UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] Registration statement pursuant to section 12(b) or (g) of the
Securities Exchange Act of 1934
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 2000
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____________ to
_____________
Commission File Number 001-15002
ICICI BANK LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Vadodara, Gujarat, India
(Jurisdiction of incorporation or organization)
ICICI Towers
Bandra-Kurla Complex
Mumbai - 400051
(Address of principal executive or organization)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class Name of Each Exchange on Which Registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act.
American Depositary Share
each represented by 2 Equity Shares, par value Rs. 10 share.
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
Not Applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report -196,818,880 Equity Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes.........x............ No.....................
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17.................. Item 18.........x......
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TABLE OF CONTENTS
Page
----
Cross Reference Sheet ................................................... 3
Certain Definitions ..................................................... 5
Forward-Looking Statements .............................................. 6
Exchange Rates .......................................................... 7
Risk Factors ............................................................ 8
Relationship with the ICICI Group ....................................... 19
Business ................................................................ 22
Overview .............................................................. 22
History ............................................................... 22
Our Strategy .......................................................... 23
Our Principal Business Activities ..................................... 25
Corporate Banking ..................................................... 26
Retail Banking ........................................................ 36
Treasury .............................................................. 44
Funding ............................................................... 47
Loan Portfolio ........................................................ 48
Non-Performing Loans .................................................. 51
Risk Management ....................................................... 60
Technology ............................................................ 72
Competition ........................................................... 73
Employees ............................................................. 75
Properties ............................................................ 76
Legal and Regulatory Proceedings ...................................... 76
Selected Consolidated Financial and Operating Data ...................... 77
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 82
Management .............................................................. 101
Related Party Transactions .............................................. 108
Overview of the Indian Financial Sector ................................. 110
Supervision and Regulation .............................................. 120
Exchange Controls ....................................................... 130
Nature of the Indian Securities Trading Market .......................... 131
Restriction on Foreign Ownership of Indian Securities ................... 139
Principal Shareholders .................................................. 141
Dividends ............................................................... 142
Taxation ................................................................ 143
Use of Proceeds ......................................................... 147
Presentation of Financial Information ................................... 147
Additional Information .................................................. 147
Selected Financial Information for ICICI Bank under Indian GAAP ......... 149
Significant Differences between Indian GAAP and US GAAP ................. 151
Exhibit Index ........................................................... 154
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CROSS REFERENCE SHEET
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
See "Exchange Rates", "Risk Factors" and "Selected Consolidated Financial
and Operating Data".
Item 4. Information on the Company
See "Business", "Relationship with the ICICI Group", "Overview of the
Indian Financial Sector" and "Supervision and Regulation".
Item 5. Operating and Financial Review and Prospects
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Item 6. Directors, Senior Management and Employees
See "Management" and "Business--Employees".
Item 7. Major Shareholders and Related Party Transactions
See "Relationship with the ICICI Group", "Management--Interest of
Management in Certain Transactions", "Principal Shareholders", "Related Party
Transactions" and Note 13 to ICICI Bank's US GAAP Financial Statements.
Item 8. Financial Information
See the Report of Independent Auditors on ICICI Bank's US GAAP Financial
Statements and ICICI Bank's US GAAP Financial Statements and the notes thereto.
Item 9. The Offer and Listing
See "Nature of the Indian Securities Trading Market".
Item 10. Additional Information
See "Exchange Controls", "Restriction on Foreign Ownership of Indian
Securities", "Dividends", "Taxation" and "Additional Information".
Item 12. Description of Securities Other than Equity Securities
Not applicable.
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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
See "Use of Proceeds".
PART III
Item 18. Financial Statements
See the Report of Independent Auditors on ICICI Bank's US GAAP Financial
Statements and ICICI Bank's US GAAP Financial Statements and the notes thereto.
Item 19. Exhibits
See the Exhibit Index and attached exhibits, if any.
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CERTAIN DEFINITIONS
In this annual report, all references to "we", "our", "us" and "ICICI
Bank" are to ICICI Bank Limited. References to "ICICI" are to ICICI Limited on
an unconsolidated basis and references to the "ICICI group" and "the group" are
to ICICI Limited and its consolidated subsidiaries including us.
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FORWARD-LOOKING STATEMENTS
We have included statements in this annual report which contain words or
phrases such as "will", "aim", "will likely result", "believe", "expect", "will
continue", "anticipate", "estimate", "intend", "plan", "contemplate", "seek
to", "future", "objective", "goal", "project", "should", "will pursue" and
similar expressions or variations of such expressions, that are
"forward-looking statements". Actual results may differ materially from those
suggested by the forward-looking statements due to certain risks or
uncertainties associated with our expectations with respect to, but not limited
to, our ability to successfully implement our strategy, the market acceptance
of and demand for Internet banking services, future levels of non-performing
loans, our growth and expansion, the adequacy of our allowance for credit and
investment losses, technological changes, investment income, cash flow
projections and our exposure to market risks. By their nature, certain of the
market risk disclosures are only estimates and could be materially different
from what actually occur in the future. As a result, actual future gains,
losses or impact on net interest income could materially differ from those that
have been estimated.
In addition, other factors that could cause actual results to differ
materially from those estimated by the forward-looking statements contained in
this document include, but are not limited to: general economic and political
conditions in India, south east Asia, and the other countries which have an
impact on our business activities or investments, the monetary and interest
rate policies of India, inflation, deflation, unanticipated turbulence in
interest rates, changes in the value of the rupee, foreign exchange rates,
equity prices or other rates or prices, the performance of the financial
markets and level of Internet penetration in India and globally, changes in
domestic and foreign laws, regulations and taxes, changes in competition and
the pricing environment in India, and regional or general changes in asset
valuations. For further discussion on the factors that could cause actual
results to differ, see the discussion under "Risk Factors" contained in this
annual report.
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EXCHANGE RATES
Fluctuations in the exchange rate between the Indian rupee and the US
dollar will affect the US dollar equivalent of the Indian rupee price of the
equity shares on the Indian stock exchanges and, as a result, will affect the
market price of the ADSs in the United States. These fluctuations will also
affect the conversion into US dollars by the depositary of any cash dividends
paid in Indian rupees on the equity shares represented by ADSs.
On an average annual basis, the rupee has consistently declined against
the dollar since 1980. In early July 1991, the government of India adjusted the
rupee downward by an aggregate of approximately 20.0% against the dollar as
part of an economic package designed to overcome an external payments crisis.
In fiscal 2001, the rupee has declined sharply against the US dollar and
other currencies as a result of a number of factors including rising petroleum
prices and decisions by international fund and other investment managers to
sell rupee assets. The decline in the rupee caused the Reserve Bank of India to
announce an increase in the bank rate by 100 basis points on July 21, 2000
which led to an increase in domestic interest rates.
The following table sets forth, for the periods indicated, certain
information concerning the exchange rates between Indian rupees and US dollars
based on the noon buying rate:
Fiscal Year Period End(1) Average(1)(2)
-------------------------------------- ------------- -------------
1996 ................................. 34.35 33.47
1997 ................................. 35.88 35.70
1998 ................................. 39.53 37.37
1999 ................................. 42.50 42.27
2000 ................................. 43.65 43.46
2001 (through September 15) .......... 45.85 44.80
Month High Low
-------------------------------------- ------------- -------------
March 2000 ........................... 43.65 43.58
April 2000 ........................... 43.75 43.63
May 2000 ............................. 44.65 43.67
June 2000 ............................ 44.85 44.65
July 2000 ............................ 45.15 44.69
August 2000 .......................... 46.05 45.15
---------
(1) The noon buying rate at each period end and the average rate for each
period differed from the exchange rates used in the preparation of our
financial statements.
(2) Represents the average of the noon buying rate on the last day of each
month during the period.
Although we have translated certain rupee amounts in this annual report
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be, converted into dollars at any
particular rate, the rates stated below, or at all. Except in the section on
"Nature of the Indian Securities Trading Market", all translations from rupees
to dollars are based on the noon buying rate in the City of New York for cable
transfers in rupees at March 31, 2000. The Federal Reserve Bank of New York
certifies this rate for customs purposes on each date the rate is given. The
noon buying rate on March 31, 2000 was Rs. 43.65 per US$ 1.00 and on September
15, 2000 was Rs. 45.85 per US$ 1.00. The exchange rates used for convenience
translations differ from the actual rates used in the preparation of our
financial statements.
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RISK FACTORS
You should carefully consider the following risk factors as well as the
other information contained in this annual report in evaluating us and our
business.
Risks Relating to India
A slowdown in economic growth in India could cause our business to suffer.
Our performance and the quality and growth of our assets are necessarily
dependent on the health of the overall Indian economy. The Indian economy has
grown over the past few years with real GDP increasing from Rs. 7,990.8 billion
(US$ 183.1 billion) in fiscal 1994 to Rs. 11,513.6 billion (US$ 263.8 billion)
in fiscal 2000. However, there was a slowdown in industrial growth in fiscal
1997 and fiscal 1999. Industrial production in India suffered during these
years as a result of the global downturn in commodity prices, particularly in
the man-made fibers, iron and steel and textile sectors. This slowdown in
industrial growth also had an adverse impact on manufacturing industries,
including the light manufacturing industry. Although industrial growth has
recovered in fiscal 2000, any future slowdown in the Indian economy or future
volatility of global commodity prices could adversely affect our borrowers and
contractual counterparties. This in turn could adversely affect our business,
including our ability to grow our asset portfolio, the quality of our assets,
and our ability to implement our strategy.
The high price of crude oil could affect our banking business.
India imports over 70% of its requirements of petroleum products. The
sharp increase in global prices of these products, such as has occurred in the
past few months, could adversely impact the Indian economy in general and
consequently the Indian banking system. Overall industrial growth could slow
down which in turn could adversely affect our business including our ability to
grow, the quality of our assets and our ability to implement our strategy.
A significant change in the Indian government's economic liberalization and
deregulation policies could disrupt our business and cause the price of our
equity shares and our ADSs to go down.
We are an Indian company and all our operations are conducted, and almost
all of our assets and customers are located, in India. The Indian government
has traditionally exercised and continues to exercise a dominant influence over
many aspects of the economy. Its economic policies have had and could continue
to have a significant effect on private-sector entities, including us, and on
market conditions and prices of Indian securities, including our equity shares
and our ADSs. However, since 1991, the Indian government has adopted a policy
of deregulating the domestic economy, has been opening the economy to foreign
trade and has been reforming the framework for foreign investment.
Since 1996, the government of India has changed four times. The most
recent parliamentary elections were completed in October 1999. A coalition
government led by the Bhartiya Janata Party was formed with A. B. Vajpayee as
the Prime Minister of India. Although the Vajpayee government has continued
India's current economic liberalization and deregulation policies, a
significant change in these policies could adversely affect business and
economic conditions in India in general as well as our business, our future
financial performance and the price of our equity shares and our ADSs.
Financial instability in other countries, particularly emerging market
countries in Asia, could disrupt our business and cause the price of our equity
shares and our ADSs to go down.
The Indian market and the Indian economy are influenced by economic and
market conditions in other countries, particularly emerging market countries in
Asia. Financial turmoil in Asia, Russia and elsewhere in the world in recent
years had affected different sectors of the Indian economy in varying degrees.
Although economic conditions are different in each country, investors'
reactions to developments in one country can have adverse effects on the
securities of companies in other countries, including India. A loss of investor
confidence in the financial systems of other emerging markets may cause
increased volatility in Indian financial markets and, indirectly, in the Indian
economy in general. Any worldwide financial instability could also have a
negative impact on the Indian economy. Financial disruptions may happen again
and could have an adverse effect on our business, our future financial
performance and the price of our equity shares and our ADSs.
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Deteriorating trade deficits and economic sanctions could cause our business to
suffer and the price of our equity shares and our ADSs to go down.
India's trade relationships with other countries can also influence Indian
economic conditions. In fiscal 2000, India experienced a trade deficit of Rs.
741.2 billion (US$ 17.0 billion). In fiscal 2001, so far, our trade deficit has
been affected adversely by a rising oil-bill on account of higher global crude
prices. If trade deficits increase or are no longer manageable, the Indian
economy, our business and the price of our equity shares and our ADSs, could be
adversely affected. In May 1998, the United States imposed economic sanctions
against India in response to India's continued testing of nuclear devices.
These sanctions have now been partly lifted. However, we cannot be sure that
these sanctions would not be reactivated or that additional economic sanctions
of this nature will not be imposed by the United States or any other country,
or that such sanctions will not have a material adverse effect on our business,
our future financial performance or the price of our equity shares and our
ADSs.
A significant change in the composition of the Indian economy may affect our
business.
The Indian economy is in a state of transition. The share of the services
sector of total GDP is rising while that of the industrial and agricultural
sector is declining. It is difficult to gauge the impact of such fundamental
economic changes on our business. We cannot be certain that these changes will
not have a material adverse effect on our business.
If regional hostilities increase, our business could suffer and the price of
our equity shares and our ADSs could go down.
India has from time to time experienced social and civil unrest and
hostilities with neighboring countries. During May-July 1999, there were armed
conflicts over parts of Kashmir involving the Indian army and infiltrators from
Pakistan into Indian territory. India and Pakistan were in a heightened state
of hostilities with significant loss of life and troop conflicts. The
hostilities have since substantially abated. The hostilities between India and
Pakistan are particularly threatening because both India and Pakistan are
nuclear powers. Additionally, Pakistan experienced a military coup in October
1999 and has been under military rule since that time, resulting in further
tensions between India and Pakistan. Although these recent hostilities and the
change of government in Pakistan did not have an adverse impact on our
business, hostilities and tensions may occur in the future and on a wider
scale. These hostilities and tensions could lead to political or economic
instability in India and a possible adverse effect on our business, our future
financial performance and the price of our equity shares and our ADSs.
Risks Relating to Our Business
Our business is particularly vulnerable to volatility in interest rates.
Our results of operations are substantially dependent upon the level of
our net interest income. Interest rates are highly sensitive to many factors
beyond our control, including deregulation of the financial sector in India,
the Reserve Bank of India's monetary policies, domestic and international
economic and political conditions and other factors. Changes in interest rates
could affect the interest rates charged on interest-earning assets differently
than the interest rates paid on interest-bearing liabilities. This difference
could result in an increase in interest expense relative to interest income
leading to a reduction in our net interest income.
The Reserve Bank of India has recently reversed three years of declining
interest rates and, partly in response to exchange rate volatility, announced
an increase in the bank rate by 100 basis points on July 21, 2000. These
increases did not affect the financial results for fiscal 2000 discussed in
this annual report but can be expected to adversely affect our results during
fiscal 2001. Income from treasury operations is particularly vulnerable to
interest rate volatility. An increasing interest rate environment is likely to
adversely affect the income from treasury operations for banks in India.
Furthermore, declines in the value of the trading portfolio in such an
environment, adversely affect the income statement.
Continued interest rate increases could adversely affect our business, our
future financial performance and the price of our equity shares and our ADSs.
Volatility in interest rates could also adversely affect our business, our
future financial performance and the price of our equity shares and our ADSs.
We could be exposed to higher risk in the event of sudden changes in the Indian
financial markets.
We are a relatively small participant in the Indian banking industry. Our
limited capital base severely restricts our ability to absorb sudden changes in
the financial markets such as tightening of monetary policy, increases in
interest rates and
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significant reductions in deposits. The Indian economy is prone to these sudden
changes as a result of its political and economic situation. Therefore, any
sudden change in the Indian economy could have a material adverse effect on our
business and our future financial performance and may restrict our ability to
grow our business as anticipated.
Our funding is primarily short-term and if depositors do not roll over
deposited funds upon maturity our business could be adversely affected.
Most of our funding requirements are met through short-term funding
sources, primarily in the form of deposits including inter-bank deposits.
However, a portion of our assets have medium or long-term maturities, creating
a potential for funding mismatches. At March 31, 2000, savings deposits and
non-interest-bearing demand deposits together constituted 21.5% of our total
deposits and 17.8% of our total liabilities. In addition, time deposits with a
residual maturity of less than one year constituted 72.3% of our total deposits
and 59.9% of our total liabilities. At March 31, 2000, loans having residual
maturity of one year or more constituted 11.1% of our total assets. In our
experience, a substantial portion of our customer deposits has been rolled over
upon maturity and has been, over time, a stable source of funding. However, no
assurance can be given that this experience will continue. If a substantial
number of our depositors do not roll over deposited funds upon maturity, our
liquidity position could be adversely affected. This could have a material
adverse effect on our business, our future financial performance and the price
of our equity shares and our ADSs.
We could be subject to volatility in income from our treasury operations.
Non-interest revenue from trading account assets (primarily government of
India securities), securities and foreign exchange transactions represented
33.7% of our net revenue for fiscal 1999 and 37.0% of our net revenue for
fiscal 2000. This treasury revenue is vulnerable to volatility in the market
caused by, among other things, changes in interest rates, foreign currency
exchange rates and equity prices. Any increase in interest rates would have an
adverse effect on the value of our fixed income trading portfolio and our net
interest revenue. For a fuller description of the effect of an increasing
interest rate environment, see "-- Our business is particularly vulnerable to
volatility in interest rates". Any decrease in our income due to volatility in
income from treasury operations could have a material adverse effect on the
price of our equity shares and our ADSs.
We have high concentrations of loans to certain customers and to certain
sectors and if any of these loans were to become non-performing, the quality of
our loan portfolio could be adversely affected.
At March 31, 2000, our 10 largest loans, based on outstanding balances,
totaled approximately Rs. 5.5 billion (US$ 126 million), which represented
approximately 11.7% of our total loans and 48.2% of our stockholders' equity.
Our largest single loan exposure, based on outstanding balances at that date,
was Rs. 1020 million (US$ 23.4 million), which represented approximately 2.2%
of our total loans and approximately 9.0% of our stockholders' equity. At March
31, 2000, the largest group of companies under the same management control
accounted for approximately 2.0% of our total loans and approximately 8.2% of
our stockholders' equity. At March 31, 2000, none of our 10 largest loans based
on outstanding balances was classified as non-performing and our largest
non-performing loan was our 35th largest loan overall based on outstanding
principal balance. However, if any of our ten largest loans was to become
non-performing, the quality of our loan portfolio and the price of our equity
shares and our ADSs could be adversely affected.
At March 31, 2000, we had extended loans to nearly every industrial sector
in India. At that date, approximately 59.2% of our gross non-performing loan
portfolio was concentrated in three sectors: light manufacturing, textiles and
iron and steel with 15.1% of our total loan portfolio being concentrated in
these three sectors. Recently, these sectors have been adversely affected in
varying degrees by declining commodity prices of man-made fibers, iron and
steel and textiles, the revaluation of south-east Asian currencies and the
slowdown in industrial growth in India. Industry-specific difficulties in other
sectors could increase our level of non-performing loans and adversely affect
our business, our future financial performance and the price of our equity
shares and our ADSs.
Because the regulations for the classification and treatment of non-performing
loans in India are not as stringent as regulations in the US and other
developed economies, we may classify and reserve against non-performing loans
significantly later than our counterparts in other developed countries and we
may not set aside comparable amounts of allowance for credit losses.
The Indian financial system is primarily regulated by the Reserve Bank of
India. Rules and regulations relating to banks and financial institutions in
India are less restrictive than in the United States and other developed
countries.
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The most significant area is the treatment of non-performing loans in
India. We treat loans as non-performing and place them on a non-accrual basis
(that is, we no longer recognize payments of interest unless and until payments
are actually received) when we determine that interest or principal is past due
beyond specified periods or that the payment of interest or principal is
doubtful. Under Indian practice, loans are classified as non-performing when
interest or principal is past due for 180 days (typically two payments).
Payments on most loans are on a quarterly basis. This time period is much
longer than in the United States and other developed countries where loans are
generally placed on a non-accrual basis when any payment, including any
periodic principal payment, is not paid for a 90-day period. In addition, under
US GAAP, we provide for loan losses based on our internal subjective assessment
of the possibility of recovery of such loans based principally on the extent to
which we are able to capture sufficient cash flows from the borrower and
secondarily on the realizable value of collateral. We may classify and reserve
against non-performing loans significantly later than they would be in other
developed countries. As a result, we may not set aside comparable amounts of
allowance for credit losses as would financial institutions in the United
States or other developed countries.
If we are unable to control and reduce the level of non-performing loans in our
portfolio, our business will suffer.
Our gross non-performing loans represented 5.7% of our gross loan
portfolio at March 31, 1999 and 3.0% at March 31, 2000. Our net non-performing
loans represented 2.7% of our net loans at March 31, 1999 and 1.4% at March 31,
2000. We cannot assure you that our provisions will be adequate to cover any
further increase in the amount of non-performing loans or any further
deterioration in our non-performing loan portfolio. Although we believe that
our allowance for loan losses is adequate to cover all known losses in our
portfolio of assets, the level of our non-performing loans is higher than the
average percentage of non-performing loans in the portfolios of banks in more
developed countries. In absolute terms, our gross non-performing loans actually
decreased by Rs.195 million (US$ 4 million) or 12.1% in fiscal 2000 whereas the
same had grown by Rs. 1,009 million (US$ 23 million) or 167.1% in fiscal 1999.
As a percentage of net loan, net non-performing loans decreased to 1.4% at year
end fiscal 2000 from 2.7% at year end fiscal 1999 and 1.4% at year end fiscal
1998. Also, at March 31, 2000, 3.5% of our gross directed lending loan
portfolio was non-performing compared to 4.7% at March 31, 1999, 4.4% at March
31, 1998 and 1.7% at March 31, 1997. Under directed lending regulations in
India, we are required to lend 40.0% of our net bank credit to priority
sectors, including, among others, small-scale industries, the agriculture
sector and small businesses, and lend 12.0% of our net bank credit in the form
of export credit. We may experience a significant increase in non-performing
loans in our directed lending portfolio because economic difficulties are
likely to affect these borrowers more severely and we are less able to control
the quality of this portfolio.
A number of factors which are not in our control will likely affect our
ability to control and reduce non-performing loans, including developments in
the Indian economy, movements in global commodity markets, global competition,
interest rates and exchange rates. Although we are increasing our efforts to
improve collections and to foreclose on existing non-performing loans, as
discussed below, we may not be successful in our efforts and the overall
quality of our loan portfolio may deteriorate in the future. Our recent entry
into the credit card business and our upcoming entry in the auto loan and home
mortgage loan business during fiscal 2001 may cause our non-performing loans to
increase and the overall quality of our loan portfolio to further deteriorate.
If we are unable to control and reduce our non-performing loans, we may be
unable to execute our business plan as expected and that could adversely affect
the price of our equity shares and our ADSs. Further, our growth-oriented
strategy has involved a significant increase in our loan portfolio in recent
years which could result in additional non-performing loans.
On July 21, 2000, the Reserve Bank of India announced an increase in the
bank rate of 100 basis points in response to pressure on the exchange value of
the rupee. There is a risk that the increase in domestic interest rates, and
the impact of the sharp increase in the price of oil on the Indian economy,
could increase our non-performing loans during fiscal 2001.
If we are unable to improve our allowance for credit losses as a percentage of
non-performing loans, the price of the equity shares and the ADS could go down.
Our allowance for credit losses represented 52.8% of our gross
non-performing loans at March 31, 2000 compared to 54.6% at March 31, 1999.
Although we believe that our allowance for credit losses is adequate to cover
all known losses in our asset portfolio and is in accordance with US GAAP, we
cannot assure you that our allowance will be adequate to cover any further
deterioration in our non-performing loan portfolio. In the event of any further
deterioration in our non-performing loan portfolio, there will be an adverse
impact on our net income.
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We may be unable to foreclose on our collateral when borrowers default on their
obligations to us which may result in failure to recover the expected value of
collateral security exposing us to a potential loss.
Our loan portfolio consists primarily of working capital loans that are
typically secured by a first lien on inventory, receivables and other current
assets. In some cases, we may take further security of a first or second lien
on fixed assets, a pledge of financial assets like marketable securities,
corporate guarantees and personal guarantees.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result in, or be accompanied by, a
decrease in the value of the collateral. These delays can last for up to
several years leading to deterioration in the physical condition and market
value of the collateral. Collateral, consisting of inventory and receivables,
is particularly likely to decrease in value due to any delay in enforcement. In
the event a borrower makes an application for relief to a specialized
quasi-judicial authority called the Board for Industrial and Financial
Reconstruction, foreclosure and enforceability of collateral is normally
stayed.
We cannot guarantee that we will be able to realize the full value on our
collateral, due to, among other things, delays on our part in taking immediate
action, delays in bankruptcy foreclosure proceedings, defects in the perfection
of collateral and fraudulent transfers by borrowers. We may also face problems
in realizing the full value of any fixed assets in which we have only a
subordinated or second lien security interest if the party having the first
lien security interest has already partly or fully realized the value of this
collateral.
Additionally, we are a member of a consortium of banks for which we are
not the lead lender for 6, or 27.4% of our non-performing loans, including,
five of our top ten non-performing loans. Accordingly, we do not control the
negotiation, restructuring or settlement of these loans and may not be able to
enforce these obligations on the most advantageous terms to us. A failure to
recover the expected value of collateral security could expose us to a
potential loss, which could reduce the value of our stockholders' equity and
adversely affect our business.
We face greater credit risks than banks in more developed countries.
Our principal business is providing financing to our clients, virtually
all of whom are based in India. Our loans to middle market companies can be
expected to be more severely affected than loans to large corporations by
adverse developments in the Indian economy due to their generally weaker
financial position. In all of these cases, we are subject to the credit risk
that our borrowers may not pay us in a timely fashion or at all. The credit
risk of all our borrowers is higher than in other developed countries due to
the higher uncertainty in our regulatory, political and economic environment
and difficulties that many of our borrowers face in adapting to instability in
world markets and rapid technological advances taking place across the world.
Unlike in most other developed countries, we are required to do directed
lending to certain sectors specified by the Reserve Bank of India. For a
further discussion of the Reserve Bank of India regulations applicable to
Indian commercial banks see, "Supervision and Regulation". These sectors
generally have greater credit risks than our normal lending business. Higher
credit risk may expose us to potential losses which would adversely affect our
business, our future financial performance and the price of our equity shares
and our ADSs.
We are subject to the control of ICICI and could be subject to the control of
other shareholders.
Although ICICI owns 62.2% of our outstanding equity shares, its voting
power is limited due to Indian regulations that require that holders of 10.0%
or more of a bank's outstanding equity shares may only vote 10.0% of the
outstanding equity shares. Due to this voting restriction, and the fact that no
other shareholder owns 10.0% or more of our outstanding equity shares, ICICI
currently effectively controls 24% of the voting power of our outstanding
equity shares. For a more complete description of this voting restriction, see
"Relationship with the ICICI Group -- Capital, Dividend and Voting
Limitations".
Under the terms of our organizational documents, ICICI is entitled to
appoint one third of the members of our board of directors, including the
Executive Chairman and Managing Director of our board. ICICI is also permitted
to vote on the appointment of the remaining members of our board. ICICI has
appointed two directors to our current eight member board. Accordingly, ICICI
may be able to exercise effective control over our board and over matters
subject to a shareholder vote.
Additionally, because of the limited voting power of ICICI, it is possible
that a consortium of shareholders that acquires a portion of our outstanding
equity shares could effectively control us. If such shareholders decide to
significantly alter our business plan and change or terminate our relationship
with the ICICI group, it could have an adverse effect on the price of our
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equity shares and our ADSs. Under the current regulations, the approval of the
Reserve Bank of India is required before we can register the transfer of shares
for an individual or group which acquires 5.0% or more of our total paid up
capital.
The conversion of ICICI into a bank could impact the price of our equity shares
and our ADSs.
The regulatory situation in India that governs our relationship with our
parent company, ICICI, is in a state of flux. Under current guidelines, ICICI
may not convert to bank status and is required to reduce its ownership interest
in us to no more than 40.0% at some point in the future. The issue of universal
banking, which in the Indian context means combining commercial banks and
long-term development financial institutions, has been discussed at length over
the past few years. In its monetary and credit policy for fiscal 2001, the
Reserve Bank of India announced that it would consider proposals from
development financial institutions, like ICICI, who wish to transform
themselves into banks on a case-by-case basis. ICICI and ICICI Bank are
exploring a range of possible options should the regulatory situation change.
In this regard, ICICI has had several exploratory discussions with the
regulators. It is only after satisfactory resolution of various regulatory
issues including that of the imposition of the statutory liquidity ratio , the
cash reserve ratio and priority sector lending that a view can be taken on the
future course of action. In the meantime, this state of flux and the
uncertainty it causes may impact the price of our equity shares and our ADSs.
We work closely with ICICI and conflicts of interest with ICICI or the
deterioration of our relationship with ICICI could adversely affect our
business.
We offer products and services which largely complement the product and
services offered by ICICI and other ICICI group members. We seek to take
advantage of the customer relationships of the ICICI group. Because both ICICI
and we are offering some similar financial products and services, there may be
conflicts of interest between ICICI and us that could adversely affect our
business and the price of our equity shares and our ADSs. There is a risk that
ICICI may make business decisions which are to its advantage or the advantage
of other group companies at our expense. For example, ICICI may choose to enter
or increase its presence in certain markets in which we operate.
Any deterioration in the financial condition of our parent company, ICICI,
could adversely impact our business.
We fund our business operations independently of ICICI and our business
strategy and the execution of that strategy is independent from the business
and strategy of ICICI. However, any deterioration in ICICI's financial
condition may adversely impact the ICICI brand name and, indirectly, our
reputation and affect the confidence of our customers in us. A reduction in
consumer confidence could affect our ability to raise deposits from and make
loans to customers and adversely impact our business and our future financial
performance.
If we are unable to manage our rapid growth, our business could be disrupted
and the price of the equity shares and the ADSs could go down.
Since our inception in 1994, we have experienced rapid growth. Our asset
growth rate has been significantly higher than the Indian GDP growth rate over
the last five fiscal years. Our balance sheet growth was 78.5% in fiscal 1998,
112.1% in fiscal 1999 and 71.0% in fiscal 2000. We expect to continue to
implement a strategy of aggressive growth in our loans and deposits. Our growth
is expected to place significant demands on our management and other resources
and will require us to continue to develop and improve our operational, credit,
financial and other internal risk controls. This growth will also provide
challenges in our effort to maintain and improve the quality of our assets. Our
inability to manage our growth effectively could have a material adverse effect
on our business, our future financial performance and the price of our equity
shares and our ADSs.
The success of our Internet banking strategy will depend, in part, on the
development of the new and evolving market for Internet banking in India.
We have offered Internet banking services to our customers since October
1997, although there are currently low volumes of such transactions being
conducted in India. At March 31, 2000, we had approximately 110,000 Internet
accounts. The demand and market acceptance for Internet banking are subject to
a high level of uncertainty and are substantially dependent upon the adoption
of the Internet for general commerce and financial services transactions in
India. In 1999, there were approximately 0.8 million Internet users in India
and approximately 129 Internet service providers. The International Data
Corporation estimated in 1999 that the number of Internet users will increase
to 4.5 million by 2002 and 12.3 million by 2005.
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Many of our existing customers and potential customers have only a very
limited experience with the Internet as a communications medium. In order to
realize significant revenue from our Infinity services, we will have to
persuade our customers to conduct banking and financial transactions through
the Internet. In addition, the cost to Indian consumers of obtaining the
hardware, software and communications links necessary to connect to the
Internet is too high to enable many people in India to afford to use these
services at this time. Although relevant legislation has been introduced by the
government of India, critical issues concerning the commercial use of the
Internet, such as security, legal recognition of electronic records, validity
of contracts entered into online and the validity of digital signatures, remain
unresolved and may inhibit growth. If Internet banking does not continue to
grow or grows slower than expected, we will not be able to meet our projected
earnings and growth strategy related to our Internet banking business.
The success of our Internet banking strategy will depend, in part, on the
development of adequate infrastructure for the Internet in India.
The Internet may not be accepted as a viable commercial marketplace in
India for a number of reasons, including inadequate development of the
necessary network infrastructure. There can be no assurance that the Internet
infrastructure in India will be able to support the demands of its anticipated
growth. Inadequate infrastructure could result in slower response times and
adversely affect usage of the Internet generally. If the infrastructure for the
Internet does not effectively support growth that may occur, we will not be
able to execute our growth strategy related to our Internet banking business.
If we are unable to succeed in our new business areas, we may not be able to
execute our growth strategy.
We have recently launched several Internet banking products for our retail
and corporate customers including online bill payments and online account
opening. We have also recently entered the Indian credit card market and
started offering mobile phone banking services. ICICI group also intends to
provide online brokering services. We provide online integration between the
customer's depositary share account and bank account with us and securities
brokerage account with ICICI Web Trade Limited. We expect to offer auto loans
and home mortgage loans that qualify as priority sector lending and distribute
life insurance products proposed to be offered by the ICICI group to our
customers. We intend to continue to explore new business opportunities in both
retail and corporate banking. We cannot assure you that we have accurately
estimated the relevant demand for these new banking products or that we will be
able to master the skills and management information systems necessary to
successfully manage our new products and services. Our inability to grow in new
business areas could adversely affect our future financial performance and the
price of our equity shares and our ADSs.
Material changes in the regulations which govern us could cause our business to
suffer and the price of our equity shares and our ADSs to go down.
Banks in India operate in a highly regulated environment in which the
Reserve Bank of India extensively supervises and regulates banks. Our business
could be directly affected by any changes in policies for banks in respect of
directed lending and reserve requirements. In addition, banks are generally
subject to changes in Indian law, as well as to changes in regulation and
governmental policies, income tax laws and accounting principles. We cannot
assure you that laws and regulations governing the banking sector will not
change in the future or that any changes will not adversely affect our
business, our future financial performance and the price of our equity shares
and our ADSs.
Our business is very competitive and our growth strategy depends on our ability
to compete effectively.
Interest rate deregulation and other liberalization measures affecting the
Indian banking sector have increased competition. This liberalization process
has led to increased access for our customers to alternative sources of funds,
such as domestic and foreign commercial banks and the domestic and
international capital markets. Our corporate and retail lending business will
continue to face competition from Indian and foreign commercial banks and
non-banking finance companies. In addition, we will face increasing competition
for deposits from other banks, non-banking entities like mutual funds and
non-banking finance companies. Our future success will also depend upon our
ability to compete effectively with these entities, including the public sector
banks, which may have significantly greater resources than us. Our business
could also be affected by the increasing use of technology by our competitors.
Competition may also increase significantly with greater deregulation of the
Indian banking industry. Due to competitive pressures, we may be unable to
successfully execute our growth strategy and offer products and services at
reasonable returns and this may adversely impact our business and our future
financial performance.
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We face risks associated with potential strategic partnerships or other
ventures, including whether any such transactions can be completed and whether
the other party can be integrated with our business on favorable terms.
We may seek opportunities for growth through future acquisitions,
investments, strategic partnerships or ventures. Any such future transactions
may involve a number of risks, including increased costs, diversion of our
management's attention required to integrate the acquired business and the
failure to retain key acquired personnel and clients, some or all of which
could have an adverse effect on our business.
If we are unable to adapt to the rapid technological changes, our business
could suffer.
Our success will depend, in part, on our ability to respond to
technological advances and emerging banking industry standards and practices on
a cost-effective and timely basis. The development and implementation of such
technology entails significant technical and business risks. There can be no
assurance that we will successfully implement new technologies effectively or
adapt our transaction-processing systems to customer requirements or emerging
industry standards. If we are unable, for technical, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, our business and our future financial performance could be
materially adversely affected.
Significant security breaches and fraud could adversely impact our business.
We seek to protect our computer systems and network infrastructure from
physical break-ins as well as security breaches and other disruptive problems
caused by our increased use of the Internet. Computer break-ins and power
disruptions could affect the security of information stored in and transmitted
through such computer systems and network infrastructure. We employ security
systems, including firewalls and password encryption, designed to minimize the
risk of security breaches. Though, we intend to continue to implement security
technology and establish operational procedures to prevent break-ins, damage
and failures, there can be no assurance that these security measures will be
successful. A significant failure of security measures could have a material
adverse effect on our business and our future financial performance.
Our business operations are highly transaction-oriented. Although we take
adequate measures to safeguard against fraud, there can be no assurance that we
would be able to prevent fraud. Our reputation could be adversely affected by
significant fraud committed by employees or outsiders.
Risks Relating to the ADSs and Equity Shares
You will not be able to vote your ADSs.
Holders of ADSs have no voting rights unlike holders of the equity shares
who have voting rights. The depositary exercises its right to vote the equity
shares represented by the ADSs as directed by our board of directors. If you
wish, you may withdraw the equity shares underlying the ADSs and seek to vote
the equity shares you obtain upon withdrawal. However, for foreign investors,
this withdrawal process may be subject to delays. For a discussion of the legal
restrictions triggered by a withdrawal of the equity shares from the depositary
facility upon surrender of ADSs, see "Restriction on Foreign Ownership of
Indian Securities."
Your ability to withdraw equity shares from the depositary facility is
uncertain and may be subject to delays.
India's restrictions on foreign ownership of Indian companies limit the
number of shares that may be owned by foreign investors and generally require
government approval for foreign ownership. Investors who withdraw equity shares
from the depositary facility are subject to Indian regulatory restrictions on
foreign ownership upon withdrawal. It is possible that this withdrawal process
may be subject to delays. For a discussion of the legal restrictions triggered
by a withdrawal of equity shares from the depositary facility upon surrender of
ADSs, see "Restriction on Foreign Ownership of Indian Securities".
Your ability to sell in India any equity shares withdrawn from the depositary
facility may be subject to delays if specific government approval is required.
Investors seeking to sell in India any equity shares withdrawn upon
surrender of an ADS will require Reserve Bank of India approval for each such
transaction unless the sale of such equity shares is made on a stock exchange
or in connection with an offer made under the regulations regarding takeovers.
If approval is required, we cannot guarantee that any approval will be obtained
in a timely manner or at all. Because of possible delays in obtaining requisite
approvals, investors in equity
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shares may be prevented from realizing gains during periods of price increases
or limiting losses during periods of price declines.
You are unable to withdraw and redeposit shares in the depositary facility.
Because of certain Indian legal restrictions, the supply of ADSs may be
limited. The only way to add to the supply of ADSs will be through a primary
issuance because the depositary is not permitted to accept deposits of
outstanding equity shares and issue ADSs representing such shares. Therefore,
an investor in ADSs who surrenders an ADS and withdraws equity shares is not
permitted to redeposit his equity shares in the depositary facility. In
addition, an investor who has purchased equity shares in the Indian market is
not able to deposit them in the ADS program. The inability of investors to
withdraw from and re-enter the depositary facility may adversely affect the
market price of our ADSs.
US investors may be subject to materially adverse tax consequences if we are a
passive foreign investment company.
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, we do not expect to be
considered a passive foreign investment company. In general, a foreign
corporation is a passive foreign investment company for any taxable year in
which (i) 75.0% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties) or (ii) 50.0% or more of the average
quarterly value of its assets consists of assets that produce, or are held for
the production of passive income. We have based our expectation that we are not
a passive foreign investment company on, among other things, provisions in the
proposed regulations that provide that certain restricted reserves (including
cash and securities) of banks are assets used in connection with banking
activities and are not passive assets, as well as the composition of our income
and our assets from time to time. Since there can be no assurance that the
proposed regulations will be finalized in their current form and the
composition of our income and assets will vary over time, there can be no
assurance that we will not be considered a passive foreign investment company
for any fiscal year. If we are a passive foreign investment company at any time
that you own ADSs and you are a US person, you may be subject to materially
adverse US tax consequences. See "Taxation -- United States Taxation -- Passive
Foreign Investment Company Rules".
Conditions in the Indian securities market may affect the price or liquidity of
the equity shares and the ADSs.
The Indian securities markets are smaller and more volatile than
securities markets in more developed economies. The Indian stock exchanges have
in the past experienced substantial fluctuations in the prices of listed
securities and the price of our stock has been especially volatile. In 1999,
our stock price on the The National Stock Exchange of India Limited (NSE)
ranged from a high of Rs. 75.00 (US$ 1.72) in December 1999 to a low of Rs.
20.75 (US$ 0.48) in February 1999. From January 1, 2000 to March 31, 2000, our
stock price on the NSE, reached a peak of Rs. 275 (US$ 6.30) and a low of Rs.
66.00 (US$ 1.52). At March 31, 2000 our stock price on the NSE was Rs. 267.05
(US$ 6.12) and our ADS price was US$ 14.625 on the NYSE.
Indian stock exchanges have also experienced problems that have affected
the market price and liquidity of the securities of Indian companies. These
problems have included temporary exchange closures, broker defaults, settlement
delays and strikes by brokers. The Stock Exchange, Mumbai, formerly known as
the Bombay Stock Exchange or the BSE, was closed for three days in March 1995
following a default by a brokerage house. In addition, the governing bodies of
the Indian stock exchanges have from time to time imposed restrictions on
trading in certain securities, limitations on price movements and margin
requirements. Further, from time to time, disputes have occurred between listed
companies and stock exchanges and other regulatory bodies, which in some cases
may have had a negative effect on market sentiment. Similar problems could
happen in the future and, if they did, they could affect the market price and
liquidity of our equity shares and our ADSs.
Because of our close relationship with ICICI, volatility in the price of
ICICI shares could affect the price of our equity shares and our ADSs.
There is a limited market for the ADSs.
Even though our ADSs are listed on the New York Stock Exchange, we cannot
be certain that any trading market for our ADSs will develop or be sustained.
We cannot guarantee that a market for the ADSs will continue.
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Settlement of trades of equity shares on Indian stock exchanges may be subject
to delays.
The equity shares represented by our ADSs are listed on the Calcutta,
Delhi, Madras and Vadodara Stock Exchanges, the BSE and the NSE. Settlement on
these stock exchanges may be subject to delays and an investor in equity shares
withdrawn from the depositary facility upon surrender of ADSs may not be able
to settle trades on such stock exchanges in a timely manner.
As a result of Indian government regulation of foreign ownership, the price of
the ADSs could go down.
Foreign ownership of Indian securities is heavily regulated and is
generally restricted. ADSs issued by companies in certain emerging markets,
including India, may trade at a discount or premium to the underlying equity
shares, in part because of the restrictions on foreign ownership of the
underlying equity shares.
Your holdings may be diluted by additional issuances of equity by us and any
dilution may adversely affect the market price of our ADSs.
Any future issuances of equity by us will dilute the positions of
investors in our ADSs and could adversely affect the market price of our ADSs.
Although we do not anticipate issuing additional equity in the immediate
future, there is a risk that our continued rapid growth could require us to
fund this growth through additional equity offerings. Our recently approved
employee stock option plan could lead to the issuance of up to 5.0% of our
issued equity shares.
You may be unable to exercise preemptive rights available to other
shareholders.
A company incorporated in India must offer its holders of equity shares
preemptive rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any new
equity shares, unless these rights have been waived by at least 75.0% of the
company's shareholders present and voting at a shareholders' general meeting.
US investors in our ADSs may be unable to exercise preemptive rights for our
equity shares underlying our ADSs unless a registration statement under the
Securities Act is effective with respect to such rights or an exemption from
the registration requirements of the Securities Act is available. Our decision
to file a registration statement will depend on the costs and potential
liabilities associated with any such registration statement as well as the
perceived benefits of enabling US investors in our ADSs to exercise their
preemptive rights and any other factors we consider appropriate at the time. We
do not commit that we would file a registration statement under these
circumstances. If we issue any such securities in the future, such securities
may be issued to the depositary, which may sell such securities in the
securities markets in India for the benefit of the investors in our ADSs. There
can be no assurance as to the value, if any, the depositary would receive upon
the sale of these securities. To the extent that investors in our ADSs are
unable to exercise preemptive rights, their proportional interests in us would
be reduced.
Because the equity shares underlying our ADSs are quoted in rupees in India,
you may be subject to potential losses arising out of exchange rate risk on the
Indian rupee and risks associated with the conversion of rupee proceeds into
foreign currency.
Investors will be subject to currency fluctuation risks and convertibility
risks since the equity shares are quoted in rupees on the Indian stock
exchanges on which they are listed. Dividends on the equity shares will also be
paid in rupees, and then converted into US dollars for distribution to ADS
investors. Investors that seek to convert the rupee proceeds of a sale of
equity shares withdrawn upon surrender of ADSs into foreign currency and export
the foreign currency will need to obtain the approval of the Reserve Bank of
India for each such transaction. In addition, investors that seek to sell
equity shares withdrawn from the depositary facility will have to obtain
approval from the Reserve Bank of India, unless the sale is made on a stock
exchange or in connection with an offer made under the regulations regarding
takeovers. Holders of rupees in India may also generally not purchase foreign
currency without general or special approval from the Reserve Bank of India.
On an average annual basis, the rupee has declined against the US dollar
since 1980. As measured by the Reserve Bank of India's reference rate, the
rupee lost approximately 28.4% of its value against the US dollar in the last
four years, depreciating from Rs. 35.68 per US$ 1.00 at August 30, 1996 to Rs.
45.80 per US$ 1.00 at August 31, 2000. At March 31, 2000, the Reserve Bank of
India's reference rate was Rs. 43.65 per US$ 1.00. In addition, in the past,
the Indian economy has experienced severe foreign exchange shortages, creating
future potential decline in the value of the rupee. In 1991, the government of
India obtained substantial foreign financial assistance, including a US$ 2.3
billion standby arrangement with
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the International Monetary Fund, in order to avert difficulties in servicing
India's external debt. India's foreign exchange reserves have since increased
and were US$ 35.6 billion at September 1, 2000.
You may be subject to Indian taxes arising out of capital gains.
Generally, capital gains, whether short-term or long-term, arising on the
sale of the underlying equity shares in India are subject to Indian capital
gains tax. For the purpose of computing the amount of capital gains subject to
tax, Indian law specifies that the cost of acquisition of the equity shares
will be deemed to be the share price prevailing on the BSE or the NSE on the
date the depositary advises the custodian to redeem receipts in exchange for
underlying equity shares. The period of holding of such equity shares, for
determining whether the gain is long-term or short-term, commences on the date
of the giving of such notice by the depositary to the custodian. Investors are
advised to consult their own tax advisers and to consider carefully the
potential tax consequences of an investment in our ADSs.
There may be less company information available in Indian securities markets
than securities markets in developed countries.
There is a difference between the level of regulation and monitoring of
the Indian securities markets and the activities of investors, brokers and
other participants and that of markets in the United States and other developed
economies. The Securities and Exchange Board of India is responsible for
improving disclosure and other regulatory standards for the Indian securities
markets. The Securities and Exchange Board of India has issued regulations and
guidelines on disclosure requirements, insider trading and other matters. There
may, however, be less publicly available information about Indian companies
than is regularly made available by public companies in developed economies.
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RELATIONSHIP WITH THE ICICI GROUP
General
The ICICI group is a diversified financial services group organized under
the laws of India. The ICICI group includes ICICI, the parent company and its
subsidiaries. These companies conduct commercial banking, investment banking,
venture capital, information technology, Internet-based stock trading and
retail banking activities. ICICI is one of the largest of all Indian financial
institutions, banks and finance companies in terms of assets. ICICI has close
relationships with a client base of over 1,000 Indian companies, a growing base
of 3.7 million retail bond customers and a strong pool of experienced and
talented professionals. The ICICI group's retail products include retail
deposits, retail bonds, home mortgage loans and auto loans and other consumer
finance products and services. In fiscal 2000, the ICICI group had consolidated
net income of Rs. 9.3 billion (US$ 214 million). At March 31, 2000 the ICICI
group had consolidated assets of Rs. 780.7 billion (US$ 17.9 billion) and
consolidated stockholders' equity of Rs. 70.9 billion (US$ 1.6 billion).
Most of the activities of the ICICI group are carried out through the
parent company, ICICI, which is listed on the New York Stock Exchange (symbol:
IC). ICICI accounted for over 82.2% of the consolidated assets at year-end
fiscal 2000 and 76.3% of the consolidated net income for fiscal 2000. We are
the largest subsidiary in the ICICI group, accounting for 16.7% of the
consolidated assets at year-end fiscal 2000 and 15.0% of the consolidated net
income for fiscal 2000.
Capital, Dividend and Voting Limitations
Under the conditions of the commercial banking license granted to ICICI in
1994 to establish us, there must be an arms length relationship
organizationally and operationally between ICICI and us. We are also prohibited
from extending any credit to ICICI. We have no agreement with ICICI and no
plans to enter into an agreement regarding any future contribution of capital
by ICICI to us for maintenance of our minimum capital adequacy ratio or with
respect to any future issuance of equity shares by us to ICICI. Any declaration
and payment of a dividend by us to any shareholder, including ICICI, must be
recommended by our board of directors and approved by our shareholders in
accordance with applicable Indian law, and if the dividend is in excess of
25.0% of the par value of our shares, we must obtain prior approval from the
Reserve Bank of India.
ICICI has no preemptive or registration rights with respect to our shares
and we have no agreement to issue any equity or debt securities to ICICI.
ICICI owns 62.2% of our equity shares. Under Indian law, no person holding
shares in a banking company can vote more than 10.0% of such bank's outstanding
equity shares. This means that while ICICI owns 62.2% of our equity shares, it
can only vote 10.0% of our equity shares. Due to this voting restriction and
the fact that no other shareholder owns 10.0% or more of our outstanding equity
shares, ICICI effectively controls 24.0% of the voting power of our outstanding
equity shares.
Our organizational documents permit ICICI to appoint up to one third of
the members of our board, including the Executive Chairman and Managing
Director of our board. Pursuant to this authority, ICICI has appointed two
directors to our eight-member board of directors. ICICI may also vote on the
appointment of remaining members of our board of directors. Pursuant to our
organizational documents, to convene a board meeting, one of the two ICICI
directors on our board of directors must be present unless they waive this
requirement in writing.
Ownership Considerations
As we describe in "Group Operating Strategy" below, we work closely with
ICICI and, given its large equity interest in us, we believe that ICICI has an
incentive to help us perform well. There is a possibility that ICICI may make
business decisions which are to its advantage or the advantage of other group
companies at our expense.
The regulatory situation in India that governs our relationship with our
parent company, ICICI, is in a state of flux. Under current guidelines, ICICI
may not convert to bank status and is required to reduce its ownership interest
in us to no more than 40.0% at some point in the future. The issue of universal
banking, which in the Indian context means combining commercial banks and
long-term development financial institutions, has been discussed at length over
the past few years. In its monetary and credit policy for fiscal 2001, the
Reserve Bank of India announced that it would consider proposals from
development financial institutions, like ICICI, who wish to transform
themselves into banks on a case-by-case basis. ICICI and ICICI Bank
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are exploring a range of possible options should the regulatory situation
change. In this regard, ICICI has had several exploratory discussions with the
regulators. It is only after satisfactory resolution of various regulatory
issues including that of the imposition of the statutory liquidity ratio , the
cash reserve ratio and priority sector lending that a view can be taken on the
future course of action.
Complementary Product Ranges
Traditionally, regulation in the banking and financial services sector in
India segregated the offering of various products and services between
commercial banks like us and financial institutions like ICICI. In recent
years, some of these restrictions have been relaxed, and there is some overlap
between the product offerings of ICICI and us, as described below. However, we
believe that both of our product ranges remain largely complementary and enable
the ICICI group to attract and retain customers by providing a complete range
of financial products and services.
Corporate Lending
Both we and ICICI offer term loans and guarantees although we generally do
not compete with each other to provide these services. Because ICICI has a
significantly larger balance sheet than us and our funding sources are of a
shorter term than those of ICICI, ICICI typically offers larger loans on a
fixed rate basis with longer maturities, while we offer smaller loans on a
floating rate basis with shorter maturities. We can offer documentary credits
for all purposes while, under current authorization, ICICI can offer
documentary credits only to customers having an available line of foreign
currency credit with them, and only for import of capital goods. ICICI is not
permitted to offer these products for the import of raw materials, which we can
do.
Retail Lending
While ICICI does not offer credit cards, it does, together with its
subsidiary, ICICI Home Finance Company Limited, offer retail asset products
including auto loans and home mortgage loans which are marketed through its
subsidiary, ICICI Personal Financial Services Limited. We offer credit cards,
loans against time deposits and loans against shares for subscriptions to
initial public offerings of Indian companies. We plan to offer auto loans and
home mortgage loans in fiscal 2001 which will be marketed through ICICI
Personal Financial Services. Pursuant to an understanding between ICICI and us,
we will offer auto loans and home mortgage loans that qualify as priority
sector lending and ICICI, together with ICICI Home Finance, will offer all
other auto loans and home mortgage loans. Home mortgage loans of up to Rs. 1
million and auto loans to professionals qualify as priority sector lending. For
a description of our priority sector lending requirements, see "Business --
Corporate Banking -- Directed Lending".
Funding
ICICI is not permitted to offer banking products involving checking
facilities including savings accounts, checking accounts, cash management
services and time deposits of a maturity of less than one year. These products
form our core funding base.
Treasury
Our foreign exchange treasury is a full-fledged authorized dealer while
ICICI is permitted to deal only with regard to its underlying transactions. Our
domestic treasury desk serves its customers independent of the ICICI desk.
Group Operating Strategy
In fiscal 1999, in an effort to enhance the delivery of products and
services to clients, the ICICI group decided to reorganize its structure. It
formed three client relationship groups, the Major Clients Group, the Growth
Clients Group and the Personal Financial Services Group, for this purpose.
The relationship managers in the Major Clients Group and the Growth
Clients Group are drawn from companies across the ICICI group, including from
us. These relationship managers are responsible for offering the full range of
the ICICI group's corporate banking products and services with an emphasis on
cross-selling products and services offered by ICICI group companies and the
generation of fee-based income. These groups are client-driven, so they cater
to the needs of the ICICI group's customers regardless of which relationship
manager is servicing a particular customer and whether the product is one
offered by us or other ICICI group companies. The salary and other expenses of
a relationship manager that is working
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for one of these client relationship groups are borne by the company that has
seconded the relationship manager to one of these client relationship groups.
The ICICI group restructuring has enabled us to take advantage of ICICI's
strong relationships with over 1,000 corporations in India to sell our products
and services. These relationships have been particularly effective in helping
us gain access to the larger corporations, as our balance sheet on a
stand-alone basis would not have permitted us to take the large exposures that
may be undertaken by ICICI given its large balance sheet capabilities. As
described in greater detail below, in cases where ICICI and we both provide
credit to the same customer, we appraise the customers' credit requirements
separately and independently. On the basis of our credit analysis, pricing,
portfolio exposure and other factors, we determine whether and to what extent
we take an exposure. Our decision is independent of ICICI's credit approval and
appraisal processes. There have been instances where ICICI has extended credit
to a particular borrower and we have not.
We also seek to benefit from ICICI's corporate relationships in growing
our retail business. We sell retail products to the employees of the ICICI
group's corporate customers, including offering corporate customers our payroll
deposit scheme for their employees.
The Personal Financial Services Group manages ICICI's retail business.
ICICI's 3.7 million retail bond customers also present us with an opportunity
for cross-selling a variety of products, including bank accounts, credit cards,
depositary share accounts and, to a limited extent, retail loans.
Both our and the ICICI group's retail strategy is based on the offering of
multiple products through multiple delivery channels to provide choice and
convenience to customers. Offering the entire range of products and services
through multiple channels also results in greater economies of scale. The
channels are owned by different ICICI group companies. We own the bank branch
channel and Infinity, the Internet banking channel, and ICICI Personal
Financial Services owns the telephone banking call centers. We use the services
of ICICI Personal Financial Services to offer telephone banking to our
customers. For this purpose, we pay them on the basis of actual call volume.
The ICICI centers, which are low-cost standalone offices acting as marketing
and service centers, are owned by ICICI. Our credit card back-end processing
operations are managed by ICICI Personal Financial Services. We pay ICICI
Personal Financial Services on a cost plus 10.0% markup basis. See "Business --
Retail Banking -- Credit Cards" and "Related Party Transactions".
To enable the pooling of talent and a compensation structure aligned to
those of other information technology companies, the group decided to
consolidate the technology teams from all group companies into one information
technology company, ICICI Infotech Services Limited. ICICI Infotech now offers
technology solutions to the entire ICICI group. We outsource our information
technology requirements from ICICI Infotech and 33 of their employees have been
seconded to us. These officers are dedicated to meet our requirements and we
pay ICICI Infotech the salary expenses of these ICICI Infotech employees. While
the personnel are outsourced from ICICI Infotech, the existing hardware and
software continue to be owned by us.
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BUSINESS
Overview
We are a private sector commercial bank organized under the laws of India
in 1994. We offer a wide range of banking products and services to corporate
and retail customers through a variety of delivery channels. We believe our
emphasis on providing value-added products and quality service which are
responsive to the financial needs of our customers will allow us to continue to
gain market share in our target customer markets. We are a subsidiary of ICICI
Limited, one of the largest of all Indian financial institutions, banks and
finance companies in terms of assets, a well-recognized brand in the Indian
financial sector and the first Indian bank to list its securities on the New
York Stock Exchange. In fiscal 2000, our net income was Rs. 1,402 million (US$
32 million). At March 31, 2000, we had assets of Rs. 130.4 billion (US$ 3.0
billion) and stockholders' equity of Rs. 11.4 billion (US$ 261 million).
Our organization has three key activities: corporate banking, retail
banking and treasury operations. In corporate banking, our primary goal is to
build a strong asset portfolio consisting mainly of working capital and term
loans to large, well-established Indian corporations as well as to select
middle market companies in growth industries. We also seek to provide a wide
variety of fee-based corporate products and services, like documentary credits,
cash management services, cross-border trade services, standby letters of
credit and treasury-based derivative products that help us increase our
non-interest income. In building our corporate banking activities, we have
capitalized on the strong relationships that our parent company, ICICI, enjoys
with many of India's leading corporations. We intend to generate significant
growth in revenues based on increased synergies with ICICI and its group of
companies.
Our retail products and services include payroll accounts and other retail
deposit products, online bill payment and remittance facilities, credit cards,
depositary share accounts, retail loans against time deposits and loans against
shares for subscriptions to initial public offerings. We have built a base of
demand and time deposits with 636,877 retail customer accounts at March 31,
2000. We offer our customers a choice of delivery channels including physical
branches, ATMs, telephone banking call centers and the Internet. In recent
years, we have expanded our physical delivery channels, including bank branches
and ATMs, to cover a total of 175 locations in 47 cities throughout India at
March 31, 2000.
Our treasury engages in domestic and foreign exchange operations. It seeks
to manage our balance sheet, including by maintaining required regulatory
reserves. In addition, our treasury seeks to optimize profits from our trading
portfolio by taking advantage of market opportunities using funds acquired from
the inter-bank markets and corporate deposits. Our trading portfolio includes
our regulatory portfolio as there is no restriction on active management of our
regulatory portfolio.
Since our inception in 1994, we have consistently used technology to
differentiate our products and services from those of our competitors. For
example, we were the first bank in India to offer Internet banking. Our
technology-driven products also include electronic commerce-based
business-to-business and business-to-consumer banking solutions, cash
management services and mobile phone banking services. To support our
technology initiatives, we have set up online real time transaction processing
systems. We remain focused on changes in customer needs and technological
advances and seek to remain at the forefront of electronic banking in India.
Our legal name is ICICI Bank Limited but we are known commercially as
ICICI Bank. We were incorporated in 1994 under the laws of India as a limited
liability corporation. Our principal corporate office is located at ICICI
Towers, Bandra Kurla Complex, Mumbai 400 051, India, our telephone number is
011-91-22-653-1414 and our website address is www.icicibank.com.
History
We were formed in 1994 as a part of the ICICI group of companies. Our
initial equity capital was contributed 75.0% by ICICI and 25.0% by SCICI
Limited, a diversified finance and shipping finance lender of which ICICI owned
19.9% at December 1996. In December 1996, SCICI was merged into ICICI, and as a
result, we became a wholly-owned subsidiary of ICICI. We have grown rapidly in
size to become a leading player among the new private sector Indian banks.
After our ADS offering in March 2000, ICICI held 62.2% of our equity shares.
See "Relationship with the ICICI Group - Ownership Considerations" for a
discussion of the regulatory situation in India that governs our relationship
with our parent company, ICICI.
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Our Strategy
Our objective is to be the leading provider of banking products through
technology driven distribution channels servicing a targeted group of corporate
and retail customers.
To achieve our objective, the key elements of our strategy are to:
o Increase our market share in corporate banking;
o Build a profitable retail franchise;
o Apply Internet-related technologies to existing product offerings and
create new business opportunities on the Internet;
o Use technology to provide a multi-channel distribution network;
o Enhance our recurring fee income; and
o Emphasize conservative risk management practices to enhance our asset
quality.
Increase Our Market Share in Corporate Banking
Our corporate lending products and services, consisting principally of
working capital finance and term lending, have grown at a compound annual
growth rate of 54.0% over the past three fiscal years. We expect that
short-term finance will continue to represent a significant growth opportunity
as the economy in India develops. Over the past year, we have shifted our focus
in favor of financing large, highly rated corporations, although we continue to
seek to identify and gain market share in the new growth sectors of the Indian
economy. Further, in all of our activities, we seek to be flexible and
responsive to our clients needs, while at the same time seeking to maintain
safeguards through conservative risk management practices. Our outstanding
share in the Indian banking system's loan asset exposures as at March 31, 2000
was 1.07%, and our incremental share was 2.38%.
We believe we can continue to expand our market presence by leveraging
strong corporate relationships of the ICICI group, the effective use of
technology, speedy response times, quality service and the provision of
products and services designed to meet specific customer needs. The ICICI group
enjoys strong financial ties with over 1,000 of India's leading corporations,
mainly through long-term funding relationships. Together with other members of
the ICICI group, we participate in joint marketing teams to provide a
comprehensive range of long and short-term financial products to these
corporate customers. As a result, ICICI group relationships have enabled us to
significantly enhance our market share in short-term funding. We expect to
continue to work closely with the ICICI group to harness synergies in the
marketing of our complementary range of products and rapidly expand our asset
base.
Build a Profitable Retail Franchise
We believe the "ICICI" brand name is well established and one of the most
respected names in the financial services business in India. We believe that
this strength in brand identity, together with the ICICI group's strong
corporate relationships and existing retail investor base, provides us with a
unique opportunity to build a profitable retail franchise in India. At March
31, 2000, we had 636,877 retail customer accounts and at August 31, 2000, we
had more than 1 million retail customer accounts. Within India, we have a
target market of 34 million households, consisting principally of professionals
and high net worth individuals as well as select wage and salary earners. This
market is supplemented by 22 million non-resident Indians, a significant
portion of whom are well educated and affluent and have strong links to family
members in India. We believe our range of retail products will facilitate
further penetration of the Indian retail consumer market.
We plan to attract customers through innovative products such as "Power
Pay", our direct deposit product that allows our corporate customers' employee
salaries to be directly credited to special savings accounts, to significantly
drive the growth in the number of savings accounts maintained with us.
We will continue to seek to provide our target market with a growing range
of deposit, funds transfer, and retail bank products to meet their growing
financial needs. We will continue to expand our range of retail savings
products tailored to
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meet the needs of our customer base, such as foreign currency denominated
accounts for non-resident Indians, as well as premium checking accounts for
small businesses.
We believe the lack of strong mass market players in retail assets in
India creates a significant growth opportunity for us. Our retail asset
products at present are limited to credit cards, loans against time deposits,
loans against shares, and loans for subscriptions to initial public offerings
in India. We intend to increase our retail asset base during fiscal 2001 by
offering auto loans and home mortgage loans. Pursuant to an understanding
between ICICI, and us, we will offer auto loans and home mortgage loans that
qualify for priority sector lending. These loans would be marketed through
ICICI Personal Financial Services which currently markets the retail assets of
ICICI and its subsidiary, ICICI Home Finance. We will continue to broaden our
range of retail products and services in an effort to gain market share among
our target customer base.
We are using the Retail Customer Data Mart, a database that consolidates
retail customer and product data across all ICICI group companies including
ICICI's 3.7 million retail bond customers. This data is analyzed for customer
segmentation and is used in our targeted marketing campaigns. For example, we
use this database to determine which high net worth individuals we should grant
our credit cards with pre-approved credit limits. We plan to continue our use
of this and similar information systems to enhance customer loyalty through
increased cross selling.
Apply Internet-Related Technologies to Existing Product Offerings and
Create New Business Opportunities on the Internet
We believe that by developing Internet applications for our services, we
can gain significant marketing and distribution advantages over our
competitors. We also believe that through the Internet we can vertically
integrate our product offerings, allowing customers, retailers, distributors,
manufacturers and their suppliers access to our banking system. Lower costs
from effective use of technology coupled with increased scale of operations
should allow us to deliver greater value to our customers.
Accordingly, we were the first bank in India to introduce an Internet
banking service and an Internet-based bills payment system, and even today are
one among very few banks offering this service in India. We pioneered online
business-to-business solutions in India by launching "i-payments", a payments
tool connecting our customers with their suppliers and dealers. We offer online
electronic payment facilities to our corporate customers and their suppliers
and dealers as a closed user group using the Internet as the delivery platform.
These product offerings have resulted in significant cost savings to our
clients, allowing us to develop client loyalty while at the same time better
understanding the needs of our clients. In all of our endeavors, we intend to
use the Internet as a means of enhancing our accessibility and overall customer
convenience and satisfaction.
Use Technology to Provide a Multi-Channel Distribution Network
As we have recently entered the banking sector, we have been able to use
current technology to develop all our systems. We believe that product
differentiation through multiple delivery channels has improved our ability to
attract and retain customers, enabling us to achieve gains in market share.
Accordingly, we have tried to provide products and services, using the
Internet, ATMs and other technology to increase our service and attract and
satisfy customers. Our use of online delivery channels offers added convenience
for our customers while markedly reducing the cost of financial transactions
and the need to have an extensive branch network. Our technology is expected to
allow the customer access to any product through any delivery channel and
thereby give the customer the option of choosing the most convenient channel.
To further expand our ATM network, we have entered into alliances with
petroleum companies, department stores and cyber cafes to provide ATMs at
select high traffic locations. Our goal is to develop a cost efficient, highly
effective distribution network, which ensures quality customer service.
Enhance Our Recurring Fee Income
We will continue to seek to develop value-added products and services in
an effort to enhance our market share and to increase our recurring fee income.
Our fee and commission income has grown at a compounded annual growth rate of
65.3% since fiscal 1997, principally from issuing guarantees, documentary
credits and similar instruments. We believe we were the second largest provider
of cash management services in India and were among the market leaders in
providing trust, retention and escrow account services at March 31, 2000. We
have developed countrywide collection and payment mechanisms for rural and
cooperative banks with limited geographic presence. We continue to seek to
provide funds collection and transfer services to our clients and clients of
the ICICI group. We also offer our customers depositary share accounts and
direct sales of third
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party mutual funds and propose to distribute insurance products to be offered
by the ICICI group in the future. Through Infinity, our Internet banking
service, we offer Money2India, our online remittance facility for non-resident
Indians, which is already generating fee income. We also offer "i-payments",
our business-to-business electronic commerce solution for corporate customers,
and electronic payment of utility bills for retail customers, which are
presently free to increase customer acquisition. We provide all cross-border
trade services to our customers. We believe these and other initiatives will
enhance our recurring fee income in ways that are responsive to the needs of
our customers.
Emphasize Conservative Risk Management Practices to Enhance Our Asset Quality
We believe conservative risk management policies, processes and controls
are critical for our long-term success. While we will continue to extend credit
to growth oriented companies with strong financial positions, we expect that
our emphasis on lending primarily to higher rated credits and active management
of older less creditworthy assets should help improve the risk profile of our
loan portfolio. In connection with our new credit card business, we have
devised an internal credit scoring model and maintain strict monitoring of
repayment patterns to minimize the risks associated with this business. Once we
enter the auto loan and home mortgage loan market, we intend to apply the same
rigor to credit evaluation standards for these products as we have applied to
the credit evaluation standards for our current loan products.
We expect to build on our established credit risk management procedures,
credit evaluation and rating methodology, credit risk pricing models,
proprietary analytics and monitoring and control mechanisms.
Finally, we believe that our adoption of U.S. GAAP accounting including
its stringent provisioning requirements embodies a more conservative approach
to quantifying credit losses.
Possible Alliances
The banking sector in India is changing rapidly and we are considering a
number of selective strategic options on an ongoing basis. These include
alliances and other initiatives with Internet portal and other Internet service
providers, telecommunications companies and banks for online financial products
and services, alliances for installation of ATMs at gas station outlets, cyber
cafes, outlets of consumer durable companies and retail chain stores and third
party bank locations. After careful assessment, we may also consider selective
acquisitions to further these or other strategic options. The goal of any such
initiative would be to further our overall strategy of broadening our customer
base, increasing market share and providing superior services through low-cost
distribution channels and thus increasing shareholder value.
Our Principal Business Activities
Our principal business activities include corporate banking, retail
banking and treasury operations. In corporate banking, we make working capital
loans and term loans to our corporate borrowers, take deposits from corporate
customers and provide a range of fee-based products and services. In retail
banking, we take deposits from retail customers through multiple products and
delivery channels and since January 2000, have begun to offer credit cards in
addition to other retail loan products.
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The following table sets forth, for the periods indicated, the share of
our corporate and retail banking deposits and loans in our total business:
At March 31, 1999 At March 31, 2000
----------------------------- -----------------------------
Corporate Retail Corporate Retail
banking banking Total banking banking Total
--------- ------- ----- --------- ------- ------
(in Rs. billion, except percentages)
Gross loans .. 27.4 1.1 28.5 46.2 1.5 47.7
% of total ... 96.1% 3.9% 100.0% 96.7% 3.3% 100.0%
Deposits ..... 45.6 15.1 60.7 68.1 30.5 98.6
% of total ... 75.1% 24.9% 100.0% 69.0% 31.0% 100.0%
Our treasury manages our balance sheet, including by maintaining required
regulatory reserves. In addition, our treasury seeks to optimize profits from
our trading portfolio by taking advantage of market opportunities.
Corporate Banking
General
Our largest activity in terms of deposits and gross loans is our corporate
banking operations. At March 31, 2000, corporate banking represented 69.0% of
our deposits and 96.7% of our gross loans.
Our key corporate banking products include loan products and fee and
commission-based products and services. Our principal loan products consist of
working capital loans, including cash credit facilities (a revolving floating
rate asset-backed overdraft facility) and bill discounting (a type of
receivables financing), and term loans. Fee and commission-based products and
services include documentary credits and standby letters of credit, forward
contracts, interest and currency swaps, cash management services, trust and
retention accounts, cross border trade services and payment services. Most of
these fee and commission-based products and services provide recurring fees
from each customer. We also take rupee or foreign currency deposits with fixed
or floating interest bases from our corporate customers. Our deposit taking
products include certificates of deposit, checking accounts and time deposits.
We deliver our corporate banking products and services through a combination of
physical branches, correspondent banking networks and the Internet.
We seek to differentiate ourselves from our competitors primarily by
capitalizing on the relationships of the ICICI group and through speedy and
efficient client servicing. We seek to achieve this through the effective use
of technology, high quality staff, speedy decision-making and the provision of
structured financial products meeting specific customer needs.
We provide our products and services to a wide range of private sector and
public sector commercial and industrial corporations, including some of India's
leading companies as well as growth-oriented, middle market commercial
enterprises, traders and service providers and to the agricultural sector. In
the first few years of our operations, due to our small balance sheet size,
small to medium-sized middle market companies were our target customers. Over
the past year as our balance sheet has grown, we have, consistent with our
strategy of focusing on quality growth opportunities, concentrated on financing
large, highly-rated corporations by taking advantage of the corporate
relationships of the ICICI group. Of our 852 corporate customers at March 31,
2000, 191 were also ICICI customers representing 21% of our loan portfolio.
Corporate Loan Products
Our corporate loan products are working capital finance and term loans. We
offer a substantial portion of our corporate loans on a floating rate basis.
For more details on our loan portfolio, see "-- Loan Portfolio".
Working Capital Finance
Under working capital finance, we offer our corporate customers cash
credit facilities and bill discounting. At March 31, 2000, gross working
capital loans outstanding were Rs. 31.6 billion (US$ 723 million), constituting
66.1% of our gross loan portfolio.
Cash Credit Facilities. Cash credit facilities are the most common form of
working capital financing in India. Cash credit facilities are given to
borrowers to finance the cash flow gap arising out of the time difference
between the purchase of raw materials and the realization of sale proceeds. A
cash credit facility is a revolving overdraft line of credit for meeting the
working capital needs of companies and is generally backed by current assets
like inventories and receivables. Under the cash
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credit facility, we provide a line of credit up to a pre-established amount
based on the borrower's projected level of inventories, receivables and cash
deficits. Within this limit, disbursements are made based on the actual level
of inventories and receivables. A portion of the cash credit facility can also
be made in the form of a demand loan. A cash credit facility is typically given
to companies in the manufacturing, trading and service sectors on a floating
interest rate basis. We earn interest on this facility on a quarterly basis,
based on the daily outstanding amounts. The facility is generally given for a
period of up to 18 months, with a review after 12 months. Our cash credit
facility is generally fully secured with full recourse to the borrower. In most
cases, we have a first lien on the borrower's current assets, which normally
are inventory and receivables. Additionally, in some cases, we may take further
security of a first or second lien on fixed assets including real estate, a
pledge of financial assets like marketable securities, corporate guarantees and
personal guarantees.
Cash credit facilities are extended to borrowers by either a single bank,
multiple banks or a consortium of banks with a lead bank. The nature of the
arrangement depends upon the amount of working capital financing required by
the borrower, the risk profile of the borrower and the amount of loan exposure
a single bank can take on the borrower. Though in the past we have extended
cash credit facilities on our own, with our increased focus on more highly
rated large corporations, we are increasingly participating in multiple bank
and consortium arrangements. For a description of these arrangements, see "--
Loan Portfolio -- Collateral -- Completion, Perfection and Enforcement".
Regardless of the arrangement, we undertake our own due diligence and follow
our credit risk policy to determine whether we should lend money to the
borrower and, if so, the amount to be lent to the borrower. For more details on
our credit risk procedures, see "-- Risk Management -- Credit Risk".
In cases where ICICI provides long-term loans for financing projects of
corporations, we seek to provide, or participate in the consortium providing,
working capital loans or the short-term portion of their working requirements.
We appraise the customers' credit requirement separately and independently from
ICICI.
Bill Discounting. Bill discounting involves the financing of short-term
trade receivables through negotiable instruments. These negotiable instruments
can then be discounted with other banks if required, providing us liquidity. In
addition to traditional bill discounting, we also provide customized solutions
to our corporate customers having large dealer networks. Loans are approved to
dealers in the form of working capital lines of credit, based on analysis of
dealer credit risk profiles. These dealer financing facilities help us to
strengthen our relationships with our corporate customers and may be expanded
into Internet-based corporate banking services.
Term Loans
Term loans are amortizing loans given typically for a period of between
three and seven years for financing core working capital requirements and
normal capital expenditures of small and medium-sized companies. Our term
credits include rupee loans, foreign currency loans, lease financing and
subscription to preferred stock. These products also include marketable
instruments such as fixed rate and floating rate debentures. In the case of
rupee and foreign currency loans and debentures, we generally have a security
interest and first lien on all the fixed assets of the borrower. The security
interest typically includes property, plant and equipment and other tangible
assets of the borrower. We typically provide term loans of smaller size,
generally up to Rs. 200 million, (US$ 5 million), considering our liability
profile, and refer larger loans to ICICI.
At March 31, 2000, gross term loans outstanding were Rs. 14.6 billion (US$
335 million), constituting 30.6% of our gross loan portfolio.
Fee and Commission-Based Activities
Our fee and commission-based products and services include documentary
credits, standby letters of credit, forward contracts, interest and currency
swaps, cash management services, trust and retention accounts and payment
services.
Documentary Credits
We provide documentary credit facilities to our working capital loan
customers both for meeting their working capital needs as well as for capital
equipment purchases. For working capital purposes, we issue documentary credits
on behalf of our customers for the sourcing of their raw materials and stock
inputs. Lines of credit for documentary credits and standby letters of credit
are approved as part of a working capital loan package provided to a borrower.
These facilities, like cash credit facilities, are generally given for a period
up to 18 months, with review after 12 months. Typically, the line is drawn down
on a revolving basis over the term of the facility, resulting in a fee payable
to us at the time of each drawdown, based on the amount
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and term of the drawdown. A significant proportion of our documentary credits
for capital equipment are issued on behalf of borrowers who also had taken term
loans from ICICI.
We issue documentary credits on behalf of borrowers both for domestic and
foreign purchases. Borrowers pay a fee to us based on the amount drawn down
from the facility and the term of the facility. This facility is generally
secured by the same collateral available for cash credit facilities. We
generally also take collateral in the form of cash deposits from our borrowers
before each drawdown of the facility.
At March 31, 2000, we had a portfolio of documentary credits of Rs. 8.5
billion (US$ 195 million).
Standby Letters of Credit
We provide standby letter of credit facilities, called guarantees in
India, that can be drawn down any number of times up to the committed amount of
the facility. We issue standby letters of credit on behalf of our borrowers in
favor of corporations and government authorities inviting bids for projects,
guaranteeing the performance of our borrowers. We also issue standby letters of
credit as security for advance payments made to our borrowers by project
authorities and for deferral of and exemption from the payment of import duties
granted to our borrowers by the government against fulfillment of certain
export obligations by our borrowers. The term of these standby letters of
credit is generally up to 18 months. This facility is generally secured by
collateral similar to that of documentary credits.
At March 31, 2000, we had a portfolio of standby letters of credit of Rs.
7.6 billion (US$ 173 million).
Forward Contracts and Interest and Currency Swaps
We provide forward contracts to our customers for hedging their short-term
exchange rate risk on foreign currency denominated receivables and payables. We
generally provide this facility for a term of up to six months and occasionally
up to 12 months. We also offer interest rate and currency swaps to our
customers for hedging their medium and long-term risks due to interest rate and
currency exchange rate movements. We offer these swaps for a period ranging
from three to ten years. Our customers pay a commission to us for this product
that is included in the price of the product and is dependent upon market
conditions. We also hedge our own exchange rate risk related to our foreign
currency trading portfolio with products from banking counterparties.
At March 31, 2000, we had a portfolio of outstanding forward contracts of
Rs. 62.9 billion (US$ 1.4 billion) and a portfolio of interest and currency
swaps of Rs. 8.6 billion (US$ 196 million).
Cash Management Services
Under cash management services, we offer our corporate clients custom-made
payment and remittance services allowing them to reduce the time period between
collections and remittances, thereby streamlining their cash flows. Our cash
management products include physical check-based clearing in locations where
settlement systems are not uniform, electronic clearing services, central
pooling of country-wide collections, dividend and interest remittance services
and Internet-based payment products. We believe we were the second largest
provider of cash management services in India at March 31, 2000. We also
provide cash management services to our parent, ICICI. Our customers including
ICICI pay a fee to us for these services based on the volume of the
transaction, the location of the check collection center and speed of delivery.
The total amount handled under cash management services was Rs. 656.2
billion (US$ 15.0 billion) for fiscal 2000, resulting in fee income of Rs.
122.7 million (US$ 2.8 million). At March 31, 2000, we had 254 cash management
service customers. ICICI paid us Rs. 21 million (US$ 481,000) for fiscal 2000
for these services provided to it by us.
Trust and Retention Accounts
We offer trust and retention account facilities to lenders in limited and
non-recourse project finance transactions who typically require the setting up
of trust and retention accounts as part of the project financing structure and
our customers include power and telecommunications companies. This service
enables us to capture the receivables of the project on behalf of the lenders
and channel the cash flows in a pre-determined manner. We also offer escrow
account facilities for securitization and merger and acquisition transactions.
Our customers pay a negotiated fee to us for this product based on the
complexity of the structure and the level of monitoring involved in the
transaction.
28
<PAGE>
We actively provide these services and use the strengths of our parent as
a leading project financier in the country to obtain customers for these
services. We believe that we are the market leader in providing these services
in India, with about 100 accounts. The cash flows managed under this product
during fiscal 2000 were about Rs. 26.0 billion (US$ 595 million)
Payment Services
We offer online electronic payment facilities to our corporate customers
and their suppliers and dealers as a closed user group, where the entire group
is required to maintain bank accounts with us. We use the Internet as the
delivery platform for this business-to-business electronic commerce product,
which we call "i-payments". Under this service, all payments from our corporate
customers to their suppliers and payments from the dealers to our corporate
customers are made electronically. This service offers a high level of
convenience since no physical instruments are required, all transactions are
done online and the information may be viewed on the Internet. This product can
be customized to meet the specific requirements of individual customers. We do
not charge a fee for this service, as it results in large low-cost funds for
short durations in checking accounts of customers, that we invest profitably.
We have already entered into memoranda of understanding with over 100
large Indian corporations relating to "i-payments". Many of these corporations
have come to us as a result of our relationship with members of the ICICI
group. Most of these corporations intend to include approximately 10-20 dealers
and suppliers in their electronic commerce closed user group. Based on these
statistics, we believe that, based on ICICI's corporate relationship base of
over 1,000 customers, we have the potential to grow to service 15,000 small,
medium and large corporate users over the next few years.
Other Corporate Banking Activities
International Banking Business
We provide a wide range of cross-border banking services from 25 of our
branches spread across the country. Our international business services include
foreign currency loans for imports and exports, documentary credits, standby
letters of credit and collection and funds transfer services. All these
branches are connected directly to the Society for Worldwide Inter-Bank
Financial Telecommunication network (SWIFT), to quickly facilitate
transactions. We also have correspondent arrangements with over 105
international banks covering all major countries with which India has trade
relationships. These arrangements facilitate the execution of cross border
transactions including letters of credit and funds transfers. We also provide
travel-related services to our corporate customers including money changing,
sale and cashing of travelers' checks and foreign currency remittances to
international travel destinations. Our customers pay fees to us for
substantially all of these products and services.
Treasury Products
We provide liquidity management services to our corporate customers to
enable them to invest their short-term cash surpluses in a variety of
short-term treasury and deposit-based instruments, including treasury bills,
commercial papers and certificates of deposit. These products allow our
customers to earn income on their short-term cash surpluses since deposits for
periods of less than 15 days are non-interest-bearing pursuant to Reserve Bank
of India regulations. We also facilitate the holding of foreign currency
accounts. Our target customers for these products are large public and private
sector companies, provident funds and high net worth individuals.
Products for Other Banks
Various cooperative banks and rural banks in India are limited to specific
regions or states of India. These banks need relationships with banks present
in most of the large cities in India to be able to service the needs of their
customers for country-wide collection and payment. We have developed customized
products and solutions for cooperative banks. Although we do not charge a fee
for these products, they result in large amounts being maintained with us in
non-interest-bearing checking accounts that we can invest profitably.
Corporate Loan Pricing
We price our corporate loans over our prime lending rate based on four
factors:
o our internal credit rating of the company;
29
<PAGE>
o the nature of the banking arrangement (either a single bank, multiple
bank or consortium arrangement);
o the collateral available; and
o market conditions.
Our current credit approval process generally requires a minimum credit
rating of A--. For a description of our credit rating system, see "-- Risk
Management -- Credit Risk".
Our Asset-Liability Management Committee fixes prime lending rates based
on yield curve factors, such as interest rate and inflation rate expectations,
as well as the market demand for loans of a certain term and our cost of funds.
Working capital financing is usually contracted at rates linked to the prime
lending rate for maturities over 365 days. The prime lending rates relevant to
other maturities are used for short-term bill discounting products.
We have four prime lending rates linked to the term of the loan. At March
31, 2000, our prime lending rates per annum were as follows:
Term Prime lending rate
------------------------------------- ------------------
Up to 90 days ....................... 11.75%
91 days to 180 days ................. 12.50
181 days to 364 days ................ 13.00
365 days and over ................... 13.50
Under the existing Reserve Bank of India regulations, loan exposures
through corporate debt instruments and bill discounting are not subject to the
prime lending rate regulations. Banks can lend at an interest rate below their
prime lending rates when delivery is through these products.
One of our competitive advantages in the corporate banking industry is our
speed of delivery. We are generally able to preliminarily approve credit
requests within two business days since we study the borrower and its credit
rating well in advance of our marketing efforts. The formal credit approval
process, including due diligence, generally takes about three to four weeks to
complete. We believe this is a key factor in giving us a substantive
competitive advantage and enabling us to charge a premium in pricing over many
of our competitors.
Directed Lending
The Reserve Bank of India requires banks to lend to certain sectors of the
economy. Such directed lending is comprised of priority sector lending, export
credit and housing finance.
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend 40.0% of their net bank credit (total domestic loans less marketable debt
instruments and certain exemptions permitted by the Reserve Bank of India from
time to time) to certain specified sectors called priority sectors. Priority
sectors include small-scale industries, the agricultural sector, food and
agro-based industries and small businesses. Out of the 40.0%, we are required
to lend a minimum of 18.0% of our net bank credit to the agriculture sector and
the balance to certain specified sectors, including small scale industries
(defined as manufacturing, processing and services businesses with a limit on
investment in plant and machinery of Rs. 10 million), small businesses,
including retail merchants, professional and other self employed persons and
road and water transport operators and to specified state financial
corporations and state industrial development corporations.
The following table sets forth, for the periods indicated, our priority
sector loans broken down by type of borrower.
30
<PAGE>
<TABLE>
% of net
bank credit
At March 31, at March 31,
--------------------------------------------------------------------- ------------
1997 1998 1999 2000 2000 2000
--------- --------- --------- ---------- ------ ------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Small scale industries ......... Rs. 1,860 Rs. 2,753 Rs. 3,510 Rs. 5,958 US$136 17.2%
Others including small
businesses ................... 231 513 1,959 2,662 61 7.7
Agricultural Sector ............ 252 501 675 1,520 35 4.3
--------- --------- --------- ---------- ------ ----
Total .......................... Rs. 2,343 Rs. 3,767 Rs. 6,144 Rs. 10,140 US$232 29.2%
========= ========= ========= ========== ====== ====
</TABLE>
We are required to comply with the priority sector lending requirements at
the end of each fiscal year. Any shortfall in the amount required to be lent to
the priority sectors may be required to be deposited with Indian development
banks like the National Bank for Agriculture and Rural Development and the
Small Industries Development Bank of India. These deposits have a maturity of
up to five years and carry interest rates lower than market rates. These
deposits also satisfy part of our priority sector requirement.
At March 31, 2000, our priority sector loans were Rs. 10.1 billion,
constituting 29.2% of net bank credit. This led to a shortfall of Rs. 3.7
billion (US$ 86 million) in our priority sector lending. The Reserve Bank of
India requires us to deposit the shortfall in the National Bank for Agriculture
and Rural Development when it makes a demand on us. At March 31, 2000, this
bank has taken deposits of only Rs. 170 million (US$ 3.90 million) from us. We
believe that a large number of Indian commercial banks have had a shortfall in
meeting their priority sector lending requirements.
In fiscal 2001, as part of our retail banking activities, we plan to offer
auto loans and home mortgage loans. These loans will be marketed through ICICI
Personal Financial Services. ICICI, together with its subsidiary, ICICI Home
Finance, offers these retail loans. These loans are also marketed through ICICI
Personal Financial Services. Pursuant to an understanding between ICICI and us,
we will offer auto loans and home mortgage loans that qualify as priority
sector lending to our customers and ICICI together with its subsidiary, ICICI
Home Finance will offer all other auto loans and home mortgage loans to its
customers. Home mortgage loans of up to Rs. 1 million and auto loans to
professionals qualify as priority sector lending and we believe that they offer
us an appropriate opportunity to meet our directed lending requirements without
sacrificing our standards for credit quality.
For a discussion of the asset quality of our priority sector loan
portfolio, see "-- Non-Performing Loans -- Analysis of Non-Performing Loans by
Directed Lending Sector".
Export Credit
As part of directed lending, the Reserve Bank of India also requires us to
make loans to exporters at concessional rates of interest. We provide export
credit for pre-shipment and post-shipment requirements of exporter borrowers in
rupees and foreign currencies. At the end of our fiscal year, 12.0% of our net
bank credit is required to be in the form of export credit. This requirement is
in addition to the priority sector lending requirement but credit extended to
exporters that are small scale industries or small businesses may also meet
part of our priority sector lending requirement. The Reserve Bank of India
provides export refinancing for an eligible portion of total outstanding export
loans at a concessional rate that is 2.0% lower than the concessional rate of
interest on export credit. The interest income earned on export credits is
supplemented through fees and commissions earned from these exporter customers
from other fee-based products and services taken by them from us, such as
foreign exchange products and bill handling. At March 31, 2000, our export
credit was Rs. 4.0 billion (US$ 92 million), constituting 11.5% of our net bank
credit.
Housing Finance
The Reserve Bank of India requires us to lend up to 3.0% of our
incremental deposits in the previous fiscal year for housing finance. This can
be in the form of home loans to individuals or investments in the debentures
and bonds of the National Housing Bank and housing development institutions
recognized by the government of India. At March 31, 2000, our housing finance
was Rs. 1.2 billion (US$ 28 million).
31
<PAGE>
Corporate Deposits
We take deposits from our corporate clients with terms ranging from 15
days to seven years but predominantly from 15 days to one year. We routinely
provide interest quotes for deposits in excess of Rs. 10 million on a daily
basis (uncommon in India), based on rates in the inter-bank term money market
and other money market instruments such as treasury bills and commercial
papers. The Reserve Bank of India regulates the term of deposits in India but
not the interest rates with some minor exceptions. We are not permitted to pay
interest for periods less than 15 days. Also, pursuant to the current
regulations, we are permitted to vary the interest rates on our corporate
deposits based upon the size range of the deposit so long as the rates offered
are the same for every customer of a deposit of a certain size range on a given
day. Corporate deposits include funds taken by us from large public sector
corporations, government organizations, other banks and large private sector
companies. Corporate deposits totaled Rs. 68.1 billion (US$ 1.6 billion) at
March 31, 2000, constituting 69.0% of our total deposits and 57.2% of total
liabilities at March 31, 2000.
We offer a variety of deposit services to our corporate customers. We take
rupee or foreign currency denominated deposits with fixed or floating interest.
Our deposit products for corporations include:
o current accounts-- non-interest-bearing demand deposits;
o time deposits -- fixed term deposits that accrue interest at a fixed
rate and may be withdrawn before maturity by paying penalties; and
o certificates of deposit-- a higher cost type of time deposit.
We have also introduced "Quantum Corporate", a value-added checking
account, which provides automatic transfer of idle balances from current
accounts to time deposits. Whenever there is a shortfall in the current
accounts, deposits are transferred back from the fixed deposit accounts. This
offers our corporate customer liquidity as well as high returns.
The following table sets forth, for the periods indicated, our corporate
deposits by product.
<TABLE>
% of total
At March 31, at March 31,
-------------------------------------------------------------------------- ------------
1997 1998 1999 2000 2000 2000
--------- ---------- ---------- ---------- --------- ------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Current accounts--banks ...... Rs. 34 Rs. 37 Rs. 74 Rs. 854 US$ 19 1.2%
Current accounts--others ..... 2,990 3,345 5,162 14,090 322 20.6
Time deposits-banks .......... 945 2,586 13,140 15,335 352 22.6
Time deposits-others ......... 4,036 9,917 25,883 37,434 858 55.0
Certificates of deposits ..... 1,335 3,169 1,330 377 9 0.6
--------- ---------- ---------- ---------- --------- -----
Total ........................ Rs. 9,340 Rs. 19,054 Rs. 45,589 Rs. 68,090 US$ 1,560 100.0%
========= ========== =========== ========== ========= =====
</TABLE>
Certificates of deposit decreased 71.7% at March 31, 2000 compared to at
March 31, 1999 primarily due to our decreased emphasis on the marketing of this
product due to its high cost and limited demand.
The following table sets forth, for the periods indicated, our corporate
deposits by type of customer.
<TABLE>
% of total
At March 31, at March 31,
-------------------------------------------------------------------------- ------------
1997 1998 1999 2000 2000 2000
--------- ---------- ---------- ---------- --------- ------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Banks ........................ Rs. 978 Rs. 2,623 Rs. 13,214 Rs. 16,389 US$ 376 24.0%
Corporations ................. 8,063 14,384 28,297 50,212 1,150 74.0
Others(1) .................... 299 2,047 4,078 1,489 34 2.0
--------- ---------- ---------- ---------- -------- -----
Total ........................ Rs. 9,340 Rs. 19,054 Rs. 45,589 Rs. 68,090 US$1,560 100.0%
========= ========== ========== ========== ======== =====
</TABLE>
---------
(1) Others include government agencies, charitable trusts, cooperatives,
non-profit organizations and universities.
32
<PAGE>
The following table sets forth, for the period indicated, the maturity
profile of our rupee term deposits (including deposits of banks) of Rs. 10
million (US$ 230,000) or more:
<TABLE>
At March 31, 2000
-----------------------------------------------
% of total
deposits
----------
(in millions, except percentages)
<S> <C> <C> <C>
Less than three months ........................ Rs. 24,522 US$562 24.8%
Above three months and less than six months ... 4,084 94 4.2
Above six months and less than twelve months .. 5,479 125 5.5
More than twelve months ....................... 1,485 34 1.5
---------- ------ ----
Total deposits of Rs. 10 million and more ..... Rs. 35,570 US$815 36.0%
========== ====== ====
</TABLE>
ICICI is one of our deposit customers. At March 31, 2000, we had Rs. 1.8
billion (US$ 41 million) of current deposits and Rs. 1.3 billion (US$ 31
million) of time deposits from ICICI. We do not pay interest on these current
deposits and we pay interest on these time deposits at rates which we pay all
other time deposit customers.
We market corporate deposits from all our corporate branches, some of our
retail branches and directly from our corporate office. With the increase in
the number of initial public offerings in the Indian equity markets, we have
been actively participating as commercial bankers to the offerings of select
companies. These companies are required to maintain the subscription funds from
the investors with the bankers to the offering until the allotment of shares
and the refund of excess subscription is completed. This process generally
takes about 30 days, resulting in short-term deposits with us. This has
resulted in significant growth in our corporate deposits. We also act as
commercial banker to companies with oversubscribed initial public offerings
when they need to refund subscription funds to investors, also resulting in
short-term deposits with us. We believe our management of our corporate deposit
customers as well as our ability to offer competitive rates on large deposits
significantly reduces the volatility in our corporate deposit base.
The growth in corporate deposits has been supplemented by our "anywhere
banking service", which allows multi-locational corporations in India to
receive cash inflows and make payments in various cities by maintaining one
central pooling account.
Our other corporate deposit products are:
o inter-bank call rate-linked floating rate deposits; and
o payout of interest and dividend checks issued to investors and
bondholders by corporations.
Client Coverage
We believe that the Indian market for working capital products is
approximately Rs. 1.9 trillion (US$ 43.5 billion). We are focusing our
corporate marketing efforts on increasing our market share in this segment. We
believe that the ICICI group's existing corporate relationships provides us
with an opportunity to provide working capital products to large companies and
high growth middle market customers and increase our fee income.
In fiscal 1999, in an effort to improve corporate client service and
profitability, the ICICI group reorganized its corporate structure and created
two corporate client relationship groups, the Major Clients Group and the
Growth Clients Group. These groups are responsible for offering the full range
of the ICICI group's products and services to its clients with an emphasis on
cross-selling and the generation of fee income.
We work with the Major Clients Group to offer various corporate banking
products and services to the top 150 Indian corporations to further the ICICI
group's objective to function as a universal bank. The Major Clients Group is
made up of a team of client bankers, taken from ICICI, ICICI Securities and us.
The Major Clients Group seeks to build on existing relationships and also
focuses on bringing into the ICICI group portfolio new multinational
corporations and large profitable public sector corporations. We currently have
four of our employees working as part of the Major Clients Group.
The Growth Clients Group focuses on middle market companies. The Growth
Clients Group is made up of a team of client bankers, from ICICI and us and
geographically dispersed among ICICI's offices across India. Over the past
several years, the middle market segment has grown rapidly, particularly in the
areas of information technology, automobile
33
<PAGE>
components, consumer goods and pharmaceuticals, and traditionally has had less
access to financing compared to our major clients. We expect that continued
growth among middle market companies will result in greater demand in the
volume and type of financial products and services. We believe that rapid
growth in the middle market segment offers us a significant opportunity to
provide a wide variety of lending and fee-based banking products, including a
substantial number of working capital lines of credit. Our internal estimates
indicate that there are over 7,000 middle market companies in India, of which
approximately 1,300 are believed to meet our benchmark credit risk rating of
A-- or above. The Growth Clients Group seeks to identify and build
relationships with these middle market clients and build upon existing client
relationships to facilitate a broader distribution of our products. The Growth
Clients Group expects to initially target approximately 800 of these companies,
mainly for our loan and deposit products. This group also seeks to provide
other products and services, including our cash management services. We
currently have 17 of our employees working as a part of the Growth Clients
Group at their various locations.
Relationship managers, who represent the entire ICICI group and include
members of our staff who participate in these client relationship groups, are
responsible for marketing our products and services as well as the products and
services of the ICICI group to corporate customers. The basic principles of
coverage followed by relationship managers include:
o further enhancing the ICICI group's strong customer
relationships;
o focusing on a well-defined list of high priority clients;
o responding to clients' needs by marketing those products best
suited to their specific circumstances;
o increasing the ICICI group's share of clients' total banking
requirements;
o serving the client needs effectively and proactively;
o cross-selling the ICICI group's products to improve client
profitability; and
o facilitating a quick roll-out of new products for the ICICI
group.
The group has structured the cross-selling process as follows:
o the relationship managers from our company and ICICI make joint
marketing calls to targeted corporations to offer the entire
range of the group's products and services;
o products and services accepted by the targeted customer are then
independently processed and delivered to the customer by the
appropriate ICICI group company; and
o fee and interest income accrue to the company that processes and
delivers the products or services. These amounts are collected
directly from the customer.
Cross-selling is also initiated by our branch managers and operating
officers, who interact with the corporate customer on a regular basis for
operating and maintaining its various cash credit accounts. They also visit the
customer's offices, factories or warehouses periodically. Business
opportunities identified are conveyed to our representatives, ICICI group
relationship managers and to other ICICI group companies.
We believe that we have benefited significantly from this joint marketing
relationship. While we had eight common customers with ICICI at March 31, 1998,
we had 191 common customers at March 31, 2000, representing 21% of our loan
portfolio at March 31, 2000 . These customers have largely been top tier Indian
corporations and improved the credit quality while significantly increasing the
size of our loan portfolio. We have also been able to increase fee income from
providing cash management services, documentary credits and stand-by letters of
credit and trust and retention account services to many of these clients.
While marketing and relationship functions are undertaken along with
ICICI, the processes of credit appraisal, approval and monitoring are
independent activities done by us. Exposures are governed by the policy
framework prescribed by our board of directors. For a discussion of our credit
approval process, see "-- Risk Management -- Credit Risk".
34
<PAGE>
Delivery Channels
Branch Network
We deliver our corporate banking services primarily through our corporate
banking network which at March 31, 2000 consisted of 25 branches out of our
total 81 branches spread across India. After review of the size of our business
and the potential of each of our branches, we reclassified 14 of our corporate
banking branches as retail branches beginning fiscal 2001. All of our corporate
branches are located in cities among the top 55 cities throughout all of
India's states in terms of gross bank credit. The corporate banking unit at our
head office in Mumbai assists and supervises these branches in the offering of
new products, marketing initiatives and credit administration. In order to
provide quality service to clients, our corporate branches work in close
coordination with the ICICI group's relationship managers.
Correspondent Banking Networks
We have correspondent banking relationships with commercial and
cooperative banks in India with large physical branch networks to offer a
broader coverage for our funds transfers and remittance related products. As a
result of our correspondent banking associations, we provide remittance and
cash management services at over 750 locations in India.
Internet
In August 1999, we launched an Internet banking service called "Corporate
Infinity" to deliver a full range of high quality financial services to
corporate customers at their offices and raise our profile as a technologically
sophisticated commercial bank. Corporate Infinity provides multi-location,
multi-user access to the ICICI group's products on a 24-hour basis. This
integrated client interface product allows our corporate customers to have a
single point of contact for their entire relationship with the ICICI group.
Corporate Infinity offers the following:
o details of transactions with the ICICI group relating to term
loans, working capital accounts, foreign currency positions,
investments, documentary credits and standby letters of credit;
o real-time access to the foreign exchange markets, domestic
treasury and bond markets and the leading stock markets in
India;
o system-generated alerts including principal and interest payment
dates, documentary credit and standby letter of credit expiry
dates;
o online fund transfers;
o requests for documentary credits, documentary credit amendments,
remittances and stop payment orders;
o generation of output in formats that can be interfaced into the
standard accounting software used by our customers;
o multiple access levels within a corporation to different levels
of data, permissions and authorizations;
o a secure e-mail environment to facilitate communication between
the group's relationship managers and our customers; and
o robust and advanced security features.
We do not charge any fee to our customers for using our Corporate Infinity
product. We intend to explore charging our customers a fee for this service in
the future. Based on the response for this product among large corporations, we
believe that we will be able to attract an increasing number of large
corporations to establish banking relationships with us. As a result, we expect
to generate additional interest and fee income.
35
<PAGE>
Retail Banking
General
Retail banking deposit accounts represented 31.0% of our deposits at March
31, 2000. We believe that retail deposits are growth opportunities for us. We
intend to continue to grow our retail deposits for funding purposes since
retail deposits are a good source of low cost, stable funds. We also intend to
introduce new retail loan products on a limited basis during fiscal 2001,
including auto and home mortgage loans that qualify as priority sector lending
to diversify our asset base and increase the proportion of retail loans in our
gross loan portfolio.
Retail deposits constituted approximately Rs. 4.7 trillion or 77.0% of
total bank deposits in India at March 31, 1998. Traditional players in the
Indian banking sector include nationalized banks and foreign banks. While the
nationalized banks have a large branch network, we believe that the advantages
arising from this network are largely negated by over-staffing, the high cost
of physical infrastructure and poor customer service. Foreign banks have mainly
concentrated on the high net worth segment. Their expansion has been restricted
by branch licensing requirements that make it difficult for them to expand
their presence. As a recent entrant in the market, we do not have to support
unprofitable branches and can open branches in locations with growth potential
and, more importantly, use technology to enhance the accessibility of our
products and services to customers and to offer a higher level of service than
generally available in the market.
We have decided to target professionals, self-employed persons, select
wage earners and other members of the middle and upper income segments in
India. The National Council for Applied Economic Research, a well established
research institute in India, estimated that, in fiscal 1996, these segments
(defined as those earning an effective income of more than Rs. 50,000 per
annum) totaled approximately 34 million households in India. We have adopted a
focused approach by targeting a limited sub-segment of about six million
households based on a variety of parameters including residence in selected
urban areas. We believe that this sub-segment is underserved and represents an
extremely attractive business opportunity for us. Further, we expect our target
market to experience continued growth in line with the growth of the Indian
economy. The 22 million non-resident Indians are another important target
market segment for us given their relative affluence and strong links to family
members in India.
According to a Reserve Bank of India report, the top 55 cities in India
accounted for 52.5% of total deposits in India at March 31, 2000, and
constitute our target market. We have focused our business activities
extensively in the top eight metropolitan cities which account for 37.7% of
total deposits. We already have branches in 26 out of these 55 cities and
expect to have branches in 55 target locations by year-end fiscal 2002.
Retail Deposits
Our retail deposit products include the following:
o time deposits including:
- recurring deposits, which are periodic deposits of a fixed
amount over a fixed term that accrue interest at a fixed rate
and may be withdrawn before maturity by paying penalties; and
- certificates of deposit;
o savings accounts, which are demand deposits that accrue interest at a
fixed rate set by the Reserve Bank of India (currently 4.0% per
annum) and upon which checks can be drawn; and
o current accounts, which are non-interest-bearing demand deposits.
In addition to deposits from Indian residents, we accept time and savings
deposits from non-resident Indians, foreign nationals of Indian origin and
foreign nationals working in India. These deposits are accepted on a
repatriable and a non-repatriable basis and are maintained in rupees and select
foreign currencies.
36
<PAGE>
The following table sets forth, for the periods indicated, our retail
deposits.
At March 31,
----------------------------------------------------------
1997 1998 1999 2000
--------- --------- ---------- ------------------
(in millions)
Retail deposits .... Rs. 4,140 Rs. 7,240 Rs. 15,140 Rs. 30,570 US$700
The following table sets forth, for the period indicated, the number of
retail deposit accounts and the balance outstanding by type of deposit.
At March 31, 2000
-------------------------------------------------------
Number of
Balance outstanding % of total accounts % of total
------------------- ---------- --------- ----------
(in millions, except percentages and number of accounts)
Current accounts ....... Rs. 930 US$ 21 3.0% 6,950 1.1%
Savings accounts ....... 5,330 122 17.4 291,784 45.8
Time deposits .......... 24,310 557 79.6 338,143 53.1
---------- ------ ----- ------- -----
Total retail deposits .. Rs. 30,570 US$700 100.0% 636,877 100.0%
========== ====== ===== ======= =====
The following table sets forth, for the periods indicated, the amount of
retail deposits outstanding by type of account holder.
<TABLE>
At March 31,
-------------------------------------------- % of total at
1998 1999 2000 March 31, 2000
--------- ---------- ------------------- --------------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C>
Individuals ............................ Rs. 6,090 Rs. 12,590 Rs. 25,800 US$591 84.4%
Clubs and associations ................. 320 610 1,310 30 4.3
Partnership and proprietorship concerns. 530 1,120 2,020 46 6.6
Cooperatives and trusts ................ 300 820 1,440 33 4.7
--------- ---------- ---------- ------ -----
Total retail deposits .................. Rs. 7,240 Rs. 15,140 Rs. 30,570 US$700 100.0%
========= ========== ========== ====== =====
</TABLE>
The following table sets forth, the amount of retail deposits outstanding
by type of product.
<TABLE>
At March 31,
-------------------------------------------- % of total at
1998 1999 2000 March 31, 2000
--------- ---------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Non-resident Indian deposits ........... Rs. 1,766 Rs. 2,805 Rs. 5,380 US$123 17.6%
Quantum Optima ......................... 450 2,240 7,160 164 23.4
Power Pay .............................. 250 780 2,780 64 9.1
Others(1) .............................. 4,774 9,315 15,250 349 49.9
--------- ---------- ---------- ------ -----
Total retail deposits .................. Rs. 7,240 Rs. 15,140 Rs. 30,570 US$700 100.0%
========= ========== ========== ====== =====
</TABLE>
---------
(1) Includes all other time deposits and current and savings accounts.
For a description of the Reserve Bank of India regulations applicable to
deposits in India and required deposit insurance, see "Supervision and
Regulation -- Regulations Relating to Deposits" and "-- Insurance of Deposits".
In addition to our conventional deposit products, we offer a variety of
special value-added products and services which enable the customer to maximize
returns as well as convenience.
Power Pay
In September 1996, we introduced "Power Pay", a direct deposit product for
a select group of our corporate customers, to help them streamline their salary
payment systems. At March 31, 2000, over 950 corporate clients were using Power
Pay, which allows their employees' salaries to be directly credited to a
special savings account established for this purpose. Direct
37
<PAGE>
deposit of paychecks is unusual in India and provides us with a competitive
advantage as these new payroll account holders often open other accounts with
us, including time deposits and subscribe to our credit card services.
To enhance the attractiveness of Power Pay, we have added several features
to the savings accounts maintained by these employees including:
o automatic overdraft up to 50.0% of monthly salary;
o free remittance facility up to Rs. 25,000;
o depositary share accounts; and
o relaxing the requirement to maintain a quarterly average balance
of Rs. 5,000.
We intend to leverage on ICICI's relationships with over 1,000 corporates
to sell our payroll account "Power Pay" to their employees. On March 31, 2000,
the number of "Power Pay" accounts stood at over 147,000, constituting 23.1% of
our total account base. The share of new "Power Pay" accounts among all new
savings accounts opened during fiscal 2000 was 40.0%.
Quantum Optima
We have introduced a savings account product that offers the customer
liquidity as well as high returns. This product provides automatic transfer of
idle balances from savings accounts to time deposits in units of Rs. 5,000,
resulting in higher yields. Whenever there is a shortfall in the customer's
savings accounts, deposits are transferred back from the fixed deposit account,
automatically in units of Rs. 1,000 to meet the shortfall.
Premium Current Account
We launched our premium current account product in August 1999 to meet the
needs of the small business segment. In addition to conventional banking
facilities, this account offers a free cash transfer remittance facility, free
cash pick-up and delivery, pick-up of checks and documents and a sweep facility
to automatically transfer any excess balance in their current account to a time
deposit.
bank@campus
In March 2000, we launched a savings account called "bank@campus" targeted
specifically at students. The product was initially launched in Mumbai and by
the end of 2000 it will be extended to other cities in India.
The target market for this product are students who are pursuing graduate
and post graduate studies, management studies and engineering, medical and
computer courses in universities and institutes across India. The product
features offer an ATM card, Internet banking, phone banking and a supplementary
credit card. We are also in the process of tying up with educational
institutions to offer payment of fees through the Internet.
Internet Banking Services
Infinity
In October 1997, we launched Infinity, India's first Internet banking
service. In September 1999, we introduced an online account opening facility
for non-resident Indians. We believe that the increasing number of Internet
users, the demographic characteristics of those users and the relative
flexibility and convenience of Internet banking provides an opportunity for us
to capitalize on our experience in this area and gain market share in the
retail banking sector.
The number of our Internet banking customers has increased from 4,000 at
March 31, 1999 to approximately 110,000 at March 31, 2000 and 209,000 at August
31, 2000. We believe that the expected increase in Internet usage will
accelerate business-to-business and business-to-consumer transactions, which
will ensure our deposit growth through this channel.
We currently offer the following services to our customers:
o access to account information;
38
<PAGE>
o transaction tracking;
o transfer of funds between accounts of the customer and to any
other account in our bank;
o placement of time deposits;
o secure e-mail facility for communications with an accounts
manager; and
o check book and stop payment requests.
We expect Internet banking services to be a value differentiator and
attract new customers from our target segment.
Online Bill Payment
On August 15, 1999, we became the first Indian company to introduce
utility bill payments through the Internet. We now have tie-ups with leading
telecommunications companies like Mahanagar Telephone Nigam Limited or MTNL and
Tata Teleservices, Internet service providers like Videsh Sanchar Nigam Limited
or VSNL and cellular operators like BPL Mobile and Usha Martin. We are
currently offering this service free to our customers with the intention of
building a base of users, based on cost sharing arrangements with most of these
utility companies where we either charge the utility company a fixed fee per
bill or the utility company maintains a balance with us before the funds are
used by the utility company resulting in short-term deposits with us. In the
future, we expect this facility to be a source of fee income from the utility
companies and the customers who use the service. We have also introduced a bill
receipt module, which allows the customer to receive the utility bill online.
Money2India Remittance Facility
For easy transfer of funds to India, we have introduced Money2India, a
web-based remittance facility. Non-resident Indians can send money to over 173
locations in India. Neither the customer nor the beneficiary needs to have an
account with us, and the remittance can be tracked on the web from origin to
destination. This facility was launched in October 1999. We charge a fee for
this service except where the customer sends funds to his accounts with us, or
if the beneficiary has a bank account with us.
Sawal Jawab -- An Online Information Service
In order to invest in India, non-resident Indians often require
information relating to financial and tax matters. To meet this need, we have
introduced a free information service called "Sawal Jawab". This service allows
non-resident Indians to post any query related to investment opportunities in
India, Indian tax laws, banking and other related issues on the Internet. Our
consultant, who is an expert in the field, replies to these queries and the
reply is posted on our website.
Web Brokering
ICICI launched web brokering services through its wholly owned subsidiary,
ICICI Web Trade Limited, in April 2000. This service involves the online
integration of a customer's various accounts with the ICICI group, including
depositary share accounts with ICICI, bank accounts with us and securities
brokerage accounts with ICICI Web Trade. We expect this service to
significantly aid us in our efforts to acquire new customers and low cost
savings deposits as we will provide each e-broking customer with a bank
account. We also expect web broking to enhance customer retention and provide
opportunities to earn fee income by cross-selling other products like loans
against subscriptions for initial public offerings and mutual fund units.
Credit Cards
In January 2000, we launched our credit cards by offering a VISA branded
credit card to select retail customers in Mumbai and by March 31, 2000 it was
available in Delhi, Pune and Nashik. As of March 31, 2000, we had issued 10,656
credit cards. We believe that:
o our credit card, business will be one of our core retail
products and will help us attract and retain customers and
generate interest and fee income;
o the low penetration of credit cards in India presents us with a
significant business opportunity;
39
<PAGE>
o while foreign banks today dominate the Indian credit card
market, a significant segment of the Indian population prefers
to deal with an Indian financial services provider; and
o our credit cards will facilitate the expansion of our retail
banking activities and the ongoing development of our retail
customer database with information on spending patterns,
repayment patterns and credit histories.
The management of our credit card issuance, billing and other operations
have been outsourced to ICICI Personal Financial Services, a subsidiary of
ICICI, on a cost plus 10% basis. ICICI Personal Financial Services manages
these operations on the basis of guidelines approved by us. A comprehensive
credit and operations policy has been laid down for processing card
applications and transactions. Credit approval is done by ICICI Personal
Financial Services employees seconded to us, on the basis of a variety of
factors determined by us including the demographic profile of the applicant,
stability of earnings and the nature of employment. Physical verification of
the applicant's details, such as residence, office location and the documents
submitted by the applicant, is carried out to ensure that only genuine
applications are accepted. Card issue, transaction processing and customer
servicing are also carried out by ICICI Personal Financial Services.
We have devised an internal credit scoring model and maintain strict
monitoring of repayment patterns to minimize the risks associated with this
business. There are no credit bureaus in India, but we are working closely with
Visa International to develop our fraud and risk management policies. An
in-house fraud unit has been set up to detect, control and manage frauds. We
have also set up a 24 hours by seven days authorization unit which enables us
to track spending patterns of card holders and trigger alerts. Our Vision Plus
software system has an elaborate delinquency management functionality, which we
believe will enable us to actively follow up on delinquent customers. Portfolio
quality will be maintained with the help of advanced technology to deliver
timely information and analytics.
We are the first Indian company to provide credit card account information
through the Internet. Our card holders have the convenience of applying for
their card, accessing card-related information, viewing their statement,
checking their balance and making payments online. Another innovation of our
credit cards is the flexibility of the cardholder to set different spending
limits on supplementary cards. This enables customers to control the spending
of their supplementary card holders.
We offer three credit card products targeted at different customer
segments.
True Blue. Positioned as an entry level offering, the True Blue card is a
value for money card. Targeted at the mass market, the card is competitively
priced with an application fee of Rs. 100 and an annual fee of Rs. 300.
Interest is charged on the amount rolled-over to the next month at 2.95% per
month. The credit limit is a function of the monthly income of the cardholder
and is subject to a maximum limit.
Sterling Silver. This credit card is a family offering with a free
supplementary card, along with comprehensive insurance benefits for both
primary as well as supplementary card members. Targeted at the upwardly mobile
customer, this card is available at an application fee of Rs. 150 and an annual
fee of Rs. 600. Interest is charged on the amount rolled-over to the next month
at 2.5% per month. The credit limit is subject to a maximum limit.
Solid Gold. The Solid Gold credit card is presently offered at a special
invitation price comprising an application fee of Rs. 300 and an annual fee of
Rs. 1,200. This credit card is the only one we offer that can be used outside
India. Interest is charged on the amount rolled-over to the next month at 2.5%
per month. The credit limit is subject to a maximum limit based on the
cardholder's income. This globally accepted card offers additional
comprehensive travel insurance, as well as a Global One Calling Card, which
enables the holder to make telephone calls while traveling abroad.
Customers do not need to have either a bank account or collateral
securities with us to obtain a credit card. For customers with a bank account
with us, we have the right to offset any delinquencies in the credit card
account against balances in the bank account.
Retail Loan Products
Our retail loans were 3.30% of our gross loans at March 31, 2000. We offer
credit cards, loans against time deposits and loans against shares for
subscriptions to initial public offerings of Indian Companies. In fiscal 2001,
we plan to offer auto loans and home mortgage loans which will be marketed
through ICICI Personal Financial Services. Pursuant to an understanding between
ICICI and us, we will offer auto and home mortgage loans that qualify as
priority sector lending and ICICI, together with ICICI Home Finance, will offer
all other auto loans and home mortgage loans. Home mortgage loans of up to Rs. 1
40
<PAGE>
million and auto loans to professionals qualify as priority sector lending.
Increasing the volume of retail loans will allow us to diversify our asset base
and will help us to meet the priority sector lending requirements specified by
the Reserve Bank of India. For more details on our loan portfolio, see "-- Loan
Portfolio".
Loans Against Time Deposits
We provide overdraft and demand loans against the security of time
deposits. The loan can be up to 85.0% of the deposit amount. The interest rate
is linked to the interest rate on the underlying deposits and our prime lending
rate.
Loans against Shares for Subscription to Initial Public Offerings
We make short-term loans to individuals to permit them to invest in
initial public offerings of select companies, whose share offerings are
expected to be significantly oversubscribed. These loans are secured by a lien
on the shares to be allotted in the offering.
Overdrafts and Personal Loans
We provide overdraft and personal loans to our Power Pay account holders.
Other Fee-Based Products and Services
Mutual Fund Sales
We have entered into arrangements with a few mutual funds, including
Prudential ICICI Mutual Fund, Templeton Mutual Fund and Kothari Pioneer Mutual
Fund, to distribute their products through our branches and our website, for
which we earn front-end and back-end commissions. We believe that due to the
growing popularity of mutual funds in India, this service has the potential to
generate increased fee income and strengthen customer relationships.
Depositary Share Accounts
Our parent ICICI, a depositary participant with the National Securities
Depository Limited, offers depositary share accounts to its customers through
its ICICI centers. We have had an arrangement with ICICI since January 1999
whereby we offer depositary share accounts to our customers through our
branches and collect fees (including account opening fees, transaction
maintenance fees and quarterly fees) from our customers for this product,
allowing us to increase our recurring fee income, attract and retain customers
and increase balances in the savings and current accounts of our customers. We
are not required to pay any fees to ICICI but pay a fee to ICICI Infotech for
the processing by it of all back office transactions relating to this business.
ICICI pays the same fees to ICICI Infotech relating to its depositary share
account business. These depositary share accounts hold the customer's equity
securities that are in book-entry form and handle purchase and sale
transactions. At March 31, 2000, ICICI had approximately 91,000 depositary
share accounts, approximately 60,000 of which were our customers' depositary
share accounts.
Life Insurance
The Insurance Regulatory and Development Authority Bill has been passed by
the Indian Parliament. On August 5, 2000, the government of India permitted
banks to enter the insurance sector by formally specifying insurance as a form
of business that could be undertaken by them under the Banking Regulation Act,
1949. Under the Reserve Bank of India guidelines, every bank planning to enter
the insurance sector will have to seek approval from the Reserve Bank of India.
From August 16, 2000, the Insurance Regulatory and Development Authority
started accepting applications for licenses in the domestic life and non-life
insurance sector from the private sector, ending the monopoly of state-owned
insurance companies.
ICICI has signed a memorandum of understanding with Prudential Insurance
Plc, UK for entering the life insurance business. Life insurance products would
be distributed through the ICICI group's distribution channels including our
network of branches, subject to obtaining necessary approvals. We expect that
we will not underwrite any insurance and our income will be based on fees
earned from policies distributed by us.
41
<PAGE>
Distribution Channels
We deliver our retail products and services through a variety of
distribution outlets, ranging from traditional bank branches to ATMs and the
Internet. We believe that India's vast geography necessitates a variety of
distribution channels to best serve our customers' needs. The key components of
our distribution network are described below.
Branches
At March 31, 2000, we had a fully computerized network of 81 branches
(including 25 corporate branches) and 16 extension counters in 47 cities.
Extension counters are small offices primarily within office buildings or on
factory premises, that provide commercial banking services. Before opening a
branch, we conduct a detailed study in which we assess the deposit potential of
the area. Although the top 55 cities in India constitute our target segment, by
having branches in 26 out of these 55 cities, we believe that we have achieved
the basic geographic spread for our branch network. Branch locations are
largely leased rather than owned. We are in the process of centralizing back
office operations at regional processing centers, which is expected to reduce
the number of employees required at the branch office, enabling us to create a
more efficient branch network. For a description of our regional processing
centers, see "-- Risk Management -- Quantitative and Qualitative Disclosures
About Market Risk -- Operational Controls and Procedures in Regional Processing
Centers".
As a part of its branch licensing conditions, the Reserve Bank of India
has stipulated that at least 25.0% of our branches must be located in
semi-urban and rural areas. A semi-urban area is defined as a center with a
population of greater than 10,000 but less than 100,000. A rural area is
defined as a center with a population of less than 10,000. The population
figures relate to the 1991 census. We have adhered to this requirement as shown
in the table below. The majority of these branches are located in suburbs of
large cities, and some of these branches are located in areas where large
corporations have their manufacturing facilities.
The following table sets forth, for the period indicated, the number of
branches broken down by area.
At March 31, 2000
--------------------------------
Number of branches % of total
------------------ ----------
Metropolitan/urban ......... 58 71.6
Semi-urban/rural ........... 23 28.4
Total ...................... 81 100.0
As at August 31, 2000, we had 86 branches and 16 extension counters.
ATMs
We have the largest network of ATMs in the country. Of the 175 ATMs we
operated at March 31, 2000, 99 were located at our branches and extension
counters. The remaining 76 were located at the offices of select corporate
clients, large residential developments, airports and on major roads in
metropolitan cities. At March 31, 2000, we had 300,500 ATM cardholders. We
currently lease a substantial portion of our ATMs from ICICI.
To increase the number of off-site ATMs, we have entered into agreements
with three major public sector petroleum companies in India. Under these
agreements, we propose to deploy ATMs at the gas station outlets of these oil
companies at strategic locations in metropolitan cities. We also propose to
install ATMs at cyber cafes and at the outlets of consumer durable companies
and retail chain stores.
By the end of fiscal 2001, we intend to expand our ATM network to 500
ATMs. At August 31, 2000, we had 249 ATMs. The capital expenditure required to
complete this expansion project is approximately Rs. 2 million per new ATM. We
intend to lease these new ATM facilities from ICICI.
We propose to issue electronic debit cards as an associate member of VISA.
Internet
We believe that many of our corporate and retail customers demand Internet
banking services as a convenient and cost effective means of conducting
financial transactions. We offer online banking services through our website.
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<PAGE>
Market Potential of the Internet in India. In India, the delivery of
banking products has traditionally been through large physical branch networks.
Rapid developments in telecommunications and the Internet are reducing the
importance of physical channels. Internet banking is relatively new in India
and we believe that the market for Internet banking services is underdeveloped.
The growth of the Internet in India was inhibited by high costs of
Internet access and an inadequate telecommunications infrastructure. With the
liberalization of the telecommunications sector and the entry of private
Internet service providers, the quality of infrastructure has improved. The
International Data Corporation predicted in 1999 that the number of Internet
users in India will grow from approximately 0.8 million in 1999 to 4.5 million
in 2002 and 12.3 million by 2005. Approximately 22 million persons of Indian
origin live overseas and many of these persons are Internet users. India has
about 175 licensed Internet service providers, 30 of which have commenced
operations. At present, there are 450,000 Internet subscribers in India.
At March 31, 1999, there were 3.2 million personal computers in India,
most of which were in the corporate segment. High telecommunications charges
and high Internet access fees charged by service providers make Internet access
from homes expensive. Although the penetration of personal computers is not
widespread in India, other means of Internet access are gradually being
developed. Cyber cafes providing Internet access to the public are opening up
in many parts of the country and have the potential to be an important
distribution channel in the future since customers can access the Internet by
paying only for actual Internet usage. Also, India has about 37 million homes
having access to cable television. The introduction of set-top boxes, which
enable Internet access through cable television, is expected to increase the
number of people having access to the Internet and to promote its reach in
India. We expect that in India the increase in Internet usage will be driven by
cyber-cafes and cable television.
We use online banner advertising with other Internet service providers and
leading Indian Internet sites like samachar.com, rediff.com, and
indiatimes.com.
Telephone Banking Call Centers
We provide telephone banking services to our customers through our call
centers located in Mumbai, Pune and Chennai. In Mumbai, we have an interactive
voice response system as well as call agents, whereas in Chennai and Pune, we
only have call agents. These call centers work for 24 hours a day, 7 days a
week and are managed by ICICI Personal Financial Services. We pay ICICI
Personal Financial Services on the basis of the call volume. We launched the
Mumbai call center in September 1999, the Pune call center in January 2000 and
the Chennai call center in March 2000. At March 31, 2000, about 15,000 of our
customers had registered for the telephone banking service. The Mumbai call
center currently handles about 4,000 calls a day, which includes service calls,
and other inbound and outbound marketing calls. Currently, long distance
telecommunications tariffs and regulations do not make a centralized call
center attractive. We expect that with continued liberalization and convergence
taking place in the telecommunications sector, we will then consolidate the
call centers into two or three regional centers.
Our customer information file is extensively used at the telephone banking
call centers. This database issues a unique relationship number to each
customer relationship that enables the call agent to cross-sell other products
to the customer. For example, if a customer calls to pay his last auto loan
installment, this database will signal the call agent to sell him either a loan
to upgrade the car, a mortgage, a tax saving investment product or a recurring
deposit. Software is being tested that, when operational, will display on the
call agent's screen the product to be cross-sold to the customer.
Franchisee Network
Our parent ICICI has an unaffiliated franchisee network to sell the retail
products of the ICICI group. These agents market the ICICI group's products
exclusively and are not expected to market or act on behalf of any of our
competitors. Agents are dedicated to a particular line of products and receive
a fee based on the volume of business and the number of client relationships
generated. We use the same franchisee network for distributing our retail
deposit products. They supplement our growing network of branches and other
electronic delivery channels and enable us to achieve deeper penetration by
offering doorstep account opening facilities to the customer.
Mobile Phone Banking
We launched mobile phone banking in Mumbai and New Delhi in March 2000.
This will enable our savings account and credit card customers to view their
account details on their mobile phone. We are in the process of finalizing
agreements with
43
<PAGE>
several telecommunication companies to provide the service in other cities in
India. We plan to introduce wireless application protocol based technology over
time to provide our customers with greater functionality.
Treasury
Through our treasury operations, we seek to manage our balance sheet
including the maintenance of required regulatory reserves and to optimize
profits from our trading portfolio by taking advantage of market opportunities
using funds acquired from the inter-bank markets and corporate deposits. Our
trading portfolio includes our regulatory portfolio as there is no restriction
on active management of our regulatory portfolio.
General
Due to regulatory requirements, a substantial portion of our trading
portfolio consists of government of India securities. At March 31, 2000,
government of India securities represented 95.3% of our trading portfolio while
the remainder included domestic debt and equity securities and foreign currency
assets.
Under the Reserve Bank of India's statutory liquidity ratio requirement,
we are required to maintain 25.0% of our total demand and time liabilities by
way of approved securities, such as government of India securities and state
government securities. We maintain the statutory liquidity ratio through a
portfolio of government of India securities that we actively trade to optimize
the yield and benefit from price movements to increase our trading income from
this portfolio.
Under the Reserve Bank of India's cash reserve ratio requirements, we are
also required to maintain 9.0% of our demand and time liabilities in a current
account with the Reserve Bank of India. The Reserve Bank of India pays no
interest on these cash reserves up to 3.0% of the demand and time liabilities
and pays 4.0% on the balance. In calculating the cash reserve ratio
requirement, we exclude the following liabilities from demand and time
liabilities:
o inter-bank liabilities;
o liabilities to primary dealers;
o deposits from non-resident Indians, both repatriable and
non-repatriable deposits;
o foreign currency deposits from non-resident Indians; and
o refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks.
For further discussion of these regulatory reserves, see "Supervision and
Regulation -- Legal Reserve Requirements".
As part of our treasury activities, we maintain proprietary trading
portfolios in domestic debt and equity securities and in foreign currencies. We
have a limited equity portfolio because the Reserve Bank of India restricts our
incremental investment in equity securities in a fiscal year to 5.0% of the
increase in deposits in the previous fiscal year.
Our treasury engages in domestic and foreign exchange operations from a
centralized trading floor in Mumbai. We believe that our dealing room is one of
the best in India in terms of technological capability and skills. The
infrastructure includes the latest voice systems and electronic dealing
terminals with access to real time market information feeds. We are upgrading
our decision support systems.
The treasury has access to the ICICI group's research teams that regularly
track the debt, equity and currency markets. This helps us to respond quickly
to capitalize on market opportunities.
The treasury consists of two parts, domestic treasury and foreign exchange
treasury. At March 31, 2000, our domestic treasury represented 77.2% of our
treasury assets and our foreign exchange treasury represented 22.8% of our
treasury assets.
Domestic Treasury
Our domestic treasury manages our liquidity and regulatory reserves with
an objective of optimizing yield on our investment portfolio. It undertakes
transactions in both fixed income securities and equity securities. Our trading
portfolio consists mainly of fixed income securities. At March 31, 2000, fixed
income securities were 95.8% of our trading portfolio.
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<PAGE>
Our investment policy, approved by our board of directors, was instituted
in June 1994 and is updated periodically. This investment policy sets out the
broad guidelines for transactions in securities and incorporates the various
regulatory requirements. These guidelines include several checks on risk,
including a duration limit, holding period limits and stop-loss limits. Our
investment policy vests the Investment Committee, dealers and other officers
with different levels of authority for investment decisions. For a more
complete description of our investment policy, see "-- Risk Management --
Quantitative and Qualitative Disclosures About Market Risk -- Market Risk
Management Procedures".
Liquidity management involves maintaining an optimum level of liquidity
and complying with the cash reserve ratio. The objective is to ensure the
smooth functioning of all our branches and at the same time avoid the holding
of excessive cash. Our domestic treasury maintains a balance between
interest-earning liquid assets and cash to optimize earnings.
Reserve management involves maintaining statutory reserves, including the
cash reserve ratio and the statutory liquidity ratio.
Our securities are classified into two categories, trading securities and
available for sale securities. Trading securities constitute a major portion of
our portfolio. The following table sets forth, for the periods indicated,
certain information related to our trading portfolio.
<TABLE>
At March 31,
------------------------------------------------------
1998 1999 2000
-------- --------- ----------------------
<S> <C> <C> <C>
(in millions)
Government of India securities ......... Rs.6,987 Rs.14,449 Rs.26,903 US$617
Equity securities ...................... 101 198 90 2
Mutual funds units ..................... - - 779 18
Commercial paper and certificates of
deposit .............................. 222 750 147 3
-------- --------- --------- ------
Total .................................. Rs.7,310 Rs.15,397 Rs.27,919 US$640
======== ========= ========= ======
</TABLE>
The following table sets forth, for the periods indicated, certain
information related to interest and dividends on trading securities, net gain
from the sale of these securities and unrealized gain/(loss) on these
securities.
<TABLE>
At March 31,
------------------------------------------------------
1998 1999 2000
-------- --------- ----------------------
<S> <C> <C> <C>
(in millions)
Interest and dividends ................. Rs. 865 Rs. 2,247 Rs. 3,073 US$ 70
Gain on sale of trading securities ..... 274 111 936 22
Unrealized gain/(loss) on trading
securities ......................... (127) 23 (79) (2)
-------- --------- --------- ------
Total .................................. Rs.1,012 Rs. 2,381 Rs. 3,930 US$ 90
======== ========= ========= ======
</TABLE>
In addition to trading securities, we also hold available for sale
securities, primarily corporate debt securities. The following tables set
forth, for the periods indicated, certain information related to our available
for sale securities.
<TABLE>
At March 31,
-----------------------------------------------------------------------------------------------
1997 1998
---------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Amortized unrealized unrealized
cost gain loss Fair value cost gain loss Fair value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
Corporate debt securities.. Rs. 580 -- Rs. (9) Rs. 571 Rs.1,117 Rs 33 Rs. (14) Rs.1,136
Government of India
securities ............ 3,156 -- (10) 3,146 59 1 -- 60
-------- ---------- ---------- ---------- --------- --------- --------- --------
Total debt securities ..... 3,736 -- (19) 3,717 1,176 34 (14) 1,196
Mutual fund securities .... -- -- -- -- 280 -- -- 280
-------- ---------- ---------- ---------- --------- --------- --------- --------
Total ..................... Rs.3,736 -- Rs. (19) Rs.3,717 Rs.1,456 Rs. 34 Rs. (14) Rs.1,476
======== ========== ========== ========== ========= ========== ========= ========
</TABLE>
45
<PAGE>
<TABLE>
At March 31, 1999 At March 31, 2000
---------------------------------------------- -------------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Amortized unrealized unrealized
cost gain loss Fair value cost gain loss Fair value
--------- ---------- ---------- ---------- --------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
Corporate debt
securities ............. Rs.2,860 Rs -- -- Rs.2,860 Rs.2,540 Rs. 34 -- Rs.2,574 US$ 59
Government of India
securities ............. 775 50 -- 825 914 89 -- 1,003 23
-------- -------- --------- --------- -------- -------- -------- -------- ------
Total debt securities .... 3,635 50 -- 3,685 3,454 123 -- 3,577 82
Mutual fund
securities.............. 266 12 -- 278 1,146 -- (14) 1,132 26
-------- -------- --------- --------- -------- -------- -------- -------- ------
Total .................... Rs.3,901 Rs. 62 -- Rs.3,963 Rs.4,600 Rs. 123 Rs. (14) Rs.4,709 US$108
======== ========= ========= ========== ======== ========= ======== ======== ======
</TABLE>
The following table sets forth, for the periods indicated, an analysis of
the maturity profile of our investments in corporate debt securities classified
as available for sale securities and the yields thereon.
<TABLE>
At March 31, 2000
-------------------------------------------------------------------------------------------
Up to one year One to five years Five to ten years More than ten years
------------------ ------------------ ------------------ -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
Corporate debt
securities ............. Rs. 403 10.44% Rs.1,563 10.59% Rs. 554 11.22% Rs. 54 14.14%
Other debt securities .... -- -- -- -- -- -- -- --
------- ----- -------- ----- ------- ----- ------ -----
Total interest-earning
securities ............. Rs. 403 10.44% Rs.1,563 10.59% Rs. 554 11.22% Rs. 54 14.14%
======= ===== ======== ===== ======= ===== ====== =====
Total amortized cost ..... Rs. 399 Rs.1,548 Rs. 543 Rs. 50
Total market value ....... 403 1,563 554 54
</TABLE>
Foreign Exchange Treasury
Our foreign exchange treasury manages our foreign currency exposures,
offers foreign exchange and risk hedging derivative products to our customers
and engages in proprietary trading of currencies. At March 31, 2000, our
foreign exchange treasury represented 22.8% of our treasury assets.
The foreign exchange treasury tracks balances on a real time basis to
optimize the yield on funds across all currencies, using foreign exchange swaps
and short-term deposits with correspondent banks.
We deal in 15 major foreign currencies and we take deposits from
non-resident Indians in four major foreign currencies. We also manage onshore
accounts in foreign currencies. The foreign exchange treasury manages its
portfolio through money market and foreign exchange instruments to optimize
yield and liquidity.
We control market risk and credit risk on our foreign exchange trading
portfolio through an internal model which sets counterparty limits, stop-loss
limits and limits on the loss of the entire foreign exchange trading operations
and exception reporting. We also use a value at risk model to monitor our spot
positions.
Customer Foreign Exchange
We provide customer specific products and services and risk hedging
solutions in 15 currencies to meet the trade and service-related requirements
of our corporate clients. The products and services offered include:
o spot foreign exchange for the conversion of foreign currencies
without any value restrictions;
o forward foreign exchange for hedging future receivables and payables,
without any value restriction, up to a maximum period of three years;
and
o foreign exchange and interest rate derivatives for hedging long-term
exposures.
We earn commissions on these products and services from our corporate
customers.
46
<PAGE>
Proprietary Trading in Currencies
We are active in the proprietary trading of currencies and are among the
few Indian banks to be approved by the Reserve Bank of India to initiate cross
currency positions abroad. Our trading is focused on US dollar, the Euro, the
Japanese yen and the UK pound sterling. The average monthly inter-bank volumes
for fiscal 2000 was US$ 3,262 million, up from US$ 1,764 million in fiscal
1999.
The following table sets forth, for the periods indicated, our growth in
trading volume in various segments of our foreign exchange operations.
<TABLE>
Year ended March 31,
----------------------------------------------------------------
1998 1999 2000
-------- -------- ----------------------------
<S> <C> <C> <C>
(in billions, except number of currencies and nostro accounts)
Trading volume:
Inter-bank ............... Rs.422.6 Rs.898.7 Rs.1,402.7 US$ 32.1
Merchants ................ 38.8 57.4 129.8 3.0
-------- -------- ---------- ---------
Total trading volume ........ Rs.461.4 Rs.956.1 Rs.1,532.5 US$ 35.1
======== ======== ========== =========
Size of foreign currency
book ...................... Rs. 59.0 Rs. 86.6 Rs. 190.8(1) US$ 4.44
Number of currencies ........ 12 15 15
Number of nostro accounts ... 14 20 22
</TABLE>
--------------------
(1) Includes Rs. 7.6 billion (US$ 175 million) of proceeds raised from our ADS
offering in March 2000.
Funding
Our funding operations are designed to ensure both stability of funding
and effective liquidity management. The primary source of funding is deposits
raised from corporate customers, which were 69.0% of total deposits at March
31, 2000. Retail deposits, which provide a cheaper source of funds, are the
other source of deposits and represented 31% of total deposits at March 31,
2000. We expect retail deposits to account for a greater share of deposits in
the future as a result of our improved market presence. We constantly monitor
our funding strategy with a view to minimizing funding costs and matching
maturities with our loan portfolio.
Total Deposits
The following table sets forth, for the periods indicated, our average
outstanding deposits based on daily balances and the percentage composition by
each category of deposits. The average cost (interest expense divided by
average of daily balances) for each category of deposits is provided in the
footnotes.
<TABLE>
Year ended March 31,
--------------------------------------------------------------------------------------------------
1997 1998 1999 2000
Amount % of total Amount % of total Amount % of total Amount % of total
-------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions except percentages)
Non-interest-bearing
demand deposits ........ Rs.2,170 21.9% Rs. 3,399 18.3% Rs. 3,539 9.0% Rs. 7,428 11.0%
Savings deposits(1) ...... 304 3.0 815 4.4 1,569 4.0 3,530 5.3
Time deposits(2) ......... 7,449 75.1 14,325 77.3 34,347 87.0 56,351 83.7
-------- ----- --------- ----- --------- ----- --------- -----
Total .................... Rs.9,923 100.0% Rs.18,539 100.0% Rs.39,455 100.0% Rs.67,309 100.0%
======== ===== ========= ===== ========= ===== ========= =====
</TABLE>
---------------
(1) With an average cost of 3.29% in fiscal 1997, 3.44% in fiscal 1998, 3.44%
in fiscal 1999 and 3.34% in fiscal 2000.
(2) With an average cost of 12.91% in fiscal 1997, 11.10% in fiscal 1998,
10.64% in fiscal 1999 and 10.06% in fiscal 2000.
For a breakdown of our corporate deposits, see "-- Corporate Banking --
Corporate Deposits", and for a breakdown of our retail deposits, see " --
Retail Banking -- Deposits".
47
<PAGE>
Short-Term Borrowings
The following table sets forth for the periods indicated, certain
information related to our short-term rupee borrowings from banks, primary
dealers and financial institutions, excluding deposits.
<TABLE>
Year ended March 31,(1)
----------------------------------------------------------
1997 1998 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in millions, except percentages)
Period end balance ......................... Rs. 100 Rs. 1,500 Rs. 325 Rs. 4,109
Average balance during the period(2) ....... 1,024 1,250 2,193 5,264
Maximum month-end balance .................. 2,476 3,195 3,968 9,710
Average interest rate during the period(3) . 12.70% 14.56% 10.31% 11.84%
Average interest at period end(4) .......... 7.00 10.30 10.64 7.37
</TABLE>
--------------
(1) Short-term borrowings include trading liabilities, such as borrowings in
the call market and repurchase agreements.
(2) Average of daily balances outstanding.
(3) Represents the ratio of interest expense on short-term borrowings to the
average of daily balances of short-term borrowings.
(4) Represents the weighted average rate of the short-term borrowings
outstanding at fiscal year-end.
Other Sources of Funds
We also obtain funds from the issuance of subordinated debt securities. In
May 1998, we issued Rs. 1.0 billion of subordinated debt due August 2003, and
in January 1999, we issued an additional Rs. 680 million of subordinated debt
due April 2006. This debt is classified as Tier 2 capital in calculating our
capital adequacy ratio. Under the Reserve Bank of India's capital adequacy
requirements, we are required to maintain a minimum ratio of capital to risk
adjusted assets and off-balance sheet items of 9.0% (effective March 31, 2000),
at least half of which must be Tier 1 capital. Total subordinated debt
classified as Tier 2 capital cannot exceed 50.0% of Tier 1 capital. For a
discussion of our capital adequacy ratios, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital".
Loan Portfolio
At March 31, 2000, our gross loan portfolio, which includes our holdings
of corporate debt instruments and preferred stock, was Rs. 47.7 billion (US$
1.1 billion) and represented approximately 1,500 loans outstanding. Corporate
debt instruments and preferred stock amounted to Rs. 10.5 billion (US$ 241
million) at March 31, 2000, or 22% of our gross loans. Very little trading
exists in these corporate debt securities, but we believe that as the secondary
debt markets in India become more active, lenders will be able to more easily
sell these corporate debt securities, thereby allowing for better management of
mismatches in the maturity of assets and liabilities and providing additional
liquidity. Almost all of our loans are to Indian borrowers.
For a description of our corporate and retail loan products, see "--
Corporate Banking -- Loan Products" and "-- Retail Banking -- Credit Cards";
and "-- Retail Banking -- Retail Loan Products".
The following table sets forth, for the periods indicated, our gross loan
portfolio classified by product group.
<TABLE>
At March 31,
----------------------------------------------------------------
1997 1998 1999 2000
-------- --------- --------- ----------------------
<S> <C> <C> <C> <C>
(in millions)
Working capital ..................... Rs.6,705 Rs. 9,256 Rs.17,508 Rs.31,576 US$ 723
Term loans(1) ....................... 1,477 3,344 9,859 14,635 335
Retail loans ........................ 380 590 1,110 1,553 36
Gross loans ......................... Rs.8,562 Rs.13,190 Rs.28,477 Rs.47,764 US$1,094
======== ========= ========= ========= ========
Of which:
Corporate debt instruments and
preferred stock ................ Rs. 153 Rs.1,424 Rs. 6,762 Rs.10,532 US$ 241
</TABLE>
48
<PAGE>
---------------
(1) Includes corporate debt instruments, preferred stock and lease finance
products. We had lease finance of Rs. 305 million (US$ 7 million) at March
31, 2000, representing 0.6% of our gross loans. In 1995-1996, we offered
lease financing to a limited number of customers due to certain tax
advantages to us from these transactions. We discontinued all of our lease
finance activities in fiscal 1998 once the Indian tax authorities disputed
this tax treatment. For a discussion of this dispute, see "-- Legal and
Regulatory Proceedings".
Shift in Customer Focus
Over the past year, consistent with our strategy of focusing on quality
growth opportunities, we have concentrated on financing large, highly rated
corporations by taking advantage of the corporate relationships of the ICICI
group. The following table sets forth, for the periods indicated, the volume of
our corporate loan outstanding to new customers broken down by the revenues of
these new customers. This table demonstrates the ongoing shift in our loan
portfolio from small to medium-sized enterprises to large corporations.
<TABLE>
Year ended March 31,
----------------------------------------------------------------------------------------
1999 2000
----------------------------------------- ----------------------------------------
Loan Loan
outstanding outstanding
Number of to new Number of to new
Revenues companies customers % of total companies customers % of total
-------- --------- ----------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(in millions, except number of companies and percentages)
Below Rs. 5 million ............... 6 Rs. 36 0.6% 13 Rs. 30 0.3%
Rs. 5 to 100 million .............. 34 562 10.3 54 538 4.9
Rs. 100 to 1,000 million .......... 50 1,003 18.5 98 1,621 14.8
Rs. 1 to 10 billion ............... 29 3,107 57.2 89 6,527 59.4
Rs. 10 to 20 billion .............. 2 231 4.2 9 1,054 9.6
Above Rs. 20 billion .............. 3 488 9.2 7 1,209 11.0
--- -------- ----- --- --------- -----
Total ............................. 124 Rs.5,427 100.0% 270 Rs.10,979 100.0%
=== ======== ===== === ========= =====
</TABLE>
Collateral -- Completion, Perfection and Enforcement
Our loan portfolio consists predominantly of working capital loans. These
loans are typically secured by a first lien on current assets, which normally
consist of inventory and receivables. Additionally, in some cases, we may take
further security of a first or second lien on fixed assets, a pledge of
financial assets like marketable securities, corporate guarantees and personal
guarantees. These security interests are perfected by the registration of these
interests within 30 days with the Registrar of Companies pursuant to the
provisions of the Indian Companies Act. This registration amounts to a
constructive public notice to other business entities. At March 31, 2000, 69.6%
of our gross loans were secured. In general, our loans are over-collateralized.
In India, there are no regulations stipulating any loan-to-collateral limits.
In India, foreclosure on collateral generally requires a written petition
to an Indian court. An application, when made, may be subject to delays and
administrative requirements that may result, or be accompanied by, a decrease
in the value of the collateral. These delays can last for several years leading
to deterioration in the physical condition and market value of the collateral.
In the event a borrower makes an application for relief to a specialized
quasi-judicial authority called the Board for Industrial and Financial
Reconstruction, foreclosure and enforceability of collateral is stayed. For a
discussion of the activities of the Board for Industrial and Financial
Reconstruction, see "Republic of India -- The Indian Economy -- Legislative
Framework for Restructuring Sick Companies".
We recognize that our ability to realize the full value of our collateral
in respect of current assets is difficult, due to, among other things, delays
on our part in taking immediate action, delays in bankruptcy foreclosure
proceedings, defects in the perfection of collateral and fraudulent transfers
by borrowers. However, cash credit facilities are so structured that we are
able to capture the cash flows of our customers for recovery of past due
amounts. In addition, we have a right of set-off for amounts due to us on these
facilities. Also, we monitor the cash flows of our working capital loan
customers on a daily basis so that we can take any actions required before the
loan becomes non-performing. On a case-by-case basis, we may also stop or limit
the borrower from drawing further credit from its facility.
Most of our corporate borrowers having large working capital requirements
borrow from more than one bank either under a consortium arrangement or under a
multiple banking arrangement. Under a consortium arrangement, the financing
banks
49
<PAGE>
formally decide on the credit proposal of the company and decide how the
funding should be distributed among the consortium banks. A lead bank, usually
the bank providing the largest share of the overall credit, is appointed under
a consortium lending arrangement. The lead bank coordinates credit appraisals,
execution of joint documents, regular review meetings and security inspections.
Under a consortium arrangement, typically the security is in the form of a
first lien on current assets, which is shared on a proportionate basis among
the participating banks. Theoretically, a member can exit from a consortium,
with its share taken either by an existing member or by induction of a new
member in the consortium. However, in the case of a non-performing loan, this
exit route is generally not available since the other members of the consortium
are not likely to take up additional credit that is impaired. Further, a member
is generally not allowed to take recovery action independent of the consortium
in the case of a non-performing loan. Hence, recovery from non-performing
companies that are under a consortium arrangement may be delayed.
Under a multiple banking arrangement, each bank stipulates its own terms
and obtains distinct and identifiable collateral. Individual documents are also
obtained and requisite liens created. Unlike a consortium arrangement lending,
in a multiple bank or sole bank lending, we can independently pursue recovery
of past due amounts either through full cash recovery, a negotiated settlement
or a legal suit. At March 31, 2000, loans with consortium arrangements
accounted for 33.2% of our gross non-performing loans, loans with multiple bank
arrangements accounted for 41.8% of our gross non-performing loans and sole
bank lending accounted for 25% of our gross non-performing loans.
Loan Concentration
Pursuant to the guidelines of the Reserve Bank of India, our credit
exposure to individual borrowers must not exceed 20.0% of our capital funds
calculated under Indian GAAP (effective April 1, 2000).
Our exposure to a group of companies under the same management control
must not exceed 50.0% of our capital funds unless the exposure is in respect of
an infrastructure project. In that case, the exposure to a group of companies
under the same management control may be up to 60.0% of our capital funds.
Pursuant to the Reserve Bank of India guidelines, an exposure is calculated as
the sum of 100.0% of the committed funded amount or the outstanding funded
amount, whichever is higher, and 50.0% of the committed non-funded amount or
the outstanding non-funded amount, whichever is higher. Our loan exposures to
individual and group borrowers have been generally within the percentages
prescribed by the Reserve Bank of India based on the capital funds calculated
under Indian GAAP. In exceptional cases, where we have exceeded these
percentages, we have obtained the approval of the Reserve Bank of India as
required.
We follow a policy of portfolio diversification and evaluate our total
financing exposure in a particular industry in light of our forecasts of growth
and profitability for that industry. Our risk management department monitors
all major sectors of the economy and specifically follows industries in which
we have credit exposures. We respond to any economic weakness in an industrial
segment by restricting new credits to that industry segment and any growth in
an industrial segment by increasing new credits to that industry segment,
resulting in active portfolio management.
50
<PAGE>
The following table sets forth, for the periods indicated, our gross loans
outstanding by the borrower's industry or economic activity and as a percentage
of our gross loans.
<TABLE>
At March 31,
--------------------------------------------------------------------------------------------------
1997 1998 1999 2000
------------------- ------------------- -------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In millions, except percentages)
Agriculture .................. Rs. 252 3.0% Rs. 501 3.8% Rs. 675 2.4% Rs. 1,520 US$ 34 3.2%
Auto including trucks ........ -- -- 600 4.5 1,006 3.5 1,680 38 3.5
Cement ....................... 60 0.7 170 1.3 540 1.9 1,124 25 2.3
Chemicals, drugs and
Pharmaceuticals............. 490 5.7 1,092 8.3 2,420 8.5 5,772 132 12.0
Computer software ............ -- -- 230 1.7 460 1.6 823 19 1.7
Construction(1) .............. 510 6.0 770 5.8 740 2.6 882 20 1.8
Electricity .................. 470 5.5 540 4.1 1,488 5.2 2,784 64 5.8
Finance ...................... 890 10.4 780 5.9 1,949 6.9 6,113 140 12.8
Iron and steel ............... 380 4.4 460 3.5 620 2.2 703 16 1.4
Other metals and metal
products ................... 220 2.6 330 2.5 1,370 4.8 1,269 29 2.7
Light manufacturing .......... 1,280 14.9 1,300 9.9 2,800 9.8 4,895 112 10.3
Other personal loans ......... 380 4.4 590 4.5 1,110 3.9 1,553 36 3.3
Paper and paper products ..... 150 1.8 240 1.8 373 1.3 745 17 1.6
Textiles ..................... 860 10.0 1,170 8.9 1,405 4.9 1,600 38 3.4
Transport .................... 230 2.7 360 2.7 159 0.6 1,686 39 3.6
Other industries(2) .......... 2,390 27.9 4,057 30.8 11,362 39.9 14,615 334 30.6
Gross loans .................. Rs.8,562 100.0% Rs.13,190 100.0% Rs. 28,477 100.0% Rs. 47,764 US$1,093 100.0%
</TABLE>
--------------
(1) Includes engineering, procurement and construction projects and building
construction.
(2) Includes over 40 different industries with no industry constituting more
than 3.0%.
At March 31, 2000, no single industry accounted for more than 15.0% of our
gross loan portfolio.
In fiscal 1998 and 1999, there was an increase in the proportion of assets
in the chemicals, drugs and pharmaceuticals and other metals and metal products
sectors, while there was a decrease in the proportion of assets in the
construction, iron and steel, and textiles sectors.
In fiscal 2000, there was an increase in the proportion of our assets in
the finance, chemicals, transport, agriculture and light manufacturing sectors
while there was a decrease in the proportion of our assets in the construction,
textiles, iron and steel, other metals and metal products sectors.
Our 10 largest loan exposures at March 31, 2000 totaled approximately Rs.
4.9 billion (US$ 112 million) and represented 10.3% of our total gross loan
portfolio. The largest group of companies under the same management control
accounted for approximately 1.7% of our portfolio.
Non-Performing Loans
The following discussion on non-performing loans is based on US GAAP. For
classification of non-performing loans under Indian regulatory requirements,
see "Supervision and Regulation".
Impact of Economic Environment
The Indian economy was adversely affected by negative trends in the global
marketplace, particularly in the commodities markets, in fiscal 1998 and 1999,
which caused a slowdown in the industrial sector. The Indian industrial sector
has been subject to increasing competitive pressures, and Indian corporations
have had to respond to these pressures through a process of restructuring and
repositioning. This restructuring process is taking place in several
industries, primarily in sectors where many small, unprofitable manufacturing
facilities have existed, principally the iron and steel and textiles
industries. This has led to a decline in the operating performance of Indian
corporations and the impairment of related loan assets in the financial system,
including some of our assets. In fiscal 2000 gross non-performing loans
decreased primarily due to recoveries and write-offs.
51
<PAGE>
India imports over 70% of its requirements of petroleum products. The
sharp increase in global prices of these products during the last few months,
combined with the Reserve Bank of India's decision to raise the bank rate by
100 basis points in July 2000, is likely to adversely impact the Indian economy
in general. The decrease in gross non-performing loans reported in this annual
report for fiscal 2000 may not be repeated in fiscal 2001.
At March 31, 2000, our gross non-performing loans as a percentage of gross
loan assets was 3.0% and our gross non-performing loans net of valuation
allowances as a percentage of net loan assets was 1.4%. We have made total
valuation allowances for 59.6% of our gross non-performing loans on which we
have made valuation allowances. These allowances are based on the expected
realization of cash flows from these assets. We cannot, however, assure you
that our provisions will be adequate to cover any further increase in the
amount of non-performing loans or any further deterioration in our
non-performing loan portfolio. We had not made valuation allowances on 11.5% of
our gross non-performing loans at March 31, 2000 based on the fact that the
discounted cash flows from these borrowers were sufficient to cover the entire
exposure of these loans. At March 31, 2000, we had 47 non-performing loans
outstanding of which the top ten represented 63.2% of all non-performing loans
and 1.9 % of our gross loan portfolio.
The following tables set forth, for the periods indicated, certain details
of our gross non-performing portfolio.
<TABLE>
At March 31,
----------------------------------------------------------- % of total at
1997 1998 1999 2000 March 31, 2000
-------- -------- --------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(in millions, except percentages)
Non-performing working capital
loans ....................... Rs. 66 Rs. 558 Rs. 1,158 Rs. 1,127 US$ 26 79.5%
Non-performing term loans ...... 121 46 236 61 1 4.3
Non-performing lease loans ..... -- -- 144 185 5 13.0
Non-performing corporate debt
instruments(1)................ -- -- 75 45 1 3.2
-------- -------- --------- --------- -------- -----
Gross non-performing loans ..... Rs. 187 Rs. 604 Rs. 1,613 Rs. 1,418 US 33 100.0%
======== ======== ========= ========= ======== =====
Gross non-performing loans
without valuation
allowances(2)................. Rs. -- Rs. 26 Rs. 466 Rs. 163 US$ 4
Gross non-performing loans
with valuation allowances(3).. 187 578 1,147 1,255 29
Total valuation allowances ..... 187 425 880 748 17
Non-performing loans net of
valuation allowances.......... -- 179 733 670 16
Gross loan assets .............. 8,562 13,190 28,477 47,764 1,094
Net loan assets ................ 8,375 12,765 27,597 47,016 1,077
</TABLE>
---------------
(1) Includes debentures, preferred stock and bonds.
(2) Includes non-performing loans on which we have not made a valuation
allowance.
(3) Includes non-performing loans on which we have made a valuation allowance.
52
<PAGE>
<TABLE>
At March 31,
-------------------------------------------
1997 1998 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
(in percentages)
Gross non-performing loans as a percentage of gross loan assets ........... 2.2% 4.6% 5.7% 3.0%
Gross non-performing loans with valuation allowances as a percentage ...... 2.2 4.4 4.0 2.6
Non-performing loans net of valuation allowances as a percentage of ....... -- 1.4 2.7 1.4
Total valuation allowances as a percentage of non-performing loans
with valuation allowances .............................................. 100.0 73.5 76.7 59.6
</TABLE>
Recognition of Non-Performing Loans
We identify loans as non-performing and place them on a non-accrual basis
once we determine that interest or principal is past due beyond specified
periods or that the payment of interest or principal is doubtful. Regarding
interest or principal that is past due beyond specified periods, we classify
loans as non-performing when interest or principal is past due for 180 days
(typically two payment periods). We may consider the payment of interest or
principal to be doubtful if the borrower has ceased operations or has incurred
cash losses and the probability of revival is uncertain or the borrower's
industry is under stress. We provide for loan losses based on our internal
subjective assessment of the possibility of recovery of such loans based
principally on the realizable value of collateral and the discounted value of
future cash flows.
We do not recognize interest on non-performing loans or credit interest to
our income account unless it is collected. Any interest accrued and not
received on non-performing loans is reversed and charged against current
earnings. We return non-performing loans to accrual status when all contractual
principal and interest amounts are reasonably assured of repayment and, in the
case of term loans, there is a sustained period of repayment performance in
accordance with the contractual terms for at least one year.
Our non-performing loans, net of allowances for credit losses decreased by
Rs. 63 million (US$ 1.4 million) in fiscal 2000 to Rs. 670 million (US$ 16
million) at March 31, 2000. Net non-performing loans were 1.4% of our total net
loan assets at March 31, 2000 compared to 2.7% at March 31, 1999.
Non-performing loans as a percentage of net loans declined in fiscal 2000
primarily due to an increase in loan assets, the write-off of hard core
non-performing loans of Rs. 559 million and recovery of Rs. 76 million.
Under Indian GAAP, net non-performing loans outstanding (determined in
accordance with the Reserve Bank of India guidelines applicable at that time)
decreased from Rs. 608 million (US$ 14 million) at March 31, 1999 to Rs. 559
million (US$ 13 million) at March 31, 2000. For a description of the
differences between Indian GAAP and US GAAP, see "Significant Differences
between Indian GAAP and US GAAP".
Analysis of Non-Performing Loans by Directed Lending Sector
In lending as required under Indian directed lending requirements, we
follow the same credit risk assessment and credit approval processes as in all
our lending. In view of the possibility of higher incidence of asset impairment
in directed lending relative to non-directed lending, we maintain the option of
fulfilling our priority sector obligations by making deposits with Indian
development banks since these yield a better risk adjusted return on capital,
though the nominal returns are much lower than in making loans.
53
<PAGE>
The following table sets forth, for the periods indicated, our gross loans
and our gross non-performing loans by segment and our gross non-performing
loans as a percentage of our gross loans in the same segment.
<TABLE>
At March 31,
--------------------------------------------------------
1997 1998
-------------------------- ---------------------------
Non- Non-
Gross Performing Gross Performing
Loans Loans % Loans Loans %
------- ---------- ---- --------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
(in millions, except percentages)
Directed
Lending:
Agriculture ... Rs. 252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6%
Small scale
industries... 1,860 37 2.0 2,753 170 6.2
Other ......... 1,708 19 1.1 2,419 44 1.8
-------- ------- ---- --------- -------- ---
Total
directed
lending...... 3,820 66 1.7 5,673 247 4.4
Non-direct
lending...... 4,742 121 2.6 7,517 357 4.7
-------- ------- ---- --------- -------- ---
Total ......... Rs.8,562 Rs. 187 2.2% Rs.13,190 Rs. 604 4.6%
======== ======= ==== ========= ======== ===
Allowance for
credit
losses ...... Rs.(187) Rs. (425)
------- --------
Net non-
performing
loans ........ -- Rs. 179
======= ========
</TABLE>
<TABLE>
At March 31,
---------------------------------------------------------------
1999 2000
--------------------------- ---------------------------------
Non-
Gross Performing Gross Non-Performing
Loans Loans % Loans Loans %
--------- ---------- ---- --------- ---------------- ----
<S> <C> <C> <C> <C> <C> <C>
(in millions, except percentages)
Directed
Lending:
Agriculture ... Rs. 675 Rs. 96 14.2% Rs. 1,520 Rs. 90 US$ 2 5.9%
Small scale
industries... 3,510 209 6.0 5,958 154 4 2.6
Other ......... 4,500 100 2.2 2,662 112 3 4.2
--------- ---------- ---- --------- -------- ------ ---
Total
directed
lending...... 8,685 405 4.7 10,140 356 9 3.5
Non-direct
lending...... 19,792 1,208 6.1 37,624 1,062 24 2.8
--------- ---------- ---- --------- -------- ------ ---
Total ......... Rs.28,477 Rs. 1,613 5.7% Rs.47,764 Rs.1,418 US$ 33 3.0%
========= ========== ==== ========= ======== ====== ===
Allowance for
credit
losses ...... Rs. (880) Rs. (748) US$(17)
---------- -------- ------
Net non-
performing
loans ........ Rs. 733 Rs. 670 US$ 16
========== ======== ======
</TABLE>
As shown by these tables, the quality of our directed lending portfolio is
similar to the quality of the rest of our loan portfolio. At March 31, 2000,
non-performing loans in the directed lending sector as a percentage of gross
loans was 3.5% and non-performing loans in the other sectors as a percentage of
gross lonas was 2.8%.
Analysis of Non-Performing Loans by Product
The following tables set forth, for the periods indicated, our
non-performing loans by product, and as a percentage of our non-performing
loans.
<TABLE>
At March 31,
-------------------------------------------------------------------------------------------------
1997 1998 1999 2000
----------------- ----------------- ----------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions, except percentages
Working capital loans:
Cash credits/demand loans ..... Rs. 66 35.3% Rs. 537 88.9% Rs.1,130 70.1 Rs.1,085 US$ 25 76.6%
Bill discounting .............. -- -- 21 3.5 28 1.7 42 1 2.9
Term loans .................... 121 64.7 46 7.6 236 14.7 61 1 4.3
Lease finance ................. -- -- -- -- 144 8.8 185 5 13.0
Corporate debt instruments .... -- -- -- -- 75 4.7 45 1 3.2
------- ----- ------- ----- -------- ----- -------- -------- -----
Total non-performing loans .... Rs. 187 100.0% Rs. 604 100.0% Rs.1,613 100.0% Rs.1,418 US$ 33 100.0%
======= ===== ======= ===== ======== ===== ======== ======== =====
Allowance for credit losses ... Rs.(187) Rs.(425) Rs. (880) Rs. (748) US$ (17)
------- ------- -------- -------- --------
Net non-performing loans ...... -- Rs. 179 Rs. 733 Rs. 670 US$ 16
======= ======= ======== ======== ========
</TABLE>
54
<PAGE>
Although lease finance represented 0.6% of our gross loans at March 31,
2000, it represented 13.0% of our gross non-performing loans. In fiscal 1996,
we offered lease financing to a limited number of small and medium-sized
companies because we gained certain tax advantages from these transactions. We
discontinued these activities in 1998 after the Indian tax authorities disputed
this tax treatment. For a discussion of this dispute, see "-- Legal and
Regulatory Proceedings". Due to the small size of these borrowers and their
concentration in industry sectors that have experienced a slowdown, such as the
textiles sector, we believe that our gross non-performing loans are greater for
this type of exposure compared to others.
Analysis of Non-Performing Loans by Industry Sector
The following table sets forth, for the periods indicated, our
non-performing loans by borrowers' industry or economic activity and as a
percentage of our loans in the respective industry or economic activity sector.
<TABLE>
At March 31,
-------------------------------------------------------------------
1997 1998
------------------------------- --------------------------------
Non- Non-
Gross performing Gross performing
loans loans % loans loans %
-------- ----------- ---- --------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
(in millions, except percentages)
Agriculture .................................. Rs. 252 Rs. 10 4.0% Rs. 501 Rs. 33 6.6%
Auto including trucks ........................ -- -- -- 600 -- --
Cement ....................................... 60 -- -- 170 -- --
Chemicals,
drug and pharmaceuticals.................... 490 -- -- 1,092 58 5.3
Computer software ............................ -- -- -- 230 -- --
Construction ................................. 510 -- -- 770 24 3.1
Electricity .................................. 470 -- -- 540 -- --
Finance ...................................... 890 -- -- 780 -- --
Iron and steel ............................... 380 -- -- 460 56 12.2
Other metals and metal products .............. 220 -- -- 330 -- --
Light manufacturing .......................... 1,280 148 11.6 1,300 94 7.2
Other personal loans ......................... 380 -- -- 590 -- --
Paper and paper products ..................... 150 -- -- 240 -- --
Textiles ..................................... 860 -- -- 1,170 62 5.3
Transport .................................... 230 -- -- 360 -- --
Other industries ............................. 2,390 29 1.2 4,057 277 6.8
-------- ------- ---- --------- -------- ----
Total ........................................ Rs.8,562 Rs. 187 2.2% Rs.13,190 Rs. 604 4.6%
======== ======= ==== ========= ======== ====
Allowance for credit losses .................. Rs.(187) Rs. (425)
Net non-performing loans ..................... ------- --------
Rs. -- Rs 179
======= ========
</TABLE>
55
<PAGE>
<TABLE>
At March 31, 1999 At March 31, 2000
----------------------------------- --------------------------------------------
Non- Non-
performing performing
Gross Loans loans % Gross Loans loans US$ %
----------- ---------- ------ ----------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(in millions, except percentages)
Agriculture ..................... Rs. 675 Rs. 96 14.2% Rs. 1,520 Rs. 90 2 5.9%
Auto including trucks ........... 1,006 -- -- 1,680 -- -- --
Cement .......................... 540 -- -- 1,124 -- -- --
Chemicals, drugs and
pharmaceuticals................ 2,420 79 3.3 5,772 80 2 1.4
Computer software ............... 460 -- -- 823 1 -- 0.1
Construction .................... 740 24 3.2 882 -- -- --
Electricity ..................... 1,488 -- -- 2,784 -- -- --
Finance ......................... 1,949 61 3.1 6,113 53 1 0.9
Iron and steel .................. 620 268 43.2 703 194 5 27.6
Other metals and metal products
products....................... 1,370 -- -- 1,269 -- -- --
Light manufacturing ............. 2,800 400 14.3 4,895 423 10 8.6
Other personal loans ............ 1,110 -- -- 1,553 -- -- --
Paper and paper products ........ 373 -- -- 745 -- -- --
Textiles ........................ 1,405 313 22.3 1,600 222 5 13.9
Transport ....................... 159 -- -- 1,686 -- -- --
Other industries ................ 11,362 372 3.3 14,615 355 8 2.4
---------- -------- ----- --------- -------- ------- -----
Total ........................... Rs. 28,477 Rs.1,613 5.7% Rs.47,764 Rs.1,418 33 3.0%
========== ======== ===== ========= ======== ======= =====
Allowance for credit losses ..... Rs. (880) Rs. (748) (17)
-------- -------- -------
Net non-performing loans ........ Rs. 733 Rs. 670 US$ 16
======== ======== =======
</TABLE>
Our gross non-performing loans as a percentage of gross loans in the
respective industries was the highest in the iron and steel, textiles and light
manufacturing industries.
Iron and Steel. Over the last few years, a sharp reduction in
international steel prices to historic lows has had a significant impact on the
companies in this sector. In addition, a substantial reduction in import
tariffs over the last three years led to price competition from certain
countries, significantly reducing domestic prices. Our outlook for the
medium-term for the sector is positive due to the anticipated increase in
prices from the historic lows reached in fiscal 1999 and an increase in
domestic consumption. The majority of our loans to small steel plants and small
re-rolling mills have already been classified as non-performing, and the
balance of loans in this sector is primarily to economically sized plants with
advanced technology. At March 31, 2000, we had classified 27.6% of our gross
loans in this sector as non-performing.
Textiles. The textiles industry experienced a reduction in exports
following the devaluation of the south-east Asian currencies in 1998, which
resulted in less competitive Indian textile exports. The reduction in exports
was also due to reduced demand in the entire region. High cotton prices in the
last two years also increased the costs for Indian manufacturers. The majority
of our loans to small entities in this sector have been classified as
non-performing, and the balance of our exposure is primarily to large
economically sized plants. Our total exposure to this sector increased to Rs.
1,600 million at March 31, 2000 from Rs. 1,405 million at March 31, 1999 due to
additional funding provided to larger better-rated companies. At March 31,
2000, we had classified 13.9% of our gross loans in this sector as
non-performing.
Light Manufacturing. The light manufacturing industry category includes
manufacturers of electronic equipment, electrical cables, fasteners, watches
and other light manufacturing items. At March 31, 2000, 77.0% of the
non-performing loans in this sector were to middle market companies. The
downturn in certain sectors of the Indian economy during the last few years
affected the middle market companies to a greater extent in view of their
higher vulnerability to external factors. At March 31, 2000, of the
non-performing loans in the light manufacturing sector, 63.8% were to six
companies engaged in the manufacture of equipment, 20.0% were to three
companies in the forging sector, and 7.0% were to two manufacturers of
electronic equipment. The lesser number of new projects during the last three
years has led to the depressed performance of companies engaged in the
manufacture of equipment. The increase in our exposure to this sector at March
31, 2000 compared to at March 31, 1999 has been to large sized companies with a
diversified product range. At March 31, 2000, we had classified 8.6% of our
gross loans in this sector as non-performing.
56
<PAGE>
Top Ten Non-Performing Loans
At March 31, 2000, we had 47 non-performing loans outstanding, of which
the top ten represented 63.2% of our gross non-performing loans, 61.0% of our
net non-performing loans and 1.9% of our gross loan portfolio. None of our top
ten non-performing loans has been restructured so far. However, we are
currently working out detailed restructuring packages for three borrowers in
conjunction with other term lenders and other working capital consortium
members. Four other borrowers have made an application for relief to the Board
for Industrial and Financial Reconstruction. For a discussion of the activities
of the Board for Industrial and Financial Reconstruction, see "Republic of
India -- The Indian Economy -- Legislative Framework for Restructuring Sick
Companies".
The following table sets forth, for the period indicated, certain
information regarding our 10 largest non-performing loans.
<TABLE>
At March 31, 2000
----------------------------------------------------------------------------------------------------
Principal
outstanding
net of Currently
Type of Gross allowance for Servicing All
banking principal credit Interest
Industry arrangement outstanding losses(1) Collateral(2)(3) Payments(4)
-------------- --------------- ----------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(in millions)
Borrower A ...... Light
manufacturing Consortium Rs. 149 Rs. 60 Rs. 139 Yes
Borrower B ...... Steel Multiple 137 114 175 No
Borrower C ...... Light Multiple 100 -- 27 No
manufacturing
Borrower D ...... Energy Multiple 97 81 86 No
Borrower E ...... Sugar Multiple 88 -- 107 No
Borrower F ...... Textile Consortium 86 86 121 Yes
Borrower G ...... Hotels/resorts Consortium 75 28 266 No
Borrower H ...... Light
manufacturing Multiple 64 37 124 No
Borrower I ...... Finance Consortium 53 -- 97 No
Borrower J ...... Steel Consortium 47 -- 66 No
--------- -------- ---------
Total ........... Rs. 896 Rs. 406 Rs. 1,208
========= ======== =========
</TABLE>
---------------
(1) The net realizable value of these loans on a present value basis is
determined by discounting the estimated cash flow over the expected period
of repayment by the rate implicit in the loan. Under US GAAP, the net
present value of a non-performing loan includes the net present value, to
the extent realizable, of the underlying collateral, if any.
(2) Collateral value is that reflected on the borrower's books, or that
determined by third party appraisers to be realizable, whichever is lower
or available. We have collateral in the form of first charge on current
assets for eight of these borrowers. Exposure to one of these eight
borrowers is additionally secured by fixed assets. The exposure to the
remaining one borrower is secured solely by a charge on fixed assets.
(3) Out of the above 10 cases, collection in the cases of borrower D, G and H
are collateral dependent. In all other cases, we are primarily dependent
on recovery through cash flows, collateral being of secondary importance.
(4) Since we also classify loans as non-performing once we determine that the
payment of interest or principal is doubtful, and since such
classification occurs even before the borrower stops paying interest and
principal, certain of our non-performing loans are currently servicing all
interest payments.
Five of our top 10 non-performing loans were to borrowers where we acted
together with other banks or as part of a consortium of banks with our share of
exposure being a maximum of 12.0% of the total exposure of all banks to these
borrowers.
Interest Foregone
Interest forgone is the interest due on non-performing loans that has not
been accrued in our books of accounts. The following table sets forth, for the
periods indicated, the amount of interest foregone.
57
<PAGE>
Interest foregone
(in millions)
----------------------
Fiscal 1997 ....................................... Rs. 6 US$ --
Fiscal 1998 ....................................... 81 2
Fiscal 1999 ....................................... 93 2
Fiscal 2000 ....................................... 124 3
Restructuring of Non-Performing Loans
Our non-performing loans are restructured on a case-by-case basis after
our management has determined that restructuring is the best means of realizing
repayment of the loan. These loans continue to be on a non-accrual basis and
will be reclassified as performing loans only after sustained performance under
the loan's renegotiated terms for at least a period of one year.
The following table sets forth, for the periods indicated, our
non-performing loans that have been restructured through rescheduling of
principal repayments and deferral or waiver of interest.
<TABLE>
At March 31,
------------------------------------------------------------
1997 1998 1999 2000
------ ------ -------- -------------------
<S> <C> <C> <C> <C> <C>
(in millions, except percentages)
Gross restructured loans .............. -- -- Rs. 38 Rs. 43 US$ 1.0
Allowance for credit losses ........... -- -- (22) (25) 0.6
Net restructured loans ................ -- -- 16 18 0.4
Gross restructured loans as a
percentage of gross
non-performing loans ............... -- -- 2.4% 3.0% --
Net restructured loans as a
percentage of net
non-performing loans ............... -- -- 2.2% 2.7% --
</TABLE>
We are currently working out restructuring packages for five borrowers
along with other term lenders and working capital consortium members in the
case of our non-performing loans under a consortium arrangement, and two
borrowers who are under sole banking arrangements.
The following table sets forth, at the date indicated, the status of our
efforts in working out restructuring packages for non performing loans:
<TABLE>
At March 31, 2000
-------------------------------------------------
Principal
Gross outstanding net of
Number of principal allowances for
borrowers outstanding credit losses
--------- ----------- ------------------
<S> <C> <C> <C>
(in millions, except numbers)
Loans under consortium arrangements(1) ...................... 5 Rs. 343 Rs. 205
Loans under sole banking arrangements(1) .................... 2 51 31
Loans to borrowers who have applied for relief to the
Board for Industrial and Financial Reconstruction(2) ...... -- -- --
--- ------- -------
Total ....................................................... 7 Rs. 394 Rs. 236
=== ======= =======
</TABLE>
---------------
(1) None of these borrowers have applied for relief to the Board of Industrial
and Financial Reconstruction.
(2) For a discussion of the activities of the Board for Industrial and
Financial Reconstruction, see "Republic of India -- The Indian Economy --
Legislative Framework for Restructuring Sick Companies".
Non-Performing Loan Strategy
The recovery and settlement of non-performing loans is of high priority to
us. In fiscal 1999, we set up a Special Asset Management Group, consisting of
seven members, for finding early solutions and pursuing recovery in
non-performing loans. Effective April 2000, the group is headed by one of our
Senior Executive Vice Presidents, with
58
<PAGE>
over 30 years of experience in the banking sector. He is assisted by one Senior
Vice President and two other officers, with specific focus on recovery of
non-performing loans. This team is assisted by representatives at branches
having a higher concentration of non-performing loans. The branch managers at
the branches having non-performing loans are also actively involved in
supporting the efforts of the Special Asset Management Group. This group is
highly focused and has specific targets in terms of recovery of non-performing
loans. This group works closely with the Special Asset Management Group
established in ICICI to work on restructuring and settlement packages for
common customers and to adapt successful recovery strategies of ICICI. The
group also uses the services of outside legal experts, accountants and
specialized agencies for due diligence, valuation and legal advice to expedite
early settlements.
Methods for resolving non-performing loans include the following:
o negotiated or compromise settlements on a one-time settlement basis;
o encouraging the financial restructuring of troubled but viable
corporations;
o encouraging the consolidation of troubled borrowers in fragmented
industries with stronger industry participants; and
o early enforcement of collateral through judicial means.
We closely monitor migration of the credit ratings of our borrowers so we
can take proactive remedial measures to prevent loans from becoming
non-performing. We frequently review the industry outlook and analyze the
impact of changes in the regulatory and fiscal environment, helping us to
contain our non-performing loans. Our quarterly review systems help us to
monitor the health of accounts and to take prompt remedial measures.
Our current approval process generally requires a minimum credit rating by
us of A--. However, prior to our organizational restructuring in April 1999,
our minimum credit rating for credit approval was BBB. At present, some of our
loans are rated BBB or below since we closely monitor the credit rating of our
borrowers and downgrade the rating of credits as soon as they show any signs of
deterioration.
Allowance for Credit Losses
The following table sets forth, for the periods indicated, movements in
our allowance for credit losses.
<TABLE>
At March 31,
------------------------------------------------------------------
1997 1998 1999 2000
---------- --------- -------- --------------------
<S> <C> <C> <C> <C> <C>
(in millions)
Allowance for credit losses at the
beginning of the period ............... Rs. -- Rs. 187 Rs. 425 Rs. 880 US$ 20
Add:
Provisions for credit losses:
Working capital ............................ 66 256 349 470 11
Term loans ................................. 121 104 17 9 --
Leasing finance ............................ -- -- 144 24 1
Marketable corporate debt instruments ...... -- -- 30 -- --
Release of provision as a result of cash
collection................................ -- -- -- (76) (2)
Total provisions for credit Losses ......... 187 360 540 427 10
Less:
Write-offs ................................. -- (122) (85) (559) 13
---------- --------- -------- -------- -------
Allowances for credit losses at the end
of the period ......................... Rs. 187 Rs. 425 Rs. 880 Rs. 748 US$ 17
========== ========= ======== ======== =======
</TABLE>
We conduct a comprehensive analysis of our entire loan portfolio on a
quarterly basis. The analysis considers both qualitative and quantitative
criteria including, among others, the account conduct, future prospects,
repayment history and financial performance. This comprehensive analysis
includes an account by account analysis of our entire loan portfolio, and an
allowance is made for any probable loss on each account. In estimating the
allowance, we consider the net realizable value on a present value basis by
discounting the future cash flows over the expected period of recovery.
Further, we also consider our past history of credit losses and value of
underlying collateral. For
59
<PAGE>
further discussions of our allowances for credit losses, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Result of operations -- Provisions for Credit Losses".
Under our US GAAP analysis of the provisions for non-performing loans, we
are required to take into account the time delay in our ability to foreclose
upon and sell collateral. Under US GAAP, the net present value of a
non-performing loan includes the net present value of the underlying
collateral, if any. As a result, even though we are generally
over-collateralized, allowances are required under US GAAP that would not be
required under Reserve Bank of India regulations because US GAAP takes into
account the time value of money.
Risk Management
As a financial intermediary, we are exposed to various risks that are
related to our lending and trading businesses, deposit taking activities and
our operating environment. Our aim in risk management is to ensure that we
understand, measure and monitor the various risks that arise and that our
organization adheres strictly to the policies and procedures which are
established to address these risks.
We are exposed to three broad categories of risk: credit risk, market risk
and operational and legal risk.
In October 1999, our risk management function was reorganized and
integrated into a single Risk Management Department separate from our three
business units. The Risk Management Department works in close association with
the business units to implement the various risk management strategies. Our
Risk Management Department is completely independent of all business
operations. This department identifies, assesses, monitors and manages all our
principal risks in accordance with well-defined policies and procedures. The
Risk Management Department consists of 25 experienced bankers and analysts and
is led by a Senior Executive Vice President reporting directly to our Managing
Director and Chief Executive Officer and the Audit and Risk Committee of our
board of directors.
60
<PAGE>
The organizational structure of our Risk Management Department is shown in
the following chart.
<TABLE>
<S> <C>
Managing Director and Chief Audit and Risk Committee of the
Executive Officer Board of Directors
--------------------------- -------------------------------
| |
--------------------------------------------------------------------------------------------
Senior Executive Vice President and
Head, Risk Management Department
--------------------------------------------------------------------------------------------
| | |
----------------- ----------------- -----------------------
Credit Risk Group Market Risk Group Operaitonal Risk Group
</TABLE>
Credit Risk
Credit risk primarily arises in our lending operations from the failure of
any party, principally our borrowers, 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. Our standardized credit approval process includes
a well-established procedure of credit evaluation and approval. We measure,
monitor and manage credit risk for each borrower. We have a comprehensive
system for tracking the rating profile of our loan portfolio and are now
working on a comprehensive portfolio risk evaluation mechanism.
Credit Risk Assessment Procedures for Corporate Loans
In order to assess the credit risk associated with any financing proposal,
we assess a variety of risks relating to the borrower and the relevant
industry. If the borrower is undergoing a major expansion project that requires
them to obtain project finance from a financial institution in addition to
working capital loans from us, we also assess the risks relating to the
project.
We evaluate borrower risk by considering:
o the financial position of the borrower by analyzing the quality of
its financial statements, its past financial performance, its
financial flexibility in terms of ability to raise capital and its
cash flow adequacy;
o the borrower's relative market position and operating efficiency; and
o the quality of management by analyzing their track record, payment
record and financial conservatism.
We evaluate industry risk by considering:
o certain industry characteristics, such as the importance of the
industry to the economy, its growth outlook, cyclicality and
government policies relating to the industry;
o the competitiveness of the industry; and
o certain industry financials, including return on capital employed,
operating margins and earnings stability.
61
<PAGE>
After conducting an analysis of a specific borrower's risk, we assign a
credit rating to the borrower. We have a scale of ten ratings ranging from AAA
to B and an additional default rating of D. We are in the process of re-rating
all our existing exposures according to the new credit rating model. We expect
to complete this process by the end of the third quarter of fiscal 2001. Credit
rating is a critical input for the credit approval process. We use studies on
the historical default patterns of loans in order to predict defaults. We
determine the desired credit risk spread over our cost of funds by considering
the borrower's credit rating and the default pattern corresponding to the
credit rating. Our credit approval process generally requires a benchmark
minimum credit rating of A-.
We study industry sectors and published reports from online databases,
including the Center for Monitoring the Indian Economy and Internet Securities
(a Euromoney group company), and review our large exposures by industry and by
corporate client. We identify, through these internal studies, the growing
industry sectors to which we should increase our exposure and the stagnating
sectors to which we should decrease our exposure. These ongoing studies and
reviews also enable us to regularly adjust a borrower's credit rating in
response to changes in that borrower's risk and the risk associated with that
borrower's industry.
Working capital loans are generally approved for a period of 18 months. At
the end of 12 months, we review the loan arrangement and the credit rating of
the borrower and take a decision on continuation of the arrangement and the
changes in the loan covenants as may be necessary. We intend to review the
credit rating of borrowers with higher credit risks more frequently.
Credit Approval Procedures for Corporate Loans
Our corporate banking approval process is dictated by our credit policy
approved by our board of directors. This policy sets out our maximum credit
exposures to individual companies, groups of companies and industries.
We have established a strong framework for the appraisal and execution of
working capital and term loan finance transactions. Pursuant to our
organizational restructuring that was implemented on April 1, 1999, our credit
appraisal and approval processes have been centralized. We evaluate commercial,
financial, marketing and management factors relating to the borrower and the
sponsor's financial strength and experience. We make use of databases of
approximately 3,000 Indian companies that contain historical financial and
operating information on these companies. We also extensively use industry
analysis reports and interact with external rating agencies to track business
cycles in specific sectors and industries, the impact of emerging fiscal,
regulatory and other environmental factors and the financial performance of
Indian companies. Once this review is completed, an appraisal note is prepared
for credit approval purposes. A structured appraisal format is used to ensure a
uniform standard across the organization. Quantitative tools like inter-firm
comparisons, sensitivity analysis and analysis of demand-supply gap patterns
are used to analyze the performance of the borrower. As part of the appraisal
process, we generate a risk matrix, which identifies each of the risks,
mitigating factors and residual risks associated with the proposal.
Credit Approval Authority for Corporate Loans
We have established five distinct levels of credit approval authorities
for our corporate banking activities: the head of Corporate Banking, the
Managing Director and Chief Executive Officer (or the Credit Committee of
Executives that acts in the absence of the Managing Director and Chief
Executive Officer), the Investment Committee, the Committee of Directors and
our board of directors.
62
<PAGE>
The following table sets forth the composition of the committees and
approval authority of the committees and the authorized officers.
<TABLE>
Authorized executives and committees Members Approval authority
------------------------------------------ ---------------------------------------- -------------------------------------------
<S> ...................................... <C> <C>
Board of Directors All the members on our board of All approvals (in practice, generally
directors above the prescribed authority of the
Committee of Directors)
Committee of Directors ................... Managing Director and Chief Executive All approvals to companies up to Rs.
Officer and four other directors 400 million (US$ 9 million)
Investment Committee ..................... Managing Director and Chief Executive All approvals for subscribing to
Officer, heads of Corporate Banking, debentures, preferred stock, bonds
Retail Banking, Risk Management, and commercial paper
Domestic Treasury and Foreign
Exchange Treasury and the Chief
Financial Officer
Managing Director and Chief Executive All approvals up to Rs. 160 million
Officer ............................. (US$ 4 million)
Credit Committee of Executives ........... Heads of Corporate Banking, Retail In the absence of the Managing Director
Banking and Risk Management and the and Chief Executive Officer, all
Chief Financial Officer approvals within the prescribed
authority of the Managing Director
and Chief Executive Officer
Head of Corporate Banking ................ All approvals up to Rs. 100 million
(US$ 2 million)
</TABLE>
The branch managers of corporate banking branches are not individually
authorized to approve loans. They are however authorized to approve excess
borrowing above the approved limits up to Rs. 10 million in respect of
corporate loans. These loans are reported to the corporate office for
ratification.
Disbursement Procedures for Corporate Loans
After credit approval, we disburse the loans though our corporate
branches. Our corporate office sends credit approval letters to the branches
stating the covenants governing the approval. Based on the credit approval
letter received from the corporate office, branches issue a credit arrangement
letter to the borrower outlining the terms of the facility, sponsors'
obligations, conditions precedent to disbursement and undertakings from and
covenants on the borrower. After the borrower accepts the terms, the loan
agreement and other documents are executed. The borrower account is then made
operational in the case of a working capital facility and disbursements are
made to the borrower in the case of other loan facilities. Our cash credit
facilities operate as revolving asset backed overdraft facilities. We determine
the amount that can be drawn by the borrower on the basis of monthly cash flow
statements or statements of current assets provided by the borrower and the
stipulated current asset cover margins.
Credit Monitoring Procedures for Corporate Loans
We have established detailed procedures for the monitoring of our credit
exposures. Our aim in credit monitoring is to:
o ensure compliance with the terms and conditions of the credit
approval;
o review performance of our borrowers against projections;
o detect early warning signals and take appropriate corrective
actions; and
o observe the performance of the borrowers.
63
<PAGE>
With a view to achieve the above, we have laid out operating procedures
for our branches and the frequency of credit monitoring activities to be
undertaken. Our branches prepare various credit monitoring reports at periodic
intervals. Any irregularity in the account is reported to the appropriate
credit approval authority on a monthly basis. The performance of the borrowers
is monitored through quarterly information reports. Monthly cash flow
statements are obtained wherever considered necessary. We monitor the
performance of companies by comparing the published results against the
projections. We undertake stock inspections and stock audits on a regular
basis.
Credit Approval Procedures for Credit Cards
The initial target group for credit cards are our present Power Pay
account holders and ICICI's retail bond customers where relationships are
already established and customer details are already available to us.
We believe that the improper verification of identity and applicant
information and payment delinquencies are the main source of credit risk in the
credit card business.
We use the services of external agencies for verification of applicant
information and for collection of past due amounts. Detailed credit
applications have been devised for aggregating information on a prospective
customer, such as the person's place of work and residence.
Credit checks are undertaken before the credit card applicants are
approved. These credit checks contain a list of the delinquent customers of
ICICI and a few non-banking finance companies. Copies of a prospective
customer's income tax return and paychecks are also obtained to determine the
income and tax status of the prospective customer. There are no credit bureaus
in India, but we have implemented our own internal credit scoring model. We
have set individual credit limits based on the monthly salary of the credit
card holder.
Credit Approval Procedures for Other Retail Loans
Since substantially all of our retail loans are fully collateralized with
either cash (in the case of loans against time deposits) or liquid equity
securities (in the case of loans against subscriptions for initial public
offering), we have not yet devised any credit risk procedures for these loans.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flows that may result from changes in the value of a financial
instrument as a result of changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect
market risk sensitive instruments. Market risk is attributed to all market risk
sensitive financial instruments, including securities, loans, deposits,
borrowings and derivative instruments. Our exposure to market risk is a
function of our asset and liability management activities, our proprietary
trading activities, and our role as a financial intermediary. The objective of
market risk management is to avoid excessive exposure of our earnings and
equity to loss and to reduce the volatility inherent in financial instruments.
Market Risk Management Procedures
Our board of directors reviews and approves the policies for the
management of market risks and has delegated the responsibility for market risk
management to the Asset Liability Management Committee. Our Managing Director
and Chief Executive Officer chairs the Asset Liability Management Committee.
Our Chief Financial Officer, executives of various business units and the Risk
Management Department are the members of the committee. The committee generally
meets on a monthly basis and reviews our interest rate and liquidity gap
position, formulates a view on interest rates, sets deposit and benchmark
lending rates and reviews the business profile and its impact on asset
liability management. Emergency meetings of the committee are convened to
respond to developments in the markets and economy. The committee also sets
market risk limits for our trading activities. The committee reports to the
Audit and Risk Committee of our board of directors on a quarterly basis.
We have established a mid-office independent of treasury, which monitors
the risks in our treasury operations and ensures adherence to various risk
control limits on a daily basis. The mid-office at regular intervals submits
reports to the head of the Risk Management Department and the Managing Director
and Chief Executive Officer on the extent of our market risk exposure.
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We have established risk control limits, including holding period limits
and stop loss limits. Additionally, in the case of foreign exchange trading, we
have set up loss limits for each half-year period (April-September and
October-March). These limits are monitored on a daily basis. We have also
implemented a value at risk model for measuring market risk of our foreign
exchange spot positions.
Our exposure to market risk arises mainly from interest rate risk, equity
risk, exchange rate risk and liquidity risk. We discuss, in the following
paragraphs, each of these sources of risk and the methods we have adopted to
manage them.
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 debt securities is negatively
impacted by an increase in interest rates while our loan portfolio benefits
from a rise in interest rates.
We measure our exposure to fluctuations in interest rates primarily by way
of gap analysis, providing us 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 us an indication of the
extent to which we are exposed to the risk of potential changes in the margins
on new or re-priced assets and liabilities.
Our core business is deposit taking and lending, in both rupees and
foreign currencies, as permitted by the Reserve Bank of India. As the rupee
market differs significantly from the international credit asset markets, our
gap positions in these markets are different.
In the Indian market, our liabilities are mostly at fixed rates of
interest for fixed periods. However, we have a mix of floating and fixed
interest rate assets. We have term-based prime lending rates. We quote interest
rates for our short-term working capital loan products as a markup over the
relevant prime lending rate, effectively making these floating rate loans. Our
corporate loan portfolio consists principally of working capital loans, which
are on a floating rate basis.
Our foreign currency liabilities, which are primarily deposits from
non-resident Indians, are at fixed rates. A large portion of our foreign
currency loans is on a floating rate basis. Although this leads to interest
rate risk, the volumes are not significant. Foreign currency liabilities, net
of foreign currency loans, enable us to raise rupee liquidity quickly by way of
currency swaps, which help us to address any liquidity risk.
The following table sets forth for both our loan portfolio and our trading
portfolio, for the period indicated, our asset-liability gap position.
<TABLE>
At March 31, 2000(1)-(7)
-----------------------------------------------------------------------------------------------------
Greater than
Total one year and
within one up to five Greater than
0-28 days 29-90 days 91-180 days 6-12months year to five years five years Total
--------- ---------- ----------- ---------- ---------- ------------- ------------ -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net ..... Rs. 3,047 Rs. 29,738 Rs. 1,859 Rs. 405 Rs. 35,049 Rs. 6,020 Rs. 5,947 Rs. 47,016
Securities ..... -- -- 251 152 403 2,566 1,740 4,709
Fixed assets ... -- -- -- -- -- -- 2,097 2,097
Trading assets . -- 851 2,698 758 4,307 11,537 12,384 28,228
Cash and cash
equivalents .. 21,512 3,197 6,011 1,002 31,722 -- 4,604 36,326
Other assets(6). -- -- -- 8,490 8,490 -- 3,550 12,040
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total assets ... Rs. 24,559 Rs. 33,786 Rs. 10,819 Rs. 10,807 Rs. 79,971 Rs. 20,123 Rs. 30,322 Rs. 130,416
========== ========== ========== ========== ========== ========== ========== ===========
Stockholders'
equity ....... Rs. -- Rs. -- Rs. -- Rs. -- Rs. -- Rs. -- Rs. 11,387 Rs. 11,387
Debt(6) ........ -- 806 -- -- 806 990 680 2,476
Deposits ....... 25,872 21,944 13,262 14,086 75,164 5,930 17,566 98,660
Other
liabilities(6) 1,495 2,396 87 8,621 12,599 -- 5,294 17,893
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total
liabilities .. Rs. 27,367 Rs. 25,146 Rs. 13,349 Rs. 22,707 Rs. 88,569 Rs. 6,920 Rs. 34,927 Rs. 130,416
========== ========== ========== ========== ========== ========== ========== ===========
Total gap ...... Rs. (2,808) Rs. 8,640 Rs. (2,530) Rs.(11,900) Rs. (8,598) Rs. 13,203 Rs. (4,605)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
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---------
(1) Assets and liabilities are classified into the applicable categories,
based on residual maturity or re-pricing date whichever is earlier.
Classification methodologies have been based on the Asset Liability
Management Guidelines issued by the Reserve Bank of India, which were
effective from April 1, 2000.
(2) Items that neither mature nor re-price are included in the "greater than
five years" category. This includes equity and fixed assets.
(3) Non-performing loans are classified in the "greater than five years"
category.
(4) Based on past trends and the Asset Liability Management Guidelines issued
by the Reserve Bank of India, the entire amount of non-interest-bearing
non-maturity deposit accounts have been classified in the "greater than
five years" category.
(5) Based on past trends and the Asset Liability Management Guidelines issued
by the Reserve Bank of India, 75.0% of interest-bearing non-maturity
deposit accounts have been classified in the "0-28 days" category and
25.0%. in the "greater than five years" category.
(6) The categorization for these items is different from that reported in the
financial statements.
(7) Cash and cash equivalents include balances with the Reserve Bank of India
required by its cash reserve ratio requirement. These balances are held in
the form of overnight cash deposits but we classify the interest sensitive
portion of these balances under the "91-180 days" category and the
remainder in the "greater than five years" category.
Price Risk (Loan Portfolio)
The following table sets forth, for the period indicated, the impact of
changes in interest rates on net interest revenue for fiscal 2001, assuming a
parallel shift in yield curve at year-end fiscal 2000.
<TABLE>
At March 31, 2000
---------------------------------------------
Change in interest rates
(in basis points)
---------------------------------------------
(100) (50) 50 100
-------- -------- ------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Rupee portfolio....................... Rs. 121 Rs. 61 Rs. (61) Rs. (121)
Foreign currency portfolio............ (119) (60) 60 119
-------- -------- ------- --------
Total................................. Rs. 2 Rs. 1 Rs. (1) Rs. (2)
======== ======== ======= ========
Profit/(loss) as a % of net income.... 0.1% 0.1% (0.1%) (0.1%)
</TABLE>
Based on our asset and liability position at March 31, 2000, the
sensitivity model shows that net interest revenue from the loan portfolio for
fiscal 2001 would fall by Rs. 2 million (US$ 46,000) if interest rates
increased by 100 basis points during fiscal 2001. Conversely, the sensitivity
model shows that if interest rates decreased by 100 basis points, net interest
revenue for fiscal 2001 would rise by Rs. 2 million (US$ 46,000). Rs. 2 million
was 0.1% of our net income for fiscal 2000.
Sensitivity analysis, which is based upon a one day picture of our asset
and liability position, is used for risk management purposes only and the model
assumes that during the course of the year we make no other changes in our
portfolio. Actual changes in net interest revenue will vary from the model.
For example, because as of March 31, 2000 we had invested the proceeds
from our ADS offering in short-term inter-bank deposits pending the creation of
other assets, the sensitivity model shows very limited interest rate risk for
fiscal 2001. By comparison, our sensitivity model for the previous year had
shown much greater interest rate risk in the loan portfolio with a 100 basis
point increase (or decrease) showing an increase (decrease) of Rs. 35 million
(US$ 802,000), or 6.9% of our net income for fiscal 1999. We believe that the
above sensitivity model understates the impact on our net interest revenue from
the Reserve Bank of India's 100 basis point increase in the bank rate on July
21, 2000 and we expect that as the proceeds from our ADS offering are
reinvested in other assets over time, the impact of the increased interest
rates on our net interest income in fiscal 2001 will be greater than the
sensitivity model amount shown in the table above.
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Price Risk (Trading Portfolio)
Trading activities are undertaken primarily to optimize the income from
our regulatory fixed income portfolio and secondarily to enhance our earnings
through profitable trading for our own account. A substantial proportion of our
trading portfolio (95.3%) consisted of investments in government of India
securities at March 31, 2000. We are required by law to invest 25.0% of our
demand and time liabilities in specified securities, including government of
India securities. Duration limits, holding period limits and stop-loss limits
are used by us to manage risks for debt security positions in our trading book.
The following table sets forth, for the period indicated, the impact of
changes in interest rates on a tax adjusted basis on the value of our rupee
fixed income trading portfolio as a percentage of net income, assuming a
parallel shift in yield curve at year-end fiscal 2000.
<TABLE>
At March 31, 2000
-----------------------------------------------------
Change in interest rates
(in basis points)
-----------------------------------------------------
Portfolio
Size (100) (50) 50 100
--------- ------- ------- -------- --------
(in millions except percentages)
<S> <C> <C> <C> <C> <C>
Government of India securities(1) .... Rs. 26,903 Rs. 612 Rs. 300 Rs. 289 Rs. (566)
Corporate bonds ...................... 147 -- -- Rs. -- --
---------- ------- ------- -------- --------
Total ................................ Rs. 27,050 Rs. 612 Rs. 300 Rs. 289 Rs. (566)
========== ======= ======= ======== ========
Profit/(loss) as % of net income ..... 43.7% 21.4% (20.6%) (40.4%)
</TABLE>
---------
(1) For the purpose of analysis, certain quasi-government corporate securities
are included as government of India securities.
At March 31, 2000, the total value of our rupee fixed income portfolio was
Rs. 27.1 billion (US$ 620 million). Based on our asset and liability position
at March 31, 2000, the sensitivity model shows that the value of the trading
portfolio would fall, on a tax adjusted basis, by Rs. 566 million (US$ 13
million) or 40.4% of our net income for fiscal 2000. Conversely, if interest
rates fell by 100 basis points, under the model, the value of this portfolio
would rise, on a tax adjusted basis, by Rs. 612 million (US$ 14 million). The
sensitivity of the value of our trading portfolio to changes in interest rates
is largely due to the government of India securities we are required to hold
under the Reserve Bank of India's statutory liquidity ratio requirement.
Moreover, any decrease in the value of the trading portfolio will be reflected
in our income statement.
As noted above, sensitivity analysis, which is based upon a one day
picture of our asset and liability position, is used for risk management
purposes only and the model assumes that during the course of the year we make
no other changes in our portfolio. Actual changes in the value of the fixed
income portfolio will vary from the model.
For example, on July 21, 2000, the Reserve Bank of India announced an
increase in interest rates of 100 basis points. We believe that the sensitivity
model for the trading portfolio overstates the adverse impact we can expect in
fiscal 2001 because, in light of the interest rate increase, we have shifted
the average maturity of our fixed income trading portfolio to shorter term
government of India securities.
Equity Risk
Our equity positions include both equity securities and units of mutual
funds. We only invest in equity securities in book-entry form, which decreases
our settlement and liquidity risk. Our total exposure to these investments was
Rs. 869 million at March 31, 2000 and Rs. 198 million at March 31, 1999.
Position limits, stop-loss limits and holding period limits are used by us to
manage risks for equity positions in the trading book. The Reserve Bank of
India requires that the net incremental investment by banks in equity
securities in a fiscal year cannot exceed 5.0% of the incremental deposits in
the previous fiscal year.
Exchange Rate Risk
We offer foreign currency hedge instruments like swaps and forwards to our
clients. We actively use cross currency swaps and forwards to hedge ourselves
against exchange risks arising out of these transactions. Our trading
activities in the foreign currency markets expose us to exchange rate risks. We
mitigate this risk by setting
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counterparty limits, stipulating stop-loss limits by deal and limits on the loss
of the entire foreign exchange trading floor, implementing an internal value at
risk model for all spot positions and engaging in exception reporting.
Liquidity Risk
Liquidity risk arises in the funding of lending, trading and investment
activities and in the management of trading positions. It includes both the
risk of unexpected increases in the cost of funding our asset portfolio at
appropriate maturities and the risk of being unable to liquidate a position in
a timely manner at a reasonable price. The goal of liquidity management is for
us to be able, even under adverse conditions, to meet all our liability
repayments on time and fund all investment opportunities.
We maintain diverse sources of liquidity to facilitate flexibility in
meeting funding requirements. We fund our operations principally by accepting
deposits from retail and corporate depositors. We also borrow in the short-term
inter-bank market. Loan maturities and sale of investments also provide
liquidity.
We use the majority of funds raised by us to extend loans or purchase
securities. Generally, deposits are of shorter average maturity than loans or
investments.
We maintain a substantial portfolio of liquid high quality securities that
may be sold on an immediate basis to meet the liquidity needs. We also have the
option to manage our liquidity by borrowing in the inter-bank market on a
short-term basis. While generally this market provides an adequate amount of
liquidity, the interest rates at which funds are available can sometimes be
volatile. We prepare regular maturity gap analyses to review our liquidity
position.
The Reserve Bank of India adopted a directive on asset liability
management in February 1999. Starting from April 1, 1999, we were required to
submit gap analysis on a quarterly basis to the Reserve Bank of India.
Effective April 1, 2000, our liquidity gap (if negative) must not exceed 20.0%
of outflows in the 0-28 day time category.
Operational and Legal Risk
Due to our vast geographical spread and our operations being largely
transaction oriented, we are exposed to many types of operational risks.
Operational risks are risks arising from non-adherence to systems and
procedures or from frauds resulting in financial or reputation loss. The Audit
Department is part of our operational risk group and the head of the Audit
Department reports to the head of the Risk Management Department. It inspects
branches and conducts revenue and concurrent audits based on an inspection
calendar drawn up each year. The primary objective of the inspection function
is to ascertain and ensure that the business activities are carried out in
accordance with our policies, systems and procedures. The Audit and Risk
Committee of our board of directors reviews the inspection function each
quarter. Any weakness noticed in either systems or procedures is addressed
appropriately. The Reserve Bank of India requires us to have a process of
concurrent audits at our branches handling large volumes, to cover a minimum of
50.0% of our business volumes. We have instituted systems to conduct concurrent
audits, using reputed chartered accountancy firms, to cover about 85.0% of our
business.
We will introduce snap audits which will entail a quick review of the
implementation of various procedures in key areas at the branches. These audits
are intended to rectify any procedural irregularities, especially in newly
opened branches and new activities.
We are subject to inspections conducted by the Reserve Bank of India under
the Banking Regulation Act. The Reserve Bank of India has adopted the global
practice of subjecting banks to examination on the basis of the CAMELS model, a
model that assigns confidential ratings to banks based on their capital
adequacy, asset quality, management, earnings, liquidity and systems and
controls. We also have independent statutory audits conducted on a quarterly
basis by auditors appointed by our shareholders.
We are now re-engineering the audit process to make it more risk-oriented.
We propose to assign each operating group to a particular level of perceived
operational risk. This would then determine a level of capital to be allocated
for unexpected losses from that operating group. Aggregation of these
allocations across operating groups would enable us to arrive at a capital
allocation for operational risks. We have, on the basis of preliminary studies
decided to allocate capital to the extent of 0.1% of our stockholders' equity
effective April 1, 2000 for operational risks. This capital allocation is not
required by Indian regulations. We believe that we are among the first banks in
India to have this capital allocation for operational risks.
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There is regular monitoring of complaints at the branches to improve
customer service. We intend to centralize our complaint tracking mechanisms.
We consider legal risk as a part of operational risk. The uncertainty of
the enforceability of the obligations of our customers and counterparties,
including the foreclosure on collateral, creates legal risk. Changes in law and
regulation could also adversely affect us. Legal risk is higher in new areas of
business where the law is often untested in the courts. For example, critical
legal issues in the area of Internet banking are unresolved in India as well as
other jurisdictions to which we would like to offer our products and services
using the Internet. However, legislation has already been introduced in India
in this area. Legal risk in other jurisdictions is also increased by the
international reach of Internet delivery.
We seek to minimize legal risk by using stringent legal documentation,
employing procedures designed to ensure that transactions are properly
authorized and consulting legal advisers. Our internal auditors scrutinize all
loan documents to ensure that these are correctly drawn up to withstand
scrutiny in court.
We have formulated a new product policy that requires the operating groups
to test run their new products a certain number of times before launching them
and to prepare detailed product profiles and requires each new product to be
thoroughly evaluated by the Operational Risk Group.
An independent Operations Department has been created to oversee our
operations, branches and regional processing centers. All operational units
report to the Head of Operations for operational matters.
Operational Controls and Procedures in Branches
We have operating manuals detailing the procedures for the processing of
various banking transactions and the operation of our main application
software, BANCS2000. Amendments to these manuals are implemented through
circulars sent to all offices.
When taking a deposit from a new customer, we require the new customer to
complete a relationship form, which details the terms and conditions for
providing various banking services. Photographs of customers are also obtained
for our records, and specimen signatures are scanned and stored in the system
for online verification. We enter into a relationship with our customer only
after the customer is properly introduced to us. When time deposits become due
for repayment, the deposit is paid to the depositor. System generated reminders
are sent to depositors before the due date for repayment. Where the depositor
does not apply for repayment on the due date, the amount is transferred to an
overdue deposits account for follow up. Balances in overdue deposit accounts
are controlled by the corporate office through monthly statements from
branches.
We have a scheme of delegation of financial powers that sets out the
monetary limit for each employee with respect to the processing of transactions
in a customer's account. Withdrawals from customer accounts are controlled by
dual authorization. Senior officers have delegated power to authorize larger
withdrawals. Our operating system validates the check number and balance before
permitting withdrawals. Cash transactions over Rs. 1 million (US$ 23,000) are
subject to special scrutiny to avoid money laundering.
We have given importance to computer security. A comprehensive computer
security manual has been provided to all offices. There is a system room in
each office where the server is located. Access to the server room is
regulated. Our banking software, BANCS2000, has multiple security features to
protect the integrity of application and data. There are user access rights and
terminal-based security features.
Operational Controls and Procedures for Internet Banking
The opening of a bank account online by a new customer is a two-step
process. First, the customer fills out an online application, giving his
personal details. Based on this preliminary information, we allot the customer
a user ID and password. Second, the customer must send to us further
documentation to prove the customer's identity, including a copy of the
customer's passport, a photograph and specimen signature of the customer and a
voided personal check so that we can contact his existing bank, if required.
After the customer completes these formalities satisfactorily, we give him full
access to his account online. For a description of the security features of our
technology related to Internet banking, see "-- Technology".
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Operational Controls and Procedures in Regional Processing Centers
To improve customer service at our physical locations, we handle
transaction processing centrally by taking away such operations from branches.
The centralization is being done both at the corporate office and on a regional
basis. We started this process in September 1999 when we implemented the
quasi-centralization of branch operations in important cities where we have
more than one branch. We have centralized operations at regional processing
centers in Mumbai, New Delhi, Chennai, Bangalore and Hyderabad. These regional
processing centers process clearing checks and inter-branch transactions, make
inter-city check collections, and engage in back office activities for account
opening, standing instructions and auto-renewal of deposits. We plan to add to
the list of regionally centralized activities, such as cash pick-up and
delivery services.
In Mumbai, we have centralized transaction processing on a nationwide
basis for transactions like the issue of ATM cards and PIN mailers,
reconciliation of ATM transactions, monitoring of ATM functioning, issue of
passwords to internet banking customers and credit card transaction processing.
Centralized processing has been extended to the issuance of personalized check
books, back office activities of non-resident Indian accounts, opening of new
bank accounts who seek web broking services and recovery of service charges for
accounts for holding shares in book-entry form.
Operational Controls and Procedures in Treasury
Management believes that we have the highest level of automation in
trading operations in India. We use technology to monitor risk limits and
exposures on a near real-time basis. Our front office, back office and
accounting and reconciliation functions are fully segregated in both the
domestic treasury and foreign exchange treasury. The respective middle offices
use various risk monitoring tools such as counterparty limits, position limits,
exposure limits and individual dealer limits. Procedures for reporting breaches
in limits are also in place.
Domestic Treasury. Our front office consists of dealers in fixed income
securities, equity securities and inter-bank money markets. The dealers analyze
the market conditions and take views on price movements. Thereafter, they
strike deals in conformity with various limits relating to counterparties,
securities and brokers. The deals are then forwarded to the back office for
settlement.
Our middle office plays the role of a risk manager, reporting to the Risk
Management Department, with an emphasis on market risk. The major functions of
the middle office are to monitor counterparty limits, evaluate the
mark-to-market impact on various positions taken by dealers and monitor market
risk exposure of the investment portfolio.
Our back office undertakes the settlement of funds and securities. The
back office exercises controls for minimizing operational risks, including deal
confirmations with counterparties, verifies authenticity of counterparty checks
and securities, ensures receipt of contract notes from brokers, monitors
receipt of interest and principal amounts on due dates, ensures transfer of
title in the case of purchases of securities, reconciles actual security
holdings with the holdings pursuant to the records, and reports any
irregularity or shortcoming observed.
Foreign Exchange Treasury. The inter-bank foreign exchange operations are
conducted through Reuters dealing systems. Brokered deals are concluded through
voice systems. Deals done through Reuters systems are captured on a real time
basis for processing. Deals carried out through voice systems are input in the
system immediately by the dealers for processing. The entire process from deal
origination to settlement and reconciliation takes place via straight through
processing. The processing ensures adequate checks at critical stages. Our
foreign exchange dealings are carried out within the guidelines and directives
outlined by the Risk Management Department. Trade strategies are discussed
frequently and decisions are taken based on the market forecasts, information
and liquidity considerations. Dealers are assigned specific currencies for
dealing to ensure focused attention. Trading operations are conducted in
conformity with the code of conduct prescribed by internal and regulatory
guidelines.
Our middle office is responsible for monitoring risk inherent to our
operations. The middle office monitors counterparty limits, positions taken by
dealers and adherence to various market risk limits set by the Risk Management
Department.
Our back office procedures were put in place to ensure speedy processing,
confirmation, accounting, confirmation matching, deal settlements and cash
balance monitoring. Our back office systems are designed to minimize settlement
risk. The matching and checking of counterparty confirmation of deals is fully
automated. Our
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22 nostro accounts (at overseas centers with correspondent banks) in 15
currencies handle almost 8,000 transactions on average per month. Reconciliation
of nostro accounts is automated and is carried out on a daily basis.
Disaster Recovery
Our disaster recovery site for treasury operations is located in downtown
Mumbai about 15 kilometers away from our existing treasury location. The site
is equipped with standard installations to run full-fledged trading operations
in case of any contingency.
Technology
With our focus on the application of technology to our business
operations, particularly with respect to the Internet and electronic commerce
solutions, we believe we are well positioned to continue to gain market share
in our target market. We believe technology is the primary source of
competitive advantage in the Indian banking sector. Our focus on technology
emphasizes:
Electronic and online channels to:
o Reach new target customers;
o Enhance existing customer relationships;
o Offer easy access to our products and services; and
o Reduce distribution costs.
Application of information systems to:
o Effectively market to our target customers;
o Monitor and control risks; and
o Identify, assess and capitalize on market opportunities.
Technology Organization
Our technology initiatives are undertaken in conjunction with ICICI
Infotech Services Limited, the technology arm of the ICICI group and an ISO
9001 certified company. ICICI Infotech is divided into business groups, which
include retail banking technology, corporate banking technology, infrastructure
(comprising network management and technology operations), software development
and web technology. At March 31, 2000, a team of 33 full-time professionals
have been seconded to us from ICICI Infotech to supervise our technology
operations in retail and corporate banking.
Electronic and Online Channels
At March 31, 2000, all of our 81 branches and 16 extension counters were
completely automated to ensure prompt and efficient delivery of products and
services. We use the branch banking software, BANCS2000, developed by Infosys
Technologies Limited, which is flexible and scalable and integrates well with
our electronic delivery channels.
Our ATMs are from NCR and Diebold, the world's leading vendors. These ATMs
work with our main banking system, BANCS2000, and are proposed to be integrated
with the recently launched credit card system. As of March 31, 2000, there were
175 ATMs across the country.
Our telephone banking call centers use an Interactive Voice Response
System (IVRS). The call centers are based on the latest technology, providing
an integrated customer database that allows the call agents to get a complete
overview of the customer's relationship with other ICICI group companies and
us. The database enables customer segmentation and assists the call agent in
identifying cross-selling opportunities. We are implementing a technology
architecture which enables a customer to access any product from any channel.
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We believe that the Internet in India will help accelerate our customer
acquisition rate through our Internet banking service. We expect the Internet
to emerge as a key service delivery channel in the future.
We continually seek to complement our delivery channels and product
offerings with strategic alliances.
We are in the process of finalizing agreements with several
telecommunications companies. When finalized, these agreements will allow our
customers to conduct banking operations through their mobile phones. This
service will initially be based on short messaging system technology to offer
account balances and stock market quotes. Gradually, this application is
scheduled to adopt wireless application protocol technology to provide greater
functionality to users.
Application of Information Systems
Treasury and Trade Finance Operations
We believe we have one of the most technologically sophisticated treasury
operations in India. We use technology to monitor risk limits and exposures on
a real time basis. We have invested significantly to acquire advanced systems
from IBM, Reuters and TIBCO and connectivity to the SWIFT network.
Banking Application Software
We have installed an advanced banking system which addresses our corporate
banking as well as retail banking requirements. It is robust, flexible and
scalable and allows us to effectively and efficiently serve our growing
customer base.
High-Speed Electronic Communications Infrastructure
We have installed a nationwide data communications network linking all our
offices. The network design is based on a mix of dedicated leased lines and
satellite links to provide for reach and redundancy which is imperative in a
vast country like India. The communications network is monitored 24 hours a day
using advanced network management software. We also use a sophisticated data
center in Mumbai for centralized data base management, data storage and
retrieval.
Security Features of Our Technology
We depend heavily on our technological base to provide our customers with
high-quality service. Security is critical due to the diversity of product
delivery platforms and the inherently sensitive nature of banking transactions.
We use well laid out processes including access control, complex passwords and
dual authentication. For our Internet banking service, we use 128 bit
encryption, secure socket layer technology, digital certificates, multiple
firewalls and isolation of web servers.
We also employ the services of technical security advisory organizations
for planned penetration of our systems, particularly our Internet banking
service. The penetration tests have found our systems to be highly resilient.
Recognition for Technology Usage
We have received various awards for our innovative use of technology. Bank
Technology News International, in their November 1997 issue, listed us as among
the 43 True Internet Banks outside the United States. The Financial Times,
London and UUNET, UK have consistently rated our website as a "highly
commended" for the last three years. In 1998, we also received the Computer
Society of India -- Tata Consultancy Services National Award for best
information technology usage. In March 2000, Forbes Global ranked our web site
as one of the top 15 banking sites in the world.
Competition
We face strong competition in all our principal areas of business from
Indian public sector banks, private sector banks, foreign banks and mutual
funds. We believe that our principal competitive advantage over our competitors
arises from our use of technology, our innovative products and services and our
highly motivated and experienced staff. In addition, our parent company, ICICI,
has long-standing customer relationships which we continue to leverage
72
<PAGE>
to cross-sell our products and services. Because of these factors, we believe
that we have a strong competitive position in the Indian financial services
market.
Corporate Banking
Our principal competition in corporate lending comes from public sector
banks, which have built extensive branch networks that have enabled them to
raise low cost deposits and, as a result, price their loans very competitively.
Supported by their large retail deposit bases, public sector banks have over
80.0% of the market share for working capital financing. Their wide
geographical reach facilitates the delivery of banking products to their
corporate customers located in most parts of the country. We have been able,
however, to build a quality loan portfolio without compromising our minimum
lending rates, because of our efficient service and prompt turnaround times
that are significantly faster than public sector banks. We seek to compete with
the large branch networks of the public sector banks through our multi-channel
distribution approach.
Foreign banks have traditionally served Indian corporates with
cross-border trade finance, fee-based services and other short-term financing
products. We effectively compete with foreign banks in cross-border trade
finance as a result of our strong correspondent banking relationships with over
105 international banks, our SWIFT- enabled corporate branches and customized
trade financing solutions. We have established strong fee-based cash management
services and compete with foreign banks due to our technological edge and
competitive pricing strategies.
Other new private sector banks also compete in the corporate banking
market on the basis of efficiency, service delivery and technology. However,
the ICICI group's strong corporate relationships and our ability to use
technology to provide innovative, value-added products and services provide us
with a competitive edge.
Retail Banking
In the retail banking market, we face strong competition from commercial
banks and mutual funds. Indian commercial banks attract the majority of retail
bank deposits, historically the preferred retail savings product in India. We
have leveraged the ICICI group's corporate relationships to gain individual
customer accounts through payroll management products such as Power Pay and
will continue to pursue a multi-channel distribution strategy utilizing
physical branches, ATMs, telephone banking call centers and the Internet to
reach our customers.
With access to the latest technology and the benefit of strategies
developed in mature and highly competitive overseas markets, several foreign
banks have recently started to target middle and upper middle class retail
customers, particularly salary earners. These banks have installed ATM networks
and introduced utility bill payment schemes, mortgages and personal loans.
We also face competition from foreign banks and some new private sector
banks in the areas of retail deposits and credit cards. Citibank recently
launched a savings bank product to attract the middle income group. Other new
private sector banks have been launching international debit cards and other
innovative deposit schemes. There could be an increase in the consolidation of
private sector banks that seek to exploit synergies of branch networks and
technologies and realize economies of scale.
Mutual funds have recently emerged as another source of competition to us.
In its fiscal 2000 budget, the government of India waived the tax on dividends
received from mutual funds. This change has made mutual fund offerings a viable
alternative to bank deposits.
General
The following table gives a comparison pursuant to Indian GAAP of the
relative levels of deposits and loans of leading foreign banks and new private
sector banks in India.
73
<PAGE>
<TABLE>
At March 31,
------------------------------------------------------
1998 1999 1998 1999
----------- ----------- ----------- ------------
Deposits Loans(1)
------------------------- --------------------------
(in billions)
<S> <C> <C> <C> <C>
Total commercial banks ................ Rs. 6,662.6 Rs. 7,999.5 Rs. 3,896.6 Rs. 4,622.8
Total foreign banks ................... 428.3 474.5 336.8 386.6
Of which leading banks are:
Citibank NA ......................... Rs. 75.5 Rs. 94.4 Rs. 51.8 Rs. 59.4
ANZ Grindlays Bank .................. 77.6 86.9 51.6 57.7
Hong Kong and Shanghai Banking
Corporation ....................... 54.9 63.9 33.0 40.9
Standard Chartered Bank ............. 48.1 53.5 34.5 44.4
Bank of America ..................... 38.6 35.0 40.6 43.5
Deutsche Bank ....................... 20.0 21.3 19.9 23.9
ABN Amro Bank ....................... 14.6 18.8 16.0 25.9
Total new private sector banks ........ Rs. 217.4 Rs. 308.1 Rs. 141.8 Rs. 211.1
Of which leading banks are:
ICICI Bank .......................... Rs. 26.3 Rs. 60.7 Rs. 14.5 Rs. 4.4
IndusInd Bank ....................... 42.7 50.2 28.6 32.3
Global Trust Bank ................... 32.9 41.0 21.4 30.2
Times Bank(2) ....................... 22.1 30.1 13.6 16.8
HDFC Bank(2) ........................ 21.9 29.2 13.9 24.4
Centurion Bank ...................... 12.5 21.4 9.2 18.3
</TABLE>
----------
(1) Loans include advances and investments in non-statutory liquidity ratio
securities.
(2) HDFC Bank and Times Bank merged with effect from February 26, 2000.
Data is not available for most of the other banks as at March 31, 2000.
Source: Reserve Bank of India publications.
Employees
At March 31, 2000, we had 1,344 employees, an increase from 891 employees
at March 31, 1999, 603 employees at March 31, 1998 and 445 employees as at
March 31, 1997. Of the 1,344 employees at March 31, 2000, 609 were
professionals, holding degrees in management, accountancy, engineering, law,
computer science, economics and banking.
We consider our relations with our employees to be good. Our human
resource practices are open and transparent. Our employees do not belong to any
union.
We use incentives in structuring compensation packages and have
established a performance-based bonus scheme under which permanent employees
can significantly increase their pay (up to 100.0% of their base salary). We
have a transparent system of performance measurement, consisting of review by
an employee's superiors as well as a self review and, in some cases, review by
any employee's peers. To encourage commitment to results and productivity, our
board of directors has recently approved an employee stock option scheme, which
was approved by our shareholders at an extraordinary general meeting on
February 21, 2000. For further details on this scheme, see "Management --
Employee Stock Option Scheme".
In addition to basic compensation, employees are eligible to receive loans
from us at subsidized rates and to participate in our provident fund and other
employee benefit plans. The provident fund, to which both we and our employees
contribute a defined amount, is a savings scheme, required by government
regulation, under which we at present are required to pay to employees a
minimum 12.0% annual return. If such return is not generated internally by the
fund, we are liable for the difference. Our provident fund has generated
sufficient funds internally to meet the 12.0% annual return requirement since
inception of the funds. We have also set up a superannuation fund to which we
contribute defined amounts. In addition, we contribute specified amounts to a
gratuity fund set up pursuant to Indian statutory requirements.
We focus on training our employees on a continuous basis and we were named
"learning organization" by the Asian Banking Digest and awarded the Asian
Banking Award for the year 1998. We have training centers in Delhi,
74
<PAGE>
Bangalore, Chandigarh and Mumbai, where we conduct regular training programs
designed to impart the necessary skills to our employees including orientation
sessions for new employees. Training programs are also conducted for developing
functional as well as managerial skills. We regularly offer courses conducted by
both national and international faculty, drawn from industry, academia and our
own organization.
For the career progression and promotion of employees, we use the
assessment center approach to identify the potential of employees to assume new
responsibilities. Career progression is assessed on the basis of job
performance, future potential and abilities to handle assignments in the higher
grade.
We share no employees with our parent company ICICI. For fiscal 2000, we
had seconded 17 employees to ICICI, and ICICI had seconded six employees to us.
In addition, ICICI Infotech had seconded 33 employees to us. When we second an
employee to ICICI, we pay the salary of that employee, but this expense is
reimbursed to us by ICICI. When ICICI seconds an employee to us, ICICI pays the
salary of that employee, but this expense is reimbursed to ICICI by us. We paid
Rs. 1 million in fiscal 1998, Rs. 1 million in fiscal 1999 and Rs. 2 million in
fiscal 2000 to ICICI for the secondment of ICICI employees to us.
In accordance with our corporate policy, all our employees, other than
those who are executive directors, retire at the age of 58 years.
Properties
Our registered office is located at Land Mark, Race Course Circle,
Vadodara-390 007, Gujarat, India. Our corporate headquarters are located at
ICICI Towers, Bandra-Kurla Complex, Mumbai 400 051, Maharashtra, India.
We had a principal office network consisting of 81 branches, 16 extension
counters and 175 ATMs at March 31, 2000. These facilities are located
throughout India. Seventeen of these facilities are located on properties owned
by us, while the remaining facilities are located on leased properties. The net
book value of all our owned properties at March 31, 2000 was Rs. 1,296 million
(US$ 30 million), which includes two residential facilities for our employees.
Legal and Regulatory Proceedings
We are involved in a number of legal proceedings in the ordinary course of
our business. However, excluding the legal proceedings discussed below, we are
not a party to any proceedings and no proceedings are known by us to be
contemplated by governmental authorities or third parties, which, if adversely
determined, may have a material adverse effect on our financial condition or
results of operations.
At March 31, 2000, we had been assessed an aggregate of Rs. 469 million
(US$ 11 million) in income tax, interest tax and sales tax demands by the
government of India's tax authorities for past years ended March 31, 1997. We
have paid Rs. 426 million (US$ 10 million) of this amount to the tax
authorities. We have appealed the tax demands for Rs. 264 million (US$ 6
million), which represents the disputed amount, of which we have paid Rs. 221
million (US$ 5 million). We believe that we have a good chance of success in
these appeals for the following reasons:
o Of the aggregate assessed tax of Rs. 469 million (US$ 11 million),
Rs. 271 million (US$ 6 million) represents income tax recoverable
from lessees of assets under various lease agreements. In accordance
with the expert opinion obtained by us, the tax treatment adopted by
us is in conformity with industry practice and in our view, the
demand by the Indian tax authorities cannot be substantiated.
Accordingly, we have not provided for or disclosed this tax demand as
a contingent liability.
o The Indian appellate authorities have ruled in our favor in respect
of the deductibility of software expenses. The Indian tax
authorities, however, have appealed against this ruling that is
pending adjudication before a higher appellate authority.
o We have treated interest accrued on securities at the time of their
purchase as revenue expenditure in accordance with standard
accounting practices and the Reserve Bank of India guidelines. The
Indian tax authorities have, however, treated such interest as
capital expenditure.
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<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
Our selected financial and other data for and at year-end fiscal 1997,
1998, 1999 and 2000 have been derived from our financial statements prepared in
accordance with US GAAP. These financial statements have been audited by KPMG,
independent accountants. Capital adequacy ratios have been calculated both from
the financial statements prepared in accordance with Indian GAAP and the
financial statements prepared in accordance with US GAAP. Five years of
selected Indian GAAP financial information is given in "Selected Financial
Information under Indian GAAP".
You should read the following data with the more detailed information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements. Historical results do not
necessarily predict the results in the future.
As agreed with the Securities and Exchange Commission before ICICI Bank's
public offering of ADSs in March 2000, selected financial data for fiscal 1996
under US GAAP has been omitted because it cannot be provided without
unreasonable effort or expense. The Bank has provided selected financial data
for fiscal 1996 under Indian GAAP under "Selected Financial Information under
Indian GAAP".
<TABLE>
Year ended March 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2000(1)
---------- ---------- ---------- ---------- ---------
(in millions, except per common share data)
<S> <C> <C> <C> <C> <C>
Selected income statement data:
Interest revenue .............................. Rs. 1,843 Rs. 2,579 Rs. 5,390 Rs. 8,434 US$ 193
Interest expense .............................. (1,170) (1,854) (4,244) (6,656) (153)
---------- ---------- ---------- ---------- --------
Net interest revenue .......................... 673 725 1,146 1,778 40
Provision for credit losses ................... (187) (360) (540) (427) (10)
---------- ---------- ---------- ---------- --------
Net interest revenue after provisions for
credit losses ............................... 486 365 606 1,351 30
Non-interest revenue, net ..................... 317 591 866 1,759 41
Net revenue ................................... 803 956 1,472 3,110 71
Non-interest expense .......................... (406) (554) (799) (1,329) (30)
---------- ---------- ---------- ---------- --------
Income before taxes ........................... 397 402 673 1,781 41
Income tax expense ............................ (155) (104) (170) (379) (9)
---------- ---------- ---------- ---------- --------
Net income .................................... Rs. 242 Rs. 298 Rs. 503 Rs. 1,402 US$ 32
========== ========== ========== ========== ========
Per common share data:
Net income-basic .............................. Rs. 1.61 Rs. 1.84 Rs. 3.05 Rs. 8.49 US$ 0.19
Net income - diluted .......................... 1.61 1.84 3.05 8.49 0.19
Dividends ..................................... 1.00 1.00 1.20 1.51 -
Book value .................................... 11.67 14.98 17.15 57.86 1.33
Common shares outstanding at end of period
(in millions of common shares) .............. 150 165 165 196.82
Weighted average common shares outstanding -
basic (in millions of common shares) ........ 150 162 165 165.09
Weighted average common shares outstanding -
diluted (in millions of common shares) ..... 150 162 165 165.11
</TABLE>
---------
(1) Rupee amounts for fiscal 2000 have been translated into US dollars using
the noon buying rate in effect on March 31, 2000 of Rs. 43.65 = US$1.00.
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of our average total assets for the
respective period.
76
<PAGE>
<TABLE>
Year ended March 31,
---------------------------------------
1997 1998 1999 2000
------ ------ ------ ------
(in percentages)
<S> <C> <C> <C> <C>
Selected income statement data:
Interest revenue ................................. 11.55% 9.67% 10.11% 9.66%
Interest expense ................................. (7.33) (6.95) (7.96) (7.62)
----- ----- ----- -----
Net interest revenue ............................. 4.22 2.72 2.15 2.04
Provision for credit losses ...................... (1.17) (1.35) (1.01) (0.49)
----- ----- ----- -----
Net interest revenue after provisions for
credit losses .................................. 3.05 1.37 1.14 1.55
Non-interest revenue, net ........................ 1.98 2.22 1.62 2.01
----- ----- ----- -----
Net revenue ...................................... 5.03 3.59 2.76 3.56
Non-interest expense ............................. (2.54) (2.08) (1.50) (1.52)
----- ----- ----- -----
Income before taxes .............................. 2.49 1.51 1.26 2.04
Income tax expense ............................... (0.97) (0.39) (0.32) (0.43)
----- ----- ----- -----
Net income ....................................... 1.52% 1.12% 0.94% 1.61%
===== ===== ===== =====
</TABLE>
<TABLE>
At March 31,
--------------------------------------------------------------------------
1997 1998 1999 2000 2000(1)
----------- ---------- ---------- ----------- ---------
(in millions)
<S> <C> <C> <C> <C> <C>
Selected balance sheet data:
Total assets ........................ Rs. 19,766 Rs. 35,278 Rs. 76,265 Rs. 130,416 US$ 2,987
Cash and cash equivalents ........... 4,099 8,728 19,928 36,326 832
Trading account assets .............. 3 7,387 15,822 28,228 647
Loans, net(2) ....................... 8,374 12,765 27,597 47,016 1,077
Securities .......................... 3,816 1,476 3,963 4,709 108
Non-performing loans, net ........... -- 179 733 670 15
Total liabilities ................... 18,016 32,807 73,435 119,029 2,726
Long-term debt ...................... 89 129 1,764 2,476 57
Deposits ............................ 13,476 26,290 60,729 98,660 2,260
Stockholders' equity ................ 1,750 2,471 2,830 11,387 261
Period average(3):
Total assets ........................ 15,958 26,661 53,325 87,264 1,999
Interest-earning assets ............. 11,730 19,467 42,521 68,982 1,580
Loans, net(2) ....................... 7,224 9,498 18,546 31,148 714
Total liabilities ................... 14,270 24,351 50,657 83,967 1,924
Interest-bearing liabilities ........ 9,484 17,185 41,212 66,897 1,533
Long-term debt ...................... 76 109 1,127 1,752 40
Total deposits ...................... 9,923 18,539 39,455 67,309 1,542
Of which:
Interest-bearing deposits ......... 7,753 15,140 35,916 59,881 1,372
Stockholders' equity ................ 1,688 2,310 2,668 3,297 76
</TABLE>
<TABLE>
At or for the year ended March 31,
-------------------------------------------------
1997 1998 1999 2000
------ ------ ------ ------
(in percentages)
<S> <C> <C> <C> <C>
Profitability:
Net income as a percentage of:
Average total assets ...................................... 1.52% 1.12% 0.94% 1.61%
Average stockholders' equity .............................. 14.34 12.90 18.85 42.52
Dividend payout ratio(4) .................................... 61.98 59.89 43.30 19.6
Spread(5) ................................................... 3.37 2.46 2.38 2.28
Net interest margin(6) ...................................... 5.74 3.72 2.70 2.58
Cost-to-income ratio(7) ..................................... 41.01 42.10 39.71 37.57
Cost-to-average assets ratio(8) ............................. 2.54 2.08 1.50 1.52
Capital:
Total capital adequacy ratio(9) ............................. 13.04 13.48 11.06 19.64
Tier 1 capital adequacy ratio(9) ............................ 12.71 13.38 7.32 17.42
Tier 2 capital adequacy ratio(9) ............................ 0.33 0.10 3.74 2.22
Average stockholders' equity as a percentage
of average total assets ................................... 10.58 8.66 5.00 3.78
77
<PAGE>
At or for the year ended March 31,
-------------------------------------------------
1997 1998 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Asset quality:
Gross non-performing loans as a percentage of
gross loans ............................................... 2.18 4.58 5.66 2.97
Net non-performing loans as a percentage of net loans ....... -- 1.40 2.66 1.43
Net non-performing loans as a percentage of total assets .... -- 0.51 0.96 0.51
Allowance for credit losses as a percentage of gross
non-performing loans ...................................... 100.00 70.36 54.56 52.75
Allowance for credit losses as a percentage of gross
total loans .............................................. 2.18 3.22 3.09 1.57
</TABLE>
---------
(1) Rupee amounts for fiscal 2000 have been translated into US dollars using
the noon buying rate in effect on March 31, 2000 of Rs. 43.65 = US$ 1.00.
(2) Net of allowance for credit losses in respect of non-performing loans.
(3) Average balances are the daily average outstanding amounts.
(4) Represents the ratio of total dividends payable on common stock, including
the dividend distribution tax, as a percentage of net income.
(5) Represents the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest- bearing liabilities.
(6) Represents the ratio of net interest revenue to average interest-earning
assets. The difference in net interest margin and spread arises due to the
difference in the amount of average interest-earning assets and average
interest-bearing liabilities. If average interest-earning assets exceed
average interest-bearing liabilities, net interest margin is greater than
spread, and if average interest-bearing liabilities exceed average
interest-earning assets, net interest margin is less than spread.
(7) Represents the ratio of non-interest expense to the sum of net interest
revenue and non-interest revenue.
(8) Represents the ratio of non-interest expense to average total assets.
(9) Our capital adequacy is computed in accordance with the Reserve Bank of
India guidelines. The computation is based on our financial statements
prepared in accordance with Indian GAAP. Our total capital adequacy ratio
computed under the applicable Reserve Bank of India guidelines and based
on our financial statements prepared in accordance with US GAAP was 19.12%
at March 31, 2000 . Using the same basis of computation, our Tier 1
capital adequacy ratio was 17.19% and our Tier 2 capital adequacy ratio
was 1.93% at March 31, 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition --
Capital".
(10) Figures for fiscal 1999 have been regrouped and reclassified. Please see
the notes to our financial statements for a more-detailed description.
Average Balance Sheet
The average balance is the daily average of balances outstanding. The
amortized portion of loan origination fees (net of loan origination costs) is
included in interest revenue on loans, representing an adjustment to the yield.
The average yield on average interest-earning assets is the ratio of interest
revenue to average interest-earning assets. The average cost on average
interest-bearing liabilities is the ratio of interest expense to average
interest-bearing liabilities. The average balances of loans include
non-performing loans and are net of allowance for credit losses. We have not
recalculated tax-exempt income on a tax-equivalent basis because we believe the
effect of doing so would not be significant. The following tables set forth,
for the periods indicated, the average balances of our assets and liabilities
outstanding, which are major components of interest revenue, interest expense
and net interest margin.
78
<PAGE>
<TABLE>
Year ended March 31, 1999 Year ended March 31, 2000
------------------------------------- ---------------------------------
Interest Interest
Average revenue/ Average Average revenue/ Average
balance expense yield/cost(1) balance expense yield/cost
------- -------- ------------- -------- -------- ----------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Cash, cash equivalents and trading
assets(1) .............................. Rs. 21,143 Rs. 2,297 10.86% Rs. 31,817 Rs. 3,184 10.01%
Securities(2) ............................ 2,832 305 10.77 6,017 684 11.37
Loans, net ............................... 18,546 2,707 14.60 31,148 4,437 14.24
Other interest income(3) ................. -- 81 -- -- 129 --
---------- --------- ----- ---------- --------- -----
Total interest-earning assets ............ 42,521 5,390 12.68 68,982 8,434 12.23
Non-interest-earning assets:
Cash and cash equivalents(4) ............. 4,345 7,273
Acceptances .............................. 4,388 7,356
Property and equipment ................... 1,704 1,777
Other assets ............................. 367 1,876
Total non-earning assets ................. 10,084 18,282
---------- --------- ----------
Total assets ............................. Rs. 53,325 Rs. 5,390 Rs. 87,264 Rs. 8,434
========== ========= ========== =========
Liabilities:
Interest-bearing liabilities:
Savings account deposits ................. Rs. 1,569 Rs. 54 3.44% Rs. 3,530 Rs. 118 3.34%
Time deposits ............................ 34,347 3,653 10.64 56,351 5,671 10.06
Long-term debt ........................... 1,127 155 13.75 1,752 244 13.93
Trading account and other liabilities .... 4,169 382 9.16 5,264 623 11.84
---------- --------- ----- ---------- --------- -----
Total interest-bearing liabilities ....... 41,212 4,244 10.30 66,897 6,656 9.95
========== ========= ===== ========== ========= =====
Non-interest-bearing liabilities:
Non-interest-bearing deposits ............ 3,539 7,428
Other liabilities ........................ 5,906 9,642
---------- ----------
Total non-interest-bearing liabilities ... 9,445 17,070
---------- ----------
Total liabilities ........................ Rs. 50,657 Rs. 4,244 Rs. 83,967 Rs. 6,656
---------- ========= ---------- =========
Stockholders' equity ..................... Rs. 2,668 Rs. 3,297
---------- ----------
Total liabilities and stockholders'
equity ................................. Rs. 53,325 Rs. 87,264
========== ==========
</TABLE>
79
<PAGE>
<TABLE>
Year ended March 31,
-------------------------------------------------------------------------------
1997 1998
--------------------------------------- --------------------------------------
Interest Interest
Average revenue/ Average Average revenue/ Average
balance expense yield/cost balance expense yield/cost
---------- ---------- ---------- ---------- --------- ----------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Cash, cash equivalents and trading
assets(1) ..............................Rs. 1,159 Rs. 81 6.99% Rs. 8,637 Rs. 913 10.57%
Securities(2) ............................ 3,347 421 12.58 1,332 148 11.11
Loans, net ............................... 7,224 1,341 18.56 9,498 1,499 15.78
Other interest income(3) ................. -- -- -- -- 19 --
---------- --------- ---------- ---------
Total interest-earning assets ............ 11,730 1,843 15.71 19,467 2,579 13.25
---------- --------- ---------- ---------
Non-interest-earning assets:
Cash and cash equivalents(4) ............. 1,287 2,776
Acceptances .............................. 2,507 2,575
Property and equipment ................... 212 910
Other assets ............................. 222 933
Total non-earning assets ................. 4,228 7,194
---------- --------- ---------- ---------
Total assets .............................Rs. 15,958 Rs. 1,843 Rs. 26,661 Rs. 2,579
========== ========= ========== =========
Liabilities:
Interest-bearing liabilities:
Savings account deposits .................Rs. 304 Rs. 10 3.29% Rs. 815 Rs. 28 3.44%
Time deposits ............................ 7,449 962 12.91 14,325 1,590 11.10
Long-term debt ........................... 76 13 17.11 109 16 14.68
Trading account and other liabilities .... 1,655 185 11.18 1,936 220 11.36
---------- --------- ---------- ---------
Total interest-bearing Liabilities ....... 9,484 1,170 12.34 17,185 1,854 10.79
---------- --------- ---------- ---------
Non-interest-bearing liabilities:
Non-interest-bearing deposits ............ 2,170 3,399
Other liabilities ........................ 2,616 3,767
---------- ----------
Total non-interest-bearing liabilities ... 4,786 7,166
---------- --------- ---------- ---------
Total liabilities ........................Rs. 14,270 Rs. 1,170 Rs. 24,351 Rs. 1,854
---------- ========= ---------- =========
Stockholders' equity .....................Rs. 1,688 Rs. 2,310
---------- ----------
Total liabilities and stockholders'
equity .................................Rs. 15,958 Rs. 26,661
========== ==========
</TABLE>
---------
(1) Includes government of India securities, inter-bank deposits and lending,
commercial paper, certificate of deposits and equity securities.
(2) Includes corporate debt securities, government of India securities held as
available for sale and mutual fund units.
(3) Includes interest income earned on balances maintained with the Reserve
Bank of India pursuant to the cash reserve ratio requirement, which is
9.0% of our demand and time liabilities as at March 31, 2000, excluding
certain specified liabilities. See "Supervision and Regulation -- Legal
Reserve Requirements -- Cash Reserve Ratio". Up to fiscal 1997, no
interest was payable by the Reserve Bank of India on these balances. Since
fiscal 1998, the Reserve Bank of India pays interest of 4.0% per annum on
balances in excess of 3.0% of our demand and time liabilities.
(4) Includes balances maintained with the Reserve Bank of India pursuant to
the cash reserve ratio requirement.
80
<PAGE>
Analysis of Changes in Interest Revenue and Interest Expense Volume and Rate
Analysis
The following table sets forth, for the periods indicated, the changes in
the components of our net interest revenue.
<TABLE>
Fiscal 1998 vs. Fiscal 1997 Fiscal 1999 vs. Fiscal 1998 Fiscal 2000 vs. Fiscal 1999
------------------------------- -------------------------------- ----------------------------------
Increase (decrease)(1) due to Increase (decrease)(1) due to Increase (decrease)(1) due to
------------------------------- -------------------------------- ----------------------------------
Change Change Change Change Change Change
in in in in in in
Net Average Average Net Average Average Net Average Average
Change Volume Rate Change Volume Rate Change Volume Rate
--------- -------- -------- --------- --------- -------- --------- --------- ----------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest revenue:
Cash, cash equivalents
and trading assets ..... Rs. 832 Rs. 790 Rs. 42 Rs. 1,384 Rs. 1,359 Rs. 25 Rs. 887 Rs. 1,068 Rs. (181)
Securities ............... (273) (224) (49) 157 162 (5) 379 362 17
Loans, net ............... 158 359 (201) 1,208 1,321 (113) 1,730 1,795 (65)
Other interest income .... 19 19 -- 62 62 -- 48 48 --
-------- ------- -------- --------- --------- -------- --------- --------- --------
Total interest
revenue..... ........... Rs. 736 Rs. 944 Rs. (208) Rs. 2,811 Rs. 2,904 Rs. (93) Rs. 3,044 Rs. 3,273 Rs. (229)
======== ======= ======== ========= ========= ======== ========= ========= ========
Interest expense:
Savings account
deposits................ Rs. 18 Rs. 18 Rs. -- Rs. 26 Rs. 26 Rs. -- Rs. 64 Rs. 66 Rs. (2)
Time deposits ............ 628 763 (135) 2,063 2,129 (66) 2,018 2,214 (196)
Long-term debt ........... 3 5 (2) 139 140 (1) 89 87 2
Trading account and
other liabilities....... 35 32 3 162 205 (43) 241 130 111
-------- ------- -------- --------- --------- -------- --------- --------- --------
Total interest expense ... Rs. 684 Rs. 818 Rs. (134) Rs. 2,390 Rs. 2,500 Rs. (110) Rs. 2,412 Rs. 2,497 Rs. (85)
======== ======= ======== ========= ========= ======== ========= ========= ========
Net interest Revenue ..... Rs. 52 Rs. 126 Rs. (74) Rs. 421 Rs. 404 Rs. 17 Rs. 632 Rs. 776 Rs. (144)
======== ======= ======== ========= ========= ======== ========= ========= ========
</TABLE>
---------
(1) The changes in net interest revenue between periods have been reflected as
attributed either to volume or rate changes. For the purpose of this
table, changes which are due to both volume and rate have been allocated
solely to volume.
Yields, Spreads and Margins
The following table sets forth, for the periods indicated, the yields,
spreads and interest margins on our interest-earning assets.
<TABLE>
Year ended March 31,
------------------------------------------------------
1997 1998 1999 2000
---------- ---------- ---------- ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Interest revenue ............................. Rs. 1,843 Rs. 2,579 Rs. 5,390 Rs. 8,434
Average interest-earning assets .............. 11,730 19,467 42,521 68,982
Interest expense ............................. 1,170 1,854 4,244 6,656
Average interest-bearing liabilities ......... 9,484 17,185 41,212 66,897
Average total assets ......................... 15,958 26,661 53,325 87,264
Average interest-earning assets as a
percentage of average total assets ......... 73.5% 73.0% 79.7% 79.0%
Average interest-bearing liabilities
as a percentage of average total assets .... 59.4 64.5 77.3 76.7
Average interest-earning assets as a
percentage of average interest-bearing
liabilities ................................ 123.7 113.3 103.2 103.1
Yield ........................................ 15.71 13.25 12.68 12.23
Cost of funds ................................ 12.34 10.79 10.30 9.95
Spread(1) .................................... 3.37 2.46 2.38 2.28
Net interest margin(2) ....................... 5.74 3.72 2.70 2.58
</TABLE>
---------
(1) Spread is the difference between yield on average interest-earning assets
and cost of average interest-bearing liabilities. Yield on average
interest-earning assets is the ratio of interest revenue to average
interest-earning assets. Cost of average interest-bearing liabilities is
the ratio of interest expense to average interest-bearing liabilities.
(2) Net interest margin is the ratio of net interest revenue to average
interest-earning assets. The difference in net interest margin and spread
arises due to the difference in amount of average interest-earning assets
and average interest-bearing liabilities. If average interest-earning
assets exceed average interest-bearing liabilities, net interest margin is
greater than the spread and if average interest-bearing liabilities exceed
average interest-earning assets, net interest margin is less than the
spread.
81
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our audited financial
statements. The following discussion is based on our audited financial
statements, which have been prepared in accordance with US GAAP.
Introduction
Our loan portfolio, financial condition and results of operations have
been, and in the future, are expected to be influenced by economic conditions,
particularly industrial growth, in India and certain global developments,
particularly in commodity prices relating to the business activities of our
corporate customers. For ease of understanding the discussion of our results of
operations that follows, you should consider the introductory discussion of
these macroeconomic factors.
Indian Economy
Despite the slowdown in the global economy between 1997 and 1999 stemming
from the economic crisis in Asia, Russia and elsewhere, the GDP growth rate for
the Indian economy was 7.8% in fiscal 1997, 5.0% in fiscal 1998 and 6.8% in
fiscal 1999. In fiscal 2000, growth in GDP was 6.4%. The overall performance in
fiscal 2000 was affected by a war on the border, mid-term elections and a
cyclone in one of the states.
Growth in industrial production in India, however, slowed to 4.0% in
fiscal 1999 from 6.6% in fiscal 1998 and 5.6% in fiscal 1997, with overall GDP
growth driven by other sectors such as agriculture and services. There was a
recovery in fiscal 2000 to 8.1%. Average inflation, as measured by the
wholesale price index, remained below 7.0% in each of fiscal 1997, 1998, 1999
and 2000. After the Asian crisis in 1997-1998, unlike certain south-east Asian
currencies, the rupee maintained its value due to effective exchange rate
management by the Reserve Bank of India and the fact that convertibility of the
rupee is still controlled. However, the rupee has come under some pressure in
recent months due to the increased demand for dollars arising out of oil
imports and slowing down of capital flows.
The Indian economy registered a GDP growth rate of 5.8% in the first
quarter ended June 30, 2000 compared to 6.9% in the first quarter ended June
30, 1999. The lower GDP growth rate was due to lower growth in agriculture and
industry. Growth in industrial production was also lower at 5.4% in the period
April-June 2000 compared to 5.7% in the period April-June 1999. Average
inflation, as measured by the wholesale price index, for the period April-July
2000 was 6.4% compared to 3.0% during the corresponding period of the previous
year. Higher inflation was essentially due to the rising prices of fuel
products.
The rapid reduction in trade barriers and integration with global markets,
and the downtrend in global commodity markets, caused difficulty in the Indian
economy for those commercial enterprises with cost inefficiencies, poor
technology and fragmented capacities. Over the last few years, a sharp
reduction in international steel prices to historic lows has had an adverse
impact, for example, on the companies in the iron and steel industry. In
addition, a significant reduction in import tariffs over the last three years
led to price competition from certain countries, substantially reducing
domestic steel prices. The textiles industry was also affected by a reduction
in exports as a result of the devaluation of certain south-east Asian
currencies in 1998, making Indian exports less competitive, and resulting in a
decrease in demand in Asia.
While the Indian economy as a whole has continued to grow, although at a
slower rate than in past periods, the decline in prices of raw materials and
commodities has made it difficult for some Indian companies to operate
profitably. Certain companies have had to restructure their operations to deal
with the resulting financial stress and in some cases, have had to operate at
levels below their overall capacities, suffering cash losses as a result. In
certain cases, while continuing to generate revenue and net profits, some of
our borrowers have had to make significant changes in their operations, selling
unproductive assets, merging with other market participants, reducing costs and
refocusing their business objectives. This has resulted in the need to
restructure and renegotiate credit and related facilities with banks and
financial institutions including, in some cases, us.
India imports over 70% of its requirements of petroleum products. The
sharp increase in global prices of these products, such as has occurred in the
past few months, could adversely impact the Indian economy in general and
consequently the Indian banking system. Overall industrial growth could slow
down which in turn could adversely affect our business including our ability to
grow, the quality of our assets and our ability to implement our strategy.
82
<PAGE>
Banking Sector
According to the Reserve Bank of India's data, total deposits of all
commercial banks have increased by 16.5% in fiscal 1997, 19.8% in fiscal 1998,
17.9% in fiscal 1999 and 13.9% in fiscal 2000. In fiscal 1997 and 1998, the
high growth in deposits was primarily the result of a shift in depositor
preference towards bank deposits and away from capital market instruments due
to depressed capital market conditions resulting from relatively lower
industrial growth. In fiscal 1999, the government-controlled State Bank of
India, the largest commercial bank in India, issued bonds, totaling Rs. 179.5
billion (US$ 4.1 billion), to non-resident Indians living abroad. These bonds
are included in computing the total deposits of all commercial banks in fiscal
1999. Excluding these proceeds, growth in deposits would have been 15.0% in
fiscal 1999 compared to 19.8% in fiscal 1998. This slowdown in the growth of
deposits reflected a higher holding by households of cash and non-bank
deposits. In fiscal 2000, growth in deposits slowed down as there was a shift
in household preference from deposits to mutual funds as well as lower interest
rates in general.
According to the Reserve Bank of India's data, bank credit increased at a
slower rate than total bank deposits in recent years, growing 9.6% in fiscal
1997, 16.4% in fiscal 1998, 13.8% in fiscal 1999 and 18.2% in fiscal 2000.
These growth rates reflected the trend in growth in industrial production
during these years. Banks in India also invest in commercial paper, medium and
long-term bonds and, to a limited extent, in equity securities. Including these
investments, the total growth in bank credit was 12.3% in fiscal 1997, 18.1% in
fiscal 1998 and 16.4% in fiscal 1999. In fiscal 2000, growth was 18.6% as a
result of improved growth in industrial production.
In the last three fiscal years there has been a downward movement in
interest rates, this movement was principally due to the Reserve Bank of
India's policy of assuring adequate liquidity to the banking system and
generally lowering the rate at which it would lend to Indian banks to ensure
that corporate borrowers have access to funding at competitive rates. The
Reserve Bank of India's primary motive has been to realign interest rates with
the market to facilitate a smooth transition from a government-controlled
regime in the early 1990s, when interest rates were heavily regulated, to a
more market-oriented interest rate regime. Banks have generally followed the
direction of interest rates set by the market and adjusted both their deposit
rates and lending rates downward. On July 21, 2000, the Reserve Bank of India
reversed the downward movement of the last three fiscal years and announced an
increase in the bank rate of 100 basis points. This increase does not affect
the financial results for the periods under review in this annual report but
can be expected to affect our results for fiscal 2001.
The following table sets forth the decline in average deposit rates and
average lending rates of five major public sector banks for the last three
years.
Average deposit rate Average prime
Fiscal year for over one year term (range) lending rate (range)
---------------------- ------------------------------ --------------------
1997 ................. 11.0-12.0% 14.5-15.0%
1998 ................. 10.5-11.0 14.0
1999 ................. 9.0-11.0 12.0-13.0
2000 ................. 8.0-10.5 12.0-12.5
---------
Source: Reserve Bank of India: Handbook of Statistics on Indian Economy, 1999,
Annual Report 1999-2000 and Weekly Statistical Supplements.
In line with the general market trends illustrated in the above table, our
average deposit rate for deposits with a maturity of greater than one year
decreased to 10.5%-11.0% in fiscal 2000 from 12.0%-14.5% in fiscal 1997. Our
average prime lending rate range decreased to 13.5% in fiscal 2000 from
17.0%-18.5% in fiscal 1997. As of September 30, 2000, our deposit rate for
deposits with a term of more than one year was 10.25% and our average prime
lending rate for loans with a term of more than one year was 14.0%. Our
competitors have similarly increased their rates following the announcement of
the Reserve Bank of India on July 21, 2000.
Results of Operations
In spite of the slowdown in the economy between 1997 and 1999 and stress
on certain core sectors of industry such as iron and steel and textiles, we
were able to add to our assets and liabilities at a rapid pace since we were a
recent entrant in the commercial banking sector and we were able to acquire new
customers from public sector banks.
83
<PAGE>
We cannot guarantee that we will be able to continue to achieve the same growth
rates as those achieved in the last three fiscal years.
We analyze our financial performance in terms of interest revenue earned
from cash, cash equivalents, trading account assets (i.e., interest-earning
liquid assets maintained by our domestic treasury for meeting reserve
requirements), loans and securities as offset by interest expense incurred from
deposits, long-term debt and trading account liabilities. We analyze our
average cost of deposits, yield on loans and returns from our trading portfolio
and portfolio of available for sale securities on a regular basis. Along with
these measures, we also focus on the gross non-performing loans, allowance for
credit losses, non-interest revenue and non-interest expense to study our
profitability. We discuss below these measures of financial performance.
Net Interest Revenue
Fiscal 2000 compared to Fiscal 1999
Net interest revenue increased 55.1% in fiscal 2000 compared to fiscal
1999 reflecting mainly the following factors:
o an increase of 62.2% in the average volume of interest-earning
assets, offset by
o a decrease of 12 basis points in the net interest margin to 2.58% in
fiscal 2000 from 2.70% in fiscal 1999 and a decrease of 10 basis
points in our spread to 2.28% in fiscal 2000 from 2.38% in fiscal
1999.
The increase in our average volume of interest-earning assets was
primarily due to a rise in our loans to more higher rated corporate clients
resulting from our joint marketing efforts with ICICI through the Major Clients
Group. During this period, our net interest margin decreased primarily due to
this shift towards loans to higher rated clients, which loans, consistent with
market conditions typically, earn lower yields due to the lower credit risk
associated with these borrowers, and an 85 basis point decline in yield on
cash, cash equivalents and trading account assets.
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue (which reflects interest revenue from
cash, cash equivalents and trading account assets, securities, loans and other
assets minus interest expense on deposits, long-term debt and trading account
and other liabilities). For further information on assets and liabilities,
changes in interest revenue and interest expense volume and rate analysis,
yields, spreads and margins for these periods, see "Selected Financial and
Operating Data".
<TABLE>
Year ended March 31,
-----------------------------------------------
2000/1999
1999 2000 2000 % change
----------- ----------- ------ ---------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Interest revenue
Cash, cash equivalents and trading
Account assets ........................... Rs. 2,297 Rs. 3,184 US$ 72 38.6%
Securities ................................. 305 684 16 124.3
Loans ...................................... 2,707 4,437 102 63.9
Others ..................................... 81 129 3 59.3
---------- ----------- ------
Total interest revenue ..................... Rs. 5,390 Rs. 8,434 US$193 56.5
---------- ----------- ------
Interest expense
Savings account deposits ................... Rs. 54 Rs. 118 US$ 3 118.5
Time deposits .............................. 3,653 5,671 130 55.2
Long-term debt ............................. 155 244 6 57.4
Trading account and other liabilities ...... 382 623 14 63.1
---------- ----------- ------
Total interest expense ..................... Rs. 4,244 Rs. 6,656 US$153 56.8
---------- ----------- ------
Net interest revenue........................ Rs. 1,146 Rs. 1,778 US$ 40 55.1
========== =========== ======
</TABLE>
Interest revenue increased 56.5% in fiscal 2000 compared to fiscal 1999
reflecting an increase in the average volume of interest-earning assets,
principally loans, offset by a decline in the gross yield on interest earning
assets.
84
<PAGE>
The average volume of loans increased by Rs. 12.6 billion (US$ 289 million) or
67.9% to Rs. 31.1 billion (US$ 714 million) in fiscal 2000 compared to fiscal
1999. Our loan growth was due to an increase in our working capital loans
primarily to more higher rated, larger corporate clients acquired through our
joint marketing efforts with ICICI through the Major Clients Group. For a
further discussion of our joint marketing efforts, see "Relationship with ICICI
Group - Group Operating Strategy". The decline in yield on interest-earning
assets was primarily due to a 85 basis points decline in yield on cash, cash
equivalents and trading account assets to 10.01% in fiscal 2000 from 10.86% in
fiscal 1999 and a decline in yield on loans by 36 basis points to 14.24% in
fiscal 2000 from 14.60% in fiscal 1999. This decrease reflected a general
decline in interest rates during this period as well as an increased volume of
loans to higher rated clients which loans, consistent with market conditions,
typically earn lower yields due to the lower credit risk associated with these
borrowers. Our yield was also impacted by our non-performing loans on which we
do not accrue interest.
The average volume of cash, cash equivalents and trading account assets
increased 50.5% in fiscal 2000 by Rs. 10.7 billion (US$ 245 million) compared
to fiscal 1999 primarily due to increased reserve requirements resulting from a
66.7% increase in average deposits in fiscal 2000. Our trading portfolio
primarily consists of government of India securities which are primarily held
to meet our statutory liquidity reserve requirements. For further discussion of
regulatory requirements applicable to our business, see "Supervision and
Regulation - Legal Reserve Requirements". The yield on cash, cash equivalents
and trading account assets decreased 85 basis points in fiscal 2000. This
decrease was primarily caused by reduced opportunities to swap rupee funds into
US dollars at forward rates as attractive as those prevalent in fiscal 1999.
The average volume of our securities portfolio increased 112.5% to Rs. 6.0
billion (US$ 138 million) in fiscal 2000 from Rs. 2.8 billion (US$ 65 million)
in fiscal 1999. The yield on these available for sale securities increased to
11.37% in fiscal 2000 from 10.77% in fiscal 1999 primarily due to the higher
level of dividend income earned from investments in mutual funds. Our
investment in mutual funds increased to Rs. 1.9 billion (US$ 44 million) at
March 31, 2000 from Rs. 278 million (US$ 6 million) at March 31, 1999 primarily
because we took advantage of the buoyant Indian equity capital markets.
Dividend income increased to Rs. 326 million (US$ 7 million) in fiscal 2000
from Rs. 57 million (US$ 1 million) in fiscal 1999.
The average volume of our interest-bearing liabilities increased primarily
due to an increase in time deposits which were 84.2% of average
interest-bearing liabilities in fiscal 2000. The average volume of time
deposits increased by Rs. 22.0 billion (US$ 504 million) or 64.1% to Rs. 56.4
billion (US$ 1.3 billion) in fiscal 2000 from Rs. 34.3 billion (US$ 787
million) in fiscal 1999 primarily due to an increase in corporate time
deposits. The growth in our corporate deposits was driven by our provision of
daily quotes of interest rates for deposits in excess of Rs. 10 million, a
service not provided by most of our competitors during this period.
The increase in the average volume of interest-bearing liabilities was
also driven by a general increase in retail deposits. We were able to increase
deposit taking from retail customers by offering products targeted at new
segments of customers, including "Power Pay", a direct deposit product designed
to streamline the salary payment systems of our corporate customers. The share
of new "Power Pay" accounts in all new savings accounts in fiscal 2000 was 40%.
New "Power Pay" customers generally tended to also open time deposit accounts
leading to a further increase in time deposits. Our focus on retail deposit
taking resulted in the 102% growth in our retail deposits in fiscal 2000
compared to 49.3% growth in our corporate deposits in the same period.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits offset, in part, by the
increase in cost of trading account and other liabilities. As our retail
deposits typically carry lower interest rates compared to our corporate
deposits, the increase in retail deposits as a percentage of total deposits
over the past year resulted in the average cost of time deposits decreasing 58
basis points to 10.06% in fiscal 2000 from 10.64% in fiscal 1999.
The average volume of trading account liabilities, consisting of
borrowings from the inter-bank money market and short-term borrowings from
institutions, increased 26.3% in fiscal 2000 to Rs. 5.3 billion (US$ 121
million) from Rs. 4.2 billion (US$ 96 million) in fiscal 1999 primarily due to
the overall growth in our business. The cost of trading account liabilities
increased to 11.84% in fiscal 2000 from 9.16% in fiscal 1999 primarily due to
our conversion in fiscal 2000 of foreign currency liabilities into rupee funds
through swap transactions to take advantage of domestic market trading
opportunities. The cost of these swap transactions was accounted for as an
interest expense and included in interest expense on trading account
liabilities.
85
<PAGE>
Fiscal 1999 compared to Fiscal 1998
Net interest revenue increased 58.1% in fiscal 1999 compared to fiscal
1998 reflecting mainly the following factors:
o an increase of 118.4% in the average volume of interest-earning
assets, offset by
o a decrease of 102 basis points in the net interest margin to 2.70% in
fiscal 1999 from 3.72% in fiscal 1998 and a decrease of eight basis
points in our spread to 2.38% in fiscal 1999 from 2.46% in fiscal
1998.
The increase in our average volume of interest-earning assets was
primarily due to growth in cash, cash equivalents and trading account assets as
discussed below. Our net interest margin decreased during this period primarily
due to a shift towards loans to more higher rated clients resulting in lower
credit spreads, an increase in gross non-performing loans and a decline in
average interest-earning assets as a percentage of average interest-bearing
liabilities to 103.2% in fiscal 1999 from 113.3% in fiscal 1998, as described
below.
The following table sets forth, for the periods indicated, the principal
components of our net interest revenue. For further information on assets and
liabilities, changes in interest revenue and interest expense volume and rate
analysis, yields, spreads and margins, see "Selected Financial and Operating
Data".
Year ended March 31,
----------------------------------------
1999/1998
1998 1999 % change
--------- --------- ---------
Interest revenue
Cash, cash equivalents and trading
Account assets ...................... Rs. 913 Rs. 2,297 151.6%
Securities............................. 148 305 106.1
Loans ................................. 1,499 2,707 80.6
Others ................................ 19 81 326.3
--------- ---------
Total interest revenue ................ Rs. 2,579 Rs. 5,390 109.0
--------- ---------
Interest expense
Savings account deposits .............. Rs. 28 Rs. 54 92.9
Time deposits ......................... 1,590 3,653 129.7
Long-term debt ........................ 16 155 868.8
Trading account and other liabilities.. 220 382 73.6
--------- ---------
Total interest expense ................ Rs. 1,854 Rs. 4,244 128.9
--------- ---------
Net interest revenue .................. Rs. 725 Rs. 1,146 58.1
========= =========
Interest revenue increased 109.0% in fiscal 1999 compared to fiscal 1998
reflecting an increase in the average volume of interest-earning assets, offset
by a decline in the gross yield on interest-earning assets. The increase in our
interest-earning assets was primarily driven by the growth in cash, cash
equivalents and trading account assets. The average volume of cash, cash
equivalents and trading account assets increased 144.8% in fiscal 1999 to Rs.
21.1 billion (US$ 483 million) compared to fiscal 1998 primarily due to
increased reserve requirements resulting from a 112.8% increase in average
deposits in fiscal 1999. Contributing to this increase in interest-earning
assets were foreign currency denominated deposits which increased as a result
of rupee funds being occasionally swapped into US dollars at attractive forward
rates and placed in banks outside India.
The decline in yield on interest-earning assets was primarily due to the
decline in yield on loans. The average volume of loans increased by Rs. 9.0
billion (US$ 208 million) or 95.3% to Rs. 18.5 billion (US$ 426 million) in
fiscal 1999 compared to fiscal 1998 due to an increase in our working capital
loans acquired through our joint marketing efforts with ICICI through the Major
Clients Group. The yield on loans decreased 118 basis points to 14.60% in
fiscal 1999 from 15.78% in fiscal 1998 primarily due to lower market rates
generally prevalent in fiscal 1999 compared to fiscal 1998 and the increased
volume of loans to higher rated clients which, consistent with market
conditions, typically earn lower yields. Our yield was also lower due to an
increase in our non-performing loans as we do not accrue interest on
non-performing loans.
86
<PAGE>
The average volume of our securities portfolio increased 112.6% to Rs. 2.8
billion (US$ 65 million) in fiscal 1999 from Rs. 1.3 billion (US$ 31 million)
in fiscal 1998. The yield on these available for sale securities declined to
10.77% in fiscal 1999 from 11.11% in fiscal 1998 primarily due to the lower
coupon rate on additional securities purchased during the year in line with the
general downward movement in market interest rates.
Other interest revenue was derived from interest paid on cash reserves we
were required to deposit with the Reserve Bank of India in accordance with
their cash reserve ratio requirements. These amounts increased 326.3% from
fiscal 1998 to fiscal 1999 primarily due to the fact that we received interest
revenue on these cash reserves for all of fiscal 1999 compared to only six
months of fiscal 1998 since the Reserve Bank of India paid interest on cash
reserves beginning October 1997 only. In addition, other interest revenue
increased due to increase in cash reserves as a result of the increase in our
average deposits since the cash reserve requirement is calculated as a
percentage of our demand and time deposits. For a further discussion of these
cash reserve requirements, see "Business -- Treasury -- General".
The average volume of our interest-bearing liabilities increased primarily
due to an increase in time deposits which accounted for 83.3% of average
interest-bearing liabilities in fiscal 1999. The average volume of time
deposits increased by Rs. 20.0 billion (US$ 460 million) or 139.8% to Rs. 34.3
billion (US$ 786 million) in fiscal 1999 from Rs. 14.3 billion (US$ 329
million) in fiscal 1998. This increase was attributable to our continued focus
on deposit taking by offering products targeting different segments of
customers with features tailored to their specific requirements. We were
thereby able to build existing customer relationships and acquire new time
deposit customers.
The average cost of interest-bearing liabilities declined primarily due to
the decrease in the average cost of time deposits and trading account and other
liabilities. The market interest rates were generally lower in fiscal 1999
compared to fiscal 1998. Consequently, we reduced the interest rate payable on
short-term deposits to 5.0%-10.0% in fiscal 1999 from 6.0%-13.0% (except for
one day during this period when the interest rate payable was 16.0%) in fiscal
1998 and the interest rate payable on deposits of over one year maturity to
11.0%- 11.5% in fiscal 1999 from 8.5%-13.0% in fiscal 1998. As a result of
these interest rate reductions, the average cost of time deposits decreased 46
basis points to 10.64% in fiscal 1999 from 11.10% in fiscal 1998. The reduction
in the average cost of time deposits was lower than the reduction in the
interest rates offered on time deposits because our time deposits re-price only
at maturity and existing deposits continue to earn interest at the original
contracted rate until their maturity. As a result, revised interest rates on
deposits are applicable only to new deposits made.
The average volume of trading account liabilities, consisting of
borrowings from the inter-bank call money market and short-term borrowings from
institutions, increased 115.3% in fiscal 1999 to Rs. 4.2 billion (US$ 96
million) from Rs. 1.9 billion (US$ 44 million) in fiscal 1998 primarily due to
the overall growth in our business. The cost of trading account liabilities
decreased to 9.16% in fiscal 1999 from 11.36% in fiscal 1998 in line with the
lower market rates prevalent in fiscal 1999.
87
<PAGE>
Provisions for Credit Losses
The following table sets forth, for the periods indicated, certain
information regarding our non-performing loans.
<TABLE>
At March 31,
--------------------------------------------------------------------
1999/1998 % 2000/1999 %
1998 1999 change 2000 2000 change
-------- --------- ----------- ------ ------ -----------
(in millions, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Gross non-performing loans ...... Rs. 604 Rs. 1,613 167.1 1,418 US$ 33 (12)%
Allowance for credit losses ..... 425 880 107.1 748 17 (15)
Net non-performing loans ........ 179 733 309.5 670 16 (9)
Gross non-performing loans
as a percentage of gross
loans ......................... 4.58% 5.66% 2.97%
Net non-performing loans as
a percentage of net loans ..... 1.40 2.66 1.43
Allowances for credit losses
as a percentage of gross
non-performing loans .......... 70.36 54.56 52.75
Allowances for credit losses
as a percentage of gross
total loans ................... 3.22 3.09 1.57
</TABLE>
The following table sets forth, for the periods indicated, certain
information regarding our provisions for credit losses.
<TABLE>
Year ended March 31,
-----------------------------------------------
1998 1999 2000 2000
-------- -------- --------- -----
(in millions, except percentages)
<S> <C> <C> <C> <C>
Provisions for credit losses .......... Rs. 360 Rs. 540 Rs. 427 US$10
Provisions for credit losses as a
percentage of net loans ............. 2.82% 1.96% 0.91%
Provisions for credit losses as a
percentage of total assets .......... 1.02 0.71 0.33
</TABLE>
For information on changes in the allowance for credit losses, see
"Business--Non-Performing Loans--Allowance for Credit Losses".
Our loan portfolio is composed largely of short-term working capital loans
where we have a security interest and first lien on all the current assets of
the borrower, typically inventory and accounts receivable. We typically lend
between 60.0% and 80.0% of the appraised value of collateral to ensure that our
loans are sufficiently over-collateralized. However, the recoveries from
non-performing loans are subject to delays that may take several years, due to
the long legal collection process in India. For a further discussion of
enforcement of collateral interests in India, see "Business - Loan Portfolio -
Collateral - Completion, Perfection and Enforcement". As a result, we make an
allowance for the loans based on the time value of money or the present value
of expected realizations of collateral, which takes into account the delay we
will experience before recovering our principal. The time to recovery, expected
future cash flows and realizable value for collateral value are periodically
reviewed in estimating the allowance.
We make an allowance for credit losses resulting from a non-performing
loan by comparing the net present value of the expected cash flows from the
loan discounted at the effective interest rate of the loan and our carrying
value of the loan. We believe that our process for ascertaining our allowance
for credit losses captures the expected losses on our entire loan portfolio.
There can, however, be no guarantee that non-performing loans will not increase
and that the current allowance for credit losses will be sufficient. For
further discussion of our treatment of non-performing loans, see "Business -
Loan Portfolio - Recognition of Non-Performing Loans".
88
<PAGE>
Changes in our provisions and our allowance for credit losses as a whole
reflect economic trends in the key manufacturing, middle market corporate
segments in which many of our customers operate. The manufacturing sector was
adversely impacted during fiscal 1998 and 1999 primarily due to a slowdown in
the Indian economy, a downturn in global commodity prices, particularly in the
steel and textiles sub-sectors, and a rapid reduction in import duties which
adversely impacted the performance of borrowers in these sectors. The impact
was, in particular, more on the middle market corporate segment which, because
of our small balance sheet in our first few years of operation were our target
customers, due to their lower resilience to external factors. As a result of
these adverse economic factors during fiscal 1998 and 1999, some of our loans
to these borrowers became non-performing.
We cannot assure you that the revival signs in the Indian economy,
reflected in the financial results as of March 31, 2000 will continue during
fiscal 2001, especially in light of the sharp increase in the price of oil and
interest rates.
Growth in gross non-performing loans was arrested in fiscal 2000. In fact,
the gross non-performing loans decreased by 12.1% as at March 31, 2000 to Rs.
1.4 billion (US$ 33 million) as compared to Rs. 1.6 billion (US$ 37 million) at
year-end fiscal 1999. The gross non-performing loans as a percentage of gross
loans declined to 2.97% as at March 31, 2000 from 5.66% at year-end fiscal 1999.
As a percentage of net loans, net non-performing loans declined to 1.43% at
March 31, 2000 from 2.66% at year-end fiscal 1999. Provisions for credit losses
as at March 31, 2000 decreased 21% to Rs. 427 million (US$ 10 million) from Rs.
540 million (US$ 12 million) as on March 31, 1999 primarily due to the lower
addition to non-performing loans in fiscal 2000 as a result of revival signs in
the Indian economy. The gross non-performing loans decreased by Rs. 195 million
(US$ 4 million) in fiscal 2000 compared to an increase of Rs. 1,009 million (US$
23 million) in gross non-performing loans in fiscal 1999. The coverage ratio for
gross non-performing loans decreased to 52.75% at fiscal 2000 from 54.56% at
year-end fiscal 1999.
Gross non-performing loans increased 167.1% in fiscal 1999 to Rs. 1.6
billion (US$ 37 million) at year-end fiscal 1999 from Rs. 604 million (US$ 14
million) at year-end fiscal 1998 due to an increase in non-performing loans to
middle market companies of Rs. 542 million (US$ 12 million) primarily in the
light manufacturing and agriculture sectors caused by a slowdown in the Indian
economy. The non-performing loans in the light manufacturing, iron and steel
and textile sector increased by Rs. 769 million (US$ 18 million) in fiscal
1999. This led to an increase in gross non-performing loans as a percentage of
gross loans to 5.66% at year-end fiscal 1999 from 4.58% at year-end fiscal
1998. As a percentage of net loans, net non-performing loans increased to 2.66%
at year-end fiscal 1999 from 1.40% at year-end fiscal 1998. Provisions for
credit losses in fiscal 1999 increased 50.0% to Rs. 540 million (US$ 12
million) from Rs. 360 million (US$ 8 million) in fiscal 1998 in line with the
increase in gross non-performing loans.
Management believes that several loans which became non-performing in
fiscal 1998, 1999 and 2000 are essentially loans to inherently viable
companies. Many of these borrowers are still making interest payments. If the
revival signs shown in the Indian economy continue, management expects credit
losses in many of these loans to be lower due to the viability of these
companies and our belief that they will eventually begin making all required
payments. These loans were classified as non-performing as a result of
continued stress on cash flows of these borrowers, primarily due to the
slowdown in the Indian economy, the global downtrend in commodity prices
coupled with the rapid reduction in domestic trade barriers over the past few
years. In some cases, the non-performing loans are to operating companies
generating positive, albeit reduced, cash flows because they are operating at
levels below their overall capacities. In some cases, in management's view the
future cash flows, discounted at the contracted rate of the loan, adequately
cover our current outstanding principal and require no allowance for credit
losses and, as a result no provisions have been made for these loans. Many of
these borrowers are making current interest payments. They have been classified
as non-performing in view of the stressed cash flow of the borrower, the
borrower's relatively weak position in its industry or, in the case of some of
the borrowers, a delay in making interest payments. In all cases of impaired
loans where no provision has been made, management believes that it has a
strong collateral position. We are monitoring the situation of these loans and
borrowers carefully and will make allowances if our view of the situation
changes. Gross non-performing loans that require no allowance for credit losses
decreased to Rs. 163 million (US$ 4 million) at year-end fiscal 2000 from Rs.
466 million (US$ 10 million) at year-end fiscal1999. This was also reflected in
the provisions for credit losses as a percentage of total assets declining to
0.33% in fiscal 2000 from 0.71% in fiscal 1999 and 1.02% in fiscal 1998. We
have also reached negotiated settlements with some of our borrowers where we
expect to recover the majority of the gross principal outstanding. At March 31,
2000, we had 9 non-performing loans having a gross principal outstanding of Rs.
163 million (US$ 4 million) for which no allowance for credit losses has been
made, as compared to 16 loans having a gross principal outstanding of Rs. 466
million (US$ 10 million) at March 31, 1999.
89
<PAGE>
We typically calculate our allowance for credit losses on a loan-for-loan
basis. Credit card receivables are collectively evaluated for impairment based
on the profile of days past due, classified into various time categories.
Provisions are based as a fixed percentage of these pre-defined time
categories. We intend to review this policy annually based on our historical
delinquency and credit loss experience.
Non-Interest Revenue
Fiscal 2000 compared to Fiscal 1999
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
<TABLE>
Year ended March 31,
--------------------------------------------
2000/1999
1999 2000 2000 % change
------- --------- ------ ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Fees and commissions (1) ............... Rs. 370 Rs. 607 US$ 14 64.1%
Trading account revenue(2) ............. 134 857 20 539.6
Securities transactions(3) ............. 21 75 2 257.1
Foreign exchange transactions(4) ....... 341 220 5 (35.5)
Other revenue .......................... - - - -
------- --------- ------
Total non-interest revenue, net ........ Rs. 866 Rs. 1,759 US$ 41 103.1
======= ========= ======
</TABLE>
---------
(1) Primarily from fee-based income on services such as the issue of
documentary credits, the issue of guarantees, cash management services and
remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for
sale securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 103.1% in fiscal 2000 to Rs. 1.8 billion
(US$ 41 million) from Rs. 866 million (US$ 20 million) in fiscal 1999,
primarily due to an increase in trading account revenue and fees and
commissions. The increase in trading account revenue was primarily due to the
significantly higher level of trading opportunities in fiscal 2000 compared to
fiscal 1999. These types of market opportunities may not be available in every
period.
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
<TABLE>
Year ended March 31,
--------------------------------------------
2000/1999
1999 2000 2000 % change
------- --------- ------ ----------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Remittances ............................ Rs. 38 Rs. 51 US$ 1 34.2%
Cash management services ............... 53 123 3 132.1
Commissions:
Bills ............................... 68 89 2 30.9
Guarantees .......................... 75 114 2 52.0
Documentary credit .................. 73 118 3 61.6
Others .............................. 63 112 3 77.8
------- -------- ------
Total commissions ...................... 279 433 10 55.2
------- -------- ------
Total fees and commissions ............. Rs. 370 Rs. 607 US$ 14 64.1
======= ========= ======
</TABLE>
Fees and commissions increased 64.1% in fiscal 2000 primarily due to the
increase in income from cash management services and commissions on documentary
credits and guarantees. Increased marketing efforts through the Growth Clients
Group and the Major Clients Group helped us to increase cash management
services, guarantees, documentary credits and bills. The number of our
customers for cash management services alone increased to 254 at
90
<PAGE>
March 31, 2000 from 155 at March 31, 1999. The amount handled under cash
management services also increased significantly to Rs. 656.2 billion (US$ 15.0
billion) in fiscal 2000 from Rs. 389.4 billion (US$ 8.9 billion) in fiscal 1999.
As a result, income from cash management services increased 132.1% to Rs. 123
million (US$ 3 million) in fiscal 2000 compared to fiscal 1999. Commissions
increased 55.2% to Rs. 433 million (US$ 10 million) in fiscal 2000 from Rs. 279
million (US$ 6million) in fiscal 1999. Our guarantees increased 63.3% to Rs. 7.6
billion (US$ 173 million) at March 31, 2000 from Rs. 4.6 billion (US$ 106
million) at year-end fiscal 1999 and our acceptances primarily consisting of
documentary credits, increased 52.0% to Rs. 8.5 billion (US$ 195 million) at
year end fiscal 2000 from Rs. 5.6 billion (US$ 128 million) at year-end fiscal
1999. As a result, in fiscal 2000, commissions on guarantees increased 52.0% and
commissions on documentary credits increased 61.6%. Commissions on bills also
increased 30.9% in fiscal 2000 compared to fiscal 1999.
Trading account revenue resulting largely from sales of government of
India securities, increased to Rs. 857 million (US$ 20 million) in fiscal 2000
from Rs. 134 million (US$ 3.1 million) in fiscal 1999 primarily due to the
significantly higher level of trading opportunities. We took advantage of the
decline in the yield on debt securities and sold higher yielding debt
securities from our portfolio. Although our equity investments are limited by
Reserve Bank of India requirements, we nonetheless were able to benefit from a
buoyant equity capital market. As a result, in fiscal 2000 the gain on sale of
trading securities was Rs. 936 million (US$ 21 million). In light of the
increases in rupee interest rates in fiscal 2001, which will adversely affect
the value of our rupee fixed income trading portfolio, management does not
expect these extraordinary results to be repeated in fiscal 2001.
Our income from foreign exchange transactions declined 35.5% to Rs. 220
million (US$ 5 million) in fiscal 2000 compared to fiscal 1999 primarily due to
the decline in spread on corporate transactions on account of competition and
the restricted trading opportunities in this period since exchange rates
remained steady.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest revenue.
Year ended March 31,
----------------------------------
1999/1998
1998 1999 % change
------- ------- ---------
(in millions, except percentages)
Fees and commissions(1) Rs. 240 Rs. 370 54.2%
Trading account revenue(2) 147 134 (8.8)
Securities transactions(3) 32 21 (34.4)
Foreign exchange transactions(4) 171 341 99.4
Other revenue 1 -- --
------- -------
Total non-interest revenue Rs. 591 Rs. 866 46.5
======= =======
---------
(1) Primarily from fee-based income on services like the issue of documentary
credits, the issue of guarantees, cash management services and
remittances.
(2) Primarily reflects income from trading in government of India securities.
(3) Primarily reflects capital gains realized on the sale of available for
sale securities.
(4) Arises primarily from purchases and sales of foreign exchange on behalf of
our corporate clients and trading for our own account.
Non-interest revenue increased 46.5% in fiscal 1999 to Rs. 866 million
(US$ 20 million) from Rs. 591 million (US$ 14 million) in fiscal 1998,
primarily due to a 54.2% increase in income from fees and commissions and a
99.4% increase in income from foreign exchange transactions offset, in part, by
a decline in trading account revenue and income from securities transactions.
The following table sets forth, for the periods indicated, the principal
components of our fees and commissions.
91
<PAGE>
Year ended March 31,
----------------------------------
1999/1998
1998 1999 % change
------- ------- ---------
(in millions, except percentages)
Remittances ........................ Rs. 24 Rs. 38 58.3%
Cash management services ........... 35 53 51.4
Commissions:
Bills ............................ 45 68 51.1
Guarantees ....................... 51 75 47.1
Documentary credits .............. 45 73 62.2
Others ........................... 40 63 57.5
------- -------
Total commissions .................. 181 279 54.1
------- -------
Total fees and commissions ......... Rs. 240 Rs. 370 54.2
======= =======
The increase in income from fees and commissions in fiscal 1999 was
primarily due to an increase in fees from cash management services and
commissions from guarantees and documentary credits. Increased marketing
efforts through the Growth Clients Group and the Major Clients Group helped us
in increasing cash management services, guarantees, documentary credits and
bills. The number of customers for cash management services increased to 155 at
year-end fiscal 1999 from 105 at year-end fiscal 1998. The amount handled under
cash management services also increased significantly to Rs. 389.4 billion (US$
8.9 billion) in fiscal 1999 from Rs. 100.7 billion (US$ 2.3 billion) in fiscal
1998. As a result, income from cash management services increased 51.4% to Rs.
53 million (US$ 1 million) in fiscal 1999 compared to fiscal 1998.
Commissions increased 54.1% to Rs. 279 million (US$ 7 million) at year-end
fiscal 1999 from Rs. 181 million (US$ 4 million) at year-end fiscal 1998.
Guarantees increased 75.0% to Rs. 4.6 billion (US$ 106 million) at year-end
fiscal 1999 from Rs. 2.6 billion (US$ 61 million) at year-end fiscal 1998 and
acceptances increased 94.9% to Rs. 5.6 billion at year-end fiscal 1999 from Rs.
2.9 billion at year-end fiscal 1998. As a result, commissions on guarantees
increased 47.1% in fiscal 1999 and commissions on documentary credits increased
62.2% in fiscal 1999. Commissions on bills increased 51.1% in fiscal 1999
compared to fiscal 1998.
Trading account revenue, resulting primarily from sales of government of
India securities, decreased 8.8% to Rs. 134 million (US$ 3 million) in fiscal
1999 from Rs. 147 million (US$ 3 million) in fiscal 1998. Income from
securities transactions, primarily consisting of capital gains realized on the
sale of corporate debt securities, decreased 34.4% to Rs. 21 million (US$
483,000) in fiscal 1999 from Rs. 32 million (US$733,000) in fiscal 1998. The
decrease in trading account revenue and income from securities transactions was
due to restricted trading opportunities in the domestic market in fiscal 1999
primarily due to uncertainty in the foreign currency markets with respect to
the valuation of the rupee in fiscal 1999 caused by economic sanctions imposed
on India in 1998 after nuclear testing was conducted in India. Subdued
sentiment in the debt market also led to a decrease in capital gains realized
in fiscal 1999. While the interest rates have been continuously declining and
the Indian government's policy seems to support a lower interest rate regime,
there can be no assurance that this type of market opportunities would be
available in the future.
Our income from foreign exchange transactions increased 99.4% to Rs. 341
million (US$ 8 million) in fiscal 1999 from Rs. 171 million (US$ 4 million) in
fiscal 1998 due to favorable market conditions in foreign exchange markets and
increase in volume of transactions to Rs. 956.1 billion (US$ 22.0 billion) in
fiscal 1999 from Rs. 461.3 billion (US$ 10.6 billion) in fiscal 1998.
92
<PAGE>
Non-Interest Expense
Fiscal 2000 compared to Fiscal 1999
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
<TABLE>
Year ended March 31,
2000/1999
1999 2000 2000 % change
------- -------- ------- ---------
(in millions, except percentages)
<S> <C> <C> <C> <C>
Employee expense:
Salaries ................................... Rs. 172 Rs. 257 US$ 6 49.4%
Employee benefits .......................... 32 59 1 84.4
------- --------- ------
Total employee expense ....................... 204 316 7 54.9
Premises and equipment expense:
Premises ................................... 49 57 1 16.3
Computer and office equipment .............. 183 283 7 54.6
------- --------- ------
Total premises and equipment expense ......... 232 340 8 46.6
------- --------- ------
Administration and other expenses:
Rentals, taxes and electricity ............. 114 180 4 58.0
Advertisement and publicity ................ 34 39 1 14.0
Communications expense ..................... 43 69 1 59.9
Other ...................................... 172 385 9 124.0
------- --------- ------
Total administration and other expense ....... 363 673 15 85.4
------- --------- ------
Total non-interest expense ................... Rs. 799 Rs. 1,329 US$ 30 66.3
======= ========= ======
</TABLE>
Non-interest expense increased 66.3% in fiscal 2000 to Rs. 1.3 billion
(US$ 30 million) from Rs. 799 million (US$ 18 million) in fiscal 1999 primarily
due to a significant increase in administration and other expenses.
Non-interest expense as a percentage of average total assets increased to 1.52%
in fiscal 2000 from 1.50% in fiscal 1999.
Administration and other expenses increased 85.4% in fiscal 2000 compared
to fiscal 1999 primarily due to additional rental payments resulting from the
expansion of our branch network and a one-time increase in expenses from the
issuance of new ATM cards to all our existing customers due to the networking
of all our ATMs to Switch which enabled all of our customers to access their
accounts online at any of our ATM machines throughout India . As we focused on
increasing our retail deposits, we engaged the services of direct selling
agents in fiscal 2000 resulting in higher expenses. The agents were paid
commissions based on the number of acceptable accounts mobilized.
Employee expense increased 54.9% in fiscal 2000 due to a 50.8% increase in
the number of employees to 1,344 at March 31, 2000 from 891 at March 31, 1999
as we expanded our branch network to 97 branches and extension counters at
March 31, 2000 from 64 branches and extension counters at March 31, 1999.
Premises and equipment expense increased 46.6% in fiscal 2000 compared to
fiscal 1999, primarily due to a 54.6% increase in computer and office equipment
expenses due to the depreciation on technology equipment including servers,
personal computers, ATMs, VSATs and BANCS2000.
Fiscal 1999 compared to Fiscal 1998
The following table sets forth, for the periods indicated, the principal
components of our non-interest expense.
93
<PAGE>
Year ended March 31,
----------------------------------
1999/1998
1998 1999 % change
------- ------- ---------
(in millions, except percentages)
Employee expense:
Salaries ......................... Rs. 116 Rs. 172 48.3%
Employee benefits ................ 21 32 52.4
------- -------
Total employee expense ............. 137 204 48.9
Premises and equipment expense:
Premises ......................... 21 49 133.3
Computer and office equipment .... 141 183 29.8
------- -------
Total premises and equipment expense 162 232 43.2
------- -------
Administration and other expenses:
Rentals, taxes and electricity ... 77 114 48.1
Advertisement and publicity ...... 21 34 61.9
Communications expense ........... 22 43 95.5
Other ............................ 135 172 27.4
------- -------
Total administration and other
expense .......................... 255 363 42.4
------- -------
Total non-interest expense ......... Rs. 554 Rs. 799 44.2
======= =======
Non-interest expense increased 44.2% in fiscal 1999 to Rs. 799 million
(US$ 18 million) from Rs. 554 million (US$ 13 million) in fiscal 1998 due to a
48.9% increase in employee expense, a 43.2% increase in premises and equipment
expense and a 42.4% increase in administration and other expense. Non-interest
expense as a percentage of average total assets decreased to 1.50% in fiscal
1999 from 2.08% in fiscal 1998.
Total employee expense increased 48.9% in fiscal 1999 due to a 47.8%
increase in the number of employees to 891 at year-end fiscal 1999 from 603 at
year-end fiscal 1998 as we expanded our branch network in fiscal 1999 to 64
branches and extension counters from 37 branches and extension counters at
year-end fiscal 1998.
Premises and equipment expense increased 43.2% in fiscal 1999 compared to
fiscal 1998, primarily due to a 133.3% increase in premises expenses as a
result of the addition of 27 new branches and extension counters and the
renovation in some of our branches in key locations. Computer and office
equipment expense increased 29.8% in fiscal 1999 primarily due to the
depreciation on technology equipment including servers, personal computers,
ATMs, VSATs and BANCS2000.
Administration and other expenses increased 42.4% in fiscal 1999 compared
to fiscal 1998 primarily due to additional rental payments resulting from the
expansion of our branch network, an increase in communication expenses, such as
telecommunications and postage expenses, resulting from a rapid growth in the
number of our customers and an increase in advertising expenses associated with
building the ICICI Bank brand name and marketing our products.
Income Tax Expense
Income tax expense increased 122.9% in fiscal 2000 to Rs. 379 million (US$
9 million) from Rs. 170 million (US$ 4 million) in fiscal 1999 primarily due to
the higher level of income in fiscal 2000. Our effective tax rate was 21.3% in
fiscal 2000 compared to 25.3% in fiscal 1999. Our effective tax rate was lower
than the marginal tax rate of 38.5% and 35.0% applicable to companies generally
in India in fiscal 2000 and fiscal 1999 primarily due to the tax-exempt income
from certain investments of our treasury department including bonds of certain
public sector corporations and mutual funds units. The government of India, in
order to facilitate access to competitive funding for certain public sector
companies, allows these companies to issue bonds, the interest on which is
tax-exempt to the bondholder. The government of India also passed a regulation
providing that any dividends received on mutual fund units are tax exempt to
the holder of the mutual fund units.
Income tax expense increased 63.5% in fiscal 1999 to Rs. 170 million (US$
4 million) from Rs. 104 million (US$ 2 million) in fiscal 1998 primarily due to
the higher level of income in fiscal 1999. Our effective tax rate was 25.3% in
fiscal 1999 compared to 25.9% in fiscal 1998.
94
<PAGE>
Financial Condition
Assets
The following tables sets forth, for the periods indicated, the principal
components of our assets.
At March 31,
-----------------------------------------------
2000/1999
1999 2000 2000 % change
----------- ----------- --------- ---------
(in millions, except percentages)
Cash and cash equivalents...... Rs. 19,928 Rs. 36,326 US$ 832 82.3%
Trading account assets (1)..... 15,822 28,228 647 78.4
Securities(2).................. 3,963 4,709 108 18.8
Loans, net..................... 27,597 47,016 1,077 70.4
Acceptances(3)................. 5,587 8,490 194 52.0
Property and equipment......... 1,761 2,097 48 19.1
Other assets (4)............... 1,607 3,550 81 120.9
----------- ----------- ---------
Total assets................... Rs. 76,265 Rs. 130,416 US$ 2,987 71.0
=========== =========== ========= =====
At March 31,
------------------------------------
1999/1998
1998 1999 % change
----------- ---------- ---------
(in millions, except percentages)
Cash and cash equivalents...... Rs. 8,728 Rs. 19,928 128.3%
Trading account assets (1)..... 7,387 15,822 114.2
Securities(2).................. 1,476 3,963 168.5
Loans, net..................... 12,765 27,597 116.2
Acceptances(3)................. 2,866 5,587 94.9
Property and equipment......... 1,363 1,761 29.2
Other assets (4)............... 693 1,607 131.9
---------- ----------
Total assets................... Rs. 35,278 Rs. 76,265 116.2
========== ==========
---------
(1) Primarily includes government of India securities.
(2) Includes corporate debt securities, government of India securities and
mutual fund units.
(3) Includes only documentary credits that are non-funded facilities.
(4) Includes deferred tax asset, interest accrued, staff loans, deposits in
leased premises and pre-paid expenses.
(5) Figures for fiscal 1999 have been regrouped and reclassified. Please see
our notes to the financial statements for a more detailed-description.
Our total assets increased 71.0% at March 31, 2000 compared to at March
31, 1999. Net loans increased 70.4% in fiscal 2000 compared to at March 31,
1999. The growth was in corporate lending as working capital loans increased
80.4% and term loans increased 39.1%. Our loan growth was driven by additional
clients referred to us by our parent, ICICI, as we increased our focus on doing
business with the large more higher rated clients that are serviced by the
ICICI group's Major Clients Group. Loans denominated in foreign currency were
less than 5.0% of our total loans at March 31, 2000. The growth in cash and
cash equivalents and in trading account assets was principally due to increased
reserve requirements resulting from a 62.5% increase in deposits in fiscal
2000. Securities increased 18.8% in fiscal 2000 primarily due to increased
investments in mutual fund units as a result of buoyant equity capital markets.
Our marketing strategy helped us in increasing our acceptances by 52.0% to Rs.
8.5 billion (US$ 194 million) at March 31, 2000 from Rs. 5.6 billion (US$ 128
million) at March 31, 1999.
Our total assets increased 116.2% at year-end fiscal 1999 compared to at
year-end fiscal 1998. The high growth in cash and cash equivalents was
principally due to increased reserve requirements resulting from a 131.0%
increase in deposits in fiscal 1999 and an increase in rupee funds swapped into
US dollars at attractive forward rates and placed in foreign currency
denominated deposits with banks outside India. Trading account assets increased
114.2%
95
<PAGE>
in fiscal 1999 principally due to increased investments in government of
India securities to meet the reserve requirements resulting from a 131.0%
increase in deposits in fiscal 1999. Securities increased 168.5% in fiscal 1999
primarily due to increased investments in corporate debt securities caused by
the rapid growth of our deposits in fiscal 1999 compared to fiscal 1998. In
fiscal 1999, our normal loan portfolio was not sufficient to cover these
liabilities so we invested in corporate debt securities as this type of
investment is the fastest way to deploy additional resources. Net loans
increased 116.2% in fiscal 1999 compared to at year-end fiscal 1998 reflecting
significant growth in corporate lending as working capital loans increased
89.2% and term loans increased 194.8%. Our loan growth was largely due to
additional clients acquired through our joint marketing efforts with ICICI
through the Major Clients Group. Our acceptances increased 94.9% at year-end
fiscal 1999 compared to at year-end fiscal 1998 as a result of increased
marketing efforts.
Liabilities and Stockholders' Equity
The following tables set forth, for the periods indicated, the principal
components of our liabilities and stockholders' equity.
At March 31,
-----------------------------------------------
2000/1999
1999 2000 2000 % change
----------- ----------- --------- ---------
(in millions, except percentages)
Deposits ........................Rs. 60,729 Rs. 98,660 US$ 2,260 62.5%
Trading account liabilities(1)... 418 1,922 44 360.1
Acceptances...................... 5,587 8,490 194 52.0
Long-term debt................... 1,764 2,476 57 40.4
Other liabilities (2)............ 4,937 7,481 171 51.5
---------- ----------- ---------
Total liabilities................ 73,435 119,029 2,726 62.1
---------- ----------- ---------
Stockholders' equity............. 2,830 11,387 261 302.4
---------- ----------- ---------
Total............................Rs. 76,265 Rs. 130,416 US$ 2,987 71.0
========== =========== =========
At March 31,
------------------------------------
1999/1998
1998 1999 % change
----------- ---------- ---------
(in millions, except percentages)
Deposits Rs. 26,290 Rs. 60,729 131.0%
Trading account liabilities(1).. 1,793 418 (76.7)
Acceptances..................... 2,866 5,587 94.9
Long-term debt.................. 129 1,764 --
Other liabilities (2)........... 1,729 4,937 185.5
----------- ----------
Total liabilities............... 32,807 73,435 123.8
----------- ----------
Stockholders' equity............ 2,471 2,830 14.5
----------- ----------
Total........................... Rs. 35,278 Rs. 76,265 116.2
=========== ==========
---------
(1) Trading account liabilities are inter-bank borrowings and short-term
borrowings from other institutions.
(2) Includes refinancing received from the Reserve Bank of India against our
export credit, interest accrued but not due on deposits and bills payable.
96
<PAGE>
The following tables set forth, for the periods indicated, the components
of our total deposits.
At March 31,
-----------------------------------------------
2000/1999
1999 2000 2000 % change
----------- ----------- --------- ---------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits ..............Rs. 2,271 Rs. 5,332 US$ 122 134.8%
Time deposits ................. 52,692 77,453 1,774 47.0
Total interest-bearing deposits . 54,963 82,785 1,896 50.6
Non interest bearing deposits:
Demand deposits ............... 5,766 15,875 364 175.3
---------- ---------- ---------
Total deposits ..................Rs. 60,729 Rs. 98,660 US$ 2,260 62.5
========== ========== =========
At March 31,
------------------------------------
1999/1998
1998 1999 % change
----------- ---------- ---------
(in millions, except percentages)
Interest-bearing deposits:
Savings deposits ............... Rs. 1,037 Rs. 2,271 119.0%
Time deposits .................. 21,621 52,692 143.7
Total interest-bearing deposits .. 22,658 54,963 142.6
Non interest bearing deposits:
Demand deposits ................ 3,632 5,766 58.8
---------- ----------
Total deposits ................... Rs. 26,290 Rs. 60,729 131.0
========== ==========
Our total deposits increased 62.5% in fiscal 2000 compared to at March 31,
1999. Some of this increase is attributable to our increased focus on deposit
taking from retail customers by offering products targeted at different
segments of customers, such as customers of "Power Pay", a direct deposit
product designed to streamline the salary payment systems of our corporate
customers. This focus on retail deposits taking was reflected in the 102%
growth in our retail deposits in fiscal 2000 compared to 49.3% growth in our
corporate deposits in the same period. Our savings account deposits increased
135% in fiscal 2000 as we continued our focus on building a strong retail
depositor base. Our time deposits increased 47.0% in fiscal 2000. Our
non-interest-bearing deposits increased 175.3% due to our specific thrust on
this segment particularly through the development and marketing of our key
corporate deposit products (described in "Business - Corporate Banking -
Corporate Deposits") as it significantly reduces our cost of funds.
Our total deposits increased 131.0% in fiscal 1999 from those at year-end
fiscal 1998 as we focused on targeting different types of customers and
offering them deposit services specifically tailored to their needs. As a
result, in fiscal 1999, our corporate deposits increased 139.3% and our retail
deposits increased 109.1%. Our savings account deposits increased 119.0% in
fiscal 1999 as we continued our focus on building a strong retail depositor
base. Our time deposits increased 143.7% in fiscal 1999 mainly from an increase
in corporate deposits. Our non-interest-bearing deposits and savings account
deposits grew at a lower rate than the time deposits, as customers appeared to
prefer investing in higher earning time deposits. Long-term debt increased to
Rs. 1.8 billion (US$ 41 million) at year-end fiscal 1999 from Rs. 129 million
(US$3 million) at year-end fiscal 1998, primarily due to our issuing unsecured
redeemable subordinated debentures of Rs. 1.7 billion (US$ 39 million) in
fiscal 1999 to augment our Tier 2 capital level.
Foreign Exchange and Derivative Contracts
We enter into foreign exchange forward contracts, swap agreements and
other derivative products, which enable customers to transfer, modify or reduce
their foreign exchange and interest rate risks. Our foreign exchange contracts
arise out of foreign exchange transactions, forward foreign exchange
transactions with corporate and non-corporate customers and inter-bank foreign
exchange transactions. We earn profit by way of an exchange margin as a mark-up
over the exchange rate offer on customer transactions. We earn profit on inter-
bank foreign exchange transactions by way of differences between the purchase
rate and the sale rate. This income is booked as income from foreign exchange
transactions.
97
<PAGE>
All our outstanding derivative contracts represent currency and interest
rate swaps for our corporate customers. We have started offering these types of
transactions only recently. The income earned by us on all such transactions is
booked as trading account revenue.
The following table sets forth, for the periods indicated, the notional
amount of our derivative contracts.
<TABLE>
Notional principal amounts Balance sheet credit exposure(1)
-------------------------------------- --------------------------------
At March 31, At March 31,
-------------------------------------- --------------------------------
1998 1999 2000 1998 1999 2000
--------- ---------- ---------- ----- ------- -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate products:
Swap agreements............... - - Rs. 900 - - -
---------- ---------- ---------- ------ ------- -------
Total interest rate products.. - - Rs. 900 - - -
========== ========== ========== ====== ======= =======
Foreign exchange products:
Forward contracts ............ Rs. 23,528 Rs. 36,705 Rs. 62,892 Rs. 77 Rs. 425 Rs. 309
Swap agreements .............. - 2,962 7,658 - - -
---------- ---------- ---------- ------ ------- -------
Total foreign exchange
Products .................. Rs. 23,528 Rs. 39,667 Rs. 70,550 Rs. 77 Rs. 425 Rs. 309
========== ========== ========== ====== ======= =======
</TABLE>
---------
(1) Denotes the mark-to-market impact of the derivative and foreign exchange
products at the indicated periods.
Capital
We are subject to the capital adequacy requirements of the Reserve Bank of
India, which are primarily based on the capital adequacy accord reached by the
Basle Committee of Banking Supervision, Bank of International Settlements in
1988. For a detailed description of the Reserve Bank of India's capital
adequacy guidelines, see "Supervision and Regulation--Capital Adequacy
Requirements". We are required to maintain a minimum ratio of total capital to
risk adjusted assets as determined by a specified formula of 9.0%, at least
half of which must be Tier 1 capital generally stockholders' equity.
The following tables set forth, for the periods indicated, our risk-based
capital, risk-weighted assets and risk-based capital adequacy ratios computed
in accordance with the applicable Reserve Bank of India guidelines and based on
our financial statements prepared in accordance with Indian GAAP.
At March 31
-----------------------------------------------
2000/1999
1999 2000 2000 % change
---------- ---------- --------- ---------
(in millions, except percentages)
Tier 1 capital.................. Rs. 3,035 Rs. 11,251 US$ 258 270.7%
Tier 2 capital.................. 1,549 1,437 32 (7.2)
---------- ---------- ---------
Total capital................... 4,584 Rs. 12,688 US$ 290 176.8
========== ========== =========
On-balance sheet risk assets.... 33,646 51,611 1,182 53.4
Off-balance sheet risk assets... 7,803 12,979 297 66.3
---------- ---------- ---------
Total risk assets............... Rs. 41,449 Rs. 64,590 US$ 1,479 55.8
========== ========== =========
Tier 1 capital adequacy ratio... 7.32% 17.42%
Tier 2 capital adequacy ratio... 3.74 2.22
---------- ----------
Total capital adequacy ratio.... 11.06% 19.64%
========== ==========
98
<PAGE>
Year ended March 31,
------------------------------------
1999/1998
1998 1999 % change
----------- ---------- ---------
(in millions, except percentages)
Tier 1 capital ................. Rs. 2,668 Rs. 3,035 13.8%
Tier 2 capital ................. 20 1,549 -
---------- ----------
Total capital .................. 2,688 4,584 70.6
========== ==========
On-balance sheet risk assets ... 15,801 33,646 112.9
Off-balance sheet risk assets .. 4,138 7,803 88.6
---------- ----------
Total risk assets .............. Rs. 19,939 Rs. 41,449 107.9
========== ==========
Tier 1 capital adequacy ratio .. 13.38% 7.32%
Tier 2 capital adequacy ratio .. 0.10 3.74
---------- ----------
Total capital adequacy ratio ... 13.48% 11.06%
========== ==========
Our total capital adequacy ratio computed under the applicable Reserve
Bank of India guidelines and based on our financial statements prepared in
accordance with Indian GAAP was 19.64% at March 31, 2000. Using the same basis
of computation, our Tier 1 capital adequacy ratio was 17.42% and our Tier 2
capital adequacy ratio was 2.22% at March 31, 2000.
Our total capital adequacy ratio computed under the applicable Reserve
Bank of India guidelines and based on our financial statements prepared in
accordance with US GAAP was 19.12% at March 31, 2000. Using the same basis of
computation, our Tier 1 capital adequacy ratio was 17.19% and our Tier 2
capital adequacy ratio was 1.93% at March 31, 2000.
Our total capital adequacy ratio computed under the applicable Reserve
Bank of India guidelines and based on our financial statements prepared in
accordance with US GAAP was 10.44% at year-end fiscal 1999. Using the same
basis of computation, our Tier 1 capital adequacy ratio was 6.92% and our Tier
2 capital adequacy ratio was 3.52% at year-end fiscal 1999.
Capital Expenditures
The following table sets forth, for the periods indicated, the details of
our capital expenditures.
Year ended March 31,
---------------------------------------
1998 1999 2000 2000
------- ------- ------- ------
(in millions)
Premises:
Owned ....................... Rs. 765 Rs. 221 Rs. 132 US$ 3
Leasehold ................... 14 27 30 1
------- ------- ------- ------
Total premises .............. 779 248 162 4
Computers and accessories ... 111 115 248 6
Other ....................... 95 124 197 4
------- ------- ------- ------
Total capital expenditures .. Rs. 985 Rs. 487 Rs. 607 US$ 14
======= ======= ======= ======
Capital expenditures increased 24.6% in fiscal 2000 compared to fiscal
1999 primarily due to a 115.7% increase in computers and accessories capital
expenditures and a 58.9% increase in other capital expenditures, including
furniture, air-conditioning and office equipment purchased for new branches
opened in this period and expenditures relating to renovations to our existing
offices to better serve our increased number of customers. Premises capital
expenditures decreased in fiscal 2000 by 34.7% largely as a result of the
absence of the capital expenditures incurred in fiscal 1999 for residential
premises for staff members. Capital expenditures decreased 50.6% in fiscal 1999
compared to fiscal 1998 primarily due to a 68.2% decrease in premises capital
expenditures caused by the absence of the capital expenditures incurred in
fiscal 1998 for the purchase of office premises in Mumbai, Bangalore and
Coimbatore.
We plan to spend approximately Rs. 1.6 billion (US$ 36 million) in capital
expenditures during fiscal 2001 and fiscal 2002 for the setting up of
additional branches and other delivery channels. The proposed capital
expenditure includes expenses on computers and accessories and other office
equipment.
99
<PAGE>
Future Impact of New Accounting Standards
The Securities Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements" on December 3,
1999. SAB 101 provides additional guidelines on the application of existing
generally accepted accounting principles to revenue recognition in financial
statements. We do not expect the guidance of SAB 101 to have a material effect
on our financial statements.
The Financial Accounting Standards Board (FASB) issued Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of Accounting Principles Board's Opinion No. 25" in March 2000.
This interpretation clarifies the application of Accounting Principles Board's
Opinion No. 25 on "Accounting for Stocks issued to Employees", with reference
to certain issues in accounting of employee stock options and is generally
effective as of July 1, 2000. We do not expect Interpretation No. 44 to have a
material effect on our financial statements.
In June 1998, the FASB issued Statements of Financial Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities". In June
1999, the FASB issued SFAS No. 117, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,
which delayed the effective date of SFAS No. 133 to fiscal periods beginning
after June 15, 2000. As our derivative activities are not significant, we do
not expect SFAS No. 133 to have a material effect on our financial statements.
100
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our board of directors, which consists of eight members, is responsible
for the management of our business. Our organizational documents provide for at
least three and no more than twelve directors. We may, subject to the
provisions of our organizational documents and the Indian Companies Act, change
the minimum or maximum number of directors by a resolution which is passed at a
general meeting by a majority of 75.0% of the present and voting shareholders.
The composition of our board of directors reflects the principal
shareholdings held by ICICI, the requirements of the Indian Banking Regulation
Act and the public ownership in India. Under the terms of our organizational
documents, ICICI is entitled to appoint one-third of the total number of
directors of our board. ICICI is also permitted to vote on the appointment of
the remaining members of our board of directors. ICICI has nominated two
directors to our board. Pursuant to our organizational documents, to convene a
board meeting, one of the two ICICI directors on our board of directors must be
present unless they waive this requirement in writing. The Banking Regulation
Act requires that not less than 51% of the board members have special knowledge
or practical experience in areas relevant to banking including accounting,
finance, agriculture, banking and small scale industry. Accordingly, all our
directors are professionals with special knowledge of accountancy, banking,
economics, administration and management. Of these, one director has expertise
in the area of agriculture and another director has experience in small scale
industries, as required by the Banking Regulation Act. In addition, under the
Banking Regulation Act, the Reserve Bank of India may require us to convene a
meeting of our shareholders for the purposes of appointing new directors to our
board of directors.
Our organizational documents also provide that we may execute trust deeds
securing our debentures under which the trustee or trustees may appoint a
director, known as a debenture director. The debenture director is not subject
to retirement by rotation and may only be removed as provided in the relevant
trust deed. There is no debenture director on our board of directors.
Our organizational documents further provide that ICICI may appoint one of
their nominated directors to act as the Executive Chairman and Managing
Director of our board for terms not exceeding five years at a time. The board
of directors has powers to appoint one of the directors to be the Executive
Chairman or Managing Director, if ICICI has not appointed one of its nominee
directors. The board of directors has proposed Mr. K. V. Kamath to be the
non-executive Chairman of our board of directors, subject to approval of the
Reserve Bank of India. Application to the Reserve Bank of India seeking
approval for this appointment has been submitted. We are awaiting this
approval. Mr. H. N. Sinor has been appointed our Managing Director and Chief
Executive Officer by the shareholders with effect from June 1, 1998 for a
period of five years.
At least two-thirds of the total number of directors, excluding the
debenture director and the directors nominated by ICICI, are subject to
retirement by rotation. One-third of these directors must retire from office at
each annual meeting of shareholders. A retiring director is eligible for
re-election. None of our directors other than the Chairman or executive
directors shall hold office continuously for a period exceeding eight years.
101
<PAGE>
Our board of directors at July 31, 2000 had the following members:
<TABLE>
Date of
Name, Designation and Profession appointment Other appointments
------------------------------------ -------------- ---------------------------------
<S> <C> <C>
Mr. Kundapur Vaman Kamath April 17, 1996 Chairman
Profession: Managing ICICI Infotech Services Limited
Director and Chief Executive ICICI Personal Financial Services
Officer of ICICI Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities and Finance
Company Limited
ICICI Venture Funds Management
Company Limited
ICICI Web Trade Limited
Prudential ICICI Asset Management
Company Limited
Director
Indian Institute of Management,
Ahmedabad
National Development Bank, Sri Lanka
Vice Chairman
Indian Business School
Member -- Governing Board
Entrepreneurship Development
Institute of India
National Institute of Bank Management
Member -- Managing Committee
The Associated Chambers of Commerce
Industry of India (ASSOCHAM)
Member -- Governing Council
Manel Srinivas Nayak Institute of
Management
Member -- Advisory Board
NCR Financial Solutions Group Limited,
London
The Economic Times Editorial
Member -- Board of Management
Manipal Academy of Higher Education
Member
Confederation of Indian Industry
Mrs. Lalita Dileep Gupte September 12, 1994 Chairperson
Profession: Joint Managing ICICI Capital Services Limited
Director and Chief Operating ICICI Home Finance Company Limited
Officer of ICICI
Director
G. S. Mhaskar Private Limited
ICICI Infotech Services Limited
ICICI Personal Financial Services
Limited
ICICI Prudential Life Insurance Company Limited
ICICI Securities and Finance Company
Limited
ICICI Venture Funds Management Company
Limited
ICICI Web Trade Limited
National Stock Exchange of India
Limited
Prudential ICICI Asset Management
Company Limited
Dr. Satish Chandra Jha May 2, 1997 Director-- Governing Board
Profession: Development Economist The Delhi Stock Exchange Association
Limited
Director
Phillips India Limited
SREI International Finance Limited
Walchand Capital Limited
Mr. Raghunathan Rajamani December 2, 1994 Director
Profession: Retired CanBank Computer Service Limited
Government Official
Trustee
Sundaram Mutual Fund
102
<PAGE>
<S> <C> <C>
Mr. Bhupendranath V. Bhargava September 12, 1994 Chairman
Profession: Chairman, India Index Services and Products
Credit Rating and Limited
Information Services of India Limited
Director
BPL Cellular Holdings Limited
Cosmo Films Limited
Grasim Industries Limited
HEG Limited
J. K. Corporation Limited
Raymond Limited
Supreme Industries Limited
Trustee
Amarnath Vidya Ashram
Sri Shanmukhananda Fine Arts and
Sangeetha
Sabha
Mr. Uday Madhav Chitale August 21, 1997 Director
Profession: Partner, Crossdomain Solutions Private Limited
M.P Chitale & Company DFK Consulting Services (India) Private
(Chartered Accountants) Limited
Seahorse Industries Limited
Partner
M.P Chitale & Associates
Chairman of Executive Committee
Shishu Vihar Mandal
Mr. Somesh R Sathe January 29, 1998 Managing Director
Profession: Managing Director, ESSP Meditek Private Limited
Arbes Tools Private Limited Sukeshan Equipments Private Limited
Mr. H.N. Sinor August 21, 1997
Profession: Managing Director
and Chief Executive Officer
</TABLE>
Our executive officers at March 31, 2000 were as follows:
<TABLE>
Total
Years of remuneration
work in fiscal Stock
Name Age Position experience 2000(1) Shareholdings options(2)
------------------------- --- ---------------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mr. H.N. Sinor 55 Managing 34 Rs. 3,266,336 1,100 75,000
Director
and Chief
Executive Officer
Mr. P.H. Ravikumar 48 Senior Executive 27 1,302,877 1,000 31,250
Vice President
Mr. M.N. Gopinath 51 Senior Executive 30 1,554,221 1,200 31,250
Vice President
Mr. Alladi Ashok 48 Senior Executive 28 1,181,940 100 18,750
Vice President
Mr. E.S. Mohan 49 Executive Vice 26 727,330 1,000 --
President
Mr. A.V.A. Subramaniam 57 Executive Vice 28 1,075,156 1,000 --
President
Mr. G. Venkatakrishnan 49 Executive Vice 25 1,137,256 -- 25,000
President and
Chief Financial
Officer
Mr. K.S. Harshan(3) 48 Senior Vice 23 901,095 1,000 18,750
President
Mr. M.S. Annigeri(3) 46 Senior Vice 20 932,020 1,000 18,750
President
Mr. R.B. Nirantar(3) 46 Senior Vice 21 982,085 100 18,750
President
Mr. Bhashyam Seshan 43 Company 22 867,997 1,200 7,500
Secretary
</TABLE>
103
<PAGE>
---------
(1) Including bonuses as described under "-Compensation and Benefits to
Directors and Officers- Bonus."
(2) See "-Compensation and Benefits to Directors and Officers- Employee Stock
Option Scheme" for a description of the terms of these stock options.
(3) Promoted as Executive Vice President from April 1, 2000.
Mr. H. N. Sinor holds Bachelor's degrees in Commerce and Law. Mr. Sinor
started his career with the Central Bank of India in September 1965 and moved
to the Union Bank of India in 1969. He worked in various positions gaining
experience in working capital finance, branch banking, resources and corporate
planning. Mr. Sinor returned to Central Bank of India as its Executive Director
in December 1996. Mr. Sinor joined us on July 1, 1997 and our board on August
21, 1997 and was appointed our Managing Director and Chief Executive Officer
with effect from June 1, 1998.
Mr. P. H. Ravikumar has a Bachelor of Commerce degree and is a Certified
Associate of the Institute of Bankers both of London and India. Mr. Ravikumar
joined the Bank of India in September 1972. In his 22 years with the Bank of
India, he has worked at various offices in India and in Paris, in the areas of
branch management, treasury, international banking, commercial advances and
planning. Mr. Ravikumar joined us in 1994 and is the Senior Executive Vice
President heading the Corporate Banking.
Mr. M. N. Gopinath holds a Bachelor's degree in Commerce, a Master's
degree in Business Administration and is a Certified Associate of the Indian
Institute of Bankers, Mumbai. He joined the Bank of India in 1970. In his 25
years with Bank of India, he has worked at various offices in India and in the
US. He has gained experience in credit, international banking, training, branch
management, operations, treasury, leasing and housing finance. He was
transferred by the Bank of India to its merchant banking subsidiary, BOI
Finance Limited, as General Manager. Mr. Gopinath joined us in 1995 and is the
Senior Executive Vice President heading the Retail Banking.
Mr. Alladi Ashok has a Bachelor of Science degree. Mr. Ashok started his
career with the State Bank of India in 1972. He worked in different branches of
State Bank of India both in India and in the US. He has handled various
responsibilities including working capital financing, credit administration,
branch management, foreign exchange and treasury. He joined us in 1996 and is
the Senior Executive Vice President heading our Risk Management Department.
Mr. E. S. Mohan holds Master's degrees in Science and in Business
Administration. He is a Certified Associate of the Institute of Bankers of both
London and India. He joined the Bank of India in 1974. He was posted at various
offices of the Bank of India in India and U.K and gained exposure in treasury
management, foreign exchange, commercial loans and branch banking. Mr. Mohan
joined us in 1994. He is an Executive Vice President and is on secondment to
Inter Commercial Bank Limited, Trinidad and Tobago as the Advisor to the
Managing Director of that bank.
Mr. A. V. A. Subramaniam has a Bachelor of Arts degree, a diploma in
Systems Management and is a Certified Associate of the Indian Institute of
Bankers. He joined the State Bank of India in 1965. He has worked in various
areas including the audit and inspection of general banking and foreign
exchange businesses of large branches and foreign offices. Mr. Subramaniam
joined us in 1995. He was the Executive Vice President heading our Audit
Department prior to April 30, 2000, when he retired on superannuation.
Mr. G. Venkatakrishnan holds a Master's degree in Science and a post
graduate diploma in bank management. He is a graduate member of Cost and Works
Accountants of India and a Certified Associate of the Indian Institute of
Bankers, Mumbai. He began his career as an officer with the State Bank of India
in 1974. He has held various positions and worked in areas including
international banking, auditing, compliance and balance sheet management. Mr.
Venkatakrishnan joined us in 1997 and is the Executive Vice President and Chief
Financial Officer.
Mr. K. S. Harshan holds a Master's degree in Economics and a post graduate
diploma in Management. He began his career with the Union Bank of India in
1976. In his 18 years with Union Bank of India, he has worked at various
offices in India and in London, in the areas of branch management,
international trade finance, foreign exchange and operations. Mr. Harshan
joined us in 1994 and is a Senior Vice President and head of Foreign Exchange
and International Banking.
104
<PAGE>
Mr. M. S. Annigeri holds a Bachelor's degree in Science. He joined the
State Bank of India in 1979. He was posted at various offices of the State Bank
of India and gained exposure in branch management and treasury management. Mr.
Annigeri joined us in 1996 and is a Senior Vice President and head of Domestic
Treasury.
Mr. R. B. Nirantar has a Bachelor's degree in Commerce, a diploma in
Industrial Relations and Personnel Management and is a Certified Associate of
the Indian Institute of Bankers. He also holds a degree in General Law. He
joined the Union Bank of India in 1974. He joined us in 1994 and is Senior Vice
President and heads our Human Resources Development department.
Mr. Bhashyam Seshan has a Bachelor's degree in Commerce. He is an
Associate Member of the Institute of Company Secretaries of India. He started
his career with State Bank of Travancore in 1978 and joined us in 1994. He is
our Company Secretary.
Corporate Governance
Our corporate governance policies recognize the accountability of the
board and the importance of making the board transparent to all our
constituents, including employees, customers, investors and the regulatory
authorities, and to demonstrate that the shareholders are the ultimate
beneficiaries of our economic activities. We have taken a series of steps
including the setting up of board sub-committees to oversee the functions of
executive management. All important board committees consist mainly of
non-executive directors. These board committees meet regularly.
Our board's role, functions, responsibility and accountability are clearly
defined. In addition to its primary role of monitoring corporate performance,
the functions of the board include:
o approving corporate philosophy and mission;
o participating in the formulation of strategic and business plans;
o reviewing and approving financial plans and budgets;
o monitoring corporate performance against strategic and business
plans, including overseeing operations;
o ensuring ethical behavior and compliance with laws and regulations;
o reviewing and approving borrowing limits;
o formulating exposure limits; and
o keeping shareholders informed regarding plans, strategies and
performance.
To enable the board of directors to discharge these responsibilities
effectively, our executive management gives detailed reports on our performance
on a quarterly basis.
The board functions either as a full board or through committees. The
following committees have been formed to focus on specific issues.
Audit and Risk Committee
The Audit and Risk Committee consists of five directors, all of which are
independent directors. The current members are Mr. Uday M. Chitale, Mrs. Lalita
D. Gupte, Mr. R. Rajamani, Mr. B.V. Bhargava and Dr. Satish C. Jha. It provides
direction to and oversees the audit and risk management function, reviews the
financial accounts, interacts with statutory auditors and reviews matters of
special interest.
Committee of Directors
The Committee of Directors consists of five directors, including the
Managing Director and Chief Executive Officer. The current members are Mr. K.V.
Kamath, Mrs. Lalita D. Gupte, Mr. B.V. Bhargava, Mr. Uday M. Chitale and Mr.
H.N. Sinor. This Committee has delegated financial powers and approves loan
proposals and expenditures within the broad parameters of the delegated
authority.
105
<PAGE>
Compensation Committee
The Compensation Committee consists of four directors including the
Managing Director and Chief Executive Officer. The current members are Mrs.
Lalita D. Gupte, Mr. Somesh R. Sathe, Mr. Uday M. Chitale and Mr. H.N. Sinor.
The functions of the committee include considering and recommending to the
board the amount of compensation payable to the executive directors, fees
payable to other directors and framing the guidelines and management of the
employee stock option scheme.
Nomination Committee
The Nomination Committee consists of four directors including the Managing
Director and Chief Executive Officer. The current members are Mr. K.V. Kamath,
Mr. R. Rajamani, Mr. B.V. Bhargava and Mr. H.N. Sinor. The functions of this
committee include the submission of recommendations to the board to fill
vacancies on the board or in senior management positions.
Share Transfer Committee
The Share Transfer Committee consists of four directors including the
Managing Director and Chief Executive Officer. The current members are Mrs.
Lalita D. Gupte, Mr. B.V. Bhargava, Mr. Uday M. Chitale and Mr. H.N. Sinor.
This committee reviews and approves transfers of our equity shares and
debentures.
Compensation and Benefits to Directors and Officers
Under our organizational documents, each director, except directors
nominated by ICICI and the Managing Director and Chief Executive Officer, is
entitled to remuneration for attending each meeting of the board or of a board
committee. The amount of remuneration is set by the board from time to time in
accordance with limitations prescribed by the Indian Companies Act or the
government of India. Remuneration for attending a board meeting is Rs. 5,000
(US$ 115) and for a committee meeting Rs. 2,000 (US$ 46). We reimburse
directors for travel and related expenses in connection with board and
committee meetings and with related matters. If a director is required to
perform services for us beyond attending meetings, we may remunerate the
director as determined by the board of directors and this remuneration may be
either in addition to or as substitution for the remuneration discussed above.
At its meeting held on March 28, 1998, the board of directors decided to
revise the salary paid to the Managing Director and Chief Executive Officer,
effective June 1, 1998. This was approved at the annual meeting of the
shareholders on June 15, 1998. The board or the compensation committee may in
its exclusive discretion fix the salary payable within the range of Rs. 60,000
to Rs. 120,000 (US$ 1,375 to US$ 2,749) per month, exclusive of committed bonus
and special achievement bonus.
The total compensation paid by us to our directors and our executive
officers in fiscal 2000 was Rs. 14 million (US$ 321,000).
Bonus
Each year, our board of directors awards bonuses to our employees
including the Managing Director and Chief Executive Officer on the basis of
performance and seniority. The performance of each employee is judged by a
management appraisal system. The aggregate amount paid towards bonuses to all
eligible employees in fiscal 2000 was Rs. 80 million (US$ 1.8 million).
Employee Stock Option Scheme
On January 24, 2000, our board approved an employee stock option scheme to
attract, encourage and retain high performing employees. Our shareholders
approved this scheme at the extraordinary general meeting on February 21, 2000.
This scheme was drafted in accordance with guidelines issued by the Securities
and Exchange Board of India. Under this scheme, up to 5.0% of our issued equity
shares can be allocated to employee stock options. The stock options will
entitle our eligible employees and directors, and eligible employees and
directors of our subsidiary and holding companies to apply for equity shares.
We do not have any subsidiaries so only our eligible employees and directors
and ICICI's eligible employees and directors could apply for equity shares.
Eligible employees include those that are assistant managers or higher. During
fiscal 2000, a total of 1,788,000 stock options were granted to 426 employees
and directors of ICICI Bank and ICICI. Of these, 75,000 stock options allocated
to
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non-executive directors were forfeited upon such non-executive directors
refusing to accept the stock options on the basis of good corporate governance
principles. Each stock option is exercisable for one equity share. On a
fully-diluted basis, these stock options constituted 0.9% of our issued share
capital as of March 31, 2000. These stock options have an exercise price of Rs.
171.90 (US$ 4) per equity share, which was the closing price on the BSE on
February 21, 2000. These stock options vest in installments over a period of
three years with 20.0% of the options vesting at the end of the first year,
30.0% at the end of the second year and 50.0% at the end of the third year.
These options can be exercised within 10 years from the date of their grant or
five years from the date of vesting, whichever is later.
ICICI has an employee stock option scheme. Under this scheme, eligible
employees of ICICI group, including our employees, may be granted options on
shares of ICICI.
Loans
Our bank has internal rules and regulations to grant loans to employees to
acquire certain assets such as property, vehicles and other consumer durables.
These loans are made at interest rates ranging from 3.5% to 6.0% per annum and
are repayable over fixed periods of time. The loans are generally secured by
the assets acquired by the employees. We have also given loans to our employees
for purchasing our shares in the offering made by ICICI in June 1997 at the
public offering price. At March 31, 2000, there were Rs. 221 million (US$ 5
million) loans outstanding to employees. Pursuant to the Banking Regulation
Act, our non-executive directors are not eligible for any loans. At March 31,
2000, there was no outstanding loan to our directors.
Gratuity
Under Indian law, we are required to pay a gratuity to employees who after
at least five years of continuous service have resigned or retired. Our bank
has set up a gratuity fund administered by the Life Insurance Corporation of
India. In accordance with our gratuity fund's rules, actuarial valuation of
gratuity liability is made based on certain assumptions regarding rate of
interest, salary growth, mortality and staff turnover. The total corpus of the
fund at March 31, 2000 was Rs. 17 million (US$ 390,000).
Superannuation Fund
We contribute 15.0% of the total annual salary of each employee to a
superannuation fund, which is administered by the Life Insurance Corporation of
India. An employee gets 33.3% of the commuted value on retirement and a monthly
pension after that for life. In the event of a death of an employee,
beneficiary receives the accumulated balance of the commuted value of 66.7%.
The total corpus of the fund at March 31, 2000 was Rs. 55 million (US$ 1
million).
Provident Fund
We are statutorily required to maintain a provident fund as a part of our
retirement benefits to our employees. Each employee contributes 12.0% of his or
her salary and we contribute an equal amount to the fund. This fund is managed
by in-house trustees. The investments of the fund are made according to rules
made by the government of India. The accounts of the fund are audited by
independent auditors. The corpus of the fund at March 31, 2000 was Rs. 86
million (US$ 2 million). We contributed Rs. 16 million (US$ 3,67,000 million)
to the provident fund in fiscal 2000.
Interest of Management in Certain Transactions
Except as otherwise stated in this annual report, no amount or benefit has
been paid or given to any of our directors or officers.
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RELATED PARTY TRANSACTIONS
We have entered into several cost-sharing arrangements with ICICI and
other group companies, including:
Lease Agreements with ICICI
We have entered into lease agreements with ICICI, as lessor, at market
rates for the lease of certain properties for both office and residential
purposes and for the lease of ATMs. We paid Rs. 92 million (US$ 2.1 million),
Rs. 20 million (US$ 460,000 million), Rs. 7 million (US$ 160,000 million) and
Rs. 36 million (US$ 825,000 million) in fiscal 1997, 1998, 1999 and 2000
respectively for the use of ICICI property for office and residential purposes.
We paid Rs. 5 million (US$ 115,000) in fiscal 2000 for the lease of ATMs. We
did not lease ATMs from ICICI before this period. These lease agreements
contain terms and conditions that are standard for agreements of these types.
We also paid interest of Rs. 4 million (US$ 92,000) to the parent company for
capital advances made by the parent company for purchase of equipment.
Agreements with ICICI Personal Financial Services Limited
On December 15, 1999, we entered into an agreement with ICICI Personal
Financial Services for the provision by them of services related to our
telephone banking call centers. The initial term of the agreement is one year.
Under this agreement, we paid fees of Rs.3 million (US$ 69,000) to ICICI
Personal Financial Services based on the number of calls handled by the call
centers.
On January 3, 2000, we entered into another agreement with ICICI Personal
Finance Services seconding some of their employees with skills in marketing and
credit processing activities relating to our credit card business. On January
17, 2000, we entered into another agreement with ICICI Personal Financial
Services for the provision by them of credit card processing services. Under
these agreements, we reimbursed ICICI Personal Finance Services an amount of
Rs. 28 million (US$ 641,000) for all costs incurred by them, including salaries
and other operating costs plus a mark-up up to 10.0%.
Agreements with ICICI Infotech Service Limited
On September 9, 1997, we entered into an agreement with ICICI Infotech for
the provision of services by them relating to the handling of share transfer
activities. This agreement expires in September 2002. In fiscal 1998, 1999 and
2000, we paid Rs. 3 million, (US$ 69,000), Rs. 6 million (US$ 137,000) and Rs.
4 million ((US$ 92,000) respectively, to ICICI Infotech pursuant to this
agreement. We also paid Rs.6 million (US$ 137,000) in fiscal 2000 for
depositary services provided by the above affiliate.
On September 1, 1999, we entered into another agreement with ICICI
Infotech for seconding some of their employees for providing information
technology services. We reimbursed the salaries of ICICI Infotech employees
seconded to us. In fiscal 2000, we paid ICICI Infotech Rs. 10 million (US$
229,000).
Other Transactions with ICICI
We have generated fee and commission income from ICICI, as one of our
customers, for the provision of banking services to ICICI, including cash
management services, the management of ICICI bond issues, remittances and
collection. We provided these services to ICICI at market rates. ICICI paid a
total of Rs. 6 million (US$ 137,000), Rs. 15 million (US$ 344,000), Rs. 12
million (US$ 275,000) and Rs. 24 million (US $ 550,000) to us in fiscal 1997,
1998, 1999 and 2000 respectively, for these banking services.
We have generated fee and commission income since January 1999 from our
customers that hold depositary share accounts. We are able to offer this
product because ICICI is a depositary participant with the National Securities
Depository Limited. ICICI does not charge us any fees for acting as the
depositary participant on behalf of our customers. During fiscal 2000, we
generated fee and commission income related to our depositary share account
holders of Rs. 14 million (US$ 321,000).
We paid Rs. 2 million (US$ 46,000), Rs. 1 million (US$ 23,000), Rs. 1
million (US$ 23,000) and Rs. 2 million (US$ 46,000) to ICICI in fiscal 1997,
1998, 1999 and 2000 respectively, for the secondment of ICICI employees to us.
We also received Rs. 6 million (US$ 137,000) in fiscal 2000 for secondment of
our employees to ICICI.
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We enter into foreign exchange currency swaps and interest rate swaps with
the parent company on a back to back basis. The outstanding contracts at March
31, 2000 are cross currency swaps amounting to Rs 3,829 million (US$
87.7million) and interest rate swaps amounting to Rs 800 million (US$ 18.3
million).
We have paid to ICICI interest on deposits and borrowings in call money
markets in the amount of Rs. 27 million (US$ 619,000), Rs. 105 million (US$ 2.4
million), Rs. 125 million (US$ 2.9 million) and Rs. 261 million (US $ 6
million) in fiscal 1997, 1998, 1999 and 2000 respectively.
In addition, we have paid dividends to ICICI, as our shareholder, in the
amount of Rs. 113 million (US$ 2.6 million), Rs. 120 million (US$ 2.7 million),
Rs. 147 million (US$ 3.4 million) and Rs. 184 million (US$ 4.2 million) for
fiscal 1997, 1998, 1999 and 2000 respectively. We have paid the same dividend
per share to ICICI as we have paid to all our other shareholders.
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OVERVIEW OF THE INDIAN FINANCIAL SECTOR
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the government of India and its various ministries and the Reserve Bank of
India, and has not been prepared or independently verified by us. This is the
latest available information to our knowledge at year-end fiscal 2000.
The Reserve Bank of India, the central banking and monetary authority of
India, is the central regulatory and supervisory authority for the Indian
financial system. A variety of financial intermediaries in the public and
private sectors participate in India's financial sector, including the
following:
o commercial banks;
o long-term lending institutions;
o non-bank finance companies, including housing finance companies; and
o other specialized financial institutions, and state-level financial
institutions.
Until the early 1990s, the Indian financial system was strictly
controlled. Interest rates were administered, formal and informal parameters
governed the asset allocation, and strict controls limited entry into and
expansion within the financial sector. The government of India's economic
reform program, which began in 1991, encompassed the financial sector. The
first phase of the reform process began with the implementation of the
recommendations of the Committee on the Financial System, the Narasimham
Committee I. The reform process has now entered into its second phase. See
"--Banking Sector Reform--Committee on Banking Sector Reform (Narasimham
Committee II)".
This discussion presents an overview of the role and activities of the
Reserve Bank of India and of each of the major participants in the Indian
financial system, with a focus on the commercial banks and the long-term
lending institutions. This is followed by a brief summary of the banking reform
process along with the recommendations of various committees which have played
a key role in the reform process. We then present a brief discussion on the
impact of the liberalization process on long-term lending institutions and
commercial banks. Finally, reforms in the non-banking financial sector are
briefly reviewed.
Reserve Bank of India
The Reserve Bank of India, established in 1935, is the central banking and
monetary authority in India. The Reserve Bank of India manages the country's
money supply and foreign exchange and also serves as a bank for the government
of India and for the country's commercial banks. In addition to these
traditional central banking roles, the Reserve Bank of India undertakes certain
developmental and promotional roles.
The Reserve Bank of India issues guidelines on exposure standards, income
recognition, asset classification, provisioning for non-performing assets and
capital adequacy standards for commercial banks, long-term lending institutions
and non-bank finance companies. The Reserve Bank of India requires these
institutions to furnish information relating to their businesses to the Reserve
Bank of India on a regular basis. For further discussion regarding Reserve Bank
of India's role as the regulatory and supervisory authority, of India's
financial system and its impact on us, see "Supervision and Regulation".
Commercial Banks
Commercial banks in India have traditionally focused only on meeting the
short-term financial needs of industry, trade and agriculture. At year-end
fiscal 2000, there were 297 scheduled commercial banks in the country, with a
network of 65,521 branches serving approximately Rs. 8.2 trillion in deposit
accounts. Scheduled commercial banks are banks which are listed in the schedule
to the Reserve Bank of India Act, 1934, and may further be classified as public
sector banks, private sector banks and foreign banks.
Commercial banks have a presence throughout India, with nearly 71.8% of
bank branches located in rural or semi-urban areas of the country. A large
number of these branches belong to the public sector banks.
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Public Sector Banks
Public sector banks make up the largest category in the Indian banking
system. They include the State Bank of India and its associate banks, 19
nationalized banks and 196 regional rural banks. Excluding the regional rural
banks, the remaining public sector banks have 45,957 branches, and account for
76.8% of the outstanding gross bank credit and 78.7% of the aggregate deposits
of the scheduled commercial banks. The public sector banks' large network of
branches enables them to fund themselves out of low cost deposits.
The State Bank of India is the largest public sector bank in India. At
year-end fiscal 2000, the State Bank of India and its seven associate banks had
13,388 branches. They accounted for 24.7% of aggregate deposits and 29.1% of
outstanding gross bank credit of all scheduled commercial banks.
Regional rural banks were established from 1976 to 1987 by the central
government, state governments and sponsoring commercial banks jointly with a
view to develop the rural economy. Regional rural banks provide credit to small
farmers, artisans, small entrepreneurs and agricultural laborers. There were
196 regional rural banks at year-end fiscal 2000 with 14,462 branches,
accounting for 3.9% of aggregate deposits and 2.8% of gross bank credit
outstanding of scheduled commercial banks.
Private Sector Banks
After the first phase of bank nationalization was completed in 1969,
public sector banks made up the largest portion of Indian banking. The focus on
public sector banks was maintained throughout the 1970s and 1980s. Furthermore,
existing private sector banks which showed signs of an eventual default were
merged with state-owned banks. In July 1993, as part of the banking reform
process and as a measure to induce competition in the banking sector, the
Reserve Bank of India permitted entry by the private sector into the banking
system. This resulted in the introduction of nine private sector banks,
including ICICI Bank. These banks are collectively known as the "new" private
sector banks. With the merger of Times Bank Limited into HDFC Bank Limited in
February 2000, there are only eight "new" private sector banks at present. In
addition, 25 private sector banks existing prior to July 1993 are currently
operating.
At year-end fiscal 2000, private sector banks accounted for approximately
11.7% of aggregate deposits and 12.4% of gross bank credit outstanding of the
scheduled commercial banks. Their network of 4,931 branches accounted for 7.5%
of the total branch network of scheduled commercial banks in the country.
Foreign Banks
At June 30, 2000, there were 42 foreign banks with 183 branches operating
in India. At year-end fiscal 2000, foreign banks accounted for 5.7% of
aggregate deposits and 8.0% of outstanding gross bank credit of scheduled
commercial banks. As part of the liberalization process, the Reserve Bank of
India has permitted foreign banks to operate more freely, subject to
requirements largely similar to those imposed on domestic banks. This has led
to increased foreign banking activity.
The primary activity of most foreign banks in India has been in the
corporate segment. However, in recent years, some of the larger foreign banks
have started to make consumer financing a larger part of their portfolios based
on the growth opportunities in this area in India. These banks also offer
products such as automobile finance, home loans, credit cards and household
consumer finance.
Cooperative Banks
Cooperative banks cater to the financial needs of agriculture, small
industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks provide
long-term credit for agriculture.
Long-Term Lending Institutions
The long-term lending institutions were established to provide medium-term
and long-term financial assistance to various industries for setting up new
projects and for the expansion and modernization of existing facilities. These
institutions provide fund-based and non-fund-based assistance to industry in
the form of loans, underwriting, direct subscription to shares, debentures and
guarantees. The primary long-term lending institutions include ICICI Limited,
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the Industrial Development Bank of India, the Industrial Finance Corporation of
India Limited and the Industrial Investment Bank of India.
The long-term lending institutions were expected to play a critical role
in Indian industrial growth and accordingly, had access to concessional
government funding. However, in recent years, the operating environment of the
long-term lending institutions has changed substantially. Although the initial
role of these institutions was largely limited to providing a channel for
government funding to industry, the reform process has required them to expand
the scope of their business activities. Their new activities include:
o fee-based activities like investment banking and advisory services;
and
o short-term lending activity including issuing corporate finance and
working capital loans.
In addition, there are three other investment institutions at the national
level, Life Insurance Corporation of India, General Insurance Corporation of
India and its subsidiaries and Unit Trust of India, which also provide
long-term financial assistance to the industrial sector.
Non-Bank Finance Companies
There are over 10,000 non-bank finance companies in India, mostly in the
private sector. All non-bank finance companies are required to register with
the Reserve Bank of India. The non-bank finance companies may be categorized
into entities which take public deposits and those which do not. The companies
which accept public deposits are subject to strict supervision and capital
adequacy requirements of the Reserve Bank of India. ICICI Securities is a
non-bank finance company, which does not accept public deposits.
The scope and activities of non-bank finance companies have grown
significantly over the years. The primary activities of the non-bank finance
companies are consumer credit, including automobile finance, home finance and
consumer durable products finance, wholesale finance products to small and
medium-sized companies such as bills discounting, and fee-based services such
as investment banking and underwriting.
Over the last few years, certain non-bank finance companies have defaulted
to investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are currently
pending.
Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank
finance companies. As a result of the various incentives given to investing in
the housing sector by the government in recent years, the scope of this
business has grown substantially. Housing Development Finance Corporation
Limited is a premier institution providing housing finance in India. In
addition, insurance institutions like Life Insurance Corporation of India and
several commercial banks have also established housing finance subsidiaries.
The National Housing Bank and the Housing and Urban Development Corporation
Limited are the two government-controlled financial institutions created to
improve the availability of housing finance in India.
Other Financial Institutions
Specialized Financial Institutions
In addition to the long-term lending institutions, there are various
specialized financial institutions which cater to the specific needs of
different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, the Small Industries Development Bank
of India, ICICI Venture Funds Management Company Limited, Risk Capital and
Technology Finance Corporation Limited, Tourism Finance Corporation of India
Limited, National Housing Bank, Power Finance Corporation Limited and the
Infrastructure Development Finance Corporation Limited.
State Level Financial Institutions
State financial corporations operate at the state level and form an
integral part of the institutional financing system. State financial
corporations were set up to finance and promote small and medium-sized
enterprises. The
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state financial institutions are expected to achieve balanced regional
socio-economic growth by generating employment opportunities and widening the
ownership base of industry. At the state level, there are also state industrial
development corporations, which provide finance primarily to medium-sized and
large-sized enterprises.
Impact of Liberalization on the Indian Financial Sector
Until 1991, the financial sector in India was heavily controlled and
commercial banks and long-term lending institutions, the two dominant financial
intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition. Long-term lending
institutions were focused on the achievement of the Indian government's various
socio-economic objectives, including balanced industrial growth and employment
creation, especially in areas requiring development. Long-term lending
institutions were extended access to long-term funds at subsidized rates
through loans and equity from the government of India and from funds guaranteed
by the government of India originating from commercial banks in India and
foreign currency resources originating from multilateral and bilateral
agencies.
The focus of the commercial banks was primarily to mobilize household
savings through demand and time deposits and to use these deposits to meet the
short-term financial needs of borrowers in industry, trade and agriculture. In
addition, the commercial banks provided a range of banking services to
individuals and business entities.
However, since 1991, there have been comprehensive changes in the Indian
financial system. Various financial sector reforms, implemented since 1991,
have transformed the operating environment of the banks and long-term lending
institutions. In particular, the deregulation of interest rates, emergence of a
liberalized domestic capital market, and entry of new private sector banks,
along with the broadening of long-term lending institutions' product
portfolios, have progressively intensified the competition between banks and
long-term lending institutions.
All of these factors are leading to a gradual disappearance of the
traditional boundaries between banks and long-term lending institutions.
Long-term lending institutions now compete directly with banks in several areas
of business. At the same time, since 1992, the long-term lending institutions'
access to subsidized domestic sources of long-term funds has diminished and
they now primarily depend upon market borrowings. They do not have complete
access to retail savings and demand deposits and have certain restrictions on
the short maturity funds that they are able to raise from the market.
Banking Sector Reform
Most large banks in India were nationalized in 1969 and thereafter were
subject to a high degree of control until reform began in 1991. In addition to
controlling interest rates and entry into the banking sector, these regulations
also channeled lending into priority sectors. Banks were required to fund the
public sector through the mandatory acquisition of low interest-bearing
government securities or statutory liquidity ratio bonds to fulfill statutory
liquidity requirements. As a result, bank profitability was low, non-performing
assets were comparatively high, capital adequacy was diminished, and
operational flexibility was severely hindered.
Committee on the Financial System (Narasimham Committee I)
The Committee on the Financial System (The Narasimham Committee I) was set
up in August 1991 to recommend measures for reforming the financial sector.
Many of the recommendations made by the committee, which addressed
organizational issues, accounting practices and operating procedures, were
implemented by the government of India. The major recommendations that were
implemented included the following:
o With fiscal stabilization and the government increasingly resorting to
market borrowing to raise resources, the statutory liquidity ratio or
the proportion of the banks' net demand and time liabilities that were
required to be invested in government securities was reduced from
38.5% in the pre-reform period to 25.0% in October 1997. This meant
that the significance of the statutory liquidity ratio shifted from
being a major instrument for financing the public sector in the
pre-reform era to becoming a prudential requirement;
o Similarly, the cash reserve ratio or the proportion of the bank's net
demand and time liabilities that were required to be deposited with
the Reserve Bank of India was reduced from 15.0% in the pre-reform
period to 8.5% currently;
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o Special tribunals were created to resolve bad debt problems;
o Almost all restrictions on interest rates for deposits were removed.
Commercial banks were allowed to set their own level of interest rates
for all deposits except savings bank deposits;
o Substantial capital infusion to several state-owned banks was approved
in order to bring their capital adequacy closer to internationally
accepted standards. By the end of fiscal 1999, aggregate
recapitalization amounted to Rs. 204.5 billion. The stronger public
sector banks were given permission to issue equity to further increase
capital; and
o Banks were granted the freedom to open or close branches.
Committee on Banking Sector Reform (Narasimham Committee II)
The second Committee on Banking Sector Reform (Narasimham Committee II)
submitted its report in April 1998. The major recommendations of the committee
were as follows:
o Capital adequacy requirements should take into account market risk in
addition to credit risk. Accordingly, this committee suggested that
government securities and other approved securities should carry risk
weights;
o Risk weight on a government guaranteed advance should be the same as
for other advances;
o Foreign exchange open positions should carry a 100.0% risk weight;
o The minimum capital to risk assets ratio should be increased from 8.0%
to 10.0% and a general provision of 1.0% for standard assets should be
introduced;
o There should be stricter standards for asset classification;
o For resolution of non-performing assets, this committee proposed the
establishment of an asset reconstruction company. Alternatively, banks
in difficulty could issue Tier II bonds guaranteed by the government
of India and these bonds could be made eligible for statutory
liquidity ratio investments;
o The shareholdings of the government of India and the Reserve Bank of
India in public sector banks should be reduced;
o Banks should introduce risk management, asset-liability management and
efficient treasury management policies;
o Decisions to merge public sector banks should originate from the
management of the relevant banks, with the government of India as the
common shareholder playing a supportive role; and
o Mergers should not be seen as a means of bailing out weak banks.
Rather, weak banks should be strengthened by slowing down their
expansion and eliminating their high cost funds and borrowings.
The Reserve Bank of India accepted and began implementing many of these
recommendations in October 1998.
Working Group on Role of Banks and Financial Institutions
In December 1997, the Reserve Bank of India created a working group under
the chairmanship of S. H. Khan to harmonize the role and operations of
long-term lending institutions and banks. In its report submitted in April
1998, the Khan Working Group recommended that banks and long-term lending
institutions progressively move towards universal banking and encouraged the
development of a regulatory framework for this purpose.
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Based on the recommendations of the Khan Working Group and the Narasimham
Committee II, the Reserve Bank of India, in January 1999, issued a discussion
paper entitled "Harmonizing the Role and Operations of Development Financial
Institutions and Banks". The paper described the future of the financial
system:
o The provision of diversified services both by banks and long-term
lending institutions should continue, subject to appropriate
regulation by the Reserve Bank of India;
o Ultimately there should be only banks and restructured non-bank
finance companies;
o The special role of long-term lending institutions being noted, a
transitional path was envisioned for them to become either
full-fledged non-bank finance companies or banks. This transitory
arrangement should be worked out in consultation with the Reserve Bank
of India;
o If a long-term lending institution chooses to provide commercial
banking services directly, permission to create a 100.0% owned banking
subsidiary would be considered by the Reserve Bank of India;
o A corporate form of organization under the Companies Act was
recommended to provide the financial intermediaries with the necessary
flexibility for mergers and acquisitions and the diversification to
meet the needs of the evolving situation;
o Any conglomerate in which a bank is present should be subject to
supervision and regulation on a consolidated basis; and
o Supervisory functions should be isolated and brought under a
consistent supervisory framework. Ownership of financial
intermediaries should be transferred from the Reserve Bank of India to
the government of India. This would help ensure that the Reserve Bank
of India focused on its supervisory and regulatory functions.
Recent Structural Reforms
Legislative Framework for Recovery of Debts due to Banks
Following the recommendations of the Narasimham Committee , the Recovery
of Debts due to Banks and Financial Institutions Act, 1993 was enacted. The
purpose of this legislation is to provide for the establishment of a tribunal
for speedy resolution of litigation and recovery of debts owed to banks or
financial institutions. This act creates tribunals before which the banks or
the financial institutions can file a suit for recovery of the amounts due to
them. However, if a scheme of reconstruction is pending before the Board for
Industrial and Financial Reconstruction, under the Sick Industrial Companies
(Special Provision) Act, 1985, no proceeding for recovery can be initiated or
continued before the tribunals.
As part of their effort to continue bank reform, the Reserve Bank of India
announced a series of measures in the credit policy for fiscal 1999 and fiscal
2000 aimed at deregulating and strengthening the financial system.
Credit Policy for Fiscal 1999
In the monetary and credit policy for fiscal 1999, the following major
changes regarding banks were announced:
o The minimum maturity of term deposits was reduced from 30 days to 15
days;
o Differential interest rates were permitted on term deposits of
different sizes, but of the same maturity; and
o To facilitate flow of credit to small borrowers the lending rates for
loans below Rs. 200,000 were not to exceed the prime lending rate.
The major changes regarding banks and long-term lending institutions
announced in the mid-term review of the monetary and credit policy for fiscal
1999 included:
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o Regulations were tightened to require provisioning for investment in
government-guaranteed loans;
o Risk weights of 2.5% for central government securities and other
approved securities and 20.0% for advances guaranteed by state
governments which remained in default were stipulated effective from
fiscal 2000;
o Effective from fiscal 1999, foreign exchange open positions carry a
100.0% risk weight;
o General provisioning of a minimum of 0.25% was introduced for standard
assets effective from fiscal 2000;
o Minimum capital to risk assets ratio for banks was raised from 8.0% to
9.0% effective from fiscal 2000; and
o The period for classifying assets in the sub-standard category as
doubtful will be reduced from 24 months to 18 months effective
year-end fiscal 2001.
Credit Policy for Fiscal 2000
In the monetary and credit policy for fiscal 2000, the Reserve Bank of
India reduced the cash reserve ratio to 10.0%. In addition, several structural
reform measures in the banking sector were introduced including:
o The introduction of differential prime lending rates for various
maturities;
o Permission for banks to provide fixed rate loans; and
o Permission for long-term lending institutions to enter the repo market
for short-term liquidity management before making the call-money
market a purely inter-bank market.
The mid-term review of the monetary and credit policy for fiscal 2000
introduced the following major changes applicable to the financial sector:
o The cash reserve ratio was reduced from 10.0% to 9.0% for banks;
o A market risk weight of 2.5% was introduced in respect of all bank
investments in government securities (on other bank investments also
from fiscal 2001); and
o The exposure limit in respect of a single borrower was reduced from
25.0% to 20.0% of the capital funds of banks and financial
institutions effective from April 1, 2000. However, at October 31,
1999, if the exposure level of any institution or bank to a single
borrower was in excess of 20.0% of its capital funds, it would have a
two year period to reduce exposure to 20.0%, i.e., by October 31,
2001.
Credit Policy for Fiscal 2001
In the monetary and credit policy for fiscal 2001, the Reserve Bank of
India introduced the following structural reform measures in the banking
sector:
o Requirement of a minimum of 85.0% daily maintenance of cash reserve
ratio balances by banks was reduced to 65.0%;
o Financial institutions were given greater flexibility to fix interest
rates on term deposits; and
o A broad approach towards "universal banking" was outlined. A
development finance institution intending to transform itself into a
bank would need to prepare a transition path in order to fully comply
with the regulatory requirements of a bank. The institution concerned
may consult the Reserve Bank of India for such transition
arrangements. The Reserve Bank of India would consider such requests
on a case-by-case basis.
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Recommendations of the Working Group on Restructuring Weak Public Sector
Banks
The Reserve Bank of India constituted a working group on restructuring
weak public sector banks which submitted its report in October 1999. The group
has suggested a restructuring program which covers the following:
o Operational restructuring involving
-- Changes in the method of operations;
-- Adoption of modern technology;
-- Resolution of the problem of high non-performing loans; and
-- Reduction in cost of operations;
o Organizational restructuring aimed at improved governance and
increased management involvement and efficiency;
o Financial restructuring including the investment of funds by the
government on fulfillment of certain conditions; and
o Restructuring providing for legal changes and institution building for
supporting the restructuring process.
Working Group to Review Deposit Insurance in India
The working group constituted by the Reserve Bank of India to review the
role of deposit insurance in India submitted its report in October 1999. The
group has recommended changes with respect to the following in the existing
system of deposit coverage:
o Institutions to be brought within the ambit of deposit insurance;
o Regulatory systems to be set up;
o Introduction of a risk-based premium;
o Parameters for the assessment of risk; and
o Parameters for the capital of a deposit insurance agency.
The Reserve Bank of India has released the report for public discussion.
Reforms of the Non-Bank Finance Companies
The standards relating to income recognition, provisioning and capital
adequacy were prescribed for non-bank finance companies in June 1994. The
registered non-bank finance companies were required to achieve a minimum
capital adequacy of 6.0% by year-end fiscal 1995 and 8.0% by year-end fiscal
1996 and to obtain a minimum credit rating. To encourage the companies
complying with the regulatory framework, the Reserve Bank of India announced in
July 1996 certain liberalization measures under which the non-bank finance
companies registered with it and complying with the prudential norms and credit
rating requirements were granted freedom from the ceiling on interest rates on
deposits and amount of deposits. A new set of regulatory measures were
announced by the Reserve Bank of India in January 1998. The Reserve Bank of
India has presently stipulated a cap of 16.0% on interest rates on the deposits
raised from the public by the non-bank finance companies.
Efforts have also been made to integrate non-bank finance companies into
the mainstream financial sector. The first phase of this integration covered
measures relating to registrations and standards. These include requiring
non-bank finance companies to register and to have minimum net owned funds of
Rs. 2.5 million. Other measures introduced include requiring non-bank finance
companies to maintain a certain percentage of liquid assets and to
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create a reserve fund. The percentage of liquid assets to be maintained by
non-bank finance companies has been revised uniformly upwards and beginning in
April 1999, 15.0% of public deposits must be maintained.
The focus of supervision has now shifted to non-bank finance companies
accepting public deposits. This is because these companies will be subject to
deposit regulations and standards. A task force on non-bank finance companies
set up by the government of India submitted its report in October 1998, and
recommended several steps to rationalize the regulation of non-bank finance
companies. Accepting these recommendations, Reserve Bank of India issued new
guidelines for non-bank finance companies, which were as follows:
o A minimum net owned fund of Rs. 2.5 million is mandatory before
existing non-bank finance companies may accept public deposits;
o A minimum investment grade rating is compulsory for loan and
investment companies accepting public deposits, even if they have the
minimum net owned funds;
o Permission to accept public deposits was also linked to the level of
capital to risk assets ratio. Different capital to risk assets ratio
levels for non-bank finance companies with different ratings were
specified; and
o Non-bank finance companies were advised to restrict their investments
in real estate to 10.0% of their net owned funds.
In the Reserve Bank of India's monetary and credit policy for fiscal 2000,
the Reserve Bank of India stipulated a minimum capital base of Rs. 20 million
for all new non-bank finance companies.
Regulations Review Authority
In March 1999, the Reserve Bank of India set up a Regulations Review
Authority to provide an opportunity to the public at large to seek
justification for and suggest deletion or modification of any regulation,
circular or return issued, or required by the Reserve Bank of India. This
authority is neither a forum for grievance redressal nor a policy-making forum.
This authority will, however, convey its views on an application to the
relevant department of the Reserve Bank of India.
Based on the recommendations of this authority, some of the existing
regulations may come under review over time.
Insurance
The R.N. Malhotra Committee was set up in April 1993 to recommend reforms
in the insurance industry. This committee submitted its report on January 7,
1994 and its major recommendations were as follows:
o the entry of the private sector in the insurance industry should be
allowed;
o India's two insurance corporations, the Life Insurance Corporation of
India and General Insurance Corporation of India should be privatized,
with the government retaining a 50.0% stake;
o the licensing system for surveyors should be abolished;
o the tariff regime in general insurance must continue;
o contributions to pension schemes must be exempt from tax;
o settlement of claims must be expedited; and
o high priority should be given to activating the regulatory apparatus.
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As a first step towards implementation of the recommendations of the
Malhotra Committee on Reforms in the Insurance Sector, the budget for fiscal
1996 indicated that an independent regulatory authority would be set up for the
insurance industry, and the Insurance Regulatory Authority was set up in 1996.
In December 1999, the parliament approved the Insurance Regulatory and
Development Authority Bill, 1999. This bill has opened up the Indian insurance
sector for foreign and private investors. This bill allows foreign equity
participation in new insurance companies of up to 26.0%. The new company should
have a minimum paid up equity capital of Rs. 1.0 billion to carry out the
business of life insurance or general insurance or Rs. 2.0 billion to carry out
exclusively the business of reinsurance. An Insurance Regulatory and
Development Authority has been set up to regulate, promote and ensure orderly
growth of the insurance industry.
In the monetary and credit policy for fiscal 2001, the Reserve Bank of
India issued guidelines governing the entry of banks and financial institutions
into the insurance business. The objective of the guidelines is to allow only
financially strong banks and financial institutions to enter the insurance
business. These guidelines permit banks and financial institutions to enter the
business of underwriting insurance through joint ventures if they meet the
stipulated criteria relating to their net worth, capital adequacy ratio,
profitability track record and level of non-performing loans and the
performance of their existing subsidiary companies. These guidelines specify
the maximum percentage of the paid up capital and of the net worth of the bank
or financial institution that can be invested in the joint venture. To keep the
risks associated with each of the businesses distinct, the guidelines envisage
an "arms length" relationship between the bank or financial institution and the
insurance company.
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SUPERVISION AND REGULATION
The main legislation governing commercial banks in India is the Banking
Regulation Act. Other important legislations include the Reserve Bank of India
Act, the Negotiable Instruments Act and the Banker's Books Evidence Act.
Additionally, the Reserve Bank of India, from time to time, issues guidelines,
to be followed by the banks.
Reserve Bank of India Regulations
Commercial banks in India are required under the Banking Regulation Act to
obtain a license from the Reserve Bank of India to carry on banking business in
India. Before granting the license, the Reserve Bank of India must be satisfied
that certain conditions are complied with, including (i) that the bank has the
ability to pay its present and future depositors in full as their claims
accrue; (ii) that the affairs of the bank will not be or are not likely to be
conducted in a manner detrimental to the interests of present or future
depositors; (iii) that the bank has adequate capital and earnings prospects;
and (iv) that the public interest will be served if such license is granted to
the bank. The Reserve Bank of India can cancel the license if the bank fails to
meet the above conditions or if the bank ceases to carry on banking operations
in India.
We, being licensed as a banking company, are regulated and supervised by
the Reserve Bank of India. The Reserve Bank of India requires us to furnish
statements, information and certain details relating to our business. It has
issued guidelines for commercial banks on recognition of income, assets,
maintenance of capital adequacy and provisioning for non-performing assets. The
Reserve Bank of India has set up a Board for Financial Supervision, under the
chairmanship of the Governor of the Reserve Bank of India. This Board is
assisted by the Department of Financial Supervision of the Reserve Bank of
India in supervising commercial banks and financial institutions. The
appointment of the auditors of the banks is subject to the approval of the
Reserve Bank of India. The Reserve Bank of India can direct a special audit in
the interest of the depositors or in the public interest.
Regulations relating to the Opening of Branches
Banks are required to obtain licenses from the Reserve Bank of India to
open new branches. Permission is granted based on factors such as the financial
condition and history of the company, its management, adequacy of capital
structure and earning prospects and the public interest. The Reserve Bank of
India may cancel the license for isolations of the conditions under which its
granted. Under the banking license granted to us by the Reserve Bank of India,
we are required to have at least 25.0% of our branches located in rural and
semi-urban areas. A rural area is defined as a center with a population of less
than 10,000. A semi-urban area is defined as a center with population of
greater than 10,000 but less than 100,000. These population figures relate to
the 1991 census conducted by the government of India.
Capital Adequacy Requirements
The Reserve Bank of India has laid down minimum capital adequacy standards
for banks based on the guidelines of the Basle Committee on Banking Regulations
and Supervisory Practices, 1988. Under these guidelines, we are required to
maintain a minimum ratio of capital to risk adjusted assets and off-balance
sheet items of 8.0%, at least half of which must be Tier 1 capital. The Reserve
Bank of India, in its credit policy announced in October 1998, has proposed to
increase the minimum capital adequacy ratio to 9.0% effective March 31, 2000.
The total capital of a banking company is classified into Tier 1 and Tier
2 capital. Tier 1 capital, the core capital, provides the most permanent and
readily available support against unexpected losses. It comprises paid-up
capital and reserves consisting of any statutory reserves, free reserves and
capital reserve in terms of Indian Income Tax Act as reduced by equity
investments in subsidiaries, intangible assets, gap in provisioning and losses
in the current period and those brought forward from the previous period.
Tier 2 capital consists of undisclosed reserves, revaluation reserves (at
a discount of 55.0%), general provisions and loss reserves (allowed up to a
maximum of 1.25% of weighted risk assets), hybrid debt capital instruments
(which combine certain features of both equity and debt securities) and
subordinated debt and redeemable cumulative non-convertible preferred equity
with an initial maturity of not less than five years. Any subordinated debt is
subject to progressive discounts each year for inclusion in Tier 2 capital and
total subordinated debt considered as Tier 2 capital cannot exceed 50.0% of
Tier 1 capital. A bank's investment in Tier 2 bonds issued by
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other banks is subject to a ceiling of 10.0% of the bank's total capital. Tier 2
capital cannot exceed Tier 1 capital. The Banking Regulation Act does not allow
banks established on or after January 15, 1937 to issue preferred equity.
Risk adjusted assets and off-balance sheet items considered for
determining the capital adequacy ratio are the risk weighted total of specified
funded and non-funded exposures. Degrees of credit risk expressed as percentage
weighting have been assigned to various balance sheet asset items and
conversion factors to off-balance sheet items. The value of each item is
multiplied by the relevant weight or conversion factor to produce risk-adjusted
values of assets and off-balance-sheet items. Guarantees and documentary
credits are treated as similar to funded exposure and are subject to similar
risk weight. All foreign exchange open position limits of the bank carry a
100.0% risk weight. Capital requirements have also been prescribed for open
foreign currency exposures and open positions in gold. Starting March 31, 2000,
investment in government and approved securities will also be assigned a risk
weight for fluctuation in prices. The aggregate risk weighted assets are taken
into account for determining the capital adequacy ratio.
Loan Loss Provisions and Non-performing Assets
In March 1994, the Reserve Bank of India issued formal guidelines on
income recognition, asset classification, provisioning standards and valuation
of investments applicable to long-term lending institutions, which are revised
from time to time. Similar guidelines are also applicable to ICICI Bank. These
guidelines are applied for the calculation of non-performing assets under
Indian GAAP. The discussion of asset quality in this annual report is under US
GAAP and the US GAAP standards applied are set forth in "`Business--Risk
Management--Non-Performing Portfolio."
The principal features of these Reserve Bank of India guidelines, which
have been implemented with respect to ICICI's loans, debentures, lease assets,
hire purchases and bills are set forth below.
Non-Performing Assets
A non-performing asset is an asset in respect of which any amount of
interest or principal has remained past due for more than two quarters. In
particular, loans are not classified as non-performing until the borrower has
missed two interest payments (180 days) or two principal payments (180 days).
Interest in respect of non-performing assets is not recognized or credited to
the income account unless collected.
Asset Classification
Assets are classified as described below:
o Standard Assets. Assets that do not have any problems or do not carry
more than normal risk attached to the business.
o Sub-Standard Assets. Assets that are non-performing assets for a
period not exceeding two years (18 months by March 31, 2001).
o Doubtful Assets. Assets that are non-performing assets for more than
two years and have not been written off, either wholly or partially
(18 months by March 31, 2001).
o Loss Assets. Assets that are considered uncollectable and identified
as a loss by us, the Reserve Bank of India or our external auditors.
Renegotiated or rescheduled loans must have no past due amounts for one
year after renegotiation or rescheduling for the loan to be upgraded.
Provisioning and Write-Offs
Provisions are based on guidelines specific to the classification of the
assets. The following guidelines apply to the various asset classifications:
o Standard Assets. A general provision of 0.25% is required.
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o Sub-Standard Assets. A general provision of 10.0% is required.
o Doubtful Assets. A 100.0% write-off is required to be taken against
the unsecured portion of the doubtful asset and charged against
income. The value assigned to the collateral securing a loan is the
amount reflected on the borrower's books or the realizable value
determined by third party appraisers. In cases where there is a
secured portion of the asset, depending upon the period for which the
asset remains doubtful, a 20.0% to 50.0% provision is required to be
taken against the secured asset as follows:
-- Up to one year: 20.0% provision
-- One to three years: 30.0% provision
-- More than three years: 50.0% provision
o Loss Assets. The entire asset is required to be written off or
provided for.
While the provisions as indicated above are mandatory, a higher provision
in a loan amount would be required if the auditors considered it necessary.
The Reserve Bank of India has also issued guidelines for classification
and valuation of investments.
Regulations relating to Making Loans
The provisions of the Banking Regulation Act govern making loans by banks
in India. The Reserve Bank of India issues directions covering the loan
activities of banks. Some of the major guidelines of Reserve Bank of India,
which are now in effect, are as follows:
o The Reserve Bank of India has prescribed norms for bank lending to
non-bank financial companies.
o Banks are free to determine their own lending rates but each bank must
declare its Prime Lending Rate as approved by the board of directors.
Prime lending rate is the minimum rate of interest charged by banks on
advances of over Rs. 200,000. Separate Prime Lending Rates can be
fixed for short-term and long-term credit. Each bank should also
indicate the maximum spread over the Prime Lending Rate for all credit
exposures other than consumer credit. The interest charged by banks on
advances up to Rs. 200,000 to any one entity (other than most personal
banking loans) must not exceed the Prime Lending Rate. Interest rates
in certain categories of advances are regulated by the Reserve Bank of
India.
The Reserve Bank of India, however, does not require interest rates to be
linked to the bank's Prime Lending Rate in respect of the following categories:
o loans covered by refinance scheme of financial institutions;
o interest rates on bank lending to intermediary agencies including
housing finance intermediary agencies; and
o bill discounting by banks; and advances or overdrafts against domestic
and non-resident deposits.
With respect to cash credit facilities (revolving asset-backed overdraft
facilities for meeting working capital needs), up to 80.0% of the facility can
be in the form of a demand loan.
Penalty interest represents additional interest charged over and above the
base rate of interest on certain events, including default in the repayment of
loans. Penalty interest is not chargeable for loans up to Rs. 25,000. For loans
over Rs. 25,000, penalty interest cannot exceed 2.0%.
There are guidelines on loans against equity shares in respect of amount,
margin and purpose.
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Directed Lending
Priority Sector Lending
The Reserve Bank of India has established guidelines requiring banks to
lend a minimum of 40.0% of their net bank credit (total domestic loans less
marketable debt instruments and certain exemptions permitted by the Reserve
Bank of India from time to time. Presently specified categories of deposits
from non-resident Indians are exempted) to certain specified sectors called
priority sectors. Priority sectors include small-scale industries, the
agricultural sector, food and agro-based industries, small business enterprises
and weaker sections of society.
The Reserve Bank of India also has set out the minimum percentage of net
bank credit that banks may direct to the priority sectors. The minimum
percentage of credit to agriculture sector is 18.0%. The balance can be lent to
the following:
o Credit to small scale industrial units which are entities engaged in
manufacturing, processing and providing services and whose investment
in plant and machinery does not exceed Rs. 10 million;
o Credit to small businesses including small road and water transport
operators, retail traders and professional and other self employed
persons;
o Educational and other loans to the weaker sections of society; and
o Direct home loans up to Rs. 1 million disbursed in urban and
metropolitan areas and investment in bonds of National Housing Bank
and Housing and Urban Development Corporation exclusively for the
financing of housing;
Any shortfall in the amount required to be lent to the priority sectors
may be required to be deposited with developmental banks like National Bank for
Agriculture and Rural Development and Small Industries Development Bank of
India. These deposits can be for a period of one year or five years and
presently carry interest at 8.0% per annum and 11.5% per annum, respectively.
The Reserve Bank of India requires banks to lend up to 3.0% of our
incremental deposits in the previous fiscal year towards housing finance. This
can be in the form of home loans to individuals or subscription to the
debentures and bonds of National Housing Bank and housing development
institutions recognized by the government of India.
Export Credit
The Reserve Bank of India also requires us to make loans to exporters at
concessional rates of interest. This enables exporters to have access to an
internationally competitive financing option. Pursuant to existing guidelines,
12.0% of our net bank credit is required to be in the form of export credit. We
provide export credit for pre-shipment and post-shipment requirements of
exporter borrowers in rupees and foreign currencies.
Regulations relating to Bridge Loans
Banks may consider approval of bridge loan or interim finance for a
maximum period of four months against commitment made by financial institutions
or other banks only in cases, where the lending institution faces temporary
liquidity constraint. These loans are subject to conditions specified by the
Reserve Bank of India.
o The bank extending bridge loan or interim finance must obtain prior
approval of other banks and financial institutions, which have
approved the term loans; and
o The approving bank must obtain a commitment from other banks and
financial institutions that the latter would directly remit the amount
of term loan to it at the time of disbursement.
Credit Exposure Limits
As a prudent measure aimed at better risk management and avoidance of
concentration of credit risk, the Reserve Bank of India has prescribed credit
exposure limits for banks in respect of their lending to individual borrowers
and borrower groups.
The limits set by the Reserve Bank of India are as follows:
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o exposure to individual borrowers must not exceed 25.0% of capital
funds of the bank (20.0% by April 1, 2000);
o exposure to a borrower group must not exceed 50.0% of capital funds of
the bank. In the case of infrastructure projects, such as power,
telecommunications, road and port projects, an additional exposure of
10.0% of capital funds is allowed; and
o exposure to individuals against shares or debentures cannot exceed Rs.
2 million if the shares or debentures are in book-entry form and Rs. 1
million if they are in physical form.
Exposure is the aggregate of:
o all approved fund-based limits;
o investments in shares, debentures and commercial papers of companies
and public sector undertakings; and
o 50.0% of approved non-fund-based limits, underwriting and similar
commitments.
Capital funds include paid-up capital and free reserves excluding
revaluation reserves pursuant to accounts audited and published under Indian
GAAP.
Our loan exposures to individual borrowers and borrower groups are within
the above limits, except in some cases where we have obtained the approval of
Reserve Bank of India for exceeding the above limits.
To ensure that exposures are evenly spread, the Reserve Bank of India
requires banks to fix internal limits of exposure to specific sectors. These
limits are subject to periodical review by the banks. We have fixed a ceiling
of 15.0% on our exposure to any one industry and monitor our exposures
accordingly. Where financial fundamentals and sponsors' backing are strong, our
exposures have exceeded these limits. However, these exposures are within the
individual and borrower group limits specified by the Reserve Bank of India.
Regulations relating to Investments
There are no limits on the amount of investments by banks in
non-convertible debt instruments. However, credit exposure limits specified by
the Reserve Bank of India in respect of a bank's lending to individual
borrowers and borrower groups apply in respect of these investments. The
Reserve Bank of India requires that the net incremental investment by banks in
equity securities in a fiscal year cannot exceed 5.0% of the incremental
deposits in the previous fiscal year. Investments in debentures convertible
into equity and equity related mutual funds are included in this 5.0% limit. In
April 1999, the Reserve Bank of India, in its monetary and credit policy stated
that the investment by a bank in subordinated debt instruments, representing
Tier 2 capital, issued by other banks and financial institutions should not
exceed 10.0% of the investing bank's capital including Tier 2 capital and free
reserves. We have complied with this requirement.
Restrictions on Investments in a Single Company
No bank may hold shares in any company exceeding 30.0% of the paid up
share capital of that company or 30.0% of its own paid up share capital and
reserves, whichever is less.
Limit on Transactions through Individual Brokers
The guidelines issued by the Reserve Bank of India require banks to
empanel brokers for transactions in securities. The guidelines also require
that a disproportionate part of the bank's business should not be transacted
only through one broker or a few brokers. The Reserve Bank of India specifies
that not more than 5.0% of the total transactions through empanelled brokers
can be transacted through one broker. If for any reason this limit is breached,
the Reserve Bank of India has stipulated that the board of directors of the
bank concerned should ratify such action.
Prohibition on Short-Selling
The Reserve Bank of India does not permit short selling of securities by
banks.
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Valuation of Investments
In terms of the Reserve Bank of India guidelines, new private sector banks
like us are required to mark-to-market their entire investment portfolio each
year while public sector banks have been gradually moved to 100% mark-to-market
in a phased market manner. At present, public sector banks are required to
provide 75% of their portfolio on a mark-to-market basis. Valuation norms
prescribed by the Reserve Bank of India, which must be followed, are as
follows:
o fixed income securities are valued on the basis of yield to maturity
of or linked to government of India securities except that debentures
issued by corporations are valued at cost if interest is serviced
regularly and treated as non-performing loans if not so serviced;
o equity shares are valued at book value as per the latest balance sheet
of the investee company except that the holding is valued at Rupee. 1
if the balance sheet is not available; and
o mutual funds are valued at their latest net asset value declared by
the fund.
Short-term instruments like treasury bills and commercial paper are to be
valued at cost.
A committee of the Reserve Bank of India has proposed new guidelines for
the valuation of investments from fiscal 2001. These guidelines, if implemented
by the Reserve Bank of India, would require banks to classify their entire
portfolio of approved securities under three categories namely "held for
trading", "available for sale" and "permanent". The permanent component would
be required not to exceed 25.0% of the total investment in approved securities.
Securities held in the "permanent" category would have to be valued at cost and
any premium paid over face value would be amortized over the period of maturity
of the instrument. The other two components would have to be marked to market
on the basis of the bank's own yield curve subject to the satisfaction of
auditors. Any gain or loss on the revaluation of investments in the "held for
trading" category would have to be recognized in the income account.
Depreciation should be recognized in the income account. However, the
appreciation, being unrealized, would be appropriated to an investment
fluctuation reserve through the income account. The gain or loss on revaluation
of investments in the "available for sale" category would have to be taken to
the investment fluctuation reserve account without routing through the income
account. If the balance in the reserve account is insufficient to provide for
any loss on revaluation, provision for such loss would have to be made in the
income account. Banks would be able to shift investments from one category to
another category only with the approval of their board of directors. These
proposed new guidelines are still under discussion by the Reserve Bank of
India.
Regulations relating to Deposits
The Reserve Bank of India has permitted banks to independently determine
rates of interest offered on fixed deposits. However, no bank is permitted to
pay interest on current account deposits. Further, banks can pay interest of
4.0% per annum on savings deposits, which was 4.5% until year-end fiscal 2000.
In respect of savings and time deposits accepted from employees, we are
permitted by the Reserve Bank of India to pay an additional interest of 1.0%
over the interest payable on deposits from the public.
Domestic time deposits can have a minimum maturity of 15 days and maximum
maturity of 10 years. Time deposits from non-resident Indians denominated in
foreign currency can have a minimum maturity of one year and maximum maturity
of three years. Rupee time deposits from non-resident Indians can have a
minimum maturity of six months and maximum maturity of three years.
Starting April 1998, the Reserve Bank of India has permitted banks the
flexibility to offer varying rates of interests on domestic deposits of the
same maturity subject to the following conditions:
o Time deposits are of Rs. 1.5 million and above; and
o Interest is paid in accordance with the schedule of interest rates
disclosed in advance by the bank and not pursuant to negotiation
between the depositor and the bank.
Deposit Insurance
Demand and time deposits of up to Rs. 100,000 (US$2,300) accepted by
Indian banks have to be mandatorily insured with the Deposit Insurance and
Credit Guarantee Corporation, a wholly-owned subsidiary of the Reserve Bank of
India. Banks are required to pay the insurance premium for the eligible amount
to the Deposit Insurance and
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Credit Guarantee Corporation on a semi-annual basis. The cost of the insurance
premium cannot be passed on to the customer.
Regulations relating to Knowing the Customer
The Reserve Bank of India requires banks to open accounts only after
verifying the identity of customers as to their name, residence and other
details to ensure that the account is being opened by the customer in his own
name. To open an account, a prospective customer requires an introduction by:
o an existing customer who has had his own account with the bank for at
least six months duration and has satisfactorily conducted that
account; or
o a well known person in the local area where the prospective customer
is residing.
If the prospective customer does not have an introducer, documents of the
prospective customer, like his identity card, passport or details of bank
accounts with other banks, are required to be submitted.
Legal Reserve Requirements
Cash Reserve Ratio
A banking company such as ICICI Bank is required to maintain a specified
percentage of its demand and time liabilities, excluding inter-bank deposits,
by way of a cash reserve with itself and by way of a balance in a current
account with the Reserve Bank of India. In April 2000, the Reserve Bank of
India in its credit and monetary policy announced the new cash reserve ratio to
be maintained by scheduled commercial banks of 8.0% which was raised to 8.5% in
July 2000. The following liabilities are not considered in the calculation of
the cash reserve ratio:
o inter-bank liabilities;
o liabilities to primary dealers;
o repatriable and non-repatriable deposits from non-resident
Indians;
o foreign currency deposits from non-resident Indians; and
o refinancing from the Reserve Bank of India and other institutions
permitted to offer refinancing to banks.
The Reserve Bank of India pays no interest on the cash reserves up to 3.0%
of the demand and time liabilities and pays 4.0% on the balance.
The cash reserve ratio has to be maintained on an average basis for a
fortnightly period and should not be below 65.0% of the required cash reserve
ratio on any particular day except the last business day of the fortnight. On
the last business day of the fortnight, no restrictions apply.
Ever since the Reserve Bank of India introduced the financial sector
reforms, the goal has been to reduce the cash reserve ratio. It has been
indicated by the Reserve Bank of India that the ratio would ultimately be
reduced to the statutory minimum of 3.0%. In July 2000, the Reserve Bank of
India raised the cash reserve ratio by 0.5 percentage points to 8.5% as part of
the measures introduced to contain the sudden depreciation of the rupee against
the US dollar. This depreciation of the rupee was due to excess demand
conditions in the foreign exchange market arising out of large payments for
crude oil imports and a slowdown in capital inflows.
Statutory Liquidity Ratio
In addition to the cash reserve ratio, a banking company such as ICICI
Bank is required to maintain a specified percentage of its net demand and time
liabilities by way of liquid assets like cash, gold or approved securities. The
percentage of this liquidity ratio is fixed by the Reserve Bank of India from
time to time. Currently, the Reserve Bank of India requires banking companies
to maintain a liquidity ratio of 25.0%.
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Regulations on Asset Liability Management
At present, Reserve Bank of India regulations for asset liability
management require banks to draw up asset-liability gap statements separately
for rupee and for four major foreign currencies. These gap statements are
prepared by scheduling all assets and liabilities according to the stated and
anticipated re-pricing date, or maturity date. These statements have to be
submitted to the Reserve Bank of India on a quarterly basis. The Reserve Bank
of India has advised banks to actively monitor the difference in the amount of
assets and liabilities maturing or being re-priced in a particular period and
place internal prudential limits on the gaps in each time period, as a risk
control mechanism. Additionally, the Reserve Bank of India had asked banks to
manage their asset-liability structure such that the negative liquidity gap in
the 1-14 day and 15-28 day time periods does not exceed 20.0% of cash outflows
in these time periods. This 20.0% limit on negative gaps has been made
mandatory with effect from April 1, 2000.
Foreign Currency Dealership
Reserve Bank of India has granted us a full-fledged authorized dealers'
license to deal in foreign exchange through our designated branches. Under this
license, we have been granted permission to:
o engage in foreign exchange transactions in all currencies;
o open and maintain foreign currency accounts abroad;
o raise foreign currency and rupee denominated deposits from non
resident Indians;
o grant foreign currency loans to on-shore and off-shore corporations;
o open documentary credits;
o grant import and export loans;
o handle collection of bills, funds transfer services;
o issue guarantees; and
o enter into derivative transactions and risk management activities that
are incidental to our normal functions authorized under our
organizational documents.
Our foreign exchange operations are subject to the guidelines specified by
the Reserve Bank of India in the exchange control manual. As an authorized
dealer, we are required to enroll as a member of the Foreign Exchange Dealers
Association of India, which prescribes the ground rules relating to foreign
exchange business in India.
Authorized dealers like us are required to determine our limits on open
positions and maturity gaps in accordance with Reserve Bank of India guidelines
and these limits are approved by the Reserve Bank of India. At present, the
limit for our over-night open positions is Rs. 1,650 million. Further, we are
permitted to hedge foreign currency loan exposures of Indian corporations in
the form of interest rate swaps, currency swaps and forward rate agreements,
subject to certain conditions.
Statutes Governing Foreign Exchange and Cross-Border Business Transactions
The foreign exchange and cross border transactions undertaken by banks are
subject to the provisions of Foreign Exchange Regulation Act. All branches
should monitor all non-resident accounts to prevent money laundering. These
transactions will be regulated by the Foreign Exchange Management Act and the
Prevention of Money Laundering Act, once they are put in force.
Requirements of the Banking Regulation Act
Prohibited Business
The Banking Regulation Act specifies the business activities in which a
bank may engage. Business activities other than the specified activities are
prohibited to be undertaken by a bank.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to
which not less than 20.0% of the profits of each year before dividends must be
transferred. If there is an appropriation from this account, the bank is
required to report the same to the Reserve Bank of India within 21 days,
explaining the circumstances leading to such appropriation.
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Restrictions on Payment of Dividends
The Banking Regulation Act requires that a bank shall pay dividend on its
shares only after all its capitalized expenses (including preliminary expenses,
organization expenses, share selling commission, brokerage, amounts of losses
and any other item of expenditure not represented by tangible assets) have been
completely written off. The government of India may exempt banks from this
provision by issuing a notification on the recommendation of the Reserve Bank
of India. We have obtained approval to write off, over a period of three years
including fiscal 2000, our issue expenses incurred in respect of our ADS
program for preparing our accounts as provided under the Banking Regulation
Act.
Prior approval of the Reserve Bank of India is required for a dividend
payment above 25.0% of par value of a company's shares or for an interim
dividend payment.
The government of India may, on recommendation of the Reserve Bank of
India, exempt a bank from requirements relating to its reserve fund and the
restrictions on dividend payment.
Restriction on Share Capital and Voting Rights
Banks can issue only ordinary shares. Banks incorporated before January
15, 1937 can also issue preferential shares. The Banking Regulation Act
specifies that no shareholder in a banking company can exercise voting rights
on poll in excess of 10.0% of total voting rights of all the shareholders of
the banking company.
Restriction on Transfer of Shares
Reserve Bank of India approval is required to obtain its approval before
we can register the transfer of shares for an individual or group which
acquires 5.0% or more of our total paid up capital.
Regulatory Reporting and Examination Procedures
The Reserve Bank of India is empowered under the Banking Regulation Act to
inspect a bank. The Reserve Bank of India monitors prudential parameters at
quarterly intervals. To this end and to enable off-site monitoring and
surveillance by the Reserve Bank of India, the banks are required to report to
the Reserve Bank of India on aspects such as:
o assets, liabilities and off-balance sheet exposures;
o the risk weighting of these exposures, the capital base and the
capital adequacy ratio;
o the unaudited operating results for each quarter;
o asset quality;
o concentration of exposures;
o connected and related lending and the profile of ownership, control
and management; and
o other prudential parameters.
The Reserve Bank of India also conducts periodical on-site inspections on
matters relating to the bank's portfolio, risk management systems, internal
controls, credit allocation and regulatory compliance, at intervals ranging
from one to three years. We have been subject to the on-site inspection by the
Reserve Bank of India at yearly intervals. The inspection report, along with
the report on actions taken by us, has to be placed before our board of
directors. On approval by our board of directors, we are required to submit the
report on actions taken by us to the Reserve Bank of India. The Reserve Bank of
India also discusses the report with our management team including our chief
executive officer.
The Reserve Bank of India also conducts on-site supervision of our
selected branches with respect to their general operations and foreign exchange
related transactions.
Penalties
The Reserve Bank of India can impose penalties on banks and its employees
in case of infringement of regulations under the Banking Regulation Act. The
penalty can be a fixed amount or be related to the amount involved in any
contravention of the regulations. The penalty may also include imprisonment.
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Assets to be Maintained in India
Every bank is required to ensure that its assets in India (including
import-export bills drawn in India and Reserve Bank of India approved
securities, even if the bills and the securities are held outside India) are
not less than 75.0% of its demand and time liabilities in India.
Secrecy Obligations
Our obligations relating to maintaining secrecy arise out of common law
principles governing our relationship with our customers. We cannot disclose
any information to third parties except under clearly defined circumstances.
The following are the exceptions to this general rule:
o where disclosure is required to be made under any law;
o where there is an obligation to disclose to the public;
o where we need to disclose information in our interest; and
o where disclosure is made with the express or implied consent of the
customer.
We are required to comply with the above in furnishing any information to
any parties. We are also required to disclose information if ordered to do so
by a court. The Reserve Bank of India may, in the public interest, publish the
information obtained from the bank. Under the provisions of the Banker's Books
Evidence Act, a copy of any entry in a bankers' book, such as ledgers, day
books, cash books and account books certified by an officer of the bank may be
treated as prima facie evidence of the transaction in any legal proceedings.
Appointment and Remuneration of our Chairman, Managing Director and Other
Directors
We require prior approval of the Reserve Bank of India to appoint our
chairman and managing director and any other directors and to fix their
remuneration. The Reserve Bank of India is empowered to remove such an
appointee on the grounds of public interest, interest of depositors or to
ensure the proper management of the bank. Further, the Reserve Bank of India
may order meetings of the bank's board of directors to discuss any matter in
relation to the bank, appoint observers to such meetings and in general may
make such changes to the management as it may deem necessary and can also order
the convening of a general meeting of the company to elect new directors.
SEBI Regulations and Guidelines
The Securities and Exchange Board of India was established to protect the
interests of public investors in securities and to promote the development of,
and to regulate, the Indian securities market. We are subject to Securities and
Exchange Board of India regulations for our capital issuances, as well as our
underwriting, custodial, depositary participant, investment banking, registrar
and transfer agents, broking and debenture trusteeship activities. These
regulations provide for our registration with the Securities and Exchange Board
of India for each of these activities, functions and responsibilities. We are
required to adhere to a code of conduct applicable for these activities.
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EXCHANGE CONTROLS
Restrictions on Conversion of Rupees
There are restrictions on the conversion of rupees into dollars. Before
February 29, 1992, the Reserve Bank of India determined the official value of
the rupee in relation to a weighted basket of currencies of India's major
trading partners. In the February 1992 budget, a new dual exchange rate
mechanism was introduced by allowing conversion of 60.0% of the foreign
exchange received on trade or current account at a market-determined rate and
the remaining 40.0% at the official rate. All importers were, however, required
to buy foreign exchange at the market rate except for certain specified
priority imports. In March 1993, the exchange rate was unified and allowed to
float. In February 1994 and again in August 1994, the Reserve Bank of India
announced relaxations in payment restrictions in the case of a number of
transactions. Since August 1994, the government of India has substantially
complied with its obligations owed to the IMF, under which India is committed
to refrain from using exchange restrictions on current international
transactions as an instrument in managing the balance of payments. Effective
July 1995, the process of current account convertibility was advanced by
relaxing restrictions on foreign exchange for various purposes, such as foreign
travel and medical treatment.
In December 1999, the Indian parliament passed the new Foreign Exchange
Management Act, 1999, which has become effective on June 1, 2000, replacing the
earlier Foreign Exchange Regulation Act, 1973. This new legislation indicates a
major shift in the policy of the government with regard to foreign exchange
management in India. While the Foreign Exchange Regulation Act, 1973, was aimed
at the conservation of foreign exchange and its utilization for the economic
development of the country, the objective of the Foreign Exchange Management
Act, 1999, is to facilitate external trade and promote the orderly development
and maintenance of the foreign exchange market in India.
The Foreign Exchange Management Act, 1999, permits most transactions
involving foreign exchange except those prohibited or restricted by the Reserve
Bank of India. The Foreign Exchange Management Act, 1999, has eased
restrictions on current account transactions. However the Reserve Bank of India
continues to exercise control over capital account transactions (i.e., those
which alter the assets or liabilities, including contingent liabilities, of
persons). The Reserve Bank of India has issued regulations under the Foreign
Exchange Management Act, 1999, to regulate the various kinds of capital account
transactions, including certain aspects of the purchase and issuance of shares
of Indian companies.
Restrictions on Sale of the Equity Shares underlying the ADSs and for
Repatriation of Sale Proceeds
ADSs issued by Indian companies to non-residents have free transferability
outside India. However, under Indian regulations and practice, the approval of
the Reserve Bank of India is required for the sale of equity shares underlying
the ADSs (other than a sale on a stock exchange or in connection with an offer
made under the takeover regulations) by a non-resident of India to a resident
of India as well as for renunciation of rights to a resident of India. Further,
the depositary cannot accept deposits of outstanding equity shares and issue
ADRs evidencing ADSs representing such equity shares. Therefore, an investor in
the ADSs who surrenders ADSs and withdraws equity shares is not permitted
subsequently to deposit such equity shares and obtain ADSs. Nor would a holder
to whom such equity shares are transferred be permitted to deposit such equity
shares. Investors who seek to sell in India any equity shares (other than a
sale on a stock exchange or in connection with an offer made under the takeover
regulations) withdrawn from the depositary facility and to convert the rupee
proceeds from such sale into foreign currency and repatriate such foreign
currency from India will, subject to the foregoing, have to obtain Reserve Bank
of India approval for each such transaction.
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NATURE OF THE INDIAN SECURITIES TRADING MARKET
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the Securities and Exchange Board of India, the BSE and the NSE, and has not
been prepared or independently verified by us or the underwriters, or any of
their respective affiliates or advisors. This is the latest available
information to our knowledge.
Market Price Information
Equity Shares
Our outstanding equity shares are listed and traded on the Calcutta,
Delhi, Madras and Vadodara Stock Exchanges, the BSE and the NSE. The equity
shares were first listed on the Vadodara Stock Exchange in 1997. The prices for
equity shares as quoted in the official list of each of the Indian stock
exchanges are in Indian Rupees.
The following table shows:
o the reported high and low closing prices quoted in rupees for the
equity shares on the NSE; and
o the reported high and low closing prices for the equity shares,
translated into U.S. dollars, based on the noon buying rate on the
last business day of each period presented.
<TABLE>
<CAPTION>
Price per Price per
Equity share(1) Equity share
------------------------------------- -------------------------------------
High Low High Low
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Annual prices:
Fiscal 1998...................... Rs. 54.50 Rs. 35.00 US$ 1.38 US$ 0.89
Fiscal 1999...................... 65.00 20.75 1.53 0.49
Fiscal 2000...................... 275.00 22.70 6.30 0.52
Quarterly prices:
Fiscal 1999:
First Quarter.................... 65.00 32.00 1.53 0.75
Second Quarter................... 44.00 32.10 1.04 0.76
Third Quarter.................... 35.00 21.55 0.82 0.51
Fourth Quarter................... 33.60 20.75 0.79 0.49
Fiscal 2000:
First Quarter.................... 38.60 22.70 0.89 0.52
Second Quarter................... 45.45 32.00 1.04 0.73
Third Quarter.................... 75.00 32.15 1.72 0.74
Fourth Quarter................... 275.00 66.00 6.30 1.51
Fiscal 2001:
First Quarter.................... 279.65 189.70 6.26 4.25
Second Quarter................... 234.00 190.00 5.10 4.14
Monthly prices:
March 2000....................... 275.00 170.00 6.29 3.89
April 2000....................... 279.65 189.70 6.40 4.34
May 2000......................... 240.00 194.50 5.38 4.36
June 2000........................ 234.25 200.05 5.25 4.48
July 2000........................ 234.00 191.00 5.18 4.23
August 2000...................... 216.70 190.00 4.72 4.14
</TABLE>
__________________
(1) Data from the NSE. The prices quoted on the BSE and other stock exchanges
may be different.
On August 31, 2000, the closing price of equity shares on the NSE was Rs.
194.90 equivalent to US$ 4.25 per equity share (US$ 8.50 per ADS on an imputed
basis) translated at the noon buying rate of Rs. 45.90 per US$ 1.00 on August
31, 2000.
At August 25, 2000, there were approximately 110,625 holders of record of
our equity shares, of which 17 had registered addresses in the United States
and held an aggregate of approximately 201,623 equity shares.
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ADSs
Our ADSs, each representing two equity shares, were originally issued in
March 2000 in a public offering and were listed and traded on the New York
Stock Exchange under the symbol IBN. The equity shares underlying the ADSs have
been listed on the Calcutta, Delhi, Madras and Vadodara Stock Exchanges, the
BSE and the NSE.
The following table sets forth, for the periods indicated, the reported
high and low closing prices on the New York Stock Exchange for the outstanding
ADSs traded under the symbol IBN.
Price per ADS
------------------------------
High Low
------------- -------------
Fourth Quarter (from March 28, 2000)........... US$ 15.375 US$ 14.375
Fiscal 2001:
First Quarter.................................. 18.75 11.75
Second Quarter (through August 31, 2000)....... 15.125 10.625
Monthly prices:
March 2000 (from March 28, 2000)............... 15.375 14.375
April 2000..................................... 18.75 11.75
May 2000....................................... 17.5 14.875
June 2000...................................... 16.5 14.375
July 2000...................................... 15.125 10.75
August 2000.................................... 13.375 11.625
The Indian Securities Market
India has a long history of organized securities trading. In 1875, the
first stock exchange was established in Mumbai.
Stock Exchange Regulation
India's stock exchanges are regulated primarily by the Securities and
Exchange Board of India, as well as by the government of India acting through
the Ministry of Finance, Stock Exchange Division, under the Securities
Contracts (Regulation) Act, 1956 and the Securities Contracts (Regulation)
Rules, 1957. The Securities Contracts (Regulation) Rules regulate the
recognition of stock exchanges, the qualifications for membership and the
manner in which contracts are entered into and enforced between members.
The main objective of the Securities and Exchange Board of India, which
was established by the government of India in February 1992, is to promote the
development of and regulate the Indian securities markets and protect the
interests of investors. The Securities and Exchange Board of India may make or
amend an exchange's by-laws and rules, overrule an exchange's governing body
and withdraw recognition of an exchange. In the past, the Securities and
Exchange Board of India's regulation of market practices was limited. The
Securities and Exchange Board of India Act, 1992 granted the Securities and
Exchange Board of India powers to regulate the business of Indian securities
markets, including stock exchanges and other financial intermediaries, promote
and monitor self-regulatory organizations, prohibit fraudulent and unfair trade
practices and insider trading, and regulate substantial acquisitions of shares
and takeovers of companies. The Securities and Exchange Board of India has also
issued guidelines concerning minimum disclosure requirements by public
companies, rules and regulations concerning investor protection, insider
trading, substantial acquisitions of shares and takeovers of companies,
buybacks of securities, employee stock option schemes, stockbrokers, merchant
bankers, mutual funds, credit rating agencies and other capital market
participants.
Recently, the Securities Contracts (Regulation) Act has been amended to
include derivatives of securities and instruments of collective investment in
the definition of "securities". This has been done with a view to develop and
regulate the markets for derivatives. Trading in derivatives is expected to
commence in the near future. The Securities and Exchange Board of India also
set up a committee for the review of Indian securities laws, which has proposed
a draft Securities Bill. The draft Securities Bill, if accepted, will result in
a substantial revision in the laws relating to securities in India. Recently,
the Indian Companies Act, 1956 was amended to introduce significant changes
such as allowing buyback of securities, issuance of sweat equity shares, making
accounting standards issued by the Institute of Chartered Accountants of India
mandatory and relaxing restrictions on inter-corporate investment and loans.
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Public Issuance of Securities
Under the Companies Act, a public offering of securities in India must
generally be made by means of a prospectus, which must contain information
specified in the Companies Act and be filed with the Registrar of Companies
having jurisdiction over the place where a company's registered office is
situated. A company's directors and promoters may be subject to civil and
criminal liability for misstatements in a prospectus. The Companies Act also
sets forth procedures for the acceptance of subscriptions and the allotment of
securities among subscribers and establishes maximum commission rates for the
sale of securities.
The Securities and Exchange Board of India has issued detailed guidelines
concerning disclosures by public companies and investor protection. Prior to
the repeal of certain rules in mid-1992, the Controller of Capital Issues of
the government of India regulated the prices at which companies could issue
securities. The Securities and Exchange Board of India guidelines now permit
existing listed companies to price freely their issues of securities, though
the pricing of initial public offerings is subject to certain restrictions. All
new issues governed by the Securities and Exchange Board of India guidelines
are conditional upon a minimum subscription requirement of 90.0% of the
securities being issued. However, such minimum subscription clause is not
applicable to Development Financial Institutions. In July 1996, Securities and
Exchange Board of India relaxed the foregoing minimum subscription requirement
in the case of "offer for sale" of securities, but introduced regulations which
require that there be a minimum of ten shareholders for every Rs. 100,000 (US$
2,298) of the nominal value of shares offered to the public. In the case of
public issues, the requirement is for a minimum of five shareholders for every
Rs. 100,000 (US$ 2,298) of the nominal value of shares offered to the public.
Promoters of companies are required to retain a certain minimum certified
holding of equity share capital, which is subject to a lock-in for three years.
No issuance of bonus shares is permitted within 12 months of any public issue
or rights issue.
In 1995, the Securities and Exchange Board of India introduced guidelines
for the issue of equity capital through the use of the book-building process.
These guidelines were modified in October 1997 and again in October 1999. Under
the existing guidelines, an issuer has the option to book build either 90% or
75% of the net offering to the public. The balance of the issue is to be
offered to the public at the fixed price determined through the book-building
exercise.
Public limited companies are required under the Companies Act to prepare,
file with the Registrar of Companies and circulate to their shareholders
audited annual accounts, which comply with the Companies Act's disclosure
requirements and regulations governing their manner of presentation. In
addition, a listed company is subject to continuing disclosure requirements
pursuant to the terms of its listing agreement with the relevant stock
exchange. The Securities and Exchange Board of India has recently notified
amendments to the listing agreement tightening the continual disclosure
standards by corporations. Accordingly, companies are now required to publish
unaudited financial statements on a quarterly basis and are required to inform
stock exchanges immediately regarding any stock-price sensitive information. In
addition, the listing agreement now requires that a limited review of the
accounts at half yearly intervals be undertaken by the auditors.
Listing
The listing of securities on a recognized Indian stock exchange is
regulated by the Securities Contract Rules.
Under the standard terms of stock exchange listing agreements, the
governing body of each stock exchange is empowered to suspend trading of or
dealing in a listed security for breach of the company's obligations under such
agreement, subject to the company receiving prior notice of the intent of the
exchange. A listed company can also be delisted after a notice period of six
months if the number of public shareholders falls below five for every Rs.
100,000 nominal value of shares offered to the public or the listed company
fails to pay annual listing fees to the relevant stock exchange. The Securities
and Exchange Board of India has recently issued guidelines for standardizing
listing agreements and by-laws of stock exchanges in India. The Securities and
Exchange Board of India proposes to issue additional guidelines, which set out
basic listing standards for all stock exchanges in India. In the event that a
suspension of a company's securities continues for a period in excess of three
months, the company may appeal to the Securities and Exchange Board of India to
set aside the suspension. The Securities and Exchange Board of India has the
power to veto stock exchange decisions in this regard.
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Indian Stock Exchanges
There are 24 stock exchanges in India. These stock exchanges are served by
over 9,000 brokers dispersed across India. Most of the stock exchanges have
their governing board for self-regulation.
It is estimated that the six major exchanges, the BSE, the stock exchanges
at Ahmedabad, Calcutta, Chennai and Delhi, and the NSE, account for more than
90.0% of the market capitalization of listed Indian companies. The BSE and the
NSE account for a majority of trading volumes of securities in India. The BSE
and NSE together hold a dominant position among the stock exchanges in terms of
number of listed companies, market capitalization and trading activity.
The Securities and Exchange Board of India has prescribed certain
guidelines for the pricing and reporting of negotiated deals. A negotiated deal
refers to a transaction executed at a price not determined through stock
exchange pricing and involving a value of not less than Rs. 2.5 million or a
volume of not less than 10,000 shares. Before these guidelines were issued, a
negotiated deal had to be reported to the stock exchange within 15 minutes from
the time the trade was negotiated or, if such transaction occurred after
trading hours, on the following day when the market opened. However, for
greater transparency, the Securities and Exchange Board of India has decided
that negotiated deals will not be permitted in the existing manner and they
have to be executed on the screens of the exchanges just like any other normal
trade.
There are generally no restrictions on price movements of any security on
any given day. However, to restrict abnormal price volatility, the Securities
and Exchange Board of India instructed stock exchanges to implement daily
circuit breakers which do not allow transactions at prices different by more
than 8.0% of the previous closing price for shares quoted at Rs. 20 or more.
The Securities and Exchange Board of India has recently instructed stock
exchanges to relax the circuit breakers by a further 8.0% after half an hour
from the time prices reach the limit of 8.0%. It has allowed stock exchanges to
fix circuit breakers for shares quoted at prices up to Rs. 20. Further, margin
requirements are also imposed by stock exchanges that are required to be paid
at rates fixed by the stock exchanges. The Indian stock exchanges can also
exercise the power to suspend trading during periods of market volatility.
A settlement cycle is an account period for the securities traded on a
stock exchange. At the end of the period, obligations are settled, i.e., buyers
of securities pay for and receive securities while sellers deliver securities
and receive payment for them. The obligations are settled on a net basis, i.e.,
if some security is both purchased and sold in the same settlement cycle then
only the net quantity of securities is delivered or received and the net amount
of funds paid or received. Typically, the length of the settlement period is
five business days. The Securities and Exchange Board of India has specified
163 shares that were to be settled by rolling settlement from May 21, 2000.
Under rolling settlement, the length of the settlement period is one day.
In December 1993, the Securities and Exchange Board of India announced a
ban on forward trading on the Ahmedabad, Calcutta and Delhi stock exchanges and
the BSE in order to contain excessive speculation, protect the interests of
investors and regulate the stock market. All transactions thereafter were
required to be for payment and delivery.
In October 1995, the Securities and Exchange Board of India announced the
introduction of a modified forward trading system to enable buyers and sellers
to defer the settlement of their obligations to the following settlement cycle.
This system began on the BSE for select shares in January 1996. The new system
segregates trades into different categories, namely, carry-forward, delivery
and jobbing, with different identification numbers of the various trades. The
Securities and Exchange Board of India has appointed a committee to recommend
rules and procedures for a carry forward mechanism under the rolling
settlement. This committee has recently submitted its report. Once the revised
carry forward mechanism is approved, rolling settlement will also be applicable
for shares in the carry forward list.
In 1992, the Securities and Exchange Board of India promulgated rules and
regulations that prescribe conditions for registration of stockbrokers. A
stockbroker may not buy, sell or deal in securities except pursuant to a
certificate granted by the Securities and Exchange Board of India. The
regulations also prescribe a broker code of conduct and rules for the fair
treatment of investors by brokers, the procedures for registration, the payment
of registration fees, maintenance of appropriate books and records and the
right of inspection of the books of the stockbrokers by the Securities and
Exchange Board of India. Broker liability in cases of default extends to
suspension or cancellation of the broker's registration. The Securities and
Exchange Board of India has issued registration certificates to over
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9,000 stockbrokers who are members of various stock exchanges in India. Before
these regulations, stockbrokers were required to be registered only with the
stock exchanges of which they were members. The Securities and Exchange Board of
India regulations introduced the concept of dual registration of stockbrokers
with the Securities and Exchange Board of India and the stock exchanges, and
brought the brokers under regulation for the first time.
The Securities and Exchange Board of India has enforcement powers over
secondary market participants for violation of any provisions of the Securities
and Exchange Board of India Act, 1992, or breach of the rules and regulations
of the Securities and Exchange Board of India. The Securities and Exchange
Board of India may also take enforcement actions for violations of the
Securities Contract Act or rules made thereunder and rules, regulations and
by-laws of the stock exchanges.
National Stock Exchange or NSE
In April 1993, the government of India gave the final clearance for the
setting up of the NSE at Mumbai. The NSE was established by financial
institutions and banks, with the Industrial Development Bank of India as the
coordinating agency. The NSE serves as a national exchange, providing
nationwide on-line satellite-linked screen-based trading facilities with market
makers and electronic clearing and settlement. The principal aim of the NSE is
to enable investors to buy or sell securities from anywhere in India, serving
as a national market for securities, including government securities,
debentures, public sector bonds and units. Deliveries for trades executed
"on-market" are exchanged through the National Securities Clearing Corporation
Limited. As in the case with the BSE, negotiated or off-market trades are
reported to the NSE on-line. Since June 30, 2000, screen-based paperless
trading and settlement has been possible through the NSE in 333 cities in
India. The NSE has about 6,839 trading terminals across the country.
Trading in government securities, public sector bonds and units commenced
on the NSE in July 1994 and trading in equities of 200 large companies started
in November 1994. The average daily traded value of the capital market segment
rose from approximately Rs. 70 million in November 1994 to approximately Rs.
54.3 billion in June 2000. The NSE has 890 trading members on the capital
market segment and 96 trading members on the wholesale debt market segment. At
October 31, 1999, 685 securities were listed and 572 securities were permitted
to trade on the capital market segment. On the wholesale debt market segment,
797 securities were listed and 517 securities were permitted to trade at
October 31, 1999. The NSE launched the NSE 50 Index, now known as S&P CNX
NIFTY, on April 22, 1996 and the Mid-cap index on January 1, 1996. The
securities in the S&P CNX NIFTY are highly liquid. In May 1998, India Index
Services and Products Limited (IISL) was launched as a joint venture between
the NSE and Credit Rating and Information Services of India Limited with the
objective of providing index-related services and products for the capital
markets. IISL has a consulting agreement with Standard & Poor's, the world's
leading provider of equity indices, for co-branding IISL's equity indices. The
market capitalization of the NSE at June 30, 2000 was approximately Rs. 8.5
trillion. With a wide network in major metropolitan cities, screen-based
trading, central monitoring system and greater transparency, the NSE has lately
recorded high volumes of trading. The volume of trading on the NSE now
generally exceeds that on the BSE.
The NSE has set up a disaster recovery site at Pune to enable it to
commence normal business operations within a very short time frame should a
disaster occur.
The clearing and settlement operations of the NSE are managed by its
wholly owned subsidiary, the National Securities Clearing Corporation. A key
factor in the growth of the NSE has been the short and tight settlement cycles
that have operated since its commencement. The National Securities Clearing
Corporation operates a well-defined settlement cycle and there has been no
deviation or deferment from this cycle. The NSE provides a facility for
multiple settlement mechanisms including an account period settlement in
regular market sub-segment dealing in physical securities and rolling
settlement--normal (lot size one) and rolling settlement--normal (marketable
lots) in book-entry sub-segment.
The account period cycle starts every Wednesday and ends on a Tuesday with
the pay in of securities on the next Monday, pay-in of funds on the next
Tuesday and pay-out of funds and securities on the next Wednesday. The
settlement in the book-entry sub-segment is conducted on the next Tuesday. The
settlement is completed within eight days of the last day of the trading cycle.
The rolling settlement is typically on a T+5 working day basis, trades taking
place on Monday will be settled on the next Monday. All settlements for
securities are through the clearing house in the case of physical settlement
and through the depositary in the case of book entry sub-segment. Funds
settlement takes place through designated clearing banks. Deals on the
book-entry sub-segment are settled through
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the depositary. The National Securities Clearing Corporation Limited interfaces
with the depositary on the one hand and the clearing banks on the other to
provide delivery versus payment settlement for depositary enabled trades.
BSE
The BSE, the oldest stock exchange in India, was established in 1875. It
has evolved over the years into its present status as the premier stock
exchange of India. The BSE switched over to online trading (BOLT) in May 1995.
At June 30, 2000, the BSE had 680 members, comprising 229 individual members,
430 Indian companies, 20 foreign brokers and one composite corporate member.
Only a member of the BSE has the right to trade in the stocks listed on the
BSE.
At June 30, 2000, the estimated market capitalization of stocks trading on
the BSE was Rs. 7.9 trillion. The average daily turnover on the BSE has also
shown a significant increase from approximately Rs. 67 million in January 1987
to approximately Rs. 39.2 billion in June 2000. At June 30, 2000, the BSE had
1,544 trading work-stations in 276 cities across the country. The BSE has
Securities Exchange Board of India approval to expand its BOLT on-line trading
network to 424 cities.
Until 1995, brokers and members of the BSE received individual orders from
which any cross-orders were matched and taken off. The balance of the orders
was transmitted to the trading floor for execution in an open outcry system.
The BSE has now introduced its BOLT online trading system on the exchange. The
enhanced transparency in dealings due to implementation of BOLT has assisted
considerably in smoothening settlement cycles and improving efficiency in back
office work. From July 3, 1995, all listed shares were transferred to BOLT.
At June 30, 2000, there were 5,886 listed companies trading on the BSE.
Shares on the BSE are classified into A, B1, B2 and Z groups. All the groups
follow a seven-day (five working day) trading period commencing every Monday
and ending every Friday. All groups settle funds and securities through the BSE
clearing house. For the A group of shares, forward trading and custodial
settlement are permitted. For the B1 group of shares, custodial settlement is
permitted but forward trading is not permitted. For the B2 group of shares,
neither forward trading nor custodial settlement is permitted. The Z group
includes those companies who have not fulfilled the listing guidelines or have
not paid listing fees. Our equity shares are in the A group.
The trading period for all group shares lasts from Monday to Friday. The
trades are normally settled by the broker's net payment to the BSE clearing
house for securities on the following Thursday and the broker's delivery of
securities to the BSE clearing house on the same Thursday and, in the case of
overflow of securities, on Friday. The BSE clearing house then makes payments
and delivers securities to the brokers on the following Monday. All shortages
in delivery are compulsorily auctioned by the clearing house. The auction
system is fully computerized and has been following a closed-bid system. For
payments, the bank accounts of the brokers are maintained with the designated
clearing banks which are debited or credited on the specified days.
The maximum commission charged by brokers for trading equities is 2.5% of
the transaction value but, in practice, commissions are normally in the range
of 0.5% to 2.0%. The 1994 budget imposed a 5.0% service tax on brokerage
commissions.
The following two indices are generally used in tracking the aggregate
price movements on the BSE.
o The BSE Sensitive Index (Sensex) consists of the listed shares of 30
large market capitalization companies from the A group, including
ICICI. The companies were selected on the basis of market
capitalization, liquidity and the need for sectoral representation.
The BSE Sensitive Index was first compiled in 1986 with fiscal 1979 as
its base year. This is the most commonly used index in India. Our
shares are now included in this index.
o The BSE 100 Index (formerly the BSE National Index) consists of the
listed shares of 100 companies including the 30 in the BSE Sensitive
Index. The BSE 100 Index was introduced in January 1986 with fiscal
1984 as its base year.
Internet-Based Securities Trading and Services
The Securities and Exchange Board of India has recently allowed
Internet-based securities trading under the existing legal framework. The
regulations allow the Internet to be used as an order routing system through
stock
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brokers registered with the Securities and Exchange Board of India on behalf of
clients for executing trades on a recognized stock exchange in India. Stock
brokers interested in providing this service are required to apply for
permission from the respective stock exchange and also must comply with certain
minimum conditions stipulated by the Securities and Exchange Board of India.
Given the limited life of these new regulations to date, it is possible that
these regulations will continue to evolve in the future.
Takeover Code
Disclosure and mandatory bid obligations under Indian law are governed by
the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (the "Takeover Code") which prescribes certain
thresholds or trigger points that give rise to these obligations. The Takeover
Code is under constant review by the Securities and Exchange Board of India and
was recently amended.
The most important features of the Takeover Code, as amended, are as
follows:
Any acquirer (meaning a person who, directly or indirectly, acquires or
agrees to acquire shares or voting rights in a company, either by himself or
with any person acting in concert) who acquires shares or voting rights that
would entitle him to more than 5.0% of the shares or voting rights in a company
is required to disclose the aggregate of his shareholding or voting rights in
that company to the company (which in turn is required to disclose the same to
each of the stock exchanges on which the company's shares are listed) within
four working days of (a) the receipt of allotment information or (b) the
acquisitions of shares or voting rights, as the case may be.
o A person who holds more than 15.0% of the shares or voting rights in
any company is required to make annual disclosure of his holdings to
that company (which in turn is required to disclose the same to each
of the stock exchanges on which the company's shares are listed).
o Promoters or persons in control of a company are also required to make
annual disclosure of their holdings in the same manner.
o An acquirer cannot acquire shares or voting rights which (taken
together with existing shares or voting rights, if any, held by him or
by persons acting in concert with him) would entitle such acquirer to
exercise 15.0% or more of the voting rights in a company, unless such
acquirer makes a public announcement offering to acquire a further
20.0% of the shares of the company.
o An acquirer who, together with persons acting in concert with him,
holds between 15.0% and 75.0% of the shares cannot acquire additional
shares or voting rights that would entitle him to exercise a further
5.0% of the voting rights in any period of 12 months unless such
acquirer makes a public announcement offering to acquire a further
20.0% of the shares of the company.
o Any further acquisition of shares or voting rights by an acquirer who
holds 75.0% of the shares or voting rights in a company triggers the
same public announcement requirements.
o In addition, regardless of whether there has been any acquisition of
shares or voting rights in a company, an acquirer acting in concert
cannot directly or indirectly acquire control over a company (for
example, by way of acquiring the right to appoint a majority of the
directors or to control the management or the policy decisions of the
company) unless such acquirer makes a public announcement offering to
acquire a minimum of 20.0% of the shares of the company.
The Takeover Code sets out the contents of the required public
announcements as well as the minimum offer price.
The Takeover Code permits conditional offers as well as the acquisition
and subsequent delisting of all shares of a company and provides specific
guidelines for the gradual acquisition of shares or voting rights. Specific
obligations of the acquirer and the board of directors of the target company in
the offer process have also been set out. Acquirers making a public offer are
also required to deposit in an escrow account a percentage of the total
consideration which amount will be forfeited in the event that the acquirer
does not fulfill his obligations. In addition, the Takeover Code introduces the
"chain principle" by which the acquisition of a holding company will obligate
the acquirer to make a public offer to the shareholders of each subsidiary
company which is listed.
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The general requirements to make such a public announcement do not,
however, apply entirely to bail-out takeovers when a promoter (i.e., a person
or persons in control of the company, persons named in any offer document as
promoters and certain specified corporate bodies and individuals) is taking
over a financially weak company but not a "sick industrial company" pursuant to
a rehabilitation scheme approved by a public financial institution or a
scheduled bank. A "financially weak company" is a company which has at the end
of the previous financial year accumulated losses, which have resulted in
erosion of more than 50.0% but less than 100.0% of the total sum of its paid up
capital and free reserves at the end of the previous financial year. A "sick
industrial company" is a company registered for more than five years which has
at the end of any financial year accumulated losses equal to or exceeding its
entire net worth.
The Takeover Code does not apply to certain specified acquisitions
including the acquisition of shares (i) by allotment in a public, rights and
preferential issue, (ii) pursuant to an underwriting agreement, (iii) by
registered stockbrokers in the ordinary course of business on behalf of
clients, (iv) in unlisted companies, (v) pursuant to a scheme of reconstruction
or amalgamation or (vi) pursuant to a scheme under Section 18 of the Sick
Industrial Companies (Special Provisions) Act, 1985. The Takeover Code does not
apply to acquisitions in the ordinary course of business by public financial
institutions such as ICICI either on their own account or as a pledgee. In
addition, the Takeover Code does not apply to the acquisition of ADSs so long
as they are not converted into equity shares.
Depositaries
In August 1996, the Indian Parliament enacted the Depositaries Act, 1996
which provides a legal framework for the establishment of depositaries to
record ownership details and effectuate transfers in book-entry form. The
Securities and Exchange Board of India passed the Securities and Exchange Board
of India (Depositaries and Participants) Regulations, 1996 which provides for
the formation of such depositaries, the registration of participants as well as
the rights and obligations of the depositaries, participants and the issuers.
Every depositary has to register with the Securities and Exchange Board of
India. Pursuant to the Depositaries Act, the National Securities Depository
Limited was established by the Unit Trust of India, the Industrial Development
Bank of India and the NSE in 1996 to provide electronic depositary facilities
for trading in equity and debt securities. The National Securities Depository
Limited, which commenced operations in November 1996, was the first depositary
in India. Another depositary, the Central Depository Services Limited,
established by the BSE has commenced operations since July 15, 1999. The
depositary system has significantly improved the operations of the Indian
securities markets.
Trading of securities in book-entry form commenced in December 1996 and
was available for securities of 865 companies in June 2000. In order to
encourage "dematerialization" of securities, the Securities and Exchange Board
of India has set up a working group on dematerialization of securities
comprising foreign institutional investors, custodians, stock exchanges, mutual
funds and the National Securities Depository Limited to review the progress of
securities and trading in dematerialized form and to recommend scrips for
compulsory dematerialized trading in a phased manner. Accordingly, commencing
January 1998, the Securities and Exchange Board of India has notified scrips of
various companies for compulsory dematerialized trading by certain categories
of investors such as foreign institutional investors and other institutional
investors and has also notified compulsory dematerialized trading in specified
scrips for all retail investors. The Securities and Exchange Board of India
proposes to increase the number of scrips in which dematerialized trading is
compulsory for all investors significantly in the near future. The Securities
and Exchange Board of India has also provided that the issue and allotment of
shares in public, rights or offer for sale offerings after a specified date to
be notified by the Securities and Exchange Board of India shall only be in
dematerialized form and an investor shall be compulsorily required to open a
depositary account with a participant.
However, even in case of scrips notified for compulsory dematerialized
trading, investors, other than institutional investors, are permitted to trade
in physical shares on transactions outside the stock exchange where there are
no requirements of reporting such transactions to the stock exchange and
transactions on the stock exchange involving lots less than 500 securities.
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RESTRICTION ON FOREIGN OWNERSHIP OF INDIAN SECURITIES
India strictly regulates ownership of Indian companies by foreigners.
Foreign investment in Indian securities, including the equity shares
represented by the ADSs, is generally regulated by the Foreign Exchange
Management Act, 1999, which permits transactions involving the inflow or
outflow of foreign exchange and empowers the Reserve Bank of India to prohibit
or regulate such transactions.
The Foreign Exchange Management Act permits most transactions involving
foreign exchange except those prohibited or restricted by the Reserve Bank of
India. The Foreign Exchange Management Act has eased restrictions on current
account transactions. However, the Reserve Bank of India continues to exercise
control over capital account transactions (i.e., those which alter the assets
or liabilities, including contingent liabilities, of persons). The Reserve Bank
of India has issued regulations under the Foreign Exchange Management Act to
regulate the various kinds of capital account transactions, including certain
aspects of the purchase and issuance of shares of Indian companies.
The Reserve Bank of India has recently issued a notification under the
provisions of the Foreign Exchange Management Act relaxing the requirement of
prior approval for an Indian company making an ADS issue provided that the
issuer is eligible to issue ADSs pursuant to guidelines issued by the Ministry
of Finance and has the necessary approval from the Foreign Investment Promotion
Board.
Under the foreign investment rules, there are four applicable restrictions
on foreign ownership:
o Under the foreign direct investment route, foreign investors may own
equity shares of ICICI Bank only with the approval of the Foreign
Investment Promotion Board; this approval is granted on a case-by-case
basis except, as discussed immediately below, where the investment is
by acquisition of ADSs or GDRs;
o Under the Issue of Foreign Currency Convertible Bonds and Equity
Shares (through Depositary Receipt Mechanism) Scheme, 1993, foreign
investors may purchase ADSs or GDRs, subject to the receipt of all
necessary government approvals at the time the depositary receipt
program is set up;
o Under the portfolio investment route, foreign institutional investors,
subject to registration with the Securities and Exchange Board of
India and the Reserve Bank of India, may be permitted to own in the
aggregate up to an additional 24.0% of ICICI Bank's equity shares that
are not represented by ADSs or GDRs; no single foreign institutional
investor may own more than 10.0% of ICICI Bank's equity shares;
o Non-resident Indians and corporate bodies predominantly owned by
non-resident Indians may own up to 10.0% of ICICI Bank's equity
shares; no single non-resident Indian or corporate body predominantly
owned by non-resident Indians may own more than 5.0% of ICICI Bank's
total equity shares.
We obtained the approval of the Foreign Investment Promotion Board for the
recent ADS offering in March 2000 which was a foreign direct investment. Under
the guidelines issued by the Indian government relating to foreign direct
investment in a banking company, non-resident Indians, inclusive of foreign
investors, are allowed to invest up to 40.0% of the bank's equity capital. Out
of this 40.0%, foreign investment of up to 20.0% is permitted by foreign
banking companies or finance companies. The Reserve Bank of India has confirmed
to us that portfolio investment in the secondary market in India by foreign
institutional investors and non-resident Indians described above is not
included in the above limit of 40.0%.
As of March 31, 2000, foreign investors owned approximately 20.0% of ICICI
Bank's equity in total, of which 16.2% was through the ADS program.
As an investor in ADSs, you do not need to seek the specific approval from
the government of India to purchase, hold or dispose of your ADSs. In our ADS
offering, we obtained the approval of the Department of Company Affairs and the
relevant stock exchanges.
Equity shares which have been withdrawn from the depositary facility and
transferred on our register of shareholders to a person other than the
depositary or its nominee may be voted by that person. However, you may
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not receive sufficient advance notice of shareholder meetings to enable you to
withdraw the underlying equity shares and vote at such meetings.
Notwithstanding the foregoing, if a foreign institutional investor,
non-resident Indian or overseas corporate body were to withdraw its equity
shares from the ADS program, its investment in the equity shares would be
subject to the general restrictions on foreign ownership noted above and may be
subject to the portfolio investment restrictions, including the 10-24.0%
portfolio investment limitations, and the 5-10.0% non-resident Indian
limitation. The application of these limitations, however, is not clear.
Secondary purchases of securities of Indian companies in India by foreign
direct investors or investments by non-resident Indians, persons of Indian
origin, overseas corporate bodies and foreign institutional investors above the
ownership levels set forth above require government of India approval on a
case-by-case basis. It is unclear whether similar case-by-case approvals of
ownership of equity shares withdrawn from the depositary facility by foreign
institutional investors, non-resident Indians and overseas corporate bodies
would be required.
Further, if you withdraw your equity shares from the ADS program and your
direct or indirect holding in us exceeds 15.0% of our total equity (under the
Takeover Code), you would be required to make a public offer to the remaining
shareholders. If you withdraw your equity shares from the depositary facility,
you will not be able to redeposit them with the depositary.
If you wish to sell the equity shares withdrawn from the depositary
facility, you will be required to receive the prior approval of the Reserve
Bank of India, unless the sale is on a stock exchange or in connection with an
offer under the Takeover Code.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of our equity shares, at March 31, 2000.
<TABLE>
<CAPTION>
Percentage of
total equity Number of
shares equity
outstanding shares held
------------- -----------
<S> <C> <C>
ICICI(1).............................................................. 62.2% 122,505,800
Unit Trust of India................................................... 3.3 6,537,049
Other Indian institutional investors and corporate bodies............. 5.1 9,937,709
Individual domestic investors(2)...................................... 9.3 18,417,179
Foreign institutional investors, foreign banks, overseas
corporate bodies and non-resident Indians excluding
Bankers Trust Company, as depositary................................ 3.9 7,602,963
Bankers Trust Company, as depositary.................................. 16.2 31,818,180
------------- -----------
100.0% 196,818,880
============= ===========
</TABLE>
_______________
(1) Under the Indian Banking Regulation Act, no person holding shares in a
banking company can vote more than 10.0% of the outstanding equity shares.
This means that while ICICI owns 62.2% of our equity shares, it can only
vote 10.0% of our equity shares. Similarly, Bankers Trust Company (as
depositary), which owns 16.2% of our equity shares, can only vote 10.0% of
our equity shares. Due to this voting restriction, and the fact that no
other shareholder owns 10.0% or more of our outstanding equity shares,
ICICI and Bankers Trust Company effectively controls 24.0% each of the
voting power of our outstanding equity shares.
(2) Executive officers and directors as a group held less than 0.01% of our
equity shares at March 31, 2000.
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DIVIDENDS
Under Indian law, a company pays dividends upon a recommendation by its
board of directors and approval by a majority of the shareholders at the annual
general meeting of shareholders held within six months of the end of each
fiscal year. The shareholders have the right to decrease but not increase the
dividend amount recommended by the board of directors. Dividends may be paid
out of company profits for the fiscal year in which the dividend is declared or
out of undistributed profits of prior fiscal years. We have paid dividends
consistently every year since fiscal 1996, the second year of our operations.
The following table sets forth, for the periods indicated, the dividend
per equity share and the total amount of dividends paid on the equity shares,
both exclusive of dividend tax.
Dividend per Total amount of
equity share dividends paid
------------ ----------------
(in millions)
-------------------------------------
For fiscal year
1996............................... Rs.0.80 Rs.117
1997............................... 1.00 150
1998............................... 1.00 162
1999............................... 1.20 198
2000............................... 1.50 247
Until fiscal 1997, investors were required to pay tax on dividend income.
From fiscal 1998, dividend income was made tax-exempt. However, all companies
were required to pay a 10% tax on distributed profits. From fiscal 1999, this
tax rate rose to 11% because of a 10% surcharge imposed on all taxes by the
government. The government of India's budget for fiscal 2001 raised this tax to
22.0% (including surcharge) for dividend distribution subsequent to May 2000.
Future dividends will depend upon our revenues, cash flow, financial
condition and other factors. As an owner of ADSs, you will be entitled to
receive dividends payable in respect of the equity shares represented by such
ADSs except for fiscal 2000 as stated in prospectus to the recent ADS Issue.
The equity shares represented by ADSs rank pari passu with existing equity
shares. At present, we have equity shares issued in India and equity shares
represented by ADSs.
With respect to equity shares issued by us during a particular fiscal
year, dividends declared and paid for such fiscal year generally are prorated
from the date of issuance to the end of such fiscal year.
Before paying any dividend on our shares, we are required under the Indian
Banking Regulation Act to write off all capitalized expenses (including
preliminary expenses, organization expenses, share-selling commission,
brokerage, amounts of losses incurred or any other item of expenditure not
represented by tangible assets). Before declaring dividends, we are required to
transfer at least 20.0% of the balance of profits of each year to a reserve
fund. The government of India may, however, on recommendation of the Reserve
Bank of India, exempt us from such requirement. We require prior approval from
the Reserve Bank of India to pay a dividend of more than 25.0% of the par value
of our shares. We also require prior approval from the Reserve Bank of India to
pay an interim dividend.
We have no agreement with ICICI regarding the payment of dividends by us
to ICICI or the contribution of capital by ICICI to us for maintenance of our
minimum capital adequacy ratio. Any declaration or payment of a dividend by us
to ICICI would have to be approved by our board of directors and shareholders,
and if the dividend is in excess of 25.0% of the par value of our shares, we
would have to obtain prior approval from the Reserve Bank of India. Pursuant to
the Banking Regulation Act, ICICI, though holding more than 10.0% of our share
capital, has voting power equal to only 10.0% of our outstanding equity shares.
Under our dividend policy we intend to pay every year as dividend 25% to
30% of our profit after tax under Indian GAAP subject to necessary approval.
The board may review this dividend payout from time to time.
For a description of the tax consequences of dividends paid to our
shareholders, see "Taxation -- Indian Tax -- Taxation of Distributions".
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TAXATION
Indian Tax
The following discussion of Indian tax consequences for investors in ADSs
and equity shares received upon redemption of ADSs who are not resident in
India whether of Indian origin or not is based on the provisions of the Indian
Income-Tax Act, 1961, including the special tax regime for ADSs contained in
Section 115AC, which has recently been extended to cover additional ADSs that
an investor may acquire in an amalgamation or restructuring of the company, and
certain regulations implementing the Section 115AC regime. The Indian Income
Tax Act is amended every year by the Finance Act of the relevant year. Some or
all of the tax consequences of the Section 115AC regime may be amended or
modified by future amendments to the Indian Income Tax Act.
The summary is not intended to constitute a complete analysis of the tax
consequences under Indian law of the acquisition, ownership and sale of ADSs
and equity shares by non-resident investors. Potential investors should,
therefore, consult their own tax advisers on the tax consequences of such
acquisition, ownership and sale, including specifically the tax consequences
under Indian law, the law of the jurisdiction of their residence, any tax
treaty between India and their country of residence, and in particular the
application of the regulations implementing the section 115 AC regime.
Residence
For the purpose of the Income Tax Act, an individual is a resident of
India during any fiscal year, if he (i) is in India in that year for 182 days
or more or (ii) having within the four years preceding that year been in India
for a period or periods amounting in all to 365 days or more, is in India for
period or periods amounting in all to 60 days or more in that year. The period
of 60 days is substituted by 182 days in case of Indian citizen or person of
Indian origin who being resident outside India comes on a visit to India during
the financial year or an Indian citizen who leaves India for the purposes of
his employment during the financial year. A company is resident in India in any
fiscal year if it is registered in India or the control and management of its
affairs is situated wholly in India in that year. A firm or other association
of persons is resident in India except where the control and the management of
its affairs are situated wholly outside India.
Taxation of Distributions
Dividend distributed will not be subject to tax in the hands of the
shareholders. Consequently, withholding tax on dividends paid to shareholders
does not apply. However, if dividends are declared, the company is required to
pay a 22.0% tax on distributable profits
Taxation on Redemption of ADSs
The acquisition of equity shares upon a redemption of ADSs by a
non-resident investor will not give rise to a taxable event for Indian tax
purposes.
Taxation on Sale of Equity Shares or ADSs
Any transfer of ADSs or equity shares outside India by a non-resident
investor to another non-resident investor does not give rise to Indian capital
gains tax.
Subject to any relief under any relevant double taxation treaty, a gain
arising on the sale of an equity share to a resident of India or where the sale
is made inside India will generally give rise to a liability for Indian capital
gains tax. Such tax is required to be withheld at source. Where the equity
share has been held for more than 12 months (measured from the date of advice
of redemption of the ADS by the Depositary), the rate of tax is 11.0%. Where
the equity share has been held for 12 months or less, the rate of tax varies
and will be subject to tax at normal rates of income-tax applicable to
non-residents under the provisions of the Indian Income Tax Act, subject to a
maximum of 48.0% in the case of foreign companies. The actual rate depends on a
number of factors, including without limitation the nature of the non-resident
investor. During the period the underlying equity shares are held by
non-resident investors on a transfer from the Depositary upon redemption of
ADRs, the provisions of the Avoidance of Double Taxation Agreement entered into
by the government of India with the country of residence of the non-resident
investors will be applicable in the matter of taxation of any capital gain
arising on a transfer of the equity shares.
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The double taxation treaty between the United States and India does not provide
US residents with any relief from Indian tax on capital gains.
For purposes of determining the amount of capital gains arising on a sale
of an equity share for Indian tax purposes, the cost of acquisition of an
equity share received upon redemption of an ADS will be the price of the share
prevailing on the BSE or the NSE on the date on which the depositary advises
the custodian of such redemption, not the acquisition cost of the ADS being
redeemed. The holding period of an equity share received upon redemption of an
ADS will commence from the date of advice of redemption by the depositary. The
exact procedures for the computation and collection of Indian capital gains tax
are not settled.
Rights
Distribution to non-resident holders of additional ADSs or equity shares
or rights to subscribe for equity shares made with respect to ADSs or equity
shares are not subject to tax in the hands of the non-resident holder.
It is unclear as to whether capital gain derived from the sale of rights
by a non-resident holder not entitled to exemption under a tax treaty to
another non-resident holder outside India will be subject to Indian capital
gains tax. If rights are deemed by the Indian tax authorities to be situated
within India, as our situs is in India, the gains realized on the sale of
rights will be subject to customary Indian taxation as discussed above.
Stamp Duty
Upon the issuance of the equity shares underlying the ADSs, we are
required to pay a stamp duty of 0.1% per share of the issue price. A transfer
of ADSs is not subject to Indian stamp duty. Normally, upon the acquisition of
equity shares from the depositary in exchange for ADSs representing such equity
shares in physical form, an investor would be liable for Indian stamp duty at
the rate of 0.5% of the market value of the equity shares at the date of
registration. Similarly, a sale of equity shares by an investor would also be
subject to Indian stamp duty at the rate of 0.5% of the market value of the
equity shares on the trade date, although customarily such tax is borne by the
transferee, that is, the purchaser. However, our equity shares are compulsorily
deliverable in dematerialized form except for trades up to 500 shares only
which may be for delivery in physical form. Under Indian stamp law, no stamp
duty is payable on the acquisition or transfer of equity shares in
dematerialized form.
Other Taxes
At present, there are no taxes on wealth, gifts and inheritance which may
apply to the ADSs and underlying equity shares.
Service Tax
Brokerage or commissions paid to stockholders in connection with the sale
or purchase of shares is subject to a service tax of 5.0%. The stockbroker is
responsible for collecting the service tax and paying it to the relevant
authority.
United States Tax
The following discussion describes certain US federal income tax
consequences of the acquisition, ownership and sale of ADSs that are generally
applicable to US investors. For these purposes, you are an US investor if you
are:
o a citizen or resident of the United States under US federal income tax
laws;
o a corporation organized under the laws of the United States or of any
political subdivision of the United States; or
o an estate or trust the income of which is includable in gross income
for US federal income tax purposes regardless of its source.
This discussion only applies to ADSs that you own as capital assets.
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This discussion assumes that we are not a passive foreign investment
company. Please see the discussion under "Passive Foreign Investment Company
Rules" below.
Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address investors subject to special rules, including:
o insurance companies;
o tax-exempt entities;
o dealers in securities;
o financial institutions;
o persons who own the ADSs as part of an integrated investment
(including a straddle, hedging or conversion transaction) comprised of
the ADS, and one or more other positions for tax purposes;
o persons whose functional currency is not the US dollar; or
o persons who own, actually or constructively, 10.0% or more of our
voting stock.
This discussion is based on the tax laws of the United States currently in
effect (including the Internal Revenue Code of 1986, as amended, referred to as
"the Code"), Treasury Regulations, Revenue Rulings and judicial decisions.
These laws may change, possibly with retroactive effect.
For US federal income tax purposes, if you own an ADS, you will generally
be treated as the owner of the equity shares underlying the ADS.
Please consult your tax advisor with regard to the application of the US
federal income tax laws to the ADSs in your particular circumstances, including
the passive foreign investment company rules described below, as well as any
tax consequences arising under the laws of any state, local or other taxing
jurisdiction.
Taxation of Dividends
Dividends you receive on the ADSs, other than certain pro rata
distributions of common shares or rights to acquire common shares or ADSs,
will generally constitute foreign source dividend income for US federal income
tax purposes. The amount of the dividend you will be required to include in
income will equal the US dollar value of the rupees, calculated by reference to
the exchange rate in effect on the date the payment is received by the
depositary, regardless of whether the payment is converted into US dollars. If
you realize gain or loss on a sale or other disposition of rupees, it will be
US source ordinary income or loss. You will not be entitled to claim a
dividends-received deduction for dividends paid by ICICI Bank.
Taxation of Capital Gains
You will recognize capital gain or loss for U.S. federal income tax
purposes on the sale or exchange of ADSs in the same manner as you would on the
sale or exchange of any other shares held as capital assets. The gain or loss
will generally be U.S. source income or loss. You should consult your own tax
advisors about the treatment of capital gains, which may be taxed at lower
rates than ordinary income for non-corporate taxpayers, and capital losses, the
deductibility of which may be limited.
Passive Foreign Investment Company Rules
Based upon proposed Treasury regulations, which are proposed to be
effective for taxable years after December 31, 1994, ICICI Bank does not expect
to be considered a passive foreign investment company. In general, a foreign
corporation is a passive foreign investment company for any taxable year in
which (i) 75.0% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties) or (ii) 50.0% or more of the average
quarterly value of its assets consists of assets that produce, or are held for
the production of, passive income. ICICI Bank has based the expectation that it
is not a passive foreign investment company on, among other things, provisions
in the proposed regulations that provide that certain restricted reserves
(including cash and securities) of
145
<PAGE>
banks are assets used in connection with banking activities and are not passive
assets, as well as the composition of ICICI Bank's income and ICICI Bank's
assets from time to time. Since there can be no assurance that the proposed
regulations will be finalized in their current form, and the composition of
income and assets of ICICI Bank will vary over time, there can be no assurance
that ICICI Bank will not be considered a passive foreign investment company for
any fiscal year. If ICICI Bank is a passive foreign investment company at any
time that you own ADSs,
o you may be subject to additional taxes and interest charges on certain
dividends and on any gain recognized on the disposition of the shares.
This tax is assessed at the highest tax rate applicable for corporate
or individual taxpayers for the relevant periods; and
o you will be subject to additional US tax filing requirements for each
year that you hold the shares.
Please consult your tax advisors about the possibility that ICICI Bank
will be a passive foreign investment company and the rules that would apply to
you if ICICI Bank were.
146
<PAGE>
USE OF PROCEEDS
Pursuant to our Registration Statement on form F-1 (File No. 333-30132),
which was declared effective by the Securities and Exchange commission on March
28, 2000, we registered $125 million of its equity shares, par value Rs. 10 per
share, each represented by 0.5 ADSs, and offered and sold 15,909,090 ADSs, each
representing two equity shares, at the public offering price of US$ 11.00 per
ADS or aggregating USR 174,999,990. We received net proceeds of US$ 166,949,990
from the sale of these ADSs, after deducting the underwriting discount and
actual offering expenses of US$ 8,050,000. The joint global coordinators of
this offering were Merrill Lynch (Singapore) Pte. Ltd. and Morgan Stanley & Co.
International Limited.
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our historical financial statements in accordance with
Indian generally accepted accounting principles. Starting in fiscal 2000, we
published in our annual shareholders' report our financial statements in US
GAAP as well as in Indian GAAP.
The financial information in this annual report has been prepared in
accordance with US GAAP, unless we have indicated otherwise. Our fiscal year
ends on March 31 of each year so all references to a particular fiscal year are
to the year ended March 31 of that year. The financial statements, including
the notes to these financial statements, audited by KPMG, independent
accountants, are set forth at the end of this annual report. The reference to
"non-performing loans" in this annual report means impaired loans as classified
pursuant to US GAAP.
Although we have translated in this annual report certain rupee amounts
into dollars for convenience, this does not mean that the rupee amounts
referred to could have been, or could be, converted into dollars at any
particular rate, the rates stated earlier in this annual report, or at all.
Except in the section on "Nature of the Indian Securities Trading Market", all
translations from rupees to dollars are based on the noon buying rate in the
City of New York for cable transfers in rupees at March 31, 2000. The Federal
Reserve Bank of New York certifies this rate for customs purposes on each date
the rate is given. The noon buying rate on March 31, 2000 was Rs. 43.65 per
US$1.00. The exchange rates used for convenience translations differ from the
actual rates used in the preparation of our financial statements.
ADDITIONAL INFORMATION
Memorandum and Articles of Association
Objects and Purposes
Pursuant to our Memorandum of Association, our main objective is to carry
on the business of banking in any part of India or outside India.
Directors' Powers
Our directors' powers include the following:
o Article 140 of the Articles of Association provides that no director
of ICICI Bank shall, as a director, take any part in the discussion of
or vote on any contract or arrangement if such director is directly or
indirectly concerned or interested.
o Directors have no powers to vote in absence of a quorum.
o Article 83 of the Articles of Association provides that the directors
may raise and secure the payment of amounts in a manner and upon such
terms and conditions in all respects as they think fit and in
particular by the issue of bonds, debenture stock, or any mortgage or
charge or other security on the undertaking or the whole or any part
of the property of ICICI Bank (both present and future) including its
uncalled capital.
147
<PAGE>
Amendment to Rights of Holders of Equity Shares
Any change to the existing rights of the equity holders can be made only
by amending the Articles of Association which would require a special
resolution of the shareholders, which must be passed by not less than three
times the number of votes cast against the resolution.
Change in Control Provisions
Article 59 of the Articles of Association provides that the board of
directors may at their discretion decline to register or acknowledge any
transfer of shares in respect of shares upon which we have a lien. Moreover,
the board of directors may refuse to register the transfer of any shares if the
total nominal value of the shares or other securities intended to be
transferred by any person would, together with the total nominal value of any
shares held in ICICI Bank, exceed 1% of the paid up equity share capital of
ICICI Bank or if the board of directors is satisfied that as a result of such
transfer, it would result in the change in the board of directors or change in
the controlling interest of ICICI Bank and that such change would be
prejudicial to the interests of ICICI Bank. However, under the Indian Companies
Act, the enforceability of such transfer restrictions is unclear.
Incorporation by Reference
We incorporate by reference the information disclosed under "Description
of Equity Shares" in our Registration Statement on Form F-1 (File No.
333-30132).
148
<PAGE>
SELECTED FINANCIAL INFORMATION FOR ICICI BANK UNDER INDIAN GAAP
The selected financial and other data given in the table below have been
derived from our financial statements, prepared in accordance with Indian GAAP.
Our Indian GAAP financial statements for fiscal 1996, 1997 and 1998 have been
audited by Lodha & Co., Chartered Accountants and for fiscal 1999 and 2000 by
S. B. Billimoria and Company, Chartered Accountants.
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000(1)
---------- ---------- ---------- ---------- ---------- -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Income:
Interest income(2)............. Rs. 1,066 Rs. 1,827 Rs. 2,585 Rs. 5,441 Rs. 8,529 US$ 195
Other income(3)................ 249 426 851 890 1,940 45
---------- ---------- ---------- ---------- ---------- -----------
Total income................... 1,315 2,253 3,436 6,331 10,469 240
Expenses:
Interest expense............... 754 1,171 1,855 4,255 6,670 153
Operating expenses (excluding
depreciation on fixed
assets)(4)................... 223 323 431 654 1,285 29
Depreciation on fixed assets... 45 82 145 175 248 6
---------- ---------- ---------- ---------- ---------- -----------
Expenses before provisions and
write-offs................... 1,022 1,576 2,431 5,084 8,203 188
Provisions and write-offs:
Provisions for depreciation on
investments.................. 52 54 138 (48) 128 3
Other provisions and
contingencies(5)............. 9 51 137 323 755 17
---------- ---------- ---------- ---------- ---------- -----------
Provisions and write-offs...... 61 105 275 275 883 20
Profit:
Profit before tax.............. 232 572 730 972 1,383 32
Provision for taxes............ 61 171 228 338 330 8
---------- ---------- ---------- ---------- ---------- -----------
Profit for the year............ Rs. 171 Rs. 401 Rs. 502 Rs. 634 Rs. 1,053 US$ 24
========== ========== ========== ========== ========== ===========
</TABLE>
______________
(1) For your convenience, rupee amounts for fiscal 2000 have been translated
into US dollars using the noon buying rate in effect on March 31, 2000 of
Rs. 43.65 = US$ 1.00.
(2) Represents interest income on advances, income on investments and discount
on bills purchased and discounted and interest earned on cash balances.
(3) Represents commission, exchange and brokerage, profit on sale or
revaluation of investments, sale of land, buildings and other assets and
profit on exchange transactions.
(4) Represents employee expenses, establishment expenses and other expenses.
(5) Primarily represents provisioning for bad and doubtful debts.
149
<PAGE>
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000 2000(1)
---------- ---------- ---------- ---------- ---------- -----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and balances with the
Reserve Bank of India........ Rs. 1,043 Rs. 1,503 Rs. 3,101 Rs. 4,658 Rs. 7,219 US$ 165
Balances with banks and
money at call and short
notice....................... 586 2,226 5,628 11,725 26,933 617
Advances(2).................... 6,507 7,980 11,278 21,101 36,573 838
Investments.................... 2,628 4,354 10,234 28,612 44,167 1,012
Fixed assets................... 465 964 1,837 1,996 2,221 51
Other assets(3)................ 342 792 716 1,725 3,613 83
---------- ---------- ---------- ---------- ---------- -----------
Total assets................... Rs. 11,571 Rs. 17,819 Rs. 32,794 Rs. 69,817 Rs.120,726 US$ 2,766
========== ========== ========== ========== ========== ===========
Liabilities:
Borrowings:
Deposits(4).................. 7,299 13,476 26,290 60,730 98,660 2,260
Other borrowings(5).......... 2,090 930 1,922 1,999 4,915 113
---------- ---------- ---------- ---------- ---------- -----------
Total borrowings............... 9,389 14,406 28,212 62,729 103,575 2,373
Other liabilities and
provisions................... 615 1,594 1,914 4,005 5,656 130
---------- ---------- ---------- ---------- ---------- -----------
Total liabilities.............. 10,004 16,000 30,126 66,734 109,231 2,503
Shareholders' funds
Equity capital............... 1,500 1,500 1,650 1,650 1,968 45
Reserves and surplus........... 67 319 1,018 1,433 9,527 218
---------- ---------- ---------- ---------- ---------- -----------
Total shareholders' funds...... 1,567 1,819 2,668 3,083 11,495 263
---------- ---------- ---------- ---------- ---------- -----------
Total liabilities and
shareholders' funds......... Rs. 11,571 Rs. 17,819 Rs. 32,794 Rs. 69,817 Rs.120,726 US$ 2,766
========== ========== ========== ========== ========== ===========
</TABLE>
_____________
(1) For your convenience, rupee amounts for fiscal 2000 have been translated
into US dollars using the noon buying rate in effect on March 31, 2000 of
Rs. 43.65 = US$ 1.00.
(2) Includes bills purchased and discounted.
(3) Includes current assets and advances for capital assets.
(4) Represents deposits received from banks as well as others.
(5) Represents borrowings from the Reserve Bank of India and from other banks
and institutions.
(6) Includes debentures issued by us.
150
<PAGE>
SIGNIFICANT DIFFERENCES BETWEEN INDIAN GAAP AND US GAAP
Indian GAAP differs in several respects from US GAAP. A summary of the
significant differences between Indian GAAP and US GAAP is presented below:
<TABLE>
<CAPTION>
Subject Indian GAAP US GAAP
----------------------------------------- ----------------------------------------- ------------------------------------------
<S> <C> <C>
Statement of cash flows.................. Statement is required for companies Statement is required.
listed on the stock exchanges and is
recommended for other companies
Statement of changes in stockholders'
equity................................. Statement is not required. Statement is required.
Consolidation............................ The practice of consolidation is not When company controls more than
followed. 50.0% of the voting securities of another
company, the investee company is known as a
subsidiary and is generally considered to
be a part of the controlling company
(parent). In these circumstances, the
financial statements of the investee are
generally required to be consolidated with
the financial statements of its parent in
which all material transactions between
them are eliminated.
Equity method............................ Equity accounting is not recognized as an When a company controls 20.0% to 50.0% of
acceptable method of accounting. the investee's voting securities or has a
subsidiary that is not consolidated, the
investment is generally stated at the
underlying net asset value, with the equity
in the investee's earnings or loss included
in the investor's income statement for the
current period (equity accounting).
Business combination..................... The conditions for applying the purchase Business combinations are accounted for
method are different and business either under the purchase method or the
combinations are generally accounted as pooling method.
per the pooling of interest method.
Allowance for credit losses.............. Allowance for credit losses are based on Loans are identified as non-performing and
defaults expected both on principal and placed on non-accrual basis, where
interest. The allowance does not consider management estimates that payment of
present value of future inflows. interest or principal is doubtful of
collection. Non-performing loans are
reported after considering the impact of
impairment. The impairment is measured by
comparing the carrying amount of the loan
to the present value of expected future
cash flows or the fair value of the
collateral (discounted at the loans'
effective rate).
Loan origination fees/costs.............. Loan origination fees and costs are taken Loan origination fees (net of loan
to the income statement in the year origination costs) are deferred and
accrued/incurred. recognized as an adjustment to yield over
the life of the loan.
Interest capitalization.................. Capitalization of interest is Interest cost incurred for funding an asset
optional. during its construction period is required
to be capitalized based on the average
outstanding investment in the asset and the
average cost of funds. The capitalized
interest cost is included in the cost of
the relevant asset and is depreciated over
the useful life of
151
<PAGE>
the asset.
Redeemable preference shares............. Redeemable preference shares are a Redeemable preference shares do not form a
component of shareholders' equity, and part of the shareholders' equity and
preference dividend is reported as an dividends on such shares are charged to the
appropriation of income. income statement.
Investment in debt and equity securities. Securities are classified as current or Securities are classified as trading, held
permanent. Current securities are valued to maturity or available for sale based on
at the lower of cost or market value with management's intention on the acquisition
any unrealized loss charged to the income date. While trading and available for sale
statement. Unrealized gains are not securities are valued at fair value, held
recorded. Permanent investments are to maturity securities are valued at cost,
valued at cost, adjusted for permanent adjusted for amortization of premiums and
diminution. accretion of discount. The unrealized gains
and losses on trading securities are taken
to the income statement, while those on
available for sale securities are reported
as a separate component of stockholders'
equity, net of applicable taxes.
Revaluation of property, plant and Revaluation of property, plant and plant Revaluation of property, plant and
equipment.............................. and equipment is permitted. equipment is not permitted except in
certain cases.
Accounting for finance leases............ Assets under finance leases are not Assets under finance leases should be
required to be capitalized by lessees capitalized and depreciated by lessees,
but, instead, are capitalized and with the corresponding recognition of the
depreciated by lessors at statutory rates. lease obligation. Lease rentals are
The difference between the depreciation recognized as payments of the lease
charge and annual lease charge is obligation and interest thereon. Lessors
adjusted in the income statement through should recognize the minimum lease payments
a lease equalization account. less unearned income, i.e., the net
investment in the lease, as an asset and
the interest component of the lease rental
as income.
Lessees recognize lease rental payments
as expenses as they are incurred.
Sale of securities under repurchase Recorded as sales and removed from Sales proceeds are recorded as borrowings
agreements............................... balance sheet of seller. in the balance sheet of seller/borrower.
Securities continue to be reflected as
assets in the balance sheet of
seller/borrower.
Income taxes............................. The amount of tax that is payable is Income taxes are provided against current
recorded. period income as reflected in the financial
statements, even though all or some of such
income will not be reported for tax
purposes in the current period and taxes
will not be payable currently. This means
that, even though certain amount of the
current period accounting income is not
taxable, income tax must be provided in the
financial statements against both income on
which taxes are payable and income on which
the tax liability is deferred regardless of
the length of that deferral, subject to
valuation allowances for deferred tax
assets.
Share issue expenses..................... Share issue expenses are generally Direct costs to sell shares are treated
deferred and amortized over a period of as a reduction of the issue proceeds;
three to five years. They may also be indirect costs are expensed as incurred.
written off against share premium account.
152
<PAGE>
Debt issue costs......................... Debt issue expenses is written off in the Debt issue costs are deferred and amortized
year debt is taken. over the life of the debt using the
"interest method".
Extraordinary items...................... Extraordinary items are disclosed Extraordinary items are disclosed
separately in the statement of profit and separately in the statement of profit and
loss. loss net of applicable tax effects.
Prior period items....................... Prior period items are disclosed Prior period items, less related tax
separately in the current statement of effects, are excluded from the current
profit and loss. statements of profit and loss and reflected
as adjustments to the opening balance of
retained earnings.
Segmental information.................... Segmental information is not required. Information regarding total revenues,
operating costs, gross profit, assets and
liabilities for each operating segment is
required to be disclosed
</TABLE>
153
<PAGE>
INDEX TO US GAAP FINANCIAL STATEMENTS
Page
Independent Auditors' Report on the Financial Statements F-2
Balance Sheets at March 31, 1999 and 2000 F-3
Statements of Income for the years ended March 31, 1998,
1999 and 2000 F-4
Statements of Changes in Stockholders' Equity for the years
ended March 31, 1998, 1999 and 2000 F-5
Statements of Cash Flows for the years ended March 31, 1998,
1999 and 2000 F-7
Notes to Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the board of directors and stockholders of ICICI Bank Limited
We have audited the accompanying balance sheets of ICICI Bank Limited as of
March 31, 2000 and March 31, 1999 and the related statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2000. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ICICI Bank Limited as of March
31, 2000 and 1999, and the result of its operations and its cash flows for each
of the years in the three-year period ended March 31, 2000, in conformity with
accounting principles generally accepted in United States.
The United States dollar amounts are presented in the accompanying financial
statements solely for the convenience of the readers and are arithmetically
correct on the basis disclosed in note 1.1.3.
/s/ KPMG
KPMG
Mumbai, India
April 24, 2000
F-2
<PAGE>
<TABLE>
ICICI BANK LIMITED
US GAAP BALANCE SHEETS
AT MARCH 31, 1999 AND 2000
At March 31,
-----------------------------------------------
1999 2000 2000
---- ---- ----
(in millions)
-----------------------------------------------
Rs Rs USD
<S> <C> <C> <C>
Assets
Cash and cash equivalents ............................... 19,928 36,326 832
Trading account assets .................................. 15,822 28,228 647
Securities, available for sale .......................... 3,963 4,709 108
Loans, net............................................... 27,597 47,016 1,077
Acceptances ............................................. 5,587 8,490 194
Property and equipment .................................. 1,761 2,097 48
Other assets ............................................ 1,607 3,550 81
------ ------- -----
Total assets ............................................ 76,265 130,416 2,987
Liabilities
Interest bearing deposits ............................... 54,963 82,785 1,896
Non-interest bearing deposits ........................... 5,766 15,875 364
------ ------- -----
Total deposits .......................................... 60,729 98,660 2,260
Trading account liabilities ............................. 418 1,922 44
Acceptances ............................................. 5,587 8,490 194
Long-term debt .......................................... 1,764 2,476 57
Other liabilities ....................................... 4,937 7,481 171
------ ------- -----
Total liabilities. ...................................... 73,435 119,029 2,726
Stockholders' equity
Common stock ............................................ 1,650 1,968 45
Additional paid in capital .............................. 375 7,435 171
Deferred Compensation - Employee Stock Option Plan ...... - (39) (1)
Retained earnings ....................................... 756 1,940 44
Accumulated comprehensive income ........................ 49 83 2
------ ------- -----
Total stockholders' equity .............................. 2,830 11,387 261
------ ------- -----
Total liabilities and stockholders' equity .............. 76,265 130,416 2,987
====== ======= =====
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
<TABLE>
ICICI BANK LIMITED
US GAAP STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Year ended March 31,
----------------------
1998 1999 2000 2000
------------ ---------- ---------- --------
(in millions, except per share data)
----------------------------------------------------
Rs Rs Rs USD
Interest revenue
<S> <C> <C> <C> <C>
Loans, including fees ......................................... 1,499 2,707 4,437 102
Securities, including dividends ............................... 148 305 684 16
Trading account assets, including dividends ................... 865 2,247 3,073 70
Other ......................................................... 67 131 240 5
----- ----- ----- ---
Total interest revenue ........................................ 2,579 5,390 8,434 193
----- ----- ----- ---
Interest expense
Deposits ...................................................... 1,618 3,707 5,789 133
Long term debt ................................................ 16 155 244 6
Trading account liabilities ................................... 216 256 542 12
Other. ........................................................ 4 126 81 2
----- ----- ----- ---
Total interest expense ........................................ 1,854 4,244 6,656 153
----- ----- ----- ---
Net interest revenue .......................................... 725 1,146 1,778 40
Provision for credit losses ................................... (360) (540) (427) (10)
----- ----- ----- ---
Net interest revenue after provision for credit losses ........ 365 606 1,351 30
Non-interest revenue, net
Fees and commissions .......................................... 240 370 607 14
Trading account revenue ....................................... 147 134 857 20
Securities transactions ....................................... 32 21 75 2
Foreign exchange transactions ................................. 171 341 220 5
Other ......................................................... 1 - -
----- ----- ----- ---
Net revenue ................................................... 956 1,472 3,110 71
----- ----- ----- ---
Non-interest expense
Salaries ...................................................... 116 172 257 6
Employee benefits ............................................. 21 32 59 1
----- ----- ----- ---
Total employee expense ........................................ 137 204 316 7
Premise and equipment expense ................................. 162 232 340 8
Administration and other expense. ............................. 255 363 673 15
----- ----- ----- ---
Total non-interest expense .................................... 554 799 1,329 30
----- ----- ----- ---
Income before taxes. .......................................... 402 673 1,781 41
Income tax expense ............................................ 104 170 379 9
----- ----- ----- ---
Net income .................................................... 298 503 1,402 32
===== ===== ===== ===
Earnings per share
Basic and diluted ............................................. 1.84 3.05 8.49 0.19
Weighted average number of common shares (in millions) used
for computing earnings per share
- Basic .................................................... 162.08 165.00 165.09 165.09
- Diluted .................................................. 162.08 165.00 165.11 165.11
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
<TABLE>
ICICI BANK LIMITED
US GAAP STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Year ended March ,
------------------------------------------------
1998 1999 2000 2000
----------- ---------- --------- ---------
(in millions)
Rs Rs Rs USD
Common stock
<S> <C> <C> <C> <C>
Balance, beginning of year ........................................ 1500 1,650 1,650 38
Common stock issued ............................................... 150* - 318 7
----- ----- ------ ---
Balance, end of year. ............................................. 1,650 1,650 1,968 45
----- ----- ------ ---
Additional paid in capital
Balance, beginning of year ........................................ - 375 375 9
Common stock issued ............................................... 375* - 7,020 161
Compensation related to stock option grants ....................... - - 40 1
----- ----- ------ ---
Balance, end of year .............................................. 375 375 7,435 171
----- ----- ------ ---
Deferred Compensation - Employee Stock Option Plan
Balance, beginning of year ........................................ - - - -
Compensation related to stock option grants. ...................... - - (40) (1)
Amortisation of compensation related to stock option grants ....... - - 1 -
----- ----- ------ ---
Balance, end of year .............................................. - - (39) (1)
----- ----- ------ ---
Retained earnings
Balance, beginning of year ........................................ 283 431 756 17
Net income. ....................................................... 298 503 1,402 32
Dividend declared on common stock ................................. (150) (178) (218) (5)
----- ----- ------ ---
Balance, end of year .............................................. 431 756 1,940 44
----- ----- ------ ---
Accumulated comprehensive income
Balance, beginning of year ........................................ (33) 15 49 1
Unrealized gain / (loss) securities, net. ......................... 48 34 34 1
----- ----- ------ ---
Balance, end of year .............................................. 15 49 83 2
----- ----- ------ ---
Total stockholders' equity
Balance, beginning of year. ....................................... 1,750 2,471 2,830 65
Common stock issued ............................................... 525 - 7,338 168
Compensation amortized during the year ............................ - - 1 -
Net income. ....................................................... 298 503 1,402 32
Dividend declared on common stock ................................. (150) (178) (218) (5)
Unrealized gain / (loss) on securities, net ....................... 48 34 34 1
----- ----- ------ ---
Balance, end of year .............................................. 2,471 2,830 11,387 261
----- ----- ------ ---
</TABLE>
* Common stock issued to parent company
F-5
<PAGE>
ICICI BANK LIMITED
US GAAP STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Year ended March 31,
------------------------------
1998 1999 2000 2000
---- ---- ---- ----
(in millions)
------------------------------
Rs Rs Rs USD
Net income ............................... 298 503 1,402 32
Other comprehensive income, net of tax
Unrealized gain / (loss) on securities ... 48 34 34 1
--- --- ----- --
Comprehensive income ..................... 346 537 1,436 33
--- --- ----- --
See accompanying notes to the financial statements.
F-6
<PAGE>
<TABLE>
ICICI BANK LIMITED
US GAAP STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Year ended March 31,
----------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
(in millions)
----------------------------------------
Rs Rs Rs USD
Cash flows from operating activities
<S> <C> <C> <C> <C>
Net income ......................................... 298 503 1,402 32
Adjustments to reconcile net income to net cash from
operating activities:
Provision for credit losses ........................ 360 540 427 10
Depreciation and amortization ...................... 148 163 374 9
Loss on sale of fixed assets ....................... -- -- 1 --
Provision for deferred taxes ....................... (99) (130) 113 3
Unrealized (gain)/loss on trading securities ....... 127 (23) 79 2
Net gain on sale of securities, available for sale . (32) (21) (75) (2)
Change in assets and liabilities
Other assets ....................................... (301) (914) (1,977) (45)
Other liabilities .................................. 1,787 2,278 2,361 54
Trading account assets ............................. (7,511) (8,412) (12,509) (287)
Trading account liabilities ........................ 952 (1,375) 1,504 34
------ ------ ------ ----
Net cash used in operating activities .............. (4,271) (7,391) (8,300) (190)
------ ------ ------ ----
Cash flows from investing activities
Securities, available for sale
Purchases .......................................... (142) (3,610) (10,714) (246)
Proceeds from sales ................................ 2,609 1,103 10,020 230
Net increase in loans .............................. (4,751) (15,373) (19,843) (455)
Capital expenditure on property and equipment ...... (985) (487) (528) (12)
Proceeds from sale of property and equipment ....... 1 1 2 --
------ ------ ------ ----
Net cash used in investing activities .............. (3,268) (18,366) (21,063) (483)
====== ======= ======= ====
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE>
<TABLE>
ICICI BANK LIMITED
US GAAP STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
Year ended March 31,
-------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
(in millions)
-------------------------------------------
Rs Rs Rs USD
Cash flows from financing activities
<S> <C> <C> <C> <C>
Net increase in deposits ............................ 12,813 34,439 37,931 869
Proceeds from issuance of long term debt ............ 40 1,636 710 16
Maturity and redemption of long term debt ........... -- -- -- --
Proceeds from issuance of common stock .............. 525* -- 7,338 168
Payment of dividend ................................. (150) (178) (218) (5)
------ ------ ------ -----
Net cash from financing activities .................. 13,228 35,897 45,761 1,048
====== ====== ====== =====
Net increase in cash and cash equivalents ........... 5,689 10,140 16,398 375
Cash and cash equivalents at beginning of period .... 4,099 9,788 19,928 457
------ ------ ------ -----
Cash and cash equivalents at end of the period ...... 9,788 19,928 36,326 832
====== ====== ====== =====
</TABLE>
* Proceeds from issuance of stock to parent company
See accompanying notes to the financial statements.
F-8
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
1 Significant accounting policies
1.1 Basis of presentation
1.1.1 ICICI Banking Corporation Limited, incorporated in Vadodara, India
provides a wide range of banking and financial services including
commercial lending, trade finance and treasury products. The name of
ICICI Banking Corporation Limited was changed to ICICI Bank Limited
("ICICI Bank" or "the Bank") on September 10, 1999. ICICI Bank is a
banking company governed by the Banking Regulations Act, 1949. ICICI
Bank is a 62.24% owned subsidiary of ICICI Limited ("the parent
company"), a leading financial institution in India. ICICI Bank does
not have any majority owned subsidiaries or investments where its
shareholding exceeds 20% of the voting stock of the investee.
1.1.2 The accounting and reporting policies of ICICI Bank used in the
preparation of these financial statements reflect industry practices
and conform to generally accepted accounting principles in the United
States of America ("US GAAP"). The preparation of financial
statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported income and expenses during the reporting period. Management
believes that the estimates used in the preparation of the financial
statements are prudent and reasonable. Actual results could differ
from these estimates.
1.1.3 The accompanying financial statements have been prepared in Indian
rupees ("Rs"), the national currency of India. Solely for the
convenience of the reader, the financial statement at and for the
year ended March 31, 2000 has been translated into US dollars, at the
noon buying rate in New York city at March 31, 2000 for the cable
transfers in rupees, as certified for customs purposes by the Federal
Reserve of New York of US$1.00 = Rs 43.65. No representation is made
that the rupee amounts have been, could have been or could be
converted into US dollars at such rate or any other rate on March 31,
2000 or at any other certain date.
1.2 Revenue recognition
1.2.1 Interest income is accounted on an accrual basis except in respect of
impaired loans, where it is recognized on a cash basis.
1.2.2 Income from leasing operations is accrued in a manner to provide a
fixed rate of return on outstanding investments.
1.2.3 Discount on bills is recognized on a straight line basis over the
tenure of the bills.
1.2.4 Fees from non-fund based activities such as guarantees and letters of
credit are amortized over the contractual period of the commitment.
1.3 Cash and cash equivalents
1.3.1 ICICI Bank considers all highly liquid investments, which are readily
convertible into cash and have contractual maturities of three months
or less from the date of purchase, to be cash equivalents. The
carrying value of cash equivalents approximates fair value.
F-9
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
1.4 Securities and trading account activities
1.4.1 ICICI Bank has adopted the Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". SFAS No. 115 requires that investments
in debt and equity securities be reported at fair value, except for
debt securities classified as held-to-maturity securities, which are
reported at amortized cost. Equity securities and debt securities
available for sale are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity,
net of applicable income taxes. Realized gains and losses on sale of
securities are included in earnings on a weighted average cost basis.
1.4.2 Any "other than temporary diminution" in the value of
held-to-maturity or securities, available for sale is charged to the
income statement. "Other than temporary diminution" is identified
based on management's evaluation.
1.4.3 Trading account assets include securities held for the purpose of
sale in the short term. These securities are valued at fair value,
with the unrealized gains/losses being taken to trading account
revenue. Trading account activities also include foreign exchange
products. Foreign exchange trading positions are valued at prevailing
market rates on the date of the balance sheet and the resulting
gains/losses are included in foreign exchange revenue.
1.5 Loans
1.5.1 Loans are reported at the principal amount outstanding, inclusive of
interest accrued and due pursuant to the contractual terms. Loan
origination fees (net of loan origination costs) are deferred and
recognized as an adjustment to yield over the period of the loan.
Interest is accrued on the unpaid principal balance and is included
in interest income.
1.5.2 Loans are identified as impaired and placed on a non-accrual basis,
when it is determined that payment of interest or principal is
doubtful of collection or that interest or principal is past due
beyond two payment periods (each payment period being 90 days). Such
loans are classified as non-performing. Any interest accrued (and not
received) on impaired loans is reversed and charged against current
earnings, and interest is thereafter included in earnings only to the
extent actually received in cash. Non-performing loans are returned
to an accrual status when all contractual principal and interest
amounts are reasonably assured of repayment and there is a sustained
period of repayment performance in accordance with the contractual
terms.
1.5.3 Non-performing loans are reported after considering the impact of
"non-performance". Non-performance is measured by comparing the
carrying amount of the loan with the present value of the expected
future cash flows/fair value of the collateral, discounted at the
effective rate of the loan. In cases of default wherein ICICI Bank
does not have adequate security and/or the borrower is not traceable
and legal recourse is not expected to result in recovery, ICICI Bank
writes off all or part of the carrying value of the loan.
1.5.4 Loans include aggregate rentals on lease financing transactions and
residual values, net of related unearned income and security deposit
collected from the lessee. Substantially all of the lease financing
transactions represent direct financing leases. Unearned income is
amortized under a method which primarily results in an approximate
level rate of return when related to the unrecovered lease
investment. Income on non-performing leases is recognised on the same
basis as non-performing loans.
F-10
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
1.5.5 Loans further include credit substitutes, such as privately
placed/negotiated debt instruments and preferred shares, which are
not readily marketable.
1.6 Aggregate allowance for credit losses
1.6.1 ICICI Bank evaluates its entire corporate credit portfolio on a
periodic basis and grades its accounts considering both qualitative
and quantitative criteria. This analysis includes an account by
account analysis of the entire loan portfolio, and an allowance is
made for any probable loss on each account. In evaluating its credit
losses, management has estimated recovery of such loans at various
stages of time to recovery and has discounted these using the
effective interest rate of the loans. In estimating recovery, ICICI
Bank considers its past credit loss experience and such other
factors, which in its judgement, deserve recognition in estimating
probable credit losses. Actual recovery may differ from estimates and
consequently actual loss could differ from the estimated loss. The
aggregate allowance for credit losses is increased by amounts charged
to the provisions for credit losses, net of write-offs and releases
of provisions as a result of cash collections.
1.6.2 Credit card receivables are collectively evaluated for impairment
based on the profile of days past due, classified into various
buckets. Provisions are based as a fixed percentage of pre defined
buckets. The Bank intends to review this policy annually based on the
historical delinquency and credit loss experience.
1.7 Property and equipment
1.7.1 Property and equipment are stated at cost, less accumulated
depreciation. The cost of additions, capital improvements and
interest during the construction period are capitalized, while
repairs and maintenance are charged to expenses when incurred.
1.7.2 Depreciation is provided over the estimated useful lives of the
assets.
1.7.3 The cost and accumulated depreciation for property and equipment
sold, retired or otherwise disposed of are relieved from the
accounts, and the resulting gains/losses are reflected in the income
statement.
1.7.4 Property under construction and advances paid towards acquisition of
property, plant and equipment are disclosed as capital work in
progress.
1.8 Interest capitalization
1.8.1 The interest cost incurred for funding an asset during its
construction period is capitalized based on the actual outstanding
investment in the asset from the date of purchase/expenditure and the
average cost of funds. The capitalized interest cost is included in
the cost of the relevant asset and is depreciated over the asset's
estimated useful life.
F-11
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
1.9 Income taxes
1.9.1 Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss carry forwards.
Deferred tax assets are recognized subject to management's judgement
that realization is more likely than not. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are
expected to be received and settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
income statement in the period of change.
1.10 Retirement benefits
Gratuity
1.10.1 In accordance with Indian law, ICICI Bank provides for a gratuity to
its employees in the form of a defined benefit retirement plan
covering all employees. The plan provides a lump sum payment to
vested employees at retirement, on death while in employment or on
termination of employment based on the respective employee's salary
and the years of employment with ICICI Bank. The gratuity benefit
conferred by ICICI Bank on its employees is equal to or greater than
the statutory minimum.
1.10.2 ICICI Bank provides the gratuity benefit through annual contributions
to a fund administered by trustees and managed by the Life Insurance
Corporation of India. Under this scheme, the settlement obligation
remains with the bank although the Life Insurance Corporation of
India administers the scheme and determines the contribution premium
required to be paid by the bank. ICICI Bank contributed and expensed
Rs 3 million, Rs 5 million and Rs 6 million to the gratuity fund in
fiscal 1998, 1999 and 2000 respectively. The impact of the scheme is
not material or expected to become material to the Bank's financial
condition or operations.
Superannuation
1.10.3 The permanent employees of ICICI Bank are entitled to receive
retirement benefits under the superannuation fund operated by ICICI
Bank. The Superannuation fund is a defined contribution plan under
which ICICI Bank contributes annually a sum equivalent to 15% of the
employee's eligible annual salary to Life Insurance Corporation of
India, the manager of the fund, that undertakes to pay the lump sum
and annuity payments pursuant to the scheme. ICICI Bank contributed
Rs 10 million, Rs 12 million and Rs 20 million to the superannuation
plan in fiscal 1998, 1999 and 2000 respectively.
Provident fund
1.10.4 In accordance with Indian law, all employees of ICICI Bank are
entitled to receive benefits under the provident fund, a defined
contribution plan, in which, both the employee and ICICI Bank
contribute monthly at a determined rate (currently 12% of employees'
salary). These contributions are made to a fund set up by ICICI Bank
and administered by a board of trustees. ICICI Bank contributed Rs 7
million, Rs 11 million and Rs 16 million to the provident fund in
fiscal 1998, 1999 and 2000 respectively. Further, in the event the
return on the fund is lower than 12% (current guaranteed rate of
return to the employees), such difference will be contributed by
ICICI Bank and charged to income.
F-12
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Leave encashment
1.10.5 The liability for leave encashment on retirement or on termination of
services of the employee of ICICI Bank is valued on the basis of the
employee's last drawn salary and provided for. Accordingly ICICI Bank
has made a provision of Rs 1 million, Rs 4 million and Rs 6 million,
for fiscal 1998, 1999 and 2000 respectively.
1.11 Foreign currency transactions
1.11.1 Revenue and expenses in foreign currency are accounted at the
exchange rate on the date of the transaction. Foreign currency
balances at year-end are translated at the year-end exchange rates
and the revaluation gains/losses are adjusted through the income
statement.
1.11.2 Speculative forward exchange contracts are revalued at year-end based
on forward exchange rates for residual maturities and the contracted
rates and the revaluation gain/loss is recognised in the income
statement. Forward exchange contracts that are accounted for as
hedges of foreign currency exposures, are revalued based on year-end
spot rates and the spot rates at the inception of the contract. The
revaluation gain/loss is recognised in the income statement. Premium
or discount on such forward exchange contracts is recognised over the
life of the contract.
1.12 Derivative instruments
1.12.1 ICICI Bank enters into currency swaps with its corporate clients
which it hedges with the parent company. Such hedge contracts are
structured to ensure that changes in their market values would fully
offset the effect of a change in the fair value of the underlying
contracts. Accordingly, these swap contracts are designated as hedge
transactions and accounted for under accrual method.
1.12.2 ICICI Bank has entered into interest swap contracts for its own
balance sheet management purposes as well as for taking trading
positions. The contracts which have been entered into for its balance
sheet management purposes have been designated as `hedge
transactions' and accounted for under the accrual method. The
contracts entered into for trading purposes have been designated as
`Traded Contracts' and have been accounted at their fair value.
1.13 Debt issuance costs
1.13.1 Debt issuance costs are amortized over the tenure of the debt.
1.14 Dividends
1.14.1 Dividends on common stock and the related dividend tax are recorded
as a liability at the point of their approval by the board of
directors.
1.15 Earnings per share
1.15.1 Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share is computed by adjusting outstanding
shares assuming conversion of all potentially dilutive stock options
and other convertible securities.
F-13
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
1.16 Stock-based compensation
1.16.1 The Bank has introduced a stock option plan, wherein options were
granted to certain employees and whole time director of the Bank and
employees of the parent company. The Bank accounts for employee stock
options, granted to its employees and whole time director in
accordance with Accounting Principles Board ("APB") No. 25,
"Accounting for Stock issued to Employees" and furnishes the proforma
disclosures required under SFAS No. 123, "Accounting for Stock-based
compensation" in respect of these options.
1.16.2 Options granted to employees of the parent company are accounted for
in accordance with SFAS No 123. The Bank values the stock options
issued, based upon an option-pricing model and recognizes this value
as an expense over the period in which the options vest.
1.17 Accounting for outward clearing
1.17.1 In fiscal 2000, the Bank decided to account for cheques deposited by
customers and sent for clearing. Accordingly at March 31, 2000 Rs.
1,610 million has been accounted for as outward clearing suspense and
included in cash and cash equivalents and other liabilities
respectively. This change is not material to the financial position
of the Bank and accordingly, the outward clearing balance as at March
31, 1999 amounting to Rs 1,440 million has been included in the
financial statements for the year ended March 31, 1999.
2 Financial instruments
2.1.1 ICICI Bank provides a wide variety of financial instruments as
products to its customers, and it also uses these instruments in
connection with its own activities. Following are explanatory notes
regarding financial assets and liabilities, off-balance sheet
financial instruments, concentration of credit risk and the estimated
fair value of financial instruments.
2.1.2 Collateral requirements are assessed on a case-by-case evaluation of
each customer and product, and may include cash, securities,
receivables, property, plant and equipment and other assets.
2.2 Financial assets and liabilities
Cash and cash equivalents
2.2.1 Cash and cash equivalents at March 31, 2000 include a balance of Rs
6,904 million (March 31, 1999: Rs 4,565 million) maintained with the
Reserve Bank of India being the minimum daily stipulated amount to be
maintained. This balance is subject to withdrawal and usage
restrictions.
2.2.2 Cash and cash equivalents at March 31, 2000 also includes,
interest-bearing deposits with banks aggregating Rs 25,273 million
(March 31, 1999: Rs 11,083 million) and outward clearing suspense of
Rs 1,610 million (March 31, 1999: 1,440 million)
F-14
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Trading account assets
2.2.3 A listing of the trading account assets is set out below:
At March 31,
1999 2000
---------- ---------
(in Rs millions)
----------------------
Government of India securities ..................... 14,449 26,903
Equity securities .................................. 198 90
Mutual fund units .................................. -- 779
Revaluation gains on derivative and foreign
exchange contracts ............................... 425 309
Commercial paper /certificates of deposits ......... 750 147
------ ------
Total .............................................. 15,822 28,228
====== ======
2.2.4 In accordance with the Banking Regulation Act, 1949, ICICI Bank is
required to maintain a specified percentage of its net demand and
time liabilities by way of liquid unencumbered assets like cash, gold
and approved securities. The amount of securities required to be
maintained at March 31, 2000 was Rs 20,570 million (March 31, 1999:
Rs 12,875 million).
2.2.5 As at March 31, 2000, trading account assets included certain
securities amounting to Rs 72 million (March 31, 1999:Rs 18 million),
which are pledged in favour of certain banks for the purposes of
availing borrowing and funds transfer facilities.
Trading account revenue
2.2.6 A listing of trading account revenue is set out below:
Year ended March 31,
------------------------
1998 1999 2000
------ ----- ------
(in Rs millions)
-----------------------
Gain on sale of trading securities ................ 274 111 936
Revaluation gain/(loss) on trading securities ..... (127) 23 (79)
---- -- ---
Total ............................................. 147 134 857
=== === ===
Repurchase transactions
2.2.7 During the period under review, ICICI Bank has undertaken repurchase
and reverse repurchase transactions in Government of India
securities. The average level of repurchase outstandings during
fiscal 1999 and 2000 was Rs 417 million and Rs 225 million,
respectively. The average level of reverse repurchase transactions
outstanding during fiscal 1999 and 2000 was Rs 211 million and Rs 203
million, respectively. At March 31, 2000 outstanding repurchase and
outstanding reverse repurchase contracts amounts to Nil (March 31,
1999: Nil) and Rs 256 million (March 31, 1999: Nil) respectively.
F-15
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Securities, available for sale
2.2.8 The portfolio of securities, available for sale is set out below:
<TABLE>
At March 31, 1999
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gain loss Value
(in Rs millions)
--------------------------------------------
<S> <C> <C>
Corporate debt securities ................ 2,860 -- - 2,860
Government of India securities ........... 775 50 - 825
----- ----- ----- -----
Total debt securities .................... 3,635 50 - 3,685
Mutual fund units ........................ 266 12 - 278
----- ----- ----- -----
Total securities, available for sale ..... 3,901 62 - 3,963
===== ===== ===== =====
</TABLE>
<TABLE>
At March 31, 2000
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gain loss Value
(in Rs millions)
--------------------------------------------
<S> <C> <C> <C>
Corporate debt securities ............... 2,540 34 -- 2,574
Government of India securities .......... 914 89 -- 1,003
----- ----- ----- -----
Total debt securities ................... 3,454 123 -- 3,577
Mutual fund units ....................... 1,146 -- (14) 1,132
----- ----- ----- -----
Total securities, available for sale .... 4,600 123 (14) 4,709
===== ===== ===== =====
</TABLE>
Income from securities, available for sale
2.2.9 A listing of interest and dividends on available for sale securities
is set out below:
Year ended March 31,
--------------------------
1998 1999 2000
-------- ------- -----
(in Rs millions)
--------------------------
Interest ...................................... 129 248 358
Dividends ..................................... 19 57 326
--- --- ---
Total interest, including dividends .......... 148 305 684
=== === ===
F-16
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Maturity profile of debt securities
2.2.10 A listing of debt securities, available for sale at March 31, 1999
and March 31, 2000 by original contractual maturity is set out below:
March 31, 1999 March 31, 2000
-------------- --------------
Amortized Fair Amortized Fair
cost Value cost Value
(in Rs millions)
---------------------------------------
Corporate debt securities
Less than one year ............... 266 266 399 403
One to five years ................ 1,894 1,894 1,548 1,563
More than five years ............. 700 700 593 608
----- ----- ----- -----
Total ............................ 2,860 2,860 2,540 2,574
===== ===== ===== =====
Loans
2.2.11 A listing of loans by category is set out below:
At March 31,
1999 2000
---- ----
(in Rs millions)
-------------------------
Corporate
Working capital finance ........................ 17,508 31,576
Term loans ..................................... 2,731 3,798
Credit substitutes ............................. 6,762 10,532
Leasing and related activities ................. 366 305
Retail loans ................................... 1,110 1,553
------ ------
Gross loans .................................... 28,477 47,764
Aggregate allowance for credit losses .......... (880) (748)
------ ------
Net loans ...................................... 27,597 47,016
====== ======
2.2.12 Loans given to persons domiciled outside India at March 31, 2000 were
Rs 265 million (March 31, 1999: Rs 91 million).
2.2.13 Normally, the working capital advances are secured by a first lien on
current assets, principally comprising inventory and receivables.
Additionally, in certain cases ICICI Bank may obtain additional
security through a first or second lien on property and equipment, a
pledge of financial assets like marketable securities and
corporate/personal guarantees. The term loans are normally secured by
a first lien on the property and equipment and other tangible assets
of the borrower.
F-17
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Net investment in leasing activities
2.2.14 Contractual maturities of ICICI Bank's net investment in leasing
activities and its components, which are included in loans, are set
out below:
At March 31, 2000
-----------------
(in Rs millions)
----------------
Gross finance receivable for the year
ended/ending March 31
2001 ........................................................ 178
2002 ........................................................ 128
2003 ........................................................ 47
2004 ........................................................ 40
2005 beyond ................................................. 26
----
419
Less: Unearned income. ...................................... (68)
Security deposits...................................... (46)
----
Investment in leasing and other receivables. ................ 305
Less: Aggregate allowance for credit losses. ................ (104)
----
Net investment in leasing and other receivables ............. 201
===
Maturity profile of loans
2.2.15 A listing of each category of loans other than net investment in
leases and other receivables by maturity is set out below:
March 31, 1999
--------------
More than
Up to 1 Year 1-5 years 5 years Total
------------ --------- ------- -----
(in Rs millions)
------------------------------------------------
Term loan ....................... 784 1,886 61 2,731
Working capital finance ......... 15,240 2,268 - 17,508
Credit substitutes .............. - 5,744 1,018 6,762
Retail loans .................... 1,110 - - 1,110
------ ----- ----- -------
Total ........................... 17,134 9,898 1,079 28,111
====== ===== ===== ======
March 31, 2000
--------------
More than
Up to 1 Year 1-5 years 5 years Total
------------ --------- ------- -----
(in Rs millions)
------------------------------------------------
Term loan ....................... 1,402 2,302 94 3,798
Working capital finance. ........ 28,421 3,155 - 31,576
Credit substitutes. ............. 1,831 6,175 2,526 10,532
Retail loans and credit
card receivables ............... 1,553 - - 1,553
------ ----- ----- -------
Total ........................... 33,207 11,632 2,620 47,459
====== ====== ===== ======
F-18
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Interest and fees on loans
2.2.16 A listing of interest and fees on loans (net of unearned income) is
set out below:
Year ended March 31,
----------------------------------
1998 1999 2000
---- ---- ----
(in Rs millions)
---------------------------------
Working capital finance .................... 1,136 1,755 2,666
Term loan .................................. 176 338 480
Credit substitutes ......................... 74 465 981
Leasing and related activities ............. 38 21 14
Retail loans ............................... 75 128 296
----- ----- -----
Total ...................................... 1,499 2,707 4,437
===== ===== =====
Non-performing loans
2.2.17 A listing of non-performing loans is set out below:
At March 31,
---------------------
1999 2000
---- ----
(in Rs millions)
---------------------
Working capital finance ............................... 1,158 1,127
Term loan ............................................. 236 61
Credit substitutes .................................... 75 45
Leasing and related activities ........................ 144 185
----- -----
Total ................................................. 1,613 1,418
Allowance for credit losses ........................... (880) (748)
----- -----
Impaired loans net of valuation allowance ............. 733 670
===== =====
Loans without valuation allowance ..................... 466 163
Loans with valuation allowance ........................ 1,147 1,255
----- -----
Total ................................................. 1,613 1,418
===== =====
Interest foregone on non-performing assets ............ 93 124
Average non-performing loans .......................... 1,343 1,432
F-19
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Changes in the allowance for credit losses
2.2.18 A listing of the changes in allowance for credit losses is set out
below:
Year ended March 31,
--------------------
1998 1999 2000
---- ---- ----
(in Rs millions)
-----------------------------
Aggregate allowance for credit losses
at beginning of the year .................. 187 425 880
Additions
Provisions for credit losses, net of
release of provisions as a result of cash
collections................................ 360 540 427
--- --- -----
547 965 1,307
Write offs ................................. (122) (85) (559)
--- --- -----
Aggregate allowance for credit losses
at end of the year ....................... 425 880 748
=== === ===
Troubled debt restructuring
2.2.19 Loans at March 31, 2000 include loans aggregating Rs 43 million
(March 31, 1999: Rs 38 million), which are currently under a scheme
of debt restructuring and which have been identified as impaired
loans. The gross recorded investment in these loans is Rs 43 million
(March 31, 1999: Rs 38 million) against which an allowance for credit
losses aggregating Rs 25 million (March 31, 1999: Rs 22 million) has
been established. Income on restructured loans would have been Rs
6.90 million and Rs 7.70 million for fiscal 1999 and 2000
respectively, based on original terms, and was Rs 6.87 million and Rs
6.44 million for fiscal 1999 and 2000 respectively, based on the
restructured terms.
2.2.20 There are no commitments to lend incremental funds to any borrower
who is party to a troubled debt restructuring.
Concentration of credit risk
2.2.21 Concentrations of credit risk exist when changes in economic,
industry or geographic factors similarly affect groups of
counterparties whose aggregate credit exposure is material in
relation to ICICI Bank's total credit exposure. ICICI Bank's
portfolio of financial instruments is broadly diversified along
industry, product and geographic lines within the country.
F-20
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
2.2.22 A listing of the concentration of loan exposures by industry is set
out below:
<TABLE>
At March 31,
-------------------------------------------
1999 2000
-------------------- --------------------
(in Rs % (in Rs %
millions) millions)
------------ ----- ----------- ------
<S> <C> <C> <C> <C>
Light manufacturing ........................ 2,800 9.83 4,895 10.25
Chemical, Paints and Pharmaceuticals ....... 2,420 8.50 5,772 12.08
Finance .................................... 1,949 6.84 6,113 12.80
Transport .................................. 159 0.56 1,686 3.53
Electricity ................................ 1,488 5.23 2,784 5.83
Textiles ................................... 1,405 4.93 1,600 3.35
Metal and metal products .................. 1,370 4.81 1,269 2.66
Automobile ................................. 1,006 3.53 1,680 3.52
Construction ............................... 740 2.60 882 1.85
Iron and steel. ............................ 620 2.18 703 1.47
Cement ..................................... 540 1.90 1,124 2.35
Software ................................... 460 1.62 823 1.72
Agriculture ................................ 675 2.37 1,520 3.18
Personal loans ............................. 1,110 3.90 1,553 3.25
Paper and paper products ................... 373 1.30 745 1.56
Other industries ........................... 11,362 39.90 14,615 30.60
------ ----- ------ -----
Total 28,477 100.00 47,764 100.00
====== ====== ====== ======
</TABLE>
Unearned income
2.2.23 A listing of unearned income is set out below:
At March 31,
------------------
1999 2000
---- ----
(in Rs millions)
------------------
Unearned income on leasing and other receivable
transactions ................................... 84 68
Unearned commission on guarantees ................ 73 104
Unearned income on letters of credit ............. 17 15
Unamortized loan origination fees ................ - 30
F-21
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Deposits
2.2.24 Deposits include demand deposits, which are non-interest-bearing and
savings and time deposits, which are interest-bearing. A listing of
deposits is set out below:
At March 31,
----------------------------
1999 2000
---------- ---------
(in Rs millions)
----------------------------
Interest bearing
Savings deposits ....................... 2,271 5,332
Time deposits .......................... 52,692 77,453
------ ------
54,963 82,785
Non-interest bearing
Demand deposits ........................ 5,766 15,875
------ ------
Total .................................. 60,729 98,660
====== ======
2.2.25 At March 31, 2000, term deposits of Rs 71,319 million (March 31,
1999: Rs 48,720 million) have a residual maturity of less than one
year. The balance of the deposits mature between one to seven years.
Trading account liabilities
2.2.26 Trading account liabilities at March 31, 2000 include borrowings from
banks in the inter-bank call money market of Rs 1,922 million (March
31, 1999: Rs 418 million).
Long-term debt
2.2.27 Long-term debt represent debt with an original maturity of greater
than one year. Long term debt bears interest at fixed contractual
rates ranging from 12.5% to 17%. A listing of long-term debt by
residual maturity is set out below:
At March 31, 1999 At March 31, 2000
----------------- -----------------
(in Rs % (in Rs %
millions) millions)
--------- ---------
Residual maturity
One year to five years ....... 1,084 62 1,796 73
Five years to 10 years ....... 680 38 680 27
----- --- ----- ---
Total ........................ 1,764 100 2,476 100
===== === ===== ===
2.2.28 Long term debt at March 31, 2000 includes unsecured non-convertible
subordinated debt of Rs 1,680 million (March 31, 1999: Rs 1,680
million).
F-22
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
2.3 Off-balance sheet financial instruments
Foreign exchange and derivative contracts
2.3.1 ICICI Bank enters into foreign exchange forward contracts and
currency swaps with interbank participants and customers. These
transactions enable customers to transfer, modify or reduce their
foreign exchange and interest rate risks.
2.3.2 Forward foreign exchange contracts are commitments to buy or sell
foreign currency at a future date at the contracted rate. Currency
swaps are commitments to exchange cash flows by way of interest in
one currency against another currency and exchange of notional
principal amount at maturity based on predetermined rates. Currency
swaps offered to customers are hedged by opposite contracts with the
parent company and are accounted for as hedge contracts.
2.3.3 The market and credit risk associated with these products, as well as
the operating risks, are similar to those relating to other types of
financial instruments. Market risk is the exposure created by
movements in interest rates and exchange rates, during the currency
of the transaction. The extent of market risk affecting such
transactions depends on the type and nature of the transaction, value
of the transaction and the extent to which the transaction is
uncovered. Credit risk is the exposure to loss in the event of
default by counterparties. The extent of loss on account of a
counterparty default will depend on the replacement value of the
contract at the ongoing market rates.
2.3.4 The following table presents the aggregate notional principal amounts
of ICICI Bank's outstanding foreign exchange and derivative contracts
at March 31, 2000 and March 31, 1999 together with the related
balance sheet credit exposure.
Notional principal Balance sheet credit
amounts exposure (Note 1)
At March 31, At March 31,
------------ ------------
1999 2000 1999 2000
(in Rs millions)
----------------------------------------
Interest rate agreements
Swap agreements ................. -- 900 -- --
------ ------ ------ ------
-- 900 -- --
====== ====== ====== ======
Foreign exchange products
Forward contracts ............... 36,705 62,892 425 309
Swap agreements ................. 2,962 7,658 -- --
------ ------ ------ ------
39,667 70,550 425 309
====== ====== ====== ======
Note 1: Balance sheet credit exposure denotes the mark-to-market impact of
the derivative and foreign exchange products on the reporting date.
Loan commitments
2.3.5 ICICI Bank has outstanding undrawn commitments to provide loans and
financing to customers. These loan commitments aggregated Rs 9,215
million and Rs 11,643 million at March 31, 2000 and March 31, 1999
respectively. The interest rate on these commitments is dependent on
the lending rates on the date of the loan disbursement. Further, the
commitments have fixed expiry dates and may be contingent upon the
borrowers ability to maintain specific credit standards.
F-23
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
Guarantees
2.3.6 As a part of its commercial banking activities, ICICI Bank has issued
guarantees and letters of credit to enhance the credit standing of
its customers. These generally represent irrevocable assurances that
ICICI Bank will make payments in the event that the customer fails to
fulfill his financial or performance obligations. Financial
guarantees are obligations to pay a third party beneficiary where a
customer fails to make payment towards a specified financial
obligation. Performance guarantees are obligations to pay a third
party beneficiary where a customer fails to perform a non-financial
contractual obligation. The guarantees are generally for a period not
exceeding 18 months.
2.3.7 The credit risk associated with these products, as well as the
operating risks, are similar to those relating to other types of
financial instruments. Fees are recognised over the term of the
facility.
2.3.8 Details of facilities outstanding are set out below:
At March 31,
---------------------------
1999 2000
---- ----
(in Rs millions)
---------------------------
Financial guarantees ..................... 2,733 4,270
Performance guarantees ................... 1,897 3,295
----- -----
Total .................................... 4,630 7,565
===== =====
2.4 Estimated fair value of financial instruments
2.4.1 ICICI Bank's financial instruments include financial assets and
liabilities recorded on the balance sheet, as well as off-balance
sheet instruments such as foreign exchange and derivative contracts.
A listing of the fair value of these financial instruments is set out
below:
<TABLE>
Carrying Estimated Estimated fair Carrying Estimated Estimated fair
value fair value value in excess value fair value value in excess
of/(less than) of/(less than)
carrying value carrying value
March 31,
---------
1999 2000
--------------------------------------- -------------------------------------
(in Rs millions)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial assets 76,265 76,182 (83) 130,416 130,163 (253)
Financial liabilities 73,435 73,837 402 119,029 119,554 525
</TABLE>
2.4.2 Fair values vary from period to period based on changes in a wide
range of factors, including interest rates, credit quality, and
market perception of value and as existing assets and liabilities run
off and new items are generated.
F-24
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
2.4.3 A listing of the fair values by category of financial assets and
financial liabilities is set out below:
<TABLE>
Particulars Carrying Estimated Estimated fair Carrying Estimated Estimated fair
value fair value value in excess value fair value value in excess
of/(less than) of/(less than)
carrying value carrying value
March 31,
---------
1999 2000
--------------------------------------- -------------------------------------
(in Rs millions)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Securities ....................... 3,963 3,963 - 4,709 4,709 -
Trading assets ................... 15,822 15,822 - 28,228 28,228 -
Loans (Note 1) ................... 27,597 27,514 (83) 47,016 46,763 (253)
Other financial assets (Note 2) .. 28,883 28,883 - 50,463 50,463 -
------ ------ ----- ------ ------ ----
Total ............................ 76,265 76,182 (83) 130,416 130,163 (253)
====== ====== ===== ======= ======= ====
Financial liabilities
Interest-bearing deposits ........ 54,963 55,365 402 82,785 83,175 390
Non-interest-bearing deposits .... 5,766 5,766 - 15,875 15,875 -
Trading account liabilities ...... 418 418 - 1,922 1,922 -
Long-term debt. .................. 1,764 1,764 - 2,476 2,611 135
Other financial liabilities
(Note 3) ....................... 10,524 10,524 - 15,971 15,971 -
------ ------ ----- ------- ------
Total 73,435 73,837 402 119,029 119,554 525
====== ====== ===== ======= ======= ====
Derivatives
Currency swaps (Note 4) - - 12 - - 51
Interest rate swaps. - - - - - 39
</TABLE>
Note 1: The carrying value of loans is net of allowance for credit losses.
Note 2: Includes cash, due from banks, deposits at interest with banks,
short-term highly liquid securities, and customers acceptance
liability for which the carrying value is a reasonable estimate of
fair value.
Note 3: Represents acceptances and other liabilities outstanding, for which
the carrying value is a reasonable estimate of the fair value.
Note 4: All customer positions are hedged by opposite contracts with the
parent company.
2.4.4 The above data represents management's best estimates based on a
range of methodologies and assumptions. Quoted market prices are used
for many securities. For performing loans, contractual cash flows are
discounted at current market origination rates for loans with similar
terms and risk characteristics. For impaired loans, the impairment is
considered while arriving at the fair value. For liabilities, market
borrowing rates of interest of similar instruments are used to
discount contractual cash flows.
2.4.5 The estimated fair value of loans, interest-bearing deposits and long
term debt reflects changes in market rates since the loans were given
and deposits were taken.
F-25
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
3 Property and equipment
3.1.1 Property and equipment are stated at cost less accumulated
depreciation. Generally, depreciation is computed over the estimated
useful life of the asset.
3.1.2 A listing of property and equipment by asset category is set out
below:
At March 31,
------------------------
1999 2000
---- ----
(in Rs millions)
------------------------
Land ........................................... 121 126
Building ....................................... 977 1,352
Equipment and furniture ........................ 738 1,151
Capital work in progress ....................... 308 52
----- -----
Gross value of property and equipment .......... 2,144 2,681
Less: Accumulated depreciation ................ (383) (584)
----- -----
Net value of property and equipment ............ 1,761 2,097
===== =====
3.1.3 Capital work in progress at March 31, 2000 include capital advances
of Rs 52 million (March 31, 1999: Rs 91 million). Interest
capitalized for the year ended March 31, 2000 is Rs 16 million (March
31, 1999: Rs 12 million).
3.1.4 Depreciation charge in fiscal 1998, 1999 and 2000 amounts to Rs 131
million, Rs 173 million and Rs 201 million, respectively.
4 Other assets
4.1.1 Other assets at March 31, 2000 include interest accrued of Rs 1,147
million (March 31, 1999: Rs 662 million), deposits in leased premises
of Rs 185 million (March 31, 1999: Rs 157 million) and prepaid
expenses of Rs 3 million (March 31, 1999: Rs 18 million).
5 Other liabilities
5.1.1 Other liabilities at March 31, 2000 include accounts payable of Rs
1,422 million (March 31, 1999: Rs 1,121 million) and interest accrued
but not due on deposits amounting to Rs 335 million (March 31, 1999:
Rs 235 million).
6 Common stock
6.1.1 At March 31, 2000 and March 31, 1999, the authorized common stock was
300 million shares with a par value of Rs 10 per share. At March 31,
2000 the issued common stock was 196.80 million shares with paid up
value of Rs 1,968 million. At March 31, 1999, the issued common stock
was 165 million shares with paid-up values of Rs 1,650 million.
F-26
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
7 Restricted retained earnings
7.1.1 Retained earnings at March 31, 2000 computed as per generally
accepted accounting principles of India include profits aggregating
to Rs 1,039 million (March 31, 1999: Rs 789 million) which are not
distributable as dividends under the Banking Regulation Act, 1949.
These relate to requirements regarding earmarking a part of the
profits under banking laws. Utilization of these balances is subject
to approval of the Board of Directors and needs to be reported to
Reserve Bank of India. Statutes governing the operations of ICICI
Bank mandate that dividends be declared out of distributable profits
only after the transfer of at least 20% of net income, computed in
accordance with current banking regulations, to a statutory reserve.
Additionally, the remittance of dividends outside India is governed
by Indian statutes on foreign exchange transactions.
8 Employee stock option plan
8.1.1 In February 2000, the Bank introduced its employee stock option plan
wherein an aggregate of 1,788,000 options representing 1,788,000
shares were made available for grant to certain employees and
directors of the Bank and certain employees of the parent company.
These options vest over three years and have a maximum term of 10
years. Of these 994,250 options were granted to the employees and
75,000 options were granted to non-whole time directors of the bank
at an exercise price of Rs 171.90, which was equal to the quoted
market value of the Bank's common stock on the date of grant. The
awards to non-whole time directors of the bank were forfeited and
such options have been retired from the plan. The Bank has computed
and recognised compensation cost of Rs 40 million for 718,750 options
granted to the employees of the parent company. This amount will be
expensed over the vesting period.
8.1.2 Had compensation costs of the Bank's stock based compensation plan
been recognized based on the fair value on the grant date consistent
with the method prescribed by SFAS No 123, the Bank's net income and
earnings per share for the year ended March 31, 2000 would have been
impacted as indicated below:
For the year ended March 31, 2000
(Rs in millions,
except per share
data)
Net income
As reported ......................................... 1,402
Proforma under SFAS No 123 .......................... 1,401
Basic earnings per share:
As reported ......................................... 8.49
Proforma under SFAS No 123 .......................... 8.49
Diluted earnings per share
As reported ......................................... 8.49
Proforma under SFAS No 123 .......................... 8.49
8.1.3 The effects of applying SFAS No. 123, for disclosing compensation
cost under such pronouncement may not be representative of the
effects on reported net income for future years.
F-27
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
8.1.4 The fair value of the stock options granted was estimated on the date
of grant using the Black-Scholes option-pricing model, with the
following assumptions:
For the year ended March 31, 2000
---------------------------------
Expected life in years ................................ 3
Risk free interest rate ............................. 10.35%
Volatility ............................................ 30.0%
Dividend yield ........................................ 0.7%
9 Income taxes
9.1 Components of deferred tax balances
9.1.1 The tax effects of significant temporary differences are reflected
through a deferred tax asset/liability, which is included in the
balance sheet of ICICI Bank.
9.1.2 A listing of the temporary differences is set out below:
At March 31,
-----------------
1999 2000
---- ----
(in Rs millions)
-----------------
Deferred tax assets
Provision for loan losses .............................. 309 303
Non-funded provision ................................... -- 6
Leave encashment ....................................... 2 3
Loan processing fee amortization ....................... -- 12
Unrealized loss on securities, available for sale ...... 21 --
Others ................................................. 16 1
----- -----
Total deferred tax asset ............................... 348 325
Valuation allowances ................................... -- --
----- -----
Net deferred tax asset ................................. 348 325
Deferred tax liabilities
Property and equipment ................................. (187) (277)
Investments ............................................ (3) --
Unrealized gains on securities, available for sale ..... (11) --
Amortization of software cost .......................... (12) (11)
Amortization of debt issue costs ....................... (4) (4)
Performance Bonus ...................................... -- (18)
Others ................................................. (1) (3)
----- -----
Total deferred tax liability ........................... (218) (313)
----- -----
Net deferred tax asset/(liability) .................... 130 12
===== =====
Current ................................................ 10 (14)
Non-current ............................................ 120 26
9.1.3 Management is of the opinion that the realization of the recognized
net deferred tax asset of Rs 12 million at March 31, 2000 (March 31,
1999: Rs 130 million) is more likely than not based on expectations
as to future taxable income.
F-28
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
9.2 Reconciliation of tax rates
9.2.1 The following is the reconciliation of estimated income taxes at
Indian statutory income tax rate to income tax expense as reported.
Year ended March 31,
----------------------------
1998 1999 2000
---- ---- ----
(in Rs millions)
---------------------------
Net income before taxes .................... 402 673 1,781
Statutory tax rate ......................... 35% 35% 38.5%
Income tax expense at statutory tax rate ... 141 236 686
Increase (reductions) in taxes on account of
Income exempt from taxes ................... (30) (81) (340)
Effect of change in statutory tax rate ..... (15) -- 6
Others ..................................... 8 15 27
--- ---- ---
Reported income tax expense ................ 104 170 379
=== === ===
9.3 Components of income tax expense
9.3.1 The components of income tax expense are set out below:
Year ended March 31,
----------------------------
1998 1999 2000
---- ---- ----
(in Rs millions)
---------------------------
Current .................................... 203 300 266
Deferred ................................... (99) (130) 113
--- ---- ---
Total income tax expense ................... 104 170 379
=== === ===
10 Earnings per share
10.1 A listing of earnings per share is set out below:
<TABLE>
Year ended March 31,
-----------------------------------------------------------
1998 1999 2000
----------------- ------------------ ------------------
(in Rs millions except per share data)
Basic Fully Basic Fully Basic Fully
diluted Diluted Diluted
Earnings
<S> <C> <C> <C> <C> <C> <C>
Net Income ................................ 298 298 503 503 1,402 1,402
Shares
Weighted average common shares
outstanding.............................. 162.08 162.08 165.00 165.00 165.09 165.09
Dilutive effect of stock options
outstanding.............................. - - - - - 0.02
Total ..................................... 162.08 162.08 165.00 165.00 165.09 165.11
Earnings per share ........................ 1.84 1.84 3.05 3.05 8.49 8.49
</TABLE>
F-29
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
11 Segmental disclosures and related information
11.1 Segmental disclosures
11.1.1 ICICI Bank's operations are solely in the financial services industry
and consist of providing traditional banking services, primarily
commercial lending activities, treasury operations and retail banking
activities. ICICI Bank carries out these activities through offices
in India. Operating decisions are made based upon reviews of the
Bank's operations as a whole. As a result, ICICI Bank constitutes the
only reportable segment.
11.2 Geographic distribution
11.2.1 The business operations of ICICI Bank are largely concentrated in
India. Accordingly the entire revenue assets and net income are
attributed to Indian operations.
Major customers
11.2.2 ICICI Bank provides banking and financial services to a wide base of
customers. There is no major customer which contributes more than 10%
of total revenues.
12 Commitments and contingent liabilities
12.1.1 ICICI Bank is obligated under a number of capital contracts. Capital
contracts are job orders of a capital nature which have been
committed. Estimated amounts of contracts remaining to be executed on
capital account aggregated to Rs 6 million at March 31, 2000 (March
31, 1999: Rs 62 million ).
Lease commitments
12.1.2 ICICI Bank has commitments under long-term operating leases
principally for premises and Automated Teller Machines. Lease terms
for premises generally cover periods of nine years. The following is
a summary of future minimum lease rental commitments for
non-cancelable leases.
March 31, 2000
(in Rs millions)
-----------------
2001 ........................................... 119
2002 ........................................... 131
2003 ........................................... 144
2004 ........................................... 158
2005 ........................................... 174
Thereafter ..................................... 350
-----
Total minimum lease commitments ................ 1,076
=====
12.1.3 Various tax-related legal proceedings are pending against ICICI Bank.
Potential liabilities, if any, have been adequately provided for, and
management does not estimate any incremental liability in respect of
legal proceedings.
F-30
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
13 Related party transactions
13.1.1 ICICI Bank has entered into transactions with the following related
parties:
- The parent company;
- Affiliates of the Bank;
- Employees Provident Fund Trust; and
- Directors and employees of the group.
13.1.2 The related party transactions can be categorized as follows:
Banking services
13.1.3 ICICI Bank provides banking services to all the related parties on
the same terms that are offered to other customers.
13.1.4 The revenues earned from these related parties are set out below:
Year ended March 31,
--------------------------------
(in Rs Millions)
--------------------------------
1998 1999 2000
---- ---- ----
Parent company .................... 15 12 24
Affiliates(1) ..................... 5 4 6
---- ---- ----
Total ............................. 20 16 30
==== ==== ====
----------
(1) Comprising ICICI securities and Finance Company Limited, ICICI Brokerage
Services Limited, ICICI Capital Services Limited, Prudential ICICI Asset
Management Company Limited and ICICI Venture Funds Management Company
Limited
13.1.5 ICICI Bank has paid to the parent company interest on deposits and
borrowings in call money markets amounting to Rs 105 million, Rs 125
million and Rs 261 million in fiscal 1998, 1999 and 2000
respectively. Similarly, interest paid to affiliates on deposits and
call money borrowings amount to Rs 3 million, Rs 20 million and Rs 49
million in fiscal 1998, 1999 and 2000 respectively.
13.1.6 ICICI Bank paid brokerage to ICICI Brokerage Services Limited
amounting to Rs 1 million, Rs 2 million and Rs 3 million for fiscal
1998, 1999 and 2000 respectively.
Leasing of premises and infrastructural facilities
13.1.7 ICICI Bank has entered into lease agreements with the parent company
for the lease of certain premises and infrastructural facilities to
ICICI Bank. Total amount paid as rent for 1998, 1999 and 2000 is Rs
20 million, Rs 7 million and Rs 36 million respectively. Similarly,
during the fiscal 2000, ICICI Bank paid Rs 5 million towards lease
rentals on certain equipment leased from the parent company. ICICI
Bank has also paid interest of Rs 4 million to the parent company for
capital advances made by the parent company for purchase of
equipment.
Acquisition of premises
13.1.8 ICICI Bank purchased premises from the parent company for Rs 532
million in fiscal 1998.
Derivative transactions
13.1.9 ICICI Bank enters into foreign exchange currency swaps and interest
rate swaps with the parent company on a back to back basis. The
outstanding contracts at March 31, 2000 are cross currency swaps
amounting to Rs 3,829 million and interest rate swaps amounting to Rs
800 million.
F-31
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
13.1.10 Expenses for services rendered
ICICI Bank paid Rs 1 million, Rs 1 million and Rs 2 million in fiscal
1998, 1999 and 2000 to the parent company for use of the parent
company's employees. ICICI Bank also paid Rs 10 million in the year
ended March 31, 2000 to ICICI Infotech Services Limited for use of
the employees of ICICI Infotech for information technology services.
Receipts for services rendered
13.1.11 ICICI Bank has received Rs 6 million in fiscal 2000 from the parent
company for use of its employees. The Bank has receivables of Rs 11
million from ICICI PFS Limited, Rs 1 million from Prudential ICICI
Limited and Rs 1 million from ICICI Capital Limited as reimbursement
of expenditure upon the representatives of these affiliates.
Share transfer activities
13.1.12 ICICI Bank has paid Rs 3 million, Rs 6 million and Rs 4 million in
fiscal 1998, 1999 and 2000 respectively to ICICI Infotech Services
Limited for share transfer services provided by them. The Bank has
paid Rs 6 million in fiscal 2000 for DEMAT services provided by the
above affiliate.
Other transaction with related parties
13.1.13 ICICI Bank has advanced loans to employees, bearing interest ranging
from 3.5% to 6%. These are housing, vehicle and general purpose
loans. The tenure of these loans ranges from five to twenty years.
Further, ICICI Bank has advanced loans at 16% to employees for
purchase of its equity shares at the time of the public issue. The
balance outstanding at March 31, 1999 and March 31, 2000 was Rs 138
million and Rs 221 million respectively.
13.1.14 During the year ended March 31, 2000 ICICI Bank entered into an
agreement with ICICI Personal Financial Services Limited for availing
telephone banking call centers services and for performing all the
transaction processing services for the credit card related
activities. The amount paid during fiscal 2000 for these services was
Rs 3 million and Rs 28 million respectively.
13.1.15 ICICI Bank sold certain investments to Prudential ICICI Asset
Management Company Limited and booked a gain of Rs 3 million during
the year ended March 31, 2000. As on March 31, 2000 ICICI Bank has
investments in the mutual fund schemes of the above company amounting
to Rs 700 million.
13.1.16 The balances pertaining to receivables from and payable to related
parties are as follows:
Parent Affiliates(1)
company
(in Rs millions)
--------------------------
At March 31, 1999
Accounts payable ......................... 3,081 217
At March 31, 2000
Accounts receivable ...................... 1 --
Accounts payable ......................... 3,503 1,514
----------
(1) Comprises ICICI securities and Finance Company Limited, Prudential ICICI
Asset Management Company Limited, Prudential ICICI Trust Limited, ICICI
Infotech Services Limited, ICICI Brokerage Services Limited, ICICI Personal
Financial Services Limited, ICICI Capital Services Limited, ICICI Venture
Funds Management Company Limited, ICICI Properties Limited and ICICI Home
Finance Company Limited.
F-32
<PAGE>
ICICI BANK LIMITED
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
14 Capital adequacy requirements
14.1.1 The Company is a banking company within the meaning of the Indian
Banking Regulation Act, 1949, registered with and subject to
examination by the Reserve Bank of India.
14.1.2 ICICI Bank is subject to the capital adequacy requirements set by the
Reserve Bank of India, which stipulate a minimum ratio of capital to
risk adjusted assets and off-balance sheet items, at least half of
which must be Tier I capital. Effective March 31, 2000 the Reserve
Bank of India has increased the minimum capital adequacy ratio to 9%.
The capital adequacy ratio of the Bank calculated in accordance with
the Reserve Bank of India guidelines at March 31, 2000 and March 31,
1999 was 19.64% and 11.06% respectively.
15 Future impact of new accounting standards
15.1.1 In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Standards ("SFAS") No. 133, "Accounting
for derivative instruments and hedging activities" (SFAS No. 133). In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," which delayed the effective date of SFAS
No. 133 to fiscal periods beginning after June 15, 2000. As the
derivative activities of ICICI Bank are not significant, the future
impact of SFAS No. 133 on the financial statements of ICICI Bank is
unlikely to be material.
16 Year 2000
16.1.1 To date, ICICI Bank has not encountered any material Year 2000 issues
concerning its respective computer programs. ICICI Bank's plan for
the Year 2000 included replacing or updating existing systems (which
were not Year 2000 compliant), assessing the Year 2000 preparedness
of clients and counterparties and formulating a contingency plan to
ensure business continuity in the event of unforeseen circumstances.
17 Previous year's figures are regrouped and reclassified, where
appropriate. For and on behalf of the Board of directors
-------------------------------
HN Sinor
Managing Director & CEO
--------------------------------
Uday M Chitale
Director
---------------------------- ------------------------
G Venkatakrishnan Bhashyam Seshan
Executive Vice President Company Secretary
& Chief Financial Officer
F-33
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. Description of Document
----------- ------------------------------------------------------------------
1.1 ICICI Bank Articles of Association, as amended (incorporation by
reference from ICICI Bank's Registration Statement on Form F-1
(File No. 333-30132)
1.2 ICICI Bank Memorandum of Association, as amended (incorporation
by reference from ICICI Bank's Registration Statement on Form F-1
(File No. 333-30132)
2.1 Deposit Agreement among ICICI Bank, Bankers Trust Company and the
holders from time to time of American Depositary Receipts issued
thereunder(including as an exhibit, the form of American
Depositary Receipt) (incorporated by reference from ICICI Bank's
Registration Statement on Form F-1 (File No. 333-30132)).
2.2 ICICI Bank's Specimen Certificate for Equity Shares (incorporated
by reference from ICICI Bank's Registration Statement on Form F-1
(File No. 333-30132)).
4.1 ICICI Ltd. Employee Stock Option Plan (incorporated by reference
from ICICI Ltd.'s Annual Report on Form 20-F for the year ended
March 31, 2000 filed on September 27, 2000).
<PAGE>
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
For ICICI BANK LIMITED
By: /s/ H. N. Sinor
---------------------------------------
Name: H. N. Sinor
Title: Managing Director and
Chief Executive Officer
Place: Mumbai
Date: October 11, 2000
