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Study Of Risk Management On Banks With Reference To ICICI Bank

INTRODUCTION

The Bank:
The word bank means an organization where people and business can invest or borrow money change it to foreign currency etc. According to Halsbury “A Banker is an individual, Partnership or Corporation whose sole pre-dominant business is banking, that is the receipt of money on current or deposit account, and the payment of cheque drawn and the collection of cheque paid in by a customer.’’

The Origin and Use of Banks:
The Word ‘Bank’ is derived from the Italian word ‘Banko’ signifying a bench, which was erected in the market-place, where it was customary to exchange money. The Lombard Jews were the first to practice this exchange business, the first bench having been established in Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the business of money-dealing, employing bills of exchange as remittances, about the beginning of the thirteenth century. About the middle of the twelfth century it became evident, as the advantage of coined money was gradually acknowledged, that there must be some controlling power, some corporation which would undertake to keep the coins that were to bear the royal stamp up to a certain standard of value; as, independently of the ‘sweating’ which invention may place to the credit of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion, become thinner, and consequently less valuable; and it is of the last importance, not only for the credit of a country, but for the easier regulation of commercial transactions, that the etallic currency be kept as nearly as possible up to the legal standard. Much unnecessary trouble and annoyance has been caused formerly by negligence in this respect. The gradual merging of the business of a goldsmith into a bank appears to have been the way in which banking, as we now understand the term, was introduced into England; and it was not until long after the establishment of banks in other countries-for state purposes, the regulation of the coinage, etc. that any large or similar institution was introduced into England. It is only within the last twenty years that printed cheques have been in use in that establishment. First commercial bank was Bank of Venice which was established in 1157 in Italy.

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Study Of Risk Management On Banks With Reference To ICICI Bank

THE BANKING REFORMS:
In 1991, the Indian economy went through a process of economic liberalization, which was followed up by the initiation of fundamental reforms in the banking sector in 1992. The banking reform package was based on the recommendations proposed by the Narasimham Committee Report (1991) that advocated a move to a more market oriented banking system, which would operate in an environment of prudential regulation and transparent accounting. One of the primary motives behind this drive was to introduce an element of market discipline into the regulatory process that would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks to conduct their business in a prudent and efficient manner and to maintain adequate capital as a cushion against risk exposures. Recognizing that the success of economic reforms was contingent on the success of financial sector reform as well, the government initiated a fundamental banking sector reform package in 1992. Banking sector, the world over, is known for the adoption of multidimensional strategies from time to time with varying degrees of success. Banks are very important for the smooth functioning of financial markets as they serve as repositories of vital financial information and can potentially alleviate the problems created by information asymmetries. From a central bank’s perspective, such high-quality disclosures help the early detection of problems faced by banks in the market and reduce the severity of market disruptions. Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to enhance the transparency of the annual reports of Indian banks by, among other things, introducing stricter income recognition and asset classification rules, enhancing the capital adequacy norms, and by requiring a number of additional disclosures sought by investors to make better cash flow and risk assessments. During the pre economic reforms period, commercial banks & development financial institutions were functioning distinctly, the former specializing in short & medium term financing, while the latter on long term lending & project financing. Commercial banks were accessing short term low cost funds thru savings investments like current accounts, savings bank accounts & short duration fixed deposits, besides collection float.

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Study Of Risk Management On Banks With Reference To ICICI Bank Development Financial Institutions (DFIs) on the other hand, were essentially depending on budget allocations for long term lending at a concessionary rate of interest. The scenario has changed radically during the post reforms period, with the resolve of the government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had posted dismal financial results. Infect, their very viability has become a question mark. Now, they have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into the universal banking system. The banking sector is the most dominant sector of the financial system in India. Significant progress has been made with respect to the banking sector in the post liberalization period. The financial health of the commercial banks has improved manifolds with respect to capital adequacy, profitability, and asset quality and risk management. Further, deregulation has opened new opportunities for banks to increase revenue by diversifying into investment banking, insurance, credit cards, depository services, mortgage, securitization, etc. Liberalization has created a more competitive environment in the banking sector.

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Study Of Risk Management On Banks With Reference To ICICI Bank

THEME OF THE STUDY:
Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it. The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, purpose and clear understanding so that it can be measured and mitigated. It also prevents an institution from suffering unacceptable loss causing an institution to suffer or materially damage its competitive position. Functions of risk management should actually be bank specific dictated by the size and quality of balance sheet, complexity of functions, technical/ professional manpower and the status of MIS in place in that bank.

INTRODUCTION:
Risk: the meaning of ‘Risk’ as per Webster’s comprehensive dictionary is “a chance of encountering harm or loss, hazard, danger” or “to expose to a chance of injury or loss”. Thus, something that has potential to cause harm or loss to one or more planned objectives is called Risk. The word risk is derived from an Italian word “Risicare” which means “To Dare”. It is an expression of danger of an adverse deviation in the actual result from any expected result. Banks for International Settlement (BIS) has defined it as- “Risk is the threat that an event or action will adversely affect an organization’s ability to achieve its objectives and successfully execute its strategies.” Risk Management: Risk Management is a planned method of dealing with the potential loss or damage. It is an ongoing process of risk appraisal through various methods and tools which continuously ? Assess what could go wrong. ? Determine which risks are important to deal. ? Implement strategies to deal with those risks.

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Study Of Risk Management On Banks With Reference To ICICI Bank

STUDY PROBLEM:
Basel II norms came as an attempt to reduce the gap in point of views between conflict practices. Therefore, the implementation of those resolutions emerged by the banks. Regarding this issue the survey has been made. Study problem can be stated as follows: To what extent banks have implemented Basel II norms related to enhancing internal control in the banks?

Basel I Accord: The Basel Committee on Banking Supervision, which came into existence in 1974, volunteered to develop a framework for sound banking practices internationally. In 1988 the full set of recommendations was documented and given to the Central banks of the countries for implementation to suit their national systems. This is called the Basel Capital Accord or Basel I Accord. It provided level playing field by stipulating the amount of capital that needs to be maintained by internationally active banks. Basel II Accord: Banking has changed dramatically since the Basel I document of 1988. Advances in risk management and the increasing complexity of financial activities / instruments (like options, hybrid securities etc.) prompted international supervisors to review the appropriateness of regulatory capital standards under Basel I. To meet this requirement, the Basel I accord was amended and refined, which came out as the Basel II accord. The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks have to face and realign regulatory capital more closely with underlying risks. Each of these three pillars has risk mitigation as its central board. The new risk sensitive approach seeks to strengthen the safety and soundness of the industry by focusing on:
? Risk based capital (Pillar 1) ? Risk based supervision (Pillar 2) ? Risk disclosure to enforce market discipline (Pillar 3)

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Study Of Risk Management On Banks With Reference To ICICI Bank

BASEL II FRAMEWORK:
The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. Basel II Framework

Pillar I Minimum Capital Requirements

Pillar II Supervisory Review Process

Pillar III Market Discipline

THE FIRST PILLAR – MINIMUM CAPITAL REQUIREMENTS:
The first pillar sets out minimum capital requirement for the bank. The new framework maintains minimum capital requirement of 8% of risk assets. Basel II focuses on improvement in measurement of risks. The revised credit risk measurement methods are more elaborate than the current accord. It proposes for the first time, a measure for operational risk, while the market risk measure remains unchanged.

THE SECOND PILLAR - SUPERVISORY REVIEW PROCESS:
Supervisory review process has been introduced to ensure not only that bank have adequate capital to support all the risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles: a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels.

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Study Of Risk Management On Banks With Reference To ICICI Bank b) Supervisors should review and evaluate bank’s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. d) Supervisors should seek to intervene at an early stage to prevent capital from decreasing below minimum level and should require rapid remedial action if capital is not mentioned or restored.

THE THIRD PILLAR – MARKET DISCIPLINE:
Market discipline imposes strong incentives to banks to conduct their business in a safe, sound and effective manner. It is proposed to be effected through a series of disclosure requirements on capital, risk exposure etc. so that market participants can assess a bank’s capital adequacy. These disclosures should be made at least semi-annually and more frequently if appropriate. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be published annually.

TYPES OF RISKS:
When we use the term “Risk”, we all mean financial risk or unexpected financial loss. If we consider risk in terms of probability or occur frequently, we measure risk on a scale, with certainty of occurrence at one end and certainty of non-occurrence at the other end. Risk is the greatest phenomena where the probability of occurrence or nonoccurrence is equal. As per the Reserve Bank of India guidelines issued in Oct. 1999, there are three major types of risks encountered by the banks and these are Credit Risk, Market Risk & Operational Risk. Further after eliciting views of banks on the draft guidelines on Credit Risk Management and market risk management, the RBI has issued the final guidelines and advised some of the large PSU banks to implement so as to gauge the impact. Risk is the potentiality that both the expected and unexpected events may have an adverse impact on the bank’s capital or its earnings.

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Study Of Risk Management On Banks With Reference To ICICI Bank The expected loss is to be borne by the borrower and hence is taken care of by adequately pricing the products through risk premium and reserves created out of the earnings. It is the amount expected to be lost due to changes in credit quality resulting in default. Whereas, the unexpected loss on account of the individual exposure and the whole portfolio is entirely borne by the bank itself and hence care should be taken. Thus, the expected losses are covered by reserves/provisions and the unexpected losses require capital allocation.

CREDIT RISK:
In the context of Basel II, the risk that the obligor (borrower or counterparty) in respect of a particular asset will default in full or in part on the obligation to the bank in relation to the asset is termed as Credit Risk. Credit Risk is defined as-“The risk of loss arising from outright default due to inability or unwillingness of the customer or counter party to meet commitments in relation to lending, trading, hedging, settlement and other financial transaction of the customer or counter party to meet commitments”. Credit Risk is also defined, “as the potential that a borrower or counter party will fail to meets its obligations in accordance in agreed terms”.

CREDIT RISK APPROACHES:

Credit Risk

Standardized approach

Advanced Approach

Foundation IRB

Advanced IRB

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Study Of Risk Management On Banks With Reference To ICICI Bank Standardized approach: the Basel committee as well as RBI provides a simple methodology for risk assessment and calculating capital requirements for credit risk called Standardized approach. This approach is divided into the following broad topics for simpler and easier understanding 1. Assignment of Risk Weights: all the exposures are first classified into various customer types defined by Basel committee or RBI. Thereafter, assignment of standard risk weights is done, either on the basis of customer type or on basis of the asset quality as determined by rating of the asset, for calculating risk weighted assets. 2. External Credit Assessments: the regulator or RBI recognizes certain risk rating agencies and external credit assessment institutions (ECAIs) and rating assigned by these ECAIs, to the borrowers may be taken as a basis for assigning risk weights to the borrowers. Better rating means better quality of assets and lesser risk weights and hence lesser requirement of capital allocation. 3. Credit Risk Mitigation: Basel recognized Collaterals and Basel recognized Guarantees are two securities that banks obtain for loans / advances to cover credit risk, which are termed as “Credit Risk Mitigants” Advanced Approach: Basel II framework also provides for advanced approaches to calculate capital requirement for credit risk. These approaches rely heavily on a banks internal assessment of its borrowers and exposures. These advanced approached are based on the internal ratings of the bank and are popularly known as Internal Rating Based (IRB) approaches. Under Advanced Approaches, the banks will have 2 options as under ? Foundation Internal Rating Based (FIRB) Approaches. ? Advanced Internal Rating Based (AIRB) Approaches.

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Study Of Risk Management On Banks With Reference To ICICI Bank The differences between foundation IRB and advanced IRB have been captured in the following table: Table 2.9.1.1: The differences between foundation IRB and advanced IRB Data Input Probability of Default Loss Given Default Exposure at Default Effective Maturity Foundation IRB Provided by bank own estimates Supervisory values Committee Supervisory values Committee Supervisory values Committee Advanced IRB Provided by bank based on own estimates Provided by bank based on own estimates Provided by bank based on own estimates Provided by bank based on own estimates Or At the national discretion, provided by bank based on own estimates

based on set by the set by the set by the

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Study Of Risk Management On Banks With Reference To ICICI Bank

MARKET RISK:
It is defined as “the possibility of loss caused by changes in the market variables such as interest rate, foreign exchange rate, equity price and commodity price”. It is the risk of losses in, various balance sheet positions arising from movements in market prices. RBI has defined market risk as the possibility of loss to a bank caused by changes in the market rates/ prices. RBI Guidance Note focus on the management of liquidity Risk and Market Risk, further categorized into interest rate risk, foreign exchange risk, commodity price risk and equity price risk. Market risk includes the risk of the degree of volatility of market prices of bonds, securities, equities, commodities, foreign exchange rate etc., which will change daily profit and loss over time; it’s the risk of unexpected changes in prices or rates. It also addresses the issues of Banks ability to meets its obligation as and when due, in other words, liquidity risk.

MARKET RISK APPROACHES:

Market Risk

Standardized Approach

Internal Model Based approach

Maturity Based

Duration Based

RBI has issued detailed guidelines for computation of capital charge on Market Risk in June 2004. The guidelines seek to address the issues involved in computing capital charge for interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold and precious metals) in both trading and banking book.

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Study Of Risk Management On Banks With Reference To ICICI Bank Trading book will include: ? ? ? ? Securities included under the Held for trading category Securities included under the Available for Sale category Open gold position limits Open foreign exchange position limits ? Trading position in derivatives and derivatives entered into for hedging trading book exposures.

OPERATIONAL RISK:
Operational risk is the risk associated with the operations of an organization. It is defined as “risk of loss resulting from inadequate or failed internal process, people and systems or from external events.” It includes legal risk. It excludes strategic and reputational risks, as the same are not quantifiable. Operational risk includes the risk of loss arising from fraud, system failures, trading error and many other internal organizational risks as well as risk due to external events such as fire, flood etc. the losses due to operation risk can be direct as well as indirect. Direct loss means the financial losses resulting directly from an incident or an event. E.g. forgery, fraud etc. indirect loss means the loss incurred due to the impact of an incident.

OPERATIONAL RISK APPROACHES:

Operational Risk

Basic Indicator Approach

Standardized Approach

Advanced Measurement Approach

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Study Of Risk Management On Banks With Reference To ICICI Bank Basic Indicator Approach: Under the basic indicator approach, Banks are required to hold capital for operational risk equal to the average over the previous three years of a fixed percentage (15% - denoted as alpha) of annual gross income. Gross income is defined as net interest income plus net non-interest income, excluding realized profit/losses from the sale of securities in the banking book and extraordinary and irregular items. Standardized Approach: Under the standardized approach, banks activities are divided into eight business lines. Within each business line, gross income is considered as a broad indicator for the likely scale of operational risk. Capital charge for each business line is calculated by multiplying gross income by a factor (denoted beta) assigned to that business line. Total capital charge is calculated as the three-year average of the simple summations of the regulatory capital across each of the business line in each year. Advanced Measurement Approach: Under advanced measurement approach, the regulatory capital will be equal to the risk measures generated by the bank’s internal risk measurement system using the prescribed quantitative and qualitative criteria.

REGULATORY RISK:
The owned funds alone are managed by an entity, it is natural that very few regulators operate and supervise them. However, as banks accept deposit from public obviously better governance is expected from them. This entails multiplicity of regulatory controls. Many Banks, having already gone for public issue, have a greater responsibility and accountability in this regard. As banks deal with public funds and money, they are subject to various regulations. The various regulators include Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Department of Company Affairs (DCA), etc. Moreover, banks should ensure compliance of the applicable provisions of The Banking Regulation Act, The Companies Act, etc. Thus all the banks run the risk of multiple regulatory-risks which inhibits free growth of business as focus on compliance of too many regulations leave little energy scope and time for developing new business. Banks should learn the art of playing their business activities within the regulatory controls.

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Study Of Risk Management On Banks With Reference To ICICI Bank

ENVIRONMENTAL RISK:
As the years roll the technological advancement takes place, expectation of the customers change and enlarges. With the economic liberalization and globalization, more national and international players are operating the financial markets, particularly in the banking field. This provides the platform for environmental change and exposure of the bank to the environmental risk. Thus, unless the banks improve their delivery channels, reach customers, innovate their products that are service oriented; they are exposed to the environmental risk.

KEYS FOR EFFECTIVE RISK MANAGEMENT:
? To direct risk behaviour & influence the shape of a firm’s risk profile, management should use all available options. Using financial incentives and penalties to influence risk taking behaviour is effective management tool. ? Sharing of information by keeping confidentiality intact is also helpful to find out different ways for controlling the risk as valuable inputs may be received through this sharing. Even information on creditworthiness of counterparties that are known to take substantial risk can also help. ? Diversification is extremely important. As it lowers the variance in investor portfolios, improves corporate ability to raise debt, reduces employment risks, & heightens operating efficiency. ? Governance should never be ignored. Careful structuring of the alliance in advance of the deal and continual adjustment thereafter help to build a constructive relationship. ? One should not trust while in business. Personal chemistry is good but is no substitute for monitoring mechanism, co-operation incentives, & organizational alignment. ? Without support system within the organization itself, external alliances are doomed to fail.

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Study Of Risk Management On Banks With Reference To ICICI Bank

The Importance Of Credit Risk Management:
The importance of credit risk management for banking is tremendous. Banks and other financial institutions are often faced with risks that are mostly of financial nature. These institutions must balance risks as well as returns. For a bank to have a large consumer base, it must offer loan products that are reasonable enough. However, if the interest rates in loan products are too low, the bank will suffer from losses. In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too little that it leads itself to financial instability and to the risk of regulatory non-compliance. Credit risk management, in finance terms, refers to the process of risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. Likewise, the assessment of risk is also crucial in coming up with the position to balance risks and returns. Banks are constantly faced with risks. There are certain risks in the process of granting loans to certain clients. There can be more risks involved if the loan is extended to unworthy debtors. Certain risks may also come when banks offer securities and other forms of investments. The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected. Because of the exposure of banks to many risks, it is only reasonable for a bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability. The second Basel Accords provides statements of its rules regarding the regulation of the bank's capital allocation in connection with the level of risks the bank is exposed to. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. To determine the risks that come with lending and investment practices, banks must assess the risks. Credit risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies. To manage and assess the risks faced by banks, it is important to make certain estimates, conduct monitoring, and perform reviews of the performance of the bank. However, because banks are into lending and investing practices, it is relevant to make reviews on loans and to scrutinize and analyse portfolios. Loan reviews and portfolio analysis are crucial then in determining the credit and investment risks. Credit risk management for banking is a very useful system, especially if the risks are in line with the survival of banks in the business world.
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Study Of Risk Management On Banks With Reference To ICICI Bank

LITERATURE REVIEW

Arora, Anju. IUP Journal of Financial Risk Management 9. 3 (Sep 2012)
Numerous authors in various countries have performed empirical study on CRM practices followed in banks. Studies such as Treacy and Carey (1998) for the USA, Gray (1998) for Australia, Anbar (2005) for Turkey, Parreñas (2003) for four Asian emerging markets, Shafakli (2007) for Northern Cyprus, and Hussein and Mohammad (2007) for UAE, have given empirical evidence of CRM practices in their research works. Studies by Indian authors like Rajaraman and Vasistha (2002), Bhaumik and Piesse (2003), Sathye (2005), and Chaudhari and Sensarma (2008) have focused on issues relating to default probability, non-performing advances, impact of privatization on management, and risk management policies. Their findings revealed that large banks and profitable banks had better risk management procedures and technology. In a recent study, Mehra (2010) examined the impact of ownership and size on a range of operational risk management practices in Indian banks. The study concluded that large-sized banks had a well-developed framework/model for operational risk management/measurement as compared to their peers, but size was also observed to be a deterrent to collection of external loss data, deeper level of involvement of operational risk functionaries, data collection and analysis.

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Study Of Risk Management On Banks With Reference To ICICI Bank

Ana Paula Matias Gama, Helena Susana Amaral Geraldes. Management Research Review 35. 8 (2012)
Bank loans are the most important source of external financing for SMEs ([21] Cowling, 2009), yet exchange relationships between lenders and borrowers often suffer from market imperfections, such as information asymmetries ([22] Craig et al. , 2007). Information asymmetries occur because lenders have little reliable information about applicants' default risk. In particular, smaller firms, which are rarely listed, followed by analysts, or subject to audited financial statements, have difficulty signalling their quality to financial institutions ([17] Blumberg and Letterie, 2008). Moreover, smaller firms, with their limited resources, prefer to avoid the time-consuming and costly task of releasing their information, which creates the so-called opacity problem ([13] Berger and Frame, 2007). The information asymmetry between banks and SMEs may grow so severe that it results in credit rationing, which [70] Stiglitz and Weiss (1981) define as the situation in which the demand for loans exceeds the supply at the prevailing interest rate, so loans must be allocated by some mechanism other than price. Demand rationing may mean that the borrower does not receive the full amount of credit requested (type I rationing) or that some borrowers are simply refused (type II rationing). The demand for credit then exceeds the supply, even in equilibrium ([17] Blumberg and Letterie, 2008). If there is excess demand for bank funds, banks likely raise loan prices (interest rates) to equalize demand with supply and increase their profits. In the normal course of bank lending though, this situation is rare, because banks lack sufficient incentive to raise interest rates when demand exceeds supply ([21] Cowling, 2009). Some borrowers that do not receive bank credit would be willing to pay a higher price, but if the bank accepted this higher interest rate, it would attract riskier borrowers (i.e. adverse selection effect). Therefore, banks reject the higher interest rate, because the related higher-risk lending could not provide sufficient higher returns (i.e. if banks raise the interest rate, borrowers prefer riskier projects; moral hazard effect). These arguments suggest that demand does not equal supply and that banks prefer to ration credit ([70] Stiglitz and Weiss, 1981). Because obtaining reliable information about small firms is costly, the firm and the bank might enter into long-term relationships to ensure the firm's access to credit and the bank's access to information ([20] Carletti, 2004). This relationship also creates an effective technique for collecting information about SMEs ([28] Elsas and Krahnen, 1998); relationship lending tends to be based on soft information or qualitative data that
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Study Of Risk Management On Banks With Reference To ICICI Bank are difficult to observe ([12] Berger, 2006; [13] Berger and Frame, 2007). If small firms have an exclusive relationship with an outside financier, such as with their (Haus)bank, the bank gains more relevant, timelier information than can other banks and is more committed to the firms. However, an information monopoly by a (Haus)bank also can pose a risk for the borrower, which becomes hostage to the lender in terms of the information provided ([28] Elsas and Krahnen, 1998). In a repeated lending scenario, the (Haus)bank can extract profits through a higher, possibly unfair interest rate, because the bank accumulates privileged information about the firm's quality that other potentials lenders do not know. If this borrower asks for financing from another bank, the new bank might assume the borrower suffers from bad quality; otherwise, it would simply obtain financing from the (Haus)bank. In such costly long-term bank relationships, firms might experience sub-optimal reduced investments and thus lower profits ([28] Elsas and Krahnen, 1998; [63] Neuberger et al 2008). Initiating a second bank lending relationship could be a solution. According to [34] Farinha and Santos (2002), firms engage in multiple banking relationships to obtain financial services at more competitive terms than those available from their (Haus)bank, particularly in highly concentrated markets. However, the new lender still lacks the information the (Haus)bank possesses, so it must assume a higher default risk and charge higher interest rates. Furthermore, a new lending firm creates switching costs for the borrower ([13] Berger and Frame, 2007). A bank-customer relationship instead might be characterized by transaction lending that is based primarily on hard, quantitative data. According to [15] Berger and Udell (2002), transaction-lending technologies require a particular type of information, such as financial ratios for financial statement lending, accounts receivable and inventory pledged as collateral, or a history of the financial conditions experienced by the firm's principal owner for small business credit scores. Therefore, only SMEs with sufficient quantitative information usually receive transaction credit from banks ([12] Berger, 2006).

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Study Of Risk Management On Banks With Reference To ICICI Bank

Bandopadhyay, Kalpataru; Bandyopadhyay, Souvik Kumar. Decision 37. 3 (Dec 2010)
There is some literature on risk measurement in the field of business. However, before 1970's risk management was largely based on experience and judgment. Later on several techniques and models were developed (e.g. concept of standard deviation, concept of beta, optionpricing models, credit link swap, interest swap, cross asset risk exposure etc.) to tackle the issue of risk in business activities. Some of these techniques and models had been used to assess the risk of banks as well. During mid-1990's at the initiation of J. P. Morgan Chase, value-at risk (VaR) has been developed to measure portfolio risk of a business entity. The banks preferred VaR to measure the market risk and portfolio risk. Jaschke (2002) and Saita (2007) found the limitations of VaR. Saita (2007) is of the opinion that while the highly technical measurement techniques and methodologies of VaR have attracted huge interest, much less attention has been focused on how VaR and the risk-adjusted performance measures [such as RAROC] are to be used to manage risk. Anthony (1996) reported about several risk management techniques in the banking industry. He reported the standard practices and evaluated how and why it is conducted in the particular way chosen. He also mentions the elements missed in the existing methodology. Macdonald (1998) described the scope of carrying out quantitative monitoring of banks on the basis of consolidated financial statements and off-balance sheet item. He concluded that bank supervision must respond to the challenge of new developments for banks and consequent additional risks they represent for depositors. There are some studies that dealt with different issues of risk in banks. Applying option-pricing model, Robinovitch (1989) found that the banks in his study have very low insolvency risk. Kotrozo & Choi (2006) used Herfindahl Index (HHI) to measure diversification and found that total risk is increased for those banks that focused on their revenue activities. On the other hand, Boyd et al. (2006) observed that there is no relationship between the bank's risk of failure and concentration. They further observed that competition fosters the willingness of banks to lend. DeYoung & Roland (2001) conducted a study on different product mix and earning volatility of commercial banks using leverage model. Smith, Chirstos and Geoffery (2003) demonstrated the relationship between non-interest income and income stability. Morton et al. (2005) introduced a general and flexible framework for asset allocation to manage risk using Monte Carlo techniques.

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Study Of Risk Management On Banks With Reference To ICICI Bank In India, there is dearth of studies on risk of banking. After deregulation, among one of the very few studies in this field, Rao & Ghosh (2008) rightly pointed out that India banking sector is still in its preparatory stage in implementing a sound operational risk management due to lack of quantification. Das (1999) attempted to measure risk preference of different categories of banks. Ramsastri et al. (2004) had conducted a study on scheduled commercial banks and concluded that though average net interest income declined, the stability of income of commercial banks has improved during the period 1997 to 2003. On the other hand, Ghosh et al. (2008) analysed the firm specific abnormal returns using cross-sectional regression. Sadakkadulla (2001) arithmetically added up different types of risk to find out overall risk. Chattopadhyay & Mazumdar (2006) conducted a study on seventeen banks and concluded that the risk of PSU banks have come down significantly while Indian Private Banks assumes to be more risky. On the basis of extensive ratio analysis, Bandopadhyay & Dutta (2006) assessed risk and found that the risk level is low in case of PSU Banks in comparison to Indian private banks. Risk cannot be measured directly. It is the derivative of fluctuations of some parameters. In India, there is no serious study to analyze the overall risk of a bank. Hence, in this paper our endeavor is to compare risk of different categories of banks using the mixed model approach. In mixed model, it would be possible to capture the random effect generated by the group and by the respective individual bank which in turn would help to have the risk analysis with more accurate predictive value.

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Study Of Risk Management On Banks With Reference To ICICI Bank

Mermod, Asli Yüksel, PhD. Journal of Internet Banking and Commerce 16. 1 (Apr 2011)
Introduction and development of e-banking especially began in 1990s (Pikkarainen et al.2004, p.224). A research made in U.S in year 1999 stated that there have been huge increases in the use of e-banking in America. Examining the development of online banking in the world, one can say that the European countries are still the leader of the use of newest banking technologies and online banking (Pyun et al, 2002,p.73). According to a study, less than 15 percent of banks with transactional websites will realize profits directly attributable to those sites(Courchanne et al,2002, p.354). USA's first online banking service, the Security First Network Bank, was the first internetonly bank created in 1995. Before Security First Network Bank some banks had many different trials with a variety of systems for offering online banking. Usually this involved some kind of token that was placed in an account that could only be used on the Internet. The tokens were not protected by depositors insurance. Around the same time, Wells Fargo was the first brick-and-mortar bank to establish its online presence. For most of the rest of the banks, however, online presence in the first few years often meant only having a corporative website. After creating many web pages the second evolution in internet technology for banks was the creation of new software applications that allowed their customers to access to their accounts, follow their positions and even to perform financial operations online. By the end of 2003, more than half of the commercial banks present in U.S. and Europe offered online-banking services to their customers (Roberto et al,2007,p.2) Internet and mobile Internet banking services are the most innovative and profitable banking services introduced by commercial banks in Turkey. According to Turkish banking Association's (TBB) statements Isbank offered the first internet banking service in 1997 to its customers and were followed by Garantibank in the same year. And for year 2004 it's reported that 22 banks in Turkey were offering internet banking services to their customers. According to a recent statistic about the Internet Banking usage in Turkey made by Turkish Banking Association, there are 15 million users registered for retail banking and approximately 1 million users for corporate banking. This makes 16 million for overall registered users of which are 17% active for retail banking and 47% for corporate banking.

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Study Of Risk Management On Banks With Reference To ICICI Bank E-banking has affected customers' expectations as bank's clients prefer to deal with banks that offer enhanced, well-organized, professional and innovative services. Banks have to bring improved quality services to their customers to survive in this vulnerable environment (Uppal, 2008,p.64). There are many forces that have an effect on banks to develop their online banking services. One of them is to reduce the cost of their services. With the online channels, banks can eliminate costly transactions by reducing the number of branches. New physical locations have high starting up costs and online services and ATM banking reduces the need of new branches. The freedom of no time limitation and the benefit of low-cost services can be considered therefore the key reasons behind the development of online banking services (Robinson T, 2000,p. 104). Another important reason which triggers the development of online banking is globalization. Online banking enables customers to conduct banking activities across the borders. The need of electronic banking started with the improvements in electronic trade or in other words electronic commerce in which companies have conducted businesses through electronic networks. Electronic trade applications needed electronic money and electronic finance. E-money is a form of money to be used in internet shopping or trade; it's a prepaid payment mechanism. Electronic finance covers all electronic banking activities and other financial services and products including insurance and online brokering. E-banking, being an important section of the electronic finance provides banking products and services through electronic delivery channels and is composed of internet banking, telephone banking and other intelligent electronic delivery channels.

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Study Of Risk Management On Banks With Reference To ICICI Bank

INDUSTRY PROFILE
The Indian banking system emerged relatively unscathed from the global economic downturn of 2008?09. While credit growth slowed down, banks were able to control the level of non?performing assets (NPAs), thanks partly to the Reserve Bank of Indian allowing one?time restructuring of accounts. NPAs as a proportion of gross advances increased slightly from 2.3 per cent as on March 31, 2009 and 2.5 per cent as the end of March 31, 2010. The government has been supporting the growth of public sector banks by infusing capital as per requirement. The government is expected to continue to maintain its strong support for the banking system, while simultaneously imposing stringent prudential norms to ensure its orderly growth. Aggregate y?o?y bank credit growth was 22 per cent as of the first week of November 2010, primarily supported by large borrowings for 3G spectrum and broadband wireless access auctions. Despite hike in deposit rates by 50 bps (on an average) in the first half of 2010?11, the deposit growth rate has been 14?15 per cent till 5th November, 2010. This is primarily because of investors preferring to channelise their savings to other avenues on account of negative real interest rates on bank deposits. For inflows to revive, the deposit rates will need to be more attractive. Realising this, several banks increased their deposit rates by a further 25?75 bps in the first week of October 2010.

Banks also may offer investment and insurance products, which they were once prohibited from selling. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role accepting deposits and lending funds from these deposits. Banking is comprised of two parts: Monetary Authorities Central Bank, and Credit Intermediation and Related Activities. The former includes the bank establishments of the U.S. Federal Reserve System that manage the Nation’s money supply and international reserves, hold reserve deposits of other domestic banks and the central banks of other countries, and issue the currency we use. The establishments in the credit intermediation and related services industry provide banking services to the general public. They securely save the money of depositors, provide checking services, and lend the funds raised from depositors to consumers and businesses for mortgages, investment loans, and lines of credit.

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Study Of Risk Management On Banks With Reference To ICICI Bank

COMPANY PROFILE ICICI BANK
Promoted by erstwhile Industrial Credit & Investment Corporation of India Limited, ICICI Bank Ltd (ICICI) was incorporated in 1994. In 2002, the parent company was merged with the bank. ICICI is the Second largest bank in India and the largest private sector bank. It offers banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non?life insurance, venture capital and asset management.

No 2 in the country:
ICICI is the second largest bank in India. As on March 31, 2010, it had an asset size of Rs 3.63 trillion, constituting 6% of banking sector assets. The bank is present in 19 countries, including India, through its subsidiaries, branches, and representative offices. Its international operations accounted for 35% of its consolidated banking advances. The bank has developed wide technology?backed network that consists of branches, ATMs, phone and Internet banking and call centres. It has a wide spread network consisting of 2,507 branches and extension counters, and more than 5,700 ATMs.

Amalgamation with Bank of Rajasthan:
In August 2010, ICICI amalgamated with Bank of Rajasthan (BoR), a listed "old?generation" private sector bank. As on March 31, 2009, BoR had 463 branches and 111 ATMs, total assets of Rs 172.24 bn, deposits of Rs 151.87 bn and advances of Rs 77.81 bn. Around 40% of the BoR's branches are located in rural and semi?urban areas. The amalgamation enhanced ICICI's branch network, already the largest among Indian private sector banks, and strengthened its presence in northern and western India.

Presence across financial segments:
ICICI is a full?fledged commercial bank, with presence across project and corporate finance, life and general insurance, asset management, investment banking, retail broking and private equity. The bank has significant presence in these financial services
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Study Of Risk Management On Banks With Reference To ICICI Bank through its subsidiaries ICICI Prudential Life Insurance Co is one of the largest private sector players in the life insurance business. ICICI Lombard General Insurance Co is a leading private operator in the general insurance space, ICICI Prudential Asset Management Co is among the Top 3 mutual funds in India in terms of assets under management, ICICI Venture Capital Funds Management Co is a private equity and venture fund player in the country and ICICI Securities is in the retail broking and investment banking space. Key Roles: ? Foreign currency fluctuation, as international operations account for 35% of the bank's Business. ? Risk of non?ability of borrowers to meet financial obligations. ? Increasing level of gross NPAs (5.1% as on March 31, 2010). ? Credit risk on account of slowdown in economy.

Background:
ICICI is the second largest bank in India and the largest private sector bank. It provides a wide range of banking and financial services including commercial banking and treasury operations. The bank has subsidiaries in the UK, Russia and Canada, branches in the US, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai and representative offices in the UAE, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. It is the first Indian bank to be listed on the New York Stock Exchange. ICICI's international operations are focused on building a retail deposit franchise, meeting the foreign currency needs of Indian corporate clients, taking select trade finance exposures linked to imports to India and becoming the preferred bank for the non?resident Indian (NRI) community in key markets. Its NRI customer base as on March 31, 2010, stands at over 600,000. The bank's resource profile has been continuously improving, driven by increasing proportion of low?cost current and savings account (CASA) deposits. CASA deposits accounted for 38.8% of total deposits as on March 31, 2010. ICICI has a capital adequacy ratio (CAR) of 19.4% and Tier?I capital of 13.48% as on March 31, 2010, making it one of the most strongly capitalised banks in India.

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Study Of Risk Management On Banks With Reference To ICICI Bank

Competitive position:

ICICI Bank Ltd.
Mar-10

Net Interest Income (Rs Mn) PAT (Rs Mn)
Net Interest Margin (NIM)

94,245 48,434 1.9 19.4 2.0 43.40 470.10 21.9 2.0 9.7 1.0

HDFC Bank Ltd. Mar-10 84,353 30,362 4.2 17.4 0.3 66.30 468.40 29.1 4.1 16.7 1.5

IDBI Bank Ltd. Mar-10 23,860 10,205 1.2 11.3 1.0 14.10 115.30 8.2 1.0 12.8 0.5

YES Bank Ltd. Mar-10 7,880 4,631 2.7 20.6 0.1 13.60 91.00 18.7 2.8 19.7 1.6

(%) Capital adequacy ratio (%) Net NPA ratio (%) EPS (Rs) Book value P/e (x) P/BV (x) ROE (%) ROA (%)

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Study Of Risk Management On Banks With Reference To ICICI Bank

ICICI BANK
Annual Report: Rs Million Net Interest Income (NII) Non Interest Income Total Income Pre? provisioning profit (PPP) Provisions PBT TAX PAT Mar-08 83,280 259,581 342,861 79,221 30,178 42,249 20,438 29,306 Mar-09 97,635 279,024 376,658 102,867 45,117 49,684 22,078 33,794 Mar-10 94,245 294,461 388,706 119,002 45,587 65,786 19,732 48,434

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Study Of Risk Management On Banks With Reference To ICICI Bank Balance Sheet: Rs Million Equity Capital Reserves Shareholders Funds Deposits Borrowings Other Liabilities & Provisions Deferred Tax Liability (Asset) Sources of Funds Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Net Fixed Assets Other Assets Applications Of Funds Mar-08 11,127 442,659 453,786 2,769,832 1,073,238 558,561 -17,280 4,838,137 298,008 155,279 1,600,458 2,514,017 46,784 223,582 4,838,127 Mar-09 11,133 464,187 475,187 2,618,558 1,160,664 570,808 -25,184 4,800,033 178,754 171,859 1,481,070 2,661,305 44,975 262,070 4,800,033 Mar-10 11,149 512,964 524,113 2,415,723 1,156,983 795,098 -24,842 4,867,075 278,503 192,938 1,863,198 2,257,781 38,623 236,032 4,867,075

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Study Of Risk Management On Banks With Reference To ICICI Bank

ICICI Risk Management:
As a financial intermediary, ICICI Bank is exposed to risks that are particular to its lending and trading businesses and the environment within which it operates. ICICI Bank’s goal in risk management is to ensure that it understands, measures and monitors the various risks that arise and that the organization adheres strictly to the policies and procedures which are established to address these risks. As a financial intermediary, ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk. ICICI Bank has a central Risk, Compliance and Audit Group with a mandate to identify, assess, monitor and manage all of ICICI Bank’s principal risks in accordance with well-defined policies and procedures. The Head of the Risk, Compliance and Audit Group reports to the Executive Director responsible for the Corporate Center, which does not include any business groups, and is thus independent from ICICI Bank’s business units. The Risk, Compliance and Audit Group coordinates with representatives of the business units to implement ICICI Bank’s risk methodologies. Committees of the board of directors have been constituted to oversee the various risk management activities. The Audit Committee of ICICI Bank’s board of directors provides direction to and also monitors the quality of the internal audit function. The Risk Committee of ICICI Bank’s board of directors reviews risk management policies in relation to various risks including portfolio, liquidity, interest rate, off-balance sheet and operational risks, investment policies and strategy, and regulatory and compliance issues in relation thereto. The Credit Committee of ICICI Bank’s board of directors reviews developments in key industrial sectors and ICIC I Bank’s exposure to these sectors. The Asset Liability Management Committee of ICICI Bank’s board of directors is responsible for managing the balance sheet and reviewing the asset-liability position to manage ICICI Bank’s market risk exposure. The Agriculture & Small Enterprises Business Committee of ICICI Bank’s board of directors, which was constituted in June 2003 but has not held any meetings to date, will, in addition to reviewing ICICI Bank’s strategy for small enterprises and agri-business, also review the quality of the agricultural lending and small enterprises finance credit portfolio.

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Study Of Risk Management On Banks With Reference To ICICI Bank

Credit Risk:
In our lending operations, we are principally exposed to credit risk. Credit risk is the risk of loss that may occur from the failure of any party to abide by the terms and conditions of any financial contract with us, principally the failure to make required payments on loans due to us. We currently measure, monitor and manage credit risk for each borrower and also at the portfolio level. We have a structured and standardized credit approval process, which includes a well-established procedure of comprehensive credit appraisal.

Credit Risk Assessment Procedures For Corporate Loans:
In order to assess the credit risk associated with any financing proposal, ICICI Bank assesses a variety of risks relating to the borrower and the relevant industry. Borrower risk is evaluated by considering: ? The financial position of the borrower by analyzing the quality of its financial statements, its past financial performance, its financial flexibility in terms of ability to raise capital and its cash flow adequacy; ? The borrower's relative market position and operating efficiency; and ? The quality of management by analyzing their track record, payment record and financial conservatism. Industry Risk Is Evaluated By Considering: ? Certain industry characteristics, such as the importance of the industry to the economy, its growth outlook, cyclicality and government policies relating to the industry; ? The competitiveness of the industry; and ? Certain industry financials, including return on capital employed, operating margins and earnings stability. After conducting an analysis of a specific borrower's risk, the Credit Risk Management Group assigns a credit rating to the borrower. ICICI Bank has a scale of 10 ratings ranging from AAA to B and an additional default rating of D. Credit rating is a critical input for the credit approval process. ICICI Bank determines the desired credit risk spread over its cost of funds by considering the borrower's credit rating and the default pattern corresponding to the credit rating. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the appropriate industry specialists in the Credit Risk Management Group before being submitted for approval to the appropriate approval authority.
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Study Of Risk Management On Banks With Reference To ICICI Bank

The approval process for non-fund facilities is similar to that for fund based facilities. The credit rating for every borrower is reviewed at least annually and is typically reviewed on a more frequent basis for higher risk credits and large exposures. ICICI Bank also reviews the ratings of all borrowers in a particular industry upon the occurrence of any significant event impacting that industry. Working capital loans are generally approved for a period of 12 months. At the end of 12 months, ICICI Bank reviews the loan arrangement and the credit rating of the borrower and takes a decision on continuation of the arrangement and changes in the loan covenants as may be necessary.

Credit Approval Procedures For Corporate Loans:
ICICI Bank has a strong framework for the appraisal and execution of project finance transactions. ICICI Bank believes that this framework creates optimal risk identification, allocation and mitigation, and helps minimize residual risk. The project finance approval process begins with a detailed evaluation of technical, commercial, financial, marketing and management factors and the sponsor's financial strength and experience. Once this review is completed, an appraisal memorandum is prepared for credit approval purposes. As part of the appraisal process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and residual risks associated with the project. The appraisal memorandum analyzes the risk matrix and establishes the viability of the project. Typical key risk mitigating factors include the commitment of stand-by funds from the sponsors to meet any cost overruns and a conservative collateral position. After credit approval, a letter of intent is issued to the borrower, which outlines the principal financial terms of the proposed facility, sponsor obligations, conditions precedent to disbursement, undertakings from and covenants on the borrower. After completion of all formalities by the borrower, a loan agreement is entered into with the borrower.

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Study Of Risk Management On Banks With Reference To ICICI Bank In addition to the above, in the case of structured project finance in areas such as infrastructure and oil, gas and petrochemicals, as a part of the due diligence process, ICICI Bank appoints consultants, wherever considered necessary, to advise the lenders, including technical advisors, business analysts, legal counsel and insurance consultants. These consultants are typically internationally recognized and experienced in their respective fields. Risk mitigating factors in these financings generally also include creation of debt service reserves and channeling project revenues through a trust and retention account. ICICI Bank’s project finance credits are generally fully secured and have full recourse to the borrower. In most cases, ICICI Bank has a security interest and first lien on all the fixed assets and a second lien on all the current assets of the borrower. Security interests typically include property, plant and equipment as well as other tangible assets of the borrower, both present and future. Typically, it is ICICI Bank’s practice to lend between 60.0% and 80.0% of the appraised value of these types of collateral securities. ICICI Bank’s borrowers are required to maintain comprehensive insurance on their assets where ICICI Bank is recognized as payee in the event of loss. In some cases, ICICI Bank also takes additional collateral in the form of corporate or personal guarantees from one or more sponsors of the project and a pledge of the sponsors' equity holding in the project company. In certain industry segments, ICICI Bank also takes security interest in relevant project contracts such as concession agreements, offtake agreements and construction contracts as part of the security package. In limited cases, loans are also guaranteed by commercial banks and, in the past, have also been guaranteed by Indian state governments or the government of India. It is ICICI Bank’s current practice to normally disburse funds after the entire project funding is committed and all necessary contractual arrangements have been entered into. Funds are disbursed in tranches to pay for approved project costs as the project progresses. When ICICI Bank appoints technical and market consultants, they are required to monitor the project's progress and certify all disbursements. ICICI Bank also requires the borrower to submit periodic reports on project implementation, including orders for machinery and equipment as well as expenses incurred. Project completion is contingent upon satisfactory operation of the project for a certain minimum period and, in certain cases, the establishment of debt service reserves. ICICI Bank continues to monitor the credit exposure until its loans are fully repaid.

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Study Of Risk Management On Banks With Reference To ICICI Bank Quantitative And Qualitative Disclosures About Market Risk: Market risk is exposure to loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates and other asset prices. The prime source of market risk for us is the interest rate risk we are exposed to as a financial intermediary, which arises on account of our asset liability management activities. In addition to interest rate risk, we are exposed to other elements of market risk such as, liquidity or funding risk, price risk on trading portfolios, and exchange rate risk on foreign currency positions. Market Risk Management Procedures: The board of directors of ICICI Bank reviews and approves the policies for the management of market risk. The board has delegated the responsibility for market risk management on the banking book to the Asset Liability Management Committee and the trading book to the Committee of Directors, under the Risk Committee of the Board. The Asset Liability Management Committee is responsible for approving policies and managing interest rate risk on the banking book and liquidity risks reflected in the balance sheet. The Committee of Directors is responsible for setting policies and approving risk controls for the trading portfolio. The Asset Liability Management Committee is chaired by the Joint Managing Director and all four Executive Directors are 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 Committee reports to the Risk Committee. A majority of the members of the Risk Committee are independent directors and the committee is chaired by an independent director. The Balance Sheet Management Group, reporting to the Chief Financial Officer, is responsible for managing interest rate risk on the banking book, and liquidity, under the supervision of the Asset Liability Management Committee. An independent Market Risk Management Group, which is part of the Risk, Compliance and Audit Group, recommends changes in risk policies and controls, including for new trading products, and the processes and methodologies for quantifying and assessing market risks. Risk limits including position limits and stop loss limits for the trading book are monitored on a daily basis and reviewed periodically. In addition to risk limits, risk monitoring tools such as Value-at-Risk models are also used for measuring market risk in the trading portfolio.
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Study Of Risk Management On Banks With Reference To ICICI Bank

Interest Rate Risk:
Since our balance sheet consists predominantly of rupee assets and liabilities, movements in domestic interest rates constitute the main source of interest rate risk. Our portfolio of traded and other debt securities and our loan portfolio are negatively impacted by an increase in interest rates. Exposure to fluctuations in interest rates is measured primarily by way of gap analysis, providing a static view of the maturity and re-pricing characteristics of balance sheet positions. An interest rate gap report is prepared by classifying all assets and liabilities into various time period categories according to contracted maturities or anticipated re-pricing date. The difference in the amount of assets and liabilities maturing or being re-priced in any time period category, would then give an indication of the extent of exposure to the risk of potential changes in the margins on new or re-priced assets and liabilities. ICICI Bank prepared interest rate risk reports on a fortnightly basis in fiscal 2003. The same were reported to the Reserve Bank of India on a monthly basis. Interest rate risk is further monitored through interest rate risk limits approved by the Asset Liability Management Committee. Our core business is deposit taking and lending in both rupees and foreign currencies, as permitted by the Reserve Bank of India. These activities expose us to interest rate risk. As the rupee market is significantly different from the international currency markets, gap positions in these markets differ significantly. In the rupee market, most of our deposit taking is at fixed rates of interest for fixed periods, except that 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 are primarily floating rate loans where the rates are reset every quarter. We follow 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. We seek to eliminate interest rate risk on undisbursed commitments by fixing interest rates on rupee loans at the time of loan disbursement.

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Study Of Risk Management On Banks With Reference To ICICI Bank 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.

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Study Of Risk Management On Banks With Reference To ICICI Bank

SWOT ANALYSIS

Strengths of ICICI Bank:
? ICICI is the second largest bank in terms of total assets and market share ? Total assets of ICICI is Rs. 4062.34 Billion and recorded a maximum profit after tax of Rs. 51.51 billion and located in 19 countries ? One of the major strength of ICICI bank according to financial analysts is its strong and transparent balance sheet ? ICICI bank has first mover advantage in many of the banking and financial services. ICICI bank is the first bank in India to introduce complete mobile banking solutions and jewelry card ? The bank has PAN India presence of around 2,567 branches and 8003 ATM’s ? ICICI bank is the first bank in India to attach life style benefits to banking services for exclusive purchases and tie-ups with best brands in the industry such as Nakshatra, Asmi, D’damas etc ? ICICI bank has the longest working hours and additional services offering at ATM’s which attracts customers ? Marketing and advertising strategies of ICICI have good reach compared to other banks in India

Weaknesses of ICICI Bank:
? Customer support of ICICI section is not performing well in terms of resolving complaints ? There are lot of consumer complaints filed against ICICI ? The ICICI bank has the most stringent policies in terms of recovering the debts and loans, and credit payments. They employ third party agency to handle recovery management ? There are also complaints of customer assault and abuse while recovering and the credit payment reminders are sent even before the deadlines which annoys the customers ? The bank service charges are comparatively higher ? The employees of ICICI are bank in maximum stress because of the aggressive policies of the management to win ahead in the race. This may result in less productivity in future years.

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Study Of Risk Management On Banks With Reference To ICICI Bank

Opportunities of ICICI Bank:
? Banking sector is expected to grow at a rate of 17% in the next three years ? The concept of saving in banks and investing in financial products is increasing in rural areas as more than 62% percentage of India’s population is still in rural areas. ? As per 2010 data in TOI, the total number b-schools in India are more than 1500. This can ensure regular supply of trained human power in financial products and banking services ? Within next four years ICICI bank is planning to open 1500 new branches ? Small and non performing banks can be acquired by ICICI because of its financial strength ? ICICI bank is expected to have 20% credit growth in the coming years. ? ICICI bank has the minimum amount of nonperforming assets.

Threats of ICICI Bank:
? RBI allowed foreign banks to invest up to 74% in Indian banking ? Government sector banks are in urge of modernizing the capacities to ensure the customers switching to new age banks are minimized ? HDFC is the major competitor for ICICI, and other upcoming banks like AXIS, HSBC impose a major threat ? In rural areas the micro financing groups hold a major share ? Though customer acquisition is high on one side, the unsatisfied customers are increasing and make them to switch to other banks.

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Study Of Risk Management On Banks With Reference To ICICI Bank

OBJECTIVES OF CREDIT RISK MANAGEMENT

Reduction or Risks: The primary objective of credit risk management is to reduce the risks as much as possible with the help of credit analysis and reviews. The process of gathering information to determine the risks involved in the lending is called the credit analysis. For such type of analysis, the name, address, age, social security number, the driving license number and credit references. Good Customer Service: The next objective is the proper customer service whose responsibility lies on the sales and marketing departments. Though the sales department has nothing to do with the risk management analysis, there are indirect responsibilities to it. Internal Communication: The credit department must have internal communication as long as credit risk management is concerned. The requirements of the risk reduction are met and there is more efficiency in the in the performance. Apart from communication, there needs to be a co-ordination into the department. Risk Factors: Income – the people with high income are less prone to risks of default. It is also an important factor that is necessary for acquiring a loan. Rate of Interest – loans being set at fixed interest rates, the borrower will also have to pay the same interest amount. There are also flexible rates that can act as a risk factor in case the rates are high and it becomes difficult for debt recovery. Credit History and Economy – the borrower’s credit history plays an important role as is the state of economy. The credit history must therefore be kept clean by proper debt management methods.

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Study Of Risk Management On Banks With Reference To ICICI Bank

SCOPE OF THE SURVEY
The Banking Industry has been assessed the readiness in seven areas: ? ? ? ? ? ? ? Awareness of regulations Organizational structure Reporting ability Compliance with Basel II Capital allocation Basel II action plan Technology

Data Collection:
? Primary information: Personal interview/ Questionnaire ? Secondary information: Through internet, Manuals

Study Coverage And Sample:
? Study coverage consists of all bank employees within internal control, risk management, operations department, and credit department. 13 questionnaires were distributed over 10 banks in Mumbai, selected on random sampling technique. ? The survey assesses the readiness of the banking industry for implementing the Basel II regulatory framework and provides a view of the strategic issues and key trends related to the many aspects of compliance within this framework and credit risk management.

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Study Of Risk Management On Banks With Reference To ICICI Bank

DATA ANALYSIS
1. Do you have an assigned Credit risk, Market risk and Operational risk manager in your bank?

CREDT RISK YES NO 10

MARKET RISK 9 1

OPERATIONAL RISK 9 1

10 9.8 9.6 9.4 9.2 9 8.8 8.6 8.4 CREDT RISK MARKET RISK YES NO OPERATIONAL RISK 9 9 10 1 1

2. To whom does the Risk manager report? CREDT RISK 4 MARKET RISK 6 1 2 OPERATIONAL RISK 6 1 2

CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER ASSETS AND LIABLITY 2 MANAGER CREDIT RISK OFFICER 4 OTHER SPECIFY

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Study Of Risk Management On Banks With Reference To ICICI Bank

10 8 6 4 2 0 CREDT RISK MARKET RISK OPERATIONAL RISK 4 4 2 6 6 2 1 2 1

CHIEF EXECUTIVE OFFICER ASSETS AND LIABLITY MANAGER OTHER SPECIFY

CHIEF FINANCIAL OFFICER CREDIT RISK OFFICER

3. What is the assigned manager’s time dedicated to this activity? CREDT RISK 0-20% 20-50% >50% 2 2 6 MARKET RISK 4 1 5 OPERATIONAL RISK 2 2 6

10 8 6 1 4 2 0 CREDT RISK MARKET RISK 0-20% 20-50% OPERATIONAL RISK >50% 2 4 2 2 2 6 5 6

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Study Of Risk Management On Banks With Reference To ICICI Bank

4. How many people work in these departments? CREDT RISK 1–3 3–5 5- 10 > 10 2 6 1 1 MARKET RISK 4 4 1 1 OPERATIONAL RISK 1 5 1 3

10 8 6 4 2 0

1 1

1 1 4

3 1

6 5 4 2 CREDT RISK 1-3 MARKET RISK 3-5 5- 10 1 OPERATIONAL RISK > 10

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Study Of Risk Management On Banks With Reference To ICICI Bank 5. Do you have a Risk Committee? CREDT RISK YES NO 6 4 MARKET RISK 5 5 OPERATIONAL RISK 6 4

10 8 6 4 2 0 CREDT RISK MARKET RISK YES NO OPERATIONAL RISK 6 6 4 5 4

5

OBSERVATIONS ? Almost all of the participating banks have a risk management departemnt. ? Most of the industry’s risk managers’ report to the Chief Executive Officer, Asset and liability manager and Chief Risk Officer accounting for the balance in equal proportions. ? Slightly more attention is paid to credit and operational risk than to Market risk, as 40 % of the banks operating do not have risk committee. INTERPRETATION ? Despite the relatively small size of banks, they are generally well aware of the risk management function, and for this purpose, risk managers spend over half their time performing these functions.

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Study Of Risk Management On Banks With Reference To ICICI Bank 6. Are you producing reporting for CREDT RISK REGULATORY PURPOSE 3 MONITORING 7 DECISION MAKING 7 PURPOSE MARKET RISK 4 8 4 OPERATIONAL RISK 4 8 4

18 16 14 12 10 8 6 4 2 0

7

4

4

8 7 4 MARKET RISK MONITORING

8

3 CREDT RISK REGULATORY PURPOSE

4 OPERATIONAL RISK DECISION MAKING PURPOSE

7. How frequent is your internal reporting? CREDT RISK Daily Weekly Monthly Annually 1 8 1 1 8 1 MARKET RISK OPERATIONAL RISK 1 1 7 1

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Study Of Risk Management On Banks With Reference To ICICI Bank

10 8 6 4 2

1

1

1

8

8

7

1 0 CREDT RISK Daily

1 MARKET RISK Weekly Monthly

1 1 OPERATIONAL RISK Annually

8. Does external reporting drive your internal reporting? CREDT RISK VERY SIGNIFICANTLY SIGNIFICANTLY NOT AT ALL SIGNIFICANTLY 4 5 1 MARKET RISK 5 4 1 OPERATIONAL RISK 4 5 1

10 8

1

1 4

1

5 6 4 2 0 CREDT RISK VERY SIGNIFICANTLY 4

5

5

4

MARKET RISK SIGNIFICANTLY

OPERATIONAL RISK NOT AT ALL SIGNIFICANTLY

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Study Of Risk Management On Banks With Reference To ICICI Bank OBSERVATIONS . ? All the Banks produce internal report. ? Most of the Banks produce Internal Report monthly. ? Most of the banks said External reporting affect their decision making process. INTERPRETATION ? Reporting for all risk still needs to be developed.

9. Does your current IT infrastructure allow you to meet the Basel II requirements? CREDT RISK YES NO 10 MARKET RISK 8 2 OPERATIONAL RISK 9 1

10 8 6 4 2 0 CREDT RISK 10

2

1

8

9

MARKET RISK YES NO

OPERATIONAL RISK

10. Will you develop an IT solution for Risk management? CREDT RISK YES NO 7 3 MARKET RISK 7 3 OPERATIONAL RISK 7 3

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Study Of Risk Management On Banks With Reference To ICICI Bank

10 8 6 4 2 0

3

3

3

7

7

7

CREDT RISK

MARKET RISK YES NO

OPERATIONAL RISK

OBSERVATIONS ? ? More than half of the Banking industry will use their IT infrastructure in its current format. Difficulties that banks foresee are more on Data Gathering and Human Resource.

INTERPRETATION ? ? The banks should train their employees, in order to overcome the difficulties in implementing the Basel II norms. The banks should develop sufficient infrastructure to gather the required data.

11. Will you outsource activities with high capital consumption? CREDT RISK MARKET RISK OPERATIONAL RISK

YES NO

4 6

3 7

5 7

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Study Of Risk Management On Banks With Reference To ICICI Bank

12 10 7 8 6 4 2 0 CREDT RISK MARKET RISK YES NO OPERATIONAL RISK 4 5 3 6 7

12. Will you insure selected Risk? CREDT RISK YES NO 7 3 MARKET RISK 5 5 OPERATIONAL RISK 6 4

10 3 8 6 4 2 0 CREDT RISK MARKET RISK YES NO OPERATIONAL RISK 7 5 6 5 4

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Study Of Risk Management On Banks With Reference To ICICI Bank 13. Will you make use of Basel II requirements to implement an economic capital allocation throughout your business lines? CREDT RISK YES NO 9 MARKET RISK 8 1 OPERATIONAL RISK 8 1

9 8.8 8.6 8.4 8.2 8 7.8 7.6 7.4 CREDT RISK MARKET RISK YES NO OPERATIONAL RISK 8 8 9 1 1

OBSERVATIONS ? ? ? Most of the banks do not outsource activities with high capital consumption. Half of the banks insure selected Risk. Banks with less sophisticated approaches are likely to use regulatory capital as the basis for internal capital allocation.

INTERPRETATION ? Very few banks plan to outsource activities with high capital consumption, but the majority will insure their credit risks, while nearly half will plan to insure their market and operational risks. A strong majority of local banks will allocate economic capital according to business lines, while a stronger majority will use the Basel II requirements to implement that capital allocation process.

?

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Study Of Risk Management On Banks With Reference To ICICI Bank

METHODOLOGY
1. Do you have an assigned Credit risk, Market risk and Operational risk manager in your bank? CREDT RISK YES NO 2. To whom does the Risk manager report? CREDT RISK CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER ASSETS AND LIABLITY MANAGER CREDIT RISK OFFICER OTHER SPECIFY 3. What is the assigned manager’s time dedicated to this activity? CREDT RISK 0-20% 20-50% >50% 4. How many people work in these departments? CREDT RISK 1-3 3-5 5- 10 > 10 MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK

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Study Of Risk Management On Banks With Reference To ICICI Bank 5. Do you have a Risk Committee? CREDT RISK YES NO 6. Are you producing reporting for CREDT RISK Regulatory Purpose Monitoring Decision Making Purpose 7. How frequent is your internal reporting? CREDT RISK Daily Weekly Monthly Annually 8. Does external reporting drive your internal reporting? CREDT RISK VERY SIGNIFICANTLY SIGNIFICANTLY NOT AT ALL SIGNIFICANTLY 9. Does your current IT infrastructure allow you to meet the Basel II requirements? CREDT RISK YES NO MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK MARKET RISK OPERATIONAL RISK

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Study Of Risk Management On Banks With Reference To ICICI Bank 10. Will you develop an IT solution for Risk management? CREDT RISK YES NO MARKET RISK OPERATIONAL RISK

11. Will you outsource activities with high capital consumption? CREDT RISK MARKET RISK OPERATIONAL RISK

YES NO 12. Will you insure selected Risk? CREDT RISK YES NO MARKET RISK OPERATIONAL RISK

13. Will you make use of Basel II requirements to implement an economic capital allocation throughout your business lines? CREDT RISK YES NO MARKET RISK OPERATIONAL RISK

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Study Of Risk Management On Banks With Reference To ICICI Bank

FINDINGS
? Credit risk is generally well contained, but there are still problems associated with loan classification, loan loss provisioning, and the absence of consolidated accounts. ? Market risk and Operational risk are clear challenge, as they are relatively new to the areas that were not well developed under the original Basel Capital Accord. ? The new regulations will allow banks to introduce substantial improvements in their overall risk management capabilities, improving risk based performance measurement, capital allocation as portfolio management techniques. ? Future complexity is expected because banks diversify their operations. It is expected that banks will diversify their operations to generate additional income sources, particularly fee-based income i.e. noninterest income, to improve returns. ? Basel II leads to increase in Data collection and maintenance of privacy and security in various issues. ? The banks that would prefer to adopt the Standard Approach should try to adopt Advanced Approach.

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Study Of Risk Management On Banks With Reference To ICICI Bank

SUGGESTIONS
? The Banks should review Basel II components and develop a vision, strategy and action plan for what is expected to be a suitable framework based on how the banking system evolves over time. ? The Banks need regular engagement for sustained support. A qualified longterm advisor would be preferable. ? A workshop should be planned to produce a road map to Basel II Compliance. ? Training and additional assistance to make it easier for the banking system to comply with new guidelines on market and operational risk. ? Data Privacy and security needs more attention

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CONCLUSION
Implementation of Basel II has been described as a long journey rather than a destination by itself. Undoubtedly, it would require commitment of substantial capital and human resources on the part of both banks and the supervisors. RBI has decided to follow a consultative process while implementing Basel II norms and move in a gradual, sequential and co-ordinate manner. For this purpose, dialogue has already been initiated with the stakeholders. As envisaged by the Basel Committee, the accounting profession too, will make a positive contribution in this respect to make Indian banking system still stronger. To the extent the bank can take risk more consciously, anticipates adverse changes and hedges accordingly, it becomes a source of competitive advantage, as it can offer its products at a better price than its competitors. What can be measured can mitigation is more important than capital allocation against inadequate risk management system. Basel proposal provides proper starting point for forward-looking banks to start building process and systems attuned to risk management practice. Given the dataintensive nature of risk management process, Indian Banks have a long way to go before they comprehend and implement Basel II norms.

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Study Of Risk Management On Banks With Reference To ICICI Bank

BIBLIOGRAPHY

WEB SITES ? ? ? ? ? ?

www.bis.org www.rbi.org www.kpmg.com www.icicibank.com www.google.com www.yahoo.com

BOOKS ? Hand Book on Risk management & Basel II norms ? Hand book on Managing Banking Risk

ARTICALS ? Risk Management in Banks. -- R S Raghavan Chartered Accountant. ? White Paper The Ripple Effect: How Basel II will impact institutions of all sizes ? Risk Management Guidelines for Commercial Banks & DFIs. ? BASEL II – Are Indian Banks Going to Gain? -- Santosh N. Gambhire Jamanalal, Bajaj Institute of Management Studies Mumbai

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