a study of management of assets and liabilities in relation to performance and profitability in...

8/6/2019 A Study of Management of Assets and Liabilities in Relation to Performance and Profitability in ICICI Bank

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Project Report

A study ofManagement of Assets and Liabilities

in relation toperformance and profitability

in ICICI bank

A project report submitted toDepartment of Commerce

in partial fulfillment ofthe requirements the degree

of Master of Finance and Control(2007-2009)

Supervised By: Submitted By:

Dr. Navkiran Jeet Tanvi Rai

DEPARTMENT OF COMMERCE

PUNJABI UNIVERSITY,

PATIALA

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DECLARATION

I hereby certify that the work presented in this project report is

exclusively my own, it does not contain any work for which adegree has been awarded by any other university or institution.

(Tanvi Rai)

Countersigned By:

Dr.Navkiran Jeet

Acknowledgement

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In writing this term paper, I am in debited to Dr. Navkiran Jeet for

important suggestions, advice and guidance provided to me from time

to time in the preparation of this report.

I am thankful to acknowledge the assistance rendered to me by the

officials and staff of ICICI bank, for the information I needed to write

this report.

All others too who have helped me in any way specially my brother, to

make possible the completion and publishing of this report deserve in

no small words a very special note of appreciation

(TANVI

RAI)

Contents:

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Chapter 1: Introduction

Introduction of Indian Banking System

Structure of Banking Sector

Concept of ALMo ALM Objectives

Risk Management and ALMo Credit Risko Market Risko Operational Risk ALM System in Banks RBI Guidelines 1999

Chapter 2: Review of Literature and ResearchMethodology

Review of Literature Research Methodologyo Need of Studyo Objectives of Studyo Methodologyo Scope and Need

o Limitationso Chapter scheme

Chapter 3: Overview & Performance of ICICI Bank

Brief Profile of ICICI Banko Subsidiaries of ICICI Bank

Credit Deposit Ratio

Loans and Advances Deposit Mobilization

Investment

Priority Sector Advances Net Interest Margin

Non-Interest Income Conclusions

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Chapter 4: Assets Management of ICICI Bank

Areas of Asset Managemento Reserve Position Managemento Investment Managemento Liquidity Management

Measuring and Managing Liquidity Risk

Conclusions

Chapter 5: Liabilities Management of ICICI Bank

Capital Reserves and Surplus Depositso Fixed Deposit/ Term Deposito Saving Bank Deposito Demand Deposito Borrowingso Other Liabilities and Provisions

Conclusions

Chapter 6: Profitability Analysis of ICICI Bank

Analysis of Ratioso Incomeo Expenditureo Spread Ratioso Burden Ratioso Net Profit Ratios

Conclusions

Chapter 7: Loan Portfolio Management of ICICI Bank

Loan Portfolio Managemento Loan Portfolio Objectives

Types of Loans

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Constituent of Loan Portfolio of Banks

Conclusions

Chapter 8: Findings and Suggestions

Findings

Suggestions

Bibliography

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Chapter 1

Introduction

Introduction:

Indian banking system, over the years has gone through various

phases after establishment of Reserve Bank of India in 1935

during the British rule, to function as Central Bank of the country.

Earlier to creation of RBI, the central bank functions were being

looked after by the Imperial Bank of India. With the 5-year plan

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having acquired an important place after the independence, the

Govt. felt that the private banks may not extend the kind of

cooperation in providing credit support, the economy may need.

In 1954 the All India Rural Credit Survey Committee submitted its

report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with

an effective machinery of branches spread all over the country.

The recommendations of this committee led to establishment of

first Public Sector Bank in the name of State Bank of India on July

01, 1955 by acquiring the substantial part of share capital by RBI,

of the then Imperial Bank of India. Similarly during 1956-59, as a

result of re-organization of princely States, the associate banks

came into fold of public sector banking.

Another evaluation of the banking in India was undertaken during

1966 as the private banks were still not extending the required

support in the form of credit disbursal, more particularly to the

unorganized sector. Each leading industrial house in the country

at that time was closely associated with the promotion and

control of one or more banking companies. The bulk of the

deposits collected, were being deployed in organized sectors of

industry and trade, while the farmers, small entrepreneurs,

transporters, professionals and self-employed had to depend onmoney lenders who used to exploit them by charging higher

interest rates. In February 1966, a Scheme of Social Control was

set-up whose main function was to periodically assess the

demand for bank credit from various sectors of the economy to

determine the priorities for grant of loans and advances so as to

ensure optimum and efficient utilization of resources. The

scheme however, did not provide any remedy. Though a no. of

branches were opened in rural area but the lending activities of

the private banks were not oriented towards meeting the creditrequirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies

(Acquisition and Transfer of Undertakings) Ordinance 1969 to

acquire 14 bigger commercial bank with paid up capital of

Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with

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4134 branches accounting for 80% of advances. Subsequently in

1980, 6 more banks were nationalized which brought 91% of the

deposits and 84% of the advances in Public Sector Banking.

During December 1969, RBI introduced the Lead Bank Scheme on

the recommendations of FK Narasimham Committee.

Meanwhile, during 1962 Deposit Insurance Corporation was

established to provide insurance cover to the depositors.

In the post-nationalization period, there was substantial increase

in the no. of branches opened in rural/semi-urban centers

bringing down the population per bank branch to 12000 appx.

During 1976, RRBs were established (on the recommendations of

M. Narasimham Committee report) under the sponsorship and

support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. The

Service Area Approach was introduced during 1989.

While the 1970s and 1980s saw the high growth rate of branch

banking net-work, the consolidation phase started in late 80s and

more particularly during early 90s, with the submission of report

by the Narasimham Committee on Reforms in Financial Services

Sector during 1991.

The banking sector in India consists of vast and diversified

network operating at several tiers, linked operationally to the

international, multilateral financial organization, national

government machinery and other sectors of the economy at

various other points. Over the last three decades, however the

role of banking in the process of financial intermediation has

undergone complete metamorphosis due to changes in the global

financial system. It is now clear that a thriving and vibrant

banking system requires a well developed financial structure withmultiple intermediaries operating in the market, with different

risk profiles. The present banking system in India was evolved to

meet the financial needs of trade and industry and also to satisfy

the credit needs of the institutions of the country. The constituent

of the present banking system in India are of varying origin and

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sizes. At the apex is the Reserve Bank of India, the central bank

of the country.

1.1 Structure of Banking Sector:

Banking Structure

Scheduled Commercial Banks Non- scheduledCommercial Banks

(168) (4)

Public Sector Banks Private Sector Banks Foreign BanksRegional Rural Banks

(28) (22) (30)(88)

New Private Sector Banks Old Private

Sector Banks (7)

(15)

SBI Group Other Public Sector BanksNationalized Banks

(8) (1)(19)

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SBI Subsidiary Banks

(1) (7)

Scheduled Banks in India constitute those banks which have beenincluded in the Second Schedule of Reserve Bank of India(RBI) Act,1934. RBI in turn includes only those banks in this schedule whichsatisfy the criteria laid down vide section 42 (6) (a) of the Act.

The banks included in this schedule list should fulfill two conditions.1. The paid capital and collected funds of bank should not be less thanRs. 5 lac.2. Any activity of the bank will not adversely affect the interests ofdepositors.

Non-Scheduled Commercial Banks: The banks which are not under thepurview of second schedule of RBI Act.

A private sector bank is made up of all businesses and firms owned byordinary members of the general public whereas, public sector bank isowned and controlled by a government while the banks owned byforeign entities are called as foreign banks. Regional Rural Banks arespecial in there type. The banks provide credit to the weaker sectionsof the rural areas, particularly the small and marginal farmers,agricultural labourers, artisans and small entrepreneurs.

1.2 Concept of ALM

ALM is the process involving decision making about the

composition of assets and liabilities including off balance sheet

items of the bank / FI and conducting the risk assessment. In

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banking, asset liability management is the practice of

managing risks that arise due to mismatches between the assets

and liabilities (debts and assets) of the bank.

Banks face several risks such as the liquidity risk, interest rate

risk, credit risk and operational risk. Asset Liability Management

is a strategic management tool to manage interest rate risk and

liquidity risk faced by banks, other financial services companies

and corporations.

Banks manage the risks of Asset Liability mismatch by matching

the assets and liabilities according to the maturity pattern or the

matching the duration, by hedging and by securitization.

ALM is concerned with strategic management of Balance

Sheet by giving due weightage to market risks viz. Liquidity

Risk, Interest Rate Risk & Currency Risk.

ALM function involves planning, directing, controlling the

flow, level, mix, cost and yield of funds of the bank

ALM builds up Assets and Liabilities of the bank based on

the concept of Net Interest Income (NII) or Net Interest

Margin (NIM).

ALM is concerned with strategic Balance Sheet

management involving all market risks

It involves in managing both sides of balance sheet to

minimize market risk

ALM Objectives:

Liquidity Risk Management.

Interest Rate Risk Management. Currency Risks Management.

Profit Planning and Growth Projection.

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Liquidity Risk:

Liquidity risk refers to the risk that the institution might not be

able to generate sufficient cash flow to meet its financial

obligations. The factors affecting liquidity risk are:

Over extension of credit High level of NPAs

Poor asset quality Mismanagement

Non recognition of embedded option risk Reliance on a few wholesale depositors

Large undrawn loan commitments Lack of appropriate liquidity policy & contingent plan

Interest Rate Risk Management

Interest Rate risk is the exposure of a banks financialconditions to adverse movements of interest rates. Though this is normal part of banking business,excessive interest rate risk can pose a significant threat to abanks earnings and capital base.

Changes in interest rates also affect the underlyingvalue of the banks assets, liabilities and off-balance-sheetitem.

Interest rate risk refers to volatility in Net InterestIncome (NII) or variations in Net Interest Margin(NIM).

Therefore, an effective risk management process thatmaintains interest rate risk within prudent levels is essentialto safety and soundness of the bank.

Currency Risk Management

It is the risk that the value of an asset/ liability/ financialinstrument will change due to changes in FX rates. It has a direct

relation with the volatility of currencies, if the currencies are

more volatile then the currency risk is higher. Currency risk is

evaluated using probability distributions. Capital investment in an

external market depends largely upon the expected rate of return

on the investment as measured relative to the investment

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currency. The expected return is derived almost entirely from

volume projections, expenditure estimates, and the resulting

cash flow in the operations currency. These projections are then

translated into the investment currency for comparison with

other capital investment opportunities on an equivalent basis. Asa result, investment decisions rely almost entirely on translations

exposure when considering currency risk.

Profit Planning and Growth Projection

Profit planning is must for bank. It largely depends upon the

growth of the sector and the handling of deposits and

investments by the bank. It is an organized method of collecting

and analyzing banks operating information for the purpose ofproviding the bank manager with the information he needs to

effectively manage the bank. It is a simple procedure by which

information collected is used to design strategies for the bank. It

is based on the development of standards for the key costs and

revenues in the business and the regular comparison of actual

costs and revenues to the standards. Simple projections will

provide a picture of operating results daily. Bad news will be

known almost immediately, while there is time to correct the

cause.

1.3 RISK MANAGEMENT AND ALM

Risk is the potentiality that both the expected &

unexpected events may have an adverse impact the banks

capital & earnings. It is essential to have an understanding of the

risk faced by the bank so as to effectively manage & control

them.

As per RBI guidelines issued in 1999, there are 3 major types of

risks encountered by the banks:

1. Credit Risk

2. Market Risk

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3. Operational Risk

(1) Credit Risk:

It is the risk related to the possibility of the default in the

repayment obligation by the borrowers of the funds. It is most

simply defined as the potential of a bank borrower or counter

party to fail to meet its obligation in accordance with agreed

terms. For most banks, loans are the largest and most obvious

source of credit risk.

Counter Party Risk: It is related to non performance of the

trading partners due to counterpartys refusal and or

inability to perform.

Country Risk: It is also a type of credit risk where non

performance by a borrower or counterparty arises due to

constrained or restrictions imposed by a country.

(2) Market Risk:

It is defined as the possibility of loss to a bank caused by thechanges in the market variables i.e. movement in equity and

interest rate markets, currency exchange rates and commodity

prices.

(3) Operational Risk:

It is the risk of loss resulting from inadequate or failed internal

processes, people and systems or from external events. It mayloosely be comprehended as any risk which is not characterized

as market or credit risk.

The Narasimham Committee reports on the banking sector

reforms highlighted the weakness in the Indian Banking system

and suggested reforms based on the Basel Norms.

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ALM System in Banks RBI Guidelines 1999

RBI has issued guidelines for ALM system in banks. RBI gave

some instruction with reference to the implementation of the

guidelines. Banks should give adequate attention to putting in

place an effective ALM System. Banks should set up an internal

Asset-Liability Committee (ALCO), headed by the CEO/CMD or the

ED. The Management Committee or any specific Committee of

the Board should oversee the implementation of the system and

review its functioning periodically. Also in order to enable the

banks to monitor their liquidity on a dynamic basis over a time

horizon spanning from 1-90 days, an indicative format is given.

The statement of short-term Dynamic Liquidity should be

prepared as on each reporting Friday and put up to the ALCO/

Top Management within 2/3 days from the close of the reporting

Friday. RBI guidelines for ALM cover the banks operations in

domestic currency. In regard to foreign currency risk, banks

should follow the instructions contained in Circular AD No. 52

dated December 27, 1997 issued by the Exchange Control

Department. Keeping in view the level of computerization and the

current MIS in banks, adoption of a uniform ALM System for all

banks may not be feasible. The final guidelines have been

formulated to serve as a benchmark for those banks which lack aformal ALM System. Banks which have already adopted more

sophisticated systems may continue their existing systems but

they should ensure to fine-tune their current information and

reporting system so as to be in line with the ALM System

suggested in the Guidelines. Other banks should examine their

existing MIS and arrange to have an information system to meet

the prescriptions of the new ALM System. To begin with, banks

should ensure coverage of at least 60% of their liabilities and

assets. As for the remaining 40% of their assets and liabilities,banks may include the position based on their estimates. It is

necessary that banks set targets in the interim, for covering 100

per cent of their business by April 1, 2000. The MIS would need to

ensure that such minimum information/data consistent in quality

and coverage is captured and once the ALM System stabilizes

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and banks gain experience, they must be in a position to switch

over to more sophisticated techniques like Duration Gap Analysis,

Simulation and Value at Risk for interest rate risk management.

They are:

ALM Information Systemso Management Information Systemso Information availability, accuracy, adequacy and

expediency

ALM Organizationo Structure and responsibilitieso Level of top management involvement

ALM Processo Risk parameterso Risk identificationo Risk measuremento Risk managemento Risk policies and tolerance levels

(i) ALM Information Systems:

ALM has to be supported by a management philosophy whichclearly specifies the risk policies and tolerance limits. Thisframework needs to be built on sound methodology with

necessary information system as back up. Thus, information isthe key to the ALM process. It is, however, recognized thatvaried business profiles of banks in the public and privatesector as well as those of foreign banks do not make theadoption of a uniform ALM System for all banks feasible. Thereare various methods prevalent world-wide for measuring risks.

These range from the simple Gap Statement to extremelysophisticate and data intensive Risk Adjusted ProfitabilityMeasurement methods. However, the central element for theentire ALM exercise is the availability of adequate and

accurate information with expedience and the existingsystems in many Indian banks do not generate information inthe manner required for ALM. Collecting accurate data in atimely manner will be the biggest challenge before the banks,particularly those having wide network of branches but lackingfull scale computerization. However, the introduction of baseinformation system for risk measurement and monitoring has

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to be addressed urgently. As banks are aware, internationally,regulators have prescribed or are in the process of prescribingcapital adequacy for market risks. A pre-requisite for this isthat banks must have in place an efficient information system.

Considering the large network of branches and the lack of (anadequate) support system to collect information required forALM which analyses information on the basis of residualmaturity and behavioral pattern, it will take time for banks inthe present state to get the requisite information. The problemof ALM needs to be addressed by following an ABC approachi.e. analyzing the behavior of asset and liability products in thesample branches accounting for significant business and thenmaking rational assumptions about the way in which assetsand liabilities would behave in other branches. In respect of

foreign exchange, investment portfolio and money marketoperations, in view of the centralized nature of the functions, itwould be much easier to collect reliable information. The dataand assumptions can then be refined over time as the bankmanagement gain experience of conducting business within anALM framework. The spread of computerization will also helpbanks in accessing data.

(ii)ALM Organization:

a) Successful implementation of the risk management processwould require strong commitment on the part of the seniormanagement in the bank, to integrate basic operations andstrategic decision making with risk management. The Boardshould have overall responsibility for management of risks andshould decide the risk management policy of the bank and setlimits for liquidity, interest rate, foreign exchange and equityprice risks.

b) The Asset - Liability Committee (ALCO) consisting of the

bank's senior management including CEO should beresponsible for ensuring adherence to the limits set by theBoard as well as for deciding the business strategy of the bank(on the assets and liabilities sides) in line with the bank'sbudget and decided risk management objectives.

c) The ALM Support Groups consisting of operating staff shouldbe responsible for analyzing, monitoring and reporting the risk

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profiles to the ALCO. The staff should also prepare forecasts(simulations) showing the effects of various possible changesin market conditions related to the balance sheet andrecommend the action needed to adhere to bank's internallimits.

The ALCO is a decision making unit responsible for balancesheet planning from risk -return perspective including thestrategic management of interest rate and liquidity risks. Eachbank will have to decide on the role of its ALCO, itsresponsibility as also the decisions to be taken by it. Thebusiness and risk management strategy of the bank shouldensure that the bank operates within the limits / parametersset by the Board. The business issues that an ALCO wouldconsider, inter alia, will include product pricing for deposits

and advances, desired maturity profile and mix of theincremental assets and liabilities, etc. In addition to monitoringthe risk levels of the bank, the ALCO should review the resultsof and progress in implementation of the decisions made inthe previous meetings. The ALCO would also articulate thecurrent interest rate view of the bank and base its decisionsfor future business strategy on this view. In respect of thefunding policy, for instance, its responsibility would be todecide on source and mix of liabilities or sale of assets.

Towards this end, it will have to develop a view on future

direction of interest rate movements and decide on fundingmixes between fixed vs floating rate funds, wholesale vsretaildeposits, money market vs capital market funding ,domestic vs foreign currency funding, etc. Individual banks willhave to decide the frequency for holding their ALCO meetings.

(iii) ALM Process:

The scope of ALM function can be described as follows:

Liquidity risk management Management of market risks Trading risk management Funding and capital planning Profit planning and growth projection

The guidelines given in this note mainly address Liquidity andInterest Rate risks. Measuring and managing liquidity needs

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are vital for effective operation of commercial banks. Byassuring a bank's ability to meet its liabilities as they becomedue, liquidity management can reduce the probability of anadverse situation developing. The importance of liquiditytranscends individual institutions, as liquidity shortfall in one

institution can have repercussions on the entire system. Banksmanagement should measure not only the liquidity positions ofbanks on an ongoing basis but also examine how liquidityrequirements are likely to evolve under different assumptions.Experience shows that assets commonly considered as liquidlike Government securities and other money marketinstruments could also become illiquid when the market andplayers are unidirectional. Therefore liquidity has to be trackedthrough maturity or cash flow mismatches. For measuring andmanaging net funding requirements, the use of a maturity

ladder and calculation of cumulative surplus or deficit of fundsat selected maturity dates is adopted as a standard tool.

The phased deregulation of interest rates and the operationalflexibility given to banks in pricing most of the assets andliabilities imply the need for the banking system to hedge theInterest Rate Risk. Interest rate risk is the risk where changesin market interest rates might adversely affect a bank'sfinancial condition. The changes in interest rates affect banksin a larger way. The immediate impact of changes in interest

rates is on bank's earnings (i.e. reported profits) by changingits Net Interest Income (NII). A long-term impact of changinginterest rates is on bank's Market Value of Equity (MVE) or NetWorth as the economic value of bank's assets, liabilities andoff-balance sheet positions get affected due to variation inmarket interest rates. The interest rate risk when viewed fromthese two perspectives is known as 'earnings perspective' and'economic value' perspective, respectively. The risk from theearnings perspective can be measured as changes in the NetInterest Income (NII) or Net Interest Margin (NIM). There are

many analytical techniques for measurement andmanagement of Interest Rate Risk. In the context of poor MIS,slow pace of computerization in banks and the absence of totalderegulation, the traditional Gap analysis is considered as asuitable method to measure the Interest Rate Risk in the firstplace. It is the intention of RBI to move over to the moderntechniques of Interest Rate Risk measurement like Duration

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Gap Analysis, Simulation and Value at Risk over time whenbanks acquire sufficient expertise and sophistication inacquiring and handling MIS. The Gap Report should begenerated by grouping rate sensitive liabilities, assets and off-balance sheet positions into time buckets according to residual

maturity or next repricing period, whichever is earlier. Thedifficult task in Gap analysis is determining rate sensitivity. Allinvestments, advances, deposits, borrowings, purchasedfunds, etc. that mature/reprice within a specified timeframeare interest rate sensitive. Similarly, any principal repaymentof loan is also rate sensitive if the bank expects to receive itwithin the time horizon. This includes final principal paymentand interim installments. Certain assets and liabilitiesreceive/pay rates that vary with a reference rate. These assetsand liabilities are repriced at pre-determined intervals and are

rate sensitive at the time of repricing. While the interest rateson term deposits are fixed during their currency, the advancesportfolio of the banking system is basically floating. Theinterest rates on advances could be repriced any number ofoccasions, corresponding to the changes in PLR.

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Chapter 2

Review of Literature and

Research Methodology

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Review of Literature and Research Methodology:

One of the major imperatives of the financial sector reforms has

been to strengthen the banking sector by improving the financial

health of banks through better capital adequacy and asset

quality. The traditional phase of banks as near financial

intermediaries has since altered and Risk management has

emerged as the defining attribute.

With the initiation of the reforms banks were required to evolve

strategies rather than ad-hoc fire fighting solutions. These

strategies are executed in the form of ALM practices. ALM

involves quantification of risks and conscious decision making

with regard to asset-liabilities structure in order to maximize

interest earning within the framework of perceived risk. ALM is

the only solution for the banks to survive in this rapid changing

environment where the composition, duration and risk profile of a

banks assets and liabilities have an important impact on their

growth and profitability.

Many studies have been concluded in India and abroad to

investigate the major structural changes in the field of banking

and the relevance of ALM for commercial banks in marinating

their interest spreads and profitability. In this context the present

chapter is an attempt to review the studies already done anddraw some important conclusions that can serve as a guide mark

for the study.

2.1 Review of Literature

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Kumar, Ravi T. (2000) in the study, Asset Liability Management,

has discussed the ALM in different models. According to him, ALM

is basically a hedging response to the risk in financial

intermediation with ALM in place, managers can evaluate the

impact of alternative decisions on the future risk profiles.Managing the spread income and controlling the risk associated

with generating the spread are the crucial part of the ALM

process for any Bank. He concluded that intense competition for

business on the Asset and Liability side coupled with increasing

volatility in both domestic interest rates and foreign exchange

rates is putting pressure on the management of banks to

maintain spreads, profitability and long term viability. He further

concluded that to remain competitive Indian financial institutions

can not afford to remain aloof and they should evolve necessarysystem for the adoption of ALM.

Joshi, C. Vasant and Joshi, C. Vinay (2002) in the study,

Managing Indian Banks: The Challenges Ahead, emphasized on

the importance of ALM in the planning process. According to

them ALM focused on the net interest income of the institution.

The principal purpose of ALM has been to control the size of NII.

To achieve transparency a bank must provide accurate, relevant

and sufficient disclosure of qualitative and quantitativeinformation activities and risk profiles. In the light of the

recommendations of the Basel Committee, the balance sheet

must truly highlight the state of the banks health. They

concluded that bank should take some amount of risk on their

asset liability management, but it should never be on interest

rate predictions, as in a globally competitive environment. The

Indian banks need to build on their strengths and reach the

desired standards as soon as possible.

Rajwade, A. V. (2002) in the study, Issues in Asset Liability

Management III: More on Regulatory Framework, emphasized

on different issues involved in ALM by bank and focused mainly

on points arising from the regulatory framework. The study

showed that deregulation of interest rates, itself was a recent

idea and that RBI had an inflation as well as exchange rate target

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or objective. Again RBIs mechanism for implementing monitoring

policy was undergoing changes and refinement. The study found

that of the reserved money, around 72% came from holding of

foreign currency reserves and around 28% from RBI holdings of

government securities. The study concluded that fro predictingchanges in interest rates, one will have to take a view of the

exchange market demand supply in future and this was a very

difficult exercise as it depended on many factors such as

sentiment, other political or economic scenario, which are beyond

anybodys control.

Sehgal, M. and Kher, R. (2002) in the study, Asset Liability

Management in the Indian Banks, stressed on the objective and

aspects of ALM in bank, and to some extent, on the broader

aspects of risk management. They viewed that a sound ALM

system for the bank should encompass review of interest rate

outlook, fixation of interest, product pricing of both assets and

liabilities, review of credit portfolio and credit risk management of

foreign exchange operations and management of liquidity risks.

In the present context, ALM exercised should comprise of

prudential management of funds with respect to size and

duration minimizing undesirable maturity mismatch to avoid

liquidity problem and reducing the gap between risks sensitiveassets and rate sensitive liabilities with the given risk taken

capacity.

Qamar, F. (2003) in the study, Profitability and Resource use

Efficiency in Scheduled Commercial Banks in India: A

Comparative Analysis of Foreign New Private Sector, Old Private

Sector and Public Sector Banks, presented that banking sector

reforms on one hand, strive to increase efficiency and profitability

of banking institutions and on the other hand brought the existingbanking institutions face to face with global competition. The

objective of the study was to examine whether foreign banks,

new private sector banks, old private sector banks and public

sector banks differ significantly in terms of their endowment and

risk factors, revenue diversification initiatives, profitability and

resource use efficiency. The study concluded that public sector

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banks were better endowed in their assets based share capital

and share holders equity than most other types of banking

institutions in the country.

Gurumoorthy, T. R. (2004) in the study, Analysis of Income and

Expenditure ion Banks, attempted to analyze the income,

expenditure and operating profit of public sector banks, foreign

banks, old private sector banks and new private sector banks.

The new private sector banks have been in the stage of branch

expansion and have spent for full fledged internet banking. Thus,

the percentage rise in expenditure of the new private sector

banks has been greater than that of the other banks. As far as

operating profits are concerned the new private sector banks

stand first, followed by old private sector banks, public sector

banks and foreign banks. In this competitive environment the

efficient asset liability management, project appraisal and

recovery mechanism will help to earn the interest income

substantially.

Thimmaiah, G. (2004) in the study, Asset Liability Management

in Post Indian Banking Sector Reforms, focused on Asset Liability

Management in the bank and to some extent on broader aspects

of risk management. The objective of the study was to review the

interest rate, credit portfolio, investment portfolio, credit risk

management, risk management and management of liquidity

risk. In the study four principal approaches were used to quantify

the risk i.e. Gap Method, Duration Method, Simulation Method

and Value at Risk Method. The study concluded that there was a

need of ALM in India because to maximize income with

acceptable risk there was need to emphasize on interest

margin/spread, liquidity and capital which were having desired

maneurability.Prasad, L and Pande, M. C. (2005) in the study, Asset-Liability

Management: An emerging trend in Banking Sector, presented

the role and importance of asset-liability management in

commercial banks. The study selected the Nainital Bank Limited

as sample which has rendered its services in four states

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Uttaranchal, Uttar Pradesh, Delhi and Haryana. The study was

based on secondary data and the period of the study was four

years. The study showed that process of Globalization has arrived

in India, without proper advance planning. The study found the

slow pace of computerization was barring the progress of ALM inbank. The study concluded that ALM has been proved of great

use in curtailing NPAs, increasing profitability and facing

competition with other banks. This study suggested that the

commercial banks should improve their Management Information

System as per the needs of ALM.

Raghavan, R. S. (2005) in the study, Risk Management An

Overview, discussed the implication of Basel-II Accord on the

capital structure of banks. The purpose of Basel-II is to introduce

a more risk sensitive capital framework with incentives for good

risk management practices. Under Basel-II approach, capital

requirements will increase for those banks that hold high risk

assets/ low quality assets and those with low risk assets (high

quality assets), a balanced portfolio as well as effective risk

management control systems may need less capital

requirements. He concluded that the financial system has to cope

constantly with changes in the broader environment in which it

operates and face new challenges that those developmentsimpose on it.

Sharma, K. and Kulkarni, P. R. (2006) in the study, Asset Liability

Management Approach in Indian Banks: A Review and

Suggestions, emphasized that Assets Liability Management

should ensure a proper balance between funds mobilization and

their deployment with respect to their maturity profiles, cost,

yields and risk exposures. For this Indian Banks need to reorient

their credit deployment strategies. They suggested that Bankshould diversify the portfolio suitably between the small and

large borrowers as this will help in reducing risks. Bank should

withdraw their exposure to sunset industries as their loans may

turn into NPAs. Bank should think in terms of loan exposures to

different regions in the country. It is highly essential to look at

credit deployment in terms of managing credit portfolio and its

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diversification, both geographically and industry-wise which helps

them to reduce the portfolio risk of credit.

Bhasin, A. (2007) in the study, Understanding Risks in Banking:

A Note, endeavored to discuss the important concepts in tasks

management as applicable to banks against the backdrop of

Basel-II. The article aims to develop a basic understanding on

major risks surrounding a bank institution as also the more

popular means of managing them. She concluded that risk

management calls for consolidating on the techniques and

structures already built rather than going haphazardly for new

techniques as effort have been made already to create an

environment for all market participants in terms of regulation,

infrastructure and instruments.

R. P. Sinha (2007) in the study entitled Asset Quality Based

Ranking of Indian Commercial Bank a Non-Parametric

Approach - tried to make an asset quality based ranking of

selected (28) Indian commercial Banks. The period of the study

was five years from 2000-01 to 2005-06. The study used data

Envelopment Analysis a Non-Parametric Tool. The study

compared the observed Banks in terms of total factor productivity

growth for the study period. The study found that the exercise

indicated improvement in technical efficiency scores in 2004-05

related to the previous four years. The observed private sector

banks exhibited higher mean technical efficiency relative to the

observed public sector banks. The study concluded that both

types of banks were focusing their attention on fee-based

activities as opposed to fund based activities. This was probably

the reason for negative total factor productivity growth exhibited

by them during the observed years.

Batra, N. K. and Kapoor, R. (2008) in the study, ProfitabilityAnalysis of New Private Sectors Bank in India, emphasized that

banks exerted influence on economic growth and profit was main

cause of business. The study also showed that if the domestic

financial resources of the country were properly channelized

towards productive investment then the economy of that country

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could be fully developed. The objective of the study was to

evaluate profitability of new private sector banks and to analyze

their relative efficiency in India. The period of the study was from

2001-05. The data for the study was collected from IBA Bulletins

annual issues and monthly issues, statistical tables relating tobanks in India and from RBI bulletins and from Annual Reports.

The study analyzed the performance of various private sector

banks. The study concluded that evaluation of banks in terms of

profitability was very essential because with the help of profits a

business could be flourished to the maximum extent which was

the due need for the existence of Business.

2.2 Research Methodology

2.2.1 Need of the Study:

Now a days, the Indian banking sector is waking up to the concept of

ALM. The uncertainty of interest rate movements gave rise to interest

rate risk, thereby causing banks to look for processes to manage their

risks. In the wake of interest rate risk, came liquidity risk and credit

risk as interest components of risks for banks. The recognition of these

risks has brought ALM to the center stage of financial intermediation.With the RBI framing up a regulatory framework to monitor the ALM

from March 31, 1999, the ALM has attained tremendous importance in

the banking sector. Banks are now operating in a fairly deregulated

environment and are required to determine on their own, interest rate

on deposits and advances on a dynamic basis. Managing the spread

income and controlling the risk associated with generating the spread

is a vital area of ALM, as it requires simultaneous decisions and

maturity structure of the institution.

The present study aims to analyze the importance of ALM for banks

and its impact on the profitability performance of ICICI bank.

Management of net interest is one of the most important means of

earning of banks. The choice of assets portfolio of banks is expected

to be influenced by the kinds of liabilities held by them and vice versa.

In this context, the bank has to identify its assets and liability structure

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which is not only compatible but also capable to generate net interest

revenue that helps is attaining the earnings objective. There is a need

to study the various aspects of ALM that directly affect profitability

because commercial viability is essential for the existence and growth

of banks.

2.2.2 Objective of the study:

The specific objectives are:

To analyze the growth and performance of ICICI bank.

To study the extent to which the ICICI bank has efficiently

managed their assets and liabilities during the period understudy.

To analyse the profitability of the bank.

To examine the loan portfolio management of the bank.

To suggest the future strategies for assets and liabilities for ICICI

bank.

2.2.3 Methodology

The study covers ICICI bank. The period of the study is from

2003-2004 to 2007-2008. The study is based on secondary data.

The secondary data has been collected from various sources i.e

RBI bulletins, trends & progress of banking sector in India, IBA

bulletins, economic surveys, website of ICICI bank etc. The

various methods used are:

Compound Growth Rate: Compound Annual Growth Rate isn't theactual return in reality. It's an imaginary number that describesthe rate at which an investment would have grown if it grew at asteady rate. You can think of Compound Annual Growth Rate as away to smooth out the returns.

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The compound annual growth rate is calculated by taking the nthroot of the total percentage growth rate, where n is the numberof years in the period being considered.

This can be written as follows:

The percentage rate, generally stated on an annual basis, at

which a variable grows adjusted for compounding. For example, a

7% compound growth rate for ten years results in $100 growing

to slightly less than $200. Without compounding, the $100 wouldearn $7 per year and grow to only $170. Financial analysts

frequently use historical and projected compound growth rates in

analyzing earnings, sales, and dividends.

Trend Analysis:Trend means any general tendency. Analysis of

these is called trend analysis. It has major importance in

interpretation of financial statements. It is done to know the trend

of available financial institutions. It gives information about

increase or decrease in the ratios of the data. For trend analysis,various trend ratios of different items are calculated for various

periods for comparison purpose. The trend ratios are the index

numbers of the movement of reported financial items in the

financial statements which are calculated for more than one year.

They help in making horizontal analysis of comparative

statements. It reflects the behavior of items over a period of

time.

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Ratio Analysis: According to J. Batty, The term accounting ratio is

used to describe significant relationship which exist between

figures shown in the balance sheet in a profit and loss account, in

a budgetary control system or in any other part of the accounting

organization.

The study and interpretation of the relationships between

various financial variables by investors or lenders. Ratios are

regarded as the true test of earning capacity, financial soundness

and operating efficiency of a business organization. It is used to

know inter relationship among figures appearing in the financial

statements and to analyze the past performance and to make

further projections. The following are the ratios:

Asset Management Ratios

Liability Management Ratios

Liquidity Ratios

Burden Ratios

Spread Ratios

Profitability Ratios

2.2.4 Limitations

1. The financial information collected for the present study isentirely secondary in nature. In such a case, the study carriesall the limitations inherent with the secondary data.

2. Scope of the study is limited due to the constraint of time andresearch.

2.2.5 Chapter Scheme

Chapter 1: Introduction

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Introduction of Indian Banking System is introduced and then

Structure of Banking Sector is discussed. Concept of ALM and

ALM objectives are discussed in detail. Then is Risk Management

and ALM in which Credit Risk, Market Risk and Operational Risk

are discussed. After it ALM System in Banks RBI guidelines areexplained in detail.

Chapter 2: Review of Literature and Research

Methodology

This chapter has details of all the literature reviewed and then

the research methodology in which rationale of study, objectives

of study, methodology, scope and need and limitations are

discussed.

Chapter 3: Overview & Performance of ICICI Bank

In this chapter, first of all ICICI banks profile is written and then is

information about its subsidiaries with major subsidiaries

explained. Then credit deposit ratio, Loans and Advances,

Deposit Mobilization and Investment are discussed. After that

Priority Sector Advances, Net Interest Margin, Non-Interest

Income and then at then end conclusions from the study of above

ratios is discussed

Chapter 4: Assets Management of ICICI Bank

First of Assets Management is introduced and then in the areas of

assets management, Reserve Position Management, Investment

Management, Liquidity Management, Measuring and Managing

Liquidity Risk and then at the ends final conclusions from the

above study.

Chapter 5: Liabilities Management of ICICI Bank

In this after introducing Liabilities Management, Capital, Reserves

and Surplus, Deposits are discussed. In deposits, Fixed Deposit/

Term Deposit, Saving Bank Deposit, Demand Deposit, Borrowings

and other Liabilities and Provisions are explained in detail. At the

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end again conclusions made from the study of above ratios are

given.

Chapter 6: Profitability Analysis of ICICI Bank

In this first of all profitability trends are introduced and thentrends in various ratios are discussed. Trends in Income,

Expenditure, Spread Ratios, Burden Ratios and Net Profit are

discussed. Again conclusion at the end.

Chapter 7: Loan Portfolio Management of ICICI Bank

In this Loan Portfolio Management is introduced and its objectives

are discussed. Then various types of loan are talked about

extending to the constituents of Loan Portfolio of Banks and then

the final conclusions discussing about the interpretations made

from the above study.

Chapter 8: Findings and Suggestions

This includes various findings of the study done for the span of

five years for ICICI bank and then the list of suggestions made.

Bibliography

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Chapter 3

Overview and Performance of ICICI

Bank

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3.1 Brief Profile of ICICI Bank

ICICI Bank is India's second-largest bank. The Bank has a network ofabout 573 branches and extension counters and over 2,000 ATMs. ICICIBank was originally promoted in 1994 by ICICI Limited, an Indianfinancial institution, and was its wholly-owned subsidiary.

ICICI was formed in 1955 at the initiative of the World Bank, theGovernment of India and representatives of Indian industry. Theobjective was to create a development financial institution forproviding medium-term and long-term project financing to Indianbusinesses.

In the 1990s, ICICI transformed its business from a developmentfinancial institution offering only project finance to a diversifiedfinancial services group offering a wide variety of products andservices, both directly and through a number of subsidiaries and

affiliates like ICICI Bank.

In 1999, ICICI become the first Indian company and the first bank orfinancial institution from non-Japan Asia to be listed on the NYSE. In2001, ICICI bank acquired Bank of Madura Limited.

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ICICI Bank set up its international banking group in fiscal 2002 to caterto the cross border needs of clients and leverage on its domesticbanking strengths to offer products internationally. ICICI Bank currentlyhas subsidiaries in the United Kingdom, Canada and Russia, branchesin Singapore and Bahrain and representative offices in the United

States, China, United Arab Emirates, Bangladesh and South Africa.Today, ICICI Bank offers a wide range of banking products and financialservices to corporate and retail customers through a variety of deliverychannels and through its specialized subsidiaries and affiliates in theareas of investment banking, life and non-life insurance, venturecapital and asset management.

In 2008 the major initiative taken is that ICICI Bank enters US, launchesits first branch in New York. Also Bank enters Germany, opens its firstbranch in Frankfurt. ICICI Bank launched iMobile, a breakthrough

innovation in banking where practically all internet bankingtransactions can now be simply done on mobile phones. ICICI Bankconcluded India's largest ever securitization transaction of a pool ofretail loan assets aggregating to Rs. 48.96 billion (equivalent of USD1.21 billion) in a multi-tranche issue backed by four different assetcategories. It is also the largest deal in Asia (ex-Japan) in 2008 till dateand the second largest deal in Asia (ex-Japan & Australia) since thebeginning of 2007.

In 2007 it introduced a new product - 'NRI smart save Deposits' a

unique fixed deposit scheme for nonresident Indians. Representativeoffices opened in Thailand, Indonesia and Malaysia. ICICI Bank becamethe largest retail player in the market to introduce a biometric enabledsmart card that allow banking transactions to be conducted on thefield. A low-cost solution, this became an effective delivery option forICICI Bank's micro finance institution partners. Financial counselingcentre Disha launched. Disha provides free credit counseling, financialplanning and debt management services.

In 2006, ICICI Bank became the first private entity in India to offer a

discount to retail investors for its follow-up offer. Bank became the firstIndian bank to issue hybrid Tier-1 perpetual debt in the internationalmarkets. ICICI Bank subsidiary set up in Russia.

In 2005, Bank and CNBC TV 18 announced India's first ever awardsrecognising the achievements of SMEs, a pioneering initiative toencourage the contribution of Small and Medium Enterprises to thegrowth of Indian economy. ICICI Bank opened its 500th branch in India.

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ICICI Bank introduced partnership model wherein ICICI Bank wouldforge an alliance with existing micro finance institutions (MFIs). The MFIwould undertake the promotional role of identifying, training andpromoting the micro-finance clients and ICICI Bank would finance theclients directly on the recommendation of the MFI. ICICI Bank

introduced 8-8 Banking wherein all the branches of the Bank wouldremain open from 8a.m. to 8 p.m. from Monday to Saturday. ICICI Bankintroduced the concept of floating rate for home loans in India. Firstrural branch and ATM launched in Uttar Pradesh at Delpandarwa,Hardoi. "Free for Life" credit cards launched wherein annual fees of allICICI Bank Credit Cards were waived off.

In 2004, the Max Money, a home loan product that offers the dualbenefit of higher eligibility and affordability to a customer, introduced.Mobile banking service in India launched in association with Reliance

Infocomm. India's first multi-branded credit card with HPCL and Airtellaunched. Kisaan Loan Card and innovative, low-cost ATMs in ruralIndia launched.

Subsidiaries of the ICICI Bank are:

Following are the subsidiaries of ICICI:

ICICI Personal Financial Services Limited ICICI Capital Services Limited

ICICI Prudential Life Insurance Company ICICI Bank UK, Russia, Canada, branches in US, Singapore,

Bahrain, Hong Kong, Sri Lanka, Qatar Dubai International Finance Centre

ICICI General Insurance Company, Lombard ICICI Securities

ICICI Capital Services

ICICI Web Trade ICICI Personal Finance

Major Subsidiaries are:

ICICI Prudential Life Insurance CompanyICICI Prudential Life Insurance Company (ICICI Life) continued tomaintain its market leadership among private sector life insurancecompanies with a retail market share of about 12.7% in the overallindustry in fiscal 2008 (on weighted received premium basis) as

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against 9.1% in fiscal 2007. ICICI Lifes new business premium (onweighted received premium basis) grew by 68.3% from Rs. 39.71billion in fiscal 2007 to Rs. 66.84 billion in fiscal 2008. Life insurancecompanies worldwide make losses in the initial years, in view ofbusiness set-up and customer acquisition costs in the initial years as

well as reserving for actuarial liability. While the growing operations ofICICI Life had a negative impact of Rs. 10.31 billion on the Banksconsolidated profit after tax in fiscal 2008 on account of the abovereasons, the companys unaudited New Business Profit (NBP) for fiscal2008 was Rs. 12.54 billion as compared to Rs. 8.81 billion in fiscal2007. NBP is a metric for the economic value of the new businesswritten during a defined period. It is measured as the present value ofall the future profits for the shareholders, on account of the newbusiness based on standard assumptions of mortality, expenses andother parameters. Actual experience could differ based on variance

from these assumptions especially in respect of expense overruns inthe initial years.

ICICI Lombard General Insurance CompanyICICI Lombard General Insurance Company (ICICI General) enhanced itsleadership position with a market share of 29.8% among private sectorgeneral insurance companies and an overall market share of about11.9% during fiscal 2008. ICICI Generals gross written premium(excluding share of motor third party insurance pool) grew by 11.4%from Rs. 30.03 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008.

The industry witnessed a slowdown in growth on account of de-tariffication of the general insurance industry whereby insurancepremiums were freed from price controls, resulting in a significantreduction in premium rates. The industry also witnessed the formationof the motor third party insurance pool for third party insurance ofcommercial vehicles. Accordingly, all insurance companies arerequired to cede 100% of premiums collected and claims incurred forthis segment to the pool. At the end of the year, the results of the poolare shared by all insurance companies in proportion to their overallmarket share in the industry. The motor third party pool had a

negative impact of Rs. 0.53 billion on the profit of ICICI General. ICICIGeneral is also required to expense upfront, on origination of a policy,all sourcing expenses related to the policy. ICICI General achieved aprofit after tax of Rs. 1.03 billion in fiscal 2008, a growth of 50.5% overfiscal 2007.

ICICI Prudential Asset Management Company

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ICICI Prudential Asset Management Company (ICICI AMC) was thesecond largest asset management company in India with averageassets under management of Rs. 543.55 billion for March 2008. ICICIAMC achieved a profit after tax of Rs. 0.82 billion in fiscal 2008, agrowth of 69.7% over fiscal 2007.

ICICI Venture Funds Management Company LimitedICICI Venture Funds Management Company Limited (ICICI Venture)strengthened its leadership position in private equity in India, withfunds under management of about Rs. 95.50 billion at year-end fiscal2008. ICICI Venture achieved a profit after tax of Rs. 0.90 billion infiscal 2008 compared to Rs. 0.70 billion in fiscal 2007.

ICICI Securities Limited and ICICI Securities Primary DealershipLimited

The securities and primary dealership business of the ICICI group havebeen reorganised. ICICI Securities Limited has been renamed as ICICISecurities Primary Dealership Limited. ICICI Brokerage Services Limitedhas been renamed as ICICI Securities Limited and has become a directsubsidiary of ICICI Bank. ICICI Securities achieved a profit after tax ofRs. 1.50 billion and ICICI Securities Primary Dealership achieved aprofit after tax of Rs. 1.40 billion, in fiscal 2008.

ICICI Bank UK PLCICICI Bank UK PLC (ICICI Bank UK) is a full-service bank offering retail

and corporate and investment banking services in the UK and Europe.ICICI Bank UKs total assets increased by 81.4% from US$ 4,868 millionat March 31, 2007 to US$ 8,829 million at March 31, 2008 while totaldeposits grew by 84.2% from US$ 2,812 million at March 31, 2007 toUS$ 5,180 million at March 31, 2008. ICICI Bank UKs profit after taxwas US$ 38.4 million during fiscal 2008 after taking into accountinvestment valuation charges.

ICICI Bank CanadaICICI Bank Canada is a full-service direct bank established in Canada as

a wholly-owned subsidiary of ICICI Bank, and offers a wide range offinancial solutions to cater to personal, commercial, corporate,investment, treasury and trade requirements. ICICI Bank Canadastotal assets increased by 92.3% from US$ 2,002 million at March 31,2007 to US$ 3,849 million at March 31, 2008. Total deposits increasedby 77.7% from US$ 1,796 million at March 31, 2007 to US$ 3,191million at March 31, 2008. ICICI Bank Canada recorded a net loss of

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US$ 14.3 million during fiscal 2008, after taking into accountinvestment valuation charges.

As per the financial statement of ICICI bank for the year ended 2007-

08

ICICI Banks credit ratings by various credit rating agencies at March

31, 2008 are given below:

Agency RatingMoodys Investor Service (Moodys) Baa2Standard & Poors (S&P) BBB-Credit Analysis & Research Limited (CARE) CARE AAAInvestment Information and Credit Rating Agency(ICRA)

AAA

CRISIL Limited AAAJapan Credit Rating Agency (JCRA) BBB+

3.2 Credit Deposit Ratio

Credit Deposit Ratio indicates the total advances as a percentage of

total deposits. It is a measure of utilization of resources by banks

and has a direct bearing on the size and the loan portfolio. This ratioindicates the bank aggressiveness to improve income.

Although the deployment of credit and time pass of Credit Deposit

ratio in general, are influenced by the structural transformation of

the economy.

Year Credit Deposit Ratio(%)

% Inc/Dec to prev.Year

2003-04 94.59 ------

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2004-05 95.35 0.8032005-06 90.61 - 4.972006-07 85.03 - 6.152007-08 90.76 6.73

Compounded Growth Rate (CGR)= -0.82%

CGR is negative, which shows that credit deposit ratio has decreased

over the period of study and the above table depicts the same.

3.3 Loans and Advances

Loans and Advances represent that part of customer deposit whichthe bank considers may be safely lent, while the remainder is in the

form of cash and other assets. It includes working capital and term

finance, for different types of borrowers, various forms of bank

lending by way of loans (demand loans and term loans) and

advances over drafts, cash credit, letter of credit and bill finance.

Year Loans and Advances (Rs

in 000s)

% Inc/Dec to prev.

Year2003-04 643,958,205 ------2004-05 964,099,562 49.712005-06 1,562,603,202 62.072006-07 2,113,994,413 35.282007-08 2,514,016,693 18.92

Compounded Growth Rate (CGR)= 31.31%

Positive value of CGR says about the increase in loans and advancesover the last five years of study but after 2005-06 the increment rate

has declined.

3.4 Deposit Mobilization

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Deposits constitute a vital source of funds in a bank which places an

almost exclusive reliance on public deposits for its operations, for

the fact that equity capital invested in a bank is very insignificant

part of the total funds of the bank. Lending an investment

operations of a bank are influenced by the magnitude of deposits.Deposits expansion of the banking system can only be done by co-

operation of all banks and by a willingness on the part of monetary

and fiscal authorities to permit such expansion by making additional

reserves available. Various types of deposits from public, banks and

another financial institutions are:

(a) Demand Deposits

(b) Saving Bank Deposits

(c)Fixed Deposits

Year Deposits (Rs in000s)

% Inc/Dec to prev.Year

2003-04 680,787,334 ------2004-05 1,011,086,273 48.512005-06 1,724,509,830 70.562006-07 2,486,136,330 44.162007-08 2,769,832,312 11.41


CGR shows a favorable response to social obligation, there

management devised various schemes of deposit mobilization and

started providing many facilities to their depositors and the table

shows the same.

3.5 Investments

Investment is the sacrifice of the certain present value for (possibly

uncertain) future value. Classification of investments given in

schedule VI:-

There are three categories:

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(a) Government Securities

(b) Share Debenture and Bonds

(c)Immovable properties

The principal objective of investment by a commercial bank is to

maximize earnings and to keep the funds liquid and safe. Banks

invests in Indian securities as well as foreign securities.

Year Investments (Rs in000s)

% share intotal assets

% Inc/Dec toprev. Yr(Investments)

2003-04 455,747,851 34.85 ------2004-05 546,527,266 30.63 19.91

2005-06 840,138,822 30.30 53.722006-07 1,206,166,898 30.58 43.562007-08 1,600,467,579 32.95 32.69


CGR is positive showing that investments has increased over the

period of study but in the last three years, the rate of increment has

decline. Still as a whole, CGR has increased over the total span of

five years.

3.7 Priority Sector advances

Priority sector advances is an important element of social banking. It is

an advances given by bank to the priority sectors which requires

development. If bank fail to meet priority sector lending target through

direct lending the bank can invest the shortfall amount.

Year Priority Sector

Advances (Rs in000s)

% share in

totaladvances

% Inc/Dec to prev.

Yr. (Priority SectorAdvances)

2003-04

145,307,396 22.56 ------

2004-05

215,591,362 22.36 48.36

2005- 447,310,487 28.62 107.48

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06

2006-07

555,491,571 26.27 24.18

2007-08

606,025,758 24.10 9.09


CGR is positive. Thus ICICI has started giving more advances to priority

sector but the increment rate has declined over the years and the

table also depicts the rising trend.

3.8 Net Interest Margin (NIM)

NIM is defined as net interest income divided by average total

assets.

Net interest margin can be viewed as the spread on earning

assets. The net income of banks comes mostly from the spreads

maintained between total interest income and total interest

expense. The higher the spread the more will be the NIM. There

exists a direct correlation between risks & return. As a result,

greater spreads only imply enhanced risk exposure. But since any

business is conducted with the objective of making profits &

achieving higher profitability is the target, it is the management of

risks that holds key to success & not risk elimination.

Year NIM (%) % Inc/Dec to prev.Year

2003-04 1.8 ------2004-05 2.4 33.332005-06 2.4 0.02006-07 2.6 8.33

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2007-08 2.2 - 15.38


Increase in NIM reflects that spread in earning assets has

increased over the period of study. Positive CGR says about this

and table above too depicts the same.

3.9 Non Interest Income

It is also known as fee based income and it has become an

important source of income for banks. NII consists of income from

commission, exchange and brokerage transaction and other

miscellaneous incomes. This stream of revenue is not dependent on

the banks. Capital adequacy and consequently, potential to increase

this transaction is vast.

Year NII (Rs in 000s) % Inc/Dec to prev.Year

2003-04 45,530,184 ------2004-05 70,971,868 55.872005-06 111,469,028 57.002006-07 163,625,427 46.702007-08 259,581,255 58.64


CGR is positive and is quite high too which shows a large increase

in NII for the bank. This shows that over the past five years non-

interest income has increased manifold for the bank and this is

clear from the table too.

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Conclusions:

1. Credit Deposit Ratio: It shows the utilization of resources by

the bank and has a direct bearing on the size and the loan

portfolio. It shows a declining trend which is a matter of

concern for the bank. Bank lending policy have an inherent in

the size of the ratio.

2. Loans and Advances: It represent that part of the customer

deposit which the bank considers may be safely lent and itshows an increment till 2005-06 and it declines thereafter.

3. In the recent years, market risks associated with the holding of

securities has increased, so greater awareness is required

while extending loans.

4. Deposits shows a favorable response to social obligation, there

management devised various schemes of deposit mobilization

and started providing many facilities to their depositors.

5. Greater orientation towards investment activities and a

aversion to credit risk exposure have deterred banks from

undertaking their core functions of providing loans and

advances.

6. Due to the liberalization and reluctant competition and soft

interest rates prevalent in the Indian economy, risk arising out

of traditional banking business are on increase and the net

interest margin over the period under study is almost atsteady rate.

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Chapter 4

Assets Management of ICICI Bank

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Assets Management:

While a banks asset can be conceptually subdivided into components

such as reserves, investments and loans, management policies and

decisions should serve to identify and measure the inter-relationshipsamong these elements. The decisions concerning loan and investment

strategies are closely linked to management of banks liquidity position

and the other element such as the structure and variability of deposits,

capital structure and international operations also are seen to be

interrelated with effective asset management.

In managing its liquidity position a bank is confronted by a trade off

between liquidity and profitability. Because liquid assets often provide

zero or low return, bank manager must constantly analyze theopportunity cost involved in not reducing liquid assets and increasing

high yielding assets. Recent changes in the structure of bank assets

and liabilities place doubt on the significance of traditional liquidity

ratios. According to a article by James L. Pierce also questions the

traditional measures in view of new techniques by which banks can

affect their liquidity particularly by means of endogenous deposit

determination. He suggests that an appropriate concept of liquidity

must consider the time dimension involved in selling an asset and

demonstrates that the liquidity decision is closely linked to the loan-supply function of banks.

Mismatch of assets and liabilities is the cause of many risks. Banks

need to address these risks in a structured manner by upgrading their

risk management and adopting more comprehensive ALM practices

than has been done earlier. As per RBI guidelines, dated Feb. 10, 1999,

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issued to all scheduled commercial banks. ALM is also concerned with

risk management and provides a comprehensive and dynamic

framework for measuring monitoring and managing liquidity, interest

rates, and foreign exchange, equity and commodity price risks of a

bank. The focus of the Asset Liability Management should be on theprofitability and long term operating viability.

Components of Assets are:

Cash and balance with RBI

- Cash in hand

- Balance with RBI

- Balances with banks and money at call and shortnotice

Investments

Advances

- Cash credits, overdrafts and loans repayable on

demand

- Term loans- Bills purchased and discounted

- Secured/unsecured advances

- Secured by tangible assets

- Covered by bank/government guarantees

- Unsecured advances

Fixed assets

Other assets

- Inter - office adjustments

- Interest accrued

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- Tax paid in advance/tax deducted at source

- Stationary and stamps

- Non banking assets acquired in satisfaction of claims

- others

4.1 AREAS OF ASSET MANAGEMENT

Reserve position management

Investment management

Liquidity management

4.1.1 Reserve position management

Reserve position management is based on the statutory requirements

along with maintenance of working reserves for operational needs. The

primary objective of reserve position management is minimizing risks

& maximizing returns by achieving an optimum risk reward ratio.

(A) Primary reserves:

Primary reserves are those non-earning assets of commercial banks

made uoto cash or its equivalent. The objective of primary reserves isto maintain liquidity and solvency. It consists of cash in hand, balance

with central bank and demand deposits with other banks. From the

liquidity point of view/the primary reserves plays the role of first day-

to-day business needs but to comply with the obligation imposed on it

by law. The primary reserves divided into two categories:

- Legal reserves

- Working reserves

A.1 Legal reserves

The legal reserves represent that portion of the primary reserve which

the law requires a bank to maintain. These reserves are computed on

the basis of average deposits outstanding on the banks books over the

short periods (one or two weeks). Originally, legal reserve

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requirements were expected to compel commercial banks to maintain

prudent standards of liquidity which would enable them to meet the

withdrawals of deposits in cash.

Through the years the above conception of legal reserves has

changed. It is now generally recognized that the legal reserve does not

serve as a safty fund to protect banks against the hazards of liquidity.

The primary function of legal reserve is to serve as a potent control

tool in the hands of central banking authority to affect the supply of

money. By changing the reserve requirements, the central bank can

regulate the magnitude of credit.

A.2 Working Reserve

Since the legal reserve cannot be depended upon for overcomingilliquidity crises, commercial banks have to carry cash reserves in

excess of the legal minimum reserve to meet the depositors claims,

satisfy the credit needs of the community, & provide protection against

unforeseen withdrawals. This excess cash reserves held by the banks

to fulfill day-to-day business requirements is designated as working

reserve. It consists of :

- Cash in their own vaults;

- Demand deposits with other banks; and

- Excess reserve with central bank

The principal function of the working reserve is to take care of both

regular & exceptional requirements. How much of its total deposit

liabilities should be held in the form of working reserve is a basic

problem which confronts a commercial bank because it involves a

trade off between liquidity & profitability.

(a) Cash & balance with RBI in current account: It has shown thesteady increase in it and it is clear from the table.

(b) Balance with other banks in current account: Again the

continuous increase in this year by year says about the victory

path of ICICI bank.

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(c)Primary reserves as % of total deposits: This shows the declining

trend up to 2005-06 and then it is increasing till 2007-08.

Year Cash &balance withRBI incurrentaccount

Balance withother banksin currentaccount

Primaryreserves as% of totaldeposits

% inc. /dec. toprev. year

2003-04

49,613,712 6,909,886 8.30 ------

2004-05

57,966,103 12,732,346 6.99 -15.78

2005-

06

77,259,488 12,292,632 5.19 -25.75

2006-07

166,407,662 25,235,925 7.7 48.36

2007-08

265,353,394 28,953,021 10.62 37.92

Compounded Growth Rate (Primary Reserves as percentage of Total

Reserves)=5.05%

CGR is positive which shows that primary reserves as percentage oftotal reserves has increased in the past five years but the increase was

not continuous as it declined for the first three years and then

increased thereafter.

(B) Secondary Reserves:

The aggregate of highly liquid earning assets is designated as the

secondary reserves in banking circles. The principal objective ofholding the secondary reserves is to impart adequate liquidity to funds

without adversely affecting the profitability of a bank. It must,

therefore, comprise such assets as yield some income to the bank and

at the same time, are highly liquid. Only such assets as fulfill the three

conditions of shift ability, low risk & yield can be included in the

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secondary reserves. The shift ability of asset is possible if there is a

ready market for it. Apart from the high degree of shift ability, an asset

must be free from the money rate risk- the risk arising out of

fluctuation in security prices due to variations in interest rate.

Secondary reserve assets must yield income. But it should beemphasized; for the sake of income the liquidity attribute should not

be foregone. The income factor has to receive secondary emphasis

while choosing assets for the secondary reserves.

Constituents are:

Call loans to stock brokers & commercial banks

Short term loans to commercial banks

Short term loans secured against self liquidating assets for blue

chips

Investment in treasury bill

Promissory notes to short period maturity

Discounting of usance bills eligible for rediscounting from the RBI

Short period debentures of company with an unimpeachable

credit standing.

Year Moneyat call &shortnotice

&balancewithbanks

Billdiscounted &purchase

d

Cashcredit,overdraft & loans

payableondemand

Gov.securities

Deb andbonds

Sec.res.as %of

TotalDep.

%inc/decto

theprevyr

2003-04

4,150,667

18,267,009

61,254,576

318,551,612

64,916,056

68.61

-----

2004- 41,534,9 68,868,43 123,344,4 360,243,8 335,035,5 62.2 -9.32

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05 60 0 10 38 25 12005-06

33,750,713

107,554,857

258,593,077

538,681,776

27,896,238

56.04

-9.91

2006-07

56,809,959

71,995,344

334,781,882

717,115,958

458,299,459

49.33

-11.97

2007-08

91,995,784

68,903,033

351,458,670

827,450,043

49,447,032

50.15

1.66

Compounded growth rate (Sec Res as % of Total Deposits) (CGR)=

-6.07%

CGR is negative and the position of the secondary reserve is different

and secondary reserves are more than the primary reserves and the

tables shows the declining trend till 2007-08 and small increase in

2007-08.

4.1.2 Investment management

The foremost concern of a bank is to ensure its liquidity by maintaining

adequate primary & secondary reserves. Investment is then, residual

in nature. It includes gilt edged securities & stock exchange securities

as well as the shares & bonds of highly reputed companies. The

principal objective of investment by a commercial bank is to maximizeearnings & to keep the funds liquid & safe. As a matter of fact security

investment is supposed to act as the third line of defense & to

replenish the secondary reserves to meet the unexpected withdrawals

of deposit & usual loan demands.

Classification of investment portfolio is:

Government securities

Approved securities

Shares

Debentures & bonds

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