------------ ---------
Total balances
with Reserve
Bank of
India and other
banks............ 50,655 2,194 4.33 71,576 2,335 3.26 92,392 3,434 3.72
Other interest
income ......... 1,806 2,270 958
Interest-earning
assets:
Rupee............. 886,027 88,908 10.03 1,065,150 90,598 8.51 1,531,261 131,315 8.58
Foreign currency.. 99,717 4,618 4.63 152,557 7,740 5.07 275,340 14,827 5.38
---------- --------- ---------- --------- ------------ ---------
Total
interest-earning
assets.......... 985,744 93,526 9.49 1,217,707 98,338 8.08 1,806,601 146,142 8.09
Fixed assets....... 41,009 40,786 41,495
Other assets....... 147,788 210,885 318,801
---------- --------- ---------- --------- ------------ ---------
Total non-earning
assets.......... 188,797 251,671 360,296
------------ --------- ------------ --------- ------------ ---------
Total assets....... Rs.1,174,541 Rs.93,526 Rs.1,469,378 Rs.98,338 Rs.2,166,897 146,142
============ ========= ============ ========= ============ =========
75
Year ended March 31,
-------------------------------------------------------------------------------------------
2004 2005 2006
--------------------------- --------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ Yield/
balance expense Cost balance Expense Cost Balance expense Cost
------- -------- ------- ------- --------- ------- ------- -------- -------
(in millions, except percentages)
Liabilities:
Savings account
deposits:
Rupee............. Rs.56,840 Rs.1,348 2.37% Rs.97,097 Rs.2,179 2.24% Rs.157,037 Rs.3,946 2.51%
Foreign currency . 76 3 3.95 1,014 25 2.47 14,621 574 3.93
---------- --------- ---------- -------- ----------
Total savings
account deposits 56,916 1,351 2.37 98,111 2,204 2.25 171,658 4,520 2.63
Time deposits:
Rupee............. 438,982 28,420 6.47 540,056 29,153 5.40 846,963 51,345 6.06
Foreign currency . 14,682 424 2.89 43,276 1,266 2.93 93,309 3,726 3.99
---------- --------- ---------- -------- ---------- --------
Total time
deposits ........ 453,664 28,844 6.36 583,332 30,419 5.21 940,272 55,071 5.86
Other demand
deposits.........
Rupee............. 53,783 84,360 138,357
Foreign currency . 149 2,722 4,492
---------- ---------- ----------
Total other demand
deposits......... 53,932 87,082 142,849
Borrowings:
Rupee............. 375,602 39,130 10.42 340,811 31,396 9.21 349,907 32,879 9.40
Foreign currency . 72,490 2,352 3.24 111,966 4,025 3.59 190,558 8,545 4.48
---------- --------- ---------- -------- ---------- --------
Total borrowings ... 448,092 41,482 9.26 452,777 35,421 7.82 540,465 41,424 7.66
Interest-bearing
liabilities:
Rupee............. 925,207 68,898 7.45 1,062,324 62,728 5.90 1,492,264 88,170 5.91
Foreign currency . 87,397 2,779 3.18 158,978 5,316 3.34 302,980 12,845 4.24
---------- --------- ---------- -------- ---------- --------
Total
interest-bearing
Liabilities...... 1,012,604 71,677 7.08 1,221,302 68,044 5.57 1,795,244 101,015 5.63
Other liabilities .. 84,942 134,166 205,933
---------- --------- ---------- -------- ---------- --------
Total liabilities .. 1,097,546 71,677 1,355,468 68,044 2,001,177 101,015
Preference share
capital.......... 3,500 3,500 3,500
Stockholders'
equity........... 73,495 110,410 162,220
---------- --------- ---------- -------- ---------- --------
Total liabilities
and
stockholders'
equity .......... Rs.1,174,541 Rs.71,677 Rs.1,469,378 Rs.68,044 Rs.2,166,897 Rs.101,015
============ ========= ============ ========= ============ ==========
Analysis of changes in interest income and interest expense volume and rate
analysis
The following table sets forth, for the periods indicated, the changes in
the components of net interest income. The changes in net interest income
between periods have been reflected as attributed either to volume or rate
changes. For the purpose of this table, changes, which are due to both volume
and rate, have been allocated solely to volume.
Fiscal 2005 vs. Fiscal 2004 Fiscal 2006 vs. Fiscal 2005
-------------------------------------- --------------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------------- --------------------------------------
Change in Change in
average Change in average Change in
Net change volume average rate Net change volume average rate
---------- --------- ------------ ---------- --------- ------------
(in millions)
Interest income:
Advances:
Rupee....................... Rs.5,467 Rs.15,552 Rs.(10,085) Rs.27,317 Rs.32,437 Rs.(5,120)
Foreign currency............ 2,356 1,568 788 4,013 4,196 (183)
---------- ---------- ---------- --------- --------- ---------
Total advances,............. 7,823 17,120 (9,297) 31,330 36,633 (5,303)
Investments:
Rupee....................... (4,067) 876 (4,943) 15,086 8,345 6,741
76
Fiscal 2005 vs. Fiscal 2004 Fiscal 2006 vs. Fiscal 2005
-------------------------------------- --------------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------------- --------------------------------------
Change in Change in
average Change in average Change in
Net change volume average rate Net change volume average rate
---------- --------- ------------ ---------- --------- ------------
(in millions)
Foreign currency............ 451 449 2 1,600 1,498 102
---------- --------- ---------- --------- --------- ----------
Total investments............ (3,616) 1,325 (4,941) 16,686 9,843 6,843
Balances with Reserve Bank
of India
and other banks:
Rupee....................... (174) 226 (400) (375) 42 (417)
Foreign currency............ 315 301 14 1,474 870 604
---------- --------- ---------- --------- --------- ----------
Total balances with Reserve
Bank of India
and other banks 141 527 (386) 1,099 912 187
Other interest income 464 464 (1,311) (1,311)
---------- --------- ---------- --------- --------- ----------
Total interest income:
Rupee....................... 1,690 16,654 (14,964) 40,717 40,824 (107)
Foreign currency............ 3,122 2,318 804 7,087 6,564 523
---------- --------- ---------- --------- --------- ----------
Total interest income........ 4,812 18,972 (14,160) 47,804 47,388 416
Interest expense:
Savings account deposits:
Rupee....................... 831 903 (72) 1,767 1,506 261
Foreign currency............ 22 23 (1) 549 534 15
---------- --------- ---------- --------- --------- ----------
Total savings account
deposits ................. 853 926 (73) 2,316 2,040 276
Time deposits:
Rupee....................... 733 5,456 (4,723) 22,192 18,605 3,587
Foreign currency............ 842 836 6 2,460 1,998 462
---------- --------- ---------- --------- --------- ----------
Total time deposits.......... 1,575 6,292 (4,717) 24,652 20,603 4,049
Borrowings:
Rupee....................... (7,734) (3,205) (4,529) 1,483 855 628
Foreign currency ........... 1,673 1,419 254 4,520 3,524 996
---------- --------- ---------- --------- --------- ----------
Total borrowings............. (6,061) (1,786) (4,275) 6,003 4,379 1,624
Total interest expense:
Rupee....................... (6,170) 3,154 (9,324) 25,442 20,966 4,476
Foreign currency ........... 2,537 2,278 259 7,529 6,056 1,473
---------- --------- ---------- --------- --------- ----------
Total interest expense....... Rs.(3,633) Rs.5,432 Rs.(9,065) 32,971 27,022 5,949
Net interest income:
Rupee....................... 7,860 13,500 (5,640) 15,275 19,858 (4,583)
Foreign currency............ 585 40 545 (442) 508 (950)
========== ========= ========== ========= ========= ==========
Total net interest income.... Rs.8,445 Rs.13,540 Rs.(5,095) Rs.14,833 Rs.20,366 Rs.(5,533)
========== ========= ========== ========= ========= ==========
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and net interest margins on interest-earning assets.
Year ended March 31,
---------------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
(in millions, except percentages)
Interest income.......................... Rs.21,539 Rs.96,908 Rs.93,526 Rs.98,338 Rs.146,142
Average interest-earning assets(1)....... 225,405 882,342 985,744 1,217,707 1,806,601
Interest expense......................... 15,603 81,268 71,676 68,044 101,015
Average interest-bearing liabilities(1).. 228,149 904,099 1,012,604 1,221,302 1,795,244
Average total assets(1).................. 252,370 10,48,825 1,174,541 1,469,378 2,166,897
Average interest-earning assets as a
percentage of average total assets.... 89.32% 84.13% 83.93% 82.87% 83.37%
Average interest-bearing liabilities as
a percentage of average total assets.. 90.40 86.24 86.21 83.12 82.85
Average interest-earning assets as a
percentage of average
interest-bearing liabilities.......... 98.80 97.55 97.35 99.71 100.63
77
Year ended March 31,
---------------------------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
(in millions, except percentages)
Yield.................................... 9.56 10.98 9.49 8.08 8.09
Rupee................................... 9.92 11.48 10.03 8.51 8.58
Foreign currency........................ 3.40 4.80 4.63 5.07 5.38
Cost of funds............................ 6.84 8.98 7.08 5.57 5.63
Rupee................................... 6.97 9.75 7.45 5.90 5.91
Foreign currency........................ 4.07 3.14 3.18 3.34 4.24
Spread(2)................................ 2.72 2.00 2.41 2.50 2.46
Rupee................................... 2.95 1.73 2.59 2.60 2.67
Foreign currency........................ (0.67) 1.66 1.45 1.73 1.15
Net interest margin(3)................... 2.63 1.77 2.22 2.49 2.50
Rupee................................... 2.66 1.56 2.26 2.62 2.82
Foreign currency........................ 0.77 1.38 1.85 1.59 0.72
----------
(1) The averages for 2002 are based on outstanding quarterly balances of ICICI
Bank Limited. ICICI Limited balances for March 2002 have not been
considered.
(2) Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest income to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(3) Net interest margin is the ratio of net interest income to average
interest-earning assets. The difference in net interest margin and spread
arises due to the difference in amount of average interest-earning assets
and average interest-bearing liabilities. If average interest-earning
assets exceed average interest-bearing liabilities, net interest margin is
greater than the spread and if average interest-bearing liabilities exceed
average interest-earning assets, net interest margin is less than the
spread.
Fiscal 2006 to Fiscal 2005
Summary
Net profit increased by 30.7% to Rs.24.2 billion (US$544 million) for fiscal
2006 from Rs.18.5 billion (US$416 million) for fiscal 2005, primarily due to a
49.0% increase in net interest income and a 57.1 % increase in non-interest
income offset, in part, by a 49.8% increase in non-interest expenses and a
Rs.11.9 billion (US$266 million) increase in provisions and contingencies.
o Net interest income increased by 49.0% to Rs.45.1 billion (US$1.0
billion) for fiscal 2006 from Rs.30.3 billion (US$681 million) for
fiscal 2005, reflecting an increase of 48.4% in the average volume of
interest-earning assets.
o Non-interest income increased by 57.1% to Rs.111.5 billion (US$2.5
billion) for fiscal 2006 from Rs.71.0 billion (US$1.6 billion) for
fiscal 2005 primarily due to a 56.8% increase in commission, exchange
and brokerage and a 67.9% increase in income from insurance business.
o Non-interest expense increased by 49.8% to Rs.109.1 billion (US$2.5
billion) for fiscal 2006 from Rs.72.9 billion (US$1.6 billion) in
fiscal 2005 primarily due to an increase of 56.9% in employee expenses
and a 62.4% increase in expenses pertaining to the insurance business.
o Provisions and contingencies (excluding provisions for tax) increased
to Rs.16.5 billion (US$370 million) in fiscal 2006 from Rs.4.6 billion
(US$104 million) in fiscal 2005 primarily due to the significantly
higher level of amortization of premium on government securities in
fiscal 2006, lower level of write-backs in fiscal 2006 and higher
level of provisioning on standard assets in fiscal 2006 as per the
Reserve Bank of India guidelines.
o Gross restructured loans decreased by 15.5% to Rs.55.5 billion (US$1.2
billion) at year-end fiscal 2006 from Rs.65.6 billion (US$1.5 billion)
at year-end fiscal 2005 primarily due to the reclassification of
certain loans as standard based on satisfactory performance of the
borrower accounts. Gross non-performing assets decreased by 34.0% to
Rs.23.1 billion (US$519 million) at year-end fiscal 2006 from Rs.35.0
billion
78
(US$786 million) at year-end fiscal 2005 primarily due to sale and
repayments of certain non-performing loans.
o Total assets increased by 55.4% to Rs.2,772.3 billion (US$62.3
billion) at year-end fiscal 2006 compared to Rs.1,784.3 billion
(US$40.1 billion) at year-end fiscal 2005 primarily due to an increase
in retail loans and investments in government securities.
Net Interest Income
The following table sets forth, for the periods indicated, the principal
components of net interest income.
Year ended March 31,
-------------------------------------------------------------------
2006/2005
2005 2006 2006 % change
--------- --------- -------- ---------
(in millions, except percentages)
Interest income..................... Rs.98,338 Rs.146,142 US$3,286 48.6%
Interest expense.................... (68,044) (101,015) (2,271) 48.5
--------- ---------- --------
Net interest income................. Rs.30,294 Rs. 45,127 US$1,015 49.0%
========= ========== ========
Net interest income increased by 49.0% to Rs.45.1 billion (US$1.0 billion)
in fiscal 2006 from Rs.30.3 billion (US$681 million) in fiscal 2005 reflecting
mainly the following:
o an increase of Rs.588.9 billion (US$13.2 billion) or 48.4% in the
average volume of interest-earning assets; and
o a marginal increase of 1 basis point in the net interest margin.
The average volume of interest-earning assets increased by 48.4% or
Rs.588.9 billion (US$13.2 billion) to Rs.1,806.6 billion (US$40.6 billion)
during fiscal 2006 from Rs.1,217.7 billion (US$27.4 billion) during fiscal 2005,
primarily due to the increase in average advances. Average advances increased by
57.2% to Rs.1,200.3 billion (US$27.0 billion) in fiscal 2006 from Rs.763.7
billion (US$17.2 billion) in fiscal 2005. This increase in average advances was
primarily due to increased disbursements of retail finance loans offset, in
part, by the sell-down/securitization and repayments of loans. The average
volume of interest-earning foreign currency assets increased by 80.5% to
Rs.275.3 billion (US$6.2 billion) during fiscal 2006 from Rs.152.6 billion
(US$3.4 billion) during fiscal 2005 primarily due to increased business volumes
of our international branches and subsidiaries.
Total interest income increased by 48.6% to Rs.146.1 billion (US$3.3
billion) for fiscal 2006 from Rs.98.3 billion (US$2.2 billion) for fiscal 2005
primarily due to an increase of 48.4% in the average volume of total
interest-earning assets to Rs.1,806.6 billion (US$40. 6 billion) during fiscal
2006 from Rs.1,217.7 billion (US$27.4 billion) during fiscal 2005. The overall
yield on average interest earning assets remained at nearly the same levels
given that the decline in yield on advances to 8.4% for fiscal 2006 from 9.1%
for fiscal 2005 was offset by the increase in yield on investments to 7.9% for
fiscal 2006 from 6.3% for fiscal 2005.
In February 2006, the Reserve Bank of India issued guidelines on accounting
for securitization of standard assets. In accordance with these guidelines, with
effect from February 1, 2006, we account for any loss on securitization
immediately at the time of sale and the profit/premium arising on account of
securitization is amortized over the life of the asset. Prior to February 1,
2006, profit arising on account of securitization was recorded at the time of
sale. The gains on sell down were about 10.1% of net interest income for fiscal
2006 (0.3% of average interest-earning assets) compared to 17.2 % of net
interest income for fiscal 2005 (0.4% of average interest-earning assets).
Total interest expense increased by 48.5% to Rs.101.0 billion (US$2.3
billion) during fiscal 2006 from Rs.68.0 billion (US$1.5 billion) during fiscal
2005 primarily due to an increase of 47.0% in average interest-bearing
liabilities to Rs.1,795.2 billion (US$40.4 billion) in fiscal 2006 from
Rs.1,221.3 billion (US$27.5 billion) in fiscal 2005. Average deposits, with an
average cost of 4.8% for fiscal 2006, constituted 69.9% of total average
interest-bearing liabilities compared to 62.9% of the total average
interest-bearing liabilities with a cost of 4.2% for fiscal 2005. The increase
in average cost of deposits in fiscal 2006 was primarily due to the general
increase in interest rates reflecting the tight liquidity scenario in the last
quarter of fiscal 2006. The average cost of total borrowings
79
including subordinated debt decreased to 7.7% in fiscal 2006 from 7.8% in fiscal
2005 primarily due to increase in foreign currency borrowings and repayment of
high cost borrowings of ICICI.
Our net interest margin was 2.50% for fiscal 2006 as compared to 2.49% for
fiscal 2005 as the positive impact of equity capital raising in fiscal 2006 was
offset by increased cost of deposits and a lower contribution of securitization
gains.
Our margin still continues to be lower than that of other banks in India
primarily due to maintenance of the statutory liquidity ratio and cash reserve
ratio on ICICI's liabilities, which were not subject to these ratios prior to
the amalgamation. Our net interest margin is expected to continue to be lower
than other banks in India until we repay the borrowings of ICICI. The net
interest margin is also impacted by the relatively lower net interest margin
earned by our overseas branches, which is offset by the higher fee income that
we are able to earn by leveraging our international presence and our ability to
meet the foreign currency borrowing requirements of the Indian companies.
Non-Interest Income
The following table sets forth, for the periods indicated, the principal
components of non-interest income.
Year ended March 31,
-------------------------------------------------------
2006/2005
2005 2006 2006 % change
--------- --------- ------ ---------
(in millions, except percentages)
Commission, exchange and brokerage.............. Rs.20,751 Rs.32,546 US$732 56.8%
Profit/(loss) on sale of investments (net)...... 7,560 10,989 247 45.3
Profit/(loss) on revaluation of investments
(net)........................................ 146 (504) (11) -
Profit/(loss) on sale of land, buildings and
other assets (net)........................... (9) 52 1 -
Profit/(loss) on foreign exchange transactions
(net)........................................ 2,781 4,452 100 60.1
Income pertaining to insurance business......... 35,355 59,353 1,334 67.9
Miscellaneous income (including lease income)... 4,392 4,581 102 4.3
--------- --------- ------
Total other income.............................. Rs.70,976 Rs.111,469 US$2,505 57.1%
========= ========== ========
Non-interest income increased by 57.1% for fiscal 2006 to Rs.111.5 billion
(US$2.5 billion) from Rs.71.0 billion (US$1.6 billion) for fiscal 2005 primarily
due to a 56.8% increase in commission, exchange and brokerage to Rs.32.5 billion
(US$732 million) in fiscal 2006 from Rs.20.8 billion (US$467 million) in fiscal
2005 and a 67.9% increase in income pertaining to insurance business to Rs.59.4
billion (US$1.3 billion) in fiscal 2006 from Rs.35.4 billion (US$795 million) in
fiscal 2005.
Commission, exchange and brokerage increased by 56.8% primarily due to
growth in credit card fees and third-party product fees, increase in income from
remittances and other fees from international banking business and growth in
corporate banking fees.
Profit on sale of investments increased by 45.3% to Rs.11.0 billion (US$247
million) in fiscal 2006 from Rs.7.6 billion (US$170 million) as we continued to
capitalize on the opportunities created by the buoyant equity market through
divestment of certain of our non-core investments and through proprietary
trading operations. Income from foreign exchange transaction includes income
from derivatives reflecting primarily the transactions undertaken with customers
by us and hedged or in the inter-bank market, and income from merchant foreign
exchange transactions.
Income pertaining to insurance business representing primarily premium
income on our life and general insurance products increased by 67.9% to Rs.59.4
billion (US$1.3 billion) from Rs.35.4 billion (US$795 million) reflecting
primarily an increase in the number of policies issued. The income pertaining to
insurance business includes Rs.43.8 billion (US$985 million) from our life
insurance business and Rs.15.5 billion (US$349 million) from our general
insurance business. We recognize life insurance premium as income when due.
Premium on lapsed policies is recognized as income when such policies are
reinstated. General insurance premium is recognized as income over the period of
risks or the contract period. Any subsequent revision to premium is recognized
over the remaining period of risks or contract period.
Miscellaneous income increased by 4.3% to Rs.4.6 billion (US$102 million)
in fiscal 2006 from Rs.4.4 billion (US$99 million) in fiscal 2005. Miscellaneous
income includes unrealized gain/loss on certain derivative transactions.
80
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal
components of non-interest expense.
Year ended March 31,
-------------------------------------------------------------
2006/2005
2005 2006 2006 % change
--------- --------- ------ ---------
(in millions, except percentages)
Payments to and provisions for employees Rs.10,908 Rs.17,112 US$385 56.9%
Depreciation on own property............ 3,283 3,908 88 19.0
Auditor's fees and expenses............. 36 43 1 19.3
Other administrative expenses........... 18,549 26,563 597 43.2
Operating expenses...................... 32,776 47,626 1,071 45.3
Direct marketing agency expenses........ 5,064 6,696 151 32.2
Depreciation on leased assets........... 2,975 2,771 62 (6.8)
Expenses pertaining to insurance
business............................. 32,042 52,038 1,170 62.4
--------- ---------- --------
Total non-interest expenses............. Rs.72,857 Rs.109,131 US$2,454 49.8%
========= ========== ========
Non-interest expense increased by 49.8% to Rs.109.1 billion (US$2.5
billion) in fiscal 2006 from Rs.72.9 billion (US$1.6 billion) in fiscal 2005
primarily due to an increase in employee expenses and increase in the expenses
pertaining to the insurance business.
Employee expenses increased by 56.9% to Rs.17.1 billion (US$385 million) in
fiscal 2006 from Rs.10.9 billion (US$245 million) in fiscal 2005, primarily due
to an increase in the number of employees. The employee expenses for ICICI Bank
Limited increased by 46.8% to Rs.10.8 billion (US$243 million) in fiscal 2006
from Rs.7.4 billion (US$166 million) in fiscal 2005 primarily due to a 40.8%
increase in the number of employees. The employee expenses for ICICI Prudential
Life Insurance Company increased by 71.8% to Rs.2.9 billion (US$65 million) in
fiscal 2006 from Rs.1.7 billion (US$38 million) in fiscal 2005 primarily due to
a 48.7% increase in number of employees. The employee expenses for ICICI Lombard
General Insurance Company increased by 61.7% to Rs.1.2 billion (US$27 million)
in fiscal 2006 from Rs.745 million (US$17 million) in fiscal 2005 primarily due
to a 82.8% increase in number of employees. The increase in employees was
commensurate with the growth in business.
Other administrative expenses increased by 43.2% to Rs.26.6 billion (US$597
million) in fiscal 2006 from Rs.18.6 billion (US$417 million) in fiscal 2005
primarily due to the increased volume of business, particularly in retail
business and include maintenance of ATMs, credit card related expenses, call
center expenses and technology expenses. The number of bank branches (excluding
foreign branches) and extension counters increased to 614 at year-end fiscal
2006 from 562 at year-end fiscal 2005. The number of ATMs increased to 2,200 at
year-end fiscal 2006 from 1,910 at year-end fiscal 2005. The number of branches
and offices of our insurance subsidiaries increased to 463 at year-end fiscal
2006 from 277 at year-end fiscal 2005.
Direct marketing agency expenses increased by 32.2% to Rs.6.7 billion
(US$151 million) in fiscal 2006 from Rs.5.1 billion (US$114 million) in fiscal
2005 in line with the growth in our retail credit business. We use marketing
agents, called direct marketing agents or associates, for sourcing retail
assets. These commissions are expensed upfront and not amortized over the life
of the loan. We reduce direct marketing agency expenses incurred in connection
with sourcing our automobile loans on an upfront basis from interest income.
Expenses pertaining to insurance business, representing provisions for
claims, contribution to linked business, commissions paid and reserving for
actuarial liability increased by 62.4% to Rs 52.0 billion (US$1.1 billion) in
fiscal 2006 from Rs. 32.0 billion (US$720 million) in view of the higher
business levels in fiscal 2006. The provisions for claims are determined based
on actuarial valuation. In line with accounting norms for insurance companies we
do not amortize the customer acquisition cost, but account for the expenses
upfront.
Provisions for Non-performing Assets and Restructured Loans
The following table sets forth, at the dates indicated, certain information
regarding restructured loans and non-performing assets.
81
At March 31,
----------------------------------------------------------------
2006/2005
2005 2006 2006 % change
------------- ------------- -------------- ---------
(in millions, except percentages)
Gross restructured loans.................... Rs. 65,623 Rs. 55,463 US$ 1,247 (15.5)%
Provisions for restructured loans........... (2,991) (2,305) (52) (22.9)
------------- ------------- --------------
Net restructured loans...................... 62,632 53,158 1195 (15.1)
------------- ------------- --------------
Gross non-performing assets................. 34,973 23,086 519 (34.0)
Provisions for non-performing assets(1)..... (14,890) (12,280) (276) (17.5)
------------- ------------- --------------
Net non-performing assets................... 20,083 10,806 243 (46.2)
------------- ------------- --------------
Gross restructured loans and non-performing
assets................................... 100,596 78,548 1766 (21.9)
Provision for restructured loans and
non-performing assets(2)................. (17,881) (14,584) (328) (18.4)
------------- ------------- --------------
Net restructured loans and non-performing
assets................................... 82,715 63,964 1,438 (22.7)
------------- ------------- --------------
Gross customer assets....................... 1,049,431 1,638,552 36,838 56.1
Net customer assets......................... 1,029,299 1,622,675 36,481 57.6
Gross restructured loans as a percentage of
gross customer assets.................... 6.25% 3.38%
Gross non-performing assets as a percentage
of gross customer assets................. 3.33 1.41
Net restructured loans as a percentage of
net customer assets 6.08 3.28
Net non-performing assets as a percentage
of net customer assets................... 1.95 0.67
Provisions on restructured loans as a
percentage of gross restructured assets.. 4.56 4.16
Provisions on non-performing assets as a
percentage of gross non-performing assets 42.58 53.19
Provisions as a percentage of gross
customer assets(3)....................... 2.14 1.32
----------
(1) Includes interest suspense.
(2) Excludes technical write-offs.
(3) Includes general provision on performing assets.
We classify our assets in accordance with the Reserve Bank of India
guidelines into performing and non-performing assets. Further, non-performing
assets are classified into sub-standard, doubtful and loss assets based on the
criteria stipulated by the Reserve Bank of India. The Reserve Bank of India has
separate guidelines for restructured loans. A fully secured standard loan can be
restructured by rescheduling of principal repayments and/or the interest
element, but must be separately disclosed as a restructured loan in the year of
restructuring. Similar guidelines apply to restructuring of sub-standard loans.
See also "Business-Classification of loans".
Gross restructured loans decreased by 15.5% to Rs.55.5 billion (US$1.2
billion) at year-end fiscal 2006 from Rs.65.6 billion (US$1.5 billion) at
year-end fiscal 2005 primarily due to the reclassification of certain loans as
standard based on satisfactory performance of the borrower accounts. Gross
non-performing assets decreased by 34.0% to Rs.23.1 billion (US$519 million) at
year-end fiscal 2006 from Rs.35.0 billion (US$786 million) at year-end fiscal
2005 primarily due to sale and repayment of non-performing assets. We sold a
gross aggregate value of assets amounting to Rs.6.2 billion (US$139 million) to
an asset reconstruction company during fiscal 2006 and a gross outstanding
amount of Rs.14.4 billion (US$323 million) to other entities. As a percentage of
net customer assets, net restructured loans were 3.3% at year-end fiscal 2006
and 6.1% at year-end fiscal 2005 and net non-performing assets were 0.67% at
year-end fiscal 2006 and 1.95% at year-end fiscal 2005.
82
The following table sets forth, for the period indicated, the composition
of provision and contingencies excluding provision for tax.
Year ended March 31,
--------------------------------------------------------
2006/2005
2005 2006 2006 % change
---------- ---------- ---------- --------
(in millions, except percentages)
Provisions for investments (including credit
substitutes)(net)................................. Rs. 5,433 Rs. 8,156 US$ 183 50.1%
Provision for non-performing assets and for standard
assets(1)......................................... (890) 8,117 182 1012.2
Others............................................... 86 204 5 136.7
---------- ---------- ----------
Total provisions and contingencies (excluding tax)... Rs. 4,629 Rs. 16,477 US$ 370 255.9%
========== ========== ==========
----------
(1) We do not distinguish between provisions and write-offs while assessing the
adequacy of our loan loss coverage, as both provisions and write-offs
represents a reduction of the principal amount of a non-performing asset.
In compliance with regulations governing the presentation of financial
information by banks, gross non-performing assets are reported gross of
provisions net of cumulative write-offs in our financial statements.
Provisions are made on sub-standard and doubtful assets at rates prescribed
by Reserve Bank of India. Loss assets and unsecured portion of doubtful assets
are provided/written off as per the extant Reserve Bank of India guidelines. The
Bank also makes additional floating provisions against retail non-performing
assets and additional provisions against specified corporate non-performing
assets. See "Business - Classification of Loans."
Provisions and contingencies (excluding provisions for tax) increased to
Rs.16.5 billion (US$370 million) in fiscal 2006 from Rs.4.6 billion (US$104
million) in fiscal 2005 primarily due to the significantly higher level of
amortization of premium on government securities of Rs.8.0 billion (US$175
million) in fiscal 2006, compared to Rs.2.8 billion (US$60 million) in fiscal
2005. The increase in premium on government securities was primarily due to an
increase in the investments in government securities and transfer of a
substantial portion of the investments in government securities from "available
for sale" to "held to maturity category" in the second half of fiscal 2005.
Provisions on non-performing and standard assets increased by Rs.9.0 billion
(US$202 million) to Rs.8.1 billion (US$182 million) in fiscal 2006 primarily due
to the lower level of write-backs and higher level of general provisions on
standard assets. With effect from the quarter ended December 31, 2005, the
Reserve Bank of India increased the requirement of general provisioning on
standard advances (excluding advances to the agricultural sector and small and
medium enterprises) to 0.40% compared to 0.25% applicable until September 30,
2005. In accordance with the Reserve Bank of India's guidelines we made general
provisions of Rs. 3.4 billion (US$76 million) in fiscal 2006. During fiscal
2006, we reassessed our provision requirements on performing loans and
non-performing loans on a portfolio basis and wrote back an amount of Rs.1.69
billion (US$38 million) from the provisions against non-performing loans, which
were in excess of the regulatory requirements.
Tax Expense
Total tax expense was Rs.7.0 billion (US$157 million) for fiscal 2006
compared to Rs.5.7 billion (US$128 million) in fiscal 2005. Income tax expense
was Rs.6.6 billion (US$148 million) for fiscal 2006 compared to Rs.5.7 billion
(US$127 million) in fiscal 2005. The effective rate of income tax expense was
21.2% for fiscal 2006 compared to the effective rate of income tax expense of
23.8% for fiscal 2005. The effective income tax rate of 21.2% for fiscal 2006
was lower compared to the statutory tax rate of 33.7% primarily due to exempt
interest and dividend income and the charging of income at rates lower than
statutory tax rates, offset in part by disallowances of certain expenses for
tax purposes. Further, during fiscal 2006, we created a deferred tax asset on
carry forward capital losses based on our firm plans that sufficient taxable
capital gains will be available against which the losses can be set off.
The Indian Finance Act, 2005 imposes an additional income tax on companies
called "fringe benefit tax". Pursuant to this Act, companies are deemed to have
provided fringe benefits to the employees if certain defined expenses are
incurred. A portion of these expenses is deemed to be a fringe benefit to the
employees and subjects the Bank to tax at a rate of 30%, exclusive of applicable
surcharge and cess. This tax is effective from April 1, 2005. The fringe benefit
tax expense amounted to Rs.386 million (US$9 million) for fiscal 2006.
83
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of assets.
At March 31,
----------------------------------------------------------------
2006/2005
2005 2006 2006 % change
-------------- ------------- -------------- ---------
(in millions, except percentages)
Cash and cash equivalents................ Rs. 136,277 Rs. 182,551 US$ 4,104 34.0%
Investments ............................. 546,516 840,139 18,888 53.7
Advances (net of provisions) ............ 964,100 1,562,603 35,130 62.1
Fixed assets ............................ 41,782 41,429 931 (0.8)
Other assets ............................ 95,662 145,574 3,274 52.2
-------------- -------------- --------------
Total assets ............................ Rs. 1,784,337 Rs. 2,772,296 US$ 62,327 55.4%
============== ============== ==============
Our total assets increased by 55.4% to Rs.2,772.3 billion (US$62.3
billion) at year-end fiscal 2006 compared to Rs.1,784.3 billion (US$40.1
billion) at year-end fiscal 2005, primarily due to an increase in advances and
investments. Total investments at year-end fiscal 2006 increased by 53.7% to
Rs.840.1 billion (US$18.9 billion) from Rs.546.5 billion (US$12.3 billion) at
year-end fiscal 2005 primarily due to a 46.7% increase in investments in
government and other approved securities in India to Rs.528.3 billion (US$11.9
billion) at year-end fiscal 2006 from Rs.360.18 billion (US$8.1 billion) at
year-end fiscal 2005. Net advances increased by 62.1% to Rs.1,562.6 billion
(US$35.1 billion) at year-end fiscal 2006 from Rs.964.1 billion (US$21.7
billion) at year-end fiscal 2005 primarily due to an increase in retail assets
in accordance with our strategy to increase our retail assets portfolio,
offset, in part, by a reduction due to repayments and securitization of assets.
Total assets (gross) of overseas branches of ICICI Bank (including offshore
banking unit in Mumbai) increased by 117.3% to Rs.275.9 billion (US$6.2
billion) at year-end fiscal 2006 from Rs.127.0 billion (US$2.9 billion) at
year-end fiscal 2005. During the year we acquired an additional stake of 6% in
Prudential ICICI Asset Management Company Limited and Prudential ICICI Trust
Limited increasing our total shareholding in the company to 51%. The above
acquisition resulted in a goodwill of Rs.487 million (US$11 million), which is
included in other assets. Other assets increased by 52.2% to Rs. 145.6 billion
(US$ 3.3 billion) at year-end fiscal 2006 from Rs. 95.7 billion (US$ 2.2
billion) at year-end fiscal 2005 primarily due to an increase in the
recoverables in the ordinary course of business from our counterparties,
customers and clients resulting from the general increase in business volumes.
Liabilities and Stockholders' Equity
The following table sets forth, at the dates indicated, the principal
components of liabilities and stockholders' equity.
At March 31,
--------------------------------------------------------------
2006/2005
2005 2006 2006 % change
-------------- -------------- -------------- ---------
(in millions, except percentages)
Deposits................................. Rs. 1,011,086 Rs. 1,724,510 US$ 38,770 70.6%
Borrowings............................... 383,690 450,000 10,117 17.3
Other liabilities(1)..................... 254,601 360,310 8,101 41.5
Proposed dividend (including corporate
dividend tax)......................... 7,193 8,809 198 22.5
Minority interest........................ 1,525 2,749 62 80.3
-------------- -------------- --------------
Total liabilities........................ 1,658,095 2,546,378 57,248 53.6
84
At March 31,
------------
2006/2005
2005 2006 2006 % change
-------------- -------------- -------------- --------
(in millions, except percentages)
Equity share capital..................... 7,368 8,898 200 20.8
Preference share capital 3,500 3,500 79 0.0
Reserves and surplus..................... 115,374 213,520 4,800 85.1
-------------- -------------- --------------
Total liabilities (including capital and
reserves)............................. Rs. 1,784,337 Rs. 2,772,296 US$ 62,327 55.4%
============== ============== ==============
----------
(1) Includes subordinated debt.
Deposits increased by 70.6% to Rs.1,724.5 billion (US$38.8 billion) at
year-end fiscal 2006 from Rs.1011.1 billion (US$22.7 billion) at year-end fiscal
2005. This significant growth in deposits was primarily achieved through
increased focus on retail and corporate customers by offering a wide range of
products designed to meet varied individual and corporate needs and leveraging
our network of branches, extension counters and ATMs. Borrowings (excluding
subordinated debt) increased by 17.3% to Rs.450.0 billion (US$10.1 billion) at
year-end fiscal 2006 from Rs.383.7 billion (US$8.6 billion) at year-end fiscal
2005. Minority interest increased to Rs.2,749 million (US$62 million) at
year-end fiscal 2006 from Rs.1525 million (US$34 million) at year-end fiscal
2005. The increase is primarily due to the acquisition of additional stakes in
Prudential ICICI Asset Management Company Limited and Prudential ICICI Trust
Limited as a result of which these companies have been accounted for as
subsidiaries in fiscal 2006 as compared to the proportionate consolidation
method of accounting followed in fiscal 2005. Stockholders' equity increased by
81.2% at year-end fiscal 2006 to Rs.222.4 billion (US$5.0 billion) from Rs.122.7
billion (US$2.8 billion) at year-end fiscal 2005 primarily due to equity capital
raised by us amounting to Rs.80.0 billion (US$1.8 billion) during fiscal 2006.
Fiscal 2005 to Fiscal 2004
Summary
Net profit increased by 17.2% to Rs.18.5 billion (US$416 million) for fiscal
2005 compared to Rs.15.8 billion (US$355 million) for fiscal 2004 primarily due
to a 38.6% increase in net interest income and a 55.9% increase in non-interest
income offset, in part, by a 73.7% increase in non-interest expense.
o Net interest income increased by 38.6% to Rs.30.3 billion (US$681
million) in fiscal 2005 from Rs.21.8 billion (US$491 million) in
fiscal 2004 reflecting an increase of 23.5% in the average volume of
interest-earning assets and an increase in net interest margin by 27
basis points.
o Non-interest income increased by 55.9% in fiscal 2005 to Rs.71.0
billion (US$1.6 billion), from Rs.45.5 billion (US$1.0 billion) in
fiscal 2004 primarily due to a 72.4% increase in commission, exchange
and brokerage and an increase of 176.0% in the income relating to the
insurance business offset, in part, by a 46.7% decrease in profit on
sale of investments.
o Non-interest expense increased by 73.7% for fiscal 2005 to Rs.72.9
billion (US$1,638 million) from Rs.41.9 billion (US$943 million) for
fiscal 2004 primarily due to a 53.5% increase in employee expenses and
a 169.5% increase in expenses relating to our insurance business.
o Provisions and contingencies (excluding provisions for tax) decreased
by 25.9% to Rs.4.6 billion (US$104 million) in fiscal 2005 from
Rs.6.3 billion (US$141 million) in fiscal 2004 primarily due to lower
additions to non-performing assets and a higher level of write-backs
in fiscal 2005.
o Gross restructured loans decreased by 13.0 % to Rs.65.6 billion
(US$1.5 billion) at year-end fiscal 2005 from Rs.75.5 billion (US$1.7
billion) at year-end fiscal 2004 primarily due to the reclassification
of certain loans as performing based on satisfactory performance of
the borrower accounts. Gross non-performing assets decreased by 14.3%
to Rs.35.0 billion (US$786 million) at year-end fiscal 2005 from
Rs.40.8 billion (US$918 million) at year-end fiscal 2004 primarily due
to transfer of certain non-performing assets to an asset
reconstruction company and reclassification of certain assets as
performing based on satisfactory performance of the borrower accounts.
85
o Our total assets increased by 36.5% to Rs.1,784.3 billion (US$40.1
billion) at year-end fiscal 2005 compared to Rs.1,307.5 billion
(US$29.4 billion) at year-end fiscal 2004 primarily due to a 48.4%
increase in advances portfolio.
Net Interest Income
The following table sets forth, for the periods indicated, the principal
components of net interest income.
Year ended March 31,
--------------------------------------------------------------
2005/2004
2004 2005 2005 % change
------------ ----------- ----------- ---------
(in millions, except percentages)
Interest income................... Rs. 93,526 Rs. 98,338 US$ 2,211 5.1%
Interest expense.................. (71,677) (68,044) (1,530) (5.1)
------------ ----------- ------------
Net interest income............... Rs. 21,849 Rs. 30,294 US$ 681 38.6%
============ =========== ============
Net interest income increased by 38.6% to Rs.30.3 billion (US$681 million)
in fiscal 2005 from Rs.21.8 billion (US$491 million) in fiscal 2004 reflecting
mainly the following:
o an increase of Rs.232.0 billion (US$5.2 billion) or 23.5% in the
average volume of interest-earning assets;
o an increase of 27 basis points in net interest margin to 2.49% in
fiscal 2005 from 2.22% in fiscal 2004.
The average volume of interest-earning assets increased by 23.5% or
Rs.232.0 billion (US$5.2 billion) to Rs.1,217.7 billion (US$27.4 billion) during
fiscal 2005 from Rs.985.7 billion (US$22.2 billion) during fiscal 2004,
primarily due to the increase in average advances. The average advances
increased by 32.3% to Rs.763.7 billion (US$17.1 billion) in fiscal 2005 from
Rs.577.1 billion (US$13.0 billion) in fiscal 2004. This increase in average
advances was primarily due to increased disbursements of retail finance loans
offset, in part, by sell-down/securitization and repayments of loans. The
average volume of interest-earning foreign currency assets increased by 53.0% to
Rs.152.6 billion (US$3.4 billion) during fiscal 2005 from Rs.99.7 billion
(US$2.2 billion) during fiscal 2004 primarily due to increased business volumes
of our international branches and subsidiaries.
Total interest income increased by 5.1% to Rs.98.3 billion (US$2.2 billion)
for fiscal 2005 from Rs.93.5 billion (US$2.1 billion) for fiscal 2004 primarily
due to an increase of 23.5% in the average volume of interest-earning assets to
Rs.1,217.7 billion (US$27.4 billion) during fiscal 2005 from Rs.985.7 billion
(US$22.2 billion) during fiscal 2004 offset, in part, by a decline in the yield
on interest-earning assets. The yield on interest-earning assets decreased to
8.1% in fiscal 2005 from 9.5% in fiscal 2004 primarily due to a decline in the
yield on advances to 9.1% in fiscal 2005 from 10.7% in fiscal 2004 and a decline
in yield on investments to 6.3% in fiscal 2005 from 7.7% in fiscal 2004. The
yield on advances declined in fiscal 2005 primarily due to origination of new
loans at lower rates in line with the reduction in lending rates and a reduction
in higher yield loans.
Total interest expense decreased by 5.1% to Rs.68.0 billion (US$1.5
billion) during fiscal 2005 from Rs.71.7 billion (US$1.6 billion) during fiscal
2004 primarily due to a decline of 151 basis points in the cost of liabilities
offset, in part, by a 20.6% increase in average interest-bearing liabilities to
Rs.1,221.3 billion (US$27.5 billion) in fiscal 2005 from Rs.1,012.6 billion
(US$22.8 billion) in fiscal 2004. The average cost of borrowings decreased to
7.8% in fiscal 2005 from 9.3% in fiscal 2004 primarily due to repayment of high
cost borrowings. Average deposits, with an average cost of 4.2% for fiscal 2005,
constituted 62.9% of total average interest-bearing liabilities compared to
55.8% of the total average interest-bearing liabilities with an average cost of
5.4% for fiscal 2004.
As a result of a 151 basis points reduction in the cost of funds offset, in
part, by a 141 basis points reduction in the yield on interest-earning assets,
the net interest margin increased by 27 basis points.
86
Non-Interest Income
The following table sets forth, for the periods indicated, the principal
components of non-interest income.
Year ended March 31,
-----------------------------------------------------------
2005/2004
2004 2005 2005 % change
------------ ------------ ------------ ---------
(in millions, except percentages)
Commission, exchange and brokerage.......... Rs. 12,037 Rs. 20,751 US$ 467 72.4%
Profit/(loss) on sale of investments (net).. 14,175 7,560 170 (46.7)
Profit/(gloss) on revaluation of
investments (net)........................ 10 146 3 1296.4
Profit/(loss) on sale of land, buildings
and other assets (net)................... (19) (9) (0) (51.3)
Profit/(loss) on foreign exchange
transactions (net)....................... 2,086 2,781 63 33.3
Income pertaining to insurance business 12,809 35,355 795 176.0
Miscellaneous income (including lease
income).................................. 4,432 4,392 99 (0.9)
------------ ------------ ------------ -------
Total other income.......................... Rs. 45,530 Rs. 70,976 US$ 1,597 55.9%
============ ============ ============ =======
Non-interest income increased by 55.9% in fiscal 2005 to Rs.71.0 billion
(US$1.6 billion), from Rs.45.5 billion (US$1.0 billion) in fiscal 2004 primarily
due to a 72.4% increase in commission, exchange and brokerage and a 176.0%
increase in the income pertaining to insurance business offset, in part, by a
46.7% decrease in profit on sale of investments.
Commission, exchange and brokerage increased by 72.4% to Rs.20.8 billion
(US$467 million) in fiscal 2005 from Rs.12.0 billion (US$271 million) in fiscal
2004 primarily due to growth in fee income from retail products and services,
including fees arising from retail asset products like home loans and credit
cards and retail liability-related income like account servicing charges, and an
increase in transaction banking fee income from small enterprises as well as an
increase in transaction banking and other fee income from corporate banking.
During this period there were also significant increases in the business volumes
of transaction banking services such as banker's acceptances, bank guarantees
and cash management services.
Income from sale of investments decreased by 46.7% to Rs.7.6 billion
(US$170 million) for fiscal 2005 from Rs.14.2 billion (US$319 million) for
fiscal 2004 due to the decrease in trading profits on government securities and
corporate debt securities as a result of increasing interest rates in the fixed
income market. During fiscal 2005 the yield on 10-year government of India
securities increased by 1.52% to 6.68%. During fiscal 2004 the yield on 10-year
government of India securities had declined by 1.1% and we had capitalized on
this decline to realize a high level of trading profits on fixed income
securities. The level of trading profits is volatile as it depends on specific
market conditions, which may or may not be favorable. Income from foreign
exchange transaction includes income from derivatives reflecting primarily the
transactions undertaken with customers by us and hedged internally or in the
inter-bank market and income from merchant foreign exchange transactions.
Income pertaining to insurance business, representing primarily premium
income on our life and general insurance products was Rs.35.4 billion (US$795
million) as compared to Rs 12.8 billion (US$288 million). Our consolidated
financial statements for fiscal 2004 include a 74% share of income of our
insurance subsidiaries as compared to a 100% share of income for fiscal 2005
reflecting a change in accounting for consolidation of joint ventures which are
subsidiaries as required by the Institute of Chartered Accountants of India. The
increase in income was also on account of an increase in the number of policies
issued and new insurance products introduced during the year.
Miscellaneous income decreased by 0.9% to Rs.4,392 million (US$99
million) in fiscal 2005 from Rs.4,432 million (US$100 million) in fiscal 2004.
87
Non-Interest Expense
The following table sets forth, for the periods indicated, the principal
components of non-interest expense.
Year ended March 31,
-------------------------------------------------------------
2005/2004
2004 2005 2005 % change
----------- ----------- ----------- --------
(in millions, except percentages)
Payments to and provisions for employees...... Rs. 7,107 Rs. 10,908 US$ 245 53.5%
Depreciation on own property.................. 2,804 3,283 74 17.1
Auditor's fees and expenses................... 31 36 1 16.1
Other administrative expenses................. 14,207 18,549 417 30.5
----------- ----------- -----------
Operating expenses............................ 24,149 32,776 737 35.7
Direct marketing agency expenses.............. 3,091 5,064 114 63.8
Depreciation on leased assets................. 2,805 2,975 67 6.1
Expenses pertaining to insurance business..... 11,889 32,042 720 169.5
----------- ----------- -----------
Total non-interest expenses................... Rs. 41,934 Rs. 72,857 US$ 1,638 73.7%
=========== =========== ===========
Non-interest expense increased by 73.7% in fiscal 2005 to Rs.72.9 billion
(US$1,638 million) from Rs.41.9 billion (US$943 million) in fiscal 2004
primarily due to an increase in administration expense and salary expenses and
expenses relating to insurance expenses.
Employee expenses increased by 53.5% to Rs.10.9 billion (US$245 million) in
fiscal 2005 from Rs.7.1 billion (US$160 million) in fiscal 2004, primarily due
to an increase in the number of employees. The employee expenses for ICICI Bank
Limited increased by 35.0% to Rs.7.4 billion (US$166 million) in fiscal 2005
from Rs.5.5 billion (US$123 million) in fiscal 2004 primarily due to a 38.0%
increase in the number of employees. Other administrative expenses increased by
30.5% to Rs.18.5 billion (US$417 million) in fiscal 2005 from Rs.14.2 billion
(US$319 million) in fiscal 2004, primarily due to increased volume of business,
particularly in retail banking, including maintenance of ATMs, credit card
expenses, call center expenses and technology expenses. The increase is also due
to an increase in the number of bank branches and extension counters to 562 at
year-end fiscal 2005 compared to 469 at year-end fiscal 2004. The number of
branches and offices of our insurance subsidiaries increased to 277 at year-end
fiscal 2005 from 187 at year-end fiscal 2004.
We incurred directing marketing agency expenses of Rs.5.1 billion (US$114
million) on the retail assets portfolio in fiscal 2005 compared to Rs.3.1
billion (US$70 million) in fiscal 2004, in commensuration with the growth in
retail business volumes. We deduct direct marketing agency expenses incurred in
connection with sourcing our automobile loans on an upfront basis from interest
income.
Expenses relating to the insurance business representing expenses relating
to provisions for claims, contribution to linked business, commission paid and
reserving for actuarial liability was Rs 32.0 billion (US$720 million) in
fiscal 2005 as compared to Rs 11.9 billion (US$267 million). Our consolidated
financial statements for fiscal 2004 include a 74% share of expenses of our
insurance subsidiaries as compared to a 100% share of expenses for fiscal 2005
reflecting a change in accounting for consolidation of joint ventures which are
subsidiaries as required by the Institute of Chartered Accountants of India.
The increase in expense was also on account of an increase in the number of
life and general insurance policies written and a general increase in our
insurance business. The provisions for claims are based on actuarial
valuations.
88
Provisions for Non-performing Assets and Restructured Loans
The following table set forth, at the dates indicated, certain information
regarding restructured loans and non-performing assets.
At March 31,
----------------------------------------------------------
2005/2004
2004 2005 2005 % change
----------- ----------- ----------- ---------
(in millions, except percentages)
Gross restructured loans...................... Rs. 75,454 Rs. 65,623 US$ 1,475 (13.0)%
Provisions for restructured loans............. (9,169) (2,991) (67) (67.4)
---------- ----------- -----------
Net restructured loans........................ 66,285 62,632 1,408 (5.5)
---------- ----------- -----------
Gross non-performing assets................... 40,821 34,973 786 (14.3)
Provisions for non-performing assets(1)....... (20,331) (14,890) (334) (26.8)
---------- ----------- -----------
Net non-performing assets..................... 20,490 20,083 452 (2.0)
---------- ----------- -----------
Gross restructured loans and non-performing
assets..................................... 116,275 100,596 2,262 (13.5)
Provision for restructured loans and
non-performing asset(2).................... (29,500) (17,881) (402) (39.47)
---------- ----------- -----------
Net restructured loans and non-performing
assets..................................... 86,775 82,715 1,860 (4.7)
---------- ----------- -----------
Gross customer assets......................... 772,986 1,049,431 23,593 35.8
Net customer assets........................... 736,297 1,029,299 23,141 39.8
Gross restructured loans as a percentage of
gross customer assets...................... 9.76% 6.25%
Gross non-performing assets as a percentage
of gross customer assets................... 5.28 3.33
Net restructured loans as a percentage of net
customer assets............................ 9.00 6.08
Net non-performing assets as a percentage of
net customer assets........................ 2.78 1.95
Provisions on restructured loans as a
percentage of gross restructured assets.... 12.15 4.56
Provisions on non-performing assets as a
percentage of gross non-performing assets.. 49.81 42.58
Provisions as a percentage of gross customer
assets(3).................................. 5.25 2.14
----------
(1) Includes interest suspense
(2) Net of technical write-offs.
(3) Includes general provision on standard assets.
Gross restructured loans decreased by 13.0 % to Rs.65.6 billion (US$1.5
billion) at year-end fiscal 2005 from Rs.75.5 billion (US$1.7 billion) at
year-end fiscal 2004 primarily due to the reclassification of certain assets as
performing based on satisfactory performance of the borrower accounts, offset in
part, by restructuring of loans to certain companies and reclassification to
non-performing assets. Gross non-performing assets decreased by 14.3% to Rs.35.0
billion (US$786 million) at year-end fiscal 2005 from Rs.40.8 billion (US$918
million) at year-end fiscal 2004 primarily due to transfer of certain
non-performing assets to an asset reconstruction company and reclassification of
certain assets as performing based on satisfactory performance of the borrower
accounts. As a percentage of net customer assets, net restructured loans were
6.1% at year-end fiscal 2005 and 9.0% at year-end fiscal 2004 and net
non-performing assets were 1.9% at year-end fiscal 2005 and 2.8% at year-end
fiscal 2004.
The following table sets forth, for the period indicated, the composition
of provision and contingencies excluding provision for tax.
89
Year ended March 31,
----------------------------------------------------
2005/2004
2004 2005 2005 % change
---------- ---------- ---------- ---------
in millions, except percentages)
Provisions for investments
(including credit
substitutes)(net)............... Rs. 1,170 Rs. 5,433 US$ 122 364.2%
Provision for non-performing assets
and provision for standard
assets(1)....................... 4,873 (890) (20) (118.3)
Others............................. 208 86 2 (58.6)
---------- ---------- ----------
Total provisions................... Rs. 6,251 Rs. 4,629 US$ 104 (25.9)%
========== ========== ==========
---------------
(1) We do not distinguish between provisions and write-offs while assessing the
adequacy of our loan loss coverage, as both provisions and write-offs
represents a reduction of the principal amount of a non-performing asset.
In compliance with regulations governing the presentation of financial
information by banks, gross non-performing assets are reported gross of
provisions net of cumulative write-offs in our financial statements.
Total provisions decreased by 25.9% to Rs.4.6 billion (US$104 million) in
fiscal 2005 from Rs.6.3 billion (US$141 million) in fiscal 2004. During fiscal
2005, we transferred investments amounting to Rs.213.5 billion (US$4.8 billion)
from available for sale category to held to maturity category in accordance
with the Reserve Bank of India guidelines. The difference between the book
value of each investment and the lower of its acquisition cost and market value
on the date of transfer, amounting to Rs.1.8 billion (US$40 million) is
included in the provision on investments. In addition, provision on investments
was higher in fiscal 2005 on account of a higher amount of amortization of
premium on government securities classified in the held to maturity category.
We made a net write back of provision on non-performing assets (including
provision for standard assets) of Rs.890 million (US$20 million) in fiscal 2005
as compared to a provision of Rs.4.9 billion (US$110 million) in fiscal 2004
primarily due to lower additions to non-performing assets in fiscal 2005 and a
higher level of write-backs in fiscal 2005.
Tax Expense
Total tax expense amounted to Rs.5.7 billion (US$128 million) for fiscal
2005 compared to Rs.3.4 billions (US$76 million) in fiscal 2004. Income tax
expense amounted to Rs.5.7 billion (US$127 million) for fiscal 2005 compared to
Rs.3.4 billions (US$76 million) at year-end fiscal 2004. The effective rate of
income tax expense was 23.8% for fiscal 2005 compared to the effective income
tax expense of 17.6% for fiscal 2004. The effective income tax rate of 23.8% for
fiscal 2005 was lower compared to statutory tax rate of 36.6% primarily due to
exempt interest and dividend income and the charging of certain income at rates
other than statutory tax rate.
Financial Condition
Assets
The following table sets forth, at the dates indicated, the principal
components of assets.
At March 31,
----------------------------------------------------------
2005/2004
2004 2005 2005 % change
------------ ------------ ----------- ---------
(in millions, except percentages)
Cash and cash equivalents.......... Rs. 89,884 Rs. 136,277 US$ 3,064 51.6%
Investments........................ 462,675 546,516 12,287 18.1
1,675 48.4
Fixed assets....................... 41,471 41,782
Fixed assets....................... 41,471 41,782 939 0.8
Other assets....................... 63,967 95,662 2,151 49.5
------------ ------------ -----------
Total assets....................... Rs.1,307,476 Rs.1,784,337 US$ 40,116 36.5%
============ ============ ===========
Our total assets increased by 36.5% to Rs.1,784.3 billion (US$40.1 billion)
at year-end fiscal 2005 compared to Rs.1,307.5 billion (US$29.4 billion) at
year-end fiscal 2004, primarily due to an increase in advances and investments.
Net advances increased by 48.4% to Rs.964.1 billion (US$21.7 billion) at
year-end fiscal 2005 from Rs.649.5 billion (US$14.6 billion) at year-end fiscal
2004 primarily due to an increase in retail advances in accordance with our
strategy to increase our retail assets portfolio, offset, in part, by a
reduction due to repayments
90
and securitization of loans. Total investments at
year-end fiscal 2005 increased by 18.1% to Rs.546.5 billion (US$12.3 billion)
from Rs.462.7 billion (US$10.4 billion) at year-end fiscal 2004 primarily due to
a 13.0% increase in investments in government and other approved securities in
India to Rs.360.2 billion (US$8.1 billion) at year-end fiscal 2005 from Rs.318.7
billion (US$7.2 billion) at year-end fiscal 2004. Other assets increased by
49.5% to Rs.95.7 billion (US$2.2 billion) at year-end fiscal 2005 from Rs.64.0
billion (US$1.4 billion) at year-end fiscal 2004.
Liabilities and Stockholders' Equity
The following table sets forth, at the dates indicated, the principal
components of liabilities and stockholders' equity.
At March 31,
----------------------------------------------------------
2005/2004
2004 2005 2005 % change
------------ ------------ ----------- ---------
(in millions, except percentages)
Deposits .......................... Rs. 680,787 Rs.1,011,086 US$ 22,731 48.5%
Borrowings......................... 349,581 383,690 8,626 9.8
Other liabilities(1)............... 189,801 254,601 5,724 34.1
Proposed dividend
(including corporate
dividend tax)................... 6,137 7,193 162 17.2
Minority interest.................. 111 1,525 34 1271.0
Total liabilities.................. 1,226,417 1,658,095 37,277 35.2
Equity share capital............... 6,164 7,368 166 19.5
Preference share capital........... 3,500 3,500 79 0.0
Reserve and surplus................ 71,395 115,374 2,594 61.6
------------ ------------ -----------
Total liabilities (including
capital and reserves)............ Rs.1,307,476 Rs.1,784,337 US$ 40,116 36.5%
============ ============ ===========
-------------------------
(1) Includes subordinated debt
Deposits increased by 48.5% to Rs.1,011.1 billion (US$22.7 billion) at
year-end fiscal 2005 from Rs.680.8 billion (US$15.3 billion) at year-end fiscal
2004. This significant growth in deposits was primarily achieved through
increased focus on retail and corporate customers by offering a wide range of
products designed to meet varied individual and corporate needs and leveraging
our network of branches, extension counters and ATMs. Borrowings (excluding
subordinated debt) increased by 9.8% to Rs.383.7 billion (US$8.6 billion) at
year-end fiscal 2005 from Rs.349.6 billion (US$7.9 billion) at year-end fiscal
2004. Minority interest increased to Rs.1.5 billion (US$34 million) at year-end
fiscal 2005 from Rs.111 million (US$3 million) at year-end fiscal 2004. The
increase in minority interest is due to the inclusion of the minority
shareholders of ICICI Prudential Insurance Company Limited and ICICI Lombard
General Insurance Company Limited in fiscal 2005. These entities were accounted
for as subsidiaries in fiscal 2005 due to a limited revision made to Accounting
Standard 27 (AS 27) on 'Financial Reporting of Interest in Joint Venture', which
required joint ventures that qualify as subsidiaries to be accounted for as per
the principles of Accounting Standard 21 (AS 21) on `Consolidated Financial
Statement' instead of the proportionate consolidation method recommended
earlier. Stockholders' equity increased 58.3% at year-end fiscal 2005 to
Rs.122.7 billion (US$2.8 billion) from Rs.77.6 billion (US$1.7 billion) at
year-end fiscal 2004 primarily due to equity capital amounting to Rs. 32.5
billion (US$730 million) raised by us during fiscal 2005.
Off Balance Sheet Items, Commitments and Contingencies
Foreign Exchange and Derivative Contracts
We enter into foreign exchange forwards, options, swaps and other
derivative products to enable customers to transfer, modify or reduce their
foreign exchange and interest rate risks and to manage our own interest rate and
foreign exchange positions. These instruments are used to manage foreign
exchange and interest rate risk relating to specific groups of on-balance sheet
assets and liabilities. The following table sets forth, at the dates indicated,
the notional amount of derivative contracts.
91
Notional principal amounts Balance sheet credit exposure(1)
--------------------------------------------------------- ------------------------------------------------
At March 31 At March 31
--------------------------------------------------------- ------------------------------------------------
2004 2005 2006 2006 2004 2005 2006 2006
------------ ------------ ------------ ----------- --------- --------- --------- ---------
(in millions)
Interest rate
products:
Swap agreements..... Rs.1,227,115 Rs.1,737,555 Rs.2,720,713 US$ 61,167 Rs. 1,493 Rs. 439 Rs. 2,800 US$ 63
Others.............. 47,691 89,502 49,390 1,110 (7) (52) 18 -
------------ ------------ ------------ ----------- --------- --------- --------- ---------
Total interest rate
products......... Rs.1,274,806 Rs.1,827,057 Rs.2,770,103 US$ 62,277 Rs. 1,486 Rs. 387 Rs. 2,818 US$ 63
============ ============ ============ =========== ========= ========= ========= =========
Foreign exchange
products:
Forward contracts... Rs. 557,353 Rs. 714,653 Rs. 919,149 US$ 20,664 Rs. 659 Rs. 1,012 Rs. 1,987 US$ 45
Swap agreements..... - 25,194 566 - - 51 1
Others.............. 35,528 79,178 254,882 5,730 (345) 93 446 10
------------ ------------ ------------ ----------- --------- --------- --------- ---------
Total foreign
exchange products Rs. 592,881 Rs. 793,831 Rs.1,199,225 US$ 26,960 Rs. 314 Rs. 1,105 Rs. 2,484 US$ 56
============ ============ ============ =========== ========= ========= ========= =========
-----------------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products on the reporting date.
The notional principal amount of interest rate products increased to
Rs.2,770.1 billion (US$62.3 billion) at year-end fiscal 2006 compared to
Rs.1,827.1 billion (US$41.1 billion) at year-end fiscal 2005. The notional
principal amount of foreign exchange products increased to Rs.1,199.2 billion
(US$27.0 billion) at year-end fiscal 2006 compared to Rs.793.8 billion (US$17.8
billion) at year-end fiscal 2005. This significant increase in the volumes of
interest rates swaps and foreign exchange forward contracts was primarily due to
increased transactions carried out by us on behalf of our customers and growth
in the market for such products. Market volumes have also increased
significantly during this period. As an active player and market-maker in swap
and forward exchange contract markets and due to the fact that reduction in
positions is generally achieved by entering into offsetting transactions rather
than termination/cancellation of existing transactions, we have seen a
substantial increase in the notional principal of our swap portfolio during this
period.
An interest rate swap does not entail exchange of notional principal and
the cash flow arises on account of the difference between the interest rate pay
and receive legs of the swap which is generally much lower than the notional
principal of the swap. A large proportion of interest rate swaps, currency swaps
and forward exchange contracts are on account of market making which involves
providing regular two-way prices to customers or inter-bank counter-parties.
This results in generation of a higher number of outstanding transactions, and
hence a large value of gross notional principal of the portfolio. For example,
if a transaction entered into with a customer is covered by an exactly opposite
transaction entered into with another counter-party, the net market risk of the
two transactions will be zero whereas, the notional principle of the portfolio
will be the sum of both transactions.
Securitization
We primarily securitize commercial loans through "pass-through"
securitizations. In fiscal 2006, we securitized loans which resulted in gains
of Rs.4,032 million (US$91 million) compared to Rs.3,976 million (US$89
million) in fiscal 2005. The gains are reported as a component of interest
income. After the securitization, we generally continue to maintain customer
account relationships and service loans transferred to the securitization
trust. The securitizations are either with or without recourse. In certain
cases, we may enter into derivative transactions such as written put options
and interest rate swaps with the transferees. In February 2006, the Reserve
Bank of India issued guidelines on accounting for securitization of standard
assets. In accordance with these guidelines, in effect since February 1, 2006,
we account for any loss arising on securitization immediately at the time of
sale and we amortize the profit / premium arising on account of securitization
over the life of the asset. Prior to February 1, 2006, profit arising on
account of securitization was recorded at the time of sale.
In certain cases, we write put options, which require us to purchase, upon
request of the holders, securities issued in certain securitization
transactions. The put options seek to provide liquidity to holders of such
instruments. If exercised, we are obligated to purchase the securities at the
pre-determined exercise price.
We may sometimes invest in financial assets such as mortgage loans,
commercial vehicles and trade receivables transferred in pass-through
securitizations. An originator of a typical securitization transfers a portfolio
of financial
92
assets to a special purpose entity (SPE), commonly a Trust. We account for these
investments at inception at acquisition price.
Loan Commitments
We have outstanding undrawn commitments to provide loans and financing to
customers. These loan commitments aggregated Rs.82.6 billion (US$1,858 million)
at year-end fiscal 2006 compared to Rs.37.8 billion (US$850 million) at year-end
fiscal 2005. The interest rate on these commitments is dependent on the lending
rates on the date of the loan disbursement. Further, the commitments have fixed
expiration dates and are contingent upon the borrower's ability to maintain
specific credit standards.
Capital Commitments
We are obligated under a number of capital contracts. Capital contracts are
job orders of a capital nature, which have been committed. Estimated amounts of
contracts remaining to be executed on capital account aggregated Rs.1.5 billion
(US$33 million) at year-end fiscal 2006 compared to Rs.704.4 million (US$16
million) at year-end fiscal 2005 signifying the unpaid amount for acquisition of
fixed assets as per contracts entered into with suppliers.
Operating Lease Commitments
We have commitments under long-term operating leases principally for
premises. The following table sets forth, a summary of future minimum lease
rental commitments at year-end fiscal, for non-cancelable leases.
Lease rental commitments for fiscal in millions)
----------------------------------- ------------
2007............................................................ Rs. 615
2008............................................................ 577
2009............................................................ 564
2010............................................................ 462
2011............................................................ 373
Thereafter...................................................... 807
------------
Total minimum lease commitments................................. Rs. 3,398
============
Guarantees
As a part of our financing activities, we issue guarantees to enhance the
credit standing of our customers. The guarantees are generally for a period not
exceeding 10 years. The credit risk associated with these products, as well as
the operating risks, are similar to those relating to other types of financial
instruments. We have the same appraisal process for guarantees as that for any
other loan product. Guarantees increased by 25% to Rs.201.8 billion (US$4.6
billion) at year-end fiscal 2006 from Rs.161.7 billion (US$3.6 billion) at
year-end fiscal 2005.
The following table sets forth, at the dates indicated, guarantees
outstanding.
At March 31,
-------------------------------------------------------------------------------
2005/2004 2006/2005
2004 2005 % change 2006 2006 % change
----------- ----------- --------- ----------- ---------- ---------
(in millions, except percentages)
Financial guarantees(1).............. Rs. 57,344 Rs. 61,848 7% Rs. 68,660 US$ 1,544 12%
Performance guarantees(2)............ 65,000 99,808 54% 133,079 2,992 33%
----------- ----------- ----------- ----------
Total guarantees .................... Rs. 122,344 Rs. 161,656 32% Rs. 201,739 US$ 4,536 25%
=========== =========== =========== ==========
---------------
(1) Consists of instruments guaranteeing the timely contractual payment of loan
obligations, primarily to foreign lenders on behalf of project companies.
(2) Consists of instruments guaranteeing the performance by a company of an
obligation, such as exports.
93
The following table sets forth contractual obligations on long-term debt,
operating lease and guarantees at year-end fiscal 2006.
Payments due by period
-------------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
------------------------------------ ----------- ----------- ----------- ----------- -----------
(in millions)
Long-term debt obligations.......... Rs. 393,649 Rs. 72,832 Rs. 119,835 Rs. 101,622 Rs. 99,360
Operating lease obligations......... 3,398 615 1,141 835 807
Guarantees
Financial guarantees............. 68,660 44,427 14,084 6,917 3,232
Performance guarantees........... 133,079 56,085 58,250 15,283 3,461
Total............................... ----------- ----------- ----------- ----------- -----------
Rs. 598,557 Rs. 173,730 Rs. 193,218 Rs. 124,749 Rs. 106,860
=========== =========== =========== =========== ===========
Capital Resources
ICICI Bank is subject to the capital adequacy requirements of the Reserve
Bank of India, which are primarily based on the capital adequacy accord reached
by the Basel Committee of Banking Supervision, Bank of International
Settlements in 1988. ICICI Bank is required to maintain a minimum ratio of
total capital to risk adjusted assets of 9.0%, at least half of which must be
Tier 1 capital.
Our total capital adequacy at March 31, 2006 was 13.35%, including Tier I
capital adequacy of 9.20% and Tier II capital adequacy of 4.15%. In accordance
with the Reserve Bank of India guidelines, the risk-weighted assets at March
31, 2006 include home loans to individuals at a risk weight of 75%, other
consumer loans, commercial real estate exposure and capital market exposure at
a risk weight of 125%. The risk-weighted assets at March 31, 2006 also include
the impact of capital requirements for market risk on the held for trading and
available for sale portfolio.
The Reserve Bank of India issued guidelines in October 2005 permitting
banks that have maintained capital of at least 9.0% of the risk-weighted assets
for credit risk and market risk for held for trading and available for sale
categories of investments at March 31, 2006, to transfer the balance in the
investment fluctuation reserve `below the line' in the profit and loss
appropriation account to the statutory reserve, general reserve or balance of
profit and loss account. Pursuant to the above, the entire balance in investment
fluctuation reserve of Rs. 13.20 billion (US$297 million) at year-end fiscal
2006 was transferred to revenue and other reserves and hence considered in the
Tier I capital.
For all securitization deals executed subsequent to February 1, 2006,
capital requirements have been considered in accordance with the Reserve Bank
of India guidelines issued on February 1, 2006. Deferred tax assets of Rs.1.64
billion (US$37 million) and unamortized expenses of Rs.886 million (US$19
million) on account of the early retirement option in 2003 have also been
deducted from Tier I capital. In accordance with the Reserve Bank of India
guidelines, Tier I capital includes Rs.1.50 billion (US$ 34 million) of 20-year
non-cumulative preference shares issued to ITC Limited (face value of Rs.3.50
billion (US$ 79million)) as a part of the scheme for merger of ITC Classic
Finance Limited with ICICI.
In January 2006, the Reserve Bank of India issued guidelines permitting
banks to issue perpetual debt with a call option after not less than 10 years,
to be exercised with its prior approval, for inclusion in Tier I capital up to
a maximum of 15% of total Tier I capital. The Reserve Bank of India also
permitted banks to issue debt instruments with a minimum maturity of 15 years
and a call option after not less than 10 years, to be exercised with its prior
approval, for inclusion in Tier II capital. At March 31, 2006 we had not issued
any hybrid Tier I or upper Tier II instruments. In fiscal 2007 (through
September 20, 2006), we issued debt instruments qualifying for Tier II capital
treatment amounting to Rs. 33.3 billion (US$ 748 million), rupee denominated
Tier I debt instruments amounting to Rs. 7.8 billion (US$ 176 million) and
foreign currency denominated Tier I debt instruments amounting to US$ 340
million.
In February 2005, the Reserve Bank of India issued draft guidelines for
the implementation of the revised capital adequacy framework of the Basel
Committee. These draft guidelines, which are proposed to be effective
94
from April 1, 2006, specify that all banks in India should adopt the
standardized approach for credit risk and the basic indicator approach for
operational risk with effect from March 31, 2007. After adequate expertise has
been developed, both at the banks and at the supervisory levels, some banks may
be allowed to migrate to the internal ratings based approach after obtaining the
approval of the Reserve Bank of India. The guidelines also prescribe a 75.0%
risk weight for retail credit exposures, differential risk weights for other
credit exposures linked to their credit rating, and a capital charge for
operational risk based on a factor of 15.0% of the sum of a bank's net interest
income and non-interest income (excluding extraordinary income).
The following table sets forth, at the dates indicated, risk-based
capital, risk-weighted assets and risk-based capital adequacy ratios computed
in accordance with the applicable Reserve Bank of India guidelines and based on
ICICI Bank's unconsolidated financial statements prepared in accordance with
Indian GAAP.
At March 31,
------------------------------------------------
2005 2006 2006
-------------- ------------- ------------
(in millions)
Tier 1 capital ............................. Rs. 102,463 Rs. 191,815 US$ 4,312
Tier 2 capital ............................. 56,566 86,611 1,947
-------------- ------------- ------------
Total capital .............................. Rs. 159,029 Rs. 278,426 US $6,259
On- balance sheet risk weighted assets ..... Rs. 1,080,528 Rs. 1,557,236 US $35,010
Off-balance sheet risk weighted assets ..... 269,640 528,700 11,886
-------------- ------------- ------------
Total risk weighted assets ................. Rs. 1,350,168 Rs. 2,085,936 US $46,896
============== ============= ============
Tier 1 capital adequacy ratio .............. 7.59% 9.20%
Tier 2 capital adequacy ratio .............. 4.19% 4.15%
-------------- -------------
Total capital adequacy ratio ............... 11.78% 13.35%
============== =============
From time to time, we may access the capital markets through additional
equity or debt offerings to increase our capital resources.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the risk
of unexpected increases in the cost of funding an asset portfolio at appropriate
maturities and the risk of being unable to liquidate a position in a timely
manner at a reasonable price. The goal of liquidity management is to be able,
even under adverse conditions, to meet all liability repayments on time and fund
all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. Incremental operations are principally funded by
accepting deposits from retail and corporate depositors. The deposits are
augmented by borrowings in the short-term inter-bank market and through the
issuance of bonds. Loan maturities and sale of investments also provide
liquidity. Most of the funds raised are used to extend loans or purchase
securities. Generally, deposits are of a shorter average maturity than loans or
investments.
Most of our incremental funding requirements, including replacement of
maturing liabilities of ICICI, which generally had longer maturities, are met
through short-term funding sources, primarily in the form of deposits including
inter-bank deposits. However, a large portion of our assets, primarily the
assets of ICICI and our home loan portfolio, have medium or long-term
maturities, creating a potential for funding mismatches. We actively monitor our
liquidity position and attempt to maintain adequate liquidity at all times to
meet all requirements of all depositors and bondholders, while also meeting the
requirement of lending groups. From time to time, we may buy back some of our
outstanding bonds at our discretion in the open market or in privately
negotiated transactions depending on market conditions, interest rates and other
factors. We seek to establish a continuous information flow and an active
dialogue between the funding and borrowing divisions of the organization to
enable optimal liquidity management. A separate group is responsible for
liquidity management.
Another source of liquidity risk is the put options written by us on the
loans, which we have securitized. These options are binding on us and require us
to purchase, upon request of the holders, securities issued in such securitized
transactions. The options seek to provide liquidity to the security holders. If
exercised, we will be
95
obligated to purchase the securities at the pre-determined exercise price. Under
the Reserve Bank of India's statutory liquidity ratio requirement, we are
required to maintain 25.0% of our total demand and time liabilities by way of
approved securities, such as government of India securities and state government
securities. We maintain the statutory liquidity ratio through a portfolio of
government of India securities that we actively manage to optimize the yield and
benefit from price movements. Under the Reserve Bank of India's cash reserve
ratio requirements, we were required to maintain 5.0% of our demand and time
liabilities in a current account with the Reserve Bank of India.We also have
recourse to the liquidity adjustment facility and the refinance window, which
are short-term funding arrangements provided by the Reserve Bank of India. We
maintain a portfolio of liquid high quality securities that may be sold on an
immediate basis to meet our liquidity needs.
We also have the option of managing liquidity by borrowing in the
inter-bank market on a short-term basis. The overnight market, which is a
significant part of the inter-bank market, is susceptible to volatile interest
rates. These interest rates on certain occasions have touched historical highs
of 100.0% and above. To curtail reliance on such volatile funding, our
liquidity management policy has stipulated daily limits for borrowing and
lending in this market. The limit on daily borrowing is more stringent than the
limit set by the Reserve Bank of India. ICICI Securities Limited, like us,
relies for a certain proportion of its funding on the inter-bank market for
overnight money and is therefore also exposed to similar risk of volatile
interest rates.
We are required to submit gap analysis on a monthly basis to the Reserve
Bank of India. Pursuant to the Reserve Bank of India guidelines, the liquidity
gap (if negative) must not exceed 20.0% of outflows in the 1-14 day and the
15-28 day time category. We prepare fortnightly maturity gap analysis to review
our liquidity position. Static gap analysis is also supplemented by a dynamic
analysis for the short-term, to enable the liability raising units to have a
fair estimate of the short-term funding requirements. In addition, we also
monitor certain liquidity ratios on a fortnightly basis.
The bonds forming part of our Tier II capital are rated AAA by two Indian
credit rating agencies, ICRA Limited and Credit Analysis & Research Limited. The
bonds forming part of our Upper Tier II capital and Tier I capital are rated AAA
by two Indian credit rating agencies, CRISIL Limited and Credit Analysis &
Research Limited. The foreign currency bonds forming part of Tier I capital are
rated Baa2 by Moody's and BB- by S&P. Our term deposits are rated AAA by ICRA
Limited and Credit Analysis & Research Limited. Our certificate of deposits are
rated A1+ by ICRA Limited and PR1+ by Credit Analysis & Research Limited. Our
long-term foreign currency borrowings are rated Baa2 by Moody's Investors
Service, BB+ by Standard and Poor's and BBB by Japan Credit Rating Agency
Limited (JCRA). Our short-term foreign currency ratings are Ba2/Not Prime by
Moody's Investors Service and B by Standard and Poor's. The outlook from
Standard and Poor is positive while the outlook from both Moody's and JCRA is
stable. Any downgrade in these credit ratings, or any adverse change in these
ratings relative to other banks and financial intermediaries, could adversely
impact our ability to raise resources to meet our funding requirements, which in
turn could adversely impact our liquidity position. See also "Risk Factors -
Risks Relating to Our Business - We are subject to credit, market and liquidity
risk which may have an adverse effect on our credit ratings and our cost of
funds".
Capital Expenditure
The following tables set forth, for the periods indicated, certain
information related to capital expenditure by category of fixed assets.
Fiscal 2004
--------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Net assets at
2003 transfers transfers Depreciation March 31, 2004
---------- --------- ----------- ------------ --------------------
(in millions)
Premises............................ Rs. 16,336 Rs. 1,089 Rs. (333) Rs. 1,113 Rs. 15,979 US$ 359
Other fixed assets (including
furniture and fixes)............. 11,295 3,478 (183) 5,788 8,802 198
Assets given on lease............... 21,546 777 (1587) 4,046 16,690 375
---------- --------- ----------- --------- ---------- --------
Total............................... Rs. 49,177 Rs. 5,344 Rs. (2,103) Rs.10,947 Rs. 41,471 US$ 932
========== ========= =========== ========= ========== ========
96
Fiscal 2005
--------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Net assets at
2004 transfers transfers Depreciation March 31, 2004
---------- ---------- ----------- ------------ --------------------
(in millions)
Premises............................ Rs. 17,092 Rs. 2,619 Rs. (126) Rs. 1,650 Rs. 17,935 US$ 403
Other fixed assets (including
furniture and fixes)............. 14,590 3,480 (261) 8,511 9,298 209
Assets given on lease............... 20,736 213 (525) 5,875 14,549 327
---------- --------- ---------- --------- ---------- --------
Total............................... Rs. 52,418 Rs. 6,312 Rs. (912) Rs.16,036 Rs. 41,782 US$ 939
========== ========= ========== ========= ========== ========
Fiscal 2006
--------------------------------------------------------------------------
Cost at
March 31, Additions/ Deletions/ Net assets at
2005 transfers transfers Depreciation March 31, 2004
---------- --------- ----------- ------------ -------------------
(in millions)
Premises............................ Rs. 19,585 Rs. 1,724 Rs. (152) Rs. 2,278 Rs. 18,879 US$ 424
Other fixed assets (including
furniture and fixes)............. 17,809 4,915 (203) 11,710 10,811 243
Assets given on lease............... 20,424 (1,259) 7,427 11,738 264
---------- --------- ---------- --------- ---------- --------
Total............................... Rs. 57,818 Rs. 6,639 Rs. (1614) Rs.21,415 Rs. 41,428 US$ 931
========== ========= ========== ========= ========== ========
Our capital expenditure on property and other assets was Rs.6.6 billion
(US$149 million) for fiscal 2006 compared to Rs.6.3 billion (US$142 million) in
fiscal 2005. Capital expenditure of Rs.4.9 billion (US$111 million) on other
fixed assets in fiscal 2006 included Rs.615.1 million (US$13.8 million) on
software. Our capital expenditure on premises and other assets increased by
18.1% to Rs 6.3 billion (US$141.9 million) for fiscal 2005 compared to fiscal
2004.
Significant Changes
Except as stated in this annual report, no significant changes have
occurred to us since the date of the fiscal 2006 consolidated financial
statements contained in this annual report.
Segment Revenues and Assets
Our operations are classified into the following segments: consumer and
commercial banking segment, investment banking segment and others.
The consumer and commercial banking segment provides medium-term and
long-term project and infrastructure financing, securitization, lease
financing, working capital finance and foreign exchange services to clients.
Further, it provides deposit and loan products to retail customers. The
investment banking segment includes ICICI Bank's treasury operations and the
operations of ICICI Securities Limited, and deals in the debt, equity and money
markets and provides corporate advisory products such as mergers and
acquisition advice, loan syndication advice and issue management services. The
others segment comprises of ICICI Lombard General Insurance Company Limited,
ICICI Prudential Insurance Company Limited, Prudential ICICI Asset Management
Company Limited, Prudential ICICI Trust Limited, ICICI Property Trust, ICICI
Investment Management Company Limited, ICICI Trusteeship Services Limited,
TCW/ICICI Investment Partners LLC and TSI Ventures (India) Private Limited.
Consumer and Commercial Banking Segment
Fiscal 2006 compared to Fiscal 2005
Profit before tax of the commercial banking segment increased to Rs.25.9
billion (US$582 million) in fiscal 2006 from Rs.18.8 billion (US$424 million) in
fiscal 2005, primarily due to an increase in net interest income by Rs.13.5
billion (US$304 million) and non-interest income by Rs.9.5 billion (US$214
million) in fiscal 2006 as compared to fiscal 2005 offset, in part, by an
increase in the provisions and contingencies (excluding provisions for tax) by
Rs.6.4 billion (US$143 million) and an increase of Rs.9.6 billion (US$216
million) in non-interest expense in fiscal 2006 as compared to fiscal 2005.
97
Net interest income increased 52.9% to Rs.39.1 billion (US$879 million) for
fiscal 2006 from Rs.25.6 billion (US$575 million) for fiscal 2005 primarily due
to an increase in average interest-earning assets.
Non-interest income increased 37.9% to Rs.34.6 billion (US$778 million) in
fiscal 2006 from Rs.25.1 billion (US$564 million) in fiscal 2005 primarily due
to growth in commission, exchange and brokerage income. Commission, exchange
and brokerage income increased mainly due to growth in credit card related fees
and third party distribution fees, an increase in income from remittances and
other fees from our international business and growth in fees from corporate
customers.
Non-interest expense increased 31.3% to Rs.40.3 billion (US$905 million) in
fiscal 2006 from Rs.30.7 billion (US$689 million) in fiscal 2005 primarily due
to an increase in employee expenses and enhanced operations and the growth in
retail franchise, including maintenance of ATMs, credit card expenses, call
center expenses and technology expenses.
Provisions and contingencies (excluding provisions for tax) was Rs.7.5
billion (US$169 million) for fiscal 2006 as compared to Rs.1.2 billion (US$26
million) for fiscal 2005 primarily due to increased provisions on standard
assets as per Reserve Bank of India guidelines in fiscal 2006 and a lower level
of write backs in fiscal 2006.
Fiscal 2005 compared to Fiscal 2004
Profit before tax of the commercial banking segment increased to Rs.18.8
billion (US$424 million) in fiscal 2005 as compared to Rs.7.3 billion (US$165
million) in fiscal 2004, primarily due to an increase in net interest income by
Rs.4.6 billion (US$103 million) and non-interest income by Rs.9.0 billion
(US$203 million) in fiscal 2005 as compared to fiscal 2004 and decrease in the
provisions and contingencies (excluding provisions for tax) by Rs.5.7 billion
(US$129 million)in fiscal 2005, offset, in part by an increase of Rs.8.0 billion
(US$178 million) in non-interest expense.
Net interest income increased 21.9% to Rs.25.6 billion (US$575 million) for
fiscal 2005 from Rs.21.0 billion (US$471 million) for fiscal 2004 primarily due
to replacement of higher cost liabilities of ICICI Limited with relatively lower
cost deposits resulting in a positive impact on the net interest income.
Non-interest income increased 56.4% to Rs.25.1 billion (US$564 million) in
fiscal 2005 from Rs.16.0 billion (US$360 million) in fiscal 2004. The large
increase was primarily due to growth in retail liability product income like
account servicing charges and transaction banking fee income from small
enterprises, as well as an increase in transaction banking and other fee income
from corporate banking. There was a significant increase in business volume of
transaction banking services like bankers acceptances, bank guarantees and cash
management services.
Non-interest expense increased by 34.8% to Rs.30.7 billion (US$689 million)
in fiscal 2005 from Rs.22.8 billion (US$512 million) in fiscal 2004 primarily
due to an increase in salary and other administration expenses.
Provisions and contingencies (excluding provisions for tax)decreased to
Rs.1.2 billion (US$26 million) for fiscal 2005 from Rs.6.9 billion (US$155
million) for fiscal 2004 primarily due to lower additions to gross restructured
loans and other non-performing loans and higher level of write-backs in fiscal
2005.
Investment Banking Segment
Fiscal 2006 compared to Fiscal 2005
Profit before tax for the investment banking segment declined to Rs.5.2
billion (US$117 million) in fiscal 2006 compared to Rs.7.0 billion (US$157
million) in fiscal 2005, primarily due to an increase of Rs.5.4 billion (US$123
million) in the provisions and contingencies (excluding provisions for tax) and
an increase of Rs.2.5 billion (US$55 million) in non-interest expenses in fiscal
2006 as compared to fiscal 2005, offset in part by an increase in the
non-interest income by Rs.5.3 billion (US$119 million) in fiscal 2006 as
compared to fiscal 2005.
Net interest income increased 21.6% to Rs.5.0 billion (US$112 million) in
fiscal 2006 from Rs.4.1 billion (US$92 million) in fiscal 2005 primarily due to
an increase in interest income from government securities, offset in part by an
increase in interest on inter-bank borrowings.
Non-interest income increased 55.3% to Rs.14.9 billion (US$334 million) in
fiscal 2006 from Rs.9.6 billion (US$215 million) in fiscal 2005 primarily due to
higher capital gains realized on sale of equity investments.
98
Non-interest expense increased to Rs.5.7 billion (US$127 million) in fiscal
2006 from Rs.3.2 billion (US$72 million) in fiscal 2005 primarily due to an
increase in employee expenses and other administrative expenses.
Provisions and contingencies (excluding provisions for tax) increased to
Rs.8.9 billion (US$201 million) for fiscal 2006 from Rs.3.5 billion (US$78
million) for fiscal 2005 primarily due to an increase in the amount of
amortization of premium on government securities.
Fiscal 2005 compared to Fiscal 2004
Profit before tax for the investment banking segment declined to Rs.7.0
billion (US$157 million) in fiscal 2005 compared to Rs.13.2 billion (US$296
million) in fiscal 2004, primarily due to a decrease in the profit on sale of
investments by Rs.6.8 billion (US$152 million) and an increase in the provisions
and contingencies due to amortization of premium on government securities.
Net interest income increased to Rs.4.1 billion (US$92 million) in fiscal
2005 from Rs.466 million (US$10 million) in fiscal 2004 primarily due to
reduction in cost of borrowings. Profit on sale of investments decreased 48.7%
to Rs.7.1 billion (US$160 million) for fiscal 2005 from Rs.13.9 billion (US$312
million) for fiscal 2004 primarily due to a decrease in trading profits on
government securities and corporate debt securities as a result of the
increasing interest rate environment. Non-interest expense decreased 18.5% to
Rs.3.2 billion (US$72 million) in fiscal 2005 from Rs.3.9 billion (US$89
million) in fiscal 2004.
Provisions and contingencies (excluding provisions for tax) increased by
Rs.4.1 billion (US$93 million) in fiscal 2005 to Rs.3.5 billion (US$78 million)
primarily due to an increase in the amount of amortization of premium on
government securities and a provision of Rs.1.8 billion (US$41 million) made on
transfer of investment from the available for sale category to the held to
maturity category during fiscal 2005. During fiscal 2005, we transferred
investments amounting to Rs.213.5 billion (US$4.8 billion) from the available
for sale category to the held to maturity category in accordance with the
Reserve Bank of India guidelines. The difference between the book value of each
investment and the lower of its acquisition cost and market value on the date
of transfer, amounting to Rs.1.8 billion (US$41 million) was provided for in
the profit and loss account.
Related party transactions
During fiscal 2006, ICICI Bank conducted transactions with related parties,
including joint ventures, associates and key management personnel. The following
represent the significant transactions between ICICI Bank and such related
parties:
Lease of premises and facilities
During fiscal 2006, we charged for lease of premises, facilities and other
administrative costs amounting to Rs.Nil (US$Nil) as compared to Rs.3 million
(US$67,446) in fiscal 2005 (fiscal 2004: Rs. 186 million (US$ 4 million)).
Interest received
During fiscal 2006, we received interest from our key management personnel
amounting to Rs.1 million (US$22,482) as compared to Rs.0.3 million (US$6,745)
in fiscal 2005 (fiscal 2004: Rs. 0.4 million, (US$ 8,993)).
99
Interest paid
During fiscal 2006, we paid interest to our joint ventures amounting to
Rs. Nil as compared to Rs. 19 million (US$ 427,158) in fiscal 2005 (fiscal
2004: Rs. 26 million (US$ 584,532)).
Sale of investments
During fiscal 2006, we sold certain investments to our joint ventures
amounting to Rs. Nil as compared to Rs. 3,637 million (US$ 82 million) in
fiscal 2005 (fiscal 2004: Rs. 220 million (US$ 5 million)). On the sales made
to the joint ventures we accounted for a loss of Rs. Nil in fiscal 2006 as
compared to Rs. 15 million (US$ 328,237) in fiscal 2005 (fiscal 2004: profit of
Rs. 5.1 million (US$ 114,658)).
Purchase of investments
During fiscal 2006, we purchased certain investments from our joint
ventures amounting to Rs.20 million (US$449,640) as compared to Rs.5,001
million (US$112 million) in fiscal 2005 (fiscal 2004: Rs. 1,241 million (US$ 28
million)).
Custodial charges received
During fiscal 2006, we received custodial charges from our joint ventures
amounting to Rs. Nil as compared to Rs. 2 million (US$ 44,964) in fiscal 2005
(fiscal 2004: Rs.2 million (US$ 44,964)).
Fees
During fiscal 2006, we received cash management services fees from our
joint ventures amounting to Rs. Nil as compared to Rs. 15 million (US$ 337,230)
in fiscal 2005 (fiscal 2004: Rs. 20 million (US$ 449,640)).
Related party balances
The table below sets forth the balances payable to/receivable from related
parties as on March 31, 2006:
Joint
Ventures Key
and Management
Items / Related Party Associates Personnel(1) Total
----------------------------------------------- ----------- ------------ -----
(in millions)
Deposits with ICICI Bank........................ Rs.5 Rs.25 Rs.30
Advances........................................ Nil 15 15
Investments of ICICI Bank....................... 33 Nil 33
Investments of related parties in ICICI Bank.... Nil 4 4
The table below sets forth the balances payable to/receivable from related
parties as on March 31, 2005:
Joint Key
Ventures and Management
Items / Related Party Associates Personnel(1) Total
----------------------------------------------- ----------- ------------ -----
(in millions)
Deposits with ICICI Bank....................... Rs. 2 Rs. 37 Rs. 39
Advances....................................... 1 19 20
Investments of ICICI Bank...................... 67 Nil 67
Investments of related parties in ICICI Bank... Nil 2 2
100
The following balances payable to / receivable from the related parties are
included in the balance sheet as on March 31, 2004:
Key
Joint Ventures Management
Items / Related Party and Associates Personnel(1) Total
-------------------------------------------- --------------- ------------ -----------
(in millions)
Deposits with ICICI Bank ................... Rs. 965 Rs. 23 Rs. 988
Advances ................................... Nil 10 10
Investments of ICICI Bank .................. 6,690 Nil 6,690
Investments of related parties in ICICI Bank Nil 2 2
Receivables ................................ 252 Nil 252
Payables ................................... 11 Nil 11
(1) Whole-time directors of the Board and their relatives.
Joint ventures and associates
For fiscal 2006, TCW/ICICI Investment Partners LLC and TSI Ventures (India)
Private Limited were classified as joint ventures whereas for fiscal 2005,
Prudential ICICI Asset Management Company Limited and Prudential ICICI Trust
Limited were classified as joint ventures. Prudential ICICI Asset Management
Company Limited and Prudential ICICI Trust Limited have been accounted as
"subsidiaries" as defined in AS 21 on "Consolidated Financial Statements" in
fiscal 2006. For fiscal 2004 ICICI Prudential Life Insurance Company Limited,
ICICI Lombard General Insurance Company Limited, Prudential ICICI Asset
Management Company Limited, Prudential ICICI Trust Limited, and TCW/ICICI
Investment Partners L.L.C have been classified as joint ventures.
Reconciliation of net profit between Indian GAAP and US GAAP
Our consolidated financial statements are prepared in accordance with
Indian GAAP, which differs, in certain significant aspects from US GAAP. The
following discussion explains the significant adjustments to our consolidated
profit after tax under Indian GAAP for the fiscal years ended March 31, 2006,
2005 and 2004 that would result from the application of US GAAP instead of
Indian GAAP.
Consolidated profit after tax as per Indian GAAP for the year ended March
31, 2006 of Rs. 24.2 billion (US$ 544 million) was higher than the net income
as per US GAAP of Rs. 20.0 billion (US$ 451 million) primarily due to
additional charges to the income statement under US GAAP on account of higher
provisions for loan losses of Rs. 5.2 billion (US$ 117 million) on restructured
and other impaired loans and differences in the accounting for business
combinations of Rs. 1.1 billion (US$ 24 million), including amortization of
intangible assets created on acquisitions, offset in part by amortization of
loan origination costs, net of fees, of Rs. 3.2 billion (US$ 71 million).
Consolidated profit after tax as per Indian GAAP for the year ended March
31, 2005 of Rs. 18.5 billion (US$ 416 million) was higher than the net income as
per US GAAP of Rs. 8.5 billion (US$ 192 million) primarily due to additional
charges to the income statement under US GAAP on account of higher provisions
for loan losses of Rs. 14.7 billion (US$ 330 million) on restructured and other
impaired loans and differences in accounting for derivative transactions under
US GAAP of Rs. 1.5 billion (US$ 33 million), offset in part by amortization of
loan origination costs, net of fees, of Rs. 1.9 billion (US$ 44 million).
Consolidated profit after tax as per Indian GAAP for the year ended March
31, 2004 of Rs. 15.8 billion (US$ 355 million) was higher than the net income
as per US GAAP of Rs. 5.2 billion (US$ 117 million) primarily due to additional
charges to the income statement under US GAAP on account of higher provisions
for loan losses of Rs. 11.6 billion (US$ 260 million) on restructured and other
impaired loans and differences in the accounting for business combinations of
Rs. 1.3 billion (US$ 30 million), including amortization of intangible assets
created on acquisitions, offset in part by amortization of loan origination
costs, net of fees, of Rs. 1.3 billion (US$ 28 million).
101
For a further description of significant differences between Indian GAAP
and US GAAP, a reconciliation of net income and stockholders equity to US GAAP
and certain additional information required under US GAAP, see notes 22 and 23
to our consolidated financial statements included herein.
Critical Accounting Policies
In order to understand our financial condition and results of operations,
it is important to understand our significant accounting policies and the extent
to which we use judgments and estimates in applying those policies. Our
accounting and reporting policies are in accordance with Indian GAAP and conform
to standard accounting practices relevant to our products and services and the
businesses in which we operate. Indian GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported income and expenses during the
reported period. Accordingly, we use a significant amount of judgment and
estimates based on assumptions for which the actual results are uncertain when
we make the estimation.
We have identified three critical accounting policies: accounting for
investments, provisions/write offs on loans and other credit facilities and
transfer and servicing of assets.
Accounting for Investments
We account for investments in accordance with the guidelines on investment
classification and valuation issued by the Reserve Bank of India. We classify
all our investments into held to maturity, available for sale and held for
trading. Under each classification, we further categorize investments into (a)
government securities, (b) other approved securities, (c) shares, (d) bonds and
debentures, (e) subsidiaries and joint ventures and (f) others.
Held to Maturity securities are carried at their acquisition cost or at
amortized cost, if acquired at a premium over the face value. Any premium over
the face value of the securities acquired is amortized over its remaining period
to maturity on a constant effective yield basis. We also evaluate our
investments for any other than temporary diminution in its value.
We compute the market value of our securities classified as available for
sale and held for trading in accordance with the guidelines issued by the
Reserve Bank of India. We amortize the premium, if any, over the face value of
our investments in government securities classified as available for sale over
the remaining period to maturity on a constant effective yield basis. We compute
the market value our quoted investments based on the trades/quotes on the
recognized stock exchanges, SGL account transactions, price list of Reserve
Bank of India or prices declared by Primary Dealers Association of India
jointly with Fixed Income Money Market and Derivatives Association ("FIMMDA"),
periodically.
We compute the market value of our unquoted government securities included
in the Available for Sale and Held for Trading categories as per the rates
published by FIMMDA.
We compute the market value of non-government securities, other than those
quoted on the stock exchanges, wherever linked to the Yield-to-Maturity ("YTM")
rates, with a mark-up (reflecting associated credit risk) over the yield to
maturity rates for government securities published by FIMMDA.
We compute the market value of our unquoted equity shares at the book
value, if the latest balance sheet (which is not more than one year prior to the
date of the valuation) is available or, at Rupee 1.
We compute the market value of our securities scrip-wise and the
depreciation/appreciation is aggregated for each category. Net appreciation in
each category, if any, being unrealized, is ignored, while net depreciation is
provided for.
Provisions / write-offs on loans and other credit facilities
We classify our loans into standard, sub-standard, and doubtful assets
based on the number of days an account is overdue. We create provisions on our
secured and unsecured corporate loans classified as sub-standard and doubtful
assets at rates prescribed by the Reserve Bank of India. Subject to the minimum
provisioning levels
102
prescribed by the Reserve Bank of India, provision on homogeneous loans relating
to retail assets is assessed on a portfolio level, on the basis of days past
due.
We create provisions for our restructured / rescheduled loans based on the
present value of the interest sacrifice provided at the time of restructuring.
We upgrade a restructured non-performing loan to a standard account only
after the specified period, i.e., a period of one year after the date on which
the first payment of interest or of principal, whichever is earlier, is due,
subject to satisfactory performance of the account during the period. We upgrade
all other non-performing loans to a standard account if arrears of interest and
principal are fully paid by the borrower.
We also create general provisions on our standard loans based on the
guidelines issued by the Reserve Bank of India.
Additionally, we also create provisions on individual country exposures
(other than for home country exposures). The countries are categorized into
seven risk categories namely insignificant, low, moderate, high, very high,
restricted and off-credit and provisioning is made on the exposures exceeding 90
days on a graded scale ranging from 0.25% to 100%. For exposures with
contractual maturity of less than 90 days, 25% of the provisions is required to
be held. We do not create provisions if the country exposure (net) in respect of
each country does not exceed 1% of our total funded assets.
Transfer and servicing of assets
We transfer commercial and consumer loans through securitization
transactions. The transferred loans are de-recognised and gains / losses, net of
provisions, are accounted for only if we surrender the rights to benefits
specified in the loan contract. Recourse and servicing obligations are deducted
from proceeds of the sale. We measure the retained beneficial interests in the
loans by allocating the carrying value of the loans between the assets sold and
the retained interest, based on the relative fair value at the date of the
securitization.
Effective February 1, 2006, we account for any loss arising on sale
immediately at the time of sale and the profit/premium arising on account of
sale is amortized over the life of the securities issued or to be issued by the
special purpose vehicle to which the assets are sold.
Recently Issued Accounting Standards
Indian GAAP
Employee benefits
In March 2005, the Institute of Chartered Accountants of India issued the
proposed Accounting Standard 15 (revised 2005) on "Employee Benefits". This
standard specifies the actuarial assumptions and actuarial method to be applied,
defines employees to include part time, casual and temporary employees, allows
deferral of past service costs and requires provisions for compensated absences.
AS 15 (revised 2005) is applicable to us in respect of the accounting
periods commencing on or after April 1, 2006. We are in the process of
estimating the impact of the revised AS 15 on the profit and loss account for
the year ending March 31, 2007.
Provisions on standard assets
The Reserve Bank of India has increased the requirement of general
provisioning on standard loans (relating to personal loans and advances
qualifying as capital market exposure and residential housing loans beyond Rs
2.0 million) to 1% compared to 0.40% earlier. These provisions would have to be
made in a graded manner until March 2007 (i.e., 0.55% by June 30, 2006, 0.70% by
September 30, 2006, 0.85% by December 31, 2006, and 1% by March 31, 2007).
The impact of adoption of revised guidelines of provisions on standard
asset cannot be predicted at this time because it will depend on levels of
standard assets in the future.
103
Floating provisions
The Reserve Bank of India has issued guidelines on the creation and
utilization of floating provisions by banks. The new guidelines require banks to
create floating provisions as per a policy approved by the Board of Directors.
Further, the guidelines allow utilization of these floating provisions only in
certain exceptional circumstances with the prior permission of the Board of
Directors and the Reserve Bank of India.
Investment in venture capital funds
The Reserve Bank of India has issued guidelines on investment in venture
capital funds. The new guidelines require quoted equity shares/bonds/units of
venture capital funds in the bank's portfolio to be held under available for
sale category and marked to market preferably on a daily basis, but at least on
a weekly basis in line with valuation norms for other equity shares as per
existing instructions. Banks' investments in unquoted shares/bonds/units of
venture capital funds made after issuance of these guidelines will be
classified under held to maturity category for an initial period of three years
and will be valued at cost during this period. For the investments made before
issuance of these guidelines, the classification would be done as per the
existing norms. After three years, the unquoted units/shares/bonds should be
transferred to the available for sale category and valued as per the
guidelines.
US GAAP
Fair value measurement
In September 2006, the FASB issued Statement No. 157, Fair value
measurements. It establishes a single authoritative definition of fair value,
sets out a framework for measuring fair value, and requires additional
disclosures about fair value measurements. The Statement applies only to fair
value measurements that are already required or permitted and is expected to
increase the consistency of those measurements. The Statement is effective for
fair-value measures already required or permitted by other standards for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years.
Accounting for uncertainty in income taxes
In July 2006, the FASB issued the final Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, (FIN 48). FIN 48 applies to all tax positions
that relate to income taxes subject to Financial Accounting Standard Board
Statement No. 109, Accounting for Income Taxes, (FAS 109). This includes tax
positions considered to be "routine" as well as those with a high degree of
uncertainty. FIN 48 utilizes a two-step approach for evaluating tax provisions.
Recognition (step one) occurs when an enterprise concludes that a tax provision,
based solely on its technical merits, is more likely than not to be sustained
upon examination. Measurement (step two) is only addressed if step one has been
satisfied (i.e., the position is more likely than not to be sustained). Under
step two, the tax benefit is measured as the largest amount of benefit,
determined on a cumulative probability basis, that is more likely than not to be
realized upon ultimate statement. We are in the process of estimating the impact
of FIN 48 on the profit and loss account for the year ending March 31, 2007.
Taxes Collected from Customers and Remitted to Governmental Authorities
In June 2006, the FASB released EITF Issue No. 06-3 on "How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement`. The Task Force reached a consensus that the presentation
of taxes within the scope of Issue on either a gross basis (included in revenues
and costs) or a net basis (excluded from revenues) is an accounting policy
decision that should be disclosed pursuant to Opinion 22. An entity is not
required to reevaluate its existing policies related to taxes assessed by a
governmental authority as a result of this consensus. In addition, for any such
taxes that are reported on a gross basis, an entity should disclose the amounts
of those taxes in interim and annual financial statements for each period for
which an income statement is presented if those amounts are significant. The
disclosure of those taxes can be done on an aggregate basis. The consensuses in
this Issue should be applied to financial reports for interim and annual
reporting periods beginning after December 15, 2006.
104
Accounting for servicing of financial assets
In March 2006, the FASB issued FASB Statement No. 156, Accounting for
servicing of financial assets, which amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized servicing
assets and servicing liabilities. This Statement requires an entity to recognize
a servicing asset or servicing liability each time it undertakes an obligation
to service a financial asset by entering into a servicing contract in any of the
specified conditions. It requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable. It
permits an entity to use either the amortization method or the fair value
measurement method for subsequent measurement of the asset or liability. This
Statement is applicable for the first fiscal year which begins after September
15, 2006. We are currently considering the impact that adoption of SFAS No. 156.
Hybrid financial instruments
In February 2006, the Financial Accounting Standards Board ('FASB') issued
statement No. 155 `Accounting for Certain Hybrid Financial Instruments.'('SFAS
No. 155'). SFAS No. 155 permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that would otherwise require
bifurcation. It allows an irrevocable election to be made to initially and
subsequently measure such a hybrid financial instrument at fair value, with
changes in fair value recognized through income. Such election needs to be
supported by concurrent documentation. SFAS No. 155 is effective for financial
years beginning after 15 September 2006, with early adoption permitted. We are
currently considering the impact of adoption of SFAS No. 155.
Other-than-temporary impairments of securities
In November 2005 the FASB released FASB Staff Position FSP FAS 115-1 'The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments' which supersedes the guidance provided by EITF 03-1 'The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments'. FSP
FAS 115-1 clarifies when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an impairment loss.
FSP FAS 115-1 is effective for fiscal years beginning after December 15, 2005.
Accounting changes and error corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154") which replaces Accounting Principles Board ("APB")
Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28".
SFAS No. 154 applies to all voluntary changes in accounting principles and
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principles and the reporting of a correction of an error. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
Share based payment
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values.
SFAS No. 123(R) would be applicable to all awards granted, modified or
settled in the first reporting period under US GAAP that begins after June 15,
2005.
Statement 123(R) permits public companies to adopt its requirements using
one of two methods:
105
A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of Statement
123(R) for all share-based payments granted after the effective date and (b)
based on the requirements of Statement 123 for all awards granted to employees
prior to the effective date of Statement 123(R) that remain unvested on the
effective date.
A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption.
The company plans to adopt Statement 123(R) using the modified-prospective
method. As permitted by Statement 123, the company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
The impact of adoption of Statement 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share in our consolidated
financial statements.
106
MANAGEMENT
Directors and Executive Officers
Our Board of Directors, consisting of 17 members at August 31, 2006, is
responsible for the management of our business. Our organizational documents
provide for a minimum of three directors and a maximum of 21 directors,
excluding the government director and the debenture director (defined below), if
any. We may, subject to the provisions of our organizational documents and the
Companies Act, change the minimum or maximum number of directors by a resolution
which is passed at a general meeting by a majority of the present and voting
shareholders. In addition, under the Banking Regulation Act, the Reserve Bank of
India may require us to convene a meeting of our shareholders for the purposes
of appointing new directors to our Board of Directors.
The Banking Regulation Act requires that at least 51% of the directors
should have special knowledge or practical experience in banking and areas
relevant to banking including accounting, finance, agriculture and small scale
industry. All of our directors are professionals with special knowledge of one
or more of the above areas. Of the 17 directors, five are directors who are in
our wholetime employment, or wholetime directors. The appointment of wholetime
directors requires the approval of the Reserve Bank of India and the
shareholders. Under the terms of the loan and guarantee facilities provided by
the Government of India to us, the Government of India is entitled to appoint
and has appointed one representative to our board, currently Mr. Vinod Rai. Of
the remaining 11 independent directors, Mr. N. Vaghul is the non-executive
chairman of our board, Mr. R.K. Joshi is the Chairman-cum-Managing Director of
General Insurance Corporation of India and Mr. T.S. Vijayan is the Chairman of
Life Insurance Corporation of India, which are among ICICI Bank's large
institutional shareholders. One director is a consultant, one is a chartered
accountant and business advisor, one is a professor of finance, one is a
retired company executive, one is from a financial holding company with
investments in insurance and investment management and three are from
industrial companies (including agriculture-based industries). Of the 11
non-wholetime directors, three have specialized knowledge in respect of
agriculture and rural economy or small-scale industry. The Reserve Bank of
India has also prescribed `fit and proper' criteria to be considered while
appointing persons as directors of banking companies. Our directors are
required to make declarations confirming their ongoing compliance of the `fit
and proper' criteria. Our Board of Directors has reviewed the declarations
received from the directors in this regard and determined that all our
directors satisfy the 'fit and proper' criteria.
Pursuant to the provisions of the Companies Act, at least two-thirds of the
total number of directors, excluding the government director and the debenture
director, are subject to retirement by rotation. One-third of these directors
must retire from office at each annual meeting of shareholders. A retiring
director is eligible for re-election. Pursuant to the provisions of the Banking
Regulation Act, none of the directors other than wholetime directors may hold
office continuously for a period exceeding eight years. Pursuant to the Reserve
Bank of India guidelines, a person would be eligible for appointment as director
if he or she is between 35 and 70 years of age.
Our organizational documents also provide that we may execute trust deeds
in respect of our debentures under which the trustee or trustees may appoint a
director, known as the debenture director. The debenture director is not subject
to retirement by rotation and may only be removed as provided in the relevant
trust deed. Currently, there is no debenture director on our Board of Directors.
Our Board of Directors appointed Mr. R. K. Joshi, Chairman-cum-Managing
Director, General Insurance Corporation of India and Mr. Narendra Murkumbi,
founder Managing Director, Shree Renuka Sugars Limited as non-wholetime
directors effective October 13, 2005 and January 20, 2006, respectively. The
shareholders have approved their appointments at the annual general meeting held
on July 22, 2006. Mr. Somesh Sathe who was appointed as a non-wholetime director
effective January 29, 1998 retired from our board effective January 28, 2006, on
completion of eight years as a non-wholetime director as provided in the Banking
Regulation Act.
Mr. N. Vaghul was appointed as a director on March 27, 2002. He was
appointed as non-wholetime chairman of the board effective May 3, 2002 for a
period of three years. The board at its meeting on April 30, 2005 reappointed
him as non-wholetime chairman of the board until April 30, 2009 which has been
approved by the Reserve Bank of India.
107
Our Board of Directors had appointed Ms. Chanda Kochhar and Dr. Nachiket
Mor as Executive Directors effective April 1, 2001, Mr. K.V. Kamath and Ms.
Lalita D. Gupte, previously non-wholetime directors on our board, as Managing
Director & CEO and Joint Managing Director respectively, effective May 3, 2002
and Ms. Kalpana Morparia as Executive Director, effective May 3, 2002. Our board
subsequently re-appointed Ms. Lalita D. Gupte, whose tenure of appointment was
until June 23, 2004, as Joint Managing Director till October 31, 2006. Our board
designated Ms. Kalpana Morparia as Deputy Managing Director effective February
1, 2004. Our board at its meeting held on April 29, 2006 designated Ms. Kalpana
Morparia as Joint Managing Director and Ms. Chanda Kochhar and Dr. Nachiket Mor
as Deputy Managing Directors. The board and the shareholders have approved the
following re-appointments with respect to the wholetime directors of the Bank:
o Mr. K. V. Kamath, Managing Director & CEO, from May 1, 2006, until April
30, 2009.
o Ms. Kalpana Morparia, Joint Managing Director, from May 1, 2006, until
May 31, 2007 (up to the date of retirement).
o Ms. Chanda Kochhar and Dr. Nachiket Mor, Deputy Managing Directors, from
April 1, 2006, until March 31, 2011.
The Reserve Bank of India has approved the re-appointment of Mr. K. V.
Kamath up to April 30, 2009 and that of Ms. Chanda Kochhar and Dr. Nachiket Mor
up to March 31, 2009 and of Ms. Kalpana Morparia up to May 31, 2007.
In order to comply with the provisions of the Companies Act and our
organizational documents, Ms. Lalita D. Gupte and Ms. Kalpana Morparia will be
subject to retirement by rotation if at any time the number of non-rotational
directors exceeds one-third of the total number of directors. If they are
re-appointed as directors immediately upon retirement by rotation, they will
continue to hold their offices as wholetime directors, and the retirement by
rotation and re-appointment shall not be deemed to constitute a break in their
appointment. Our other executive officers may hold office until they retire,
unless they are discharged earlier by us.
Our Board of Directors had the following members at August 31, 2006:
Name, Designation and Profession Age Date of Appointment Other appointments
----------------------------------------- ------- ---------------------- --------------------------------------------------
Mr. Narayanan Vaghul
Chairman 70 March 27, 2002 Chairman
Asset Reconstruction Company
Chairman: (India) Limited
Board Governance & Remuneration GIVE Foundation
Committee Himatsingka Seide Limited
Credit Committee ICICI Knowledge Park
Customer Service Committee Risk Mahindra World City Developers Limited (formerly
Committee Mahindra Industrial Park Limited)
Profession: Pratham India Education Initiative
Development Banker Director
Air India Limited
Air India Air Transport Services Limited
Air India Engineering Services Limited
Apollo Hospitals Enterprise Limited
Azim Premji Foundation
Hemogenomics Private Limited
Mahindra & Mahindra Limited
Mittal Steel Caribbean
Mittal Steel Company NV
Nicholas Piramal India Limited
Wipro Limited
108
Name, Designation and Profession Age Date of Appointment Other appointments
----------------------------------------- ------- ---------------------- --------------------------------------------------
Mr. Sridar Iyengar 59 April 30, 2005 Director
American India Foundation
Chairman: Foundation for Democratic Reforms in India Inc.
Audit Committee Infosys Technologies Limited
Mango Analytics Inc.
Profession: Onmobile Asia Pacific Private Limited
Business Advisor Progeon Limited
Rediff.com India Limited
Rediff Holdings Inc.
TiE Inc.
Mr. Ram Kishore Joshi 59 October 13, 2005 Chairman-cum-Managing Director
Chairman-cum-Managing Director General Insurance Corporation of
India
Profession: Chairman
Company Executive GIC Asset Management Company Limited
GIC Housing Finance Limited
Loss Prevention Association of India Limited
Director
Andhra Pradesh Paper Mills Limited
Deposit Insurance and Credit Guarantee Corporation
Export Credit Guarantee Corporation of India Limited
Indian Register of Shipping
Kenindia Assurance Company Limited
Life Insurance Corporation of India
The New India Assurance Company Limited
Mr. Lakshmi Niwas Mittal 56 May 3, 2002 Director
Artha Limited
Profession: Galmatias Limited
Industrialist LNM Capital Limited
LNM Internet Ventures Limited
Lucre Limited
Mittal Steel Company N.V.
Mittal Steel Company Limited
Mittal Steel South Africa Limited
Mittal Steel USA Inc.
Nestor Limited
Nuav Limited
ONGC Mittal Energy Limited
ONGC Mittal Energy Services Limited
Pratham UK Limited
Tommyfield Limited
President
Ispat Inland U.L.C.
Mr. Narendra Murkumbi 36 January 20, 2006 Managing Director
Shree Renuka Sugars Limited
Profession: Director
Industrialist Murkumbi Bioagro Private Limited
Murkumbi Industries Private Limited
Director & CEO
Renuka Commodities DMCC, Dubai
109
Name, Designation and Profession Age Date of Appointment Other appointments
----------------------------------------- ------- ---------------------- --------------------------------------------------
Mr. Anupam Pradip Puri 60 May 3, 2002 Director
Dr. Reddy's Laboratories Limited
Profession: Mahindra & Mahindra Limited
Management Consultant Tech Mahindra Limited (formerly Mahindra British
Telecom Limited)
Mr. Vinod Rai 58 January 3, 2003 Director
Special Secretary (Financial Sector) Bank of Baroda
Ministry of Finance, Government of IDBI Limited
India Indian Infrastructure Finance Company Limited
Infrastructure Development Finance Company
Profession: Limited
Government Service Small Industries Development Bank of
India
Mr. Mahendra Kumar Sharma 59 January 31, 2003 Vice-Chairman
Chairman: Hindustan Lever Limited
Fraud Monitoring Committee Director
Share Transfer & Shareholders'/Investors' Hind Lever Trust Limited
Grievance Committee Lever Associated Trust Limited
Unilever India Exports Limited (formerly Indexport
Alternate Chairman: Limited)
Audit Committee Unilever Nepal Limited (formerly Nepal Lever Limited)
Profession:
Company Executive
Mr. Priya Mohan Sinha 66 January 22, 2002 Chairman
Bata India Limited
Profession: Director
Professional Manager Azim Premji Foundation
Indian Oil Corporation Limited
Lafarge India Private Limited
Wipro Limited
Prof. Marti Gurunath Subrahmanyam 60 May 3, 2002 Director
Infosys Technologies Limited
Profession: International School of
Professor Business Management Limited
Nomura Asset Management (U.S.A.), Inc.
Supply Chainge Inc.
The Animi Offshore Fund Limited
The Animi Offshore Concentrated Risk Fund
Usha Communication Inc.
Director -- Board of Governors
National Institute of
Securities Markets
Director -- Advisory Board
Metahelix Life Sciences Private Limited
Microcredit Foundation of India
110
Name, Designation and Profession Age Date of Appointment Other appointments
----------------------------------------- ------- ---------------------- --------------------------------------------------
Mr. T.S. Vijayan 53 April 30, 2005 Chairman
Life Insurance Corporation of India
Profession: Non-executive Vice Chairman
Company Executive LIC Housing Finance Limited
Life Insurance Corporation (Nepal) Limited
LIC (Lanka) Limited
LIC (Mauritius) Offshore Limited
LIC Mutual Fund Asset Management Company
Limited (formerly Jeevan Bima Sahyog Asset
Management Company Limited)
Deputy Chairman
LIC International B.S.C
Director
General Insurance Corporation of India
Kenindia Assurance Company Limited
LIC HFL Care Homes Limited
National Commodity & Derivatives Exchange
Limited
Saudi Indian Insurance Company
Mr. V. Prem Watsa 56 January 29, 2004 Chairman & CEO
Fairfax Financial Holdings Limited
Profession: Chairman
Company Executive Crum & Foster Holdings Corp.
Northbridge Financial Corporation
TIG Holdings, Inc.
Director
Lindsey Morden Group Inc.
Odyssey Re Holdings Corp.
Mr. Kundapur Vaman Kamath 58 April 17, 1996 Chairman
Managing Director & CEO ICICI Bank Canada
Chairman: ICICI Bank Eurasia Limited Liability Company
Committee of Directors (formerly Investment Credit Bank Limited Liability
Company)
Profession: ICICI Bank UK Limited
Company Executive ICICI Lombard General Insurance Company Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
ICICI Venture Funds Management Company
Limited
Prudential ICICI Asset Management Company Limited
Director
Indian Institute of Management, Ahmedabad
Visa International Asia Pacific Regional Board
Director -- Board of Governors
Indian Institute of Information Technology
Member -- Governing Board
Indian School of Business
111
Name, Designation and Profession Age Date of Appointment Other appointments
----------------------------------------- ------- ---------------------- --------------------------------------------------
Ms. Lalita Dileep Gupte 57 September 12, 1994 Director
Joint Managing Director ICICI Bank Canada
Chairperson: ICICI Bank Eurasia Limited Liability Company (formerly
Asset Liability Management Committee Investment Credit Bank Limited Liability Company)
ICICI Bank UK Limited
Profession: ICICI Lombard General Insurance Company Limited
Company Executive ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
ICICI Venture Funds Management Company
Limited
Ms. Kalpana Morparia 57 May 3, 2002 Chairperson
Joint Managing Director ICICI Investment Management Company Limited
Director
Profession: ICICI Lombard General Insurance Company
Company Executive Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities Limited
ICICI Venture Funds Management Company
Limited
Prudential ICICI Asset Management Company Limited
Ms. Chanda Kochhar 44 April 1, 2001 Chairperson
Deputy Managing Director ICICI Home Finance Company Limited
Director
Profession: ICICI Prudential Life Insurance Company Limited
Company Executive
Dr. Nachiket Mor 42 April 1, 2001 Director
Deputy Managing Director Care, USA
ICICI Home Finance Company Limited
Profession: ICICI Knowledge Park
Company Executive ICICI Securities Limited
ICICI Venture Funds Management Company
Limited
Pratham India Education Initiative
112
Our executive officers at August 31, 2006 were as follows:
Total Total
stock stock
Total Bonus stock stock Share- options options
remuneration for options options holdings granted outstand-
Designation Years in fiscal fiscal granted granted at through ing at
and Respon- of work 2006(1) 2006(2) in fiscal in fiscal August 31, August 31, August 31,
Name Age sibilities experience (in Rupees) (Rupees) 2006(4) 2007(6)(7) 2006(3) 2006(5) 2006(5)
------------------- ------- ----------- ----------- ------------ ----------- ---------- ------------ --------- --------- -----------
Mr. K.V. Kamath 58 Managing 35 19,564,981 5,215,200 250,000 250,000 164,500 1,275,000 1,090,000
Director & CEO
Ms. Lalita D. Gupte 57 Joint Managing 35 14,894,164 3,911,400 165,000 165,000 111,041 960,000 802,500
Director -
International
Banking
Ms. Kalpana Morparia 57 Joint Managing 31 10,511,539 3,180,000 150,000 165,000 21,190 805,000 785,000
Director -
Corporate
Centre
Ms. Chanda D. Kochhar 44 Deputy Managing 22 9,003,983 2,385,000 125,000 125,000 176,425 630,000 402,500
Director -
Retail &
Corporate
Banking
Dr. Nachiket Mor 42 Deputy Managing 19 7,389,013 2,385,000 125,000 125,000 40,000 627,000 360,000
Director -
Rural Banking &
Proprietary
Trading
Mr. Bhargav Dasgupta 40 Senior General 16 4,781,874 2,640,000 75,000 75,000 10,675 323,475 286,900
Manager
Mr. Sanjiv Kerkar 55 Senior General 31 7,231,753 2,266,200 37,500 25,000 51,089 248,000 160,000
Manager
Ms. Vishakha Mulye 37 Chief Financial 13 4,330,531 2,400,000 75,000 75,000 36,555 285,975 234,920
Officer and
Treasurer
Ms. Ramni Nirula 54 Senior General 30 5,295,326 2,746,800 37,500 40,000 69,800 322,000 211,000
Manager
Ms. Madhabi Puri-Buch 40 Senior General 17 5,054,338 2,760,000 75,000 75,000 1,411 354,900 297,450
Manager
Mr. K. Ramkumar 45 Senior General 21 4,999,981 2,640,000 75,000 75,000 - 255,000 222,000
Manager
Mr.V. Vaidyanathan 38 Senior General 16 6,172,241 2,760,000 75,000 75,000 55,960 334,900 211,250
Manager
Mr. Pravir Vohra 52 Senior General 31 4,964,145 2,400,000 37,500 40,000 21,000 179,500 135,500
Manager
---------------------------------------
(1) Including ICICI Bank's contribution to the superannuation fund, provident
fund and leave travel allowance and excluding bonus payable for fiscal 2005
which was paid in fiscal 2006. Includes aggregate leave travel allowance
availed during the year: K.V. Kamath - Rs 2,050,000 (US$46,088), Lalita D.
Gupte - Rs.4,050,000 (US$91,052), Kalpana Morparia - Rs.1,250,000
(US$28,103), Chanda D. Kochhar - Rs.2,187,500 (US$49,179), Nachiket Mor -
Rs.Nil (US$Nil) and all other executive officers Rs.5,937,250 (US$133,481)
and leave encashment : K.V. Kamath - Rs.1,230,000 (US$27,653), Lalita D.
Gupte - Rs.676,500 (US$15,209), Kalpana Morparia - Rs.550,000 (US$12,365)
and Chanda D. Kochhar - Rs.12,500 (US$281), Nachiket Mor - Rs.Nil (US$Nil)
and all other executive officers Rs.1,133,651 (US$25,487).
(2) Bonus for fiscal 2006 was paid in fiscal 2007.
(3) Executive officers and directors as a group held around 0.5% of ICICI
Bank's equity shares as of this date.
(4) Each stock option, once exercised, is equivalent to one equity share of
ICICI Bank. ICICI Bank granted these stock options to its executive
officers at no cost. See "-Compensation and Benefits to Directors and
Officers - Employee Stock Option Scheme" for a description of the other
terms of these stock options.
(5) In accordance with the Scheme of Amalgamation, directors and employees of
ICICI have received stock options in ICICI Bank equal to half the number of
the outstanding unexercised stock options they held in ICICI with the
exercise price of these options being equal to twice the
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exercise price for the ICICI stock options exchanged. The stock options
mentioned above include ICICI stock options converted into ICICI Bank stock
options on this basis.
(6) Through August 31, 2006.
(7) Ms. Madhabi Puri Buch was granted 50,000 stock options of 3i Infotech
Limited in her capacity as a Director of 3i Infotech Limited. The exercise
price of each option is Rs. 185. The options vest over three years from the
date of grant. The last date for exercise of the options is April 10, 2016.
Mr. K.V. Kamath is a mechanical engineer and a post-graduate in business
management from the Indian Institute of Management, Ahmedabad. He joined ICICI
in 1971 and worked in the areas of project finance, leasing, resources and
corporate planning. In 1988, he left ICICI to join the Asian Development Bank,
where he worked for six years. In January 1995, he joined a private sector group
in Indonesia as advisor to its chairman. Mr. Kamath joined the Board of
Directors of ICICI in October 1995. He was appointed Managing Director & CEO of
ICICI in May 1996 and was re-appointed in May 2001. Mr. Kamath was a
non-wholetime director on the board of ICICI Bank from April 1996. Effective May
3, 2002 our board appointed Mr. Kamath as Managing Director & CEO. Our board,
shareholders and the Reserve Bank of India have approved his re-appointment as
Managing Director & CEO until April 30, 2009.
Ms. Lalita D. Gupte has a Bachelor of Arts degree and also holds a Masters
degree in management science from the Jamnalal Bajaj Institute of Management
Studies, University of PlaceNameMumbai. She joined ICICI in 1971,
where she worked in the areas of project finance, leasing, resources and
treasury, and credit operations. She joined the Board of Directors of ICICI in
June 1994 as Executive Director and was designated as Deputy Managing Director
in 1996. In April 1999, she was designated as the Joint Managing Director and
Chief Operating Officer of ICICI. From July 2001, she was designated as Joint
Managing Director and Chief Operating Officer - International Business. Ms.
Gupte was a non-wholetime director on the board of ICICI Bank from September
1994. Effective May 3, 2002, our board appointed Ms. Gupte as Joint Managing
Director. Our board, shareholders and Reserve Bank of India have approved her
re-appointment as Joint Managing Director until October 31, 2006. She is
currently in charge of the international operations.
Ms. Kalpana Morparia holds Bachelor's degrees in science and law. She
worked in the legal department of ICICI from 1975 to 1994. From 1996, when she
was designated as General Manager, she was in charge of the legal, planning,
treasury and corporate communications departments. In 1998, she was designated a
Senior General Manager of ICICI. She joined the Board of Directors of ICICI in
May 2001. Effective May 3, 2002 our board appointed Ms. Morparia as an Executive
Director. Effective February 1, 2004, our board designated her as Deputy
Managing Director. Effective April 29, 2006, our board elevated her as Joint
Managing Director. She is currently in charge of the Corporate Centre which
includes transaction processing and operations for wholesale, retail, rural and
international banking, strategy, risk management, compliance, audit, legal,
finance, treasury, secretarial, human resources management, corporate
communications and facilities management and administration functions. Our
board, shareholders and the Reserve Bank of India have approved her
re-appointment as a wholetime director until May 31, 2007.
Ms. Chanda D. Kochhar holds a management degree from the Jamnalal Bajaj
Institute of Management Studies, Mumbai and a degree in cost and works
accountancy from the Institute of Cost and Works
Accountants of India. She started her career in 1984 with ICICI in its project
finance department and has worked in the areas of corporate credit,
infrastructure financing, e-commerce, strategy and retail finance. Ms. Kochhar
was designated a Senior General Manager of ICICI in 2000 and was in charge of
its retail business over the past six years. She was appointed to our board as
an Executive Director in April 2001. Effective April 29, 2006, our board
elevated her as Deputy Managing Director. She is currently responsible for
retail and corporate banking. Our board and shareholders have approved her
re-appointment as a wholetime director until March 31, 2011. The Reserve Bank of
India has approved her re-appointment until March 31, 2009.
Dr. Nachiket Mor holds a post-graduate diploma in finance management from
the Indian Institute of Management, Ahmedabad and a Doctorate of Philosophy in
Financial Economics from the University of PlaceNamePennsylvania,
Philadelphia, USA. He started his career as an officer in the corporate
planning and policy cell of ICICI in 1987. He has worked in the areas of
project and corporate finance, corporate planning and treasury. Dr. Mor was
designated a Senior General Manager of ICICI in 2000 and was in charge of
treasury. He was appointed to
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our Board of Directors as an Executive Director in April 2001. Effective April
29, 2006, our board elevated him as Deputy Managing Director. He is currently
responsible for rural banking, government banking, structural rate risk
management and proprietary trading. Our board and shareholders have approved
his re-appointment as a wholetime director until March 31, 2011. The Reserve
Bank of India has approved his re-appointment until March 31, 2009.
Mr. Bhargav Dasgupta is an engineer and has a post graduate degree in
management from the Indian Institute of Management, Bangalore. He joined ICICI
in 1992 in the project finance department. In 2003 he was designated as Senior
General Manager of ICICI Bank. Currently, he is responsible for international
banking.
Mr. K. Ramkumar is a science graduate from Madras University with
post-graduate diploma in industrial relations and labor laws. He worked with ICI
India before joining ICICI in 2001 in the human resources department. In 2004,
he was designated as Senior General Manager of ICICI Bank and he is currently in
charge of human resources management, facilities management and administration
and retail infrastructure.
Ms. Madhabi Puri-Buch is a graduate in mathematical economics and has a
post-graduate degree in management from the Indian Institute of Management,
Ahmedabad. She joined ICICI in 1989 in the project finance department. She left
ICICI in 1992 and worked in ANZ Grindlays Bank and ORG MARG Research before
joining ICICI again in January 1997 in the planning and treasury department. In
2003 she was designated as Senior General Manager of ICICI Bank. Currently, she
is responsible for operations and service delivery and the corporate brand
management function.
Mr. Pravir Vohra is a post-graduate in economics from Delhi University. He
was Joint President in 3i Infotech Limited (formerly ICICI Infotech Limited)
before he joined ICICI Bank in 2002. He was designated as Senior General Manager
in 2005 and he is currently in charge of technology.
Ms. Ramni Nirula is a post-graduate in management studies from Delhi
University. She joined ICICI in 1975 and held various positions in the northern
regional office of ICICI. She was designated as Senior General Manager of ICICI
in fiscal 2000. She was the Managing Director & CEO of ICICI Securities from
January 1, 2003 to January 31, 2004. Thereafter she was responsible for
government banking, rural and micro-banking and agri-business. In November 2005,
she took over as head of corporate banking.
Mr. Sanjiv Kerkar is a chemical engineer and holds a management degree from
the Jamnalal Bajaj Institute of Management Studies, University of Mumbai. He
worked with ICICI from 1979 to 1993. Mr. Kerkar worked with Asian Finance and
Investment Company from 1993 to 1996. In 1996, he re-joined ICICI and was
designated as Senior General Manager of ICICI in 1998. Currently, Mr. Kerkar
heads the Organizational Excellence Group, which is responsible for our quality
initiatives.
Mr. V. Vaidyanathan has Bachelor's and Master's degrees in business
administration from Birla Institute of Technology & Science, Ranchi. He worked
in Citibank N.A. before joining ICICI in 2000 in the personal financial services
division. In 2003 he was designated as Senior General Manager of ICICI Bank.
Currently, he is responsible for retail banking.
Ms. Vishakha Mulye is a commerce graduate from Mumbai University, and a
chartered accountant. Ms. Mulye joined ICICI in 1993 in the project finance
department. She was designated as Senior General Manager in 2004. Currently she
is our Chief Financial Officer and Treasurer.
In September 2006, Ms. Madhavi Soman joined ICICI Bank as Senior General
Manager responsible for rural banking and Mr. Sashidharan Menon joined ICICI
Bank as Senior General Manager responsible for internal audit.
Corporate Governance
Our corporate governance policies recognize the accountability of the board
and the importance of making the board transparent to all its constituents,
including employees, customers, investors and the regulatory authorities, and to
demonstrate that the shareholders are the ultimate beneficiaries of our economic
activities.
Our corporate governance framework is based on an effective independent
board, the separation of the board's supervisory role from the executive
management and the constitution of board committees, generally comprising a
115
majority of independent directors and chaired by an independent director, to
oversee critical areas and functions of executive management.
Our corporate governance philosophy encompasses not only regulatory and
legal requirements, such as the terms of listing agreements with stock
exchanges, but also several voluntary practices aimed at a high level of
business ethics, effective supervision and enhancement of value for all
stakeholders.
Our board's role, functions, responsibility and accountability are clearly
defined. In addition to its primary role of monitoring corporate performance,
the functions of our board include:
o approving corporate philosophy and mission;
o participating in the formulation of strategic and business plans;
o reviewing and approving financial plans and budgets;
o monitoring corporate performance against strategic and business plans,
including overseeing operations;
o ensuring ethical behavior and compliance with laws and regulations;
o reviewing and approving borrowing limits;
o formulating exposure limits; and
o keeping shareholders informed regarding plans, strategies and performance.
To enable our Board of Directors to discharge these responsibilities
effectively, executive management gives detailed reports on our performance to
the board on a quarterly basis.
Our board functions either as a full board or through various committees
constituted to oversee specific operational areas. These board committees meet
regularly. The constitution and main functions of the various committees are
given below.
In view of the similarity of powers and functions of the Agriculture &
Small Enterprises Business Committee and the Credit Committee, Agriculture &
Small Enterprises Business Committee was dissolved effective October 13, 2005
and the powers of the Agriculture & Small Enterprises Business Committee were
vested in the Credit Committee. Further, as the Bank's budget and other
strategic issues were being reviewed directly by the Board, the Business
Strategy Committee was dissolved with effect from April 29, 2006. Further, a
separate Customer Service Committee was constituted by the Board at its Meeting
held on July 22, 2006 and the powers relating to customer service (which earlier
vested with the Audit Committee and subsequently with the Risk Committee) have
been delegated to this Committee.
Audit Committee
The Audit Committee comprises three independent directors - Mr. Sridar
Iyengar, who is a chartered accountant, Mr. M.K. Sharma and Mr. Narendra
Murkumbi. Mr. Sridar Iyengar is the Chairman of the Committee. Mr. M.K. Sharma
was appointed as Alternate Chairman of the Committee effective July 22, 2004.
Our Board of Directors has determined that Mr. Sridar Iyengar qualifies as an
audit committee financial expert.
The Audit Committee provides direction to the audit function and monitors
the quality of the internal and statutory audit. The responsibilities of the
Audit Committee include overseeing the financial reporting process to ensure
fairness, sufficiency and credibility of financial statements, recommendation of
appointment and removal of central and branch statutory auditors and chief
internal auditor and fixation of their remuneration, approval of payments to
statutory auditors for other services rendered by them, review of functioning of
Whistle Blower Policy, review of the quarterly financial statements before
submission to Board, review of the adequacy of internal control systems and the
internal audit function, review of compliance with the inspection and audit
reports and reports of statutory auditors, review of the findings of internal
investigations, review of statement of significant related party
116
transactions, review of management letters/letters of internal control issued by
statutory auditors, discussion on the scope of audit with external auditors and
examination of reasons for substantial defaults, if any, in payment to
stakeholders. The Audit Committee provides direction to the internal audit
function and monitors the quality of internal and statutory audit.
In addition, as required by Rule 10A-3 under the Exchange Act, the Audit
Committee is empowered to appoint and oversee the work of any registered public
accounting firm, establish procedures for the receipt and treatment of
complaints regarding accounting and auditing matters, engage independent counsel
and provide for appropriate funding for compensation to be paid to any advisors.
All audit and non-audit services to be provided by our principal
accountants are pre-approved by the Audit Committee before such services are
provided to us.
Board Governance & Remuneration Committee
The Board Governance & Remuneration Committee comprises five independent
directors - Mr. N. Vaghul, Mr. Anupam Puri, Mr. M.K. Sharma, Mr. P. M. Sinha,
and Prof. Marti G. Subrahmanyam. Mr. N. Vaghul is the Chairman of the Committee.
The functions of the Board Governance & Remuneration Committee include
recommendation of appointments to our board, evaluation of the performance of
the Managing Director & CEO and other wholetime Directors on predetermined
parameters, recommendation to our board of the remuneration (including
performance bonuses and perquisites) to wholetime directors, approving the
policy for and quantum of bonus payable to the members of the staff, framing
guidelines for the employees stock option scheme and recommendation of grant of
stock options to the staff and wholetime directors of ICICI Bank and its
subsidiary companies.
Credit Committee
The Credit Committee comprises five directors - Mr. N. Vaghul, Mr. Narendra
Murkumbi Mr. M. K. Sharma, Mr. P. M. Sinha and Mr. K. V. Kamath. The majority of
the members of the committee are independent directors and Mr. N. Vaghul is the
Chairman of the Committee.
The functions of this Committee include review of developments in key
industrial sectors and approval of credit proposals in accordance with the
authorization approved by our board. The functions of this Committee also
include review of our business strategy in the agribusiness and small
enterprises segments and review of the quality of the agricultural lending and
small enterprises finance credit portfolio.
Customer Service Committee
The Customer Service Committee comprises five directors - Mr. N. Vaghul,
Mr. Narendra Murkumbi, Mr. M. K. Sharma, Mr. P. M. Sinha and Mr. K. V. Kamath.
The majority of the members of the committee are independent directors and Mr.
N. Vaghul is the Chairman of the Committee.
The functions of this Committee include review of customer service
initiatives and overseeing the functioning of the Customer Service Council.
Fraud Monitoring Committee
The Committee comprises five directors - Mr. M.K. Sharma, Mr. Narendra
Murkumbi, Mr. K.V. Kamath, Ms. Kalpana Morparia and Ms. Chanda D. Kochhar. Mr.
M.K. Sharma is the Chairman of the Committee.
The functions of the Fraud Monitoring Committee include monitoring and
review of all instances of frauds involving Rs.10.0 million (US$224,820) and
above.
117
Risk Committee
The Risk Committee comprises five directors - Mr. N. Vaghul, Mr. Sridar
Iyengar, Prof. Marti G. Subrahmanyam, Mr. V. Prem Watsa and Mr. K. V. Kamath.
The majority of the members of this committee are independent directors and Mr.
N. Vaghul is the Chairman of the Committee.
This Committee reviews risk management policies in relation to various
risks (credit, portfolio, liquidity, interest rate, off-balance sheet and
operational risks), investment policies and strategy and regulatory and
compliance issues in relation thereto.
Share Transfer & Shareholders'/Investors' Grievance Committee
The Share Transfer & Shareholders'/Investors' Grievance Committee comprises
four directors - Mr. M.K. Sharma, Mr. Narendra Murkumbi, Ms. Kalpana Morparia
and Ms. Chanda D. Kochhar. Mr. M.K. Sharma, an independent director, is the
Chairman of the Committee.
The functions and powers of the Share Transfer & Shareholders'/Investors'
Grievance Committee include approval and rejection of transfer or transmission
of equity and preference shares, bonds, debentures and securities, issue of
duplicate certificates, allotment of shares and securities issued from time to
time, including those under stock options, review and redressal of shareholders'
and investors' complaints, delegation of authority for opening and operation of
bank accounts for payment of interest, dividend and redemption of securities and
the listing of securities on stock exchanges.
Committee of Directors
The Committee of Directors comprises all five wholetime directors and Mr.
K.V. Kamath, Managing Director & CEO is the Chairman of the Committee.
The powers of the Committee include credit approvals as per authorization
approved by our board, approvals in respect of borrowing and treasury operations
and premises and property related matters and review of performance against
targets for various business groups.
Asset-Liability Management Committee
The Asset Liability Management Committee comprises the Joint Managing
Directors and Deputy Managing Directors and Ms. Lalita D. Gupte, Joint Managing
Director, is the Chairperson of the Committee.
The functions of the Committee include management of our balance sheet,
review of the asset-liability profile with a view to manage the market risk
exposure assumed by us and deciding our deposit rates and prime lending rate.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics for our directors and
all our employees, which is filed as an exhibit to this report. In fiscal 2006,
we have not made any amendments to any provision of the Code that is applicable
to our executive officers, nor have we granted a waiver from any provision of
the Code to any of our executive officers.
Principal Accountant Fees and Services
The total fees (excluding service tax and out of pocket expenses) paid to
our principal accountant relating to audit of consolidated financial statements
for fiscal 2005 and fiscal 2006 and the fees for other professional services
billed in fiscal 2005 and fiscal 2006 are as follows:
118
Convenience translation
into US$
---------------------------
Year ended March 31, Year ended March 31,
--------------------------- ---------------------------
2005 2006 2006
------------ -------------- ---------------------------
(in millions)
Audit
Audit of ICICI Bank Limited and its subsidiaries ........ Rs.s 27.8 Rs. 38.5 US$ 865,929
Audit-related services
Opinion on non-statutory accounts presented in ........
Indian Rupees ....................................... 6.7 7.9 176,896
Others ..................................................... -- 6.0 134,892
Sub-total .................................................. 34.5 52.4 1,177,717
Non-audit services .........................................
Tax services ............................................
Tax compliance ........................................ 1.1 1.2 27,571
Other services .......................................... -- 4.9 110,541
Sub-total .................................................. 1.1 6.1 138,112
------------ -------------- ---------------------------
Total ...................................................... 35.6 58.5 1,315,829
------------ -------------- ---------------------------
Fees for "other services" under the non-audit services category are
principally fees related to certification services. Our Audit Committee approved
the fees paid to our principal accountant relating to audit of consolidated
financial statements for fiscal 2006 and fees for other professional services
billed in fiscal 2006. Our Audit Committee pre-approves all significant
assignments undertaken for us by our principal accountant.
Summary Comparison of Corporate Governance Practices
The following is a summary comparison of significant differences between
our corporate governance practices and those required by the NYSE for US
issuers.
Independent directors. A majority of our board are independent directors,
as defined under applicable Indian legal requirements. Under these requirements,
directors are not independent if they have any material pecuniary relationship
or transactions with us, our management or our subsidiaries. We have not made a
determination as to whether our directors would be considered independent under
the NYSE rules. Though the judgment on independence must be made by our board,
there is no requirement that our board affirmatively make such determination, as
required by the NYSE rules. Further, one of our directors is a representative of
the Indian government, as required by the terms of the loan and guarantee
facilities provided by the Indian government.
Non-management directors meetings. Though there is no such requirement
under applicable Indian legal requirements, our non-management directors meet
separately before each board meeting.
Board Governance and Remuneration Committee and the Audit Committee. The
members of our Board Governance and Remuneration Committee are independent, as
defined under applicable Indian legal requirements. All members of our Audit
Committee are independent under Rule 10A-3 under the Exchange Act. The
constitution and main functions of these committees as approved by our board are
described above and comply with the spirit of the NYSE requirements for US
issuers.
Corporate Governance Guidelines. Under NYSE rules, US issuers are required
to adopt and disclose corporate governance guidelines addressing matters such as
standards of director qualification, responsibilities of directors, director
compensation, director orientation and continuing education, management
succession and annual performance review of the Board of Directors. As a foreign
private issuer, we are not required to adopt such guidelines.
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Compensation and Benefits to Directors and Officers
Remuneration
Under our organizational documents, each non-wholetime director, except the
government director, is entitled to receive remuneration for attending each
meeting of our board or of a board committee. The amount of remuneration payable
to non-wholetime directors is set by our board from time to time in accordance
with limitations prescribed by the Indian Companies Act or the Government of
India. The remuneration for attending each board or committee meeting is
currently fixed at Rs.20,000 (US$450). In addition, we reimburse directors for
travel and related expenses in connection with board and committee meetings and
related matters. If a director is required to perform services for us beyond
attending meetings, we may remunerate the director as determined by our Board of
Directors and this remuneration may be either in addition to or as substitution
for the remuneration discussed above. We have not paid any remuneration to
non-wholetime directors other than the remuneration for attending each meeting
of our board or of a board committee. Non-wholetime directors are not entitled
to the payment of any benefits at the end of their term of office.
Our board or any committee thereof may fix, within the range stated below,
the salary payable to the wholetime directors.
Rs. 600,000 - Rs.1,050,000 (US$ 13,489 to US$
Mr. K.V. Kamath, Managing Director & CEO........... 23,606) per month
Rs. 400,000 - Rs. 900,000 (US$ 8,993 to US$ 20,234) per
Ms. Lalita D. Gupte, Joint Managing Director....... month
Rs. 300,000 - Rs. 900,000 (US$ 6,745 to US$ 20,234) per
Ms. Kalpana Morparia, Joint Managing Director...... month
Rs. 200,000 - Rs. 500,000 (US$ 4,496 to US$ 11,241) per
Ms. Chanda D. Kochhar, Deputy Managing Director.... month
Rs. 200,000 - Rs. 500,000 (US$ 4,496 to US$ 11,241) per
Dr. Nachiket Mor, Deputy Managing Director......... month
We are required to obtain specific approval of the Reserve Bank of India
for the actual monthly salary and performance bonus paid each year to the
wholetime directors. The Reserve Bank of India has approved the payment of
performance bonus to our wholetime directors for fiscal 2006 and the monthly
salary payable for fiscal 2007. None of the service contracts with our directors
provide for benefits upon termination of engagement.
The wholetime directors are entitled to perquisites (evaluated pursuant to
Indian Income Tax Rules, wherever applicable, and otherwise at actual cost to
ICICI Bank), such as furnished accommodation, gas, electricity, water and
furnishings, club fees, personal insurance, use of car and telephone at
residence or reimbursement of expenses in lieu thereof, payment of income-tax on
perquisites by ICICI Bank to the extent permissible under the Indian Income Tax
Act, 1961 and the Rules framed thereunder, medical reimbursement, leave and
leave travel concession, education benefits, provident fund, superannuation
fund, gratuity and other retirement benefits, in accordance with the scheme(s)
and rule(s) applicable to employees of ICICI Bank from time to time.
Where accommodation is not provided, each of the wholetime directors is
eligible for a house rent allowance of Rs. 50,000 (US$1,124) per month and
maintenance of accommodation including furniture, fixtures and furnishings, as
may be provided by ICICI Bank.
The total compensation paid by ICICI Bank to its wholetime directors and
executive officers, Mr. K.V. Kamath, Ms. Lalita D. Gupte, Ms. Kalpana Morparia,
Ms. Chanda D. Kochhar, Dr. Nachiket Mor, Mr. Bhargav Dasgupta, Mr. K. Ramkumar,
Ms. Madhabi Puri-Buch, Mr. Nagesh Pinge (who has since left the organization),
Mr. Pravir Vohra, Ms. Ramni Nirula, Mr. Sanjiv Kerkar, Mr. V. Vaidyanathan and
Ms. Vishakha Mulye in fiscal 2006, including bonus for fiscal 2005, was Rs.
143.7 million (US$ 3.2 million).
Bonus
Each year, our Board of Directors awards discretionary bonuses to employees
and wholetime directors on the basis of performance and seniority. The
performance of each employee is evaluated through a performance
120
management appraisal system. The aggregate amount paid by ICICI Bank for bonuses
to all eligible employees and wholetime directors for fiscal 2006 was Rs. 1.84
billion (US$ 40.0 million). This amount was paid in fiscal 2007.
Employee Stock Option Scheme
On January 24, 2000, our board approved an employee stock option scheme to
attract, encourage and retain high performing employees. Our shareholders
approved this scheme at the extraordinary general meeting on February 21, 2000.
This scheme was drafted in accordance with guidelines issued by the Securities
and Exchange Board of India. Under this scheme, up to 5.0% of our issued equity
shares at March 31, 2000 could be allocated to employee stock options. The
employee stock option scheme as amended by the Scheme of Amalgamation restricted
the maximum number of options granted to any eligible employee (as defined
below) in a year to 0.05% of our issued equity shares at the time of the grant,
and the aggregate of all such options to 5.0% of our issued equity shares
following the amalgamation. In April 2004, our board approved the recommendation
of the Board Governance & Remuneration Committee to modify the limit of the
aggregate number of options that could be granted under the employee stock
option scheme to 5.0% of our issued capital as on the date of grant. The
shareholders approved the modification at our annual general meeting held on
September 20, 2004.
Under the stock option scheme, eligible employees are entitled to apply for
equity shares. An eligible employee is a permanent employee or a director of
ICICI Bank or of its subsidiaries or its holding company. ICICI Bank has no
holding company.
The options granted for fiscal 2003 and earlier vest annually in a graded
manner over a three-year period, with 20.0%, 30.0% and 50.0% of the grants
vesting each year, commencing not earlier than 12 months from the date of grant.
Options granted for fiscal 2004 and thereafter vest in a graded manner over a
four-year period with 20.0%, 20.0%, 30.0% and 30.0% of grants vesting each year,
commencing from the end of 12 months from the date of grant. The options can be
exercised within 10 years from the date of grant or five years from the date of
vesting, whichever is later.
The exercise price for options granted prior to June 30, 2003 is equal to
the market price of our equity shares on the date of grant on the stock
exchange, which recorded the highest trading volume on the date of grant. On
June 30, 2003, the Securities and Exchange Board of India revised its guidelines
on employee stock options. While the revised guidelines provided that companies
were free to determine the exercise price of stock options granted by them, they
prescribed accounting rules and other disclosures, including expensing of stock
options in the income statement, which are applicable to our Indian GAAP
consolidated financial statements, in the event the exercise price was not equal
to the average of the high and low market price of the equity shares in the two
week period preceding the date of grant of the options, on the stock exchange
which recorded the highest trading volume during the two week period. Effective
July 22, 2004, the Securities and Exchange Board of India revised this basis of
pricing to the latest available closing price, prior to the date of the meeting
of the Board of Directors in which options are granted, on the stock exchange
which recorded the highest trading volume on that date. The exercise price for
options granted by ICICI Bank on or after June 30, 2003, but before July 22,
2004 is equal to the average of the high and low market price of the equity
shares in the two week period preceding the date of grant of the options, on the
stock exchange which recorded the highest trading volume during the two week
period. The exercise price of options granted on or after July 22, 2004 is equal
to the closing price on the stock exchange which recorded the highest trading
volume preceding the date of grant of options.
The following table sets forth certain information regarding the stock
option grants ICICI Bank has made under its employee stock option scheme. ICICI
Bank granted all of these stock options at no cost to its employees. ICICI Bank
has not granted any stock options to its non-wholetime directors.
Number of options
Date of grant granted Exercise price
------------------------------------------------------------------------------------------------------------------
February 21, 2000........................................... 1,713,000 Rs. 171.90 US$ 3.86
April 26, 2001.............................................. 1,580,200 170.00 3.82
March 27, 2002.............................................. 3,155,000 120.35 2.71
April 25, 2003.............................................. 7,338,300 132.05 2.97
July 25, 2003............................................... 147,500 157.03 3.53
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Number of options
Date of grant granted Exercise price
------------------------------------------------------------------------------------------------------------------
October 31, 2003............................................ 6,000 222.40 5.00
April 30, 2004.............................................. 7,539,500 300.10 6.75
September 20, 2004.......................................... 15,000 275.20 6.19
April 30, 2005.............................................. 4,906,180 359.95 8.09
August 20, 2005............................................. 70,600 498.20 11.20
January 20, 2006............................................ 5,000 569.55 12.80
April 29, 2006.............................................. 6,267,400 576.80 12.97
ICICI also had an employee stock option scheme for its directors and
employees and the directors and employees of its subsidiary companies, the terms
of which were substantially similar to the employee stock option scheme of ICICI
Bank. The following table sets forth certain information regarding the stock
option grants made by ICICI under its employee stock option scheme prior to the
amalgamation. ICICI granted all of these stock options at no cost to its
employees. ICICI had not granted any stock options to its non-wholetime
directors.
Number of options
Date of grant granted Exercise price
------------------------------------------------------------------------------------------------------------------
August 3, 1999.............................................. 2,323,750 Rs. 85.55 US$ 1.92
April 28, 2000.............................................. 2,902,500 133.40 3.00
November 14, 2000........................................... 20,000 82.90 1.86
May 3, 2001................................................. 3,145,000 82.00 1.84
August 13, 2001............................................. 60,000 52.50 1.18
March 27, 2002.............................................. 6,473,700 60.25 1.35
------------
(1) The exercise price is equal to the market price of ICICI's equity shares on
the date of grant. However, the share options granted on August 3, 1999
were accounted as a variable plan resulting in a compensation cost of Rs.97
million (US$2 million) which is being amortized over the vesting period.
In accordance with the Scheme of Amalgamation, directors and employees of
ICICI and its subsidiary companies received stock options in ICICI Bank equal to
half the number of their outstanding unexercised stock options in ICICI. The
exercise price for these options is equal to twice the exercise price for the
ICICI stock options. All other terms and conditions of these options are similar
to those applicable to ICICI Bank's stock options pursuant to its employee stock
option scheme.
The following table sets forth certain information regarding the options
granted by ICICI Bank (including options granted by ICICI adjusted in accordance
with the Scheme of Amalgamation) at August 31, 2006.
Particulars ICICI Bank
------------------------------------------------------------------------------------------------------
Options granted................................................................. 40,206,155
Options vested.................................................................. 22,543,132
Options exercised............................................................... 15,373,911
Options forfeited/lapsed........................................................ 4,328,135
Extinguishment or modification of options....................................... None
Amount realized by sale of options.............................................. Rs. 2,395,034,837
Total number of options in force................................................ 20,504,109
ICICI Prudential Life Insurance Company and ICICI Lombard General Insurance
Company each have an employee stock option plan for their respective wholetime
directors and employees
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Loans
ICICI Bank has internal rules and regulations to grant loans to employees
and wholetime directors to acquire certain assets such as property, vehicles
and other consumer durables. ICICI Bank's loans to employees have been made at
interest rates ranging from 2.5% to 3.5% per annum and are repayable over fixed
periods of time. The loans are generally secured by the assets acquired by the
employees. Pursuant to the Banking Regulation Act, ICICI Bank's non-whole time
directors are not eligible for any loans. At year-end fiscal 2006, there were
loans of Rs.4.7 billion (US$105.7 million), compared to loans of Rs.4.5 billion
(US$101.2 million) at year-end fiscal 2005, outstanding to ICICI Bank
employees. This amount included loans of Rs.57 million (US$1.3 million),
compared to Rs.70 million (US$1.6 million) at year-end fiscal 2005, to certain
of its directors and executive officers (including employees who became
executive officers during fiscal 2006), made on the same terms, including as to
interest rates and collateral, as loans to other employees.
Gratuity
Under Indian law, ICICI Bank is required to pay a gratuity to employees who
retire or resign after at least five years of continuous service. ICICI Bank
makes contributions to three separate gratuity funds, for employees inducted
from ICICI, employees inducted from Bank of Madura and employees of ICICI Bank
other than employees inducted from ICICI and Bank of Madura.
The gratuity funds for employees inducted from ICICI and Bank of Madura
are separate gratuity funds managed by ICICI Prudential Life Insurance Company
Limited. Actuarial valuation of the gratuity liability is determined by an
actuary appointed by ICICI Prudential Life Insurance Company Limited. The
investments of the funds are made according to rules prescribed by the
government of India. The accounts of the funds are audited by independent
auditors. The total corpus of these funds at year-end fiscal 2006 based on
their unaudited financial statements was Rs.493 million (US$11.1 million).
The gratuity fund for employees of ICICI Bank other than employees
inducted from ICICI and Bank of Madura, is administered by the Life Insurance
Corporation of India. In accordance with the gratuity fund's rules, actuarial
valuation of gratuity liability is calculated based on certain assumptions
regarding rate of interest, salary growth, mortality and staff turnover. The
total corpus of the funds at year-end fiscal 2006 was Rs.281million (US$6.3
million) compared to Rs.184 million (US$ 4.1 million) at year-end fiscal 2005.
Superannuation Fund
ICICI Bank contributes 15.0% of the total annual salary of each employee to
a superannuation fund for ICICI Bank employees. ICICI Bank's employees get an
option on retirement or resignation to receive one-third of the total balance
and a monthly pension based on the remaining two-third balance. In the event of
death of an employee, his or her beneficiary receives the remaining accumulated
balance of 66.7%. ICICI Bank also gives a cash option to its employees, allowing
them to receive the amount contributed by ICICI Bank in their monthly salary
during their employment. From fiscal 2006, the superannuation fund is being
administered by Life Insurance Corporation of India and ICICI
Prudential Life Insurance Company Limited. Employees have the option to retain
the existing balance with Life Insurance Corporation of India
or seek a transfer to ICICI Prudential Insurance Company Limited. The total
corpus of the superannuation fund was Rs.919 million (US$20.7 million) at
year-end fiscal 2006 compared to Rs.812 million (US$18.3 million) at year-end
fiscal 2005.
Provident Fund
ICICI Bank is statutorily required to maintain a provident fund as a part
of its retirement benefits to its employees. There are separate provident funds
for employees inducted from Bank of Madura (other than those employees who have
opted for pensions), and for other employees of ICICI Bank. These funds are
managed by in-house trustees. Each employee contributes 12.0% of his or her
basic salary (10.0% for clerks and sub-staff of Bank of Madura) and ICICI Bank
contributes an equal amount to the funds. The investments of the funds are made
according to rules prescribed by the government of India. The
accounts of the funds are audited by independent auditors. The total corpuses of
the funds for employees inducted from Bank of Madura, and other employees of
ICICI Bank at year-end fiscal 2006 were Rs. 396.6 million (US$ 8.9 million), and
Rs.2.36 billion (US$ 53.1 million) respectively. ICICI Bank made aggregate
contributions of Rs. 417 million (US$9.4 million) to these funds during fiscal
2006, compared to Rs.280 million (US$ 6.3 million) in fiscal 2005.
Pension Fund
Out of the employees inducted from Bank of Madura and employed with ICICI
Bank at year-end fiscal 2006, 296 employees had opted for pensions and 680
employees had opted for a provident fund. For employees who opted for a
provident fund, ICICI Bank's contribution of 12.0% of his or her basic salary
(10% for clerks and sub-staff) is
123
credited to the provident fund every month. For employees who opted for
pensions, ICICI Bank's contribution of 12.0% of his or her basic salary (10% for
clerks and sub-staff) is credited to the pension fund every month. These funds
are managed by in-house trustees. The investments of the funds are made
according to rules prescribed by the government of India. The accounts of the
fund are audited by independent auditors. The employees who opted for pensions
are entitled to a monthly pension from the day after their retirement. ICICI
Bank also gives a cash option to employees, allowing them to receive the present
value of one-third of their monthly pension in total satisfaction. Upon death of
an employee, family members are entitled to payment of a family pension pursuant
to the rules in this regard. The corpus of the fund at year-end fiscal 2006 was
Rs.1.03 billion (US$23.2 million), compared to Rs.923 million (US$20.8 million)
at year-end fiscal 2005.
Interest of Management in Certain Transactions
Except as otherwise stated in this annual report, no amount or benefit has
been paid or given to any of our directors or executive officers.
124
OVERVIEW OF THE INDIAN FINANCIAL SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from the
Government of India and its various ministries and the Reserve Bank of India,
and has not been prepared or independently verified by us. This is the latest
available information to our knowledge at August 31, 2006.
Introduction
The Reserve Bank of India, the central banking and monetary authority of
India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sectors participate in India's financial sector, including the
following:
o commercial banks;
o long-term lending institutions;
o non-bank finance companies, including housing finance companies;
o other specialized financial institutions, and state-level financial
institutions;
o insurance companies; and
o mutual funds.
Until the early 1990s, the Indian financial system was strictly controlled.
Interest rates were administered, formal and informal parameters governed asset
allocation, and strict controls limited entry into and expansion within the
financial sector. The Government of India's economic reform program, which began
in 1991, encompassed the financial sector. The first phase of the reform process
began with the implementation of the recommendations of the Committee on the
Financial System, the Narasimham Committee I. The second phase of the reform
process began in 1999. See "Banking Sector Reform--Committee on Banking Sector
Reform (Narasimham Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants
in the Indian financial system, with a focus on the commercial banks. This is
followed by a brief summary of the banking reform process along with the
recommendations of various committees that have played a key role in the reform
process. A brief discussion on the impact of the liberalization process on
long-term lending institutions and commercial banks is then presented. Finally,
reforms in the non-banking financial sector are briefly reviewed.
Reserve Bank of India
The Reserve Bank of India, established in 1935, is the central banking and
monetary authority in India. The Reserve Bank of India manages the country's
money supply and foreign exchange and also serves as a bank for the Government
of India and for the country's commercial banks. In addition to these
traditional central banking roles, the Reserve Bank of India undertakes certain
developmental and promotional roles.
The Reserve Bank of India issues guidelines on exposure limits, income
recognition, asset classification, provisioning for non-performing and
restructured assets, investment valuation and capital adequacy for commercial
banks, long-term lending institutions and non-bank finance companies. The
Reserve Bank of India requires these institutions to furnish information
relating to their businesses to it on a regular basis. For further discussion
regarding the Reserve Bank of India's role as the regulatory and supervisory
authority of India's financial system and its impact on us, see "Supervision
and Regulation".
Commercial Banks
Commercial banks in India have traditionally focused
only on meeting the short-term financial needs of industry, trade and
agriculture. At year-end fiscal 2006, there were 218 scheduled commercial banks
in the country,
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with a network of 68,681 branches serving approximately Rs.20.93 trillion (US$
471 billion) in deposit accounts. Scheduled commercial banks are banks that are
listed in the schedule to the Reserve Bank of India Act, 1934, and are further
categorized as public sector banks, private sector banks and foreign banks.
Scheduled commercial banks have a presence throughout India, with approximately
66.8% of bank branches located in rural or semi-urban areas of the country. A
large number of these branches belong to the public sector banks.
Public Sector Banks
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its seven
associate banks, 19 nationalized banks and 133 regional rural banks. Excluding
the regional rural banks, the remaining public sector banks have 47,688
branches, and accounted for 70.6% of the outstanding gross bank credit and 71.9%
of the aggregate deposits of the scheduled commercial banks at year-end fiscal
2006. The public sector banks' large network of branches enables them to fund
themselves out of low cost deposits.
The State Bank of India is the largest bank in India. At year-end fiscal
2006, the State Bank of India and its seven associate banks had 13,820
branches. They accounted for 23.4% of aggregate deposits and 23.1% of
outstanding gross bank credit of all scheduled commercial banks.
Regional rural banks were established from 1976 to 1987 by the central
government, state governments and sponsoring commercial banks jointly with a
view to develop the rural economy. Regional rural banks provide credit to small
farmers, artisans, small entrepreneurs and agricultural laborers. The National
Bank for Agriculture and Rural Development is responsible for regulating and
supervising the functions of the regional rural banks. In 1986 the Kelkar
Committee made comprehensive recommendations covering both the organizational
and operational aspects of regional rural banks, several of which were
incorporated as amendments to the Regional Rural Banking Act, 1976. As part of
comprehensive restructuring programme, recapitalization of the regional rural
banks was initiated in fiscal 1995, a process which continued until fiscal 2000
and covered 187 regional rural banks with aggregate financial support of
Rs.21.88 billion (US$492 million) from the stakeholders. Simultaneously,
prudential norms on income-recognition, asset classification and provisioning
for loan-losses following customary banking benchmarks were introduced.
At year-end fiscal 2006, there were 133 regional rural banks with 14,372
branches, accounting for 3.4% of aggregate deposits and 2.6% of gross bank
credit outstanding of scheduled commercial banks. During fiscal 2006, the number
of regional rural banks was reduced from 173 to 133 through amalgamations of
several regional rural banks.
Private Sector Banks
After the first phase of bank nationalization was completed in 1969, public
sector banks made up the largest portion of Indian banking. The focus on public
sector banks was maintained throughout the 1970s and 1980s. In addition,
existing private sector banks which showed signs of an eventual default were
merged with state-owned banks. In July 1993, as part of the banking reform
process and as a measure to induce competition in the banking sector, the
Reserve Bank of India permitted entry of the private sector into the banking
system. This resulted in the introduction of private sector banks, including
ICICI Bank. These banks are collectively known as the "new" private sector
banks. At the end of June 2005, there were nine "new" private sector banks. A
merger between two of these banks, Centurion Bank and Bank of Punjab, came into
effect from October 1, 2005. In addition, 21 private sector banks existing prior
to July 1993 were operating at year-end fiscal 2006.
At year-end fiscal 2006, private sector banks accounted for approximately
19.4% of aggregate deposits and 20.2% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 6,385 branches accounted for 9.3%
of the total branch network of scheduled commercial banks in the country. At
year-end fiscal 2006, ICICI Bank accounted for approximately 8.7% of aggregate
deposits and 10.0% of non-food credit outstanding of the scheduled commercial
banks.
During fiscal 2007 (through September 2006), two private sector banks
merged under a scheme of amalgamation by the Indian government subsequent to one
of them being placed under moratorium by the Reserve Bank of India. The Reserve
Bank of India has issued a draft scheme of amalgamation of
two other private sector
126
banks subsequent to placing one of them under moratorium. See also "Supervision
and Regulation - Reserve Bank of India Regulation - Moratorium, Reconstruction
& Amalgamation of Banks".
Foreign Banks
At year-end fiscal 2006, there were 29 foreign banks with 236 branches
operating in India. Foreign banks accounted for 5.3% of
aggregate deposits and 6.5% of outstanding gross bank credit of scheduled
commercial banks at year-end fiscal 2006. As part of the liberalization process,
the Reserve Bank of India has permitted foreign banks to
operate more freely, subject to requirements largely similar to those imposed on
domestic banks. The primary activity of most foreign banks in
India has been in the corporate segment. However, some of the
larger foreign banks have made consumer financing a larger part of their
portfolios. These banks offer products such as automobile finance, home loans,
credit cards and household consumer finance. Foreign banks operate in
India through branches of the parent bank. Certain foreign
banks also have wholly-owned non-bank finance company subsidiaries or joint
ventures for both corporate and retail lending. In a circular dated July 6,
2004, the Reserve Bank of India stipulated that banks should
not acquire any fresh stake in a bank's equity shares, if by such acquisition,
the investing bank's holding exceeded 5.0% of the investee bank's equity
capital. This also applies to holdings of foreign banks with a presence in
India, in Indian banks.
The Reserve Bank of India issued a notification on "Roadmap for presence
of foreign banks in India" on February 28, 2005, announcing the following
measures with respect to the presence of foreign banks:
o During the first phase (up to March 2009), foreign banks will be allowed
to establish a presence by setting up wholly-owned subsidiaries or by
converting existing branches into wholly-owned subsidiaries.
o In addition, during the first phase, foreign banks would be allowed to
acquire a controlling stake in a phased manner only in private sector
banks that are identified by the Reserve Bank of India for
restructuring.
o For new and existing foreign banks, it has been proposed to go beyond
the existing World Trade Organization commitment of allowing increases
of 12 branches per year. A more liberal policy will be followed for
under-banked areas.
o During the second phase (from April 2009 onwards), after a review of the
first phase, foreign banks would be allowed to acquire up to 74.0% in
private sector banks in India.
Cooperative Banks
Cooperative banks cater to the financing needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of
India. The state land development banks and the primary land
development banks provide long-term credit for agriculture. In the light of
liquidity and insolvency problems experienced by some cooperative banks in
fiscal 2001, the Reserve Bank of India undertook several interim measures,
pending formal legislative changes, including measures related to lending
against shares, borrowings in the call market and term deposits placed with
other urban cooperative banks. Presently the Reserve Bank of
India is responsible for supervision and regulation of urban
cooperative banks, and the National Bank for Agriculture and Rural Development
for state cooperative banks and district central cooperative banks. The Banking
Regulation (Amendment) and Miscellaneous Provisions Act, 2004 provides for the
regulation of all cooperative banks by the Reserve Bank of
India. See also "Recent Structural Reforms -- Proposed
Amendments to the Banking Regulation Act". In its Annual Policy Statement for
fiscal 2005, the Reserve Bank of India announced that it
proposed to consider issuance of fresh licenses to urban cooperative banks only
after a comprehensive policy on urban cooperative banks was in place, including
an appropriate legal and regulatory framework for the sector. In the mid-term
review of the annual policy statement for fiscal 2005, the Reserve Bank of
India announced that a vision document for the future role of
urban cooperative banks is being evolved to ensure depositors' interests and
avoid contagion while providing useful service to local communities. With
respect to structural issues, the Reserve Bank of India has
stated that it would be encouraging growth of strong and viable entities within
this sector through consolidation. A task force appointed by the Government of
India to examine the reforms required in the cooperative banking system
submitted its report in December 2004. It recommended several structural,
regulatory
127
and operational reforms for cooperative banks, including the provision of
financial assistance by the government for revitalizing this sector. In the
Union Budget for fiscal 2006, the Finance Minister accepted the recommendations
of the Task Force in principle and proposed to call state governments for
consultation and begin to implement the recommendations in the states willing to
do so. In the Annual Policy Statement for fiscal 2006, the Reserve Bank of India
has stated that it is in the process of preparing a medium-term framework for
urban cooperative banks.
Long-Term Lending Institutions
The long-term lending institutions were established to provide medium-term
and long-term financial assistance to various industries for setting up new
projects and for the expansion and modernization of existing facilities. These
institutions provided fund-based and non-fund-based assistance to industry in
the form of loans, underwriting, direct subscription to shares, debentures and
guarantees. The primary long-term lending institutions included Industrial
Development Bank of India (now a bank), IFCI Limited, Industrial Investment
Bank of India as well as ICICI prior to the amalgamation.
The long-term lending institutions were expected to play a critical role in
Indian industrial growth and, accordingly, had access to concessional government
funding. However, in recent years, the operating environment of the long-term
lending institutions has changed substantially. Although the initial role of
these institutions was largely limited to providing a channel for government
funding to industry, the reform process required them to expand the scope of
their business activities, including into:
o fee-based activities like investment banking and advisory services; and
o short-term lending activity including making corporate finance and
working capital loans.
Pursuant to the recommendations of the Narasimham Committee II and the
Khan Working Group, a working group created in 1999 to harmonize the role and
operations of long-term lending institutions and banks, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
transforming themselves into banks subject to compliance with the prudential
norms as applicable to banks. In April 2001, the Reserve Bank of India issued
guidelines on several operational and regulatory issues which were required to
be addressed in evolving the path for transition of a long-term lending
institution into a universal bank. See "Recent Structural Reforms - Universal
Banking Guidelines". In April 2002, ICICI merged with ICICI Bank. The
Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
converted the Industrial Development Bank of India into a banking company
incorporated under the Companies Act, 1956 on September 27, 2004, with
exemptions from certain statutory and regulatory norms applicable to banks,
including an exemption for a period of five years from the statutory liquidity
ratio. IDBI Bank Limited, a new private sector bank that was a subsidiary of
the Industrial Development Bank of India, was merged with the Industrial
Development Bank of India in April 2005.
Non-Bank Finance Companies
There are over 13,000 non-bank finance companies in India, mostly in the
private sector. All non-bank finance companies are required to register with the
Reserve Bank of India. The non-bank finance companies may be categorized into
entities which take public deposits and those which do not. The companies which
take public deposits are subject to strict supervision and capital adequacy
requirements of the Reserve Bank of India. ICICI Securities Limited, our
subsidiary, is a non-bank finance company, which does not accept public
deposits. The primary activities of the non-bank finance companies are consumer
credit, including automobile finance, home finance and consumer durable products
finance, wholesale finance products such as bill discounting for small and
medium-sized companies, and fee-based services such as investment banking and
underwriting. In 2003, Kotak Mahindra Finance Limited, a large non-bank finance
company was granted a banking license by the Reserve Bank of India and converted
itself into Kotak Mahindra Bank.
Over the past few years, certain non-bank finance companies have defaulted
to investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are currently
pending. See also "Reforms of the Non-Bank Finance Companies".
128
Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank finance
companies. As a result of the various incentives given by the government for
investing in the housing sector in recent years, the scope of this business has
grown substantially. Until recently, Housing Development Finance Corporation
Limited was the premier institution providing housing finance in India. In
recent years, several other players including banks have entered the housing
finance industry. We are a major housing finance provider and also have a
housing finance subsidiary, ICICI Home Finance Company Limited. The National
Housing Bank and the Housing and Urban Development Corporation Limited are the
two government-controlled financial institutions created to improve the
availability of housing finance in India. The National Housing Bank Act provides
for securitization of housing loans, foreclosure of mortgages and setting up of
the Mortgage Credit Guarantee Scheme.
Other Financial Institutions
Specialized Financial Institutions
In addition to the long-term lending institutions, there are various
specialized financial institutions which cater to the specific needs of
different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, Small Industries Development Bank of
India, Risk Capital and Technology Finance Corporation Limited, Tourism Finance
Corporation of India Limited, National Housing Bank, Power Finance Corporation
Limited and the Infrastructure Development Finance Corporation Limited.
State Level Financial Institutions
State financial corporations operate at the state level and form an
integral part of the institutional financing system. State financial
corporations were set up to finance and promote small and medium-sized
enterprises. The state financial institutions are expected to achieve balanced
regional socio-economic growth by generating employment opportunities and
widening the ownership base of industry. At the state level, there are also
state industrial development corporations, which provide finance primarily to
medium-sized and large-sized enterprises.
Insurance Companies
Currently, there are 32 insurance companies in India, of which 16 are life
insurance companies, 15 are general insurance companies and one is a
re-insurance company. Of the 16 life insurance companies, 15 are in the private
sector and one is in the public sector. Among the general insurance companies,
nine are in the private sector and six (including the Export Credit Guarantee
Corporation of India Limited and the Agriculture Insurance Company of India
Limited) are in the public sector. The re-insurance company, General Insurance
Corporation of India, is in the public sector. Life Insurance Corporation of
India, General Insurance Corporation of India and public sector general
insurance companies also provide long-term financial assistance to the
industrial sector. We have joint ventures in each of the life insurance and the
general insurance sectors. Our life insurance joint venture, ICICI Prudential
Life Insurance Company Limited, and our general insurance joint venture, ICICI
Lombard General Insurance Company Limited, are both major players in their
respective segments. During fiscal 2005, the gross premiums underwritten by all
general insurance companies and the total new premiums of all life insurance
companies amounted to Rs.181.0 billion (US$ 4.1 billion) and Rs.253.4 billion
(US$5.7 billion) respectively. First year premium underwritten in the life
insurance sector recorded a growth of 40.6% to reach Rs.358.98 billion (US$ 8.1
billion) in fiscal 2006 with the private sector's retail market share (on
weighted received premium basis) increasing from 25.4% in fiscal 2005 to 34.2%
in fiscal 2006. Gross premium in the non-life insurance sector (excluding Export
Credit Guarantee Corporation of India Limited) grew by 16.2% to Rs.203.79
billion (US$ 4.6 billion) in fiscal 2006 with the private sector's market share
increasing from 20.3% in fiscal 2005 to 26.6% in fiscal 2006.
The insurance sector in India is regulated by the Insurance Regulatory and
Development Authority. In December 1999, the parliament passed the Insurance
Regulatory and Development Authority Act, 1999. This Act opened up the Indian
insurance sector for foreign and private investors. The Act allows foreign
equity participation in new insurance companies of up to 26.0%. The new company
should have a minimum paid up equity capital of Rs.1.0 billion (US$ 22 million)
to carry on the business of life insurance or general insurance or Rs.2.0
billion (US$ 45 million) to carry on exclusively the business of reinsurance.
129
In the monetary and credit policy for fiscal 2001, the Reserve Bank of
India issued guidelines governing the entry of banks and financial institutions
into the insurance business. The guidelines permit banks and financial
institutions to enter the business of insurance underwriting through joint
ventures provided they meet stipulated criteria relating to their net worth,
capital adequacy ratio, profitability track record, level of non-performing
loans and the performance of their existing subsidiary companies. The promoters
of insurance companies have to divest in a phased manner their shareholding in
excess of 26.0% (or such other percentage as may be prescribed), after a period
of 10 years from the date of commencement of business or within such period as
may be prescribed by the Indian government. The Indian government, while
presenting its budget for fiscal 2005, proposed an increase in the limit on
foreign equity participation in private sector insurance companies from 26.0% to
49.0%. However, this requires an amendment to the Insurance Regulatory and
Development Authority Act 1999 and has not been implemented as yet.
Mutual Funds
At the end of July 2006 , there were 29 mutual funds in India with total
assets under management of Rs. 2,792.4 billion (US$ 62.8 billion). From 1963 to
1987, Unit Trust of India was the only mutual fund operating in the country. It
was set up in 1963 at the initiative of the government and the Reserve Bank of
India. From 1987 onwards, several other public sector mutual funds entered this
sector. These mutual funds were established by public sector banks, the Life
Insurance Corporation of India and General Insurance Corporation of India. The
mutual funds industry was opened up to the private sector in 1993. The industry
is regulated by the SEBI (Mutual Fund) Regulation, 1996. At the end of July
2006, there were 24 private sector mutual funds with a 80.6% market share in
terms of total assets under management. Our asset management joint venture,
Prudential ICICI Asset Management Company Limited, was the largest mutual fund
in India based on assets under management at July 31, 2006.
In 2001, Unit Trust of India, with a high level of investment in equity
securities, started to face difficulties in meeting redemption and assured
return obligations due to a significant decline in the market value of its
securities portfolio. In response, the Government of India implemented a package
of reform measures for Unit Trust of India, including guaranteeing redemption
and assured return obligations to the unit holders, subject to restrictions on
the maximum permissible redemption amount. As part of the reforms, Unit Trust of
India was divided into two mutual funds structured in accordance with the
regulations of the Securities and Exchange Board of India, one comprising
assured return schemes and the other comprising net asset value based schemes.
Impact of Liberalization on the Indian Financial Sector
Until 1991, the financial sector in India was heavily controlled and
commercial banks and long-term lending institutions, the two dominant financial
intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition. Long-term lending
institutions were focused on the achievement of the Indian government's various
socio-economic objectives, including balanced industrial growth and employment
creation, especially in areas requiring development. Long-term lending
institutions were extended access to long-term funds at subsidized rates through
loans and equity from the Government of India and from funds guaranteed by the
Government of India originating from commercial banks in India and foreign
currency resources originating from multilateral and bilateral agencies.
The focus of the commercial banks was primarily to mobilize household
savings through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, the commercial banks provided a range of banking services to
individuals and business entities.
However, since 1991, there have been comprehensive changes in the Indian
financial system. Various financial sector reforms, implemented since 1991, have
transformed the operating environment of the banks and long-term lending
institutions. In particular, the deregulation of interest rates, emergence of a
liberalized domestic capital market, and entry of new private sector banks,
along with the broadening of long-term lending institutions' product portfolios,
have progressively intensified the competition between banks and long-term
lending institutions. The Reserve Bank of India has permitted the transformation
of long-term lending institutions into banks subject to compliance with the
prudential norms applicable to banks.
130
Banking Sector Reform
Most large banks in India were nationalized in 1969 and thereafter were
subject to a high degree of control until reform began in 1991. In addition to
controlling interest rates and entry into the banking sector, these regulations
also channeled lending into priority sectors. Banks were required to fund the
public sector through the mandatory acquisition of low interest-bearing
government securities or statutory liquidity ratio bonds to fulfill statutory
liquidity requirements. As a result, bank profitability was low, impaired assets
were comparatively high, capital adequacy was diminished, and operational
flexibility was hindered.
Committee on the Financial System (Narasimham Committee I)
The Committee on the Financial System (The Narasimham Committee I) was set
up in August 1991 to recommend measures for reforming the financial sector. Many
of the recommendations made by the committee, which addressed organizational
issues, accounting practices and operating procedures, were implemented by the
Government of India. The major recommendations that were implemented included
the following:
o with fiscal stabilization and the government increasingly resorting to
market borrowing to raise resources, the statutory liquidity ratio or
the proportion of the banks' net demand and time liabilities that were
required to be invested in government securities was reduced from 38.5%
in the pre-reform period to 25.0% in October 1997;
o similarly, the cash reserve ratio or the proportion of the bank's net
demand and time liabilities that were required to be deposited with the
Reserve Bank of India was reduced from 15.0% in the pre-reform period
to 4.5%. In a circular dated September 11, 2004, the Reserve Bank of
India has raised the cash reserve ratio to 4.75% with effect from
September 18, 2004 and 5.0% with effect from October 2, 2004;
o special tribunals were created to resolve bad debt problems;
o most of the restrictions on interest rates for deposits were removed.
Commercial banks were allowed to set their own level of interest rates
for all deposits except savings bank deposits; and
o substantial capital infusion to several state-owned banks was approved
in order to bring their capital adequacy closer to internationally
accepted standards. By the end of fiscal 2002, aggregate
recapitalization amounted to Rs.217.5 billion (US$ 4.9 billion). The
stronger public sector banks were given permission to issue equity to
further increase capital.
Committee on Banking Sector Reform (Narasimham Committee II)
The second Committee on Banking Sector Reform (Narasimham Committee II)
submitted its report in April 1998. The major recommendations of the committee
were in respect of capital adequacy requirements, asset classification and
provisioning, risk management and merger policies. The Reserve Bank of India
accepted and began implementing many of these recommendations in October 1998.
Recent Structural Reforms
Amendments to the Reserve Bank of India Act
In May 2006, the Indian Parliament approved amendments to the Reserve Bank
of India Act removing the minimum cash reserve ratio requirement of 3.0%, giving
the Reserve Bank of India discretion to reduce the cash reserve ratio to less
than 3.0%. The amendments also resulted in no interest being payable by the
Reserve Bank of India on cash reserve ratio balances. Further, the amendments
also created a legal and regulatory framework for derivative instruments.
Recent Amendments to Laws Governing Public Sector Banks
The Indian Parliament recently amended the laws governing India's public
sector banks permitting these banks to issue preference shares and make
preferential allotments or private placements of equity, The amendments also
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empower the Reserve Bank of India to prescribe `fit and proper' criteria for
directors of these banks, and permit supercession of their boards and
appointment of administrators in certain circumstances.
Proposed Amendments to the Banking Regulation Act
Legislation seeking to amend the Banking Regulation Act has been introduced
in the Indian Parliament. As presently drafted, the main amendments propose to:
o permit all banking companies to issue preference shares that will not
carry any voting rights;
o make prior approval of the Reserve Bank of India mandatory for the
acquisition of more than 5.0% of a banking company's paid up capital or
voting rights by any individual or firm or group;
o remove the minimum statutory liquidity ratio requirement of 25.0%,
giving the Reserve Bank of India discretion to reduce the statutory
liquidity ratio to less than 25.0%. See also "Supervision and
Regulation -- Legal Reserve Requirements -- Statutory Liquidity Ratio";
and
o remove the limit of 10.0% on the maximum voting power exercisable by a
shareholder in a banking company.
Legislative Framework for Recovery of Debts due to Banks
In fiscal 2003, the Indian Parliament passed the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002. This Act provides that a secured creditor may, in respect of loans
classified as non-performing in accordance with the Reserve Bank of India
guidelines, give notice in writing to the borrower requiring it to discharge
its liabilities within 60 days, failing which the secured creditor may take
possession of the assets constituting the security for the loan, and exercise
management rights in relation thereto, including the right to sell or otherwise
dispose of the assets. This Act also provides for the setting up of asset
reconstruction companies regulated by the Reserve Bank of India to acquire
assets from banks and financial institutions. The Reserve Bank of India has
issued guidelines for asset reconstruction companies in respect of their
establishment, registration and licensing by the Reserve Bank of India, and
operations. Asset Reconstruction Company (India) Limited, set up by us,
Industrial Development Bank of India, State Bank of India and certain other
banks and institutions, has received registration from the Reserve Bank of
India and commenced operation in August 2003. Foreign direct investment is now
permitted in the equity capital of asset reconstruction companies and
investment by Foreign Institutional Investors registered with the Securities
and Exchange Board of India is permitted in security receipts issued by asset
reconstruction companies, subject to certain conditions and restrictions.
Several petitions challenging the constitutional validity of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 were filed before the Indian Supreme Court. The
Supreme Court, in April 2004, upheld the constitutionality of the Act, other
than the requirement originally included in the Act that the borrower deposit
75.0% of the dues with the debt recovery tribunal as a pre-condition for appeal
by the borrower against the enforcement measures. In November 2004, the
Government of India issued an ordinance amending the Securitisation Act. The
Indian Parliament has subsequently passed this ordinance as an Act. This Act, as
amended, now provides that a borrower may make an objection or representation to
a secured creditor after a notice is issued by the secured creditor to the
borrower under the Act demanding payment of dues. The secured creditor has to
give reasons to the borrower for not accepting the objection or representation.
The Act also introduces a deposit requirement for borrowers if they wish to
appeal the decision of the debt recovery tribunal. Further, the Act permits a
lender to take over the business of a borrower under the Securitisation Act
under certain circumstances (unlike the earlier provisions under which only
assets could be taken over). See "Supervision and Regulation -- Reserve Bank of
India Regulations -- Regulations relating to Sale of Assets to Asset
Reconstruction Companies."
Earlier, following the recommendations of the Narasimham Committee, the
Recovery of Debts due to Banks and Financial Institutions Act, 1993 was enacted.
This legislation provides for the establishment of a tribunal for speedy
resolution of litigation and recovery of debts owed to banks or financial
institutions. The Act creates tribunals before which the banks or the financial
institutions can file a suit for recovery of the amounts due to them.
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However, if a scheme of reconstruction is pending before the Board for
Industrial and Financial Reconstruction, under the Sick Industrial Companies
(Special Provision) Act, 1985, no proceeding for recovery can be initiated or
continued before the tribunals. This protection from creditor action ceases if
the secured creditor takes action under Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act. While presenting its
budget for fiscal 2002, the Government of India announced measures for the
setting up of more debt recovery tribunals and the eventual repeal of the Sick
Industrial Companies (Special Provision) Act, 1985. To date, however, this Act
has not been repealed.
Corporate Debt Restructuring Forum
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. The objective of this framework is to ensure a timely and
transparent mechanism for the restructuring of corporate debts of viable
entities facing problems, outside the purview of the Board of Industrial and
Financial Rehabilitation, debt recovery tribunals and other legal proceedings.
In particular, this framework aims to preserve viable corporates that are
affected by certain internal and external factors and minimize the losses to the
creditors and other stakeholders through an orderly and coordinated
restructuring program. The corporate debt restructuring system is a
non-statutory mechanism and a voluntary system based on debtor-creditor and
inter-creditor agreements.
Universal Banking Guidelines
Universal banking in the Indian context means the transformation of
long-term lending institutions into banks. Pursuant to the recommendations of
the Narasimham Committee II and the Khan Working Group, the Reserve Bank of
India, in its mid-term review of monetary and credit policy for fiscal 2000,
announced that long-term lending institutions would have the option of
transforming themselves into banks subject to compliance with the prudential
norms as applicable to banks. If a long-term lending institution chose to
exercise the option available to it and formally decided to convert itself into
a universal bank, it could formulate a plan for the transition path and a
strategy for smooth conversion into a universal bank over a specified time
frame. In April 2001, the Reserve Bank of India issued guidelines on several
operational and regulatory issues which were required to be addressed in
evolving the path for transition of a long-term lending institution into a
universal bank.
Pension Reforms
Currently, there are three categories of pension schemes in India: pension
schemes for government employees, pension schemes for employees in the organized
sector and voluntary pension schemes. In case of pension schemes for government
employees, the government pays its employees a defined periodic benefit upon
their retirement. Further, the contribution towards the pension scheme is funded
solely by the government and not matched by a contribution from the employees.
The Employees Provident Fund, established in 1952, is a mandatory program for
employees of certain establishments. It is a contributory program that provides
for periodic contributions of 10% to 12% of the basic salary by both the
employer and the employees. The contribution is invested in prescribed
securities and the accumulated balance in the fund (including the accretion
thereto) is paid to the employee as a lump sum on retirement. Besides these,
there are voluntary pension schemes administered by the government (the Public
Provident Fund to which contribution may be made up to a maximum of Rs.70,000 or
US$ 1,574 per annum) or offered by insurance companies, where the contribution
may be made on a voluntary basis. Such voluntary contributions are often driven
by tax benefits offered under the scheme.
In 1998, the government commissioned the Old Age Social and Income Security
(OASIS) project and nominated an expert committee to suggest changes to the
existing policy framework. The committee submitted its report in January 2000,
recommending a system for private sector management of pension funds to provide
market-linked returns. It also recommended the establishment of a separate
pensions regulatory authority to regulate the pensions system. Subsequently, in
the budget for fiscal 2001, the government announced that a high level committee
would be formulated to design a contribution-based pension scheme for new
government recruits. The government also requested the Insurance Regulatory and
Development Authority to draw up a roadmap for implementing the OASIS Report.
The Insurance Regulatory and Development Authority submitted its report in
October 2001. The report suggested that pension fund managers should constitute
a separate legal entity to conduct their pension business. In August 2003, the
government announced that it would be mandatory for its new employees (excluding
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defense personnel) to join a new defined contribution pension scheme where both
the government and the employee would make monthly contributions of 10% of the
employee's salary. The government also announced that a Pension Fund Development
and Regulatory Authority would be set up to regulate the pension industry. The
government constituted the interim Pension Fund Development and Regulatory
Authority on October 11, 2003. In December 2003, the government announced that
the new pension scheme would be applicable to all new recruits to Indian
government service (excluding defense personnel) from January 1, 2004. Further,
on December 30, 2004, the government promulgated an ordinance establishing the
statutory regulatory body, Pension Fund Regulatory and Development Authority
(PFRDA) to undertake promotional, developmental and regulatory functions with
respect to the pension sector. In March 2005, the Government tabled the Pension
Fund and Development Authority Bill in Parliament. The Union Budget for fiscal
2006 has recognized the opportunities for foreign direct investment in the
pension sector and it has also announced that the government would issue
guidelines for such investment.
Credit Policy Measures
The Reserve Bank of India issues an annual policy statement setting out its
monetary policy stance and announcing various regulatory measures. It issues a
review of the annual policy statement on a quarterly basis.
Annual Policy Statement for Fiscal 2007
In its annual policy statement for fiscal 2007 announced in April 2006, the
Reserve Bank of India:
o Raised the requirement of general provisioning on standard advances to
specific sectors like residential housing loans beyond Rs.2.0 million
(US$44,964) and commercial real estate loans from 0.40% to 1.0%.
o Increased the risk weight on commercial real estate exposure from
125.0% to 150.0%.
o Proposed to include banks' total exposure to venture capital funds as
a part of capital market exposure with a risk weight of 150.0%.
o Raised the ceiling on non resident external deposit rates to
LIBOR/SWAP rates of US Dollar of corresponding maturities plus 100
basis points from the existing level of 75 basis points above
LIBOR/SWAP rates;
First Quarter Review of Annual Policy Statement for Fiscal 2007
In its first quarter review of the annual policy statement announced on
July 25, 2006, the Reserve Bank of India has raised the reverse repo rate by 25
basis points to 6.0% with immediate effect. The bank rate remained unchanged at
6.0%.
Reforms of the Non-Bank Finance Companies
Standards relating to income recognition, provisioning and capital adequacy
were prescribed for non-bank finance companies in June 1994. Registered non-bank
finance companies were required to achieve a minimum capital adequacy of 6.0% by
year-end fiscal 1995 and 8.0% by year-end fiscal 1996 and to obtain a minimum
credit rating. To encourage the companies complying with the regulatory
framework, the Reserve Bank of India announced in July 1996 certain
liberalization measures under which the non-bank finance companies registered
with it and complying with the prudential norms and credit rating requirements
were granted freedom from the ceiling on interest rates on deposits and amount
of deposits. Other measures introduced include requiring non-bank finance
companies to maintain a certain percentage of liquid assets and to create a
reserve fund. The percentage of liquid assets to be maintained by non-bank
finance companies has been revised uniformly upwards and, since April 1999,
15.0% of public deposits must be maintained. From January 1, 2000 the
requirement should not be less than 10.0% in approved securities and the
remaining in unencumbered term deposits in any scheduled commercial bank, the
aggregate of which shall not be less than 15.0% of the "public deposit"
outstanding at the close of business on the last working day of the second
preceding quarter. The maximum rate of interest that non-bank finance companies
could pay on their public deposits was reduced from 12.5% per annum to 11.0% per
annum effective March 4, 2003.
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Efforts have also been made to integrate non-bank finance companies into
the mainstream financial sector. The first phase of this integration covered
measures relating to registrations and standards. The focus of supervision has
now shifted to non-bank finance companies accepting public deposits. This is
because companies accepting public deposits are required to comply with all the
directions relating to public deposits, prudential norms and liquid assets. A
task force on non-bank finance companies set up by the Government of India
submitted its report in October 1998, and recommended several steps to
rationalize the regulation of non-bank finance companies. Accepting these
recommendations, the Reserve Bank of India issued new guidelines for non-bank
finance companies, which were as follows:
o a minimum net owned fund of Rs.2.5 million (US$ 56, 205) is mandatory
before existing non-bank finance companies may accept public deposits;
o a minimum investment grade rating is compulsory for loan and
investment companies accepting public deposits, even if they have the
minimum net owned funds;
o permission to accept public deposits was also linked to the level of
capital to risk assets ratio. Different capital to risk assets ratio
levels for non-bank finance companies with different ratings were
specified; and
o non-bank finance companies were advised to restrict their investments
in real estate to 10.0% of their net owned funds.
In the monetary and credit policy for fiscal 2000, the Reserve Bank of
India stipulated a minimum capital base of Rs.20 million (US$ 449,640) for all
new non-bank finance companies. In the Government of India's budget for fiscal
2002, the procedures for foreign direct investment in non-bank finance companies
were substantially liberalized.
During fiscal 2003, the Reserve Bank of India introduced a number of
measures to enhance the regulatory and supervisory standards of non-bank finance
companies, especially in order to bring them at par with commercial banks, in
select operations, over a period of time. Other regulatory measures adopted and
subsequently revised in November 2004 included aligning interest rates in this
sector with the rates prevalent in the rest of the economy, tightening
prudential norms and harmonizing supervisory directions with the requirements of
the Companies Act, procedural changes in nomination facilities, issuance of a
Know Your Customer policy and allowing non-bank finance companies to take up
insurance agency business.
In 2005, the Reserve Bank of India introduced stricter regulatory measures
for non-bank finance companies, including stringent reporting requirements and
revised Know Your Customer guidelines.
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SUPERVISION AND REGULATION
The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important laws include the Reserve Bank of India Act, the
Negotiable Instruments Act and the Banker's Books Evidence Act. Additionally,
the Reserve Bank of India, from time to time, issues guidelines to be followed
by banks. Compliance with all regulatory requirements is evaluated with respect
to financial statements under Indian GAAP.
Reserve Bank of India Regulations
Commercial banks in India are required under the Banking Regulation Act to
obtain a license from the Reserve Bank of India to carry on banking business in
India. Before granting the license, the Reserve Bank of India must be satisfied
that certain conditions are complied with, including (i) that the bank has the
ability to pay its present and future depositors in full as their claims accrue;
(ii) that the affairs of the bank will not be or are not likely to be conducted
in a manner detrimental to the interests of present or future depositors; (iii)
that the bank has adequate capital and earnings prospects; and (iv) that the
public interest will be served if such license is granted to the bank. The
Reserve Bank of India can cancel the license if the bank fails to meet the above
conditions or if the bank ceases to carry on banking operations in India.
ICICI Bank, being licensed as a banking company, is regulated and
supervised by the Reserve Bank of India. The Reserve Bank of India requires
ICICI Bank to furnish statements, information and certain details relating to
its business. It has issued guidelines for commercial banks on recognition of
income, classification of assets, valuation of investments, maintenance of
capital adequacy and provisioning for non-performing assets. The Reserve Bank of
India has set up a Board for Financial Supervision, under the chairmanship of
the Governor of the Reserve Bank of India. The appointment of the auditors of
banks is subject to the approval of the Reserve Bank of India. The Reserve Bank
of India can direct a special audit in the interest of the depositors or in the
public interest.
Regulations relating to the Opening of Branches
Section 23 of the Banking Regulation Act provides that banks must obtain
the prior approval of the Reserve Bank of India to open new branches. Permission
is granted based on factors such as the financial condition and history of the
banking company, its management, adequacy of capital structure and earning
prospects and the public interest. The Reserve Bank of India may cancel the
license for violations of the conditions under which it was granted. Under the
banking license granted to ICICI Bank by the Reserve Bank of India, ICICI Bank
is required to have at least 25.0% of its branches located in rural and
semi-urban areas. A rural area is defined as a center with a population of less
than 10,000. A semi-urban area is defined as a center with a population of
greater than 10,000 but less than 100,000. These population figures relate to
the 1991 census conducted by the Government of India. In September 2005, the
Reserve Bank of India issued a new branch authorization policy in terms of which
the existing system of granting authorizations for opening individual branches
from time to time will be replaced by a system of aggregated approvals on an
annual basis. The Reserve Bank of India will discuss with individual banks their
branch expansion strategies and plans over the medium term. The term "branch"
for this purpose has been defined to also include extension counters, offsite
ATMs, administrative offices and back offices. While processing authorization
requests, the Reserve Bank of India will give importance to the nature and scope
of banking services particularly in under-banked areas, actual credit flow to
the priority sector and efforts to promote financial inclusion, the need to
induce enhanced competition in the banking sector, the bank's regulatory
compliance, quality of governance, risk management and relationships with
subsidiaries and affiliates.
Capital Adequacy Requirements
ICICI Bank is subject to the capital adequacy requirements of the Reserve
Bank of India, which, based on the guidelines of the Basel Committee on Banking
Regulations and Supervisory Practices, 1998, require ICICI Bank to maintain a
minimum ratio of capital to risk adjusted assets and off-balance sheet items of
9.0%, at least half of which must be Tier I capital.
The total capital of a banking company is classified into Tier I and Tier
II capital. Tier I capital, the core capital, provides the most permanent and
readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves as
reduced by equity investments in subsidiaries,
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intangible assets and losses in the current period and those brought forward
from the previous period. In fiscal 2003, the Reserve Bank of India issued a
guideline requiring a bank's deferred tax asset to be treated as an intangible
asset and deducted from its Tier I capital.
Tier II capital includes undisclosed reserves, revaluation reserves (at a
discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of risk weighted assets), hybrid debt capital instruments
(which combine certain features of both equity and debt securities) and
subordinated debt. Any subordinated debt is subject to progressive discounts
each year for inclusion in Tier II capital and total subordinated debt
considered as Tier II capital cannot exceed 50.0% of Tier I capital. Tier II
capital cannot exceed Tier I capital.
In January 2006, the Reserve Bank of India issued guidelines permitting
banks to issue perpetual debt with a call option after not less than 10 years,
to be exercised with its prior approval, for inclusion in Tier I capital up to a
maximum of 15% of total Tier I capital, The Reserve Bank of India also permitted
banks to issue debt instruments with a minimum maturity of 15 years and a call
option after not less than 10 years, to be exercised with its prior approval,
for inclusion in Tier II capital. In July 2006, the Reserve Bank of India issued
guidelines permitting the issuance of Tier I and Tier II debt instruments
denominated in foreign currencies. See also "Operating and Financial Review and
Prospects - Capital Resources."
Risk adjusted assets and off-balance sheet items considered for determining
the capital adequacy ratio are the risk weighted total of specified funded and
non-funded exposures. Degrees of credit risk expressed as percentage weighting
have been assigned to various balance sheet asset items and conversion factors
to off-balance sheet items. The value of each item is multiplied by the relevant
weight or conversion factor to produce risk-adjusted values of assets and
off-balance-sheet items. Standby letters of credit and guarantees are treated as
similar to funded exposure and are subject to similar risk weight. All foreign
exchange open positions carry a 100.0% risk weight. Capital requirements have
also been prescribed for open positions in gold. In December 2004, the Reserve
Bank of India increased the risk weights on housing loans from 50.0% to 75.0%
and on consumer credit including personal loans and credit card receivables from
100.0% to 125.0% as a temporary counter-cyclical measure given the rapid growth
of these segments. In July 2005, the Reserve Bank of India increased the risk
weights on capital market exposure and exposure to commercial real estate from
100.0% to 125.0%. In its annual policy statement for fiscal 2007, the Reserve
Bank of India further increased the risk weight on loans and exposure to
commercial real estate from 125.0% to 150.0%. The risk weight for venture
capital funds included for capital market exposure was increased to 150.0%. The
Reserve Bank of India issued guidelines on securitization of standard assets on
February 1, 2006. The guidelines define true sale, criteria to be met by special
purpose vehicles set up for securitization, policy on provision of credit
enhancement facilities, liquidity facilities, underwriting facilities and
provision of services. The guidelines also cover capital requirements on
securitization, prudential norms for investment in securities issued by special
purpose vehicles, accounting treatment of the securitization transactions and
disclosure requirements.
Effective March 31, 2001, banks and financial institutions were required to
assign a risk weight of 2.5% in respect of the entire investment portfolio to
cover market risk, over and above the existing risk weights for credit risk in
non-government and non-approved securities. In fiscal 2002, with a view to the
building up of adequate reserves to guard against any possible reversal of the
interest rate environment in the future due to unexpected developments, the
Reserve Bank of India advised banks to build up an investment fluctuation
reserve of a minimum of 5.0% of the bank's investment portfolio within a period
of five years, by fiscal 2006. This reserve had to be computed with respect to
investments in held for trading and available for sale categories. Investment
fluctuation reserve is included in Tier II capital. In June 2004, the Reserve
Bank of India issued guidelines on capital for market risk. The guidelines
prescribe the method of computation of risk-weighted assets in respect of market
risk. The aggregate risk weighted assets are required to be taken into account
for determining the capital adequacy ratio. Banks were required to maintain a
capital charge for market risk in respect of their trading book exposure
(including derivatives) by year-end fiscal 2005 and securities included under
available for sale category by year-end fiscal 2006. In October 2005, the
Reserve Bank of India specified that banks that maintain capital for both credit
risk and market risk for both held for trading and available for sale categories
at year-end fiscal 2006 would be permitted to treat the entire balance in the
investment fluctuation reserve as Tier I capital.
In February 2005, the Reserve Bank of India issued draft guidelines for the
implementation of the revised capital adequacy framework of the Basel Committee.
These draft guidelines, which are proposed to be effective from April 1, 2006,
specify that all banks in India will adopt the standardized approach for credit
risk and the basic
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indicator approach for operational risk with effect from March 31, 2007. After
adequate expertise has been developed, both at the banks and at the supervisory
levels, some banks may be allowed to migrate to the internal ratings based
approach after obtaining the approval of the Reserve Bank of India. The
guidelines also prescribe a 75.0% risk weight for retail credit exposures,
differential risk weights for other credit exposures linked to their credit
rating, and a capital charge for operational risk based on a factor of 15.0% of
the sum of a bank's net interest income and non-interest income (excluding
extraordinary income).
Loan Loss Provisions and Non-Performing Assets
In April 1992, the Reserve Bank of India issued formal guidelines on income
recognition, asset classification, provisioning standards and valuation of
investments applicable to banks, which are revised from time to time.
The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to ICICI Bank's loans, debentures, lease
assets, hire purchases and bills are set forth below.
The Reserve Bank of India guidelines stipulate the criteria for determining
and classifying a non-performing asset set forth below:
Asset Classification
A non-performing asset is an asset in respect of which any amount of
interest or principal is overdue for more than 90 days (180 days until year-end
fiscal 2003). In particular, an advance is a non-performing asset where:
o interest and/or installment of principal remains overdue for a period
of more than 90 days in respect of a term loan;
o the account remains "out-of-order" for a period of more than 90 days
in respect of an overdraft or cash credit;
o the bill remains overdue for a period of more than 90 days in case of
bills purchased and discounted;
o installment of interest or principal remains overdue for two harvest
seasons for short duration crops or for one harvest season for long
duration crops; or
o any amount to be received remains overdue for a period of more than 90
days in respect of other accounts.
Interest in respect of non-performing assets is not recognized or credited
to the income account unless collected.
Non-performing assets are classified as described below.
Sub-Standard Assets. Assets that are non-performing assets for a period not
exceeding 12 months (18 months until year-end fiscal 2004). In such cases, the
current net worth of the borrower/guarantor or the current market value of the
security charged is not enough to ensure recovery of dues to the banks in full.
Such an asset has well-defined credit weaknesses that jeopardize the liquidation
of the debt and are characterized by the distinct possibility that the bank will
sustain some loss, if deficiencies are not corrected.
Doubtful Assets. Assets that are non-performing assets for more than 12
months (18 months until year-end fiscal 2004). A loan classified as doubtful has
all the weaknesses inherent in assets that are classified as sub-standard, with
the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently known facts, conditions and values, highly
questionable and improbable.
Loss Assets. Assets on which losses have been identified by the bank or
internal or external auditors or the Reserve Bank of India inspection but the
amount has not been written off fully.
There are separate guidelines for projects under implementation which are
based on the achievement of financial closure and the date of approval of the
project financing.
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The Reserve Bank of India also has separate guidelines for restructured
loans. A fully secured restructured standard loan can be restructured by
reschedulement of principal repayment and/or the interest element, but must be
separately disclosed as a restructured loan. The amount of sacrifice, if any, in
the element of interest, measured in present value terms, is either written off
or provision is made to the extent of the sacrifice involved. Similar guidelines
are applicable to sub-standard assets. The sub-standard accounts which have been
subjected to restructuring, whether in respect of principal installment or
interest amount, by whatever modality, are eligible to be upgraded to the
standard category only after the specified period, i.e., a period of one year
after the date when first payment of interest or of principal, whichever is
earlier, falls due, subject to satisfactory performance during the period.
To put in place an institutional mechanism for the restructuring of
corporate debt, the Reserve Bank of India has devised a corporate debt
restructuring system. See "Overview of the Indian Financial Sector - Recent
Structural Reforms -- Corporate Debt Restructuring Forum".
Provisioning and Write-Offs
Provisions are based on guidelines specific to the classification of the
assets. The following guidelines apply to the various asset classifications:
o Standard Assets. A general provision of 0.25% is required. In fiscal
2006, the Reserve Bank of India increased the general provisioning
requirement from 0.25% to 0.40% (excluding direct advances to the
agriculture and small and medium enterprise sectors). In its annual
policy statement for fiscal 2007, the Reserve Bank of India increased
the general provisioning on standard advances in specific sectors
from 0.40% to 1.00%. These provisions are eligible for inclusion in
Tier II capital for capital adequacy purposes up to the permitted
extent. The Reserve Bank of India has permitted banks to phase in the
additional provisioning over the fiscal 2007 to achieve the following
levels of provisioning:
i) 0.55% by June 30, 2006;
ii) 0.70% by September 30, 2006;
iii) 0.85% by December 31, 2006; and
iv) 1.00% by March 31, 2007.
o Sub-Standard Assets. A general provision of 10.0% of the total
outstanding is required. However, unsecured exposures which are
identified as substandard would attract an additional provision of
10.0%, i.e., a total of 20.0% on the outstanding balance.
o Doubtful Assets. A 100.0% write-off is required to be taken against
the unsecured portion of the doubtful asset and charged against
income. The value assigned to the collateral securing a loan is the
amount reflected on the borrower's books or the realizable value
determined by third party appraisers. Until year-end fiscal 2004, in
cases where there was a secured portion of the asset, depending upon
the period for which the asset remained doubtful, a 20.0% to 50.0%
provision was required to be taken against the secured asset as
follows:
o Up to one year: 20.0% provision
o One to three years: 30.0% provision
o More than three years: 50.0% provision
In July 2004, the Reserve Bank of India introduced additional provisioning
requirements for non-performing assets classified as `doubtful for more than
three years'. Effective year-end fiscal 2005, 100.0% provision is required for
the secured portion of assets classified as doubtful for more than three years
on or after April 1, 2004. For the secured portion of assets classified as
doubtful for more than three years at year-end fiscal, 2004, a provision of
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60.0% is required to be made by year-end fiscal 2005, 75.0% by year-end fiscal
2006 and 100.0% by year-end fiscal 2007.
o Loss Assets. The entire asset is required to be written off or
provided for, i.e., a 100.0% provision.
o Restructured Loans. The amount of sacrifice, if any, in the element
of interest, measured in present value terms, is either written off
or provision is made to the extent of the sacrifice involved.
In June 2006, the Reserve Bank of India issued prudential norms on creation
and utilization of floating provisions (i.e., provisions which are not made in
respect of specific non-performing assets or are made in excess of regulatory
requirements for provisions for standard assets). The norms state that floating
provisions can be used only for contingencies under extraordinary circumstances
for making specific provisions in impaired accounts after obtaining approval
from the Board of Directors and with the prior permission of the Reserve Bank of
India. Floating provisions for advances and investments would be held separately
and cannot be reversed by credit to the profit and loss account. Until
utilization of such provisions, they can be netted off from gross non performing
assets to arrive at disclosure of net non performing assets. Alternatively,
floating provisions can be treated as part of Tier II capital within the overall
ceiling of 1.25% of total risk-weighted assets. Further, floating provisions
would not include specific voluntary provisions made by banks for advances at
rates which are higher than the stipulated rates.
Regulations relating to Making Loans
The provisions of the Banking Regulation Act govern the making of loans by
banks in India. The Reserve Bank of India issues directions covering the loan
activities of banks. Some of the major guidelines of the Reserve Bank of India,
which are now in effect, are as follows:
o The Reserve Bank of India has prescribed norms for bank lending to
non-bank financial companies and financing of public sector
disinvestment.
o Banks are free to determine their own lending rates but each bank must
declare its prime lending rate as approved by its Board of Directors.
Banks are required to declare a benchmark prime lending rate based on
various parameters including cost of funds, operating expenses,
capital charge and profit margin. Each bank should also indicate the
maximum spread over the prime lending rate for all credit exposures
other than retail loans. The interest charged by banks on advances up
to Rs.200,000 (US$4,360) to any one entity (other than certain
permitted types of loans including loans to individuals for acquiring
residential property, loans for purchase of consumer durables and
other non-priority sector personal loans) must not exceed the prime
lending rate. Banks are also given freedom to lend at a rate below the
prime lending rate in respect of creditworthy borrowers and exposures.
Interest rates for certain categories of advances are regulated by the
Reserve Bank of India.
In terms of Section 20(1) of the Banking Regulation Act, a bank cannot
grant any loans and advances against the security of its own shares, a banking
company is prohibited from entering into any commitment for granting any loans
or advances to or on behalf of any of its directors, or any firm in which any of
its directors is interested as partner, manager, employee or guarantor, or any
company (not being a subsidiary of the banking company or a company registered
under Section 25 of the Companies Act, 1956, or a government company) of which,
or the subsidiary or the holding company of which any of the directors of the
bank is a director, managing agent, manager, employee or guarantor or in which
he holds substantial interest, or any individual in respect of whom any of its
directors is a partner or guarantor. There are certain exemptions in this regard
as the explanation to the section provides that `loans or advances' shall not
include any transaction which the Reserve Bank of India may specify by general
or special order as not being a loan or advance for the purpose of such section.
There are guidelines on loans against equity shares in respect of amount,
margin requirement and purpose.
In June 2005, the Reserve Bank of India issued guidelines requiring banks
to put in place a policy for exposure to real estate with the approval of their
boards. The policy is required to include exposure limits, collaterals to be
considered, collateral cover and margins and credit authorization. The Reserve
Bank of India has also permitted banks to extend financial assistance to Indian
companies for acquisition of equity in overseas joint ventures or
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wholly owned subsidiaries or in other overseas companies, new or existing, as
strategic investment. Banks are not permitted to finance acquisitions by
companies in India.
Regulations relating to Sale of Assets to Asset Reconstruction Companies
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002, as amended, provides for sale of financial
assets by banks and financial institutions to asset reconstruction companies.
The Reserve Bank of India has issued guidelines to banks on the process to be
followed for sales of financial assets to asset reconstruction companies. These
guidelines provide that a bank may sell financial assets to an asset
reconstruction company provided the asset is a non-performing asset. These
assets are to be sold on `without recourse' basis only. A bank may sell a
standard asset only if the borrower has a consortium or multiple banking
arrangement, at least 75.0% by value of the total loans to the borrower are
classified as non-performing and at least 75.0% by value of the banks and
financial institutions in the consortium or multiple banking arrangement agree
to the sale. The banks selling financial assets should ensure that there is no
known liability devolving on them and that they do not assume any operational,
legal or any other type of risks relating to the financial assets sold. Further,
banks may not sell financial assets at a contingent price with an agreement to
bear a part of the shortfall on ultimate realization. However, banks may sell
specific financial assets with an agreement to share in any surplus realized by
the asset reconstruction company in the future. While each bank is required to
make its own assessment of the value offered in the sale before accepting or
rejecting an offer for purchase of financial assets by an asset reconstruction
company, in consortium or multiple banking arrangements where more than 75.0% by
value of the banks or financial institutions accept the offer, the remaining
banks or financial institutions are obliged to accept the offer. Consideration
for the sale may be in the form of cash, bonds or debentures or security
receipts or pass through certificates issued by the asset reconstruction company
or trusts set up by it to acquire the financial assets. See also "Overview of
the Indian Financial Sector - Recent Structural Reforms - Legislative Framework
for Recovery of Debts Due to Banks".
Guidelines on Sale and Purchase of Non-performing Assets
In July 2005, the Reserve Bank of India issued guidelines on sales and
purchases of non-performing assets between banks, financial institutions and
non-bank finance companies. These guidelines require that the Board of Directors
of the bank must establish a policy for purchases and sales of non-performing
assets. Purchases and sales of non-performing assets must be without recourse to
the seller and on a cash basis, with the entire consideration being paid
upfront. An asset must have been classified as non-performing for at least two
years by the seller to be eligible for sale. The purchasing bank must hold the
non-performing asset on its books for at least 15 months before it can sell the
asset to another bank. The asset cannot be sold back to the original seller.
Directed Lending
Priority Sector Lending
The Reserve Bank of India requires commercial banks to lend a certain
percentage of their net bank credit to specific sectors (the priority sectors),
such as agriculture, small-scale industry, small businesses and housing finance.
Total priority sector advances should be 40.0% of net bank credit with
agricultural advances required to be 18.0% of net bank credit and advances to
weaker sections required to be 10.0% of net bank credit, and 1.0% of the
previous year's net bank credit required to be lent under the Differential Rate
of Interest scheme. Any shortfall in the amount required to be lent to the
priority sectors may be required to be deposited with the National Bank for
Agriculture and the Rural Development. These deposits can be for a period of one
year or five years.
Prior to the amalgamation, the advances of ICICI were not subject to the
requirement applicable to banks in respect of priority sector lending. Pursuant
to the terms of the Reserve Bank of India's approval of the amalgamation, ICICI
Bank is required to maintain a total of 50.0% of its domestic net bank credit
on the residual portion of its advances (i.e., the portion of its total
advances excluding advances of ICICI) in the form of priority sector advances.
This additional requirement of 10.0% by way of priority sector advances will
apply until such time as the aggregate priority sector advances reach a level
of 40.0% of the total net bank credit of ICICI Bank.
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Export Credit
The Reserve Bank of India also requires commercial banks to make loans to
exporters at concessional rates of interest. This enables exporters to have
access to an internationally competitive financing option. Pursuant to existing
guidelines, 12.0% of a bank's net bank credit is required to be in the form of
export credit. ICICI Bank provides export credit for pre-shipment and
post-shipment requirements of exporter borrowers in rupees and foreign
currencies.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks and long-term lending institutions in respect of their
lending to individual borrowers and to all companies in a single group (or
sponsor group).
The limits currently set by the Reserve Bank of India are as follows:
o The exposure ceiling for a single borrower is 15.0% of capital funds
and group exposure limit is 40.0% of capital funds. In case of
financing for infrastructure projects, the exposure limit to a single
borrower is extendable by another 5.0%, i.e., up to 20.0% of capital
funds and the group exposure limit is extendable by another 10.0%,
i.e., up to 50.0% of capital funds. Banks may, in exceptional
circumstances, with the approval of their Board of Directors, consider
enhancement of the exposure to a borrower up to a maximum of further
5.0% of capital funds, subject to the borrower consenting to the banks
making appropriate disclosures in their annual reports.
o Capital funds is the total capital as defined under capital adequacy
norms (Tier I and Tier II capital).
o Non-fund based exposures are calculated at 100.0% and in addition,
banks include forward contracts in foreign exchange and other
derivative products, like currency swaps and options, at their
replacement cost value in determining individual or group borrower
exposure ceilings, effective April 1, 2003.
To ensure that exposures are evenly spread, the Reserve Bank of India
requires banks to fix internal limits of exposure to specific sectors. These
limits are subject to periodical review by the banks. ICICI Bank has fixed a
ceiling of 15.0% on its exposure to any one industry (other than retail loans)
and monitors its exposures accordingly.
Regulations relating to Investments and Capital Market Exposure Limits
Pursuant to the Reserve Bank of India guidelines, the exposure of banks to
capital markets by way of investments in shares, convertible debentures, units
of equity oriented mutual funds and loans to brokers, should not exceed 5.0% of
total advances (including commercial paper) at March 31 of the previous fiscal
year and investments in shares, convertible debentures and units of equity
oriented mutual funds should not exceed 20.0% of the bank's net worth. However
the exposure to capital markets in excess of 5.0% is permitted by the Reserve
Bank of India on a case by case basis. In its mid-term review of its annual
policy statement for fiscal 2006, announced on October 25, 2005, the Reserve
Bank of India has proposed to restrict a bank's capital exposure to 40.0% of its
net worth (both standalone and consolidated) and the consolidated direct capital
market exposure to 20.0% of the consolidated net worth. Pursuant to the terms of
the Reserve Bank of India's approval for the amalgamation, ICICI's project
finance related investments are excluded from the computation of these limits
for a period of five years from the amalgamation. In addition, the Reserve Bank
of India has approved the exclusion of specific equity investments acquired by
conversion of debt under restructuring schemes approved by the Corporate Debt
Restructuring Forum.
In November 2003, the Reserve Bank of India issued guidelines on
investments by banks in non-Statutory Liquidity Ratio securities issued by
companies, banks, financial institutions, central and state government sponsored
institutions and special purpose vehicles. These guidelines apply to primary
market subscriptions and secondary market purchases. Pursuant to these
guidelines, banks are prohibited from investing in non-Statutory Liquidity Ratio
securities with an original maturity of less than one year, other than
commercial paper and certificates of deposits. Banks are also prohibited from
investing in unrated securities. A bank's investment in unlisted non-Statutory
Liquidity Ratio securities may not exceed 10.0% of its total investment in
non-Statutory Liquidity Ratio securities as at the end of the preceding fiscal
year with a sub-ceiling of 5.0% for investments in bonds of public sector
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undertakings. These guidelines do not apply to investments in security receipts
issued by securitization or reconstruction companies registered with Reserve
Bank of India and asset backed securities and mortgage backed securities with a
minimum investment grade credit rating. These guidelines were effective April 1,
2004, with provision for compliance in a phased manner by January 1, 2005.
In April 1999, the Reserve Bank of India, in its monetary and credit
policy, stated that the investment by a bank in subordinated debt instruments,
representing Tier II capital, issued by other banks and financial institutions
should not exceed 10.0% of the investing bank's capital including Tier II
capital and free reserves. In July 2004, the Reserve Bank of India imposed a
ceiling of 10.0% of capital funds (Tier I plus Tier II capital) on investments
by banks and financial institutions in equity shares, preference shares eligible
for capital status, subordinated debt instruments, hybrid debt capital
instruments and any other instrument approved as in the nature of capital,
issued by other banks and financial institutions. Investments in the instruments
which are not deducted from Tier I capital of the investing bank or financial
institution, are subject to a 100.0% risk weight for credit risk for capital
adequacy purposes. The risk weight for credit risk exposure in capital markets
has been increased to 125.0% from 100.0% in July 2005. Further, banks and
financial institutions cannot acquire any fresh stake in a bank's equity shares,
if by such acquisition, the investing bank's or financial institution's holding
exceeds 5.0% of the investee bank's equity capital. Banks with investments in
excess of the prescribed limits were required to apply to the Reserve Bank of
India with a roadmap for reduction of the exposure.
Under the Reserve Bank of India's guidelines on parabanking activities, a
bank's investments in a subsidiary company, financial services company,
financial institution and stock or other exchange cannot exceed 10.0% of the
bank's paid up capital and reserves and all such investments together cannot
exceed 20.0% of the bank's paid up capital and reserves. In August 2006, the
Reserve Bank of India issued guidelines including investments in venture capital
funds in the above limit.
Consolidated Supervision Guidelines
In fiscal 2003, the Reserve Bank of India issued guidelines for
consolidated accounting and consolidated supervision for banks. These guidelines
became effective April 1, 2003. The principal features of these guidelines are:
Consolidated Financial Statements. Banks are required to prepare
consolidated financial statements intended for public disclosure.
Consolidated Prudential Returns. Banks are required to submit to the
Reserve Bank of India, consolidated prudential returns reporting their
compliance with various prudential norms on a consolidated basis, excluding
insurance subsidiaries. Compliance on a consolidated basis is required in
respect of the following main prudential norms:
o Single borrower exposure limit of 15.0% of capital funds (20.0% of
capital funds provided the additional exposure of up to 5.0% is for
the purpose of financing infrastructure projects);
o Borrower group exposure limit of 40.0% of capital funds (50.0% of
capital funds provided the additional exposure of up to 10.0% is for
the purpose of financing infrastructure projects);
o Deduction from Tier I capital of the bank, of any shortfall in capital
adequacy of a subsidiary for which capital adequacy norms are
specified; and
o Consolidated capital market exposure limit of 2.0% of consolidated
total assets and 10.0% of consolidated net worth.
ICICI Bank is in compliance with these guidelines, except for the
consolidated capital market exposure limits. ICICI Bank has submitted to the
Reserve Bank of India that the limit of 2.0% of consolidated total assets and
10.0% of consolidated net worth effectively reduces the standalone capital
market exposure limit of 5.0% of advances and 20.0% of net worth. See also
"Reserve Bank of India Regulations - Credit Exposure Limits". In its mid-term
review of its annual policy statement for fiscal 2006 announced on October 25,
2005, the Reserve Bank of India has
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proposed to restrict a bank's capital exposure to 40.0% of its net worth (both
standalone and consolidated) and the consolidated direct capital market exposure
to 20.0% of the consolidated net worth.
In June 2004, the Reserve Bank of India published the report of a working
group on monitoring of financial conglomerates, which proposed the following
framework:
o identification of financial conglomerates that would be subjected to
focused regulatory oversight;
o monitoring intra-group transactions and exposures and large exposures
of the group to outside counter parties;
o identifying a designated entity within each group that would collate
data in respect of all other group entities and furnish the same to
its regulator; and
o formalizing a mechanism for inter-regulatory exchange of information.
The framework covers entities under the jurisdiction of the Reserve Bank of
India, the Securities and Exchange Board of India, the Insurance Regulatory and
Development Authority and the National Housing Bank and would in due course be
extended to entities regulated by the proposed Pension Fund Regulatory and
Development Authority. The Reserve Bank of India has identified ICICI Bank and
its related entities as a financial conglomerate with ICICI Bank as the
designated entity responsible for reporting to the Reserve Bank of India.
Banks' Investment Classification and Valuation Norms
The key features of the Reserve Bank of India guidelines on categorization
and valuation of banks' investment portfolio are given below.
o The entire investment portfolio is required to be classified under
three categories: (a) held to maturity, (b) held for trading and (c)
available for sale. Held to maturity includes securities acquired with
the intention of being held up to maturity; held for trading includes
securities acquired with the intention of being traded to take
advantage of the short-term price/interest rate movements; and
available for sale includes securities not included in held to
maturity and held for trading. Banks should decide the category of
investment at the time of acquisition.
o Held to maturity investments compulsorily include (a) recapitalization
bonds received from the Government of India towards their
re-capitalization requirement and held in their investment portfolio,
(b) investments in subsidiaries and joint ventures and (c)
investments in debentures deemed as advance. Held to maturity
investments also include any other investment identified for
inclusion in this category subject to the condition that such
investments cannot exceed 25.0% of the total investment excluding
recapitalization bonds and debentures.
o Profit on the sale of investments in the held to maturity category,
net of tax and statutory reserve, is appropriated to the capital
reserve account after being taken in the income statement. Loss on any
sale is recognized in the income statement.
o The market price of the security available from the stock exchange,
the price of securities in subsidiary general ledger transactions, the
Reserve Bank of India price list or prices declared by Primary Dealers
Association of India jointly with the Fixed Income Money Market and
Derivatives Association of India serves as the "market value" for
investments in available for sale and held for trading securities.
o Investments under the held for trading category should be sold within
90 days; in the event of inability to sell due to adverse factors
including tight liquidity, extreme volatility or a unidirectional
movement in the market, the unsold securities should be shifted to the
available for sale category.
o Profit or loss on the sale of investments in both held for trading and
available for sale categories is taken in the income statement.
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o Shifting of investments from or to held to maturity may be done with
the approval of the Board of Directors once a year, normally at the
beginning of the accounting year; shifting of investments from
available for sale to held for trading may be done with the approval
of the Board of Directors, the Asset Liability Management Committee or
the Investment Committee; shifting from held for trading to available
for sale is generally not permitted.
In September 2004, the Reserve Bank of India announced that it would set up
an internal group to review the investment classification guidelines to align
them with international practices and the current state of risk management
practices in India, taking into account the unique requirement applicable to
banks in India of maintenance of a statutory liquidity ratio equal to 25.0% of
their demand and time liabilities. In the meanwhile, the Reserve Bank of India
has permitted banks to exceed the limit of 25.0% of investments for the held to
maturity category provided the excess comprises only statutory liquidity ratio
investments and the aggregate of such investments in the held to maturity
category do not exceed 25.0% of the demand and time liabilities. The Reserve
Bank of India permitted banks to transfer additional securities to the held to
maturity category as a one time measure, in addition to the transfer permitted
under the earlier guidelines. The transfer has to be done at the lower of
acquisition cost, book value or market value on the date of transfer.
Held to maturity securities are not marked to market and are carried at
acquisition cost or at an amortized cost if acquired at a premium over the face
value.
Available for sale and held for trading securities are valued at market or
fair value as at the balance sheet date. Depreciation or appreciation for each
basket within the available for sale and held for trading categories is
aggregated. Net appreciation in each basket, if any, that is not realized is
ignored, while net depreciation is provided for.
Investments in security receipts or pass through certificates issued by
asset reconstruction companies or trusts set up by asset reconstruction
companies should be valued at the net asset value announced periodically by the
asset reconstruction company based on the valuation of the underlying assets.
The Reserve Bank of India has recently issued draft revised guidelines on
investment classification, valuation and accounting which have not yet been
finalized.
Limit on Transactions through Individual Brokers
Guidelines issued by the Reserve Bank of India require banks to empanel
brokers for transactions in securities. These guidelines also require that a
disproportionate part of the bank's business should not be transacted only
through one broker or a few brokers. The Reserve Bank of India specifies that
not more than 5.0% of the total transactions through empanelled brokers can be
transacted through one broker. If for any reason this limit is breached, the
Reserve Bank of India has stipulated that the Board of Directors of the bank
concerned should ratify such action.
Prohibition on Short-Selling
The Reserve Bank of India does not permit short selling of securities by
banks excluding intra-day short selling in Central Government securities. The
Reserve Bank of India has permitted banks to sell Government of India securities
already contracted for purchase provided the purchase contract is confirmed and
the contract is guaranteed by Clearing Corporation of India Limited or the
security is contracted for purchase from the Reserve Bank of India. Each
security is deliverable or receivable on a net basis for a particular settlement
cycle.
In February, 2006, the Reserve Bank of India introduced intra-day short
selling in Central Government securities as a measure to develop the Central
Government securities market. In its Annual Policy Statement for fiscal 2007,
the Reserve Bank of India proposed to introduce a `when issued' market in
government securities in order to further strengthen the debt management
framework.
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Subsidiaries and Other Financial Sector Investments
We need the prior permission of the Reserve Bank of India to incorporate a
subsidiary. We are required to maintain an "arms' length" relationship with our
subsidiaries and with mutual funds sponsored by us in regard to business
parameters such as taking undue advantage in borrowing/lending funds,
transferring/selling/buying of securities at rates other than market rates,
giving special consideration for securities transactions, in
supporting/financing the subsidiary and financing our clients through them when
we are not able or not permitted to do so ourselves. We have to observe the
prudential norms stipulated by the Reserve Bank of India, from time to time, in
respect of our underwriting commitments. Pursuant to such prudential norms, our
underwriting or the underwriting commitment of our subsidiaries under any single
obligation shall not exceed 15.0% of an issue. We also need the prior specific
approval of the Reserve Bank of India to participate in the equity of financial
services ventures including stock exchanges and depositories notwithstanding the
fact that such investments may be within the ceiling (the lower of 30.0% of the
paid-up capital of the investee company and 30.0% of the investing bank's own
paid up capital and reserves) prescribed under Section 19(2) of the Banking
Regulation Act. Our investment in a subsidiary, financial services company or
financial institution cannot exceed 10.0% of our paid-up capital and reserves
and our aggregate investments in all such companies and financial institutions
put together cannot exceed 20.0% of our paid-up capital and reserves.
Regulations relating to Deposits
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on term deposits. However, banks are not permitted to
pay interest on current account deposits. Further, banks may only pay interest
of up to 3.5% per annum on savings deposits. In respect of savings and time
deposits accepted from employees, ICICI Bank is permitted by the Reserve Bank of
India to pay an additional interest of 1.0% over the interest payable on
deposits from the public.
o Domestic time deposits have a minimum maturity of seven days. Time
deposits from non-resident Indians denominated in foreign currency
have a minimum maturity of one year and a maximum maturity of three
years.
ICICI Bank stipulates a minimum balance of Rs.10,000 (US$ 225) for a
non-resident rupee savings deposit. Interest rates on non-resident rupee term
deposits of one to three years maturity are not permitted to exceed the
LIBOR/SWAP rates for US dollar of corresponding maturity plus 50 basis points.
Interest rates on non-resident rupee savings deposits are not permitted to
exceed the LIBOR/SWAP rate plus 50 basis points for six months maturity on US
dollar deposits and are fixed quarterly on the basis of the LIBOR/SWAP rate of
US dollar on the last working day of the preceding quarter. On November 17,
2005, the Reserve Bank of India revised the interest rate on non-resident rupee
term deposits of one to three years to LIBOR/SWAP rate plus 75 basis points. The
interest rate on non-resident savings deposits is at rate applicable to domestic
savings deposits.
Regulations relating to Knowing the Customer and Anti-Money Laundering
The Reserve Bank of India issued a notification dated November 29, 2004
prescribing guidelines for Know Your Customer and anti money laundering
procedures. Banks are required to have a customer acceptance policy laying down
explicit criteria for acceptance of customers and defining risk parameters. A
profile of the customers should be prepared based on risk categorization. Banks
have been advised to apply enhanced due diligence for high-risk customers. The
guidelines provide that banks should undertake customer identification
procedures while establishing a banking relationship or carrying out a
financial transaction or when the bank has a doubt about the authenticity or
the adequacy of the previously obtained customer identification data. Banks
need to obtain sufficient information necessary to establish the identity of
each new customer and the purpose of the intended banking relationship. The
guidelines also provide that banks should monitor transactions depending on the
account's risk sensitivity. In February 2006, the Reserve Bank of India issued
guidelines on the obligations of banks under the Prevention of Money Laundering
Act, 2002. The Reserve Bank of India also issued anti money laundering
guidelines to other entities such as non-bank finance companies and authorized
money changers.
In August 2005, the Reserve Bank of India has simplified the KYC procedure
for opening accounts for those persons who intend to keep balances not exceeding
Rs.50,000 in all their accounts taken together and the total credit
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in all the accounts taken together is not expected to exceed Rs.100,000 in a
year in order to ensure that the implementation of the KYC guidelines do not
result in the denial of the banking services to those who are financially or
socially disadvantaged.
The Indian Parliament had enacted the Prevention of Money Laundering Act in
2002. Effective July 1, 2005, the provisions of this Act have come into force.
The Act seeks to prevent money laundering and to provide for confiscation of
property derived from, or involved in, money laundering. In addition, the
applicable exchange control regulations prescribe reporting mechanisms for
transactions in foreign exchange and require authorized dealers to report
identified suspicious transactions to the Reserve Bank of India. In December
2004, the Indian Parliament passed the Unlawful Activities (Prevention)
Amendment Ordinance/Act, 2004 incorporating the provisions considered necessary
to deal with various facets of terrorism. The Narcotic Drugs and Psychotropic
Substances Act, 1985 deals with proceeds of drug related crime.
Regulations on Asset Liability Management
At present, the Reserve Bank of India's regulations for asset liability
management require banks to draw up asset-liability gap statements separately
for rupee and for four major foreign currencies. These gap statements are
prepared by scheduling all assets and liabilities according to the stated and
anticipated re-pricing date, or maturity date. These statements have to be
submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank of
India has advised banks to actively monitor the difference in the amount of
assets and liabilities maturing or being re-priced in a particular period and
place internal prudential limits on the gaps in each time period, as a risk
control mechanism. Additionally, the Reserve Bank of India has asked banks to
manage their asset-liability structure such that the negative liquidity gap in
the 1-14 day and 15-28 day time periods does not exceed 20.0% of cash outflows
in these time periods. This 20.0% limit on negative gaps was made mandatory with
effect from April 1, 2000. In respect of other time periods, up to one year, the
Reserve Bank of India has directed banks to lay down internal norms in respect
of negative liquidity gaps. In April 2006, the Reserve Bank of India issued
draft guidelines on improvements to banks' asset liability management framework.
Foreign Currency Dealership
The Reserve Bank of India has granted ICICI Bank a full-fledged authorized
dealers' license to deal in foreign exchange through its designated branches.
Under this license, ICICI Bank has been granted permission to:
o engage in foreign exchange transactions in all currencies;
o open and maintain foreign currency accounts abroad;
o raise foreign currency and rupee denominated deposits from non
resident Indians;
o grant foreign currency loans to on-shore and off-shore corporations;
o open documentary credits;
o grant import and export loans;
o handle collection of bills, funds transfer services;
o issue guarantees; and
o enter into derivative transactions and risk management activities that
are incidental to its normal functions authorized under its
organizational documents.
Further, we are permitted to hedge foreign currency loan exposures of
Indian corporations in the form of interest rate swaps, currency swaps and
forward rate agreements, subject to certain conditions.
ICICI Bank's foreign exchange operations are subject to the guidelines
specified by the Reserve Bank of India in the exchange control manual. As an
authorized dealer, ICICI Bank is required to enroll as a member of the
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Foreign Exchange Dealers Association of India, which prescribes the rules
relating to foreign exchange business in India.
Authorized dealers, like ICICI Bank, are required to determine their limits
on open positions and maturity gaps in accordance with the Reserve Bank of
India's guidelines and these limits are approved by the Reserve Bank of India.
Ownership Restrictions
The government of India regulates foreign ownership in Indian banks. The
total foreign ownership in a private sector bank, like ICICI Bank, cannot exceed
74.0% of the paid-up capital and shares held by foreign institutional investors
under portfolio investment schemes through stock exchanges cannot exceed 49.0%
of the paid-up capital.
The Reserve Bank of India's acknowledgement is required for the
acquisition or transfer of a bank's shares which will take the aggregate holding
(both direct and indirect, beneficial or otherwise) of an individual or a group
to the equivalent of 5.0% or more of its total paid up capital. The Reserve Bank
of India, while granting acknowledgement, may take into account all matters that
it considers relevant to the application, including ensuring that shareholders
whose aggregate holdings are above specified thresholds meet fitness and
propriety tests. In determining whether the acquirer or transferee is fit and
proper to be a shareholder, the Reserve Bank of India may take into account
various factors including, but not limited to, the acquirer or transferee's
integrity, reputation and track record in financial matters and compliance with
tax laws, proceedings of a serious disciplinary or criminal nature against the
acquirer or transferee and the source of funds for the investment.
While granting acknowledgement for acquisition or transfer of shares that
takes the acquirer's shareholding to 10.0% or more and up to 30.0% of a private
sector bank's paid-up capital, the Reserve Bank of India may consider additional
factors, including but not limited to:
o the source and stability of funds for the acquisition and ability to
access financial markets as a source of continuing financial support
for the bank,
o the business record and experience of the applicant including any
experience of acquisition of companies,
o the extent to which the acquirer's corporate structure is in
consonance with effective supervision and regulation of its
operations; and
o in case the applicant is a financial entity, whether the applicant is
a widely held entity, publicly listed and a well established regulated
financial entity in good standing in the financial community.
While granting acknowledgment for acquisition or transfer of shares that
takes the acquirer's shareholding to 30.0% or more of a private sector bank's
paid-up capital, the Reserve Bank of India may consider additional factors,
including but not limited to, whether or not the acquisition is in the public
interest, and shareholder agreements and their impact on the control and
management of the bank's operations.
In February 2005, the Reserve Bank of India issued guidelines on ownership
and governance in private sector banks. The key provisions of the guidelines on
ownership are:
o No single entity or group of related entities would be permitted to
directly or indirectly hold or control more than 10.0% of the paid up
equity capital of a private sector bank and any higher level of
acquisition would require the Reserve Bank of India's prior approval;
o In respect of corporate shareholders, the objective will be to ensure
that no entity or group of related entities has a shareholding in
excess of 10.0% in the corporate shareholder. In case of shareholders
that are financial entities, the objective will be to ensure that it
is widely held, publicly listed and well regulated;
o The Reserve Bank of India may permit a higher level of shareholding in
case of restructuring of problem banks or weak banks or in the
interest of consolidation in the banking industry;
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o Banks would be responsible for compliance with the "fit and proper"
criteria for shareholders on an ongoing basis; and
o Banks with shareholders with holdings in excess of the prescribed
limit would have to indicate a plan for compliance.
The Reserve Bank of India has recently announced guidelines stating that
these regulations would also apply in the event an existing shareholder's
shareholding exceed the specified limit as a result of a rights issue of shares
where other shareholders do not subscribe to the issue.
Legislation introduced in the Parliament to amend the Banking Regulation
Act provides that prior approval of the Reserve Bank of India shall be mandatory
for the acquisition of more than 5.0% of a banking company's paid up capital or
voting rights by any individual or firm or group.
Restrictions on Payment of Dividends
In May 2005, the Reserve Bank of India issued guidelines stating that a
bank may declare dividends only if all of the following conditions are met:
o Capital adequacy ratio is at least 9.0% for the preceding two
completed years and the accounting year for which the bank proposes to
declare a dividend.
o Net non-performing asset ratio is less than 7.0%.
o The bank is in compliance with the prevailing regulations and
guidelines issued by the Reserve Bank of India, including the creation
of adequate provision for the impairment of assets, staff retirement
benefits, transfer of profits to statutory reserves, etc.
o The proposed dividend will be paid out of the current year's profit.
o The Reserve Bank of India has not placed any explicit restrictions on
the bank for declaration of dividends.
In case the bank does not meet the capital adequacy norms, but has a
capital adequacy ratio of at least 9.0% for the accounting year for which it
proposes to declare a dividend, it would be eligible to do so if its net
non-performing asset ratio is less than 5.0%.
Banks that are eligible to declare dividends under the above rules can do
so subject to the following:
o The dividend payout ratio (calculated as a percentage of dividend
payable in a year to net profit during the year) must not exceed
40.0%. The maximum permissible dividend payout ratio would vary from
bank to bank, depending on the capital adequacy ratio in each of the
last three years and the net non-performing asset ratio.
o In case the profit for the relevant period includes any extraordinary
income, the payout ratio must be calculated after excluding that
income for compliance with the prudential payout ratio.
t 5 5 10 o The financial statements pertaining to the financial year for
which the bank is declaring a dividend should be free of any
qualification by the statutory auditors, which might have an adverse
effect on the profit during that year. In case there are any such
qualifications, the net profit should be suitably adjusted while
computing the dividend payout ratio.
Moratorium, Reconstruction & Amalgamation of Banks
The Reserve Bank of India can apply to the Government of India for
suspension of business by a banking company. The Government of India after
considering the application of the Reserve Bank of India may order a moratorium
staying commencement of action or proceedings against such company for a maximum
period of six months. During such period of moratorium, the Reserve Bank of
India may (a) in the public interest; or (b) in the interest of the depositors;
or (c) in order to secure the proper management of the bank; or (d) in the
interests of the
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banking system of the country as a whole, prepare a scheme for the
reconstruction of the bank or amalgamation of the bank with any other bank. In
circumstances entailing reconstruction of the bank or amalgamation of the bank
with another bank, the Reserve Bank of India invites suggestions and objections
on the draft scheme prior to placing the scheme before the Government of India
for its sanction. The Central Government may sanction the scheme with or without
modifications. The law does not require consent of the shareholders or creditors
of such banks.
Regulations on Mergers of Private Sector Banks and Banks and Non-banking
Finance Companies
In May 2005, the Reserve Bank of India issued guidelines to facilitate
mergers between private sector banks and between banks and non-banking finance
companies. The guidelines particularly emphasize the examination of the
rationale for amalgamation, the systemic benefits arising from it and the
advantages accruing to the merged entity. With respect to a merger between two
private sector banks, the guidelines require the draft scheme of amalgamation to
be approved by the shareholders of both banks with a two-thirds majority after
approval by the boards of directors of the two banks concerned. The draft scheme
should also consider the impact of amalgamation on the valuation, profitability
and capital adequacy ratio of the amalgamating bank and verify that the
reconstituted board conforms to the Reserve Bank of India norms. The approved
scheme needs to be submitted to the Reserve Bank of India for valuation and
sanction in accordance with the Banking Regulation Act, along with other
documentation such as the draft document of proposed merger, copies of all
relevant notices and certificates, swap ratio, share prices, etc. With respect
to a merger of a bank and a non-banking company, the guidelines specify that the
non-banking finance company has to comply with Know Your Customer norms for all
accounts and all relevant norms issued by the Reserve Bank of India and the
Securities and Exchange Board of India. The non-banking finance company should
also conform to insider trading norms issued by the Securities and Exchange
Board of India, whether it is listed or not, in order to regulate the promoter's
trading of shares before and after the amalgamation discussion period.
Credit Information Bureaus
The Parliament of India has enacted the Credit Information Companies
(Regulation) Act, 2005, pursuant to which every credit institution, including a
bank, has to become a member of a credit information bureau and furnish to it
such credit information as may be required of the credit institution by the
credit information bureau about persons who enjoy a credit relationship with it.
Other credit institutions, credit information bureaus and such other persons as
the Reserve Bank of India specifies may access such disclosed credit
information.
Deposit Insurance
Demand and time deposits of up to Rs.100,000 (US$ 2,248) accepted by Indian
banks have to be mandatorily insured with the Deposit Insurance and Credit
Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of India.
Banks are required to pay the insurance premium for the eligible amount to the
Deposit Insurance and Credit Guarantee Corporation on a semi-annual basis. The
cost of the insurance premium cannot be passed on to the customer.
Statutes Governing Foreign Exchange and Cross-Border Business Transactions
The foreign exchange and cross border transactions undertaken by banks are
subject to the provisions of the Foreign Exchange Management Act. All branches
should monitor all non-resident accounts to prevent money laundering.
The Reserve Bank of India issued guidelines on External Commercial
Borrowings via its Master Circular in July 2005, which stated that no financial
intermediary, including banks, will be permitted to raise such borrowings or
provide guarantees in favor of overseas lenders for such borrowings. Eligible
borrowers may raise such borrowings to finance the import of equipment and to
meet foreign exchange needs of infrastructure projects. In a guideline dated
August 1, 2005 the Reserve Bank of India has announced that external commercial
borrowing proceeds can be utilized for overseas direct investment in joint
ventures/wholly owned subsidiaries subject to the existing guidelines on Indian
Direct Investment in joint ventures/wholly owned subsidiaries abroad. Further
utilization of external commercial borrowing proceeds is not permitted for
lending, capital market investments or acquisitions in India or real estate
investments.
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In March 2006, in view of enhanced stability in India's external and
financial sectors and increased integration of the financial sector in the
global economy, the Reserve Bank of India constituted a Committee to set out a
roadmap towards fuller capital account convertibility. The Committee has
submitted its report in July 2006.
Legal Reserve Requirements
Cash Reserve Ratio
A bank is required to maintain a specified percentage of its net demand and
time liabilities, excluding inter-bank deposits, by way of cash reserve with
itself and by way of balance in current account with the Reserve Bank of India.
The cash reserve ratio can be a minimum of 3.0% and a maximum of 20.0% pursuant
to section 42 of the Reserve Bank of India Act. Effective October 2, 2004, the
cash reserve ratio is 5.0%. Following the enactment of the Reserve Bank of India
(Amendment) Bill 2006, the floor and ceiling rates on the cash reserve ratio
were removed. In a guideline dated June 22, 2006, the Reserve Bank of India
announced that the cash reserve ratio requirement would be maintained at 5.0%
till further notice. The Reserve Bank of India used to pay on cash reserves
above 3.0%, which is no longer paid pursuant to the amendments to the Reserve
Bank of India Act.
The following liabilities are excluded from the calculation of the demand
and time liabilities to determine the cash reserve ratio:
o inter-bank liabilities;
o liabilities to primary dealers;
o refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks; and
o perpetual debt qualifying for lower Tier I capital treatment.
The Reserve Bank of India pays no interest on the cash reserves up to 3.0%
of the demand and time liabilities and has discontinued paying interest on the
balance at 3.5% per annum.
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not be below 70.0% of the required cash reserve
ratio on any day of the fortnight.
Statutory Liquidity Ratio
In addition to the cash reserve ratio, a bank is required to maintain a
specified percentage of its net demand and time liabilities by way of liquid
assets like cash, gold or approved unencumbered securities. The percentage of
this liquidity ratio is fixed by the Reserve Bank of India from time to time,
and it can be a minimum of 25.0% and a maximum of 40.0% pursuant to section 24
of the Banking Regulation Act. At present, the Reserve Bank of India requires
banking companies to maintain a liquidity ratio of 25.0%. The Banking Regulation
(Amendment) Bill, 2005 recently introduced in the Indian Parliament proposes to
amend section 24 of the Banking Regulation Act to remove the minimum Statutory
Liquidity Ratio stipulation, thereby giving the Reserve Bank of India the
freedom to fix the Statutory Liquidity Ratio below this level. See also
"Overview of the Indian Financial Sector -- Recent Structural Reforms --
Proposed Amendments to the Banking Regulation Act".
Requirements of the Banking Regulation Act
Prohibited Business
The Banking Regulation Act specifies the business activities in which a
bank may engage. Banks are prohibited from engaging in business activities other
than the specified activities.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to
which it must transfer not less than 25.0% of the profits of each year before
dividends. If there is an appropriation from this account, the bank is required
to
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report the same to the Reserve Bank of India within 21 days, explaining the
circumstances leading to such appropriation. The Government of India may, on the
recommendation of the Reserve Bank of India, exempt a bank from requirements
relating to its reserve fund.
Payment of Dividend
Pursuant to the provisions of the Banking Regulation Act, a bank can pay
dividends on its shares only after all its capitalized expenses (including
preliminary expenses, share selling commission, brokerage, amounts of losses and
any other item of expenditure not represented by tangible assets) have been
completely written off. The Indian government may exempt banks from this
provision by issuing a notification on the recommendation of the Reserve Bank of
India. We have been exempted from this provision in respect of expenses relating
to the Early Retirement Option offered by us in fiscal 2004. We have obtained
permission from the Reserve Bank of India to write off these expenses over a
five-year period in our Indian GAAP accounts. Further, the payment of the
dividend by banks is subject to the eligibility criteria specified by the
Reserve Bank of India from time to time.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. The Banking Regulation Act specifies
that no shareholder in a banking company can exercise voting rights on poll in
excess of 10.0% of total voting rights of all the shareholders of the banking
company.
Only banks incorporated before January 15, 1937 can issue preference
shares. Prior to the amalgamation, ICICI had preference share capital of Rs.3.5
billion (US$ 78.7 million). The Government of India, on the recommendation of
the Reserve Bank of India, has granted an exemption to ICICI Bank which allows
the inclusion of preference capital in the capital structure of ICICI Bank for a
period of five years, though ICICI Bank is a bank incorporated after January 15,
1937.
Legislation recently introduced in the Indian Parliament proposes to amend
the Banking Regulation Act to remove the limit of 10.0% on the maximum voting
power exercisable by an shareholder in a banking company and allow banks to
issue redeemable and non-redeemable preference shares. See also "Overview of the
Indian Financial Sector -- Recent Structural Reforms -- Proposed Amendments to
the Banking Regulation Act".
Restrictions on Investments in a Single Company
No bank may hold shares in any company exceeding 30.0% of the paid up share
capital of that company or 30.0% of its own paid up share capital and reserves,
whichever is less.
Regulatory Reporting and Examination Procedures
The Reserve Bank of India is empowered under the Banking Regulation Act to
inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, banks are required to report to the
Reserve Bank of India on aspects such as:
o assets, liabilities and off-balance sheet exposures;
o the risk weighting of these exposures, the capital base and the
capital adequacy ratio;
o the unaudited operating results for each quarter;
o asset quality;
o concentration of exposures;
o connected and related lending and the profile of ownership, control
and management; and
o other prudential parameters.
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The Reserve Bank of India also conducts periodical on-site inspections on
matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging from
one to three years. ICICI Bank has been and, at present is also, subject to the
on-site inspection by the Reserve Bank of India at yearly intervals. The
inspection report, along with the report on actions taken by ICICI Bank, has to
be placed before our Board of Directors. On approval by our Board of Directors,
we are required to submit the report on actions taken by it to the Reserve Bank
of India. The Reserve Bank of India also discusses the report with the
management team including the Managing Director & CEO.
The Reserve Bank of India also conducts on-site supervision of selected
branches of ICICI Bank with respect to their general operations and foreign
exchange related transactions.
Appointment and Remuneration of the Chairman, Managing Director and Other
Directors
ICICI Bank is required to obtain prior approval of the Reserve Bank of
India before it appoints its chairman and managing director and any other
wholetime directors and fixes their remuneration. The Reserve Bank of India is
empowered to remove an appointee to the posts of chairman, managing director and
wholetime directors on the grounds of public interest, interest of depositors or
to ensure the proper management of ICICI Bank. Further, the Reserve Bank of
India may order meetings of our Board of Directors to discuss any matter in
relation to ICICI Bank, appoint observers to such meetings and in general may
make such changes to the management as it may deem necessary and may also order
the convening of a general meeting of the shareholders of ICICI Bank to elect
new directors. ICICI Bank cannot appoint as a director any person who is a
director of another banking company. In July 2004, the Reserve Bank of India
issued guidelines on `fit and proper' criteria for directors of banks.
Penalties
The Reserve Bank of India may impose penalties on banks and its employees
in case of infringement of regulations under the Banking Regulation Act. The
penalty may be a fixed amount or may be related to the amount involved in any
contravention of the regulations. The penalty may also include imprisonment. A
press release has been issued by the Reserve Bank of India giving details of the
circumstances under which the penalty is imposed on the bank along with the
communication on the imposition of the penalty in public domain. The bank is
also required to disclose the penalty in its annual report.
Assets to be Maintained in India
Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and Reserve Bank of India approved
securities, even if the bills and the securities are held outside India) are not
less than 75.0% of its demand and time liabilities in India.
Restriction on Creation of Floating Charge
Prior approval of the Reserve Bank of India is required for creating
floating charge on ICICI Bank's undertaking or property. Currently, all ICICI
Bank's borrowings including bonds are unsecured.
Secrecy Obligations
ICICI Bank's obligations relating to maintaining secrecy arise out of
common law principles governing its relationship with its customers. ICICI Bank
cannot disclose any information to third parties except under clearly defined
circumstances. The following are the exceptions to this general rule:
o where disclosure is required to be made under any law;
o where there is an obligation to disclose to the public;
o where ICICI Bank needs to disclose information in its interest; and
o where disclosure is made with the express or implied consent of the
customer.
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ICICI Bank is also required to disclose information if ordered to do so by
a court. The Reserve Bank of India may, in the public interest, publish the
information obtained from the bank. Under the provisions of the Banker's Books
Evidence Act, a copy of any entry in a bankers' book, such as ledgers, day
books, cash books and account books certified by an officer of the bank may be
treated as prima facie evidence of the transaction in any legal proceedings.
Regulations governing Offshore Banking Units
The government and Reserve Bank of India have permitted banks to set up
Offshore Banking Units in Special Economic Zones, which are specially delineated
duty free enclaves deemed to be foreign territory for the purpose of trade
operations, duties and tariffs. ICICI Bank has an Offshore Banking Unit located
in the Santacruz Electronic Exports Promotion Zone, Mumbai. The key regulations
applicable to offshore bank units include, but are not limited to, the
following:
o No separate assigned capital is required. However, the parent bank is
required to provide a minimum of US$10 million to its offshore banking
unit.
o Offshore Banking Units are exempt from cash reserve ratio
requirements.
o Reserve Bank of India may exempt a bank's offshore banking unit from
statutory liquidity ratio requirements on specific application by the
bank.
o An offshore banking unit may not enter into any transactions in
foreign exchange with residents in India, unless such a person is
eligible to enter into or undertake such transactions under the
Foreign Exchange Management Act, 1999.
o All prudential norms applicable to overseas branches of Indian banks
apply to Offshore Banking Units.
o Offshore banking units are required to adopt liquidity and interest
rate risk management policies prescribed by Reserve Bank of India in
respect of overseas branches of Indian banks as well as within the
overall risk management and asset and liability management framework
of the bank subject to monitoring by the bank's Board of Directors at
prescribed intervals. Further, the bank's board would be required to
set comprehensive overnight limits for each currency for these
branches, which would be separate from the open position limit of the
parent bank.
o Offshore banking units may raise funds in convertible foreign currency
as deposits and borrowings from non-residents including non-resident
Indians but excluding overseas corporate bodies.
o Offshore banking units may operate and maintain balance sheets only in
foreign currency.
o The loans and advances of Offshore Banking Units would not be reckoned
as net bank credit for computing priority sector lending obligations.
o Offshore banking units must follow the Know Your Customer guidelines
and must be able to establish the identity and address of the
participants in a transaction, the legal capacity of the participants
and the identity of the beneficial owner of the funds.
The Special Economic Zone Act 2005 permitted Offshore Banking Units to
additionally undertake the following activities:
o Lend outside India and take part in international
syndications/consortiums at par with foreign offices.
o Invest in foreign currency denominated debt of Indian units.
o Extend facilities to subsidiaries/units of Indian entities, located
outside India.
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Regulations and Guidelines of the Securities and Exchange Board of India
The Securities and Exchange Board of India was established to protect the
interests of public investors in securities and to promote the development of,
and to regulate, the Indian securities market. ICICI Bank is subject to the
Securities and Exchange Board of India regulations for its public capital
issuances, as well as its underwriting, custodial, depositary participant,
investment banking, registrar and transfer agents, brokering and debenture
trusteeship activities. These regulations provide for its registration with the
Securities and Exchange Board of India for each of these activities, functions
and responsibilities. ICICI Bank is required to adhere to a code of conduct
applicable for these activities.
Public Financial Institution Status
ICICI was a public financial institution under the Indian Companies Act,
1956. The special status of public financial institutions is also recognized
under other statutes including the Indian Income Tax Act, 1961, Sick Industrial
Companies (Special Provisions) Act, 1985 and Recovery of Debts Due to Banks and
Financial Institutions Act, 1993. ICICI Bank is not a public financial
institution. As a public financial institution, ICICI was entitled to certain
benefits under various statutes. These benefits included the following:
o For income tax purposes, ICICI's deposits and bonds were prescribed
modes for investing and depositing surplus money by charitable and
religious trusts. Since ICICI Bank is a scheduled bank, its deposits
and bonds are also prescribed modes for investment by religious and
charitable trusts.
o The Government of India had permitted non-government provident,
superannuation and gratuity funds to invest up to 40.0% of their
annual accretion of funds in bonds and securities issued by public
financial institutions. Further, the trustees of these funds could at
their discretion invest an additional 20.0% of such accretions in
these bonds and securities. These funds can invest up to only 10.0% of
their annual accretion in bonds and securities issued by private
sector banks, such as ICICI Bank.
o Indian law provides that a public financial institution cannot, except
as provided by law or practice, divulge any information relating to,
or to the affairs of, its customers. ICICI Bank has similar
obligations relating to maintaining secrecy arising out of common law
principles governing its relationship with its customers.
o The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 provides for establishment of debt recovery tribunals for
recovery of debts due to any bank or public financial institution or
to a consortium of banks and public financial institutions. Under this
Act, the procedures for recoveries of debt were simplified and time
frames were fixed for speedy disposal of cases. Upon establishment of
the debt recovery tribunal, no court or other authority can exercise
jurisdiction in relation to matters covered by this Act, except the
higher courts in India in certain circumstances. This Act applies to
banks as well as public financial institutions and therefore applies
to ICICI Bank.
ICICI's cessation as a public financial institution would have constituted
an event of default under certain of ICICI's loan agreements related to its
foreign currency borrowings. Prior to the amalgamation becoming effective, such
event of default was waived by the respective lenders pursuant to the terms of
such foreign currency borrowing agreements.
Special Status of Banks in India
The special status of banks is recognized under various statutes including
the Sick Industrial Companies Act, 1985, Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, and the Securitisation Act. As a bank, ICICI
Bank is entitled to certain benefits under various statutes including the
following:
o The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 provides for establishment of Debt Recovery Tribunals for
expeditious adjudication and recovery of debts due to any bank or
Public Financial Institution or to a consortium of banks and Public
Financial Institutions. Under this Act, the procedures for recoveries
of debt have been simplified and time frames have been fixed for
speedy disposal of cases. Upon establishment of the Debt Recovery
Tribunal, no court or other authority can exercise
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jurisdiction in relation to matters covered by this Act, except the
higher courts in India in certain circumstances.
o The Sick Industrial Companies Act, 1985, provides for reference of
sick industrial companies to the Board for Industrial and Financial
Reconstruction. Under the Act, other than the Board of Directors of a
company, a scheduled bank (where it has an interest in the sick
industrial company by any financial assistance or obligation, rendered
by it or undertaken by it) may refer the company to the BIFR.
o The Securitisation Act focuses on improving the rights of banks and
financial institutions and other specified secured creditors as well
as asset reconstruction companies by providing that such secured
creditors can take over management control of a borrower company upon
default and/or sell assets without the intervention of courts, in
accordance with the provisions of the Securitisation Act.
Income Tax Benefits
As a banking company, ICICI Bank is entitled to certain tax benefits under
the Indian Income Tax Act including the following:
o ICICI Bank is allowed a deduction of up to 40.0% of its taxable
business income derived from the business of long-term financing
(defined as loans and advances extended for a period of not less than
five years) which is transferred to a special reserve, provided that
the total amount of this reserve does not exceed two times the paid-up
share capital and general reserves. ICICI Bank is entitled to this
benefit because it is a financial corporation. Effective fiscal 1998,
if a special reserve is created, it must be maintained and if it is
utilized, it is treated as taxable income in the year in which it is
utilized.
o ICICI Bank is entitled to a tax deduction on the provisioning towards
bad and doubtful debts equal to 7.5% of ICICI Bank's total business
income, computed before making any deductions permitted pursuant to
Chapter VIA of the Indian Income Tax Act, and to the extent of 10.0%
of the aggregate average advances made by its rural branches computed
in the manner prescribed. ICICI Bank has the option of claiming a
deduction in excess of the specified limits, for an amount not
exceeding the income derived from redemption of securities in
accordance with the scheme framed by the Central Government.
o ICICI Bank is entitled to a tax deduction, for income from an offshore
banking unit in a special economic zone, at the rate of 100% for a
period of five consecutive years beginning with the year in which
permission under Banking Regulation Act, 1949 is obtained, i.e., up to
March 31, 2008 for OBU in SEEPZ, Mumbai and 50% deduction for a period
of five consecutive years thereafter in accordance with and subject to
the conditions prescribed therein.
o Subject to application for and receipt of certain approvals, ICICI
Bank is eligible to issue tax saving bonds approved in accordance with
and subject to the provisions of the Indian Income Tax Act and is also
eligible to issue zero coupon bonds in accordance with the applicable
guidelines.
For income tax purposes, ICICI Bank's deposits and bonds are prescribed
modes of investing and depositing surplus money by charitable and religious
trusts subject to and in accordance with the provisions contained therein.
Regulations governing Insurance Companies
ICICI Prudential Life Insurance Company and ICICI Lombard General Insurance
Company, the subsidiaries of ICICI Bank offering life insurance and non-life
insurance respectively, are subject to the provisions of the Insurance Act, 1938
and the various regulations prescribed by the Insurance Regulatory and
Development Authority. These regulations regulate and govern, among other
things, registration as an insurance company, investment, solvency margin
requirements, licensing of insurance agents, advertising, sale and distribution
of insurance products and services and protection of policyholders' interests.
In May 2002, the Indian Parliament approved the Insurance (Amendment) Act 2002,
which facilitates the appointment of corporate agents by insurance companies and
prohibits intermediaries and brokers from operating as surrogate insurance
agents. The Indian government, while presenting its budget for fiscal 2005, has
proposed an increase in the limit on foreign equity participation in private
sector
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insurance companies from 26.0% to 49.0%. However, this would require an
amendment to the Insurance Regulatory and Development Authority Act 1999 and has
not yet been implemented.
Regulations governing International Operations
Our international operations are governed by regulations in the countries
in which we have a presence.
Overseas Banking Subsidiaries
Our wholly-owned subsidiary in the United Kingdom, ICICI Bank UK Limited is
authorized by the Financial Services Authority, which granted our application
under Part IV of the Financial Services and Markets Act, 2000 on August 8, 2003.
Our wholly-owned subsidiary in Canada, ICICI Bank Canada, was incorporated as a
Schedule II Bank in placeCanada. ICICI Bank Canada has obtained the approval of
the Canada Deposit Insurance Corporation (CDIC) for deposit insurance and is
regulated by the Office of the Superintendent of Financial Institutions. Our
wholly-owned subsidiary in Russia, ICICI Bank Eurasia LLC, is regulated by the
Central Bank of the Russian Federation.
Offshore Branches
In Singapore, we have an offshore branch, regulated by the Monetary
Authority of Singapore. The Singapore branch is allowed to accept foreign
currency deposits from Singapore non-bank-residents whose initial deposit is not
less than US$100,000. The Singapore branch is currently engaged in corporate &
institutional banking, private banking and treasury related activities. In
Bahrain, we have an offshore branch, regulated by the Central Bank of Bahrain.
The Bahrain branch is permitted to transact banking business with approved
financial institutions within Bahrain, individuals or institutions outside
Bahrain. It is also permitted to offer banking services to non-resident Indians
in Bahrain. Our branches in Hong Kong and Sri Lanka, regulated by the Hong Kong
Monetary Authority and the Central Bank of Sri Lanka, respectively, are
permitted to undertake banking business in those jurisdictions. Our branch in
the Dubai International Financial Centre (DIFC) is regulated by the DIFC
Financial Services Authority and is licensed to engage in the arrangement of
credit or investment and to provide advice on financial products and services.
Representative Offices
Our representative office in New York in the United States is licensed and
regulated by the State of New York Banking Department and the Federal Reserve
Board. Our representative office in Dubai, United Arab Emirates is regulated by
the Central Bank of the United Arab Emirates. Our representative office in
Shanghai, China is regulated by the China Banking Regulatory Commission. Our
representative office in Bangladesh is regulated by the Bangladesh Bank. Our
representative office in South Africa is regulated by the South African Reserve
Bank.
157
EXCHANGE CONTROLS
Restrictions on Conversion of Rupees
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign exchange
received on trade or current account at a market-determined rate and the
remaining 40.0% at the official rate. All importers were, however, required to
buy foreign exchange at the market rate except for certain specified priority
imports. In March 1993, the exchange rate was unified and allowed to float. In
February 1994 and again in August 1994, the Reserve Bank of India announced
relaxations in payment restrictions in case of a number of transactions. Since
August 1994, the government of India has substantially complied with its
obligations owed to the International Monetary Fund, under which India is
committed to refrain from using exchange restrictions on current international
transactions as an instrument in managing the balance of payments. Effective
July 1995, the process of current account convertibility was advanced by
relaxing restrictions on foreign exchange for various purposes, such as foreign
travel and medical treatment.
In December 1999, the Indian parliament passed the Foreign Exchange
Management Act, 1999, which became effective on June 1, 2000, replacing the
earlier Foreign Exchange Regulation Act, 1973. This legislation indicated a
major shift in the policy of the government with regard to foreign exchange
management in India. While the Foreign Exchange Regulation Act, 1973 was aimed
at the conservation of foreign exchange and its utilization for the economic
development of the country, the objective of the Foreign Exchange Management
Act, 1999 was to facilitate external trade and promote the orderly development
and maintenance of the foreign exchange market in India.
The Foreign Exchange Management Act, 1999 regulates transactions involving
foreign exchange and provides that certain transactions cannot be carried out
without the general or special permission of the Reserve Bank of India. The
Foreign Exchange Management Act, 1999 has eased restrictions on current account
transactions. However, the Reserve Bank of India continues to exercise control
over capital account transactions (i.e., those which alter the assets or
liabilities, including contingent liabilities, of persons). The Reserve Bank of
India has issued regulations under the Foreign Exchange Management Act, 1999 to
regulate the various kinds of capital account transactions, including certain
aspects of the purchase and issuance of shares of Indian companies. The Reserve
Bank of India has also permitted authorized dealers to freely allow remittances
by individuals up to US$25,000 per calendar year for any permissible current or
capital account transactions or a combination of both.
Restrictions on Sale of the Equity Shares underlying the ADSs and Repatriation
of Sale Proceeds
ADSs issued by Indian companies to non-residents have free transferability
outside India. Under current Indian regulations and practice, approval of the
Reserve Bank of India is not required for the sale of equity shares underlying
the ADSs by a non-resident of India to a resident of India if the sale has been
executed on a recognized stock exchange in India through a registered broker at
the prevailing market price. Approval of the Reserve Bank of India is not
required for a sale of shares of a company other than a company in the financial
services sector and certain other specified sectors, even if the transfer is
other than on a recognized stock exchange in India or through a registered
broker, as long as conditions prescribed in the Reserve Bank of India's
guidelines are complied with. The same applies to a renunciation of rights to a
resident of India. Foreign institutional investors registered with the
Securities and Exchange Board of India are eligible to purchase shares of an
Indian company under the Portfolio Investment Scheme. Certain limits are however
prescribed by the Reserve Bank of India for investment through the Portfolio
Investment Scheme. Approval of the Reserve Bank of India is not required for a
sale of shares under the Portfolio Investment Scheme prescribed by the Reserve
Bank of India provided the sale is made on a recognized stock exchange and
through a registered stock broker.
If a sale of securities has taken place in terms of the Reserve Bank of
India guidelines and other applicable regulations, as briefly described in the
previous paragraph, then provided (i) the securities were held on repatriation
basis, (ii) the shares have been sold on a recognised stock exchange in India
through a stock broker at the ruling market price as determined on the floor of
the exchange and (iii) a no objection/tax clearance certificate from income tax
authority has been obtained, the sale proceeds may be freely remitted. If a sale
was made pursuant to
158
specific approval of Reserve Bank of India then sale proceeds can be remitted as
per the terms of such an approval. If the equity shares underlying the ADSs are
sold under the portfolio investment scheme then the sale proceeds may be
remitted through an authorized dealer, without the approval of the Reserve Bank
of India provided that the equity shares are sold on a recognized stock exchange
through a registered stock broker and a no objection/tax clearance certificate
from the income-tax authority has been produced.
After the announcement of India's budget for fiscal 2002, the Reserve Bank
of India issued certain notifications for the liberalization of the capital
account. Pursuant to the notifications, in contrast to prior regulations,
two-way fungibility in ADS/GDR issues of Indian companies was introduced,
subject to sectoral caps, wherever applicable.
The Reserve Bank of India has issued a notification under the provisions of
the Foreign Exchange Management Act, 1999 permitting a registered broker in
India to purchase shares of any Indian company on behalf of a person resident
outside India, for the purpose of converting the shares so purchased into ADSs
provided that:
o the shares are purchased on a recognized stock exchange;
o the Indian company has issued ADSs;
o the shares are purchased with the permission of the custodian of the
ADSs of the concerned Indian company and are deposited with the
custodian;
o the number of shares so purchased shall not exceed the number of ADSs
converted into underlying shares and shall be subject to sectoral caps
as applicable; and
o the non-resident investor, broker, custodian and the overseas
depositary comply with the provisions of the Scheme for Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depositary Receipt Mechanism) Scheme, 1993 and the guidelines issued
thereunder by the government of India from time to time.
On November 23, 2002, the government of India's Ministry of Finance issued
Operative Guidelines for Disinvestment of Shares by the Indian Companies in the
Overseas Market through the Issue of ADSs. Under these guidelines, the
shareholders may divest their holdings in the overseas market through the
mechanism of a sponsored ADS issue by the Indian company. The holdings which may
be divested are holdings in Indian companies which are listed either in India or
on an overseas exchange. The divestment process is initiated when the Indian
company whose shares are being offered for divestment in the overseas market
sponsors an ADS issue against the block of existing shares offered by the
shareholders under these guidelines. Such ADS issues against existing shares
offered for divestment must also comply with the Securities and Exchange Board
of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997, if
the ADSs are cancelled and the underlying shares are to be registered with the
company. Such divestment would result in foreign equity investment and would
also need to conform to the foreign direct investment sectoral policy. All
mandatory approvals including those under the Companies Act, 1956 and the
approval of the Foreign Investment Promotion Board for foreign equity induction
through the offer of existing shares would have to be obtained.
The Reserve Bank of India has permitted Indian companies to retain abroad
for any period, the funds raised through an issue of ADSs, in order to meet
their future foreign exchange requirement. Further, pending repatriation or
utilization, the Indian company may invest the foreign currency funds raised in:
o deposits or certificates of deposit or other products offered by banks
who have been rated not less than AA(-) by Standard and Poor's Ratings
Service/Fitch IBCA or Aa3 by Moody's Investors Service; and such
rating not being less than the applicable rating stipulated by the
Reserve Bank of India from time to time.
o deposits with an overseas branch of an authorized dealer in India; and
o treasury bills and other monetary instruments with a maturity or
unexpired maturity of one-year or less.
The Reserve Bank of India has permitted resident shareholders of Indian
companies, who offer their shares for conversion to ADSs, to receive the sale
proceeds in foreign currency. However, the conversion to such ADSs should
159
have the approval of the Foreign Investment Promotion Board. Further, the sale
proceeds received by residents are also permitted to be credited to their
Exchange Earners' Foreign Currency/Resident Foreign Currency (Domestic) accounts
or to their rupee accounts in India at their option.
160
MARKET PRICE INFORMATION
Equity Shares
Our outstanding equity shares are currently listed and traded on the Bombay
Stock Exchange or the BSE and on the National Stock Exchange of India Limited or
the NSE.
At September 22, 2006, 892 million equity shares were outstanding. The
prices for equity shares as quoted in the official list of each of the Indian
stock exchanges are in Indian rupees.
The following table shows:
o the reported high and low closing prices quoted in rupees for our
equity shares on the NSE; and
o the reported high and low closing prices for our equity shares,
translated into US dollars, based on the noon buying rate on the last
business day of each period presented.
Price per equity share(1)
-------------------------------------
High Low High Low
-------- -------- -------- -------
Annual prices:
Fiscal 2002........................... 188.35 67.95 3.86 1.39
Fiscal 2003........................... 161.75 110.55 3.40 2.32
Fiscal 2004........................... 348.25 120.80 8.02 2.78
Fiscal 2005........................... 413.05 230.40 9.47 5.28
Fiscal 2006........................... 628.75 359.95 14.14 8.09
Quarterly prices:
Fiscal 2005:
First Quarter......................... 319.35 230.40 6.94 5.01
Second Quarter........................ 295.35 234.40 6.43 5.11
Third Quarter......................... 374.00 285.35 8.64 6.59
Fourth Quarter........................ 413.05 337.50 9.47 7.74
Fiscal 2006:
First Quarter......................... 433.95 359.95 9.97 8.27
Second Quarter ....................... 601.70 421.25 13.69 9.59
Third Quarter......................... 593.40 479.90 13.20 10.68
Fourth Quarter........................ 628.75 559.15 14.14 12.57
Fiscal 2007:
First Quarter......................... 662.55 451.20 14.44 9.84
Second Quarter
(through September 22, 2006)....... 663.40 467.75 14.49 10.22
Monthly prices:
March 2006........................... 620.40 588.70 13.95 13.24
April 2006............................ 621.90 559.80 13.86 12.48
May 2006.............................. 662.55 537.50 14.33 11.63
June 2006............................. 551.95 451.20 12.03 9.84
July 2006............................. 553.85 467.75 11.91 10.06
August 2006 .......................... 599.25 547.00 12.91 11.78
September 2006
(through September 22, 2006)....... 663.40 596.75 14.49 13.04
------------------
(1) Data from the NSE. The prices quoted on the BSE may be different.
At September 22, 2006 the closing price of equity shares on the NSE was Rs.
654.90 equivalent to US$ 14.31 per equity share (US$ 28.62 per ADS on an imputed
basis) translated at the noon buying rate of Rs. 45.77 per US$ 1.00 on September
22, 2006.
161
At August 31, 2006, there were approximately 485,122 holders of record of
our equity shares, of which 112 had registered addresses in the placeUnited
States and held an aggregate of approximately 22,576 equity shares.
ADSs
Our ADSs, each representing two equity shares, were originally issued in
March 2000 in a public offering and are listed and trade on the New York Stock
Exchange under the symbol IBN. The equity shares underlying the ADSs are listed
on the BSE and the NSE.
At August 31, 2006, ICICI Bank had approximately119 million ADSs,
equivalent to 239 million equity shares, outstanding. At this date, there were
125 record holders of ICICI Bank's ADSs, out of which 117 have registered
addresses in the United States.
The following table sets forth, for the periods indicated, the reported
high and low closing prices on the New York Stock Exchange for our outstanding
ADSs traded under the symbol IBN.
Price per ADS
------------------
High Low
------- -------
Annual prices:
Fiscal 2002............................................ 7.50 2.70
Fiscal 2003............................................ 8.26 4.84
Fiscal 2004............................................ 18.33 5.27
Fiscal 2005............................................ 22.65 11.25
Fiscal 2006............................................ 32.26 18.08
Quarterly prices:
Fiscal 2004:
First Quarter.......................................... 7.27 5.27
Second Quarter......................................... 10.56 7.23
Third Quarter.......................................... 17.91 10.90
Fourth Quarter......................................... 18.33 13.50
Fiscal 2005:
First Quarter.......................................... 17.25 11.57
Second Quarter......................................... 13.91 11.25
Third Quarter.......................................... 20.45 13.76
Fourth Quarter......................................... 22.65 18.27
Fiscal 2006:
First Quarter.......................................... 22.23 18.08
Second Quarter ........................................ 28.25 22.00
Third Quarter.......................................... 29.47 22.04
Fourth Quarter......................................... 32.26 27.68
Fiscal 2007:
First Quarter.......................................... 30.27 22.49
Second Quarter (through September 22, 2006)............ 29.23 21.25
Monthly prices:
March 2006............................................ 32.26 27.68
April 2006............................................. 29.79 25.70
May 2006............................................... 30.27 26.10
June 2006.............................................. 27.20 22.49
July 2006.............................................. 26.23 21.25
August 2006 ........................................... 27.61 26.01
September 2006 (through September 22, 2006............. 29.23 26.18
See also "Risk Factors -- Risks relating to the ADSs and Equity Shares --
Conditions in the Indian securities market may adversely affect the price or
liquidity of our equity shares and ADSs."
162
RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
India strictly regulates ownership of Indian companies by foreigners.
Foreign investment in Indian securities, including the equity shares represented
by the ADSs, is generally regulated by the Foreign Exchange Management Act,
1999, which permits transactions involving the inflow or outflow of foreign
exchange and empowers the Reserve Bank of India to prohibit or regulate such
transactions.
The Foreign Exchange Management Act, 1999 regulates transactions involving
foreign exchange and provides that certain transactions cannot be carried out
without the general or special permission of the Reserve Bank of India. The
Foreign Exchange Management Act, 1999 has eased restrictions on current account
transactions. However, the Reserve Bank of India continues to exercise control
over capital account transactions (i.e., those which alter the assets or
liabilities, including contingent liabilities, of persons). The Reserve Bank of
India has issued regulations under the Foreign Exchange Management Act, 1999 to
regulate the various kinds of capital account transactions, including certain
aspects of the purchase and issuance of shares of Indian companies.
Under the foreign investment rules, the following are the restrictions on
foreign ownership applicable to us:
o Foreign investors may own up to 74.0 % of our equity shares subject to
conformity with guidelines issued by the Reserve Bank of India from
time to time. This limit is under the automatic route and does not
require specific approval of the Foreign Investment Promotion Board.
This limit includes foreign direct investment, ADSs, Global Depositary
Receipts and investment under the Portfolio Investment Scheme by
foreign institutional investors and also non-resident Indians, and
also includes shares acquired by subscription to private placements
and public offerings and acquisition of shares from existing
shareholders. Aggregate foreign investment in ICICI Bank from all
sources is allowed up to a maximum of 74 % of the paid up capital of
the Bank. At least 26 % of the paid up capital would have to be held
by residents.
o Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (Through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs, subject to the receipt of all necessary
government approvals at the time the depositary receipt program is set
up.
o Under the portfolio investment scheme, foreign institutional
investors, subject to registration with the Securities and Exchange
Board of India and the Reserve Bank of India, may hold in aggregate up
to 24.0% of our paid-up equity capital and this limit may be raised to
49% by a resolution of our Board of Directors provided that no single
foreign institutional investor may own more than 10.0% of our total
paid-up equity capital. Our Board of Directors has raised this limit
to 49%. Registered FIIs are also permitted to purchase shares or
convertible debentures of an Indian company in an offering or private
placement. The shareholding of an individual non-resident Indian is
restricted to 5.0% of our total paid-up equity capital. The aggregate
paid-up value of the shares in a company purchased by all NRIs in the
aggregate is to be limited to 10% of the paid-up capital of the
company and this limit may be raised to 24 % by a special resolution
at a general meeting of the shareholders of the company.
o The Reserve Bank of India's guidelines relating to acquisition by
purchase or otherwise of shares of a private sector bank, if such
acquisition results in any person owning or controlling 5.0 % or more
of the paid up capital of the bank, are also applicable to foreign
investors investing in our shares. For more details on the Reserve
Bank of India guidelines relating to acquisition by purchase or
otherwise of shares of a private bank, see "Supervision and Regulation
- Reserve Bank of India Regulations - Ownership Restrictions".
o Since we have joint ventures in the insurance sector, applications for
foreign direct investment in ICICI Bank when required by applicable
law or regulation, have to be addressed to the Reserve Bank of India
for consideration in consultation with the Insurance Regulatory and
Development Authority in order to ensure that the 26% limit of foreign
shareholding applicable for the insurance sector is not breached.
Pursuant to a circular dated November 29, 2001, the Reserve Bank of India
notified that, as of that date, overseas corporate bodies are not permitted to
invest under the portfolio investment scheme, though they may
163
continue to hold investments that have already been made under the portfolio
investment scheme until such time as these investments are sold on the stock
exchange.
An Indian company may sponsor an issue of ADSs with an overseas depositary
against shares held by its shareholders at a price to be determined by the lead
manager. Under this mechanism the company offers its residents a choice to
submit their shares back to the company so that on the basis of such shares,
ADRs can be issued abroad. The proceeds of the issue must be repatriated to
India within a period of one month. The sponsoring company must comply with the
provisions of the Scheme for Issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 and the
guidelines issued thereunder by the Government of India from time to time. The
sponsoring company must also furnish full details of the issue in the prescribed
forms to the Reserve Bank of India within 30 days from the date of closure of
the issue.
We obtained the approval of the Foreign Investment Promotion Board for our
ADS offering in March 2000 and sponsored an ADS offering in March 2005 which
were foreign direct investments. The investments through the portfolio
investment scheme in the secondary market in India by foreign institutional
investors, non-resident Indians and overseas corporate bodies and investments
through the foreign direct investment scheme are distinct schemes that are
available concurrently. As of September 23, 2006, foreign investors owned
approximately 73.1% of our equity in total, of which 26.7% was through the ADS
program.
An investor in ADSs does not need to seek the specific approval from the
government of India to purchase, hold or dispose of ADSs. In the ADS offerings,
we obtained the approval of the government of India's Department of Company
Affairs and the relevant stock exchanges.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person provided the necessary
procedural requirements have been met. However, you may not receive sufficient
advance notice of shareholder meetings to enable you to withdraw the underlying
equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions. Secondary purchases of
securities of a banking company in India by foreign direct investors or
investments by non-resident Indians, overseas corporate bodies and foreign
institutional investors above the ownership levels set forth above require
government of India approval on a case-by-case basis. It is unclear whether
similar case-by-case approvals of ownership of equity shares withdrawn from the
depositary facility by foreign institutional investors, non-resident Indians and
overseas corporate bodies would be required.
You will be required to make a public offer to the remaining shareholders
if you withdraw your equity shares from the ADS program and your direct or
indirect holding in us exceeds 15.0% of our total equity under the Securities
and Exchange Board of India (Substantial Acquisition of Shares and Takeover)
Regulations, 1997.
ADSs issued by Indian companies to non-residents have free transferability
outside India. Under current Indian regulations and practice, approval of the
Reserve Bank of India is not required for the sale of equity shares underlying
the ADSs by a non-resident of India to a resident of India if the sale has been
executed on a recognized stock exchange in India through a registered broker at
the prevailing market price. Approval of the Reserve Bank of India is also not
required for a sale of shares of a company other than a company in the financial
services sector, even if the transfer is other than on a recognized stock
exchange in India or through a registered broker, as long as conditions
generally prescribed by Reserve Bank of India are complied with. The same
restrictions apply to a renunciation of rights to a resident of India. Approval
of the Reserve Bank of India is not required for sale of shares under the
portfolio investment scheme prescribed by the Reserve Bank of India provided the
sale is made on a recognized stock exchange and through a registered stock
broker.
Any new issue of equity shares of a banking company, either through the
automatic route or with the specific approval of the Foreign Investment
Promotion Board, does not require further approval of the Reserve Bank of India,
but must comply with certain reporting requirements.
164
DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
Board of Directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each
fiscal year. The shareholders have the right to decrease but not increase the
dividend amount recommended by the Board of Directors. Dividends may be paid
out of the company's profits for the fiscal year in which the dividend is
declared or out of undistributed profits of prior fiscal years. ICICI Bank paid
dividends consistently every year from fiscal 1996, the second year of its
operations. ICICI Bank paid the dividend for fiscal 2002 as an interim dividend
during fiscal 2002 itself and accordingly there was no dividend outflow during
fiscal 2003 in respect of dividends declared for fiscal 2002. For fiscal 2003,
we paid a dividend, excluding dividend tax, of Rs.7.50 (US$0.16) per equity
share aggregating to Rs.4.6 billion (US$103 million) which was paid in fiscal
2004. For fiscal 2004, we paid a dividend, excluding dividend tax, of Rs.7.50
(US$0.16) per equity share aggregating to Rs.5.4 billion (US$122 million). The
amount of Rs.5.4 billion (US$122 million) excludes the impact of the issue of
6,992,187 equity shares on May 24, 2004 through the exercise of the
overallotment option in the issue of equity shares in April 2004. The dividend
for fiscal 2004 was paid in fiscal 2005. For fiscal 2005, we paid a dividend,
excluding dividend tax, of Rs.7.50 (US$0.16) per equity share and a special
dividend, excluding dividend tax, of Rs.1.00 (US$0.02) per equity share to mark
the completion of 50 years in finance by ICICI group aggregating to Rs.6.3
billion (US$141 million), which we paid out in August 2005. For fiscal 2006, we
paid a dividend, excluding dividend tax, of Rs.8.50 (US$0.19) per equity share
aggregating to Rs.7.6 billion (US$171 million), which we paid out in July 2006.
The following table sets forth, for the periods indicated, the dividend per
equity share and the total amount of dividends paid out on the equity shares
during the fiscal year by ICICI Bank, each exclusive of dividend tax. This may
be different from the dividend declared for the year.
Dividend per Total amount of
equity share dividends paid
------------ ---------------
(in millions)
Dividend paid during the fiscal year
2002(1)........................................ 4.00(1) 881
2003........................................... -- --
2004........................................... 7.50 4,598
2005........................................... 7.50 5,507
2006........................................... 8.50 6,292
------------------
(1) Includes dividend of Rs.2.00 per share declared for each of the fiscal
years 2001 and 2002.
Dividend income is tax-exempt in the hands of shareholders. However, we are
required to pay a tax on distributed profits. We were required to pay a 14.0%
tax (including surcharge) on distributed profits in fiscal 2006. In fiscal 2007,
we are required to pay a 14.0% tax (including surcharge) on distributed profits.
Future dividends will depend upon our revenues, cash flow, financial
condition, the regulations of the Reserve Bank of India and other factors.
Owners of ADSs will be entitled to receive dividends payable in respect of the
equity shares represented by such ADSs. The equity shares represented by ADSs
rank pari passu with existing equity shares. At present, we have equity shares
issued in India and equity shares represented by ADSs.
Pursuant to guidelines issued by the Securities and Exchange Board of India
in February 2000, with respect to equity shares issued by us during a particular
fiscal year, dividends declared and paid for such fiscal year are paid in full
and are no longer prorated from the date of issuance to the end of such fiscal
year.
Before paying any dividend on our shares, we are required under the Indian
Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). Before declaring dividends, we are required to
transfer at least 20.0% of the balance of profits of each year before payment of
dividend to a reserve fund. The government of India may, however, on the
recommendation of the Reserve Bank of India, exempt us from such a requirement.
As per the revised guidelines issued by Reserve Bank of India, only
165
those banks, which comply with certain minimum prudential requirements
with respect to capital adequacy, net non-performing asset ratio and other
criteria, are eligible to declare dividends without prior approval of Reserve
Bank of India. Further, the guidelines prescribe a matrix for the maximum
permissible range of dividend payout ratios with a ceiling of 40.0%, excluding
dividend tax, for banks. Banks, which comply with the prudential requirements
of the above guidelines, but desire to declare dividends higher than the
specified ceiling must obtain prior approval of Reserve Bank of India for
declaration of such higher dividend. Any bank that does not meet the criteria
prescribed above has to obtain the prior approval of Reserve Bank of India
before declaring any dividend. For a description of the revised guidelines
issued by the Reserve Bank of India, please see "Supervision and Regulation -
Reserve Bank of India Regulations - Restrictions on Payment of Dividends". We
also need the prior approval from the Reserve Bank of India to pay an interim
dividend.
For a description of the tax consequences of dividends paid to
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
The following table sets forth, for the periods indicated, the dividend per
equity share and the total amount of dividends paid out on the equity shares
during the year, each exclusive of dividend tax, for ICICI, prior to the
amalgamation. This may be different from the dividend declared for the year.
Dividend per Total amount of
equity share(1) dividends paid
--------------- ---------------
(in millions)
Dividend paid during the fiscal year
1999......................................... Rs. 11.00 Rs. 2,618
2000......................................... 11.00 2,641
2001......................................... 11.00 3,505
2002(2)...................................... 22.00 8,639
-------------
(1) For fiscal 1999, 2000, 2001 and 2002, based on the exchange ratio of 1:2 in
which shareholders of ICICI were issued shares of ICICI Bank, number of
shares have been adjusted by dividing by two. Hence, these numbers are
different from the numbers reported in the annual report on Form 20-F for
fiscal 2002.
(2) Includes dividend of Rs.11.00 per share declared for each of the fiscal
years 2001 and 2002, both of which were paid during fiscal 2002.
166
TAXATION
Indian Tax
The following discussion of material Indian tax consequences to investors
in ADSs and equity shares who are not resident in India whether of Indian origin
or not (each a "non-resident") is based on the provisions of the Indian
Income-tax Act, 1961 (the "Income-tax Act"), including the special tax regime
for ADSs contained in Section 115AC, which has been extended to cover additional
ADSs that an investor may acquire in an amalgamation or restructuring of the
company, and certain regulations implementing the Section 115AC regime. The
Income-tax Act is amended every year by the Finance Act of the relevant year.
Some or all of the tax consequences of described herein may be amended or
modified by future amendments to the Income-tax Act.
The summary is not intended to constitute a complete analysis of the tax
consequences under Indian law of the acquisition, ownership and sale of ADSs and
equity shares by non-resident investors. Potential investors should, therefore,
consult their own tax advisers regarding the tax consequences of such
acquisition, ownership and sale, including the tax consequences under Indian
law, the law of the jurisdiction of their residence, any tax treaty between
India and their country of residence, and in particular the application of the
regulations implementing the Section 115AC regime.
Residence
For the purpose of the Income-tax Act, an individual is a resident of India
during any fiscal year, if he (i) is in India in that year for 182 days or more
or (ii) having been in India for a period or periods aggregating 365 days or
more during the four years preceding that fiscal year, is in India for a period
or periods aggregating 60 days or more in that fiscal year. The period of 60
days is substituted by 182 days in the case of an Indian citizen or person of
Indian origin who being resident outside India comes on a visit to India during
the fiscal year or an Indian citizen who leaves India for the purposes of his
employment during the fiscal year. A company is resident in India in any fiscal
year if it is registered in India or the control and management of its affairs
is situated wholly in India in that year. A firm or other association of persons
is resident in India except where the control and the management of its affairs
are situated wholly outside India.
Taxation of Distributions
Dividends paid are not subject to any Indian withholding or other tax.
However, we are required to pay tax at the rate of 14.025% on the dividends
distributed by us. The dividend so paid is not taxable under section 115AC in
the hands of the ADS holders.
Taxation on Redemption of ADSs
The acquisition of equity shares upon redemption of ADSs by a non-resident
investor will not give rise to a taxable event for Indian tax purposes.
Taxation on Sale of ADSs or Equity Shares
Any transfer of ADSs outside India by a non-resident investor to another
non-resident investor will not give rise to Indian capital gains tax in the
hands of the transferor.
Subject to any relief under any relevant double taxation treaty, gain
arising from the sale of an equity share will generally give rise to a liability
for Indian income tax in the hands of the transferor. Such tax is required to be
withheld at source. Such gains would either be taxable as capital gains or
business income, depending upon the nature of holding of the investor. Where the
equity share has been held for more than 12 months (measured from the date of
advice of redemption of the ADS by the Depositary as specified below), the
resulting long term capital gains would be exempt from tax. Where the equity
share has been held for 12 months or less, the resulting short-term capital
gains in the case of non-residents would be taxable at a lower tax rate of
10.2%(including education cess) where the total income does not exceed
Rs.1,000,000 (US$22,482) or 11.22% (including applicable surcharge and education
cess) where the total income exceeds Rs.1,000,000 (US$ 22,482) during the fiscal
year. These rates of tax are applicable provided the gains are treated as
capital gains and provided the shares are sold on the recognized
167
Indian stock exchanges and are liable to securities transaction tax. In other
cases, the rate of tax applicable under the provisions of the Income-tax Act
varies, subject to a maximum of 41.82% (including applicable surcharges and
education cess). The actual rate depends on a number of factors, including
without limitation the nature of the non-resident investor.
Capital gains may be exempt from taxation or the tax rates mentioned above
may be lowered as per the provisions of any double taxation treaty entered into
by the government of India with the country of residence of the non-resident
investors. The double taxation treaty between the United States and India does
not provide US residents with any relief from Indian tax on capital gains.
The transaction of sale of equity shares entered into a recognised stock
exchange in India settled by actual delivery or transfer will be subject to
securities transaction tax at the rate of 0.125% (0.1% for a period up to May
31, 2006), on the value of the transaction, payable by the seller and buyer
respectively.
For purposes of determining the amount of capital gains arising on a sale
of an equity share for Indian tax purposes, the cost of acquisition of an equity
share received upon redemption of an ADS will be the price of the share
prevailing on the Stock Exchange, Mumbai or the National Stock Exchange on the
date on which the Depositary advises the custodian of such redemption, not the
acquisition cost of the ADS being redeemed. The holding period of an equity
share received upon redemption of an ADS will commence on the date of advice of
redemption by the Depositary.
Rights
Distributions to non-resident investors of additional ADSs or equity shares
or rights to subscribe for equity shares made with respect to ADSs or equity
shares are not subject to Indian tax in the hands of the non-resident investor.
It is unclear as to whether capital gains derived from the sale of rights
outside India by a non-resident investor that is not entitled to exemption under
a tax treaty to another non-resident investor will be subject to Indian capital
gains tax. If the rights are deemed by the Indian tax authorities to be situated
within India, as our situs is in India, then the capital gains realized on the
sale of rights will be subject to customary Indian capital gains taxation as
discussed above.
Stamp Duty
Upon the issuance of the equity shares underlying the ADSs, we are required
to pay a stamp duty of 0.1% of the issue price per share. A transfer of ADSs is
not subject to Indian stamp duty. Normally, upon the receipt of equity shares in
physical form from the depositary in exchange for ADSs representing such equity
shares, a non-resident investor would be liable for Indian stamp duty applicable
on re-issuance in physical form, which is the same as stamp duty payable on the
original issuance in physical form subject to a maximum of Rs.100 per share
certificate. Similarly, a sale of equity shares in physical form by a
non-resident investor would also be subject to Indian stamp duty at the rate of
0.25% of the market value of the equity shares on the trade date, although
customarily such tax is borne by the transferee, that is, the purchaser.
However, our equity shares are compulsorily delivered in non-physical form
except for trades up to 500 shares only, which may be delivered in physical
form. Under Indian stamp law, no stamp duty is payable on the acquisition or
transfer of equity shares in non-physical form. The State of Maharashtra has,
inter alia, provided that records of transactions, electronic or otherwise,
whether electronic or otherwise, of transactions effected by a trading member of
a stock exchange through a stock exchange shall be liable to payment of stamp
duty in the case of delivery, at the rate of 0.01%, rounded off to the next
rupee, in the case of non-delivery, at the rate of 0.002%, rounded off to the
next rupee and if relating to futures and options trading, at the rate of
0.002%, rounded off to the next rupee.
Other Taxes
At present, there are no taxes on wealth, gifts or inheritance which apply
to the ADSs or underlying equity shares.
168
Service Tax
Brokerage fees paid to stockbrokers in connection with the sale or purchase
of shares which are listed on any recognized stock exchange in India are subject
to a service tax at a rate of 12.24% (including applicable education cess)
enhanced from 10.2% (including applicable education cess) with effect from April
18, 2006. The stockbroker is responsible for collecting the service tax and
paying it to the relevant authority.
United States Tax
The following discussion describes the material US federal income tax
consequences of the acquisition, ownership and sale of ADSs or equity shares
that are generally applicable to US investors. For these purposes, you are an US
investor if, for US federal income tax purposes, you are:
1. a citizen or resident of the United States;
2. a corporation, or other entity taxable as a corporation, organized
under the laws of the United States or of any political subdivision of
the United States; or
3. an estate or trust the income of which is includable in gross income
for US federal income tax purposes regardless of its source.
This discussion only applies to ADSs or equity shares that you own as
capital assets.
Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address investors subject to special rules, including:
1. insurance companies;
2. tax-exempt entities;
3. dealers and certain traders in securities;
4. certain financial institutions;
5. persons who own the ADSs or equity shares as part of an integrated
investment (including a straddle, hedging or conversion transaction)
comprised of the ADS or equity shares, and one or more other positions
for US federal income tax purposes;
6. persons whose functional currency is not the US dollar;
7. persons who own, actually or constructively, 10.0% or more of ICICI
Bank's voting stock; or
8. partnerships or other entities classified as partnerships for US
federal income tax purposes.
This discussion is based on the tax laws of the United States (including
the Internal Revenue Code of 1986, as amended, referred to as the "Code"),
Treasury Regulations, Proposed Treasury Regulations, Revenue Rulings and
judicial decisions as of the date hereof. These laws may change, possibly with
retroactive effect.
This discussion is also based in part on representations by the depositary
and assumes that each obligation under the deposit agreement and any related
agreement will be performed in accordance with its terms. Furthermore, the US
Treasury has expressed concerns that parties to whom ADSs are pre-released may
be taking actions that are inconsistent with the claiming of foreign tax credits
for US investors of ADSs. Such actions would also be inconsistent with the
claiming of the reduced rate of tax, described below, applicable to dividends
received by certain non-corporate US investors. Accordingly, the analysis of the
creditability of Indian taxes and the availability of the reduced tax rate for
dividends received by certain non-corporate US investors, each described below,
could be affected by actions taken by parties to whom ADSs are pre-released.
For US federal income tax purposes, if you own an ADS, you will generally
be treated as the owner of the equity shares underlying the ADS.
169
Please consult your tax adviser with regard to the application of the US
federal income tax laws to the ADSs or equity shares in your particular
circumstances, including the passive foreign investment company rules described
below, as well as any tax consequences arising under the laws of any state,
local or other taxing jurisdiction.
This discussion assumes that ICICI Bank is not, and will not become, a
passive foreign investment company (as discussed below).
Taxation of Dividends
Dividends you receive on the ADSs or equity shares, other than certain pro
rata distributions of equity shares or rights to acquire equity shares to all
holders of equity shares (including holders of ADSs), will generally constitute
foreign source dividend income for US federal income tax purposes. The amount of
the dividend you will be required to include in income will equal the US dollar
value of the rupees, calculated by reference to the exchange rate in effect on
the date the payment is received by the depositary (in the case of ADSs) or by
you (in the case of equity shares) regardless of whether the payment is
converted into US dollars on the date of receipt. If you realize gain or loss on
a sale or other disposition of rupees, it will be US source ordinary income or
loss. If you are a corporate US investor, you will not be entitled to claim a
dividends-received deduction for dividends paid by ICICI Bank. Subject to
applicable limitations and the discussion above regarding concerns expressed by
the U.S. Treasury, if you are a non-corporate US investor, dividends paid to you
in taxable years beginning before January 1, 2011 will be taxable at a maximum
rate of 15.0%. If you are a non-corporate US investor, you should consult your
own tax adviser to determine whether you are subject to any special rules that
limit your ability to be taxed at this favorable rate.
Taxation of Capital Gains
You will recognize capital gain or loss for US federal income tax purposes
on the sale or exchange of ADSs or equity shares in the same manner as you would
on the sale or exchange of any other shares held as capital assets. The gain or
loss will generally be US source income or loss. You should consult your own tax
advisers about the treatment of capital gains, which may be taxed at lower rates
than ordinary income for non-corporate taxpayers, and capital losses, the
deductibility of which may be limited.
Under certain circumstances as described under "Taxation - Indian Tax -
Taxation on Sale of ADSs or Equity Shares", you may be subject to Indian tax
upon the disposition of equity shares. You should consult your own tax adviser
with respect to your ability to credit this Indian tax against your US federal
income tax liability.
Passive Foreign Investment Company Rules
Based upon certain proposed Treasury regulations, which are proposed to be
effective for taxable years beginning after December 31, 1994, and upon certain
management estimates, ICICI Bank does not expect to be a PFIC for its taxable
year that ended March 31, 2006 or in the foreseeable future. In general, a
foreign corporation is a PFIC for any taxable year in which (i) 75.0% or more of
its gross income consists of passive income (such as dividends, interest, rents
and royalties) or (ii) 50.0% or more of the average quarterly value of its
assets consists of assets that produce, or are held for the production of,
passive income. Since there can be no assurance that the proposed regulations
will be finalized in their current form, the manner of the application of the
proposed regulations is not entirely clear, and the composition of ICICI Bank's
income and assets will vary over time, there can be no assurance that ICICI Bank
will not be considered a PFIC for any taxable year.
If ICICI Bank were treated as a PFIC for any taxable year during your
holding period and you have not made the mark-to-market election, as described
below, you will be subject to special rules generally intended to eliminate any
benefits from the deferral of US federal income tax that a holder could derive
from investing in a foreign corporation that does not distribute all of its
earnings on a current basis. Upon a disposition of ADSs or equity shares,
including, under certain circumstances, a disposition pursuant to an otherwise
tax-free reorganization, gain recognized by you would be allocated ratably over
your holding period for the ADSs or equity shares. The amounts allocated to the
taxable year of the disposition and to any year before ICICI Bank became a
passive foreign investment company would be taxed as ordinary income. The amount
allocated to each other taxable year would be subject to tax at the highest rate
in effect for individuals or corporations, as appropriate, and an interest
charge would
170
be imposed on the amount allocated to such taxable year. Further, any
distribution in respect of ADSs or equity shares in excess of 125.0% of the
average of the annual distributions on ADSs or equity shares received by you
during the preceding three years or your holding period, whichever is shorter,
would be subject to taxation as described above.
If the ADSs or equity shares are "regularly traded" on a "qualified
exchange", you may make a mark-to-market election. The ADSs or equity shares
will be treated as "regularly traded" in any calendar year in which more than a
de minimis quantity of the ADSs or equity shares, as the case may be, are traded
on a qualified exchange on at least 15 days during each calendar quarter. A
"qualified exchange" includes a foreign exchange that is regulated by a
governmental authority in which the exchange is located and with respect to
which certain other requirements are met. The Internal Revenue Service has not
yet identified specific foreign exchanges that are "qualified" for this purpose.
The New York Stock Exchange on which the ADSs are traded is a qualified exchange
for US federal income tax purposes.
If you make the election, you generally will include as ordinary income the
excess, if any, of the fair market value of the ADSs or equity shares at the end
of each taxable year over their adjusted basis, and will be permitted an
ordinary loss in respect of the excess, if any, of the adjusted basis of the
ADSs or equity shares over their fair market value at the end of the taxable
year (but only to the extent of the net amount of previously included income as
a result of the mark-to-market election). If you make the election, your basis
in the ADSs or equity shares will be adjusted to reflect any such income or loss
amounts. Any gain recognized on the sale or other disposition of ADSs or equity
shares will be treated as ordinary income.
If you own ADSs or equity shares during any year in which ICICI Bank is a
PFIC, you must file Internal Revenue Service Form 8621.
In addition, if we were to be treated as a PFIC in a taxable year in which
we pay a dividend or the prior taxable year, the 15.0% dividend rate discussed
above with respect to payment of dividends to certain non-corporate US investors
would not apply.
Information reporting and backup withholding
Payment of dividends and sales proceeds that are made within the United
States or through certain US-related financial intermediaries generally are
subject to information reporting and to backup withholding unless (i) you are a
corporation or other exempt recipient or (ii) in the case of backup withholding,
you provide a correct taxpayer identification number and certify that no loss of
exemption from backup withholding has occurred.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your US federal income tax liability and may entitle you to
a refund, provided that the required information is timely furnished to the
Internal Revenue Service.
171
PRESENTATION OF FINANCIAL INFORMATION
Pursuant to the issuance and listing of our securities in the United
States under registration statements filed with the United States Securities
Exchange Commission, we file annual reports on Form 20-F which must include
financial statements prepared under generally accepted accounting principles in
the United States (US GAAP) or financial statements prepared according to a
comprehensive body of accounting principles with a reconciliation of net income
and stockholders' equity to US GAAP. When we first listed our securities in the
United States, Indian GAAP was not considered a comprehensive body of
accounting principles under US securities laws and regulations. Accordingly,
our annual reports on Form 20-F for fiscal years 2000 through 2005 have
included US GAAP financial statements. However, pursuant to a significant
expansion of Indian accounting standards, Indian GAAP constitutes a
comprehensive body of accounting principles. Accordingly, we have included in
this annual report consolidated financial statements prepared according to
Indian GAAP, which varies in certain respects from US GAAP. For a
reconciliation of net income and stockholders' equity to US GAAP, a description
of significant differences between Indian GAAP and US GAAP and certain
additional information required under US GAAP, see notes 22 and 23 to our
consolidated financial statements herein. For selected financial data in
accordance with US GAAP see "Selected Financial Data in accordance with US
GAAP."
The data for fiscal 2002 through fiscal 2006 have been derived from our
consolidated financial statements. The accounting and reporting policies used
in the preparation of our financial statements reflect general industry
practices and conform with Indian GAAP including the Accounting Standards (AS)
issued by Institute of Chartered Accountants of India, guidelines issued by the
Reserve Bank of India, the Insurance Regulatory and Development Authority and
the National Housing Bank as applicable to relevant companies.
The financial statements for fiscal 2002 were audited by S.B. Billimoria &
Co., Chartered Accountants under auditing standards in India issued by the
Institute of Chartered Accountants of India (ICAI), for fiscal 2003 jointly by
N.M. Raiji & Co., Chartered Accountants and S.R. Batliboi & Co, Chartered
Accountants. under auditing standards in India issued by ICAI and for fiscal
2004, 2005 and 2006 by S.R. Batliboi & Co., Chartered Accountants . under
auditing standards in India issued by ICAI. The financial position as of March
31, 2005 and 2006 and the results of operations and cash flows for each of the
years in the three-year period ended March 31, 2006 have also been audited by
KPMG India, our independent accountants in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our financial
statements as per Indian GAAP along with the reconciliation of net profit and
stockholders' equity to US GAAP, including the notes to these financial
statements, audited by KPMG India are set forth at the end of this annual
report.
The amalgamation of ICICI, ICICI Personal Financial Services and ICICI
Capital Services with us in 2002 was accounted for using the purchase method of
accounting. The date of the amalgamation for accounting purposes under Indian
GAAP was the appointed date under the Scheme of Amalgamation approved by the
High Court of Bombay and Gujarat and the Reserve Bank of India, which was March
30, 2002. Accordingly, our profit and loss account (hereinafter referred to as
income statement) for fiscal 2002 includes the results of operations of ICICI,
ICICI Personal Financial Services and ICICI Capital Services for only two days,
i.e., March 30 and 31, 2002, although our balance sheet for fiscal 2002 reflects
the full impact of the amalgamation. As a result of the above, the income
statement for fiscal 2003 and subsequent years is not comparable with the income
statement for fiscal 2002.
The Statement on Financial Accounting Standard No. 141 on "Business
Combinations", issued by the Financial Accounting Standards Board, requires that
business combinations be accounted for in the period in which the combination is
consummated. The effective date of the amalgamation for accounting purposes
under US GAAP was April 1, 2002. Accordingly, under US GAAP, the amalgamation
was reflected for fiscal 2003, as it was consummated in April 2002. Under US
GAAP, the amalgamation was accounted for as a reverse acquisition. This means
that ICICI was recognized as the accounting acquirer in the amalgamation,
although ICICI Bank was the legal acquirer. Accordingly, any financial
information contained in this annual report for fiscal 2002 and prior years
under US GAAP, except where specifically stated otherwise, present the assets,
liabilities and results of operations of ICICI.
Under US GAAP, the consolidation of ICICI's majority ownership interest in
two insurance companies, ICICI Prudential Life Insurance Company Limited and
ICICI Lombard General Insurance Company Limited, because of substantive
participative rights retained by the minority shareholders, is accounted for by
the equity method. Under Indian GAAP these insurance subsidiaries are fully
consolidated. For fiscal 2004, ICICI Prudential Life Insurance Company Limited
and ICICI Lombard General Insurance Company Limited have been accounted as joint
ventures using the proportionate consolidation method as prescribed by
Accounting Standard 27 (AS 27) on "Financial Reporting of Interests in Joint
Ventures". Therefore, our consolidated financial statements include only 74%
share
172
(ICICI Bank's share in each of the two joint ventures) of each line item
reflected in the financial statements of these two entities for fiscal 2004.
From fiscal 2005 onwards, these two entities have been accounted as per the
principles of Accounting Standard 21 (AS 21) on "Consolidated Financial
Statements", as required by the revision in AS 27. Therefore from fiscal 2005,
our consolidated financial statements include 100% of each line item reflected
in the financial statements of these two entities with a separate disclosure for
minority interest.
Under Indian GAAP, we have not consolidated certain entities (primarily 3i
Infotech and ICICI OneSource Limited) in which control is intended to be
temporary. However under US GAAP, these entities have been consolidated as SFAS
No. 94 on "Consolidation of majority owned subsidiaries" requires consolidation
of such entities.
Although we have translated in this annual report certain rupee amounts
into dollars for convenience, this does not mean that the rupee amounts referred
to could have been, or could be, converted into dollars at any particular rate,
the rates stated earlier in this annual report, or at all. Except in the section
on "Market Price Information", all translations from rupees to dollars are based
on the noon buying rate in the City of New York for cable transfers in rupees at
March 31, 2006. The Federal Reserve Bank of New York certifies this rate for
customs purposes on each date the rate is given. The noon buying rate on March
31, 2006 was Rs. 44.48 per US$ 1.00.
173
ADDITIONAL INFORMATION
Memorandum and Articles of Association
Objects and Purposes
Pursuant to Clause III. A. 1 of ICICI Bank's Memorandum of Association,
ICICI Bank's main objective is to, inter alia, carry on the business of banking
in any part of India or outside India.
Directors' Powers
ICICI Bank's directors' powers include the following:
o Article 140 of the Articles of Association provides that no director
of ICICI Bank shall, as a director, take any part in the discussion of
or vote on any contract or arrangement if such director is directly or
indirectly concerned or interested in such contract or arrangement.
o Directors have no powers to vote in absence of a quorum.
o Article 83 of the Articles of Association provides that the directors
may by a resolution passed at a meeting of the Board of Directors
borrow moneys and raise and secure the payment of amounts in a manner
and upon such terms and conditions in all respects as they think fit
and in particular by the issue of bonds, debenture stock, or any
mortgage or charge or other security on the undertaking or the whole
or any part of the property of ICICI Bank (both present and future)
including its uncalled capital.
Amendment to Rights of Holders of Equity Shares
Any change to the existing rights of the equity holders can be made only by
amending the Articles of Association which would require a special resolution of
the shareholders, which must be passed by not less than three times the number
of votes cast against the resolution.
Change in Control Provisions
Article 59 of the Articles of Association provides that the Board of
Directors may at their discretion decline to register or acknowledge any
transfer of shares in respect of shares upon which we have a lien or whilst any
money in respect of the shares desired to be transferred or any of them remain
unpaid. Moreover, the Board of Directors may refuse to register the transfer of
any shares if the total nominal value of the shares or other securities intended
to be transferred by any person would, together with the total nominal value of
any shares held in ICICI Bank, exceed 1% of the paid up equity share capital of
the merged entity or if the Board of Directors is satisfied that as a result of
such transfer, it would result in the change in the Board of Directors or change
in the controlling interest of ICICI Bank and that such change would be
prejudicial to the interests of ICICI Bank. However, under the Indian Companies
Act, the enforceability of such transfer restrictions is unclear.
Documents on Display
The documents concerning us which are referred to herein may be inspected
at the Securities and Exchange Commission ("SEC"). You may read and copy any
document filed or furnished by us at the SEC's public reference rooms in
Washington D.C., New York and Chicago, Illinois or obtain them by mail upon
payment of prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information. The SEC also maintains a website at www.sec.gov, which contains, in
electronic form, each of the reports and other information that we have filed
electronically with the SEC. Information about ICICI Bank is also available on
the web at www.icicibank.com.
Incorporation by Reference
We incorporate by reference the information disclosed under "Description of
Equity Shares" and "Description of the American Depositary Shares" in ICICI
Bank's Registration Statement on Form F-1 (File No. 333-30132).
174
Index to Consolidated Financial Statements
Contents Page
Report of independent registered public accounting firm.............F-2
Consolidated Balance Sheet..........................................F-3
Consolidated Profit and Loss account................................F-4
Consolidated Cash Flow Statements...................................F-5
Schedules to the consolidated financial statements..................F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
ICICI Bank Limited
We have audited the accompanying consolidated balance sheet of ICICI Bank
Limited and subsidiaries ('the Company') as on March 31, 2006 and 2005 and the
related consolidated profit and loss accounts and consolidated cash flow
statements for each of the years in the three-year period ended March 31, 2006.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICICI Bank Limited
and subsidiaries as at March 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2006, in conformity with generally accepted accounting
principles in India.
Accounting principles generally accepted in India vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such
differences is presented in Note 22 to the consolidated financial statements.
The United States dollar amounts are presented in the accompanying consolidated
financial statements solely for the convenience of the readers and have been
translated into United States dollars on the basis described in Note 24 to the
consolidated financial statements.
Mumbai, India KPMG
June 11, 2006
F-2
ICICI Bank Limited and Subsidiaries
Consolidated Balance Sheets
(Rs. in thousands)
--------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$, As
--------------------- of March 31,
Schedule 2005 2006 2006
-------- ---- ---- ----
CAPITAL AND LIABILITIES
Capital ................................... 1 10,867,758 12,398,345 278,740
Reserves and Surplus ...................... 2 115,374,366 213,519,487 4,800,348
Minority interest ......................... 1,524,823 2,749,402 61,812
Deposits .................................. 3 1,011,086,273 1,724,509,830 38,770,455
Borrowings ................................ 4 383,690,219 449,999,477 10,116,895
Liabilities on policies in force .......... 34,475,904 81,221,053 1,826,013
Other liabilities and provisions .......... 5 227,317,270 287,898,021 6,472,527
------------- ------------- ----------
TOTAL CAPITAL AND LIABILITIES ............. 1,784,336,613 2,772,295,615 62,326,790
============= ============= ==========
ASSETS
Cash and balance with Reserve Bank 6 63,701,428 89,859,352 2,020,219
Balances with banks and money at call 7
short notice .................. 72,575,590 92,691,597 2,083,894
Investments ................... 8 546,516,162 840,138,822 18,888,013
Advances ...................... 9 964,099,562 1,562,603,202 35,130,468
Fixed assets .................. 10 41,781,927 41,428,705 931,401
Other assets .................. 11 95,661,944 145,573,937 3,272,795
------------- ------------- ----------
TOTAL ASSETS .................. 1,784,336,613 2,772,295,615 62,326,790
============= ============= ==========
Contingent liabilities ........ 12 2,961,013,608 4,362,316,361 98,073,659
Bills for collection .......... 23,971,962 43,469,104 977,273
Significant accounting policies and
notes to accounts ...................... 18
------------------------------------------------------------------------------------------------
The Schedules referred to above form an integral part of the Balance Sheet.
F-3
ICICI Bank Limited and Subsidiaries
Consolidated Profit and Loss account
(Rs. in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
into US$,
Year ended March 31, Year ended
-------------------------------------------- March 31,
Schedule 2004 2005 2006 2006
----------- ------------ ------------ ------------ ------------
I. INCOME
Interest earned ....................................... 13 93,526,723 98,337,569 146,141,891 3,285,564
Other income .......................................... 14 45,530,181 70,976,340 111,469,028 2,506,048
Shares in affiliates .................................. 3 -- -- --
------------ ------------ ------------ ------------
TOTAL INCOME ............................................ 139,056,907 169,313,909 257,610,919 5,791,612
============ ============ ============ ============
II. EXPENDITURE
Interest expended .................................... 15 71,676,576 68,043,787 101,014,796 2,271,015
Operating expenses ................................... 16 41,934,253 72,856,592 109,130,849 2,453,481
Provisions and contingencies ......................... 17 9,649,754 10,313,107 23,475,049 527,766
------------ ------------ ------------ ------------
TOTAL EXPENDITURE ...................................... 123,260,583 151,213,486 233,620,694 5,252,262
============ ============ ============ ============
III. PROFIT/LOSS
Net profit for the year ............................. 15,796,324 18,100,423 23,990,225 539,350
Less: Minority interest ............................. (7,459) (422,853) (210,673) (4,736)
Net profit after minority interest .................. 15,803,783 18,523,276 24,200,898 544,086
Profit brought forward .............................. 10,962 (335,960) (908,834) (20,432)
------------ ------------ ------------ ------------
TOTAL PROFIT / (LOSS) .................................. 15,814,745 18,187,316 23,292,064 523,654
============ ============ ============ ============
IV. APPROPRIATIONS/TRANSFERS
Transfer to Statutory Reserve ....................... 4,093,000 5,023,226 6,360,000 142,986
Transfer to Reserve fund ............................ -- -- 222 5
Transfer to Capital Reserve ......................... 2,658,700 200,000 680,000 15,288
Transfer to Investment Fluctuation Reserve .......... 2,760,000 -- 5,900,000 132,644
Transfer from Investment Fluctuation Reserve ........ -- -- (13,203,350) (296,838)
Transfer to Special Reserve ......................... 339,550 359,156 2,778,000 62,455
Transfer to Revenue and other reserves .............. -- 6,185,021 14,330,152 322,171
Proposed equity share dividend ...................... 5,440,592 6,329,609 7,593,326 170,713
Proposed preference share dividend .................. 35 35 35 1
Corporate dividend tax .............................. 858,828 999,103 1,289,284 28,986
Balance carried over to Balance Sheet ............... (335,960) (908,834) (2,435,605) (54,757)
------------ ------------ ------------ ------------
TOTAL ............................................... 15,814,745 18,187,316 23,292,064 523,654
============ ============ ============ ============
Significant accounting policies and notes to accounts 18
Earning per share (Refer note B. 1 )
Basic (Rs.) ........................................ 25.73 25.45 30.96 0.70
Diluted (Rs.) ....................................... 25.52 25.25 30.64 0.69
Face value per share (Rs.) .......................... 10.00 10.00 10.00 0.22
------------------------------------------------------------------------------------------------------------------------------------
The schedules referred to above form an integral part of the Profit and Loss
Account.
F-4
ICICI Bank Limited and Subsidiaries
Consolidated Cash Flow Statements
(Rs. in thousands)
---------------------------------------------------------------------------------------------------------------
Convenience
translation
into US$,
PARTICULARS Year ended March 31, Year ended
-------------------------------------------- March 31,
2004 2005 2006 2006
------------ ------------ ------------ ------------
Cash flow from operating activities
Net profit before taxes ........................ 19,202,139 24,207,093 31,198,896 701,414
Adjustments for:
Depreciation and amortisation .................. 9,483,046 9,778,945 9,462,631 212,739
Net (appreciation) / depreciation on
investments .................................... 76,365 5,287,521 8,660,775 194,712
Provision in respect of non-performing assets
(including prudential provision on standard
assets) ....................................... 4,873,127 (889,859) 8,117,173 182,490
Provision for contingencies & others ........... 207,936 85,984 203,564 4,576
(Profit) / loss on sale of fixed assets ........ 32,785 9,232 (51,832) (1,165)
------------ ------------ ------------ ------------
33,875,398 38,478,916 57,591,207 1,294,766
Adjustments for:
(Increase) / decrease in investments ........... (58,802,554) (50,917,262) (202,720,286) (4,557,560)
(Increase) / decrease in advances .............. (109,741,682) (313,691,838) (606,401,452) (13,633,126)
Increase / (decrease) in borrowings ............ 64,173,144 60,236,038 82,006,471 1,843,671
Increase / (decrease) in deposits .............. 201,280,322 330,298,939 713,348,700 16,037,515
(Increase) / decrease in other assets .......... 573,749 (28,297,407) (45,598,461) (1,025,145)
Increase / (decrease) in other liabilities and
provisions ..................................... 23,945,784 74,907,141 81,889,315 1,841,036
------------ ------------ ------------ ------------
121,428,763 72,535,611 22,524,287 506,391
(Payment) / refund of taxes (net) .............. (9,317,190) (9,475,531) (10,198,463) (229,282)
------------ ------------ ------------ ------------
Net cash generated from operating activities (A) 145,986,971 101,538,996 69,917,031 1,571,875
============ ============ ============ ============
Cash flow from investing activities
Purchase of fixed assets ....................... (6,227,868) (5,914,656) (6,557,240) (147,420)
Proceeds from sale of fixed assets ............. 372,836 323,177 1,010,888 22,727
(Purchase) / sale of long-term investment....... (18,135,921) (37,444,165) (96,168,425) (2,162,060)
Acquisition of subsidiaries (net of cash
acquired) ...................................... -- -- (688,736) (15,484)
------------ ------------ ------------ ------------
Net cash generated from investing activities (B) (23,990,953) (43,035,644) (102,403,513) (2,302,237)
Cash flow from financing activities
Proceeds from issue of share capital ........... -- 31,922,933 79,039,409 1,776,965
Amount received on exercise of stock option &
calls in arrears ............................... 539,077 649,861 811,100 18,235
Net proceeds / (repayment) of bonds (including
subordinated debts) ............................ (92,119,083) (38,366,923) 6,534,092 146,900
Dividend and dividend tax paid ................. (5,354,941) (6,381,725) (7,598,693) (170,834)
------------ ------------ ------------ ------------
Net cash generated from financing activities (C) (96,934,947) (12,175,854) 78,785,908 1,771,266
============ ============ ============ ============
Effect of consolidation of new subsidiary/
deconsolidation of subsidiary on cash and cash
equivalents (D) (673,965) -- --
Effect on account of exchange fluctuation on
translation reserve (E) -- 65,418 (25,495) (573)
---------------------------------------------------------------------------------------------------------------
F-5
ICICI Bank Limited and Subsidiaries
Consolidated Cash Flow Statements (Continued)
(Rs. in thousands)
----------------------------------------------------------------------------------------------------------------
Convenience
translation
into US$,
PARTICULARS Year ended March 31, Year ended
-------------------------------------------- March 31,
2004 2005 2006 2006
------------ ------------ ------------ ------------
Net increase / (decrease) in cash and cash
equivalents (A) + (B) + (C) + (D) + (E) 24,387,106 46,392,916 46,273,931 1,040,331
------------ ----------- ----------- ----------
Cash and cash equivalents as at 1st April 65,496,996 89,884,102 136,277,018 3,063,782
Cash and cash equivalents as at 31st March 89,884,102 136,277,018 182,550,949 4,104,113
----------------------------------------------------------------------------------------------------------------
Significant Accounting Policies and Notes to Accounts (refer Schedule 18).
The Schedules referred to above form an integral part of the consolidated
balance sheet.
F-6
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet
SCHEDULE 1 - CAPITAL
(Rs. in thousands)
----------------------------------------------------------------------------------------------------
Convenience
translation
into US$,
PARTICULARS As of March 31, As of
--------------------------- March 31,
2005 2006 2006
------------ ----------- ------------
Authorised capital
1,000,000,000 equity shares of Rs. 10 each [March 31,
2005: 1,550,000,000 equity shares of Rs. 10
each] ................................................. 15,500,000 10,000,000 224,820
55,000,000 preference shares of Rs. 100 each [March 31,
2005: Nil] ............................................ -- 5,500,000 123,651
350 preference shares of Rs. 10 million each .......... 3,500,000 3,500,000 78,687
========== ========== =========
Equity share capital
Issued, subscribed and paid-up capital
736,716,094 equity shares of Rs. 10 each (March 31,
2005: 616,391,905 equity shares) ...................... 6,163,919 7,367,161 165,629
Add : Issued 110,967,096 equity shares of Rs. 10 each
fully paid up vide prospectus dated December 8,
2005 (March 31, 2005: 115,866,538 equity shares
vide prospectus dated April 12,2004.)(1) ........ 1,158,665 1,109,671 24,948
Add : Issued 37,237,460 equity shares of Rs. 10 each
fully paid up consequent on issue of 18,618,730
American Depository Shares (ADS) vide prospectus
dated December 6, 2005 (Includes 2,428,530 ADS
issued under Green Shoe Option) ................. -- 372,374 8,372
Add : Issued 4,903,251 equity shares of Rs. 10 each
fully paid up (March 31, 2005: 4,457,651 equity
shares) on exercise of employee stock
options ......................................... 44,577 49,033 1,102
Less: Calls unpaid .................................... -- 266 6
Add : Forfeited 67,323 equity shares (March 31, 2005:
67,323 equity shares) ........................... 372 372 8
Share capital suspense [net]
[Represents application money received for Nil equity
shares (March 31, 2005: 22,470 equity shares) of Rs.10
each on exercise of employee stock options] ........... 225 -- --
---------- ---------- ----------
TOTAL EQUITY CAPITAL .................................. 7,367,758 8,898,345 200,053
Preference share capital (2)
[Represents face value of 350 preference shares of Rs.
10 million each issued to preference share holders of
erstwhile ICICI Limited on amalgamation redeemable at
par on April 20, 2018] ................................ 3,500,000 3,500,000 78,687
---------- ---------- ----------
TOTAL CAPITAL ......................................... 10,867,758 12,398,345 278,740
========== ========== =========
----------------------------------------------------------------------------------------------------
1. Includes 14,285,714 equity shares of Rs. 10 each fully paid up consequent
to green shoe option vide prospectus dated December 8, 2005 (March 31,
2005: 6,992,187 equity shares on exercise of green shoe option vide
prospectus dated April 12, 2004).
2. For these preference shares, the notification from Ministry of Finance has
currently exempted the Bank from the restriction of Section 12 (1) of the
Banking Regulation Act, 1949, which prohibits issue of preference shares by
banks.
F-7
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 2 - RESERVES AND SURPLUS
(Rs. in thousands)
-------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
---------------------------- As of March 31,
2005 2006 2006
------------ ------------ ---------------
I. Statutory reserve
Opening balance (other than joint ventures) 9,772,027 14,637,244 329,074
Additions during the year ................. 5,023,226 6,360,000 142,986
Deductions during the year ................ 158,009 9,937 223
Closing balance ........................... 14,637,244 20,987,307 471,837
II. Special reserve
Opening balance (other than joint ventures) 11,924,946 12,284,102 276,171
Additions during the year ................. 359,156 2,778,000 62,455
Deductions during the year ................ -- -- --
Closing balance ........................... 12,284,102 15,062,102 338,626
III. Share premium
Opening balance (other than joint
ventures) ................................. 8,636,104 40,005,152 899,396
Additions during the year (1) ............. 31,897,100 79,194,000 1,780,441
Deductions during the year (2) ............ 528,052 874,078 19,651
Closing balance ........................... 40,005,152 118,325,074 2,660,186
IV. Investment fluctuation reserve
Opening balance (other than joint ventures) 7,803,326 6,106,058 137,276
Additions during the year ................. 853,627 10,531,600 236,772
Deductions during the year ................ 2,550,895 14,120,409 317,455
Closing balance ........................... 6,106,058 2,517,249 56,593
V. Capital reserve
Opening balance (other than joint ventures) 4,813,166 5,013,166 112,706
Additions during the year ................. 200,000 680,000 15,288
Deductions during the year ................ -- -- --
Closing balance ........................... 5,013,166 5,693,166 127,994
VI. Foreign currencY translation reserve ...... 65,418 (25,495) (573)
VII. Reserve Fund .............................. -- 222 5
VIII. Revenue and other reserves
Opening balance for joint ventures ........ 227,900 (1,646) (37)
Opening balance for others ................ 28,217,730 37,264,872 837,789
Additions during the year for joint
ventures .................................. 948 --
Additions during the year for others ...... 8,925,158 17,420,225 391,641
Deductions during the year for joint
ventures .................................. 1,646 1,041 23
Deductions during the year for others ..... 106,864 3,722,548 83,691
Closing balance ........................... 37,263,226 50,959,862 1,145,680
------------ ----------- ------------
TOTAL RESERVES AND SURPLUS ...................... 115,374,366 213,519,487 4,800,348
============ =========== ============
-------------------------------------------------------------------------------------------------
1. Includes :-
a) Rs. 48,940.0 million (net of share premium in arrears of Rs. 92.4
million (March 31, 2005: Rs. Nil) consequent to public issue vide
prospectus dated December 8, 2005.
b) Rs. 22,134.6 million consequent to issue of ADS vide prospectus dated
December 6, 2005.
c) Rs.7,357.1 million on the exercise of the green shoe option vide
prospectus dated December 8, 2005.
d) Rs. 725.6 million (March 31, 2005: Rs. 602.5 million) on exercise of
employee stock options.
2. Represents estimated share issue expenses amounting to Rs. 874.1 million,
written-off from the share premium account as per the object of the issue.
F-8
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 3 - DEPOSITS
(Rs. in thousands)
---------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
---------------------------- As of March 31,
2005 2006 2006
------------- ------------- ---------------
A. I. Demand deposits
i) From banks ................... 1,976,547 4,697,014 105,598
ii) From others .................. 123,914,225 159,158,492 3,578,204
II. Savings bank deposits ............ 116,596,089 242,571,556 5,453,497
III. Term deposits
i) From banks ................... 64,467,974 107,092,998 2,407,666
ii) From others .................. 704,131,438 1,210,989,770 27,225,490
------------- ------------- ----------
TOTAL DEPOSITS ............................ 1,011,086,273 1,724,509,830 38,770,455
============= ============= ==========
B. I. Deposits of branches/offices in India 955,299,532 1,557,993,199 35,026,826
II. Deposits of branches/offices outside
India............................... 55,786,741 166,516,631 3,743,629
------------- ------------- ----------
TOTAL DEPOSITS ............................ 1,011,086,273 1,724,509,830 38,770,455
============= ============= ==========
---------------------------------------------------------------------------------------------
F-9
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 4 - BORROWINGS
(Rs. in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
--------------------------- As of March 31,
2005 2006 2006
----------- ----------- ----------------
I. Borrowings In India
i) Reserve Bank of India ............................................ - - -
ii) Other banks....................................................... 47,413,551 73,138,752 1,644,306
iii) Other institutions and agencies
a) Government of India........................................... 3,612,510 2,813,561 63,255
b) Financial institutions........................................ 52,628,802 38,544,121 866,549
iv) Borrowings in the form of
a) Deposits (including deposits taken over from erstwhile ICICI
Limited)....................................................... 2,334,981 1,896,486 42,636
b) Commercial paper................................................ 989,390 497,010 11,174
c) Bonds and debentures (excluding subordinated debt)
- Debentures and bonds guaranteed by the Government of
India............................................... ........ 14,815,000 14,815,000 333,071
- Borrowings under private placement of bonds carrying
maturity of 1 to 30 years from the date of placement......... 30,948,127 16,179,466 363,747
Bonds issued under multiple option/safety bonds series..........
- Regular interest bonds....................................... 9,933,481 8,556,640 192,371
- Deep discount bonds.......................................... 4,039,128 4,257,163 95,710
- Bonds with premium warrants ................................. 797,947 928,721 20,880
- Encash bonds................................................. 1,170,280 679,210 15,270
- Tax saving bonds ............................................ 59,167,873 46,187,337 1,038,384
- Pension bonds................................................ 59,351 61,052 1,373
d) Application money pending allotment............................. 6,160,858 - -
II. Borrowings outside India
i) From multilateral/bilateral credit agencies
(guaranteed by the Government of India for the equivalent of
Rs.19,542.5 million at March 31, 2006)............................ 24,949,331 23,820,581 535,535
ii) From international banks, institutions and consortiums............ 92,955,740 150,053,656 3,373,508
iii) By way of bonds and notes......................................... 31,713,869 67,570,721 1,519,126
----------- ----------- ----------
TOTAL BORROWINGS....................................................... 383,690,219 449,999,477 10,116,895
=========== =========== ==========
-----------------------------------------------------------------------------------------------------------------------------
Secured borrowings included in I and II above is Rs. 4,411.3 million (March 31,
2005: Rs. 2,951.1 million).
F-10
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 5 - OTHER LIABILITIES AND PROVISIONS
(Rs. in thousands)
-------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$
------------------------- As of March 31,
2005 2006 2006
----------- ----------- ---------------
I. Bills payable ........................... 27,944,845 33,336,184 749,465
II. Inter-office adjustments (net) .......... 5,614,186 3,496,486 78,608
III. Interest accrued ........................ 13,418,493 14,563,000 327,406
IV. Unsecured redeemable debentures/bonds
[Subordinated for Tier II capital] ...... 82,338,996 107,358,255 2,413,630
V. Others
a) Security deposits from Clients ....... 12,034,901 7,712,042 173,382
b) Sundry Creditors ..................... 46,734,948 72,892,120 1,638,762
c) Received for disbursements under
special program ...................... 2,932,942 3,007,090 67,605
d) Provision for standard assets ........ 2,307,585 5,735,262 128,940
e) Other liabilities(1) ................. 33,990,374 39,797,582 894,729
----------- ----------- -----------
TOTAL OTHER LIABILITIES AND PROVISIONS 227,317,270 287,898,021 6,472,527
=========== =========== ===========
-------------------------------------------------------------------------------------------
1. Includes :-
a) Proposed dividend of Rs. 7,675.0 million [March 31, 2005: Rs. 6,262.1
million].
b) Corporate dividend tax payable Rs. 1,134.3 million [March 31, 2005:
Rs. 930.9 million].
c) Deferred tax liability Rs. 4.1 million [March 31, 2005: Rs. Nil].
F-11
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 6 - CASH AND BALANCES WITH RESERVE BANK OF INDIA
(Rs. in thousands)
---------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
----------------------- As of March 31,
2005 2006 2006
---------- ---------- ---------------
I. Cash in hand (including foreign currency notes) ......... 5,735,325 12,599,864 283,270
II. Balances with Reserve Bank of India in current accounts... 57,966,103 77,259,488 1,736,949
---------- ---------- ---------
TOTAL CASH AND BALANCES WITH RESERVE BANK OF INDIA ........... 63,701,428 89,859,352 2,020,219
========== ========== =========
---------------------------------------------------------------------------------------------------------
SCHEDULE 7 - BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE
(Rs. in thousands)
---------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
----------------------- As of March 31,
2005 2006 2006
---------- ---------- ---------------
I. In India
i) Balances with banks
a) in current accounts .............................. 5,176,718 4,606,958 103,574
b) in other deposit accounts ........................ 9,545,677 7,870,028 176,934
ii) Money at call and short notice
a) with banks ....................................... 16,100,000 6,500,000 146,133
b) with other institutions .......................... 1,900,000 3,000 67
---------- ---------- ---------
TOTAL ...................................................... 32,722,395 18,979,986 426,708
II. Outside India
i) in current accounts ................................ 7,555,628 7,685,674 172,789
ii) in other deposit accounts .......................... 8,762,607 38,778,224 871,813
iii) Money at call and short notice .................... 23,534,960 27,247,713 612,584
---------- ---------- ---------
TOTAL ...................................................... 39,853,195 73,711,611 1,657,186
---------- ---------- ---------
TOTAL BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE 72,575,590 92,691,597 2,083,894
========== ========== =========
---------------------------------------------------------------------------------------------------------
F-12
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 8 - INVESTMENTS [net of provisions]
(Rs. in thousands)
---------------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
------------------------ As of March 31,
2005 2006 2006
----------- ----------- ---------------
I. Investments in India
i) Government securities ................................... 359,865,891 527,979,787 11,870,049
ii) Other approved securities ............................... 318,890 356,349 8,011
iii) Shares (includes equity and preference shares) .......... 32,027,936 38,738,178 870,912
iv) Debentures and bonds .................................... 35,035,525 27,896,238 627,164
vi) Others (commercial paper, mutual fund units, pass through
certificates, security receipts etc.)(1) ................ 101,247,552 166,027,372 3,732,630
----------- ----------- -----------
TOTAL ............................................................. 528,495,794 760,997,924 17,108,766
----------- ----------- -----------
II. Investments outside India
i) Government securities ................................... 377,947 10,701,989 240,602
ii) Others .................................................. 17,642,421 68,438,909 1,538,645
----------- ----------- -----------
TOTAL ............................................................. 18,020,368 79,140,898 1,779,247
----------- ----------- -----------
TOTAL INVESTMENTS ................................................. 546,516,162 840,138,822 18,888,013
=========== =========== ===========
---------------------------------------------------------------------------------------------------------------
1. Includes assets held to cover linked liabilities of life insurance
business of Rs.70,788.5 million (March 31, 2005: Rs. 26,540.6 million).
F-13
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 9 - ADVANCES (net of provisions)
(Rs. in thousands)
----------------------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
----------------------------- As of March 31,
2005 2006 2006
------------- ------------- ---------------
A. i) Bills purchased and discounted ................................ 43,984,209 63,426,766 1,425,962
ii) Cash credits, overdrafts and loans repayable on demand ....... 123,344,410 258,593,077 5,813,693
iii) Term loans ................................................... 772,559,072 1,209,251,205 27,186,403
iv) Securitisation, finance lease and hire purchase receivables(1) 24,211,871 31,332,154 704,410
------------- ------------- -------------
TOTAL ................................................................ 964,099,562 1,562,603,202 35,130,468
------------- ------------- -------------
B. i) Secured by tangible assets [includes advances against
Book debt/receivables](2) .................................... 827,679,644 1,290,962,380 28,976,686
ii) Covered by Bank/Government guarantees ........................ 10,795,838 15,235,139 342,516
iii) Unsecured .................................................... 125,624,080 256,405,683 5,811,266
------------- ------------- -------------
TOTAL ................................................................ 964,099,562 1,562,603,202 35,130,468
------------- ------------- -------------
C. I. Advances in India
i) Priority sector .............................................. 215,591,362 447,310,487 9,989,647
ii) Public sector ................................................ 11,154,310 11,572,043 260,163
iii) Banks ........................................................ 4,517,162 48,863 1,098
iv) Others ....................................................... 650,547,563 913,884,547 20,612,760
------------- ------------- -------------
TOTAL ................................................................ 881,810,397 1,372,815,940 30,863,668
------------- ------------- -------------
II. Advances outside India
i) Due from banks ............................................... 10,375,851 25,492,873 573,131
ii) Due from others
a) Bills purchased and discounted ............................ 24,884,221 44,128,091 992,088
b) Syndicated loans .......................................... 11,925,394 39,708,130 892,719
c) Others .................................................... 35,103,699 80,458,168 1,808,862
------------- ------------- -------------
TOTAL ................................................................ 82,289,165 189,787,262 4,266,800
------------- ------------- -------------
TOTAL ADVANCES ....................................................... 964,099,562 1,562,603,202 35,130,468
============= ============= =============
----------------------------------------------------------------------------------------------------------------------
1. Includes receivables under lease amounting to Rs. 695.1 million (March 31,
2005: Rs. 913.6 million).
2. Includes a loan of Rs. 16,028.7 million (March 31, 2005: Rs. Nil) for
which security is being created.
F-14
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 10 - FIXED ASSETS
(Rs. in thousands)
--------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
----------------------------- As of March 31,
2005 2006 2006
------------- ------------- ---------------
I. Premises
At cost as on March 31 of preceding year ............. 17,091,998 19,584,791 440,306
Opening adjustment ................................... 71,166 25,155 566
Additions during the year ............................ 2,547,867 1,699,414 38,206
Deductions during the year ........................... (126,240) (151,771) (3,412)
Depreciation to date ................................. (1,649,800) (2,278,057) (51,215)
----------- ----------- -----------
Net block ............................................ 17,934,991 18,879,532 424,451
----------- ----------- -----------
II. Other fixed assets (including furniture and fixtures)
At cost as on March 31 of preceding year ............. 14,589,789 17,808,855 400,379
Opening adjustment ................................... 179,786 77,299 1,738
Additions during the year ............................ 3,300,561 4,838,149 108,771
Deductions during the year ........................... (261,281) (202,946) (4,563)
Depreciation to date ................................. (8,510,555) (11,710,388) (263,273)
----------- ----------- -----------
Net block ............................................ 9,298,300 10,810,969 243,052
----------- ----------- -----------
III. Assets given on Lease
At cost as on March 31 of preceding year ............. 20,736,475 20,424,065 459,174
Additions during the year ............................ 212,838 544 12
Deductions during the year ........................... (525,248) (1,259,086) (28,307)
Depreciation to date, accumulated lease adjustment and
provisions ........................................... (5,875,429) (7,427,319) (166,981)
----------- ----------- -----------
Net block ............................................ 14,548,636 11,738,204 263,898
----------- ----------- -----------
TOTAL FIXED ASSETS ...................................... 41,781,927 41,428,705 931,401
=========== =========== ===========
--------------------------------------------------------------------------------------------------------
F-15
ICICI Bank Limited and Subsidiaries
Schedules forming part of the balance sheet (Continued)
SCHEDULE 11 - OTHER ASSETS
(Rs. in thousands)
----------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
-------------------------- As of March 31,
2005 2006 2006
------------ ----------- ---------------
I. Inter-office adjustments (net) ........................ -- -- --
II. Interest accrued ....................................... 13,835,593 22,887,616 514,560
III. Tax paid in advance/tax deducted at source (net) ....... 26,943,097 28,418,197 638,898
IV. Stationery and stamps .................................. 3,609 1,663 37
V. Non-banking assets acquired in satisfaction of
claims (1) ............................................. 3,677,234 3,627,879 81,562
VI. Others
a) Advance for capital assets ........................... 1,002,726 1,545,327 34,742
b) Outstanding fees and other income .................... 3,387,499 3,578,907 80,461
c) Exchange fluctuation suspense with Government of India 244,749 24,966 561
d) Swap suspense ........................................ 794,710 71,587 1,609
e) Deposits ............................................. 15,020,640 26,069,853 586,103
f) Deferred tax asset (Net) ............................. 702,188 2,471,990 55,575
g) Early Retirement Option expenses not written off ..... 1,269,979 885,979 19,919
h) Others (2), (3) ...................................... 28,779,920 55,989,973 1,258,768
---------- ---------- ---------
TOTAL OTHER ASSETS ........................................ 95,661,944 145,573,937 3,272,795
========== =========== =========
----------------------------------------------------------------------------------------------------------
1. Includes certain non-banking assets acquired in satisfaction of claims,
which are in the process of being transferred in the Bank's name.
2. Includes debit balance in profit and loss account Rs. 2,435.6 million
(March 31, 2005: Rs. 908.8 million) including debit balance in profit and
loss account for joint ventures of Rs. 13.7 million (March 31, 2005:
credit balance of Rs. 4.6 million.
3. Includes goodwill on consolidation amounting to Rs. 624.0 million (March
31, 2005: Nil).
F-16
ICICI Bank Limited and Subsidiaries
Schedules forming part of the profit and loss account (Continued)
SCHEDULE 12 - CONTINGENT LIABILITIES
(Rs. in thousands)
--------------------------------------------------------------------------------------------------------
Convenience
translation
As of March 31, into US$,
----------------------------- As of March 31,
2005 2006 2006
------------- ------------- ---------------
I. Claims against the Bank not acknowledged as debts .. 27,532,692 29,879,081 671,742
II. Liability for partly paid investments .............. 168,396 168,472 3,788
III. Liability on account of outstanding forward exchange
contracts ....................................... 714,653,064 919,149,224 20,664,326
IV. Guarantees given on behalf of constituents
a) In India .................................... 141,495,318 170,959,502 3,843,514
b) Outside India ............................... 16,095,087 20,488,570 460,624
V. Acceptances, endorsements and other obligations .... 74,115,736 110,082,608 2,474,879
VI. Currency swaps ..................................... 112,834,926 197,909,516 4,449,405
VII. Interest rate swaps, currency options and interest
rate futures .................................... 1,793,399,905 2,852,269,039 64,124,753
VIII. Other items for which the Bank is contingently
liable .......................................... 80,718,484 61,410,349 1,380,628
------------- ------------- ----------
TOTAL CONTINGENT LIABILITIES ........................... 2,961,013,608 4,362,316,361 98,073,659
============= ============= ==========
--------------------------------------------------------------------------------------------------------
F-17
ICICI Bank Limited and Subsidiaries
Schedules forming part of the profit and loss account (Continued)
SCHEDULE 13 - INTEREST EARNED
(Rs. in thousands)
----------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
Year Ended March 31, into US$,
--------------------------------------- year ended
2004 2005 2006 March 31, 2006
----------- ----------- ----------- --------------
I. Interest/discount on advances/bills ................................ 61,989,102 69,811,266 101,142,652 2,273,891
II. Income on investments .............................................. 27,537,393 23,921,900 40,607,809 912,945
III. Interest on balances with Reserve Bank of India and other inter-bank
funds .............................................................. 2,193,950 2,334,833 3,433,183 77,185
IV. Others (1) ......................................................... 1,806,278 2,269,570 958,247 21,543
----------- ----------- ----------- -----------
TOTAL INTEREST EARNED ................................................... 93,526,723 98,337,569 146,141,891 3,285,564
=========== =========== =========== ===========
-----------------------------------------------------------------------------------------------------------------------------------
1. Includes interest on income tax refunds Rs.415.6 million (March 31, 2005:
Rs. 307.4 million, March 31, 2004: Rs. 406.1 million).
F-18
ICICI Bank Limited and Subsidiaries
Schedules forming part of the profit and loss account (Continued)
SCHEDULE 14 - OTHER INCOME
(Rs. in thousands)
---------------------------------------------------------------------------------------------------------------------
Convenience
translation
Year Ended March 31, into US$,
--------------------------------------- year ended
2004 2005 2006 March 31, 2006
----------- ----------- ----------- --------------
I. Commission, exchange and brokerage ............... 12,037,235 20,751,386 32,546,535 731,712
II. Profit/(loss) on sale of investments (net) ....... 14,175,352 7,560,301 10,988,676 247,048
III. Profit/(loss) on revaluation of investments (net) 10,430 145,644 (504,461) (11,341)
IV. Profit/(loss) on sale of land, buildings and other
assets (net)(1) .................................. (19,955) (9,232) 51,832 1,165
V. Profit/(loss) on foreign exchange tranactions (net) 2,086,142 2,781,079 4,451,911 100,088
VI. Income pertaining to insurance business .......... 12,809,483 35,354,556 59,353,279 1,334,381
VII. Miscellaneous income (including lease income) ... 4,431,494 4,392,606 4,581,256 102,995
---------- ---------- ----------- ---------
TOTAL OTHER INCOME ...................................... 45,530,181 70,976,340 111,469,028 2,506,048
========== ========== =========== =========
--------------------------------------------------------------------------------------------------------------------
1. Includes profit/(loss) on sale of assets given on lease.
SCHEDULE 15 - INTEREST EXPENDED
(Rs. in thousands)
---------------------------------------------------------------------------------------------------------------------
Convenience
translation
Year Ended March 31, into US$,
--------------------------------------- year ended
2004 2005 2006 March 31, 2006
----------- ----------- ----------- --------------
I. Interest on deposits ............................ 30,194,309 32,622,753 59,590,224 1,339,708
II. Interest on Reserve Bank of India/inter-bank
borrowings(1) ................................... 3,230,976 4,047,872 11,888,142 267,269
III. Others (including interest on borrowings of
erstwhile ICICI Limited) ....................... 38,251,291 31,373,162 29,536,430 664,038
---------- ---------- ----------- ---------
TOTAL INTEREST EXPENDED ............................... 71,676,576 68,043,787 101,014,796 2,271,015
========== ========== =========== =========
---------------------------------------------------------------------------------------------------------------------
1. Includes interest paid on inter-bank deposits.
F-19
ICICI Bank Limited and Subsidiaries
Schedules forming part of the profit and loss account (Continued)
SCHEDULE 16 - OPERATING EXPENSES
(Rs. in thousands)
------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
Year Ended March 31, into US$,
--------------------------------------- year ended
2004 2005 2006 March 31, 2006
----------- ----------- ----------- --------------
I. Payments to and provisions for employees ..................... 7,106,649 10,907,630 17,112,066 384,714
II. Rent, taxes and lighting ..................................... 1,855,998 2,465,214 3,036,174 68,259
III. Printing and stationery ...................................... 954,119 1,052,945 1,421,619 31,961
IV. Advertisement and publicity .................................. 1,247,016 1,837,990 3,066,259 68,936
V. Depreciation on Bank's property (including non-banking assets) 2,803,542 3,283,466 3,908,328 87,867
VI. Depreciation (including lease equalisation) on leased assets . 2,805,368 2,974,662 2,771,014 62,298
VII. Directors' fees, allowances and expenses ..................... 8,372 13,749 14,523 326
VIII. Auditors' fees and expenses .................................. 30,673 36,352 43,356 975
IX. Law charges .................................................. 571,637 338,794 298,817 6,718
X. Postages, telegrams, telephones, etc ......................... 1,600,421 2,216,732 2,825,681 63,527
XI. Repairs and maintenance ...................................... 2,080,307 2,550,917 3,329,657 74,857
XII. Insurance .................................................... 371,742 186,633 298,979 6,722
XIII. Direct marketing agency expenses ............................. 3,091,033 5,064,388 6,695,874 150,537
XIV. Expenses pertaining to insurance business .................... 11,888,585 32,042,377 52,038,232 1,169,924
XV. Other expenditure ............................................ 5,518,791 7,884,743 12,270,270 275,860
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES ........................................... 41,934,253 72,856,592 109,130,849 2,453,481
=========== =========== =========== ===========
------------------------------------------------------------------------------------------------------------------------------
SCHEDULE 17 - PROVISIONS AND CONTINGENCIES
(Rs. in thousands)
--------------------------------------------------------------------------------------------------------------------------------
Convenience
translation
Year Ended March 31, into US$,
---------------------------------------- year ended
2004 2005 2006 March 31, 2006
----------- ----------- ----------- --------------
I. Income tax
- Current period tax .......................................... 3,465,972 2,522,096 8,177,377 183,844
- Deferred tax adjustment ..................................... (91,633) 3,131,712 (1,595,191) (35,863)
- Fringe Benefit Tax .......................................... -- 385,749 8,672
II. Wealth tax .................................................... 24,017 30,009 30,063 676
III. Provision for investments (including credit substitutes) (net) 1,170,335 5,433,165 8,156,314 183,370
IV. Provision for advances (net)(1) ............................... 4,873,127 (889,859) 8,117,173 182,490
V. Others ........................................................ 207,936 85,984 203,564 4,577
--------- ---------- ---------- -------
TOTAL PROVISIONS AND CONTINGENCIES ................................. 9,649,754 10,313,107 23,475,049 527,766
========= ========== ========== =======
--------------------------------------------------------------------------------------------------------------------------------
1. Includes provision on standard assets, non-performing advances,
non-performing leased assets and other receivables.
F-20
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
SCHEDULE 18: Significant accounting policies and notes to accounts
A. Significant accounting policies
Overview
ICICI Bank Limited ("ICICI Bank" or "the Bank") together with its
subsidiaries, joint ventures and associates (collectively, "the Company")
is a diversified financial services group providing a wide range of
banking and financial services including retail banking, project and
corporate finance, working capital finance, insurance, venture capital and
private equity, investment banking, broking and treasury products and
services.
The Bank was incorporated in Vadodara, India and is a publicly held
banking company governed by the Banking Regulation Act, 1949.
Principles of consolidation
The consolidated financial statements include the financials of ICICI
Bank, its subsidiaries, associates and joint ventures.
The Company consolidates subsidiaries in which it holds, directly or
indirectly, more than 50% of the voting rights or where it exercises
control. Entities where the Company holds 20% to 50% of the voting rights
and/or has the ability to exercise significant influence, other than
investments of designated venture capital subsidiaries, are accounted for
under the equity method of accounting, and the pro-rata share of their
income/(loss) is included in profit and loss account. Assets, liabilities,
income and expenditure of the jointly controlled entities are consolidated
using the proportionate consolidation method. Under the proportionate
consolidation method the Company's share of each of the assets,
liabilities, income and expenses of a jointly controlled entity is
reported as separate line items in the consolidated financial statements.
The total assets at March 31, 2006 and total income for the year ended
March 31, 2006 of the entities consolidated by the proportionate
consolidation method was Rs. 39.7 million and Rs. 3.7 million respectively
The Company does not consolidate entities where control is intended to be
temporary. All significant inter-company accounts and transactions are
eliminated on consolidation.
Basis of preparation
The accounting and reporting policies of the Company used in the
preparation of these consolidated financial statements reflect general
industry practices and conform with the generally accepted accounting
principles in India (Indian GAAP) including the Accounting Standards
("AS") issued by Institute of Chartered Accountants of India ("ICAI"),
guidelines issued by Reserve Bank of India ("RBI"), Insurance Regulatory
and Development Authority ("IRDA") and National Housing Bank ("NHB") as
applicable to relevant companies.
The Company follows the accrual method of accounting except where
otherwise stated and historical cost convention. In case the accounting
policies followed by a subsidiary, joint venture or associate are
different from those followed by the Bank, the same have been disclosed
separately.
F-21
The preparation of consolidated financial statements requires management
to make estimates and assumptions considered in the reported amounts of
assets and liabilities (including contingent liabilities) as of the date
of the consolidated financial statements and the reported income and
expenses during the reporting period. Management believes that the
estimates used in the preparation of the consolidated financial statements
are prudent and reasonable. Actual results could differ from these
estimates.
The consolidated financial statements include the results of the following
entities:
------------------------------------------------------------------------------------------------------------------------------------
Sr. Country/ Ownership
No Name of the company residence Relation Activity interest
-- ------------------- --------- -------- -------- --------
1 ICICI Securities Limited India Subsidiary Investment banking 99.90%
2 ICICI Brokerage Services Limited India Subsidiary Securities broking 99.90%
3 ICICI Securities Inc. USA Subsidiary Investment banking &
securities broking 99.90%
4 ICICI Securities Holdings Inc. USA Subsidiary Investment banking 99.90%
5 ICICI Venture Funds Management Company Limited India Subsidiary Venture fund management 100.00%
6 ICICI Home Finance Company Limited India Subsidiary(1) Housing finance 100.00%
7 ICICI Trusteeship Services Limited India Subsidiary Trusteeship services 100.00%
8 ICICI Investment Management Company Limited India Subsidiary Investment management 100.00%
9 ICICI International Limited Mauritius Subsidiary Offshore fund management 100.00%
10 ICICI Bank UK Limited United Kingdom Subsidiary Banking 100.00%
11 ICICI Bank Canada Canada Subsidiary Banking 100.00%
12 ICICI Bank Eurasia Limited Liability Company Russia Subsidiary(2) Banking
(formerly Investment Credit Bank Limited
Liability Company) 100.00%
13 ICICI Property Trust India Direct holding Assets and investments
management 100.00%
14 ICICI Eco-net Internet & Technology Fund India Direct holding Venture capital fund 92.03%
15 ICICI Equity Fund India Direct holding Venture capital fund 100.00%
16 ICICI Emerging Sectors Fund India Direct holding Venture capital fund 98.85%
17 ICICI Strategic Investments Fund India Direct holding Venture capital fund 100.00%
18 ICICI Prudential Life Insurance Company Limited India Jointly controlled Life insurance
entity(3) 74.00%
19 ICICI Lombard General Insurance Company Limited India Jointly controlled General insurance
entity(3) 74.00%
20 Prudential ICICI Asset Management Company Limited India Subsidiary(4) Asset management company
for Prudential ICICI Mutual
fund 50.99%
21 Prudential ICICI Trust Limited India Subsidiary(4) Trustee company for
Prudential ICICI Mutual fund 50.80%
22 TCW/ICICI Investment Partners LLC. Mauritius Jointly controlled Asset and fund management
entity(5) company 50.00%
23 TSI Ventures (India) Private India Jointly controlled Real estate consultant
Limited entity(5) 50.00%
------------------------------------------------------------------------------------------------------------------------------------
1. Effective August 11, 2005, ICICI Distribution Finance Private Limited
has merged with ICICI Home Finance Company Limited. Consequent to the
merger ICICI Distribution Finance Private ceases to be a subsidiary
of the Bank.
F-22
2. ICICI Bank Eurasia Limited Liability Company (formerly Investment
Credit Bank Limited Liability Company) has become a subsidiary of
ICICI Bank Limited with effect from May 19, 2005, being the date of
its acquisition.
3. Since the year ended March 31, 2005, the financial statements of
these jointly controlled entities have been consolidated as per AS 21
"Consolidated Financial Statements" consequent to the limited
revision to AS 27 "Financial Reporting of Interests in Joint
Ventures".
4. Effective August 26, 2005, Prudential ICICI Asset Management Company
Limited and Prudential ICICI Trust Limited have become subsidiaries
of the Bank. Therefore, these entities have been fully consolidated
instead of the proportionate consolidation method.
5. This investment is accounted as per the proportionate consolidation
method.
Pursuant to the resolution passed at the meeting of the Board of
Directors of ICICI Venture Funds Management Company Limited (IVFMCL),
held on July 21, 2004, IVFMCL has decided not to carry on activities
of non-banking financial companies, under Section 45-1A(6)(i) and
applied to RBI for cancellation of its non-banking financial company
certificate. The RBI vide its order dated December 27, 2004 has,
cancelled as surrendered, the certificate of registration granted to
IVFMCL. Consequently the statutory reserve, created in pursuance of
section 45-IC of the Reserve Bank of India (Amendment) Act, 1997,
amounting to Rs. 210.0 million has been treated as free reserve and
have been included as a part of revenue and other reserves.
Equity issue of ICICI Bank Ltd
During the year ended March 31, 2006, the Bank raised equity capital
amounting to Rs. 80,006.1 million. The expenses of the issue
amounting to Rs. 874.1 million have been charged to the share premium
account. The details of the equity capital raised are given in the
table below.
Rupees in million, except per share data
--------------------------------------------------------------------------------------------------
Details Amount of
No. of equity share Aggregate
shares premium proceeds
------------- --------- ---------
Fully paid equity shares of Rs. 10 each at a
premium of Rs. 515 per share 67,787,322 34,910.5 35,588.3
Fully paid equity shares of Rs. 10 each at a
premium of Rs. 488.75 per share(1) 28,894,060 14,122.0 14,410.9
18,618,730 American Depository Share ("ADS")
at a price of US$ 26.75 per share (2) 37,237,460 22,134.6 22,506.9
Fully paid equity shares of Rs. 10 each issued
by exercise of the green shoe option 14,285,714 7,357.1 7,500.0
----------- -------- --------
Total 148,204,556 78,524.2 80,006.1
=========== ======== ========
--------------------------------------------------------------------------------------------------
1. Unpaid calls of Rs. 0.3 million (Unpaid share premium Rs. 92.4
million).
2. Includes green shoe option of 2,428,530 ADSs.
During the year ended March 31, 2005, the Bank issued 115,920,758 equity
shares (including 6,992,187 equity shares issued by exercise of green shoe
option) of Rs.10 each at a premium of Rs. 270 per share aggregating Rs.
32,457.8 million under the prospectus dated April 12, 2004. The expenses
of the issue have been charged to the share premium account.
F-23
During the year ended March 31, 2005, ICICI Bank had sponsored American
Depositary Shares (ADSs) Offering, which opened for participation on March
7, 2005 and closed on March 11, 2005. In terms of the Offering, 20,685,750
ADSs representing 41,371,500 equity shares had been sold at a price of US$
21.1 per ADS. The gross proceeds from the ADS Offering were approximately
US$ 436.7 million (Rs.19,099.6 million). Pursuant to this offering,
existing outstanding equity shares were exchanged for newly issued ADSs
and accordingly the offering did not result in an increase in share
capital of the Bank.
Significant accounting policies
1. Foreign currency transactions
The consolidated financial statements are reported in Indian rupees (Rs.),
the national currency of India. Foreign currency income and expenditure
items are translated as follows:
a. For domestic operations at the exchange rates prevailing on the date of
the transaction with the resultant gain or loss accounted for in the
profit and loss account;
b. For integral foreign operations (representative offices), at weekly
average closing rate with the resultant gain or loss accounted for in the
profit and loss account. AS 11 (revised) on "The effects of changes in
foreign exchanger rates" issued by the ICAI defines an integral foreign
operation as a subsidiary, associate, joint venture or branch of the
reporting enterprise, the activities of which are based or conducted in a
country other than the country of the reporting enterprise but are an
integral part of the reporting enterprise;
c. For non-integral foreign operations (foreign branches and off-shore
banking units), at quarterly average closing rate with the resultant gains
or losses accounted for as foreign currency translation reserve.
Monetary foreign currency assets and liabilities of domestic and integral
foreign operations are translated at closing exchange rates notified by
Foreign Exchange Dealers' Association of India ("FEDAI") at the balance
sheet date and the resulting profits/losses are included in the profit and
loss account.
Both monetary and non-monetary foreign currency assets and liabilities of
non-integral foreign operations are translated at closing exchange rates
notified by FEDAI at the balance sheet date and the resulting profit/loss
on exchange differences are accumulated in the foreign currency
translation reserve until the disposal of the net investment in the
non-integral foreign operations.
Outstanding forward exchange contracts are revalued at the exchange rates
notified by FEDAI for specified maturities and at interpolated rates for
contracts of in-between maturities. The resultant gains or losses are
recognised in the profit and loss account.
Contingent liabilities on account of guarantees, endorsements and other
obligations are stated at the exchange rates notified by FEDAI at the
balance sheet date.
2. Revenue recognition
Interest income on loans and advances is accounted on an accrual basis
except in the case of loan exposures classified as non-performing assets
("NPAs") or bad and doubtful loans where it is recognised, on a cash
basis, as per the prudential norms of RBI.
Commissions paid to direct marketing agents ("DMAs") for auto loans, is
recorded upfront in the profit and loss account net of subvention income
received from them.
F-24
Income from hire purchase operations is accrued by applying the interest
rate implicit on outstanding balances.
Income from leases is calculated by applying the interest rate implicit in
the lease to the net investment outstanding on the lease over the primary
lease period. Leases effective from April 1, 2001 are accounted as
advances at an amount equal to the net investment in the lease. The lease
rentals are apportioned between principal and finance income based on a
pattern reflecting a constant periodic return on the net investment
outstanding in respect of finance lease. The principal amount is
recognised as repayment of advances and the finance income is reported as
interest income. Income on discounted instruments is recognised over the
tenure of the instrument on a constant yield basis.
Dividend income is accounted on an accrual basis when the right to receive
the dividend is established.
In case of investment banking subsidiary, fees from issue management, loan
syndication, financial advisory services and trusteeship fees are
recognised based on the stage of completion of assignments and terms of
agreement with the client.
Fees received by the Company's Canadian subsidiary, from its commercial
clients for term loans, demand loans, mortgages, and operating lines of
credit are deferred and recognised over the term of a loan. Upon approval
of the credit facility, fee income is amortised over the term of the loan,
except for demand loans, which are amortised over a 12-month period.
Non-refundable loan fees received from commercial clients are accounted
immediately if the credit facility is not approved.
All other fee income is recognised upfront on it becoming due except for
fees for guarantees which are amortised over the contracted period of the
commitment.
Net income arising from sell down of loan assets is recognised upfront in
interest income. With effect from February 1, 2006, in accordance with new
guidelines issued by RBI, net income arising from securitisation of loan
assets is amortised over the life of securities issued or to be issued by
the special purpose vehicle/special purpose entity to which the assets are
sold.
Income from brokerage activities is recognised as income on the trade date
of the transaction. Brokerage income in relation to public issues/other
securities is recognised based on mobilisation and terms of agreement with
the client. The Bank follows trade date method for accounting of its
investments.
Life insurance premium is recognised as income when due. Premium on lapsed
policies is recognised as income when such policies are reinstated. For
linked business, premium is recognised when the associated units are
allotted. Income from linked funds, which includes fund management
charges, administrative charges and mortality charges is recovered from
the linked fund in accordance with the terms and conditions of the policy
and is accounted on accrual basis. Accretion of discount and amortisation
of premium relating to debt securities is recognised over the
holding/maturity period on a straight-line basis.
General insurance premium is recognised as income over the period of risk
or the contract period based on 1/365 method, whichever is appropriate on
a gross basis, net of service tax. Any subsequent revision to premium is
recognised over the remaining period of risk or contract period.
Adjustments to premium income arising on cancellation of policies are
recognised in the period in which it is cancelled. Commission on
reinsurance business is recognised as income in the period of ceding the
risk. Profit commission under re-insurance treaties is recognised as
income in the period of determination of profits.
F-25
Insurance premium on ceding of the risk is recognised in the period in
which the risk is ceded. Any subsequent revision to premium ceded is
recognised in the period of such revision. Adjustment to reinsurance
premium arising on cancellation of policies is recognised in the period in
which it is cancelled. In case of life insurance business, reinsurance
premium ceded is accounted in accordance with the treaty or in-principle
arrangement with the reinsurer.
Premium deficiency is recognised when the sum of expected claim costs and
related expenses exceed the reserve for unexpired risks and is computed at
a business segment level.
3. Stock based compensation
The Company uses the intrinsic value-based method as prescribed by the
guidance note on 'Accounting for Stock Options" issued by ICAI to account
for its stock-based employees compensation plans. Compensation cost for
fixed and variable stock-based awards is measured by the excess, if any,
of the fair market price of the underlying stock over the exercise price.
Compensation for fixed awards is measured at the grant date while
compensation costs for variable awards is estimated until the number of
shares an individual is entitled to receive and the exercise price are
known (measurement date).
4. Income taxes
Income tax expense is the aggregate amount of current tax, deferred tax
and fringe benefit tax charge. Current year taxes are determined in
accordance with the Income Tax Act, 1961. Deferred tax adjustments
comprise changes in the deferred tax assets or liabilities during the
year.
Deferred tax assets and liabilities are recognised for the future tax
consequences of timing differences arising between the carrying values of
assets and liabilities and their respective tax bases and operating carry
forward losses. Deferred tax assets are recognised only after giving due
consideration to prudence. Deferred tax assets and liabilities are
measured using tax rates and tax laws that have been enacted or
substantially enacted by the balance sheet date. The impact on account of
changes in the deferred tax assets and liabilities is also recognised in
the profit and loss account.
Deferred tax assets are recognised and reassessed at each reporting date,
based upon management's judgement as to whether realisation is considered
certain. Deferred tax assets are recognised on carry forward of unabsorbed
depreciation, tax losses, and carry forward capital losses only if there
is virtual certainty that such deferred tax asset can be realised against
future profits.
During the year ended March 31, 2006, the Bank has created a deferred tax
asset on carry forward capital losses based on its firm plan, that
sufficient future taxable income will be available against which the loss
can be set off.
Deferred tax assets and liabilities are computed at individual company
level and aggregated for consolidated reporting.
5. Claims and benefits paid
In case of general insurance business, claims comprise claims paid,
estimated liability for outstanding claims made following a loss
occurrence reported and estimated liability for claims incurred but not
reported ('IBNR') and claims incurred but not enough reported ('IBNER').
Further, claims incurred also include specific claim settlement costs such
as survey/legal fees and other directly attributable costs. Claims (net of
F-26
amounts receivable from reinsurers/co-insurers) are recognised on the date
of intimation of the loss. Estimated liability for outstanding claims at
the balance sheet date is recorded net of claims recoverable from/payable
to co-insurers/reinsurers and salvage to the extent there is certainty of
realisation. Estimated liability for outstanding claims is determined by
the Company on the basis of ultimate amounts likely to be paid on each
claim based on past experience. These estimates are progressively
revalidated on availability of further information.
Claims IBNR represents that amount of claims that may have been incurred
during the accounting period but have not been reported or claimed. The
IBNR provision also includes provision, if any, required for claims IBNER.
Liability for claims IBNR/ claims IBNER is based on an actuarial estimate
duly certified by the appointed actuary of the Company. In case of life
insurance business, claims other than maturity claims are accounted for on
receipt of intimation. Maturity claims are accounted when due for payment.
Reinsurance on such claims is accounted for in the same period as the
related claims. Withdrawals under linked policies are accounted in the
respective schemes.
6. Liability for life policies in force
In respect of life insurance business, liability for life policies in
force and also policies in respect of which premium has been discontinued
but a liability exists, is determined by the appointed actuary on the
basis of an annual review of the life insurance business, as per the gross
premium method in accordance with accepted actuarial practice,
requirements of the IRDA and the Actuarial Society of India. The linked
policies sold by the company carry two types of liabilities - unit
liability representing the fund value of policies and non-unit liability
for future expenses, meeting death claims, income taxes and cost of any
guarantees.
7. Reserve for unexpired risk
Reserve for unexpired risk is recognised net of reinsurance ceded and
represents premium written that is attributable and to be allocated to
succeeding accounting periods for risks to be borne by the company under
contractual obligations on contract period basis or risk period basis,
whichever is appropriate. It is calculated on a daily pro-rata basis
subject to a minimum of 50% of the premium, written during the 12 months
preceding the balance sheet date for fire, marine, cargo and miscellaneous
business and 100% for marine hull business, in accordance with the
provisions of the Insurance Act, 1938.
8. Actuarial method and valuation
In case of life insurance business, the actuarial valuation liability on
both participating and non-participating policies is calculated using the
gross premium method. The gross premium reserves are calculated using
assumptions for interest, mortality, expense, and inflation and in the
case of participating policies, the future bonuses together with allowance
for taxation and allocation of profits to shareholders. These assumptions
are determined as prudent estimates at the date of valuation with
allowances for adverse deviations.
The interest rates used for valuing the liabilities are in the range of
4.7% to 10.0% per annum (Previous year - 4.0% to 10.0% per annum).
Mortality rates used are based on the published L.I.C. (1994 - 96)
Ultimate Mortality Table, adjusted to reflect expected experience and
allowances for adverse deviation. Expenses are provided for at long-term
expected renewal expense levels.
F-27
Unearned premium reserves are held for the unexpired portion of the risk
for the general fund liabilities of linked business and riders thereunder
and one year renewable group term insurance.
The unit liability in respect of linked business has been taken as the
value of the units standing to the credit of policyholders, using the net
asset value (NAV) prevailing at the valuation date. The adequacy of
charges under unit-linked policies to meet future expenses has been tested
and provision made as appropriate. Provision has also been made for the
cost of guarantee under unit-linked products that carry a guarantee.
9. Acquisition costs for insurance business
Acquisition costs are those costs that vary with, and are primarily
related to the acquisition of new and renewal of insurance contracts
including commissions and policy issue expenses. These costs are expensed
in the period in which they are incurred.
10. Staff retirement benefits
ICICI Bank is required to pay gratuity to employees who retire or resign
after at least five years of continuous service. ICICI Bank makes
contributions to three separate gratuity funds, for employees inducted
from erstwhile ICICI, employees inducted from erstwhile Bank of Madura and
employees of ICICI Bank other than employees inducted from erstwhile ICICI
and erstwhile Bank of Madura.
The gratuity funds for employees inducted from erstwhile ICICI and
erstwhile Bank of Madura are separate gratuity funds managed by ICICI
Prudential Life Insurance Company. Actuarial valuation of the gratuity
liability is determined by an actuary appointed by ICICI Prudential Life
Insurance Company. The investments of the funds are made according to
rules prescribed by the Government of India. The accounts of the funds are
audited by independent auditors.
The gratuity fund for employees of ICICI Bank other than employees
inducted from erstwhile ICICI and erstwhile Bank of Madura is administered
by the Life Insurance Corporation of India. In accordance with the
gratuity fund's rules, actuarial valuation of gratuity liability is
calculated based on certain assumptions regarding rate of interest, salary
growth, mortality and staff turnover.
ICICI Bank contributes 15.0% of the total annual salary of each employee
to a superannuation fund for ICICI Bank employees. ICICI Bank's employees
get an option on retirement or resignation to receive one-third of the
total balance and a monthly pension based on the remaining two-third
balance. In the event of death of an employee, his or her beneficiary
receives the remaining accumulated balance of 66.7%. ICICI Bank also gives
a cash option to its employees, allowing them to receive the amount
contributed by ICICI Bank in their monthly salary during their employment.
Until March 31, 2005, the superannuation fund was solely administered by
the Life Insurance Corporation of India. Subsequent to March 31, 2005, the
fund is being administered by both Life Insurance Corporation of India and
ICICI Prudential Life Insurance Company Limited. Employees have the option
to retain the existing balance with Life Insurance Corporation of India or
seek a transfer to ICICI Prudential Life Insurance Company.
ICICI Bank is statutorily required to maintain a provident fund as a part
of its retirement benefits to its employees. There are separate provident
funds for employees inducted from erstwhile Bank of Madura (other than
those employees who have opted for pensions), and for other employees of
ICICI Bank. These funds are managed by in-
F-28
house trustees. Each employee contributes 12.0% of his or her basic salary
(10.0% for clerks and sub-staff of erstwhile Bank of Madura) and ICICI
Bank contributes an equal amount to the funds. The investments of the
funds are made according to rules prescribed by the Government of India.
The accounts of the funds are audited by independent auditors.
In respect of other entities within the group, retirement benefits in the
form of provident fund and other defined contribution schemes, the
contribution payable by the Company for the year is charged to the profit
and loss account for that year. In respect of gratuity benefit and other
benefit schemes, where the Company makes payments for retirement benefits
out of its own funds, provisions are made in the profit and loss account
based on actuarial valuation. In cases where the liability for retirement
benefits is funded through a scheme administered by an insurer, the
contributions payable during the year to the insurer is charged to the
profit and loss account for that year.
11. Accounting for contingencies
The Company estimates the probability of any loss that might be incurred
on outcome of contingencies on the basis of information available up to
the date on which the consolidated financial statements are prepared. A
provision is recognised when an enterprise has a present obligation as a
result of past event and it is probable that an outflow of resources will
be required to settle the obligation, in respect of which a reliable
estimate can be made. Provisions are determined based on management
estimate required to settle the obligation at the balance sheet date,
supplemented by experience of similar transactions. These are reviewed at
each balance sheet date and adjusted to reflect the current estimates. In
cases where the available information indicates that the loss on the
contingency is reasonably possible but the amount of loss cannot be
reasonably estimated, a disclosure is made in the consolidated financial
statements. In case of remote possibility neither provision nor disclosure
is made in the consolidated financial statements.
12. Cash and cash equivalents
Cash and cash equivalents include cash in hand, balances with RBI,
balances with other banks and money at call and short notice
13. Investments
Investments of the Bank are accounted for in accordance with the extant
RBI guidelines on investment classification and valuation as given below:
a) All investments are categorised into 'Held to Maturity', 'Available
for Sale' and 'Held for Trading' categories. Reclassifications, if
any, in any category are accounted for as per the RBI guidelines.
Under each category, the investments are further classified under (a)
government securities (b) other approved securities (c) shares (d)
bonds and debentures (e) subsidiaries and joint ventures and (f)
others.
b) 'Held to Maturity' securities are carried at their acquisition cost
or at amortised cost, if acquired at a premium over the face value. A
provision is made for other than temporary diminution.
c) 'Available for Sale' and 'Held for Trading' securities are valued
periodically as per RBI guidelines. The market/fair value for the
purpose of periodical valuation of quoted investments included in the
'Available for Sale' and 'Held for Trading' categories is the market
price of the scrip as available from the trades/quotes on the stock
exchanges, price list of RBI or prices declared by Primary Dealers
F-29
Association of India jointly with Fixed Income Money Market and
Derivatives Association ("FIMMDA").
The market/fair value of unquoted statutory liquidity ratio (SLR)
securities included in the 'Available for Sale' and 'Held for
Trading' categories is as per the rates published by FIMMDA. The
valuation of non-SLR securities, other than those quoted on the stock
exchanges, wherever linked to the Yield-to-Maturity ("YTM") rates, is
with a mark-up (reflecting associated credit risk) over the YTM rates
for government securities published by FIMMDA.
Unquoted equity shares are valued at the book value, if the latest
balance sheet is available or at Re. 1.
Securities are valued scrip-wise and depreciation/appreciation
aggregated for each category. Net appreciation, if any, in each
basket, being unrealised, is ignored, while net depreciation is
provided for.
d) Costs including brokerage and commission pertaining to investments,
paid at the time of acquisition, are charged to the profit and loss
account.
e) Profit on sale of investments in the 'Held to Maturity' category is
credited to the profit and loss account and is thereafter
appropriated (net of applicable taxes and statutory reserve
requirements) to capital reserve.
f) At the end of each reporting period, security receipts issued by the
asset reconstruction company are valued in accordance with the
guidelines prescribed by RBI. Accordingly, as the security receipts
issued by the asset reconstruction company are limited to the actual
realisation of the financial assets assigned to the instruments in
the concerned scheme, the Bank considers the Net Asset Value ("NAV"),
obtained from the asset reconstruction company, for valuation of such
investments at each reporting period end.
The Company's venture capital funds carry their investments at fair
values, with unrealised gains and temporary losses on investments
recognised as components of investors' equity and accounted for in
unrealised investment reserve account included in the investment
fluctuation reserve. The realised gains and losses on investments and
units in mutual funds and unrealised gains or losses on restatement of
units in mutual funds are accounted for in the Profit and Loss Account.
The cost of investments sold is determined on weighted average basis and
the cost of units in mutual funds sold is determined on first-in,
first-out basis for the purpose of calculating gains or losses on sale.
Provisions are made in respect of accrued income considered doubtful. Such
provisions as well as any subsequent recoveries are recorded through the
profit and loss account. Subscriptions to/purchase of investments are
accounted at the cost of acquisition inclusive of brokerage, commission
and stamp duty. Bonus shares and right entitlements are recorded when such
benefits are known. Quoted investments are valued on the valuation date at
the closing market price. Quoted investments that are not traded on the
valuation date but are traded during the two months prior to the valuation
date are valued at the latest known closing price. An appropriate discount
is applied where the asset management company considers it necessary to
reflect restrictions on disposal. Quoted investments not traded during the
two months' prior to the valuation date are treated as unquoted. Unquoted
investments are valued at their estimated fair values by applying
appropriate valuation methods. Where there is a decline, other than
temporary in the carrying amounts of investments, the resultant reduction
in the carrying amount is charged to the profit and loss account during
the period in which such decline is identified.
The Company's investment banking subsidiary classifies its investments as
short-term and trading or as long-term investments. The securities held
with the intention of holding for short-term and trading are classified as
stock in trade and the securities acquired with the intention of holding
till maturity or for a longer period are classified
F-30
as long-term investments. The securities held as stock in trade are valued
at lower of cost arrived at on weighted average basis or market/fair value
and long-term investments are carried at cost arrived at weighted average
basis. Appropriate provision is made for other than temporary diminution
in the value of investments. Commission earned in respect of securities
acquired upon devolvement is reduced from the cost of acquisition.
The Company's housing finance subsidiary classifies its investments as
current investments and long-term investments. Investments that are
readily realisable and intended to be held for not more than a year are
classified as current investments, which are carried at the lower of cost
or the market value. All other investments are classified as long-term
investments, which are carried at cost. However a provision for diminution
in value is made to recognize any other than temporary decline in the
value of investments. Costs such as brokerage, commission etc. paid at the
time of acquisition of investments are included in investments costs.
In case of the Company's UK banking subsidiary, premium or discount on
investments intended to be held on a continuous basis, are amortised on an
effective interest rate basis through the profit and loss account over the
period to maturity.
The Company's Canadian banking subsidiary classifies its investments into
investment account securities or trading account securities. Investment
account securities comprise debt and equity securities, originally
purchased with the intention of holding to maturity or for a predetermined
period of time, which may be sold in response to changes in investment
objectives arising from changing market conditions or to meet the
liquidity requirements.
The Company's life insurance subsidiary values its investments in real
estate at historical cost subject to provision for impairment, if any.
Revaluation of investments in real estate is done at least once in every
three years.
14. Provisions/Write-offs on loans and other credit facilities
The Bank follows the RBI norms for income recognition and asset
classification. Accordingly, all loan exposures are classified into
performing and non-performing assets ('NPA'). NPAs of the Bank are
classified into sub-standard, doubtful and loss assets based on the
criteria stipulated by RBI. Provisions are made on sub-standard and
doubtful assets at rates prescribed by RBI. Loss assets and unsecured
portion of doubtful assets are provided/written off as per the extant RBI
guidelines. RBI norms also allow banks to create additional floating
provisions over and above the specific provisions. The additional floating
provisions are in general based on losses anticipated by the Bank on
historical loss experiences or expected anticipated losses in certain
loans. For restructured/rescheduled assets, provision is made by the Bank
in accordance with the guidelines issued by RBI, which requires the
present value of the interest sacrifice be provided at the time of
restructuring.
In the case of NPAs other than restructured NPA accounts, the account is
reclassified as "standard" account if arrears of interest and principal
are fully paid by the borrower. In respect of NPA accounts subjected to
restructuring, the account is reclassified as "standard" account if the
borrower demonstrates, over a minimum period of one year, the ability to
repay the loan in accordance with the contractual terms.
Amounts recovered against other debts written off in earlier years and
provisions no longer considered necessary in the context of the current
status of the borrower are recognised in the profit and loss account. In
addition to the specific provision on NPAs, the Bank maintains a general
provision on performing loans. The general provision meets the
requirements of the RBI guidelines.
F-31
In addition to the provisions required to be held according to the asset
classification status, provisions are held by the Bank for individual
country exposure (other than for home country). The countries are
categorised into seven risk categories namely insignificant, low,
moderate, high, very high, restricted and off-credit and provisioning made
on exposures exceeding 90 days on a graded scale ranging from 0.25% to
100%. For exposures with contractual maturity of less than 90 days, 25% of
the normal provision requirement is held. If the country exposure (net) of
the Bank in respect of each country does not exceed 1% of the total funded
assets, no provision is maintained on such country exposure.
In the case of the investment-banking subsidiary, the policy of
provisioning against NPAs is as per the prudential norms prescribed by the
RBI for non-banking financial companies. As per the policy adopted, the
provision against sub-standard assets are determined, taking into account
management's perception of the higher risk associated with the business of
the company. Certain NPAs are considered as loss assets and full provision
has been made against such assets.
In case of the housing finance subsidiary, loans and other credit
facilities are classified as per the NHB guidelines into performing and
non-performing assets. Further, NPAs are classified into sub-standard,
doubtful and loss assets based on criteria stipulated by NHB.
In the case of the Canadian subsidiary, loans are stated net of allowance
for credit losses. Loans are classified as impaired when there is no
longer reasonable assurance of the timely collection of the full amount of
principal or interest. An allowance for credit losses is maintained at a
level that management considers adequate to absorb identified
credit-related losses as well as losses that have been incurred but are
not yet identifiable.
15. Transfer and servicing of financial assets
The Company transfers commercial and consumer loans through securitisation
transactions. The transferred loans are de-recognised and gains/losses are
recorded only if the Company surrenders the rights to benefits specified
in the loan contract. Recourse and servicing obligations are reduced from
proceeds of the sale. Retained beneficial interests in the loans are
measured by allocating the carrying value of the loans between the assets
sold and the retained interest, based on the relative fair value at the
date of the securitisation.
During the year, RBI has issued specific guidelines on securitisation of
standard assets. Accordingly, with effect from February 1, 2006, the Bank
accounts for any loss arising on securitisation in the profit & loss
account immediately at the time of securitisation. Profit/premium, if any,
arising on account of securitisation is amortised over the life of the
securities issued or to be issued by the Special Purpose Vehicle (SPV).
16. Fixed assets and depreciation
Premises and other fixed assets are carried at cost less accumulated
depreciation. Depreciation is charged over the estimated useful life of a
fixed asset on a straight-line basis, except for those relating to venture
capital, investment banking and asset management subsidiaries where
depreciation is charged on a written-down value basis. The rates of
depreciation for fixed assets, which are not lower than the rates
prescribed in schedule XIV of the Companies Act, 1956, are given below:
F-32
Asset Depreciation rate
----- ----------------
Premises owned by the Bank ................................... 1.63%
ATMs ......................................................... 12.50%
Plant and machinery like air conditioners, xerox machines, etc 10.00%
Furniture and fixtures ....................................... 15.00%
Motor vehicles ............................................... 20.00%
Computers .................................................... 33.33%
EDC terminals ................................................ 16.67%
Others (including software and system development expenses) .. 25.00%
Cost comprises the purchase price and any cost attributable to bringing
the asset to working condition for its intended use.
Depreciation on leased assets and improvement to leasehold premises is
made on a straight-line basis at the higher of the rates determined with
reference to the primary period of lease and the rates specified in
Schedule XIV of the Companies Act, 1956.
Assets purchased/sold during the year are depreciated on the basis of
actual number of days the asset has been put to use.
Items costing less than Rs. 5,000 are depreciated fully over a period of
12 months from the date of purchase.
In case of the venture capital subsidiary depreciation on assets, other
than leased assets, is charged on written-down value method at the rates
and in the manner prescribed under Schedule XIV to the Companies Act,
1956.
In case of investment banking subsidiary, depreciation on assets, other
than improvements to leased property and membership rights of The Stock
Exchange, Mumbai, is charged on written-down value method at the rates
which are greater than or equal to the provisions of Schedule XIV of the
Companies Act, 1956. A membership right of the stock exchange is treated
as an asset and the value paid to acquire such rights is amortised over a
period of 10 years.
In case of the asset management subsidiary, fixed assets other than
leasehold improvements, and software development and licensing costs are
depreciated at written-down value method based on economic lives of the
asset as estimated by management.
In case of the overseas banking subsidiaries, fixed assets other than
leasehold improvements are depreciated using straight-line method over the
estimated useful lives of the assets as estimated by management. In case
of the Canadian subsidiary, depreciation on furniture and fixtures is
charged at 20% per annum.
In case of the life insurance subsidiary, assets costing up to Rs. 20,000
are fully depreciated in the year of acquisition. Intangible assets
comprising software are stated at cost less amortisation. Significant
improvements to software are capitalised while the insignificant
improvements are charged off as software expenses. Software expenses are
amortised on straight-line method over a period of three years from the
date they are put to use, being management's estimate of the useful life
of such intangibles. Depreciation on furniture and fixtures is charged at
25% per annum.
In case of the general insurance subsidiary, computer software are stated
at costless amortisation. Computer software including improvements is
amortised over a period of five years, being management's estimate of the
useful life of such intangibles.
In case of housing finance subsidiary, depreciation on computer software
is provided at 20% per annum.
F-33
17. Accounting for derivative contracts
The Company enters into derivative contracts such as foreign currency
options, interest rate and currency swaps and cross currency interest rate
swaps to hedge on-balance sheet/off-balance sheet assets and liabilities
or for trading purposes.
The swap contracts entered to hedge on-balance sheet assets and
liabilities are structured in such a way that they bear an opposite and
offsetting impact with the underlying on-balance sheet items. The impact
of such derivative instruments is correlated with the movement of
underlying assets and accounted in accordance with RBI guidelines.
Foreign currency and rupee derivatives, which are entered for trading
purposes, are marked to market and the resulting gain/loss, (net of
provisions, if any) is recorded in the profit and loss account.
During the year the Bank changed its method for testing hedge
effectiveness from the price value of basis point ("PVBP") or duration
method to the marked to market method. Due to this change certain
derivative contracts, which were hitherto accounted for as hedges, became
ineffective and were accordingly accounted for as trading.
18. Impairment of assets
Long-lived assets and certain intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net discounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognised is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
19. Earnings per share ("EPS")
Basic and diluted earnings per share are calculated by dividing the net
profit or loss for the year attributable to equity shareholders by the
weighted average number of equity shares outstanding during the year.
Diluted earnings per equity share have been computed using the weighted
average number of equity shares and dilutive potential equity shares
outstanding during the year, except where the results are anti-dilutive.
B. Notes required by Indian Accounting Standards
1. Earnings per share ("EPS")
The Company reports basic and diluted earnings per equity share in
accordance with Accounting Standard 20, "Earnings per Share". Basic
earnings per share is computed by dividing net profit after tax
attributable to equity shareholders by the weighted average number of
equity shares outstanding during the year. Diluted earnings per share is
computed using the weighted average number of equity shares and dilutive
potential equity shares outstanding during the year.
The computation of earnings per share is given below:
Rupees in million except per share data
-----------------------------------------------------------------------------------------
Year ended March 31,
----------------------------------
2005 2006
---- ----
Basic
Weighted average no. of equity shares outstanding 727,728,042 781,693,773
Net profit ....................................... 18,523.3 24,200.9
Basic earnings per share (Rs.) ................... 25.45 30.96
-----------------------------------------------------------------------------------------
F-34
-----------------------------------------------------------------------------------------
Year ended March 31,
--------------------------------
2005 2006
---- ----
Diluted
Weighted average no. of equity shares outstanding 733,720,485 789,963,635
Net profit ....................................... 18,523.3 24,200.9
Diluted earnings per share (Rs.) ................. 25.25 30.64
Nominal value per share (Rs.) .................... 10.0 10.0
-----------------------------------------------------------------------------------------
The dilutive impact is mainly due to options granted to employees by the
Bank.
2. Related party transactions
The Company has transactions with its related parties comprising joint
ventures, associates and key management personnel. The following represent
the significant transactions between the Company and such related parties:
Lease of premises and facilities
During the year ended March 31, 2006, the Company charged for lease of
premises, facilities and other administrative costs to joint ventures
amounting to Rs. Nil (March 31, 2005: Rs. 3.4 million).
Interest received
During the year ended March 31, 2006, the Company received interest from
its key management personnel(1) amounting to Rs. 0.5 million (March 31,
2005: Rs. 0.3 million).
Interest paid
During the year ended March 31, 2006, the Company paid interest to joint
ventures amounting to Rs. Nil (March 31, 2005: Rs. 18.9 million).
Remuneration to whole-time directors
Remuneration paid to the whole-time directors of the Bank during the year
ended March 31, 2006 was Rs. 75.9 million (March 31, 2005: Rs. 60.5
million).
Sale of investments
During the year ended March 31, 2006, the Company sold certain investments
to joint ventures amounting to Rs. Nil (March 31, 2005: Rs. 3,637.3
million). On the sales made to joint ventures the Bank accounted for a
loss of Rs. Nil (March 31, 2005: Rs. 14.6 million).
Purchase of investments
During the year ended March 31, 2006, the Company purchased certain
investments from its joint ventures amounting to Rs. 20.2 million (March
31, 2005: Rs. 5,001.2 million).
Custodial charges received
During the year ended March 31, 2006, the Company received custodial
charges from its joint ventures amounting to Rs. Nil (March 31, 2005: Rs.
1.7 million).
Fees
During the year ended March 31, 2006, the Company received cash management
services fees from its joint ventures amounting to Rs. Nil (March 31,
2005: Rs. 14.5 million).
F-35
Related party balances
The following are balances payable to/receivable from the related parties
included in the balance sheet as on March 31, 2006:
Rupees in million
------------------------------------------------------------------------------------------------
Items/Related Party Key
Joint Ventures Management
and Associates Personnel (1) Total
------------- ----------- ------
Deposits with ICICI Bank................................. 5.3 24.9 30.2
Advances................................................. Nil 15.4 15.4
Investments of ICICI Bank................................ 33.5 Nil 33.5
Investments of related parties in ICICI Bank............. Nil 4.3 4.3
Receivables.............................................. Nil Nil Nil
Payables................................................. Nil Nil Nil
------------------------------------------------------------------------------------------------
The following balances represent the maximum balance payable to/receivable
from related parties during the year ended March 31, 2006:
Rupees in million
------------------------------------------------------------------------------------------------
Items/Related Party Key
Joint Ventures Management
and Associates Personnel (1) Total
------------- ----------- ------
Deposits with ICICI Bank................................. 22.4 46.1 68.5
Advances................................................. Nil 21.2 21.2
Investments of ICICI Bank................................ 33.5 Nil 33.5
Investments of related parties in ICICI Bank............. Nil 4.4 4.4
Receivables.............................................. Nil Nil Nil
Payables................................................. Nil Nil Nil
------------------------------------------------------------------------------------------------
The following are balances payable to/receivable from the related parties
included in the balance sheet as on March 31, 2005:
Rupees in million
------------------------------------------------------------------------------------------------
Items/Related Party Key
Joint Ventures Management
and Associates Personnel (1) Total
------------- ----------- ------
Deposits with ICICI Bank ................................ 2.0 37.1 39.1
Advances ................................................ 0.9 19.1 20.0
Investments of ICICI Bank ............. ................. 67.1 Nil 67.1
Investments of related parties in ICICI
Bank .................................................... Nil 2.3 2.3
Receivables ............................................. Nil Nil Nil
Payables ................................................ Nil Nil Nil
------------------------------------------------------------------------------------------------
The following balances represent the maximum balance payable to/receivable
from related parties during the year ended March 31, 2005:
Rupees in million
------------------------------------------------------------------------------------------------
Items/Related Party Key
Joint Ventures Management
and Associates Personnel (1) Total
------------- ----------- ------
Deposits with ICICI Bank ................................ 64.5 196.1 260.6
Advances ................................................ 0.9 19.1 20.0
Investments of ICICI Bank ............................... 67.1 Nil 67.1
Investments of related parties in ICICI Bank............. Nil 2.3 2.3
Receivables ............................................. Nil Nil Nil
Payables ................................................ Nil Nil Nil
------------------------------------------------------------------------------------------------
(1) Whole-time directors of the Board and their relatives.
F-36
Joint ventures and associates
For the year ended March 31, 2006, TCW/ICICI Investment Partners LLC and
TSI Ventures (India) Private Limited have been classified as joint
ventures. For the period ended March 31, 2005, Prudential ICICI Asset
Management Company Limited and Prudential ICICI Trust Limited have been
classified as joint ventures. These entities have been accounted as
"subsidiaries" as defined in AS 21 "Consolidated Financial Statements" in
the current financial year.
3. Employee Stock Option Scheme ("ESOS")
In terms of the ESOS, as amended, the maximum number of options granted to
any eligible employee in a financial year shall not exceed 0.05% of the
issued equity shares of the Bank at the time of grant of the options and
aggregate of all such options granted to the eligible employees shall not
exceed 5% of the aggregate number of the issued equity shares of the Bank
on the date(s) of the grant of options.
In terms of the Scheme, 17,362,584 options (March 31, 2005: 18,215,335
options) granted to eligible employees were outstanding at March 31, 2006.
A summary of the status of the Bank's stock option plan is given below:
-------------------------------------------------------------------------------
Stock options outstanding
Year ended March 31,
----------------------------
2005 2006
---------- ----------
Outstanding at the beginning of the year ..... 15,964,982 18,215,335
Add: Granted during the year ................. 7,554,500 4,981,780
Less: Forfeited/lapsed during the year ....... 846,496 931,280
Exercised during the year .................... 4,457,651(1) 4,903,251
---------- ----------
Outstanding at the end of the year ........... 18,215,335 17,362,584
========== ==========
-------------------------------------------------------------------------------
1. Excludes options exercised but not allotted.
4. Fixed Assets
Fixed assets include certain softwares acquired by the Company. The
movement in software assets is given below:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
----------------------
Particulars 2005 2006
-------- --------
At cost as on March 31 of preceding period ....... 2,381.0 2,784.4
Additions during the year ........................ 462.2 615.1
Deductions during the year ....................... (58.8) (52.5)
Depreciation/amortisation to date ................ (1,557.3) (2,274.2)
-------- --------
Net Block ........................................ 1,227.1 1,072.8
======== ========
-------------------------------------------------------------------------------
5. Assets given under lease
5.1 Assets given under operating lease
The future lease rentals are given in the table below:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
----------------------
Period 2005 2006
--------- --------
Not later than one year .......................... 239.2 128.2
Later than one year and not later than five years 1,001.8 605.9
Later than five years ............................ 311.2 2.0
--------- --------
Total ............................................ 1,552.2 736.1
========= ========
-------------------------------------------------------------------------------
F-37
5.2 Assets taken under operating lease
The future lease rental commitments are given in the table below:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
----------------------
Period 2005 2006
--------- --------
Not later than one year .......................... 369.5 614.7
Later than one year and not later than five years 1,386.4 1,976.1
Later than five years ............................ 586.4 806.7
--------- --------
Total ............................................ 2,342.3 3,397.5
========= ========
-------------------------------------------------------------------------------
5.3 Assets given under finance lease
The future lease rentals are given below:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
----------------------
Period 2005 2006
--------- --------
Total of future minimum lease payments ........... 1,105.5 817.1
Present value of lease payments .................. 913.6 695.1
Un-matured finance charges ....................... 191.9 122.0
Maturity profile of total of future minimum
lease payments .................................
Not later than one year .......................... 293.3 232.4
Later than one year and not later than five years. 804.5 584.7
Later than five years ............................ 7.7 --
--------- --------
Total ............................................ 1,105.5 817.1
========= ========
-------------------------------------------------------------------------------
Maturity profile of present value of lease payments
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
----------------------
Period 2005 2006
--------- --------
Not later than one year .......................... 222.8 176.7
Later than one year and not later than five years 683.3 518.4
Later than five years ............................ 7.5 --
--------- --------
Total ............................................ 913.6 695.1
========= ========
-------------------------------------------------------------------------------
6. Early retirement option ("ERO")
The Bank had implemented an Early Retirement Option scheme 2003 for its
employees in July 2003. All employees who had completed 40 years of age
and seven years of service with the Bank (including period of service with
entities amalgamated with the Bank) were eligible for the ERO.
The ex-gratia payments under ERO and termination benefits and leave
encashment in excess of the provision made (net of tax benefits),
aggregating to Rs. 1,910.0 million is being amortised over a period of
five years commencing August 1, 2003 (the date of retirement of employees
exercising the Option being July 31, 2003).
On account of the above ERO scheme, an amount of Rs. 384.0 million (March
31, 2005: Rs. 384.0 million) has been charged to revenue being the
proportionate amount amortised for the year ended March 31, 2006.
F-38
7. Preference shares
The Bank had issued preference shares with a face value of Rs. 3,500.0
million during the year ended March 31,1998 under the scheme of business
combination of ITC Classic Finance Limited with erstwhile ICICI Limited.
These preference shares bear a dividend yield of 0.001% and is redeemable
at face value after 20 years. Certain government securities amounting to
Rs. 2,001.1 million (March 31, 2005: Rs. 1,952.3 million) have been
earmarked against redemption of these preference shares.
Banks in India are generally not allowed to issue preference shares.
However, the Company has been currently exempted from this restriction.
8. Transfer to Investment Fluctuation Reserve
An amount of Rs. 2,143.4 million being the excess balance in Investment
Fluctuation Reserve (IFR) account over the regulatory requirement was
transferred to general reserve account during the year ended March 31,
2005. RBI has subsequently instructed that this amount should be retained
in IFR account itself. Accordingly, the said amount was transferred back
to IFR account from the general reserve account in the first quarter of
the year ended March 31, 2006, making IFR account balance Rs. 7,303.4
million.
RBI required banks to create IFR aggregating to 5% of their investments in
fixed income securities (in AFS and Trading Book) over a five-year period
starting from March 31, 2002. Accordingly a further amount of Rs. 5,900.0
million was transferred to IFR during the year ended March 31, 2006,
making the IFR account balance Rs. 13,203.4 million. RBI has vide its
circular DBOD.No.BP.BC.38/21.04.141/2005-06 dated October 10, 2005
permitted banks that have maintained capital of at least 9% of the risk
weighted assets for both credit risk and market risk for both held for
trading and available for sale categories of investments as on March 31,
2006, to transfer the balance in the IFR 'below the line' in the profit
and loss appropriation account to statutory reserve, general reserve or
balance of profit and loss account.
Pursuant to the above, the entire IFR account balance of Rs. 13,203.4
million has been transferred from IFR to revenue and other reserves.
9. Deferred tax
As on March 31, 2006, the Company has recorded net deferred tax asset of
Rs. 2,467.9 million (March 31, 2005: Rs. 702.2 million).
The analysis of deferred tax assets and liabilities into major items is
given below:
Rupees in million
-----------------------------------------------------------------------------------------
As of March 31,
Particulars 2005 2006
-------- -------
Deferred tax assets
Provision for bad and doubtful debts .............................. 7,285.5 6,553.8
Capital Loss ...................................................... -- 950.0
Others ............................................................ 1,076.6 1,426.0
-------- -------
8,362.1 8,929.8
Less: Deferred tax liability
Depreciation on fixed assets ...................................... 7,561.1 6,709.7
Others ............................................................ 221.6 --
-------- -------
7,782.7 6,709.7
Add: Deferred tax asset pertaining to foreign branches/subsidiaries 122.8 247.8
-------- -------
Total net deferred tax asset/(liability) .......................... 702.2 2,467.9
======== =======
-----------------------------------------------------------------------------------------
F-39
During the year ended March 31, 2006, the Bank has created a deferred tax
asset on carry forward capital losses as based on its firm plans it is
virtually certain that sufficient future taxable capital gains will be
available against which the loss can be set off. Further, the life
insurance subsidiary has created a deferred tax asset on carry forward
unabsorbed losses amounting to Rs. 262.4 million (March 31, 2005: Rs.
107.9 million) based on the virtual certainty that sufficient future
taxable income will be available against which such deferred tax assets
can be realised.
10. Other assets
a. Exchange fluctuation
Exchange fluctuation aggregating Rs. 25.0 million (March 31, 2005: Rs.
244.7 million), which arises on account of rupee-tying agreements with the
Government of India, is held in "Rupee Determine Exchange Fluctuation
Account" pending adjustment at maturity on receipt of payments from the
Government for repayments to foreign lenders.
b. Swap suspense (net)
Swap suspense (net) aggregating Rs. 71.6 million (debit) (March 31, 2005:
Rs. 794.7 million (debit)), which arises out of conversion of foreign
currency swaps, is held in "Swap suspense account" and will be reversed at
conclusion of swap transactions with swap counter parties.
11. Information about business and geographical segments
The Group reports its operations into the following segments:
o Consumer and commercial banking comprises the retail and corporate
banking operations of the Bank, ICICI Home Finance Company Limited,
ICICI Bank UK Limited, ICICI Bank Canada and ICICI Bank Eurasia
Limited Liability Company.
o Investment banking comprises the treasury of the Bank, the investment
banking business of ICICI Securities Limited, ICICI Brokerage
Services Limited, ICICI Securities Inc., and ICICI Securities
Holdings Inc., ICICI Venture Funds Management Company Limited, ICICI
Eco-net Internet & Technology Fund, ICICI Equity Fund, ICICI
Strategic Investments Fund, ICICI Emerging Sectors Fund and ICICI
International Limited.
o Others comprises of ICICI Lombard General Insurance Company Limited,
ICICI Prudential Life Insurance Company Limited, Prudential ICICI
Asset Management Company Ltd, Prudential ICICI Trust Limited, ICICI
Property Trust, ICICI Investment Management Company Limited, ICICI
Trusteeship Services Limited, TCW/ICICI Investment Partners LLC and
TSI Ventures (India) Private Limited.
Inter-segment transactions are generally based on transfer pricing
measures as determined by management. Income, expenses, assets and
liabilities are either specifically identifiable with individual segments
or have been allocated to segments on a systematic basis.
Based on such allocations, segmental balance sheet as on March 31, 2006
and segmental profit and loss account for the year ended March 31, 2006
have been prepared.
F-40
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Rupees in million
-----------------------------------------------------------------------------------------------------------------------------------
Consumer and
Commercial Banking Investment Banking Others Total
---------------------- ------------------- --------------------- -----------------------
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
---------------------- ------------------- --------------------- -----------------------
2005 2006 2005 2006 2005 2006 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
1 Revenue (before
extraordinary profit) 108,779.9 151,950.1 32,599.2 53,425.6 37,037.6 63,152.8 178,416.7 268,528.5
2 Less: Inter- segment
revenue -- -- -- -- -- -- (9,102.8) (10,917.6)
3 Total revenue (1)-(2) -- -- -- -- -- -- 169,313.9 257,610.9
4 Operating profit (i.e
Profit before unallocated
expenses, extraordinary
profit, provision, and
tax) .................... 19,965.0 33,404.2 10,439.3 14,156.9 (1,606.8) 288.0 28,797.5 47,849.2
5 Unallocated expenses..... -- -- -- -- -- -- 384.0 384.0
6 Provisions .............. 1,150.9 7,532.1 3,478.4 8,944.9 (422.9) (210.7) 4,206.4 16,266.4
7 Profit before tax
(4)-(5)-(6) ............. 18,814.1 25,872.0 6,960.9 5,212.0 (1,183.9) 498.7 24,207.1 31,198.8
Income tax expenses (net)
8 / (net deferred tax
credit) ................. -- -- -- -- -- -- 5,683.8 6,998.0
9 Net Profit (7)-8) ....... -- -- -- -- -- -- 18,523.3 24,200.8
Other Information
10 Segment assets .......... 1,118,447.3 1,802,556.0 588,286.8 824,793.1 47,778.4 110,734.9 1,754,512.5 2,738,084.0
11 Unallocated assets ... -- -- -- -- -- -- 28,915.3 31,776.0
12 Total assets (10)+(11) -- -- -- -- -- -- 1,783,427.8 2,769,860.0
13 Segment
liabilities ............. 1,353,714.3 2,080,899.1 389,689.1 584,579.5 40,024.4 104,381.4 1,783,427.8 2,769,860.0
14 Unallocated
liabilities ............. -- -- -- -- -- -- -- --
15 Total liabilities
(13)+(14).............. -- -- -- -- -- -- 1,783,427.8 2,769,860.0
-----------------------------------------------------------------------------------------------------------------------------------
F-41
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Rupees in million
--------------------------------------------------------------------------------
Consumer and
Commercial Investment
Banking Banking Others Total
------------- ---------- --------- -----------
Year ended March 31, 2004
-------------------------------------------------
1 Revenue (before ............ 97,052.3 39,140.3 13,913.3 150,105.9
extraordinary profit)
2 Less: Inter- segment revenue -- -- -- (11,049.0)
3 Total revenue (1) -(2) ..... -- -- -- 139,056.9
4 Operating profit (i.e.
Profit before unallocated
expenses, extraordinary
profit, provision, and
tax) ....................... 13,148.9 13,625.0 (1,071.8) 25,702.1
5 Unallocated expenses ....... -- -- -- 256.0
6 Provisions ................. 5,803.2 440.7 -- 6,243.9
7 Profit before tax
(4)-(5)-(6) ................ 7,345.7 13,184.3 (1071.8) 19,202.2
Income tax expenses (net) /
8 (net deferred tax credit) .. -- -- -- 3,398.4
9 Net Profit (7)-(8) ......... -- -- -- 15,803.8
--------------------------------------------------------------------------------
Geographical segments
The Group reports its operations under the following geographical
segments.
a) Domestic Operations comprises branches and subsidiaries having
operations in India.
b) Foreign Operations comprises branches and subsidiaries having
operations outside India and offshore banking unit having
operations in India.
Based on above segments the assets and revenue of the Bank for the year
ended March 31, 2006 have been prepared.
Rupees in million
------------------------------------------------------------------------------------------------
Sr.
No. Particulars Domestic Operations Foreign Operations Total
----- ---------- ------------------- ----------------- -----------
1. Revenue............. 243,570.9 14,040.0 257,610.9
2. Assets.............. 2,436,465.6 333,394.4 2,769,860.0
------------------------------------------------------------------------------------------------
Hitherto the business operations of the Bank were largely concentrated in
India. The assets and income from foreign operations were not significant
to the overall consolidated operations of the Bank and have accordingly
not been disclosed for the earlier comparative year.
12. Penalties imposed by RBI
The RBI had imposed penalties (ranging from Rs. 0.5 million to Rs. 2.0
million) on certain banks including ICICI Bank on January 23, 2006 under
Section 47A(1)(b) of the Banking Regulation Act, 1949. A penalty of Rs.
0.5 million (March 31, 2005: Rs. Nil) had been imposed on the Bank citing
contravention of RBI instructions relating to opening of accounts,
monitoring of transactions for adherence to Know Your Customer
("KYC")/Anti Money Laundering ("AML") norms, and non-adherence to normal
banking practices.
F-42
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
C. Additional Notes
1. Reserves
Profit brought forward
Represents the balance of net profit after minority interest carried
forward from earlier years after allocations to following reserves:
Statutory Reserves
Represents reserves created as a percentage of the net profit before any
other appropriation as required by the Banking Regulation Act, 1949. Every
banking company is currently required to transfer not less than 25% of the
net profit (before appropriations) to the "statutory reserves".
Capital Reserves
Represents amount of gains on sale of securities classified as held to
maturity, net of tax and transfer to statutory reserves.
Share Premium
Represents amount of premium received on issue of share capital
Special Reserve
Represents reserves maintained under the Income Tax Act, 1961 to avail tax
benefits.
Foreign Currency Translation Reserve
Represents exchange differences on translation of financial statements of
non-integral foreign operations.
Revenue and other reserves
Represents any reserve other than capital reserves and includes all
reserves other than those separately classified.
Investment Fluctuation Reserve
Represents reserves required to be maintained as a percentage of the fixed
income securities of the banks for interest rate risk and unrealised
gains/losses relating to its venture capital subsidiary.
Reserve Fund
Represents appropriation of 5% of net profit by Sri Lanka branch to meet
the requirements of Section 20 of Sri Lankan Banking Act No 30 of 1988.
Debit balance in Profit and Loss Account
This is included under Other Assets and not deducted from the balance in
Reserves
F-43
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
2. Deposits
Deposits include demand deposits, which are non-interest-bearing, and
savings and time deposits, which are interest bearing.
Contractual maturities of time deposits as of March 31, 2006 are set out
below:
Rupees in million
----------------------------------------------------------------------------
Deposits maturing during the year ending March 31,
2007.................................................... 1,182,789.2
2008.................................................... 15,251.6
2009.................................................... 76,186.4
2010.................................................... 2,246.8
2011.................................................... 19,178.7
Thereafter.............................................. 22,430.1
-----------
Total time deposits..................................... 1,318,082.8
===========
----------------------------------------------------------------------------
As of March 31, 2006, the aggregate of time deposits with individual
balances greater than Rs. 5.0 million was Rs. 1,096,631.2 million (March
31, 2005: Rs. 574,769.2 million).
3. Long-term debt
Long-term debt represents debt with a contractual maturity of greater than
one year. Maturity distribution is based on contractual maturity or the
date at which the debt is callable at the option of the holder, whichever
is earlier. A significant portion of the long-term debt bears a fixed rate
of interest. Interest rates on floating-rate debt are generally linked to
the London Inter-Bank Offer Rate or similar money market rates. The
segregation between fixed-rate and floating-rate obligations is based on
the contractual terms.
A listing of long-term debt as of March 31, 2006, by maturity and interest
rate profile is set out below:
Rupees in million
------------------------------------------------------------------------------------------------
Fixed-rate Floating-rate
obligations Obligations Total
---------------- -------------- -----------
Long-term debt maturing during the year
ending March 31,
2007............................................. 66,842.6 5,989.8 72,832.4
2008............................................. 42,362.1 20,938.4 63,300.5
2009............................................. 43,786.2 12,747.9 56,534.1
2010............................................. 47,031.2 4,234.2 51,265.4
2011............................................. 41,775.6 8,581.4 50,357.0
Thereafter....................................... 85,068.4 14,291.2 99,359.6
---------- -------- ---------
Total............................................326,866.1 66,782.9 393,649.0
========== ======== =========
------------------------------------------------------------------------------------------------
All long-term debt is unsecured. Debt aggregating Rs. 31,957.5 million
(March 31, 2005: Rs. 32,864.0 million) is guaranteed by the Government of
India (GOI).
Long-term debt is denominated in various currencies. As of March 31, 2006,
long-term debt comprises Indian rupee debt of Rs. 265,722.6 million (March
31, 2005: Rs. 286,685.0 million) and foreign currency debt of Rs.
127,926.4 million (March 31, 2005: Rs. 80,380.8 million).
F-44
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Indian rupee debt
A listing of major category of Indian rupee debt is set out below
Rupees in million
--------------------------------------------------------------------------------------------
As of March 31, 2006
---------------------------------------------------------
Weighted Average
average residual
Category interest maturity
Amount rate Range (in years)
---------- -------- ------------- --------------
Bonds issued to institutional
/individual investors ....... 178,651.2 8.94% 4.74-16.38% 4.88
Bonds eligible for statutory 14,815.0 11.60% 11.50-12.00% 4.21
reserve requirements(1)......
Borrowings from GOI ......... 3,122.4 10.85% 0.00-13.00% 2.36
Refinance from financial 67,745.6 6.59% 5.50-12.00% 1.77
institutions.................
Fixed Deposits .............. 1,388.4 10.4% 9.10-11.25% 0.49
---------
Total ........................ 265,722.6 8.31% 4.00
=========
--------------------------------------------------------------------------------------------
1) Banks in India are required to mandatorily maintain a specified percentage
of certain liabilities as cash or in approved securities. These bonds
issued by the Company are approved securities under the rules.
Rupees in million
-----------------------------------------------------------------------------------------------
As of March 31, 2005
--------------------------------------------------------
Weighted Average
average residual
Category interest maturity
Amount rate Range (in years)
---------- -------- ------------- --------------
Bonds issued to institutional
/individual investors(1) ........... 196,581.7 9.90% 4.56-25.29% 3.24
Bonds eligible for statutory reserve 14,815.0 11.60% 11.50-12.00% 5.21
requirements(2).....................
Borrowings from GOI ................ 4,230.2 10.24% 0.00-13.00% 2.58
Refinance from financial 68,987.6 6.55% 5.50-12.00% 2.97
institutions........................
Fixed Deposits ..................... 2,070.5 10.67% 9.10-11.50 1.30
---------
Total ............................... 286,685.0 8.88% 3.25
=========
-----------------------------------------------------------------------------------------------
1) Includes application money received on bonds outstanding at the end of the
year.
2) Banks in India are required to mandatorily maintain a specified percentage
of certain liabilities as cash or in approved securities. These bonds
issued by the Company are approved securities under the rules.
F-45
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Foreign currency debt
A listing of major categories of foreign currency debt is set out below:
Rupees in million
-----------------------------------------------------------------------------------------------
As of March 31, 2006
--------------------------------------------------------
Weighted Average
average residual
Category interest maturity
Amount rate Range (in years)
---------- -------- ------------- --------------
Borrowings from international
development agencies (1) (2) ...... 23,820.6 5.08% 0.00-6.75% 9.39
Other borrowings from international
markets ........................... 104,105.8 5.16% 0.00-6.12% 2.95
---------
Total ............................. 127,926.4 5.14% 4.15
=========
-----------------------------------------------------------------------------------------------
1) These borrowings have been raised under specific lines of credit from
international development agencies. The borrowings have lender-imposed
restrictions that limit the use of the funds for specified purposes, which
include lending to specified sectors.
2) Exchange rate fluctuations on certain borrowings are guaranteed by the
GOI.
Rupees in million
------------------------------------------------------------------------------------------------
As of March 31, 2005
-----------------------------------------------------
Weighted Average
average residual
Category interest maturity
Amount rate Range (in years)
---------- -------- ---------- ------------
Borrowings from international development
agencies (1) (2) ........................ 24,949.3 3.84% 0.00-6.75% 8.71
Other borrowings from international
markets ................................. 55,431.5 4.38% 0.00-7.55% 3.01
--------
Total ................................... 80,380.8 4.20% 4.78
========
------------------------------------------------------------------------------------------------
1) These borrowings have been raised under specific lines of credit from
international development agencies. The borrowings have
lender-imposed restrictions that limit the use of the funds for
specified purposes, which include lending to specified sectors.
2) Exchange rate fluctuations on certain borrowings are guaranteed by
the GOI.
4. Cash and cash equivalents
Deposits with the Reserve Bank of India include Rs. 70,908.6 million
(March 31, 2005: Rs. 57,966.1 million) maintained in accordance with the
guidelines governing minimum cash reserve requirements. The balances
maintained with the Reserve Bank of India towards cash reserve
requirements are subject to withdrawal and usage restrictions.
Deposits with other Banks include Rs. 26,170.5 million (March 31, 2005:
10,780.1 million) towards deposits, which have maturity greater than 90
days.
F-46
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
5. Investments
The portfolio of investments classified as available for sale is set out
below.
Rupees in million
-------------------------------------------------------------------------------------------------------------------------
As of March 31, As of March 31,
2005 2006
--------------------------------------------- ------------------------------------------------
Gross Gross Gross Gross
Amortised unrealised unrealised Fair Amortised unrealised unrealised Fair
cost gain loss value cost gain loss value
--------- --------- --------- --------- --------- ---------- ---------- ---------
Available for sale
Corporate debt
securities .......... 19,203.3 1,342.2 (177.4) 20,368.1 34,423.8 238.3 (501.7) 34,160.4
Government securities 34,005.3 -- (0.9) 34,004.4 116,023.6 0.1 (0.1) 116,023.6
Other securities(1) . 6,561.8 51.4 (3.0) 6,610.2 12,947.2 21.6 (18.5) 12,950.3
--------- --------- --------- --------- --------- --------- ------- ---------
Total debt securities 59,770.4 1,393.6 (181.3) 60,982.7 163,394.6 260.0 (520.3) 163,134.3
Equity securities ... 19,801.8 5,619.3 (989.8) 24,431.3 23,055.8 7,023.5 (1,190.9) 28,888.4
Other investments (2) 34,765.6 3,109.3 (538.5) 37,336.4 63,460.1 3,833.2 (1,089.7) 66,203.6
--------- --------- --------- --------- --------- --------- ------- ---------
Total ............... 114,337.8 10,122.2 (1,709.6) 122,750.4 249,910.5 11,116.7 (2,800.9) 258,226.3)
========= ========= ========= ========= ========= ========= ======= =========
-------------------------------------------------------------------------------------------------------------------------
Income from securities available for sale
A listing of income from securities classified as available for sale is
set out below:
Rupees in million
------------------------------------------------------------------
Year ended March 31,
-------------------------------
2004 2005 2006
--------- -------- --------
Interest ................ 13,831.3 8,900.7 6,970.5
Dividends ............... 1,061.0 925.5 1,745.6
--------- -------- -------
Total ................... 14,892.3 9,826.2 8,716.1
========= ======== =======
Gross realised gain ..... 5,312.9 5,815.2 9,509.3
Gross realised loss ..... (3,316.9) (1,838.2) (1,257.5)
--------- -------- -------
Total ................... 1,996.0 3,977.0 8,251.8
========= ======== =======
------------------------------------------------------------------
6. Repurchase transactions
The Company has undertaken repurchase and reverse repurchase transactions
in GOI securities. The average level of repurchase transactions
outstanding during the year ended March 31, 2006, was Rs. 19,779.0 million
(March 31, 2005: Rs. 11,773.0 million). The average level of reverse
repurchase transactions outstanding during the year ended March 31, 2006,
was Rs. 1,615.0 million (March 31, 2005: Rs. 14,316.0 million). As of
March 31, 2006, outstanding repurchase and reverse repurchase transactions
were Rs. 16,450.0 million (March 31, 2005: Rs. 13,076.0 million) and Rs.
2.0 million (March 31, 2005: Rs. Nil) respectively.
F-47
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
7. Loans
A listing of loans by category is set out below.
Rupees in million
-------------------------------------------------------------------------------------------
As of March 31,
2005 2006
---------- ------------
Commercial, financial, agricultural and others ....... 447,358.3 665,549.4
Consumer loans and credit card receivables(1) ........ 532,138.4 910,870.9
Lease financing(2) ................................... 884.6 736.2
---------- ------------
Gross loans .......................................... 980,381.3 1,577,156.5
Allowances for loan losses ........................... 16,281.7 14,553.3
---------- ------------
Loans, net ........................................... 964,099.6 1,562,603.2
========= ===========
-------------------------------------------------------------------------------------------
1) Includes installment loans but excludes developer financing.
2) Leasing and related activities includes leasing and hire purchase
Maturity profile of loans
A maturity profile of gross loans is set out below:
Rupees in million
---------------------------------------------------------------------------------------------------
As of March 31,
-----------------------------
2005 2006
---------- ------------
Less than one year ................................. 284,062.4 425,591.7
One to five years................................... 407,070.0 789,909.5
Greater than five years............................. 272,967.2 347,102.0
---------- ------------
Total............................................... 964,099.6 1,562,603.2
========= ===========
---------------------------------------------------------------------------------------------------
Interest and fees on loans
A listing of interest and fees on loans (net of unearned income) is set
out below.
Rupees in million
------------------------------------------------------------------------------------------
As of March 31,
--------------------------------
2004 2005 2006
--------- --------- ----------
Commercial, financial, agricultural and others 36,836.9 31,673.7 36,791.3
Consumer loans and credit card receivables ... 25,006.6 38,024.1 64,280.6
Lease financing .............................. 145.6 113.6 70.7
--------- --------- ----------
Total ........................................ 61,989.1 69,811.4 101,142.6
======== ======== =========
------------------------------------------------------------------------------------------
F-48
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Restructured loans
The Company classifies a loan as a restructured loan where it has made
concessionary modifications that it would not otherwise consider, to the
contractual terms of a loan to a borrower experiencing financial
difficulties. As of March 31, 2006, the Company had committed to lend Rs.
1,031.4 million (March 31, 2005: Rs. 2,891.8 million), to borrowers who
are parties to troubled debt restructurings.
Standard restructured loans
A listing of restructured loans is set out below:
Rupees in million
----------------------------------------------------------------------------------------
As of March 31,
----------------------
2005 2006
---------- ----------
Commercial, financial, agricultural
and others (1) ............................................... 57,083.0 46,511.7
Working capital finance (including working capital term loans) 1,099.3 657.4
Other ........................................................ --- ---
Restructured loans ........................................... 58,182.3 47,169.1
Allowance for loan losses .................................... (2,863.3) (2,185.0)
Restructured loans, net ...................................... 55,319.0 44,984.1
------------------------------------------------------------------------------------------
-----------
(1) Excludes working capital finance.
A listing of non-performing loans is set out below:
Rupees in million
----------------------------------------------------------------------------------------
As of March 31,
----------------------
2005 2006
---------- ----------
Commercial, financial, agricultural
and others (1) ............................................... 16,836.8 5,019.1
Working capital finance (including working capital term loans) 2,808.4 2,943.4
Consumer loans and credit card receivables and others ........ 8,428.5 14,395.9
Non-performing loans ......................................... 28,073.7 22,358.4
Suspended interest and claims received from ECGC/DICGC ....... (283.6) (271.6)
Allowance for loan losses .................................... (12,483.9) (11,502.9)
Non-performing loans, net .................................... 15,306.2 10,583.9
------------------------------------------------------------------------------------------
-----------
(1) Excludes working capital finance.
Provision for loan losses
Movements in the provision for loan losses are set out below:
Rupees in million
--------------------------------------------------------------------------------------------
Year ended March 31,
---------------------------------
2004 2005 2006
--------- --------- ---------
Provisions for loan losses at the beginning of the year 22,078.1 16,308.1 12,483.9
Provisions for loan losses made during the year ....... 7,334.1 18,059.5 5,561.2
Write-off/write-back of excess provisions ............. (13,104.1) (21,883.7) (6,542.2)
--------- --------- ---------
Provisions for loan losses at the end of the year ..... 16,308.1 12,483.9 11,502.9
======== ======== ========
--------------------------------------------------------------------------------------------
F-49
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
8. Financial assets transferred during the period/year to Securitisation
Company SC) / Reconstruction Company (RC)
The Bank has transferred certain assets to an asset reconstruction company
(ARC) in terms of the guidelines issued by RBI governing such transfer.
For the purpose of the valuation of the underlying security receipts
issued by ARC, the security receipts are valued at their respective NAVs
as advised by the ARC. The details of the assets transferred for the
relevant year are given in the table below:
Rupees in million
----------------------------------------------------------------------------------------------------------------------------------
Year ended March 31,
---------------------------------
2004 2005 2006
--------- --------- ---------
A No. of accounts ......................................................................... 54 82 15
B Aggregate book value (net of provisions) of accounts sold to ARC ........................ 12,506.2 13,279.3 4,794.0
C Aggregate consideration ................................................................. 12,439.5 10,862.3 4,066.3
D Additional consideration realised in respect of accounts transferred in earlier years (1) --- --- ---
E Aggregate gain/(loss) over net sale value ............................................... (66.7) (2,417.0) (727.7)
----------------------------------------------------------------------------------------------------------------------------------
1. During the year ended March 31, 2006, ARC fully redeemed four
security receipts. The Bank realised Rs. 95.7 million over the gross
book value of the security receipts.
9. Details of non-performing assets sold excluding transfers to ARC
The Bank has sold certain cases of non-performing assets in terms of the
guidelines issued by RBI, governing such sale. The details of assets sold
are given below:
Rupees in million
-------------------------------------------------------------------------------
Year ended
March 31, 2006
--------------------
Particulars
1. No. of borrower accounts sold .................... 366
2. Aggregate outstanding (Gross) .................... 14,384.1
3. Aggregate consideration received.................. 2,223.2
-------------------------------------------------------------------------------
10. Credit Exposure
a) As on March 31, 2006 the Bank does not have any single borrower
exposure above 15% of capital funds
b) As on March 31, 2005 the Bank has taken single borrower exposure above
15% with the approval of the Board of Directors in the cases given
below:
-------------------------------------------------------------------------------------------------------------
Name of Borrower As on March 31, 2005
% to capital funds
Bharat Heavy Electrical Limited .......................................................... 19.50%
Essar Oil Limited ........................................................................ 17.46%
ARCIL (including security receipts issued by underlying trusts managed by ARCIL).......... 16.73%
Larsen & Toubro Limited .................................................................. 16.20%
-------------------------------------------------------------------------------------------------------------
F-50
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
11. Concentration of credit risk
Concentration of credit risk exists when changes in economic, industry or
geographic factors similarly affect groups of counterparties whose
aggregate credit exposure is material in relation to Company's total
credit exposure. The Company's portfolio of financial instruments is
broadly diversified along industry, product and geographic lines primarily
within India.
The Bank's 20 largest borrowers based on gross exposure, totaled
approximately Rs. 366,510.7 million as of March 31, 2006 (March 31, 2005:
Rs. 264,435.7 million) which represented 153.9% (March 31, 2005: 175.9%)
of the capital funds. The single largest borrower as of March 31, 2005 was
Rs. 30,981.8 million (March 31, 2005: 27,667.7 million) which represented
13.0% (March 31, 2005: 19.5%) of the capital funds.
The largest group of companies under the same management control accounted
for approximately 22.2% (March 31, 2005: 30.6%) of our capital funds.
12. Loan commitments
The Company has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs. 82,644.9
million as of March 31, 2006 (March 31, 2005: Rs. 37,817.7 million). The
interest rate on these commitments is dependent on the lending rates on
the date of the loan disbursement. Further, the commitments have fixed
expiration dates and are contingent upon the borrower's ability to
maintain specific credit standards.
13. Guarantees
As a part of its project financing and commercial banking activities, the
Company has issued guarantees to enhance the credit standing of its
customers. These generally represent irrevocable assurances that the
Company will make payments in the event that the customer fails to fulfill
its financial or performance obligations. Financial guarantees are
obligations to pay a third party beneficiary where a customer fails to
make payment towards a specified financial obligation. Performance
guarantees are obligations to pay a third party beneficiary where a
customer fails to perform a non-financial contractual obligation. The
guarantees are generally for a period not exceeding 10 years.
The credit risk associated with these products, as well as the operating
risks, are similar to those relating to other types of financial
instruments. The current carrying amount of the liability for the
Company's obligations under the guarantee as on March 31, 2006 amounted to
Rs. 1,042.5 million (March 31, 2005: Rs. 1,256.2 million).
Details of guarantees outstanding are set out below:
Rupees in million
------------------------------------------------------------------------------------------------------------
Nature of guarantee Maximum potential amount of future payments under guarantee
Less than
1 year 1 - 3 year 3 - 5 year Over 5 year Total
---------- ---------- ---------- ----------- ----------
Financial guarantees........... 44,426.9 14,084.0 6,917.3 3,231.9 68,660.1
Performance guarantees......... 56,085.1 58,249.6 15,283.5 3,461.2 133,079.3
--------- -------- -------- ------- ---------
Total guarantees .............. 100,512.0 72,333.6 22,200.8 6,693.1 201,739.4
========= ======== ======== ======= =========
------------------------------------------------------------------------------------------------------------
F-51
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
The Company has collateral available to reimburse potential losses on its
guarantees. Margins available to the Company to reimburse losses realised
under guarantees amounted to Rs. 10,291.4 million (March 31, 2005: Rs.
4,066.3 million). Other property or security may also be available to the
Company to cover these losses under guarantees.
14. Securitisation
The information on securitisation activity of the Company, as an
originator, for the year ended March 31, 2006 and March 31, 2005 is given
in the table below:
Rupees in million
----------------------------------------------------------------------------------------------------
Year ended March 31,
----------------------
2005 2006
---------- ----------
Total number of loan assets securitised .................................. 942,567 909,130
Total book value of loan assets securitised .............................. 160,071.2 94,856.2
Sale consideration received for the securitised assets ................... 163,412.2 102,856.6
----------------------------------------------------------------------------------------------------
The gain on account of securitisation during the year ended March 31, 2006
is Rs. 4,032.4 million (March 31, 2005: Rs. 3,976.1 million, March 31,
2004: Rs. 1,567.8 million)
The information on securitisation activity of the Bank as an originator as
on March 31, 2005 and March 31, 2006 is given in the table below:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
--------------------
2005 2006
--------- --------
Outstanding credit enhancement ............ 7,234.3 16,369.2
Outstanding liquidity facility ............ -- 2,640.4
Outstanding servicing liability ........... 260.7 695.6
Outstanding subordinate contributions...... 17,712.7 8,369.8
-------------------------------------------------------------------------------
Key assumptions during the year ended March 31, 2006 in measuring the fair
value of retained interests at the date of sale or securitisation and also
for subsequent measurement of retained interests as on March 31, 2006 are
given in the table below:
--------------------------------------------------------------------------------------------------------------------------
Auto Personal Two wheeler Mortgage
Loans loans loans loans
--------------- ---------------- ---------------- ---------------
Discount rate ............................... 8.35% to 16.22% 16.01% to 23.83% 17.68% to 20.77% 10.80% to 7.15%
Constant prepayment rate (per annum) ........ 3.00% to 39.00% 24.00% to 51.00% 12.00% 6.00% to 10.00%
Anticipated net credit losses (per annum) ... 0.55% to 3.50% 3.00% 1.82% to 2.00% 0.25%
--------------------------------------------------------------------------------------------------------------------------
15. Capital commitments
The Company is obligated under a number of capital contracts. Capital
contracts are job orders of a capital nature, which have been committed.
As of the balance sheet date, work had not been completed to this extent.
Estimated amounts of contracts remaining to be executed on capital account
aggregated Rs. 1,462.8 million as of March 31, 2006 (March 31, 2005: Rs.
704.4 million).
F-52
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
16. Forward rate agreement ("FRA")/ Interest rate swaps ("IRS")
The details of the forward rate agreements/interest rate swaps of the Bank
are given below:
Rupees in million
---------------------------------------------------------------------------------------------------
As on March 31,
--------------------------
Particular 2005 2006
------------ ------------
The notional principal of rupee swap agreements ..................... 1,165,402.0 1,870,025.6
Losses which would be incurred if counterparties failed to fulfil
their obligations under the agreements .............................. 9,865.3 16,754.4
Collateral required by the Bank upon entering into swaps ............ --- ---
Concentration of credit risk arising from the rupee swaps ........... 274.6 476.4
The fair value of the rupee trading swap book (2) ................... 333.6 922.4
---------------------------------------------------------------------------------------------------
1. Notional principal of swap agreements includes both hedge and
trading portfolio
2. Fair value represents clean mark-to-market.
17. Rupee and foreign currency derivatives
ICICI Bank is a major participant in the financial derivatives market. The
Bank deals in derivatives for balance sheet management and market making
purposes whereby the Bank offers derivative products to its customers,
enabling them to hedge their risks.
Dealing in derivatives is carried out by identified groups in the treasury
of the Bank based on purpose of transaction. Derivative transactions are
entered into by the treasury front office. Treasury middle office conducts
an independent check of the transactions entered into by the front office
and also undertakes activities such as confirmation, settlement,
accounting, risk monitoring and reporting and ensures compliance with
various internal and regulatory guidelines.
The market making and the proprietary trading activities in derivatives
are governed by the investment policy of the Bank, which lays down the
position limits, stop loss limits as well as other risk limits. The Risk
Management Group ("RMG") lays down the methodology for computation and
monitoring of risk. Risk Committee of the Board (RCB) reviews the Bank's
risk management policy in relation to various risks (portfolio, liquidity,
interest rate, off-balance sheet and operational risks), investment
policies and compliance issues in relation thereto. The RCB comprises of
independent directors and the Managing Director and CEO.
Risk monitoring on derivatives portfolio is done on a daily basis. The
Bank measures and monitors risk using Value at Risk ("VAR") approach and
the relevant greeks for options. Risk reporting on derivatives forms an
integral part of the management information system and the marked to
market position and the VAR of the derivatives portfolio is reported on a
daily basis.
The use of derivatives for hedging purpose is governed by the hedge policy
approved by Asset Liability Management Committee ("ALCO"). Subject to
prevailing RBI guidelines, the Bank deals in derivatives for hedging fixed
rate, floating rate or foreign currency assets/ liabilities. Transactions
for hedging and market making purposes are recorded separately. For hedge
transactions, the Bank identifies the hedged item (asset or liability) at
the inception of the transaction itself. The effectiveness is assessed at
the inception of the hedge and periodically thereafter. During the year
the Bank changed its method for testing hedge effectiveness from the price
value of basis point ("PVBP") or duration method to the marked to market
method. Due to this change certain derivative contracts,
F-53
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
which were hitherto accounted for as hedges, became ineffective and were
accordingly accounted for as trading.
Hedge derivative transactions are accounted for pursuant to the principles
of hedge accounting. Derivatives for market making purpose are marked to
market and the resulting gain/loss is recorded in the profit and loss
account. Premia on options are accounted for at the expiry of the options.
The Bank makes provisions on the outstanding positions in trading
derivatives for possible adverse movements in underlying. Derivative
transactions are covered under International Swap Dealers Association
("ISDA") master agreements with the respective counterparties. The credit
exposure on account of derivative transactions is computed as per RBI
guidelines and is marked against the credit limits approved for the
respective counterparties.
Rupees in million
--------------------------------------------------------------------------------------------------------------------
Sr No. Particular As on March 31, 2006
------ ---------- ----------------------------------
Currency Interest rate
derivatives (1) derivatives (2)
---------------- ----------------
1 Derivatives (Notional principal amount)
a) For hedging................................................ 14,506.6 42,005.5
b) For trading................................................ 430,887.1 2,700,016.7
2 Marked to market positions (3)
a) Asset (+).................................................. 2,184.3 2,052.9
b) Liability (-).............................. --- ---
3 Credit exposure .............................................. 21,520.9 28,293.3
--------------------------------------------------------------------------------------------------------------------
1. Options & Cross Currency Interest Rate Swap ('CCIRS') are included
in currency derivatives.
2. Foreign currency Interest Rate Swaps, Forward Rate Agreements and
swaptions are included in interest rate derivatives.
3. For trading portfolio.
Rupees in million
--------------------------------------------------------------------------------------------------------------------
Sr No. Particular As on March 31, 2005
------ ---------- ----------------------------------
Currency Interest rate
derivatives (1) derivatives (2)
---------------- ----------------
1 Derivatives (Notional principal amount)
a) For hedging................................................. 10,012.0 106,428.6
b) For trading................................................. 274,325.6 1,725,369.1
2 Marked to market positions(3)
a) Asset (+)................................................... 454.9 598.4
b) Liability (-)............................................... --- ---
3 Credit exposure ............................................... 9,426.7 18,124.4
--------------------------------------------------------------------------------------------------------------------
1. Options & Cross Currency Interest Rate Swap ('CCIRS') are
included in currency derivatives.
2. Foreign currency Interest Rate Swaps, Forward Rate Agreements and
swaptions are included in interest rate derivatives.
3. For trading portfolio
18. Tax contingencies
Various tax-related legal proceedings are pending against the Company at
various levels of appeal either with the tax authorities or in the courts.
Where after considering all available information in the opinion of
management a liability requires accrual, the Company has accrued such
liability and does not estimate any incremental liability in respect of
related proceedings.
Where such proceedings are sufficiently advanced to enable management to
assess that a liability exist and is subject to reasonable estimation
management will record its best estimate of such liability. Where a
reasonable range of potential outcomes is estimated, management will
record its best estimate, or in the absence of a basis for selecting a
F-54
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
specific estimate within a range management will record a liability no
less than the lower end of the estimated range. The contested tax demands
are adjusted by the tax authorities against refunds due to the Company on
favourable resolution of earlier years appeals/ completion of assessments
or paid or kept in abeyance in accordance with the terms of the stay
order. The payment/adjustment/stay does not prejudice the outcome of the
appeals filed by the Company. The advanced tax payments are recorded as
advance tax payments under other asset.
As of March 31, 2006, the Company has been assessed an aggregate of
Rs.30,321.0 million in excess of the provision made in the financial
statements in income tax, interest tax, wealth tax and sales tax demands
by the Government of India's tax authorities for past years. The Company
has appealed each of these tax demands. The Company believes that the tax
authorities are not likely to be able to substantiate their income tax,
interest tax, wealth tax and sales tax assessments and accordingly has not
provided for these tax demands as of March 31, 2006 based on views of
eminent counsels/favorable decisions in own/other cases.
Of the above, Rs.3,858.6 million relates to bad debt written off,
Rs.2,968.2 million towards withdrawal of special reserve, Rs.4,358.6
million towards expenditures incurred for dividends and Rs.4,180.1 million
towards penalty orders.
Of the above, Rs.11,029.1 million relates to 'disallowance of depreciation
on leased assets'. This issue is an industry-wide issue, involving
multiple litigations across the country.
In one of the instances relating to the above, the Income-tax Appellate
Tribunal, which is the second appellate level authority, has disallowed
the depreciation to the Company in case of assets leased by it. The
contingent liability on this disallowance amounts to Rs. 318.0 million.
The Company has preferred an appeal to the Mumbai High Court, which has
not yet come up for hearing. The lower level tax authorities in subsequent
years have been consistently denying the depreciation claim of the Company
by treating the lease transactions as loans and have allowed only the
principal portion of lease rentals as a deduction.
Based on judicial precedents and recent decisions of the Supreme Court and
based on consultation with senior tax counsel, the management believes
that it is more likely than not that the Company's tax positions will be
sustained. Accordingly, no provision has been made in the accounts.
19. Litigation
Various litigation and claims against the Company and its subsidiaries are
in process and pending. Based upon a review of open matters with legal
counsel, management believes that the outcome of such matters will not
have a material effect upon the Company's consolidated financial position,
results of operations or cash flows.
20. Changes in accounting policies
a. Subvention income
The Bank has aligned its accounting policy for subvention income with its
accounting policy for direct marketing agency/associate expenses.
Accordingly, subvention income has been accounted for in the period in
which it is received instead of over the period of
F-55
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
the loan. As a result of the change in policy, the impact on profit after
tax for the year ended March 31, 2006 is not expected to be significant.
b. Provisioning
RBI has increased the requirement of general provisioning on standard
loans (excluding loans to agriculture sector and small and medium
enterprises) to 0.40% compared to 0.25% applicable till September 30,
2005. In accordance with the revised guidelines on general provisioning on
standard loans, the Bank has made general provision of Rs. 3,390.2 million
during the year ended March 31, 2006. The Bank has reassessed its
provision requirement on performing loans and non-performing loans on a
portfolio basis at March 31, 2006. Based on this reassessment, the Bank
has written back an amount of Rs. 1,692.2 million from its existing
provisions against non-performing loans which were in excess of the
regulatory requirement.
c. Depreciation on premises
In case of the Bank's venture fund management company; the company has
revised the method of providing depreciation on premises taken on lease
from written down value method to amortising the same on straight-line
basis over lease period. As a result the depreciation for the year is
higher by Rs.3.0 million.
d. Derivatives
Prior to March 31, 2004 the Company recognised only unrealised losses on
trading derivatives and ignored unrealised gains, if any. With effect from
April 1, 2004 the Company recognises unrealised gains and losses in the
profit and loss account. As a result the profit after tax for fiscal 2005
was higher by Rs. 296.3 million.
21. Selected information from Indian GAAP financials
The Income statement, Balance Sheet and the Statement of stockholders
equity as per the format required by Article 3 and Article 12 of
Regulation S-X are given below:
Rupees in million
------------------------------------------------------------------------------------------------------------------------
Year ended March 31,
---------------------------------
2004 2005 2006
--------- --------- ----------
Interest and dividend income ........................................................ 93,526.7 98,337.6 146,141.9
Interest expense .................................................................... 71,676.6 68,043.8 101,014.8
Net interest income ................................................................. 21,850.1 30,293.8 45,127.1
Provision for loan losses ........................................................... 5,081.1 (803.9) 8,320.8
Provision for investments ........................................................... 1,170.3 5,433.2 8,156.3
Net interest income/ (loss) after provision for loan losses ......................... 15,598.7 25,664.5 28,650.0
Non-interest income ................................................................. 45,530.2 70,976.3 111,469.0
Non-interest expense ................................................................ 41,934.3 72,856.6 109,130.8
Income/(loss) before equity in loss of affiliates, minority interest, income taxes... 19,194.6 23,784.2 30,988.2
Equity in loss of affiliates ........................................................ --- --- ---
Less: Minority interest ............................................................. (7.5) (422.9) (210.7)
Income/(loss) before income taxes ................................................... 19,202.1 24,207.1 31,198.9
Income tax (expense)/benefit ........................................................ 3,398.3 5,683.8 6,998.0
Net income/(loss) ................................................................... 15,803.8 18,523.3 24,200.9
------------------------------------------------------------------------------------------------------------------------
F-56
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Rupees in million
------------------------------------------------------------------------------------------------------------------------
Year ended March 31,
---------------------------------
2004 2005 2006
--------- --------- ---------
Earnings per equity share: (Rs.)
Basic ............................................................................... 25.73 25.45 30.96
Diluted ............................................................................. 25.52 25.25 30.64
Weighted average number of equity shares used in computing earnings per
equity share (millions)
Basic ............................................................................... 614 728 782
Diluted ............................................................................. 619 734 790
------------------------------------------------------------------------------------------------------------------------
Rupees in million
--------------------------------------------------------------------------------
Year ended March 31,
-------------------------
2005 2006
----------- -----------
Assets
Cash and cash equivalents ........................... 136,277.0 182,550.9
Investments ......................................... 546,516.2 840,138.8
Loans, net .......................................... 964,099.6 1,562,603.2
Property, plant and equipment ....................... 41,781.9 41,428.7
Goodwill ............................................ --- 624.0
Deferred tax asset (net) ............................ 702.2 2,472.0
Interest accrued, outstanding fees and other income.. 17,223.1 26,466.5
Assets held for sale ................................ 3,677.2 3,627.9
Other Assets ........................................ 74,059.4 112,383.6
----------- -----------
Total assets ........................................ 1,784,336.6 2,772,295.6
=========== ===========
Liabilities
Interest bearing deposits.......................... 885,195.6 1,560,654.3
Non-interest bearing deposits ..................... 125,890.7 163,855.5
Short term borrowings and trading liabilities ..... 98,963.4 163,708.7
Long-term debt .................................... 367,065.8 393,649.0
Redeemable preferred stock......................... 3,500.0 3,500.0
Other liabilities ................................. 179,454.2 261,760.9
----------- -----------
Total liabilities ................................. 1,660,069.7 2,547,128.4
=========== ===========
Minority Interest ................................. 1,524.8 2,749.4
Shareholders' equity .............................. 122,742.1 222,417.8
----------- -----------
Total liabilities and shareholders' equity ........ 1,784,336.6 2,772,295.6
=========== ===========
F-57
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
The statement of stockholders equity for the years ended March 31, 2004,
March 31, 2005 and March 31, 2006.
Rupees in million
----------------------------------------------------------------------------------------------------------------
Equity Share Share Revenue and Other Special
Capital Premium Other Reserves reserves(1)
------------- ---------- --------------- -------------
Balance as on April 1, 2003............... 6,130.2 8,158.5 31,760.8 20,688.8
Proceeds from issue of share capital 33.7 477.6 --- ---
Additions during the year................. --- --- 131.1 13,638.9
Deductions during the year................ --- --- (3,446.3) (14.2)
------- ------- -------- --------
Balance as on March 31, 2004.............. 6,163.9 8,636.1 28,445.6 34,313.5
======= ======= ======== ========
----------------------------------------------------------------------------------------------------------------
1. Includes Statutory reserve, Special reserve, Investment fluctuation
reserve and Capital reserve.
Rupees in million
----------------------------------------------------------------------------------------------------------------
Equity Share Share Revenue and Other Special
Capital Premium Other Reserves reserves(1)
------------- ---------- --------------- -------------
Balance as on April 1, 2004...................... 6,163.9 8,636.1 28,445.6 34,313.5
Proceeds from issue of share capital............. 1,203.8 31,897.1 -- --
Additions during the year........................ -- -- 8,926.1 6,501.4
Deductions during the year....................... -- (528.1) (108.5) (2,708.9)
--------- -------- -------- --------
Balance as on March 31, 2005..................... 7,367.7 40,005.1 37,263.2 38,106.0
======= ======== ======== ========
----------------------------------------------------------------------------------------------------------------
1. Includes Statutory reserve, Special reserve, Investment fluctuation
reserve, Capital reserve and Foreign currency translation reserve.
Rupees in million
----------------------------------------------------------------------------------------------------------------
Equity Share Share Revenue and Other Special
Capital Premium Other Reserves reserves(1)
------------- ---------- --------------- -------------
Balance as on April 1, 2005.................. 7,367.7 40,005.1 37,263.2 38,106.0
Proceeds from issue of share capital......... 1,530.9 79,194.0 -- --
Additions during the year.................... -- -- 17,420.3 20,258.9
Deductions during the year................... (0.3) (874.1) (3,723.6) (14,130.3)
--------- --------- --------- ----------
Balance as on March 31, 2006................. 8,898.3 118,325.0 50,959.9 44,234.6
========= ========= ========= =========
----------------------------------------------------------------------------------------------------------------
1. Includes Statutory reserve, Special reserve, Investment fluctuation
reserve, Capital reserve, Reserve fund and Foreign currency
translation reserve.
Supplementary information to the Cash Flow Statement
Rupees in million
-------------------------------------------------------------------------------
Year ended March 31,
------------------------------
2004 2005 2006
-------- -------- --------
Supplementary Information
Non Cash Items
Foreclosed Items ........................ 1,087.0 3,677.0 3,628.0
Conversion of loan to equity shares...... 1,162.0 2,385.0 597.4
Interest paid ........................... 74,256.2 68,316.5 99,870.3
-------------------------------------------------------------------------------
F-58
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
22. Differences between Indian GAAP and US GAAP
The consolidated financial statements of the Company are prepared in
accordance with Indian GAAP which differs in certain significant aspects
from US GAAP.
The following tables summarize the significant adjustments to consolidated
net income and stockholders' equity which would result from the
application of US GAAP:
1. Net income reconciliation
Rupees in million
-------------------------------------------------------------------------------------------------------------------
Note Year ended March 31,
---------------------------------------------------
2004 2005 2006
-------- -------- --------
Consolidated profit after tax as per
Indian GAAP............................... 15,803.8 18,523.3 24,200.9
Adjustments on account of:
Allowance for loan losses ................ (a) (11,585.3) (14,666.9) (5,214.7)
Business combinations..................... (b) (1,331.8) (500.5) (1,051.2)
Consolidation............................. (c) (312.0) 613.0 277.5
Valuation of debt and equity securities... (d) (1,609.7) 150.5 537.8
Amortisation of fees and costs............ (e) 1,247.1 1,935.7 3,158.9
Accounting for derivatives................ (f) 834.9 (1,478.8) (154.4)
Deferred taxes............................ (g) 2.172.1 3,953.7 (1,714.5)
Total impact of all adjustments........... (10,584.7) (9,993.3) (4,160.6)
Net income as per US GAAP................. 5,219.1 8,530.0 20,040.3
Basic earnings per share
Indian GAAP (consolidated)................ 25.73 25.45 30.96
US GAAP................................... 8.50 11.72 25.64
Diluted earnings per share
Indian GAAP (consolidated)................ 25.52 25.25 30.64
US GAAP................................... 8.43 11.60 25.34
-------------------------------------------------------------------------------------------------------------------
F-59
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
2. Stockholders' equity reconciliation
Rupees in million
-------------------------------------------------------------------------------
Note As on March 31,
-----------------------
2005 2006
---------- ----------
Consolidated net worth as per Indian
GAAP................................... 121,833.3 219,982.2
Adjustments on account of:
Allowance for loan losses ............... (a) (14,819.8) (20,034.0)
Business combinations ................... (b) 396.8 (661.0)
Consolidation ........................... (c) (492.8) (2,067.4)
Valuation of debt and equity securities . (d) 2,018.8 (1,971.0)
Amortisation of fees and costs .......... (e) 4,005.6 7,389.1
Accounting for derivatives .............. (f) 179.3 26.1
Deferred taxes .......................... (g) 7,734.4 7,358.5
Proposed dividend ....................... (h) 7,140.3 8,624.3
Total impact of all adjustments ......... 6,162.6 (1,335.4)
Stockholders' equity as per US GAAP ..... 127,995.9 218,646.8
-------------------------------------------------------------------------------
a) Allowance for loan losses
The differences in the allowance for loan losses between Indian GAAP
and US GAAP are primarily on account of:
i) Prescriptive provisioning on performing and non-performing loans as
per Reserve Bank of India ("RBI") guidelines under Indian GAAP as
compared to allowances made in accordance with SFAS No. 5 on
"Accounting for Contingencies" and SFAS No. 114 on "Accounting by
Creditors for Impairment of a Loan" issued by the FASB under US GAAP.
Under Indian GAAP, in line with the RBI guidelines, the Bank
classifies loans as non-performing when interest or installments are
overdue for more than 90 days. RBI norms also allow banks to create
additional floating provisions over and above the specific provisions.
The additional floating provisions are generally based on losses
anticipated by the Bank on historical loss experiences or expected
anticipated losses in certain loans.
ii) Differences in the discount rates and cash flows used for computing
allowances created on restructured assets under Indian GAAP and US
GAAP.
iii) Provisions on sale of certain loans to an asset reconstruction company
not accounted for as sale under US GAAP. The loss on assets
transferred to an asset reconstruction company are included under
allowance for loan losses under US GAAP whereas under Indian GAAP,
these are netted off from the security receipts received as
consideration for sale as the transfer of these loans is treated as a
sale under Indian GAAP. The allowance for loan losses under US GAAP as
at March 31, 2006 included Rs 28,336.7
F-60
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
million (March 31, 2005: Rs 25,358.8 million) on loans sold to an
asset reconstruction company.
The guidelines on provisioning for loan losses are as follows:
-------------------------------------------------------------------------------
Classification Provisioning
Standard loans A general provision of 0.40% (excluding
direct advances to the agricultural and
small and medium enterprise sectors) is
required for all standard (non-impaired)
loans.
Sub-standard assets A loan is classified as sub-standard if
interest payments or installments have
remained overdue for more than 90 days. A
provision of 10% is required for all
sub-standard loans. An additional provision
of 10% is required for accounts that are
abinitio unsecured
Doubtful assets A loan is classified as a doubtful loan, if
it has remained as sub-standard for more
than a year.
A 100% provision/write-off is required in
respect of the unsecured portion of the
doubtful loans. Until year-end fiscal 2004, a
20% to 50% provision was required for the
secured portion as follows:
Up to one year: 20% provision;
One to three years: 30% provision; and
More than three years: 50% provision.
Effective quarter ended June 30, 2004 a 100%
provision is required for loans classified as
doubtful for more than three years on or
after April 1, 2004. In respect of assets
classified as doubtful for more than three
years up to March 31, 2004, 60% to 100%
provision on the secured portion is required
as follows:
By March 31, 2005: 60% provision;
By March 31, 2006: 75% provision; and
By March 31, 2007: 100% provision.
Loss assets The entire loan is required to be written off
or provided for.
Restructured loans A provision equal to the difference between
the present value of the future interest as
per the original loan agreement and the
present value of the future interest on the
basis of rescheduled terms at the time of
restructuring is required to be made.
-------------------------------------------------------------------------------
Under US GAAP, the impaired loans portfolio is classified into
restructured loans and other impaired loans. Restructured loans
represent loans whose terms relating to interest and installment
payments have been modified and qualify as troubled debt restructurings
as defined in SFAS No. 15 on "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". Other impaired loans represent loans
other than restructured loans, which qualify for impairment as per SFAS
No. 114.
Under US GAAP, larger balance, non-homogenous exposures representing
significant individual credit exposures (both funded and non-funded),
are evaluated on the basis of borrower's overall financial condition,
resources and payment record and the realisable value of any
collateral. This estimate considers all available evidence including
the present value of the expected future cash flows discounted at the
loan's contractual effective rate and the fair value of collateral.
Allowances recognized on account of reductions of future interest rates
as a part of troubled debt restructurings are accreted as a credit to
the provision for loan losses over the tenor of the restructured loan.
Each portfolio of smaller-balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans,
is individually evaluated for impairment. The allowance for loan losses
attributed to these loans is established via a process that includes an
estimate of probable losses inherent in the portfolio, based upon
various statistical analysis.
F-61
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Under US GAAP, the allowance for loan losses for restructured loans is
created by discounting expected cash flows at contracted interest
rates, unlike Indian GAAP, under which current interest rates are used.
Under US GAAP, the allowances include provisions for credit losses on
the performing portfolio based on the estimated probable losses
inherent in the portfolio. The allowances on the performing portfolio
are established after considering historical and projected default
rates and loss severities.
Under Indian GAAP, in respect of non-performing loan accounts subjected
to restructuring, the account is upgraded to standard category if the
borrower demonstrates, over a minimum period of one year, the ability
to repay the loan in accordance with the contractual terms. However,
the process of upgradation under US GAAP is not rule-based and the
timing of upgradation may differ across individual loans.
During fiscal 2005 and fiscal 2006, the Company transferred certain
impaired loans to borrower specific funds/trusts managed by an asset
reconstruction company against the issuance of security receipts by the
funds/trusts. The funds/trusts have been set up by the asset
reconstruction company under enacted debt recovery legislation in
India and aim to improve the recoveries of banks
from non-performing assets by aggregating lender interests and speeding
up enforcement of security interest by lenders. While under Indian GAAP
the entire transfer was recognized as a sale, under US GAAP these
transfers are not recognised as a sale due to the following reasons:
o Certain transfers did not qualify for sale accounting under SFAS
No. 140 on "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities".
o Certain transfers qualified for sale accounting but were impacted
by FASB Interpretation No. 46 on "Consolidation of Variable
Interests" (FIN 46)/FASB Interpretation No 46R (FIN 46R). The
funds/trusts to which these loans have been transferred are
variable interest entities within the definition contained in FIN
46. As the Bank is the 'Primary Beneficiary' of certain
funds/trusts, it is required under US GAAP to consolidate these
entities.
b) Business combinations
The differences arising due to business combinations are primarily on
account of:
i) Determination of the accounting acquirer.
ii) Accounting of intangible assets and goodwill.
Under US GAAP, the amalgamation between ICICI Bank Limited and ICICI
Limited was accounted for as a reverse acquisition in fiscal 2003. This
means that ICICI Limited was recognised as the accounting acquirer in the
amalgamation, although ICICI Bank was the legal acquirer. On the
acquisition date, ICICI held a 46% ownership interest in ICICI Bank.
Accordingly, the acquisition of the balance 54% ownership interest has
been accounted for as a step-acquisition. Under Indian GAAP, ICICI Bank
Limited was recognised as the legal and the accounting acquirer and the
assets and liabilities of ICICI Limited were incorporated in the books of
ICICI Bank Limited in accordance with the purchase method of accounting.
Further under US GAAP the amalgamation resulted in goodwill and intangible
assets while the amalgamation under Indian GAAP resulted in a capital
reserve (negative goodwill) which was accounted for as Revenue and Other
Reserves according to the scheme of amalgamation.
F-62
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Further for certain acquisitions made by the Company no goodwill has been
accounted for under Indian GAAP primarily due to accounting for the
amalgamation by the pooling of interests method. However under US GAAP
goodwill has been accounted for in accordance with SFAS No. 141 on
"Business Combinations" and SFAS No. 142 on "Goodwill and Other Intangible
Assets".
Under US GAAP subsequent to the adoption of SFAS No. 142, the Company does
not amortise goodwill and intangibles with infinite life but instead tests
the same for impairment at least annually. The annual impairment test
under SFAS No. 142 does not indicate an impairment loss for fiscal 2004,
fiscal 2005 and fiscal 2006.
Under US GAAP intangible assets are amortised over their estimated useful
lives in proportion to the economic benefits consumed in each period.
The estimated useful life of intangible assets is as follows:
No. of
years
Customer-related intangibles............................... 3-10
Other intangibles.......................................... 5
In fiscal 2006, the Company recorded goodwill under US GAAP of Rs. 1,196.8
million in relation to the acquisitions of software, business process
outsourcing and asset management companies in India and the United States
for an aggregate cash consideration of Rs 1,480.1 million. The revenue and
total assets of the acquired companies are immaterial to the consolidated
results of operations and financial position of the Company. The Company
has also entered into a contract with some of the companies acquired, to
pay additional amounts if certain criteria are met.
In fiscal 2005, the Company recorded goodwill under US GAAP of Rs. 2,004.0
million in relation to the acquisitions of business process outsourcing
and research companies in India and United States for an aggregate cash
consideration of Rs 2,139.6 million. The revenue and total assets of the
acquired companies are immaterial to the consolidated results of
operations and financial position of the Company. The Company has also
entered into a contract with some of the companies acquired to pay
additional amounts if, certain criteria are met. Further in one of the
acquisitions, the Company has the option to acquire a majority stake in
property companies owned by the seller.
A listing of goodwill and intangible assets, by category under US GAAP is
set out below:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
-------------------
2005 2006
---- ----
Goodwill........................................ 7,407.0 8,603.8
Customer-related intangibles.................... 5,991.1 5,991.1
Accumulated amortisation........................ (1,835.0) (2,467.5)
Customer related intangibles, net............... 4,156.1 3,523.6
-------- --------
Asset management and advisory intangibles(1).... -- 367.0
-------------------------------------------------------------------------------
F-63
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Other intangibles............................... 76.0 76.0
Accumulated amortisation........................ (33.0) (47.0)
-------- --------
Other intangibles, net.......................... 43.0 29.0
-------- --------
Goodwill and intangible assets, net............. 11,606.1 12,523.4
======== ========
1. With indefinite life
The following table presents the changes in goodwill under US GAAP:
Rupees in million
--------------------------------------------------------------------------------------------
As of March 31,
------------------
2005 2006
------ -------
Opening balance......................................................... 5,403.0 7,407.0
Goodwill relating to acquisitions consummated during the period......... 2,004.0 1,196.8
------- -------
Closing balance ........................................................ 7,407.0 8,603.8
======= =======
--------------------------------------------------------------------------------------------
The estimated amortisation schedule for intangible assets under US GAAP,
on a straight line basis, for the next five years is set out below.
Rupees in million
-----------------------------------------------------------------------
Year ended March 31
2007....................................................... 678.0
2008....................................................... 597.0
2009....................................................... 547.0
2010....................................................... 547.0
2011....................................................... 547.0
Thereafter 636.6
-------
Total 3,552.6
=======
-----------------------------------------------------------------------
c) Consolidation
The differences on account of consolidation are primarily on account of:
i) Majority owned entities where the Company has temporary control
ii) Variable interest entities
iii) Consolidation of insurance subsidiaries
Under Indian GAAP, the Company has not consolidated certain entities
(primarily 3i Infotech Limited and ICICI OneSource Limited) in which
control is intended to be temporary. However under US GAAP, these entities
have been consolidated as SFAS No. 94 on "Consolidation of majority owned
subsidiaries" requires consolidation of such entities. The net income and
total assets of these entities under US GAAP were Rs. 736.2 million for
fiscal 2006 (fiscal 2005: Rs. 185.2 million) and Rs. 37,039.3 million at
March 31, 2006 (March 31, 2005: Rs. 17,219.5 million).
F-64
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Under Indian GAAP, consolidation is required only if there is ownership of
more than one-half of the voting power of an enterprise or control of the
composition of the board of directors in the case of a company or of the
composition of the governing body in case of any other enterprise.
However, under US GAAP, the Company consolidates companies deemed to be
Variable Interest Entities (VIEs) where the Company is determined to be
the primary beneficiary under FIN 46.
During the year, the Company transferred certain impaired loans to
borrower specific funds/trusts managed by an asset reconstruction company.
The funds/trusts (which are separate legal entities) issued Security
Receipts ('SRs') to the Company and other transferors as consideration for
the transaction. The funds/trusts have been set up by the asset
reconstruction company under recently enacted debt recovery legislation in
India and aim to improve the recoveries of banks from impaired assets by
aggregating lender interests and speeding up enforcement of security
interest by lenders. Certain transfers did not qualify for sale accounting
under SFAS No. 140 and continue to be reflected as loans on the balance
sheet of the Company. Other transfers qualified for sale accounting but
were impacted by FIN 46/FIN 46R.
The funds/trusts to which these loans have been transferred are VIEs
within the definition contained in FIN 46.
The Company's venture capital subsidiary is involved with entities that
may be deemed VIEs. The FASB permitted non-registered investment companies
to defer consolidation of VIEs with which they are involved until the
proposed Statement of Position on the clarification of the scope of the
Investment Company Audit Guide is finalised, which is expected in 2006.
Following issuance of the Statement of Position, the FASB will consider
further modification to FIN 46R to provide an exception for companies that
qualify to apply the revised Audit Guide. Following issuance of the
revised Audit Guide and further modification, if any, to FIN 46R, the
Company will assess the effect of such guidance on its venture capital
business
Under Indian GAAP the insurance subsidiaries (ICICI Prudential Life
Insurance Company Limited and ICICI Lombard General Insurance Company
Limited) are fully consolidated whereas under US GAAP, these subsidiaries
are accounted for by the equity method of accounting as the minority
shareholders have substantive participating rights as defined in Issue No
96-16 issued by the Emerging Issues Task Force.
Acquisition costs for insurance subsidiaries are those costs that vary
with, and are primarily related to the acquisition of new and renewal
insurance contracts i.e. commissions, policy issue expenses, etc. Under
Indian GAAP, these costs are expensed in the profit and loss account while
under US GAAP the same is amortised over the life of the policy. The
claims provisions under Indian GAAP are made in accordance with IRDA
guidelines whereas under US GAAP the provisions are made in accordance
with the provisions of SFAS 60 on "Accounting and Reporting by Insurance
Enterprises" and SFAS 97 on "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realised Gains and
Losses from the Sale of Investments". The net impact of the differences on
net income of the insurance subsidiaries is insignificant.
F-65
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
d) Valuation of securities
Under Indian GAAP, net unrealised gains on investments by category are
ignored, except for the insurance subsidiaries wherein the unrealised
gains and losses are transferred to the fair value change account grouped
under Revenue and Other Reserves.
Under US GAAP the unrealised gains or losses on trading assets are
recognised in the profit and loss account and the unrealised gains or
losses on securities classified as 'available for sale' are recognised in
'Accumulated Other Comprehensive Income' under stockholders' equity, net
of tax. The total unrealised gains/(losses) taken to stockholders' equity
as on March 31, 2006 under US GAAP amounted to Rs. 431.3 million (March
31, 2005: Rs 3,289.2 million). Under Indian GAAP the unrealised gains and
temporary losses on investments of venture capital subsidiaries are
recognised in the 'Investment Fluctuation Reserve'. Under US GAAP the
unrealised gains or losses on investments of venture capital subsidiaries
are recognised in the profit and loss account.
Further, under US GAAP the merger between ICICI Limited and ICICI Bank
Limited was accounted for as a reverse merger wherein ICICI Limited was
the accounting acquirer. Accordingly all assets and liabilities of ICICI
Bank Limited were fair valued under US GAAP resulting in a different cost
basis in the books of the consolidated entity as compared to Indian GAAP
wherein ICICI Bank Limited was the accounting acquirer.
Under Indian GAAP, during fiscal 2005, the Company transferred investments
amounting to Rs. 213,489.4 million from available for sale category to
held to maturity category in accordance with the RBI guidelines. The
difference between the book value of each investment and the lower of its
acquisition cost and market value on the date of transfer, amounting to Rs
1,828.2 million has been provided for in the profit and loss account.
Under US GAAP, these investments continue to be classified as 'available
for sale'.
e) Amortisation of fees and costs
Under US GAAP, loan origination fees (net of costs) are amortised over the
period of the loans as an adjustment to the yield on the loan. However
under Indian GAAP, loan origination fees are accounted for upfront except
for certain fees which are received in lieu of sacrifice of future
interest, which are amortised over the remaining period of the facility.
Loan origination costs, including commissions paid to direct marketing
agents are expensed in the year in which they are incurred.
ICICI Bank Limited had implemented an Early Retirement Option Scheme 2003
('ERO') for its employees in July 2003. All employees who had completed 40
years of age and seven years of service with the Bank (including period of
service with entities amalgamated with the Bank) were eligible for the
ERO. The ex-gratia payments under ERO, termination benefits and leave
encashment in the excess of the provision made (net of tax benefits),
aggregating to Rs. 1,910.0 million are being amortised under Indian GAAP
over the period of five years commencing August 1, 2003. Under US GAAP,
the same has been accounted in accordance with the provisions of SFAS No.
87 on "Employers' Accounting for Pensions" and SFAS No. 88 on "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits".
f) Accounting for derivatives
Under Indian GAAP, prior to March 31, 2004 the Company recognised only
unrealised losses on trading derivatives and ignored unrealised gains, if
any. With effect from
F-66
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
April 1, 2004 the Company recognises unrealised gains and losses in the
profit and loss account.
Under Indian GAAP the swap contracts entered to hedge on-balance sheet
assets and liabilities are structured in such a way that they bear an
opposite and offsetting impact with the underlying on-balance sheet items.
The impact of such derivative instruments is correlated with the movement
of underlying assets and accounted for at fair value or on accrual basis,
in accordance with RBI guidelines.
Under US GAAP, the Company accounts for its derivative transactions in
accordance with the provisions of SFAS No. 133 on "Accounting for
Derivative Instruments and Hedging Activities". Accordingly certain
derivative contracts classified as hedges under Indian GAAP may not
qualify as hedges under US GAAP and accordingly are accounted for as
trading derivatives.
Under US GAAP the Company has designated certain derivatives as fair value
hedges of certain interest bearing assets and liabilities under SFAS No.
133. There are no cash flow hedges or hedges of net investments in foreign
operations. At the inception of a hedge transaction, the Company formally
documents the hedge relationship and the risk management objective and
strategy for undertaking the hedge. This process includes identification
of the hedging instrument, hedged item, risk being hedged and the
methodology for assessing effectiveness and measuring ineffectiveness of
the hedge. In addition, the Company assesses both at the inception of the
hedge and on an ongoing basis, whether the derivative used in the hedging
transaction is effective in offsetting changes in fair value or cash flows
of the hedged item, and whether the derivative is expected to continue to
be highly effective. The Company assesses the effectiveness of the hedge
instrument at inception and continually on a quarterly basis.
g) Deferred Taxes
The differences in the accounting for deferred taxes are primarily on
account of:
i) Tax impact of all US GAAP adjustments.
ii) Deferred taxes created on undistributed earnings of subsidiaries and
affiliates under US GAAP. Deferred taxes are not required to be
created on undistributed earnings of subsidiaries and affiliates
under Indian GAAP.
iii) Deferred taxes created on carry forward capital losses based on more
likely than not criterion under US GAAP as against virtual certainty
under Indian GAAP. As per the more likely than not criterion, a
valuation allowance on the deferred tax asset is created where the
probability of realisation of the deferred tax asset is not more
likely than not. However under the virtual certainty criterion a
deferred tax asset is recognised on unabsorbed depreciation or carry
forward losses under tax laws only to the extent there is convincing
evidence that sufficient future taxable income will be available
against which such deferred tax assets can be realised.
h) Dividend
Under US GAAP, dividends on common stock and the related dividend tax are
recognized in the year of approval by the Board of Directors. Under Indian
GAAP, dividends on common stock and the related dividend tax are
recognized in the year to which it relates to.
F-67
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
23. Notes under US GAAP
1. Additional information required under US GAAP
a. Insurance companies
Under US GAAP the Company accounts for its 74% ownership interest in ICICI
Prudential Life Insurance Limited ('ICICI Prulife') and ICICI Lombard
General Insurance Company Limited ('ICICI Lombard') by the equity method
of accounting because of substantive participative rights held by the
minority shareholders. The carrying value of the investment in these
companies as of March 31, 2006, was Rs. 6,527.4 million (March 31, 2005:
Rs. 4,294.0 million). The Company's equity in the loss of these affiliates
for the year ended March 31, 2006 was Rs. 521.2 million (March 31, 2005:
Rs. 645.0 million, March 31, 2004: Rs. 1,561.0 million).
The summarized balance-sheets and statements of operations of these
entities as of and for the years ended March 31, 2006 and March 31, 2005
is set out below.
Rupees in million
-----------------------------------------------------------------------------------------
Balance sheet As of March 31,
-------------------------------------------
2005 2006
-------------------- --------------------
ICICI ICICI ICICI ICICI
Prulife Lombard Prulife Lombard
------- ------- ------- -------
Cash and cash equivalents ................ 2,032.7 500.1 2,903.4 1,077.9
Securities ............................... 11,026.4 4,702.6 16,025.0 9,092.2
Assets held to cover linked liabilities .. 26,540.6 -- 69,996.3 --
Other assets ............................. 5,852.3 2,975.0 12,689.0 7,069.5
-------- ------- --------- --------
Total assets ............................. 45,452.0 8,177.7 101,613.7 17,239.6
======== ======= ========= ========
Provision for linked liabilities ......... 26,540.6 -- 69,996.3
Other liabilities......................... 15,476.8 5,810.7 26,505.5 13,408.4
Stockholders' equity ..................... 3,434.6 2,367.0 5,111.9 3,831.2
-------- ------- --------- --------
Total liabilities and stockholders' equity 45,452.0 8,177.7 101,613.7 17,239.6
======== ======= ========= ========
-----------------------------------------------------------------------------------------
Rupees in million
-----------------------------------------------------------------------------------------
Statement of income As of March 31,
-------------------------------------------
2005 2006
-------------------- --------------------
ICICI ICICI ICICI ICICI
Prulife Lombard Prulife Lombard
------- ------- ------- -------
Interest income .......................... 660.4 217.6 709.4 460.1
Interest expense ......................... -- -- -- --
Net interest income ...................... 660.4 217.6 709.4 460.1
Insurance premium ........................ 5,744.3 2,153.9 9,636.2 5,175.3
Other Non-interest income ................ 244.8 929.5 2,291.8 1,208.6
Non-interest expense ..................... (7,482.7) (2,826.9) (13,294.7) (6,462.0)
Income tax (expense)/ benefit............. (476.8) (37.1) (442.1) 13.1
-------- -------- --------- --------
Net income/(loss) ........................ (1,310.0) 437.0 (1,099.4) 395.1
======== ======= ========= ========
-----------------------------------------------------------------------------------------
F-68
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Others
The carrying value of the investment in other affiliates as of March 31,
2006, was Rs. 4.0 million (March 31, 2005: Rs. 431.4 million). The
Company's equity in the income of such affiliates for the year ended March
31, 2006, was Rs. 12.7 million (March 31, 2005; Rs. 70.0 million; March
31, 2004; Rs. 123.0 million).
b. Employee benefits
Gratuity
In accordance with Indian regulations, the Company provides for gratuity,
a defined benefit retirement plan covering all employees. The plan
provides a lump sum payment to vested employees at retirement or
termination of employment based on the respective employee's salary and
the years of employment with the Company. The gratuity benefit provided by
the Company to its employees is equal to or greater than the statutory
minimum.
In respect of the parent company, the gratuity benefit is provided to the
employee either through a fund administered by a Board of Trustees and
managed by Life Insurance Corporation of India (LIC) or through ICICI
Prulife. The Company is responsible for settling the gratuity obligation
through contributions to the fund. The plan is fully funded.
In respect of the remaining entities within the group, the gratuity
benefit is provided through annual contributions to a fund administered
and managed by the LIC. Under this scheme, the settlement obligation
remains with the Company, although the LIC administers the scheme and
determines the contribution premium required to be paid by the Company.
The following table sets forth the funded status of the plans and the
amounts recognized in the financial statements:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
------------------
2005 2006
---- ----
Change in benefit obligations
Projected benefit obligations at beginning of the year 803.3 946.0
Obligations assumed on acquisition ................... -- 7.5
Service cost ......................................... 153.3 214.0
Interest cost ........................................ 55.6 69.8
Benefits paid ........................................ (24.7) (67.4)
Actuarial (gain)/loss on obligations ................. (41.5) (24.1)
------ ------
Projected benefit obligations at the end of the year . 946.0 1,145.8
------ ------
Change in plan assets
Fair value of plan assets at beginning of the year ... 514.4 716.5
Fair value of plan assets acquired on acquisition .... -- 5.1
Actual return on plan assets ......................... 52.6 28.9
Employer contributions ............................... 174.2 166.4
Benefits paid ........................................ (24.7) (66.4)
------ ------
Plan assets at the end of the year ................... 716.5 850.5
------ ------
Funded status ........................................ (229.5) (295.3)
Unrecognized actuarial loss .......................... 235.8 249.3
Unrecognized transitional obligation ................. (15.5) (14.5)
Unrecognized prior service cost ...................... 55.8 50.1
-------------------------------------------------------------------------------
F-69
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
As of March 31,
------------------
2005 2006
------ ------
Net (amount recognised) prepaid gratuity cost ........ 46.6 (10.4)
====== ======
Accumulated benefit obligation at year end ........... 402.1 496.9
-------------------------------------------------------------------------------
The components of the net gratuity cost are set out below.
Rupees in million
-------------------------------------------------------------------------------
Year ended March 31,
-------------------------
2004 2005 2006
------- ------- -----
Service cost.................................. 106.0 153.3 214.0
Interest cost................................. 99.0 55.6 69.8
Expected return on assets..................... (68.0) (44.5) (59.4)
Amortisation of transition asset/liability.... (1.0) (1.0) (1.0)
Amortisation of prior service cost............ 6.0 5.7 5.7
Actuarial (gain)/loss......................... 2.0 9.8 (7.2)
Curtailment (gain)/ loss...................... 25.0 -- --
----- ----- -----
Net gratuity cost............................. 169.0 178.9 221.9
===== ===== =====
-------------------------------------------------------------------------------
Weighted average assumptions used to determine net periodic benefit cost
for the period:
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
------------------------
2004 2005 2006
---- ---- ----
Discount rate ............................. 7.0% 7.5% 8.0%
Rate of increase in the compensation levels 7.0% 7.0% 7.0%
Rate of return on plan assets ............. 7.5% 7.5% 7.5%
-------------------------------------------------------------------------------
Weighted average assumptions used to determine benefit obligations:
-------------------------------------------------------------------------------
As of March 31,
----------------
2005 2006
----- -----
Discount rate........................................ 7.5% 8.0%
Rate of increase in the compensation levels.......... 7.0% 7.0%
-------------------------------------------------------------------------------
As of March 31, 2006, of the total plan assets Rs. 1.6 million (March 31,
2005; Rs. 1.6 million) has been invested in debt securities of the
Company.
Plan Assets
The Company determines its assumptions for the expected rate of return on
plan assets based on the expected average long term rate of return over
the next 15 to 20 years.
The Company's asset allocation for the gratuity at the end of the year
ended March 31, 2006 and March 31, 2005 and the target allocation for year
ending March 31, 2007 by asset category based on fair values is as
follows:
F-70
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
Asset Category Target asset Post-retirement Post-retirement
allocation asset at Mar 31, asset at Mar 31,
2007 2006 2005
------------ ---------------- ----------------
Debt Securities ....... 0% 0% 0%
Other investments...... 100% 100% 100%
--- --- ---
Total.................. 100% 100% 100%
=== === ===
--------------------------------------------------------------------------------
The plan assets are either maintained by LIC or ICICI Prulife.
Investment strategy for plan assets maintained by ICICI Prulife
The ICICI Prulife administers the plan fund and it independently
determines the target allocation by asset category. The investment
strategy is to invest in a prudent manner for providing benefits to the
participants of the scheme. ICICI Prulife primarily invests in debt
securities or relatively low risk securities. The strategies are targeted
to produce a return that, when combined with the Company's contribution to
the funds will maintain the fund's ability to meet all required benefit
obligations. The insurance industry in the country is highly regulated and
ICICI Prulife functions within regulated investment norms.
Investment strategy for plan assets maintained by the LIC
The LIC administers the plan fund and it independently determines the
target allocation by asset category. The LIC primarily investments in
government securities and other debt instruments. The selection of
investments and the asset category is determined by LIC. The LIC's
strategy is to invest in a prudent manner to produce a return that will
enable the fund to meet the required benefit obligations. The insurance
industry in the country is highly regulated and the LIC, which is majority
owned by the Government of India, functions within regulated investment
norms. As such, while the return on investments is subject to market
interest rate and other risks, no untoward losses are expected to the plan
assets. No such events have occurred in the history of operations of the
fund.
The benefit expected be paid in each of the next five fiscal year and in
the five fiscal years thereafter is as follows:
Rupees in million
-------------------------------------------------------------------------------
Expected company contributions to the fund during the year
2006-- 2007........................................................ 178.4
Expected benefit payments from the fund during:
2006- 2007........................................................... 64.4
2007-- 2008.......................................................... 38.6
2008-- 2009.......................................................... 54.3
2009-- 2010.......................................................... 88.5
2010-- 2011.......................................................... 120.9
Thereafter 857.4
-------------------------------------------------------------------------------
Pension
The Company provides for pension, a deferred retirement plan covering
certain employees. The plan provides for a pension payment on a monthly
basis to these employees on their retirement based on the respective
employee's salary and years of employment with the Company. Employees
covered by the pension plan are not eligible for benefits under the
provident fund plan, a defined contribution plan. The pension plan
pertained to the acquiree which was acquired with effect from April 2003.
F-71
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
The pension plan is funded through periodic contributions to a fund set-up
by the Company and administrated by a Board of Trustees. Such
contributions are actuarially determined.
The following table sets forth the funded status of the plan and the
amounts recognized in the financial statements.
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
-------------------
2005 2006
------- -------
Change in benefit obligations
Projected benefit obligations at beginning of the year... 1,034.2 1,018.7
Service cost............................................. 10.2 8.9
Interest cost............................................ 70.4 74.1
Benefits paid............................................ (61.1) (72.0)
Actuarial (gain)/loss on obligations..................... (35.0) (20.6)
------- -------
Projected benefit obligations at the end of the year..... 1,018.7 1,009.1
------- -------
Change in plan assets
Fair value of plan assets at beginning of the year....... 1,046.9 1,154.0
Actual return on plan assets............................. 159.6 140.1
Employer contributions................................... 8.6 7.4
Benefits paid............................................ (61.1) (72.0)
------- -------
Plan assets at the end of the year....................... 1,154.0 1,229.5
------- -------
Funded status............................................ 135.3 220.4
Unrecognized actuarial loss/(gain)....................... (135.9) (210.8)
------- -------
Net Amount Recognized.................................... (0.6) 9.6
======= =======
Accumulated benefit obligation at year end............... 949.9 950.3
======= =======
-------------------------------------------------------------------------------
The components of the net pension cost are set out below
Rupees in million
-------------------------------------------------------------------------------
Year ended March 31,
--------------------
2005 2006
------ ------
Service cost........................................... 10.2 8.9
Interest cost.......................................... 70.4 74.1
Expected return on assets.............................. (76.7) (84.7)
Actuarial (gain) / loss -- (1.2)
----- -----
Net pension cost....................................... 3.9 (2.9)
===== =====
-------------------------------------------------------------------------------
Weighted average assumptions used to determine net periodic benefit cost
for the period:
-------------------------------------------------------------------------------
As of March 31,
-------------------
2005 2006
------ -------
Discount rate........................................... 7.5% 8.0%
Rate of increase in the compensation levels............. 7.0% 7.0%
Rate of return on plan assets........................... 7.5% 7.5%
Pension increases....................................... 3.0% 3.0%
-------------------------------------------------------------------------------
F-72
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Weighted average assumptions used to determine benefit obligations:
-------------------------------------------------------------------------------
As of March 31,
-------------------
2005 2006
------ -------
Discount rate........................................... 7.5% 8.0%
Rate of increase in the compensation levels............. 7.0% 7.0%
Pension increases....................................... 3.0% 3.0%
-------------------------------------------------------------------------------
Plan Assets
The Company determines its assumptions for the expected rate of return on
plan assets based on the expected average long-term rate of return over
the next 15 to 20 years.
The Company's asset allocation for the pension at the end of the year
ended March 31, 2005 and March 31, 2004 and the target allocation for year
ending March 31, 2005 by asset category based on fair values are as
follows:
-------------------------------------------------------------------------------
Asset Category Target asset Pension assets Pension assets
allocation at March 31, at March 31,
2006 2005 2004
------------ -------------- --------------
Debt Securities......... 100% 100% 100%
Other investments....... 0% 0% 0%
---- ---- ----
Total................... 100% 100% 100%
==== ==== ====
-------------------------------------------------------------------------------
The plan assets are maintained through a fund administered and managed by
a Board of Trustees.
The investment strategy of the Company is to invest in a prudent manner
for providing benefits to the participants of the scheme. The strategies
are targeted to produce a return that, when combined with the Company's
contribution to the funds will maintain the fund's ability to meet all
required benefit obligations. Risk is reduced by investment in GOI
Securities or relatively low risk securities.
The benefit expected be paid in each of the next five fiscal years
thereafter is as follows:
Rupees in million
---------------------------------------------------------------------------------------------------
Expected company contributions to the fund during the year 2006--2007............. 10.0
Expected benefit payments from the fund during:
2006-- 2007......................................................................... 65.8
2007-- 2008......................................................................... 68.3
2008-- 2009......................................................................... 72.8
2009-- 2010......................................................................... 76.9
2010-- 2011......................................................................... 81.2
Thereafter 465.0
---------------------------------------------------------------------------------------------------
F-73
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
Superannuation
The permanent employees of the Company are entitled to receive retirement
benefits under the superannuation scheme operated by the Company.
Superannuation is a defined contribution plan under which the Company
contributes annually a sum equivalent to 15.0% of the employee's eligible
annual salary to LIC, the manager of the fund, which undertakes to pay the
lump sum and annuity payments pursuant to the scheme. The Company
contributed Rs. 103.0 million, Rs. 109.0 million and Rs. 110.0 million to
the employees superannuation plan for the years ended March 31, 2004, 2005
and 2006, respectively.
Provident fund
In accordance with Indian regulations, employees of the Company (excluding
those covered under the pension scheme) are entitled to receive benefits
under the provident fund, a defined contribution plan, in which, both the
employee and the Company contribute monthly at a determined rate. These
contributions are made to a fund set up by the Company and administered by
a Board of Trustees. The contribution to the employees provident fund
amounted to Rs. 236.0 million, Rs. 280.0 million and Rs. 428.0 million for
the years ended March 31, 2004, 2005 and 2006, respectively.
c) Stock-based compensation -- Pro forma disclosures
The Company does not deduct the expense of stock option grant from its
income statement based on the fair value method as the Company has adopted
pro-forma disclosure provisions of SFAS No. 123 on "Accounting for Stock
based Compensation". The Company is required to adopt SFAS No. 123 (R) for
period beginning after June 15, 2005. Had compensation cost been
determined in a manner consistent with a fair value approach described in
SFAS No. 123, the Company's net income and earnings per share would have
changed to the amounts indicated below.
Rupees in Million
-----------------------------------------------------------------------------------------------------------
Year ended March 31,
---------------------------------
2004 2005 2006
---- ---- ----
Net income/(loss) (in millions)
As reported........................................................ 5,219.0 8,529.7 20,040.3
Add: Stock based employee compensation expense included in
reported net income, net of tax
effect...................................................... -- 48.0 29.0
Less: Stock based employee compensation expense determined
under fair value based method, net of tax
effect...................................................... 308.7 478.0 525.5
------- ------- --------
Pro forma net income/(loss)........................................ 4,910.3 8,099.7 19,543.8
------- ------- --------
Earnings/ (loss) per share: Basic (in Rs.)
As reported........................................................ 8.50 11.72 25.64
Pro forma.......................................................... 8.00 11.13 25.00
Earnings/ loss) per share: Diluted (in Rs.)
As reported........................................................ 8.43 11.60 25.34
Pro forma.......................................................... 7.93 11.02 24.71
-----------------------------------------------------------------------------------------------------------
F-74
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
The fair value of the options is estimated on the date of the grant using
the Black-Scholes options pricing model, with the following assumptions:
-------------------------------------------------------------------------------
Year ended March 31,
-----------------------------------------
2004 2005 2006
--------- ------------- -------------
Dividend yield................... 4.1% 2.7% 2.0%
Expected life.................... 10 years 3-6 years 3-6 years
Risk free interest rate.......... 5.1% - 5.9% 4.6%-6.1% 6.4%-7.2%
Volatility....................... 40% 39% 37.7%
-------------------------------------------------------------------------------
d. Earnings per share (EPS)
Basic earnings per share (EPS) is net income per weighted average equity
shares. Diluted EPS reflects the effect that existing options would have
on the basic EPS if they were to be exercised, by increasing the number of
equity shares.
The basic and diluted EPS under US GAAP differs to the extent that income
under US GAAP differs.
The computation of earnings per share as per US GAAP is given below:
Rupees in million
-------------------------------------------------------------------------------------------------------------
Year ended March 31,
-------------------------------------------------------------
2004 2005 2006
----------------- ----------------- -----------------
(in millions, except earnings per share data)
Fully Fully Fully
Basic Diluted Basic diluted Basic Diluted
----- ------- ----- ------- ----- -------
Earnings
Net income (before dilutive impact) 5,219.0 5,219.0 8,529.7 8,529.7 20,040.3 20,040.3
Contingent issuances of subsidiaries......... - - - (13.9) - (26.6)
------- ------- -------- ------- -------- ---------
Net income (adjusted for full dilution)...... 5,219.0 5,219.0 8,529.7 8,515.8 20,040.3 20,013.7
------- ------- -------- ------- -------- ---------
Common stock
Weighted-average common stock outstanding.... 614.2 614.2 727.7 727.7 781.7 781.7
Dilutive effect of employee stock options.... - 5.0 - 6.0 - 8.3
------- ------- -------- -------- --------- ---------
Total........................................ 614.2 619.2 727.7 733.7 781.7 790.0
======= ======= ======== ======== ========= =========
Earnings per share
Net income (Rs)............................. 8.50 8.43 11.72 11.60 25.64 25.34
-------------------------------------------------------------------------------------------------------------
Options to purchase equity shares 5,000 equity shares (March 31, 2005:
Nil) granted to employees at a weighted average exercise price of
Rs.569.55 (March 31, 2005: Rs. Nil) were outstanding during the year ended
March 31, 2006, but were not included in the computation of diluted
earnings per share because the exercise price of the options was greater
than the average market price of the equity shares during the period.
F-75
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
e. Income taxes
Components of deferred tax balances
The components of the deferred tax balances are set out below.
Rupees in million
-------------------------------------------------------------------------------
As of March 31,
----------------------
2005 2006
---- ----
Deferred tax assets
Allowance for loan losses....................... 18,930.8 14,056.7
Available for sale securities................... 1,383.7 2,502.0
Investments in trading securities............... 80.3 45.2
Employee retirement ............................ 391.5 242.3
Capital loss carry forward...................... 881.1 1,583.4
Business loss carry forward..................... 558.8 679.3
Deposits........................................ 12.0 6.5
Investments in affiliates....................... 991.0 1,274.7
Other........................................... 226.7 582.5
--------- ---------
23,455.9 20,972.6
Valuation allowance............................. (135.0) (780.2)
--------- ---------
Total deferred tax asset........................ 23,320.9 20,192.4
--------- ---------
Deferred tax liabilities
Property and equipment.......................... (7,916.4) (7,226.6)
Investments in subsidiaries and affiliates...... (431.7) (823.8)
Intangibles..................................... (1,531.5) (1,329.7)
Unearned income................................. (1,580.0) (2,614.8)
Investment in trading securities................ -- --
Long-term debt.................................. (238.7) (219.2)
Available for sale securities................... -- --
Others.......................................... (62.1) (52.2)
--------- ---------
Total deferred tax liability.................... (11,760.4) (12,266.3)
--------- ---------
Net deferred tax asset.......................... 11,560.5 7,926.1
========= =========
-------------------------------------------------------------------------------
In assessing the realisability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realised. The ultimate realisation of
the deferred tax asset is dependent on the generation of future taxable
income during the periods in which the temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, the projected future taxable income, and tax planning
strategies in making this assessment. Based on the level of historical
taxable income and projections for future taxable incomes over the periods
in which the deferred tax assets are deductible, management believes that
it is more likely than not that the Company will realise the benefits of
those deductible differences. The amount of deferred tax assets considered
realisable, however could be reduced in the near term if estimates of
future taxable income are reduced.
The Indian statutory tax rate is 35% plus a surcharge. During each of the
years presented, legislation was enacted in the first few months of the
fiscal year that changed the amount of the surcharge for that fiscal year
and future years. The surcharge was changed to 2.5%, 4.55% and 12.2%
during the years ended March 31, 2004, 2005 and 2006, respectively,
F-76
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
and resulted in a total statutory tax rate of 35.875%, 36.5925% and 33.66%
for the years ended March 31, 2004, 2005 and 2006, respectively.
Reconciliation of tax rates
The following is the reconciliation of expected income taxes at statutory
income tax rate to income tax expense /benefit as reported:
Rupees in million
--------------------------------------------------------------------------------------------------
Year ended March 31,
--------------------------------------
2004 2005 2006
---- ---- ----
Income/(loss) before income taxes ................... 6,857.0 10,166.5 28,682.9
Statutory tax rate .................................. 35.875% 36.5925% 33.66%
Income tax expense/(benefit) at the statutory
tax rate............................................. 2,459.9 3,720.2 9,654.7
Increases/(reductions) in taxes on account of:
Special tax deductions available to financial
institutions......................................... (32.1) (39.9) (841.5)
Exempt interest and dividend income ................. (905.6) (478.8) (398.9)
Income charged at rates other than statutory tax rate (741.2) (1,005.2) (1,392.7)
Changes in the statutory tax rate ................... 137.3 (147.4) 807.2
Expenses disallowed for tax purposes ................ 269.9 244.8 710.8
Tax on undistributed earnings of subsidiary ......... 134.0 12.0 108.5
Change in valuation allowance ....................... 371.3 (757.7) (38.2)
Tax adjustments in respect of prior year tax
assessments.......................................... (9.3) 6.6 65.0
Tax adjustment on account of change in tax
status of subsidiary ................................ -- -- --
Other ............................................... (46.0) 81.9 (32.5)
--------- ----------- ---------
Income tax expense/ (benefit) reported .............. 1,638.2 1,636.5 8,642.4
--------------------------------------------------------------------------------------------------
Only an insignificant amount of the Company's income/(loss) before income
taxes and income tax expense/(benefit) was from outside India.
The Company had a valuation allowance of Rs. 524.2 million as at April 1,
2003. The net change in the total valuation allowance for the years ended
March 31, 2004, March 31, 2005 and March 31, 2006 was an increase of Rs.
368.6 million, a decrease of Rs. 757.8 million and an increase of Rs.
645.2 million respectively. The majority of the valuation allowance as of
March 31, 2006 related to business loss carried forward and capital loss
carried forward.
As at March 31, 2006, the Company has total business loss carry forwards
of Rs. 1,591.5 million. Of this amount, Rs. 173.5 million expires in 2011,
Rs. 61.3 million expires in 2012 and Rs. 78.0 million expires in 2013.
Business loss carry forwards pertaining to Company's US subsidiary are Rs.
523.0 million which expire in 2025, Canada subsidiary are Rs. 755.7
million, which expire Rs. 263.1 million in 2012 and Rs. 492.6 million in
2016.
The Company has capital loss carry forward of Rs. 6,988.4 million, with
expiration dates as follows: March 31, 2009: Rs. 3.7 million, March 31,
2010: Rs. 2.8 million, March 31, 2011: Rs. 0.5 million, March 31, 2012:
Rs. 4,873.5 million and March 31, 2013: Rs. 2,107.9 million.
F-77
ICICI Bank Limited and Subsidiaries
Schedules forming part of the Consolidated Financial Statements
f. Regulatory matters
Statutory liquidity requirement
In accordance with the Banking Regulation Act, 1949, the Company is
required to maintain a specified percentage of its net demand and time
liabilities by way of liquid unencumbered assets like cash, gold and
approved securities. The amount of securities required to be maintained at
March 31, 2006 was Rs. 446,604.7 million (March 31, 2005: Rs. 325,140.0
million)
Capital Adequacy
The Company is subject to the capital adequacy requirements set by the
Reserve Bank of India, which stipulate a minimum ratio of capital to risk
adjusted assets and off- balance sheet items of 9% to be maintained. The
capital adequacy ratio of the Company calculated in accordance with the
Reserve Bank of India guidelines at March 31, 2006 was 13.35%.
24. Convenience Translation
Solely for the convenience of the readers, the financial statements as of
and for the year ended March 31, 2006, have been translated into United
States dollar at the noon buying rate in New York City on March 31, 2006,
for cable transfers in Indian rupees, as certified for customs purposes by
the Federal Reserve of New York of US$ 1 = Rs. 44.48. No representation is
made that the Indian rupee amounts have been, could have been or could be
converted into United States dollars at such a rate or any other certain
rate on March 31, 2006, or at any other certain date.
25. Comparative figures
Figures of the previous year have been regrouped to conform to the current
year presentation.
For and on behalf of Board of Directors
K. V. Kamath Kalpana Morparia
Managing Director & CEO Joint Managing Director
Vishakha Mulye Jyotin Mehta Rakesh Jha
Chief Financial Officer & General Manager & General Manager
Treasurer Company Secretary
Place: Mumbai
Date : June 11, 2006
F-78
EXHIBIT INDEX
Exhibit No. Description of Document
1.1 ICICI Bank Memorandum of Association, as amended (incorporated by
reference to ICICI Bank's Annual Report on Form 20-F for the year ended
March 31, 2004 filed on September 29, 2004).
1.2 ICICI Bank Articles of Association, as amended (incorporated by reference
to ICICI Bank's Annual Report on Form 20-F for the year ended March 31,
2005 filed on September 30, 2005).
2.1 Deposit Agreement among ICICI Bank, Deutsche Bank and the holders from
time to time of American Depositary Receipts issued thereunder (including
as an exhibit, the form of American Depositary Receipt) (incorporated
herein by reference to ICICI Bank's Registration Statement on Form F-1
(File No. 333-30132)).
2.2 Letter Agreements dated February 19, 2002 and April 1, 2002 (incorporated
herein by reference to ICICI Bank's Annual Report on Form 20-F for the
year ended March 31, 2002 filed on September 30, 2002) and Letter
Agreement dated March 8, 2005 (incorporated by reference to ICICI Bank's
Registration Statement on Form F-3 (File No. 333-121664) amending and
supplementing the Deposit Agreement.
2.3 ICICI Bank's Specimen Certificate for Equity Shares (incorporated herein
by reference to ICICI Bank's Registration Statement on Form F-1 (File No.
333-30132)).
4.1 ICICI Bank's Employee Stock Option Plan, as amended (incorporated by
reference to ICICI Bank's Annual Report on Form 20-F for the year ended
March 31, 2004 filed on September 29, 2004).
8.1 List of Subsidiaries (included under "Business - Subsidiaries and Joint
Ventures" herein).
11.1 Code of Business Conduct and Ethics (incorporated by reference to ICICI
Bank's Annual Report on Form 20-F for the year ended March 31, 2004 filed
on September 29, 2004).
12.1 Certification of the Managing Director & Chief Executive Officer of the
Company pursuant to Section 302 of the Sarbanes-Oxley Act.
12.2 Certification of the Chief Financial Officer & Treasurer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act.
13 Certification of periodic financial report pursuant to 18 USC. Section
1350, as mandated by Section 906 of the Sarbanes-Oxley Act.
Exh-1
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
For ICICI BANK LIMITED
By : /s/ Jyotin Mehta
----------------------------
Name : Mr. Jyotin Mehta
Title: General Manager and Company
Secretary
Place : Mumbai
Date : September 28, 2006