RESERVE BANK OF INDIA

ICICI Bank Ltd.

Assessment as on March 31, 2015

Risk Assessment Report (RAR)

Major Areas of Financial Divergence
Findings on Capital and Earnings
Major Areas of Non Compliance
Table of Contents

Introduction... ... ... . .. ... ... ... ... . . ... ... . . ... ... . . 3
Part I: Risk Assessment Report... 4
Summary of Aggregate Risk at Bank Level. """""""".".""". 4
Findings on Risks and Control Gaps Assessed... ................... ..... 5
Governance & Oversight........................................................ 5
Credit Risk... 8
Market Risk... 14
Liquidity Risk....................................................................... 16
Operational (Non-IT) Risk..................... .. ............................. 19
Operational (IT) Risk 23
Other Pillar II Risks................................ .... ............. .... ...... 24
Part II: Major Areas of Financial Divergence................ . . ............ 26
Part III: Findings on Capital and Earnings............... 27
Pillar I Capital & CRAR..................... . .... .............................. 27
Capital Management, ICAAP and Stress Tests (including SREP)... 28
Assessment of Internal Generation of Capital...... 29
Scope & ability to infuse capital... ... 30
Assessment of Leverage Ratio...... 30

Part IV: Major Areas of Non-Compliance........................... . ......... 31

Part V: Annex............................................................................ 1-10
Annex-1: Major Areas of Financial Divergence... 1
Annex-2: Computation of Outside Liabilities............................... 3
Annex-3: Assessed Net Worth........................... .................... 4
Annex-4: Computation of Assessed Capital........ . ......... .......... 5
An nex-5: Assessment of I nternal Generation of Capital...... 7
Annex-6: Leverage Ratio............................... ............ .......... 10

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 INTRODUCTION

A separate exercise of asset quality review (AQR), 2015 was conducted during the
current supervisory cycle with specific focus on compliance with regulatory guidelines
on IRACP norms. The review covered, inter alia, deficiencies in the systems and
processes in the bank which led to improper/ incorrect classification of assets. The
report containing findings of the AQR were shared with the bank and, after discussion,
the bank has been advised to take a review of the accounts covered under AQR by
following a proactive approach with regard to classification and provisioning by strictly
applying the IRACP norms in letter and spirit, by March 31, 2016. Further, with a view
to putting the viable assets back on track in case of failed CDR restructuring cases, the
bank was given time up to March 31,2017 to take a review of these cases. However, in
the interregnum, the bank will be required to build up prudential provision of 15%(
including 5% regulatory provision for restructured standard asset as on March 31,
2016) for failed CDR restructuring cases by March 31,2017.
In view of the above, the full impact of AQR on the bank's profitability, capital, earnings,
risk scores, etc., is not determinable in the current supervisory cycle. The impact of
AQR, therefore, has not been included while presenting the assessment in this
Inspection report.
The risk assessment of ICICI Bank for 2014-15 under the Supervisory Program for
Assessment of Risk and Capital (SPARC) was completed with March 31, 2015 as the
reference date. The assessment was made based on the off-site analysis of the data
and information furnished by the bank as well as the findings of the on-site Inspection
for Supervisory Evaluation (ISE) undertaken from October OS, 2015 to December 10,
2015 and various explanations offered by the bank in course of inspection.
As per the SPARC process, the aggregate Risk Score of the bank is arrived at 2.396,
which is indicative of high risk. On applying the assessed CRAR (16.87%) to the
aggregate risk score, the Risk of Failure score of the bank is arrived at 1.976.

Confidential Page 30f32

 PART I: RISK ASSESSMENT REPORT

Summary of Aggregate Risk at Bank Level

Inherent Risk Control Gap Aggregate Risk

Risk Category
A (1-4) B (1-4) A+B

Board 2.006

Senior Management 1.678

Risk Governance 1.976

Internal Audit 2.335

1.999

Credit Risk 3.126 2.622 2.975

Market Risk 1.987 1.983 1.986

Liquidity Risk 1.984 1.670 1.890

Operational (non-IT) Risk 2.345 1.872 2.203

Operational (IT) Risk 2.374 1.708 2.174

Other Pillar II Risk 1.702 1.855 1.748

2.466

BANK LEVEL AGGREGATE RISK 2.396

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 FINDINGS ON RISKS AND CONTROL GAPS
1. Governance & Oversight: Aggregate Score (1.999)
Major observations
1.1 Board Score: 2.006
I
1.1.1 Conduct of Board Level Committees
1. The role and responsibilities of each board committee was defined, who in
turn apprised the board on their respective areas. While the minutes of the
board committee indicated that members discussed a wide range of issues
and issued directions / guidance, in certain areas involving internal
processes of NPA identification and internal RBS, they were not proactive.
Board / ACB had not examined why the bank's internal system had not
identified the divergences as identified by successive RBI onsite inspections
including the recent AQR exercise.
2. The NPA identification was done through NPA tracker which had a design
gap. It was focused by and large on record of recovery. The concerned
division did not have mandate to examine the full database and extract
information as required by IRAC norms. The tracker was provided with
extracted data files containing limited information, primarily pertaining to
record of recovery. As a result, many of the non-financial and qualitative
parameters governing IRAC were not taken into account by the NPA tracker
leading to under identificationof NPAs.
1 .1 .2 Board Oversight of Risk Functions
~ 1. Board approved the Risk Management Framework, which stipulated the risk
limits & controls and risk tolerance. The bank stipulated zero tolerance limit
for compliance breach. However. as per the Risk Management Framework,
a compliance breach would be deemed to have occurred only when a
regulatory penalty was imposed. This was misleading as penalty was
imposed only in extreme cases. There were about 18 cases of non-
compliance during the previous year, but total no of penalty cases were only
three.
2. The Board and concerned Board Committees had not instructed CRMD to
review / revisit the internal ratings of large accounts when external rating
agencies downgrade these accounts to default grade. The Credit
Committee /Risk Committee/COEDhad also not raised any issue as to why
certain of the large exposures were not externally rated. This was fraught

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 with risk as the bank could be misled into taking unwarranted additional
exposure because of the continued investible internal rating.
1.2 Senior Management I Score: 1.678
1.2.1 Conflict of Interest
Chief Risk Officer had an internal target for containing the provisions of the
bank at a certain level. He was also involved in the NPA identification process
as no account could be downgraded without risk team examining it. The CRO
position may be kept independent of the business functions and targets having
financial implications.
1.2.2 The Chief of Internal Vigilance (CIV) of the bank was reporting to the Head-
Financial Crime Prevention Group. The CIV did not have a fixed tenure as
prescribed by regulatory guideline
1.2.3 Effectiveness of Senior Management
There was a risk built up in the credit portfolio on account of various deviations
allowed in some of the big group accounts during each post sanction period.
In the case of Essar Global Fund Ltd. (2012 sanction, current exposure ~48460
mn), an Essar Group holding Co based in Cayman Island and in GVK Coal
Developers, deviations allowed included breach of single borrowerl group
borrower limit for its exposure in Bahraini Dubai and Singapore. In two other
Essar group companies, Non Disposal Undertaking (NDU) of the guarantor,
non-disposal of assets of the borrower I guarantor were waived. Such
deviations and concessions significantly weakened the security position of the
bank.
1.2.4 Consequent to the observations on discriminatory pricing of bulk deposits under
RBS 2014, the bank had submitted its compliance to maintain transparency in
card rates and to declare them in advance on T-1. However bank had raised
several such deposits from RRB's in FY 2015 at rates higher than the
applicable card rates. This was not in conformity with our guidelines as well as
bank's earlier submission of compliance.
1.3 Risk Governance Score: 1.976
I
1.3.1 Risk Governance Framework
The Internal Audit of the bank had downgraded the rating of Credit Risk
Management Group from four 'star' to three 'star' during the reference period.
The ratings given out by CRMG had a high percentage of error at parameter
level as well as at the composite level (in about 35% cases in a sample of 41).

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 Further, there was selectivity while deciding the industry score. The operating
framework of the RMG needed improvement as 'overrides' influenced ratings.
A total of 120 overrides had been used during the rating process, of which in 75
cases, the ratings had been improved based on the overrides. Though there
was a defined process as to how overrides were to be incorporated in the main
rating, the decision to use 'override' was discretionary.
1.3.2 Adequacy of Risk Management Functions
The overseas book of the bank posed liquidity risk as 70 % of the assets were
funded through issuance of bonds or bi-Iateral borrowing from banks, which
was not very stable source of funds. The bilateral borrowings amounting to
about USD 10000 mn had covenants linked to the NPA profile (Net NPA less
than 5% and Net NPA to Net worth less than 25%) of the bank and the bonds
had a cross default linkage to external default covenants. Any breach of
covenant could potentially trigger recall options of the lenders and investors. In
such a scenario, the bank should have been very selective in taking exposures
in BBB- (lowest investible grade for the bank) or below. The supervisory
concern increased due to the high percentage of error in the rating system and
use of subjective overrides. During the year the incremental exposure taken in
the BBB- and below was about ~ 287320 mn (44% of the total incremental
exposure). Some of the large borrowers were operating in stressed segments,
overleveraged indicating increased credit risk. The credit appraisals and rating
rationales in such proposals had not discussed the cross linkages to the default
clauses on the liability side of the overseas book which could potentially be
breached and trigger liquidity crisis.
1.4 Internal Audit Score: 2.335
I
1.4.1 Quality of Internal Audit
The Risk Based Internal Audit of the bank was process oriented. Though the
transaction testing was ordinarily not expected, it was often done to check the
reliability of the process. It was observed though the lAD had commented about
the appraisal deficiencies and excess finance, end use of funds, and certain
process lapses, etc., it did not examine the application of IRAC norms
especially when the credit risk had significantly increased.

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2. Credit Risk: Aggregate Score (2.975)
Major observations
2.1 Inherent Risk Score: 3.126
I
2.1.1 Default Risk
The amount outstanding under restructured advances had increased from
~134,430 mn as on March 31, 2014 to ~177,210 mn as on March 31, 2015.
The slippages from major restructured borrowal accounts reflected the poor
asset quality of the loan book.
2.1.2 The reported incremental slippages had almost doubled from ~45314 mn as on
March 31,2014 to ~79674 mn during 2014-15 indicative of rising trend in NPA.
The fresh accretion to reported GNPA (~79674 mn) was higher than reduction
in NPA (~16824 mn) during the year. Also, there was minimal up-gradation
from sub-standard category to standard during the year. Besides, exposure
under SMA 1 and SMA2 category had increased from ~206302 mn as on March
31,2104 to ~334799 mn as on March 31, 2015
2.1.3 The principal sacrifice and waivers of accrued interest in compromise
settlements of large value accounts was considered high which was indicative
of poor quality of underlying security and also of poor recovery efforts.
2.1.4 Inherent risk stood elevated on account of high incremental exposure in BBB-
coupled with errors in rating, use of overrides during the rating exercise,
deviations and waivers allowed as a part of post sanction process.
2.1.5 Concentration Risk
The top ten group borrowers constituted 20.3% of total exposures. Some of
these groups were highly leveraged and many had assumed risks of each
other through shortfall undertakings, guarantees or through security sharing.
The exposures were mainly found to be in stressed segments like
Infrastructure, Iron & steel, etc. About 30.3% of total exposure in the WBG
segment was concentrated in infrastructure including power (11.4%), iron and
steel (4.9%), Electronics & Engineering (7.5%) and Crude petroleum/refining
(6.5%).
2.1.6 As many as seven of the top 20 borrowers were rated BBB- or below which
was indicative of poor quality of banks top borrowers and thus increase risk.
Nine such accounts were covered in the AQR.
2.1.7 The risk rating of borrowers in the top ten groups had remained more or less
constant as compared to the previous period though there were marked

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 deterioration of their external rating. Several top borrowers were externally
downgraded to default grade while they retained their internal rating at '888-',
which was investible grade in the bank. Further the external rating of some of
the big borrowers was treated as unrated for RWA purposes and did not truly
reflect the risk rating/RWAs.
2.1.8 Concentration Risk increased as compared to 2013-14 in respect of sensitive
sectors and top three industries.
2.1.9 Exposure & Tenor Risk
The appetite for concentration risk appeared to be high considering liberal
lending standards to large single/ group borrowers. The concentration risk was
heightened due to large borrowers having complex inter-connected
overleveraged group structure, inter-mingling of business and financial
transactions, common collaterals, etc. resulting in integration & compounding
of risks across the companies/ SPVs. The bank had not considered group level
aggregation of collateral as a dimension of concentration risk control. There
was also no formal and documented process for analyzing exposures to co-
related segments and it was not part of business decisions as well.
2.1.10 The weighted average residual maturity of the bank's exposure also increased
to 4.8 years in FY2015 which was 4.51 years in FY2014
2.1.11 The un-hedged foreign currency corporate exposure at 71 % was considered
high which may indirectly expose the bank to high risk in case of adverse
currency movements.
2.1.12 Recovery Risk
As much as 36.4% of the credit exposure was unsecured posing high recovery
risk. Moreover, proportion of readily redeemable non-financial collaterals and
financial collaterals was also low.
2.1.13 The progress in security creation during the year was almost at the same level
(70%) as in FY 2014 indicating no improvement in the processes in this regard.
2.1.14 The bank had a system of post sanction amendments of the sanction terms
loans. Such amendments allowed deviations in important aspects like security
conditions, financial covenants, etc. without having any linkage to the risk rating
of the borrowers. As a result, certain low rated borrowers were extended a
number of relaxations. Such concessions indicated relaxed credit standards
and inadequate risk picture in the WBG segment.
2.2 Control Gap I Score: 2.622

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2.2.1 Policy Environment
As regards credit contingent liability (BGs), the bank had a policy for payment
of invoked BG within 48 hours from the date of claim. Such policy was not in
tune with Para 2.5 of MC on Guarantees & Co-acceptances, which required
that invoked BG should be honored immediately and no approval of the
superior authority was necessary. The time frame prescribed resulted in delay
in honoring the bank's commitment. Besides, the 48 hrs window facilitated the
applicant to legal recourse or other means for not honoring the invocation.
Some instances of such non-payment of invoked BGs were observed during
FY 2014 and in June 2015 as well.
2.2.2 Risk Identification & Assessment
Some deficiencies observed in appraisal and post-sanction processes are as
below:
1. The bank had adopted a method of financing the Net Cash Gap, which took
into account a company's total fund requirement for the next year factoring
all the cash flows including debt. While the well performing accounts posed
no major concerns, this method could conceal the stress and risk in the
account besides having the potential to circumvent the IRAC norms. Under
this arrangement, repayments on existing loans got paid off out of fresh
term loan disbursals. The sanction letters mentioned that the loan could be
utilized to payoff debts of other banks, for maintenance capex,
reimbursement of maintenance capex of earlier years etc. By this method
the debt servicing of the borrowal accounts was possible without the
borrower generating sufficient cash flows from business. This assessment
method was faulty and defied conventional methods of finance as term
loans are given for short term purposes and non-asset creating purposes.
2. In a few cases, while delays in security creation and perfection were
observed, extension for approvals for security creation was done as a
matter of routine.
3. Monitoring of the accounts suffered due to multiplicity of the IT systems.
For example, in case of a large borrower, the overdraft on account of
derivative settlement was not reckoned as part of credit review and
remained so for more than nine months. Similarly, improper aggregation
among multiple systems as well as multiple current accounts resulted in few
accounts not being effectively monitored. The bank had granted loans to
two SPVs (LDHIL & LHHIL - SPVs of Lanco Infratech Ltd) for onward

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 funding of parent's needs as well as for reverse infusion of funds to SPVs.
The SPVs had acted as financial intermediaries and also· were not
bankruptcy remote as stipulated in para 2.3.8.3.(iv) of the Master Circular
on Loans and Advances - Statutory & Other Restrictions dated July 01,
2014.
2.2.3 Some of the top 20 borrowers belonging to mega corporate groups held multi-
currency, trans-geography assets and liabilities through complex web of
layered entities including those in tax havens with high leverage. The bank
considered promoters' strength and stature as well as their large sized global
operations as a positive factor from a credit risk perspective without factoring in
the risks in the complex structures holistically. Further, multiple lenders usually
lent short-term loans to these groups with frequent intra group transfers and the
bank did not have any formal system to measure and capture any early
warning signals manifested through strain in the real liquidity across the group.
2.2.4 Controls
There was no defined and documented process for fixation of moratorium
limits. Extension of moratorium for RTLs in the nature of short term loans and
for working capital purposes and non-project loans as well as for repayment of
existing bank's/other banks loans were extended without any rationale and
purely with a view to facilitate/delay repayment
2.2.5 The rating, pricing and NPV computation suffered from the following
deficiencies:
1. Proposals below BBB- were escalated to Credit Committee. Further
mapping of internal rating to rating accorded by external agencies in respect
of large corporates was absent.
2. The internal credit rating framework prescribed that improvements could be
effected by applying subjective overrides in rating and rating underwent
changes upto three notches. Overrides were used in 120 accounts, of
which, upgrades were effected in 63% (75 accounts) and in value terms it
was used in 94% (~426000 mn ) on subjective grounds like presence of
letter of comfort, letter of awareness, promoter's financial standing,
management change etc.
3. There was no effective control mechanism for monitoring unrated
exposures. (last done in July 2014). There was a system of preparing and
presenting a Risk Dashboard which was giving a broad indication of the risk

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 in the bank. The direction of the risk (quarterly) was given on y-o-y basis.
The dashboard did not contain the rating migration of the credit portfolio.
There was no consolidated rating/migration review reckoning both credit
and investment (non-SLR) exposures leading to rating migration-
rebalancing
4. As regards computation of NPV (sacrifice) for restructured loans the bank
used the 'minimum quote to the client' as reflected in the pricing calculator
as the discount rate and the spreads over the base rate lacked
transparency. Such computation was not in tune with instructions contained
in para 12.4.2 of MC on IRAC norms dated July 01,2014.
5. In few weak accounts, where the internal credit rating was around 'BBB-' or
one/two notch/es below, the external credit rating was waived off
2.2.6 In cases of some restructured accounts the bank had sanctioned facilities
outside the consortium and considered the exposures as secured even though
the bank could not create the security as borrowers could not obtain NOCs
from the existing lenders, the bank continued to grant extension for creation of
security and treated the exposure as secured.
2.2.7 There were about 198 unrated accounts with sanctioned limit above ~1 00 mn in
wholesale banking. There were about 830 unrated accounts above ~ 50 mn
indicating relaxed credit system where a loan could be sanctioned without a
rating. Many of the accounts belong to large corporate who had availed
smaller limits. A large corporate with smaller limit should not be the cause for
not rating the borrower.
2.2.8 Monitoring & Review
The country rating was decided on the basis of some macroeconomic
parameters and with reference to the country ratings assigned by Banking
Industry Country Risk Assessment (BICRA). The bank's internal assessment of
the country rating did not focus on the legal developments / implications and
relied only on the observations by BICRA. Critical country exposure were
monitored and enhancements taken wherever necessary on account of
business requirement. However the exposure vis-a-vis the limit was not
considered as a breach prior to enhancement.
2.2.9 1. The bank had adopted rectification as CAP in 217 cases (78%) under JLF
which appeared to have been carried out as a matter of routine without
proper assessment of identifiable cash flows within the required time period.

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 Moreover, additional finance was sanctioned under rectification in order to
prevent the account from slippage to NPA. Further interest rate charged
was substantially lower than that charged for the existing working capital
facilities.
2. Some of the accounts had gone into JLF within 15 months of restructuring
and / funding of certain borrowers post restructuring as well as through
conversion of loan into equity due to strain in debt servicing indicated stress
in restructured standard portfolio
2.2.10 Reporting
1. There was no integrated view about the collateral held against an exposure
as there was no central database on collateral. Moreover, the process of
collateral management was not automated.
2. There was no system of reporting differences in 'realized value' and value
as per last valuation. There were few instances, where contrary to the
extant instructions, fair market value of collateral was considered instead of
realizable value.
3. ICICI Home Finance, a group company was one of the empaneled valuers
and valuation done by ICICI HFC was broadly based only on the prevalent
market value and not on the recoverability, as the realizable value of
security was not documented as part of the valuation report.
2.2.11 The system of identification of NPAs suffered from the following lacunae:
1. In respect of non-fund based facilities, the devolvements / invocations were
mapped at Customer 10 level and not at the UCC level. Accounts with
multiple Customer IDs was a feature in most accounts and the rationale for
the same defied logic
2. In terms of para 4.2.2 of the MC on IRAC norms dated July 1, 2014, the
bank should establish appropriate internal systems to eliminate the
tendency to delay or postpone the identification of NPAs. The responsibility
and validation levels for ensuring proper asset classification had to be fixed
by the bank. However during the period under review no such system
existed. Many standard accounts were covered under AQR.
3. The implementation of policy prescription and IRAC norms were considered
for record of recovery instead of all conditions / parameters stipulated in the
IRAC norms such as genuineness of the sources of funds, security /
collateral position over the years, diversion of funds, infrastructure and

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 project loan conditions, evergreening, improper assessment in viability, etc.
4. In the case of some of the NPA accounts existence of particularly
stock/current assets was inflated and was not realistic as pointed out in
AQR.
5. Contrary to extant instructions, the bank classified short duration crops as
NPA on the basis of 365 days after the due date instead of fixing the same
in line with crop durations set by SLBC
6. The policy was silent on aspects relating to process for repossession and
sale of collaterals in case of written-off accounts.
2.2.12 The last ISE had pointed out that there was a system of opening of separate
account for each devolved LC facility and there was no aggregation. Presently
the bank had developed a system whereby aggregation was evidenced at
customer 10 level and not at borrower level (UCC). The bank may explore
possibility of aggregation at borrower level so that there would be a single
devolvement account for each borrower

3. Market Risk: Aggregate Score (1.986)

Major observations
3.1 Inherent Risk Score: 1.987
3.1.1 Trading Book Risk
J
The unlisted equity portfolio in the trading book mainly coming by the way of
loan conversion to equity constituted approximately 37.49% of the equity
trading portfolio denoting higher risk and illiquidity.
3.1.2 Banking Book Risk
The embedded optionality risk in the bank's loan book at 13.45% and coupled
with exercise of premature withdrawal option in more than 40% of deposits
indicated high degree of volatility in the asset liability structure.
3.1.3 The Earnings at Risk (EaR) based on a 200 bps shock worked out to 34%
(8.5% per annum) of Net Interest Income (Nil) for the four preceding quarters
on an average basis and the impact across different maturities was considered
substantial. Further error in preparation of Interest Rate Sensitivity (IRS)
statement undermined the accuracy of EaR as highlighted under liquidity risk.
3.2 Control Gap Score: 1.983
I
3.2.1 Policy Environment
As per the bank's investment policy, the whole investment in bonds and

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 debentures can be through private placement which was contrary to the
regulatory requirement of limit on investment through private placement.
3.2.2 The strategy of the bank was oriented towards enhanced focus on new growth
areas like small business loans and loans in rural markets, , but the same did
not flow in the form of Fund Transfer Pricing incentives to reflect the strategy.
3.2.3 The bank was financial benchmark submitter but during the reference period
such submission was made without following the conflict of interest norm
relating to 'submitter-reviewer'.
3.2.4 Risk Identification & Assessment
The computation methodology for market risk tolerance limit was flawed as in
the bank has not computed all three stress scenarios (mild, moderate, severe)
and used results of only severe stress scenarios.
3.2.5 In written off equity accounts, the bank had considered Book Value of the
securities held by them as 'Zero' instead of arriving at the cost of holding and
subsequently the equity was marked to market, giving positive MTM offsetting
depreciation of other stocks.
The conversion of loan to investments had increased by more than 300% to
~6162 mn in FY15 as against ~1458 mn in FY14. Most of the conversions
involved accounts, which were either NPA or restructured, as result of which
the investment book was stressed and market risk stood elevated. The
valuation of an account converted from a loan classified as NPA into unlisted
equity (Aravali Infrapower Limited) was taken at breakup value instead of ~ 1
and hence additional provision of ~ 26.15 mn was suggested.
3.2.6 Controls
The bank conducted back testing of VaR and breaches for three days or more
was observed in respect of few groups (ALMG, Proprietary Trading group, MG
bullion). As the actual VaR at 99% confidence interval for 252 days indicated
that any breach above 1 % of 252 days (3 days or more) was considered an
unlikely event, a review of breaches mentioned above is warranted.
3.2.7 Reporting
1. Though enhanced internal limit for short term liquidity requirement of New
York branch had expired in March 2014, the New York branch continued
borrowings through Certificate of Deposits post March 2014 till March 10,
2015 without any approval. The control group at HO also failed to identify
the breach. However the position subsequently stood rectified

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 2. Internal time period prescribed for appraising ALCO in case of rating
migration to below investment grade (M/s Punj Lloyd) was not adhered to.
3. The controls with regard to rate scan was lax as rate scan exceptions were
not reported to top management, non-availability of MIS on the subject and
exceptions getting resolved/ settled at Head of the Desk level without any
periodic reporting to top management.

4. Liquidity Risk: Aggregate Score (1.890)

4.1 Inherent Risk Score: 1.984
I
Major findingsl observations
4.1.1 Structural Liquidity
Almost 38.9% of the short term earning assets was funded by volatile liabilities
in the bank which was considered as high risk.
4.1.2 Although the bank was not breaching the limit for cumulative mismatch ratio for
6 months buckets, the bank was running a negative cumulative gap (3%) at a
consolidated level (domestic and foreign currency)
4.1.3 Stress Liquidity
1. Although CASA profile had improved in the medium term, CASA as at the
end of the year was 45.5% as against 42.9% in FY 2014. However, the
bank was exposed to volatile liability concentration indicated by high
proportion of volatile CASA (11.18%). For volatile portion of SB deposit till
one month, the bank was taking sample set of three years, which contained
only one year 'daily data' set and for rest of the two years the sample was
for 'month end balances'. Hence the bucketing till one month was effectively
considering data for only one year as against the required three year data.
The rationale for considering the daily balance, month end average balance
and the different time period reckoned was not explained in the policy note
on behavioural study. Resultantly the Saving bank deposit in near time
bucket (28 days) was determined at 5.18%.
2. Other avenues of liquidity stress arose mainly from high reliance on bulk
deposits as fortnightly average of bulk deposits for last six months stood at
23.29% of total deposits as against 21.79% for FY14. The overseas
operations were dependent on wholesale borrowings of about 70%. The
liquidity statement for all major overseas jurisdiction was drawn in USD,
assuming that the $ was fully fungible across the jurisdictions. However,

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 there were local regulatory restrictions (Singapore, Baharin) where free
movement of liability was not easy and thus asset liability mismatch would
pose a risk, though, it may not show in the SLS. Under the background,
rollover, asset-liability management from mismatch as well as gap
adjustment angle and interest rate risks stood enhanced.
4.1.4 The bank's average cost of term deposits at 8.12% and bulk deposits were on
a higher side as per market averages and suggested limited scope for raising
additional liabilities at competitive costs.
4.1.5 Asset Liquidity
The bank had limited liquidity available to it from foreign currency operations as
evident from its unswapped FX funds, which stood reduced from FY 2014
position at ~139840 mn to ~118090 mn for FY 15.
4.1.6 Market Liquidity
The liquidity available with the bank through unencumbered G-Secs/T-Bills was
limited. Given that 81.5% of the bank's loan book consisted of fixed tenor term
loan, emergent liquidity circumstances and illiquidity stood heightened. Further
dependence on short term interbank market was reflected in the bank being a
net borrower throughout the year.
4.1.7 The deposits of the bank was not keeping pace with the increase in advances
as dependence on borrowings had increased from ~1547590.54 mn to
~1724173.50 mn (by 11.41 %) over the last year with overseas jurisdictions
being heavily dependent on wholesale borrowings.
4.2 Control Gap I Score: 1.670
Major findings! observations
4.2.1 Policy Environment
The bank had raised several bulk deposits from Regional Rural Banks (RRB) in
FY15 at rates higher than the applicable card rates though the extant
guidelines do not permit raising of bulk deposits from RRB at rates higher than
the card rates.
4.2.2 Risk Identification & Assessment
The bucketing of SLS was deficient to the following extent:
1. The bank had not factored the committed liquidity support of USD 1000
mn to its overseas branches in the rupee leg of the SLS on the basis that
the aforesaid line was between the HO and its overseas branches and
hence not considered as a contingent liability.

Confidential Page 17 of32

 2. While conducting the behavioral study for rupee current accounts bank
had excluded the deposits under Capital Market Division CMD category of
current accounts and had bucketed them linearly in upto 28 days in
proportion to the length of the bucket. Such approach may not reflect the
correct state as the above balances mostly pertain to dividend payment,
IPO proceeds, refunds, etc. which had to be mandatorily refunded in few
days.
4.2.3 The deficiencies observed in respect of Base Rate computation is as below:

1. As per extant instructions, the maintenance of Capital Conservation Buffer

at 0.625% of RWA was required to be maintained only from March 2016.
Though bank was not maintaining Capital Conservation Buffer at the above
level, it had included the same at 2.50% in computing the regulatory capital
charge as a part of Profit margin and boosted its Base Rate.
2. In bank's annual review of operations cost and profit margin (April 2014),
income through third party transactions were included as part of the fee
income and were reduced from the total operations cost of the bank. In the
annual review of the operations cost and profit margin in May 2015, bank
had not deducted the same on the premise that the fee income under the
above head was largely independent of liability mobilization. This was seen
as an attempt to negate the reduction in the repo rate and as it turned out
that while the repo rate cuts were 125 bps from January 2015, the bank
had lowered its base rate by 5 bps and 35 bps in June and Oct 15. Further
such an approach by the bank was not in conformity with guidelines on
base rate, which required the bank to have a consistent methodology.
3. The bank was arriving at the unallocatable operations cost for base rate
calculation by dividing the total operations cost (net of fee income) by
Average deployable deposits. The figure used for deployable deposits was
computed by taking daily average of the deposit values for the previous
financial year. As near actuals were not reckoned, the unallocatable
operation cost factored in Base Rate resulted in enhancing the rate.
4.2.4 Controls
The bucketing of based rate linked terms loans under IRS was not consistent
with the actual frequency of the change in the base rate. During the past three
years, the base rate had changed only twice but 95% of the loans were placed
under 3-6 months bucket. Thus the bucketing of I-Base linked term loans was

Confidential Page 18 of 32
 not linked on estimating the re-pricing of assets based on past experience and
future forecast for the changes in the base rate.
4.2.5 Monitoring & Review
As per the policy on retail pricing of loans, ALCO approved the range of
spreads for retail loans. Some of the existing loans (housing loans, consumer
loans, etc) had effective floating rates in the range between 15% to 18%. As
per bank's policy a floating rate retail loan with benchmark rate other than base
rate would be migrated at the same effective rate to the I-Base (Base Rate)
portfolio. Considering the effective rate above, it was observed that the spread
was adjusted to maintain the effective floating rate extended to a customer.
Such a system of charging interest rate lacked transparency as well as
defeated the concept of extension of loans on floating rate basis.

5. Operational (Non- IT) Risk - Aggregate Score: 2.203

Major observations
5.1 Inherent Risk Score: 2.345
I
5.1.1 People Risk
High attrition level of 30.71 % in the sales/front end employees in the bank's
revenue generating business units suggested heightened people risk. Also
termination due to unethical behavior and vigilance cases against employees
were on the increase.
5.1.2 Process Risk
1. In spite of observations in the past, coverage of KYC updation exercise was
found to be sluggish as only 33% of overall accounts could be completed
by March 2015. Out of the same, only 20% of high risk accounts could be
covered, which was quite low. In respect of legacy accounts, opened prior
to March 31, 2004, KYC updation as on March 2015 was yet to be done for
44% of the accounts. Further, updation of customer profile of proprietorship
concerns was conducted for only 20% of the said customer segment,
whereas the regulatory timeline (December 31,2010) for the same has long
been elapsed.
2. The bank continued to handle complaints received from customers of its
subsidiary, ICICI Home Finance Company (IHFC). From the customer
perspective, there was no distinction between the two entities.
5.1.3 External Risk

Confidential Page 19 of 32
 1. Amidst decline in amount reported under external frauds by customers, the
cases pertaining to non-customers increased both in number and amount
(from ~247 mn to ~326 mn). There was also persistent rise in instances of
internal frauds (105 in FY 2014 to 129 in FY 2015). Frauds committed by
senior level branch officials in the first half of FY 2016 was a cause of
concern.
2. The risk perception was enhanced as complaints against outsourced
employees increased by 23.84% in FY 15.
5.1.4 Compliance Risk
The bank had a policy of zero tolerance for regulatory breach. However,
regulatory penalty levied by FIU-IND and RBI were imposed even during the
current year.
5.2 Control Gap Score: 1.872
I
5.2.1 Risk Identification & Assessment
Upfront name-screening prior to on-boarding of customers covered major
portion of customers but excluded customers under mobile money accounts,
travel cards and other small value products. Similarly name-screening was not
being done across the customer base and was limited to I-core system only.
The exclusion of other systems posed significant regulatory and reputational
risk to the bank.
5.2.2 Prescribed parameters for risk categorization were not fully implemented (e.g.
information about client's business and location, volume of turnover) despite
past observations in this regard. Further risk categorization did not cover
accounts residing in Finone and CTL Prime. Moreover the bank as per their
policy, by default reckoned all new customers as 'High Risk' for initial period of
two months. The new risk categorization model deployed in July 2015 was yet
to be linked to the AMLOCK system, which was the primary system for
transaction monitoring from STR.
Although Politically Exposed Persons (PEP) were categorized as high risk,
there was no tagging facility for the same in I-core, the primary system of the
bank.
In case of internet banking customers, the actual address proof was not being
obtained for address change requests, though online submissions were
accepted.
5.2.3 It was observed that the bank was in possession of educational certificates of

Confidential Page 20 of 32
 7000 active employees and 10,000 inactive employees (who had left the bank).
Such practice of retaining educational certificates as 'collateral' was unethical
and fraught with severe reputational and possible legal risk.
5.2.4 Controls
The internal control mechanism for ensuring genuineness of export remittance
transactions based on Foreign Inward Remittance Certificate (FIRC) was found
to be inadequate, as verification of the authenticity of FIRC was absent.
Resultantly, the bank had issued Bank Realization Certificate (BRCs) to DGFT,
GOI against certain fake FIRCs of another bank.
5.2.5 For certain activities the bank was considering 3i-lnfotech as an outsourcing
vendor whereas in following instances the activities were not classified as
outsourced:
1. It was observed that 3i-infotech was involved in verification of AOF and
KYC documents in respect of a product i.e. mobile money saving account
and based on that a decision would be taken by the Service Provider for
approving the AOFs in the mobile money system. Through this process,
total 5,03,267 mobile money accounts were opened in FY.
2. An activity pertaining to 9% senior citizen savings scheme was undertaken
by 3i-infotech.
5.2.6 Internet banking related fraud cases, where credentials were reportedly parted
with by the customer, were not treated and classified as fraud. Such
transactions were 438 in number and amounted to ~44.8 mn in FY 2015. Delay
in detection of frauds was as long as more than two years in many instances.
In spite of repeated supervisory references, the process of filing complaint with
police authorities for fraud cases was found to be tardy as undue delay was
observed in many instances.
5.2.7 A sum of ~72.8 mn was outstanding as receivable from State Bank of Bikaner
and Jaipur (SBBJ) w.r.t. the investment sold to SBBJ on account of merger of
Mewar Anchalik Gramin Bank Ltd. and Marudhara Gramin Bank Ltd. The bank
may take steps to recover the dues at the earliest.
5.2.8 Monitoring & Review
The sample check undertaken by MLRO team did not cover alerts emanating
from credit cards, Money21ndia (remittance), Direct Banking, etc. Further only
one business group handling retail accounts was considered for sample
checking. Further in some cases, STRs were filed after closure/freezing of

Confidential Page 21 of 32
 accounts. Monitoring of forex remittance transactions from AML perspective
was not linked to risk rating of counter parties/countries.
5.2.9 In respect of import remittance transactions, the mechanism of follow-up with
the importer for submission of Bill of Entry as an evidence of import was not in
line with the internal policies. In certain instances, the Bill of Entry produced by
the importer was not found to be genuine and large value import remittances
were recorded against such importers. The total outstanding entries (receipt of
BOE) pertaining to Advance Import Remittances as on September 30, 2015
was USD 9410 mn. There was an instance of DRI seeking information on a
specific account for violation of AML guidelines. Several cases of breach of
KYC / AML violations in respect of certain customers connected to the
Advance Import Transactions were observed. In one case, the customer had
about 22000 outstanding BOEs pending for several years. Though the
outstanding reports were generated and flagged to the concerned branches,
appropriate action was not taken for follow-up and submission of BOEs. This
showed the ineffectiveness of the monitoring system
5.2.10 As per the bank's internal policy, the bank was supposed to perform a
reconciliation of all the relevant masters in the AMLOCK system at half yearly
intervals to ensure correctness of risk parameters in relation to introduction of
new product codes/schemes etc. However it was observed that the said
process was last conducted on June 28, 2014 and remained unreconciled till
date.
5.2.11 As on March 31, 2015, there were 16 nostro accounts available in the bank,
which were inoperative for more than one year and above and these accounts
were not rationalized.
5.2.12 On account of reconciliation issues emanated from balancing of Subsidiary
General Ledgers (Sub-GL) for I-Loans system (retail loans) with their
underlying schedules carried out in FY 2011, an amount of ~1 02.7 mn was
lying in other liabilities of the bank, which needed to be expeditiously resolved.
5.2.13 Reporting
The centralized MIS for outsourcing in the bank had no information for annual
pay-outs to the service providers. On perusal of a sample of thirty annual
review of SPs for FY 2015, it was observed that the template used by the bank
for review could not adequately capture the rationale for continuity of the SP.
Further, no financial analysis of SPs was carried out.

Confidential Page 22 of 32
'.

6. Operational (IT) Risk - Aggregate Score: 2.174

Major observations
6.1 Inherent Risk Score: 2.374
1
6.1.1 IT Financial Risk
The total compensation on account of skimming of cards had increased from
~31.41 mn in FY14 to ~113.35 mn in FY15 indicating increased IT risk.
6.1.2 IT Operational Risk
As on March 31, 2015 Straight Through Processing (STP) was reportedly not
established in 14 systems out of 115 critical systems in the bank. Moreover,
high number (27) of independent reconciliation processes between the main
and subsidiary system added to the IT Risk. In addition incidents of
unauthorized access to bank's IT systems posed risk to the bank.
6.2 Control Gap I. Score: 1.708
6.2.1 Risk Identification & Assessment
1. The practice of using back-up tapes as primary source of storing historical
datal longer retention period data was found to be inadequate as such
system is fraught with various risks taking into the fact that data throughput
for tape based restore operation is much slower in comparison to disk
based operation and tapes suffer from wear and tear.
2. The bank had an agreement with Google Analytics for analysis of web-
usage behavior of internet banking customers according to which Google
was mandated to analyze customer's behavioral data pertaining to internet
banking, which was not part of the privacy agreement on the bank's
website.
6.2.2 Controls
It was observed that the cooling period for retail internet banking was drastically
reduced from 24 hours to four hours and subsequently to half an hour in
November 2015 was implemented prior to obtaining requisite approval from
FCPRMG.
6.2.3 In respect of Business Continuity Plan of the bank, technology solution was yet
to be implemented. The bank was still relying on spreadsheets for storage of
data pertaining to BCP.
6.2.4 Monitoring & Review
High risk and medium risk vulnerabilities identified by the Information Security
Group as a part of vulnerability assessment of security system were not

Confidential Page 23 of32

 complied / closed in a timely manner.
6.2.5 Reporting
Automatic Data Flow (ADF) process was yet to be established in case of five
DSB returns and some fraud related returns which posed higher risk related to
data integrity and data correctness.

7. Pillar II Risk: Aggregate Score (1.748)

7.1 Inherent Risk Score: 1.702

Major findings! observations

7.1 .1 Reputation Risk

1. The external credit rating for the bank by S&P and Moodys (assigned
towards banks' long term debt) remained more or less stable at the same
level as at previous year and reflected positive expectation from market
on bank's ability to generate robust income. However, considering the
increased credit risk concerns, retaining present rating may be a
challenge.
2. Number of new legal cases filed by customers at 2734 fell marginally
from 2921 during the last FY 2014. However, the verdicts were found to
be against the bank in a large number of past cases.
7.1.2 Group Risk
Investments in capital of group entities was within the prescribed limit of USD
1600 mn and stood at 14.30% of capital funds of the bank. Group risk
continues to be elevated on account of presence in venture funds, overseas
banking subsidiaries etc.

7.2 Control Gap I Score: 1.855

Major findings! observations
7.2.1 Policy Environment
The bank had formulated a business strategy for its business with focus on
cost efficiency and productivity. The strategy for overseas operations was
generic in nature and was not jurisdiction-specific as well as did not provide a
comprehensive road map for its overseas operations. The strategy of the
bank was routine as it had not factored/reckoned its experiences in products,
activities, geographic locations, HR skill sets etc. and had not critically
assessed downside risks arising from stressed assets/portfolio.

Confidential Page 24 of 32
7.2.2 Risk Identification & Assessment
The business strategy was in alignment with the risk appetite but the risk
appetite statement was generic in nature. The risk appetite and capital
planning was not adjusted as per change in business strategy, particularly on
a consolidated basis, as exit from subsidiary, stake sale in group company
did not get factored. The strategy of the bank was also not factored into
business decisions as the strategies were not incentivized through FTP.
7.2.3 Controls
1. The bank was handling complaints that were made against its group
company (ICICI Home Finance), which was not only a source of
reputation risk but also borders on the conflict of interest principle. The
quantum of complaints was deterrent in the growth of the bank. The bank
was susceptible to reputation risk, as it was holding educational
certificates of employees who had quit the services of the bank in lieu for
compensation of expenses incurred by bank on their training.
2. The bank had resorted to shifting of assets between overseas
jurisdictions particularly from Singapore branch of the bank to banks
operating in gulf region in respect of accounts which displayed
weaknesses or were on the verge of turning into NPA. Such accounts
were transferred 'at Par' and were not linked to FTP as well as were done
to take advantage of regulatory arbitrage
7.2.4 Monitoring & Review
Two SPVs/SPEs were floated during FY 2015. Though the group
companies/SPVs had independent governance structures, the need for
existence of several group entities (including SPV/ SPEs) needed to be
reviewed. The system of parking/shifting stressed assets to OBU required a
relook.

Confidential Page 25 of 32
 Part II: MAJOR AREAS OF FINANCIAL DIVERGENCE
The summary of major areas of financial divergence, including assessed risk weighted
assets, which determined assessed capital of the bank, is given below. Details are in
Annex 1.

Particulars @ No. of Outstanding Shortfall Remarks*

borrowers amounts or
, accounts Additional
provision
required
(In ~ mn)
Additional Provision As per Annex
1 26 26
for NPI
Other Assets -

Understatement of -
Expenses' Liabilities
- - -
Others (to be -
specified)
- - -
Total additional -
provisions' accounts' 1 26 26
outstanding

2. Divergence in Risk Weighted Assets (RWAs)

RWAs (In ~ mn)

Risks Reported Assessed Divergence Remarks*

Credit Risk 4741559 4790848 49289 As per Annex

Market Risk 334227 334227 - -

Operational Risk 373172 373172 - -

Total RWAs 5448958 5498247 49289

Confidential Page 26 of 32
 Part III: FINDINGS ON CAPITAL AND EARNINGS
1. Pillar I Capital & CRAR
The summary of reported and assessed capital position of the bank as on March 31,
2015 is given below: Details are in Annex-4.
Basel III Capital under Basel III (In ~ mn)

Particulars Reported Assessed Divergence Reasons for

divergence$
Total capital (TC) 927438 927412 26 TC reduced on
account of additional
Common Equity Tier 1 696610 696584 26 provisions suggested
(CET1) capital for valuation of
investment.
Tier 1 (T1) capital 696610 696584 26

Tier 2 (T2) capital 230828 230828 -

Basel III CRAR under Basel III (in %)

Particulars Reported Assessed Divergence Reasons for

divergence$
Total capital (TC) 17.02% 16.87% 0.15% 1. TC reduced on
account of additional
Common Equity Tier 12.78% 12.67% 0.11% provisions suggested
1 (CET1) capital - for valuation of
investment.
Tier 1 (T1) capital 12.78% 12.67% 0.11% 2. RWAs increased
on account of various
Tier 2 (T2) capital 4.24% 4.20% 0.04% grounds as per
annex.

2. Capital Management, ICR, ICAAP and Stress Tests

(a) Capital Planning and Business Projections

(i) The bank had a system of capital planning based on a four-year projection of
activities both under normal and stress conditions. The base case scenario did not take
into account the domestic economic factors i.e. both monetary as well as fiscal aspects.
ICAAP of the current year broadly showed the projected growth in line with the previous
year's projections for the same year/so

(ii) The bank was mainly dependent on internal accrual for maintaining the CRAR,
which had declined to 17.02% in FY2015 from 17.70% in the previous year, under
Basel-III due to various reductions from Tier II capital. The assessed CRAR stood
reduced further to 16.87%.

Confidential Page 27 of 32
(b) Assessment of Pillar I & " Capital and Internal Capital Ratio
(iii) The bank had assessed internal CRAR at 11 % under ICAAP. Other assessments
and reviews always considered regulatory minimum as the primary objective.
The bank had assessed ~154420 mn additional capital under various stress scenarios.
At the current level of RWA, this would reduce the CRAR by approximately 283 bps. As
the bank was engaged in various para-banking activities and coupled with the stress in
the credit portfolio, capital planning required enhanced attention. Further applying the
higher capital ratio of 11 % along with CCB requirement, the bank's capital buffer would
stand considerably reduced within the next few Financial Years.
(iv) The deficiencies mentioned below were adjusted to arrive at assessed Risk
Weighted Assets:

• A retail loan product, Loan against Property, was risk weighted at 100%.
However, the purpose of the loan depended on a broad declaration taken from
the borrower as "Business or Other" in most of the cases. As the risk weight for a
loan for consumption purpose was higher at 125%, the bank was required to
identify all such loans and apply risk weight to them accordingly. Exposure to
such cases was ~194290 mn as on March 31,2015.
• In some of the borrowal accounts the requirement of external rating was waived
due to inability of borrower to furnish the same as well as extension of
unjustifiable timelines. Instances of poorly rated account (BB and below) were
treated as unrated as external rating was suspended. In view of supervisory
concern, a higher risk weight had been suggested.
• Instances of reckoning better ratings than that accorded externally were also
found.
• In a few overseas accounts external rating was waived due to lack of market
practice in the respective overseas jurisdictions
• Though external rating was available, certain accounts that displayed stress
were treated as unrated and risk weighted accordingly
• In several instances the RWA was recorded as 150% in proposal notes however
for CRAR computation RWA was taken as 'unrated' and 100% was applied (E.g.
Madhucon projects Ltd., Swiber Offshore, Gems Chicago Inc. etc.)
Taking into account the above deficiencies the assessed RWA was reworked to
~5498246.9 mn as against reported RWA of ~5448957.90 mn.

(c) ICAAP
(i) One of the six general risk appetite statements stated that the bank would endeavor
to maintain AAA rating from domestic rating agencies at all times

Confidential Page 28 of32

(ii) The restructured assets of the bank had increased in recent years (increased from
~20000 mn as on March 31, 2012 to ~110000 mn as on March 31, 2015). As per
regulatory guidelines, the restructured assets would have to be classified as NPA from
April 01, 2015 and accordingly provided for. In the light of this regulation and the current
challenging credit environment, the lower projected numbers for provisions for the FY
2016 and FY 2017 may not be a proper assessment of PAT/internal capital generation
(iii) The bank has projected a 15% growth in its NDTL (deposits + borrowings),
however, despite increased LCR requirement (70% from January 01, 2016, 80% from
January 01, 2017), it had taken a low projections of 9%-11 % for the FY 2016 for its
investment portfolio
(iv) Being a large bank, the ICAAP had not talked about additional CET 1 that may be
required for a DSIB.
(v) The bank had indicated that it has devised its dividend policy with the prime
objective to comply with regulatory requirement. It was yet to devise a long term
dividend policy to have a proper assessment of internal capital generation while
undertaking its ICAAP
(vi) The impact of reputational risk on the capital projections, particularly in the light of
complaints received from HNls in the previous period was not suitably factored
(vii) The compensation was determined essentially on the basis of achievement of
business targets annually; the link with the risk appetite being hardly discernible.

(d) Stress Testing

(i) The bank has not quantified the stress impact assessment of sectoral concentration
of its credit portfolio under the stress testing exercise undertaken for ICAAP.
(ii) While undertaking the credit risk stress test all unrated exposures were treated as
BBB. Also, the exposure to group companies was excluded for the purpose of stress
testing under ICAAP.

3. Assessment of Internal Generation of Capital

(i) The total income of the bank had increased by 12.57% from ~546060 mn in FY-14 to
~612673 mn during FY-15. The significant contributions to the increase pertained to
interest income, which improved by 11.12% (from ~431850 mn in 2013-14 to ~477708
mn) while other income comprising commission, exchange and brokerage and other
operating income recorded a 16.77% increase.
(ii) Due to increase in Net Interest Income (Nil) by 15.6% from ~164756 mn in FY14 to
~190396 mn in FY15, the Net Interest Margin (NIM) increased from 3.33% to 3.48%
during the period.

Confidential Page 29 of 32
 "

(iii) Net stable income had increased from ~226524 mn to ~257438 mn during FY2015
as compared to previous year. It increased to 94% of the net total income during FY-15
as compared to 93% for FY-14 and FY-13. The proportion of fee-based income to gross
stable income had decreased from 11.79% during FY-14 to 11.65% during FY-15.
However, the same was higher than FY-13 ratio at 11 .41 %.
(iv) The operational expenses as percentage of net stable income had improved from
45.51 % during FY-14 to 44.65% during FY-15.
(v) The bank's ability to generate internal capital could be constrained on account of
increased credit risk as mentioned in the AQR.

4. Scope & ability to infuse capital

Currently, with the reported CET1 at the level of 12.78%, the bank had adequate
headroom to raise the non-common equity capital in the form of Additional Tier I (AT-1)
and Tier" (T2).

5. Assessment of Leverage Ratio

The assessed leverage ratio deteriorated significantly from 7.17% as on March 31,
2014 to 7.96% as on March 31, 2015. However, it was well above the regulatory limit of
4.5%. The details are given at Annex-6.

Page 30 of 32
Confidential
 PART IV: MAJOR AREAS OF NON-COMPLIANCE (REGULATORY GUIDELINES)
Regulation Reference
(Para & Circular no.)
Para 2.1.2.1 of Master Circular-
Loans and Advances- Statutory
and Other Restrictions
Para 3 of Annex to RBI circular Senior
DBS.CO.FrMC.BC.No.
9/23.04.001/2010-11 dated May
26,2011
Para 1.2.1 (iii) (c) of MC on
Prudential Norms for
Classification, Valuation
and Operation of Investment
Portfolio by Banks dated July
01,2013
Para 4 of Circular on Non-
PerformingAssets and
Restructuringof Advances dated
November 21,2012
Para 1.(V) of MC on Lending to Credit Risk
Priority Sector dated July 02,
2012
Para 2.3.8.3.(iv) of the Master
Circular on Loans and Advances
- Statutory & Other Restrictions
dated July 01,2014.
Para 12.4.2 of MC on IRAC
norms dated July 01, 2014.
Para III of MC on Lending to
Priority Sector dated July 02,
2012
Para 2.5 of MC on Guarantees
& Co-acceptancesdated July 1,
2014
Para 4.2.9 & 5.3.1 of MC on
IRAG dated July 1, 2014
Para 4.2.2 of the MC on IRAC
norms dated July 1, 2014
Para 1.2.1 (iii.a) of MC on
Prudential Norms of Investment
dated July 1, 2014.
Para 1.2.1 (iii.a) of MC on
Prudential Norms of Investment
dated July 1,2014
Para 2.4 of Know Your
Customer (KYC) Norms dated
Confidential
Area I Subject Nature & Description of Non-
of Non- Compliance
Compliance
Board The bank had granted car loan facilities (17 loans)
aggregating to ~22.45 million to a company where
one of the director of the bank was also on the
board of the borrower.
The CIV did not have a fixed tenure as prescribed
Management by regulatory guideline.
Credit Risk Review of rating migration on account of internal
rating was not observed.
Credit Risk Information sharing among banks in all quarters -
not done.
168 cases (having total principal outstanding of
~455.5 million) with loan disbursement amount
exceeding ~2.5 million were erroneously classified
under Housing Loan PSL.
Credit Risk The bank had granted loans to two SPVs for
onward funding of parent's needs as well as for
reverse infusion of funds to SPVs.
Credit Risk Computation of NPV (sacrifice) for restructured
loans lacked transparency.
Credit Risk PSL targets in overall Agriculture as well as sub
target for Direct and Indirect Agriculture not
achieved.
Credit Risk As regards credit contingent liability (BGs), the
bank had a policy for payment of invoked BG within
48 hours from the date of claim.
Credit Risk There was no system of reporting differences in
'realized value' and value as per last valuation.
There were few instances where fair market value
of collateral was considered instead of realizable
value.
Credit Risk No system in place to eliminate the tendency to
delay or postpone the identification of NPAs
Market Risk The Investment Policy of the bank had Debt market
limit in place with overall limits for Corporate
Bonds, however, the sub limits for PSU bonds,
guaranteed bonds, etc. was not contained in the
policy document as required under regulatory
guideline.
Market Risk As per the bank's investment policy, the whole
investment in bonds and debentures can be
through private placement which was contrary to
the regulatory requirement.
Operational (Non Non identification of the beneficial owners in case
IT) Risk of legal entities.
Page 31 of 32
Regulation Reference Area I Subject Nature & Description of Non-
(Para & Circular no.) of Non- Compliance
Compliance
July 02,2012
Para 2.14 of Know Your Operational (Non Non screening of newly opened account to verify
Customer (KYC) Norms dated IT) Risk linkage to any of the entities/individuals included in
July 02,2012 the negative list across all systems.
Para 2.21 & 2.22 of Know Your Operational (Non Non-filing/delayed filing of STRs, STRs filed after
Customer (KYC) Norms dated IT) Risk closure/freezing of accounts
July 02,2012
Para 6 of MC on Frauds- Operational (Non Undue delay in filing of police complaint within 30
classification and reporting IT) Risk days in fraud cases.
dated July 02,2012
Para A.1 of MC on Remittances Operational (Non The bank was unable to track the aggregate limit
from India- Facilities for IT) Risk for remittance through foreign currency purchased
Residents dated July 02,2012 in the form of Foreign currency/ Foreign Travelers
cheques / Travel Cards/ Retail outward remittance
across all the channels put together.
Para 2.4 (g) of MC on Know Operational (Non Coverage of re-KYC exercise was found to be
Your Customer (KYC) Norms IT) Risk tardy. Further, KYC updation yet to be done in case
dated July 02,2012 of some legacy high risk accounts opened 28 years
before.
Para (i) of guideline on Interest Operational (Non Raised several such deposits from RRB's in FY
on Deposits to be non- IT) Risk 2015 at rates higher than the applicable card rates.
discriminatory dated January 24,
2013
Para 3.1.4 of RBI MC on Frauds Operational (Non Delay in reporting of fraud cases of amount greater
dated July 01,2014 IT) Risk than ~0.1 mn individually was observed in several
cases (Six instances).
Para 2.1 and 2.3 (a)(ii) of Know Operational (Non Risk profiling of customers was not in line with
Your Customer (KYC) Norms IT) Risk regulatory guidelines as prescribed parameters for
dated July 02,2012 risk categorization were not fully implemented

Confidential Page 32 of 32
 ICiCI Bank - Annex to RAR

PART V: ANNEX to RAR

(All figures in the Annex are in ~ mn)

Annex 1: Major Areas of Financial

Divergence

Table-I: Valuation of Investments

Investment Out Provision Remarks

details Standing
Held Required Shortfall
Being unlisted company with classification as
NPA- Doubtful 2, instead of taking valuation at
Aravali Infra Re 1, the bank has taken market value at
power Limited - breakup rate contrary to para 3.9.5 of MC on
Equity Prudential Norms for Classification, Valuation
and Operation of Investment Portfolio by Banks
26 0 26 26 dated July 01, 2014.
Total 26 0 26 26

" RWA
T a bl e- II : D"Ivergence In

Particulars
As per bank As per SSM Shortfall Remark
Credit Risk - RWA 4741559 4790848 49289 As per Annex

Market Risk - RWA 334227 334227 - -

Operational Risk - RWA 373172 373172 - -
Total RWA 5448958 5498247 49289 -

1
 ICiCI Bank - Annex to RAR

Table-III: Priority Sector Classification

51. Parameters Amount reported by Misclassific Actual Shortfall Reasons

No bank ation Achievement from for
identified by as assessed bank's declassific
SSM by SSM target ation

Target Achieved

Direct
1.
Agriculture
371811 208733 - 208733 163078 -

Indirect
2.
Agriculture
123937 45588 - 45588 78349 -

TOTAL
AGRICULTURE
495748 254321 - 254321 241427 -
Micro and Small
3.
Enterprises
408271 - 408271 -
Education /
4.
Housing / others
224248 - 224248 -
TOTAL Priority
Sector
1101661 886840 - 886840 214821* -

As per Bank As per SSM

Adjusted Net Bank Credit
(Previous Year) 2754154 2754154
* Shortfall in agricultural advances was offset by overachievement in other PSL targets.

2
 ICICI Bank - Annex to RAR

Annex 2: Computation of Outside Liabilities

Sr.
Particulars Amount
No.
A Total Liabilities excluding capital & reserves as
6030792
on March 31, 2015
Upper Tier II Instruments 154410
Subordinated debt 216744
Deposits 3615627
Borrowings 1353020
Other liabilities and provisions 690991
B Internal Liabilities 169768
Provision for standard assets 23336
Provision for diminution in fair value of restructured accounts 25227
Provision for NPAs 88392
Floating provision 2
Provision for NPI 8262
Provision for depreciation in investments 18593
Any other (to be specified)
Provision for assets on lease 263
'Provision for other assets 2047
DICGC/ECGC claim received 35
Provision for securitization sell down 1260
Provision for contingencies 569
Provision for operational risk 365
Provision for country risk exposure 345
Reserve for Profit on sell down to ARCILlPhoenix 236
Fraud Risk Recovery from staff 15
Provision - Collecting Bank Fraud Risk 16
Specific provision for standard assets 781
Other provisions 24
C Total outside liabilities [A-B] 5861024

3
 ICiCI Bank - Annex to RAR

Annex 3: Assessed Net Worth

Sr.
Particulars Amount
No.
A Paid up capital
11597

B Reserves and Surplus 792623

Statutory Reserve 163206
Share Premium 318415
Capital Reserve (excluding revaluation reserve) 25852
Special Reserve 65790
Revenue Reserve 26433
'-
General Reserve 37
Investment Allowance Reserve 0
Credit Balance in P&L Alc 172614
Any other free reserve (Foreign Currency Translation
20276
Reserve)
C Intangible assets (including net deferred tax assets) &
14480
accumulated losses
D Reported net worth [A+B-C] 789740
E Adjustments following inspection findings 20302
Investment Reserve Account -
Additional Loan Loss Provision -
Additional Provision for NPI 26
Foreign Currency Translation Reserve 20276
Any other -
F Assessed net worth or real/exchangeable value of paid
769438
up capital and reserves [D-E]

4
 ICiCI Bank - Annex to RAR

Annex 4: Computation of Assessed Capital

Sr. Particulars I Items Eligible

No. amount

Computation of Common Equity Tier 1 capital (CET1)

A Common Equity Tier 1 capital (CET1): instruments and reserves 784055

before ulato I supervisory adjustments

o Adjustments I deductions applied on CET 1 following 26

Inspection for Supervisory Evaluation (lSE) findings under RBS
1 Additional Loan Loss Provision
2 Shortfall in Standard Asset Provisioning
3 Understatement of Liabilities
4 Net Deferred Tax Asset
5 Investment Reserve Account
6 Additional Provision for NPI 26
7 Any Other er Assets)
E Assessed Common Equity Tier 1 capital (CET1) [C - 0] 696584
Computation of Additional Tier 1 capital (AT1)

F Additional Tier 1 capital (AT1) : instruments before regulatory 22645

adjustments
G Total regulatory adjustments to Additional Tier 1 capital 32671

Adjustments I deductions applied on AT1 following ISE findings

1 Net DeferredTax Assets
2 Any other item to be specified
J Assessed AT1) capital [H - I]
Computation of Tier 1 Capital (T1)

Computation of Tier 2 Capital (T2)

M Tier 2 capital: instruments and provisions 255857

N Tier 2 capital: regulatory adjustments 25029

5
 ICiCI Bank - Annex to RAR

P Adjustments I deductions applied on T2 following ISE findings

1 Add: Additional Standard asset provisions
2 Any other item to be specified
Q Assessed Tier 2 (T2) capital [0 - P] 230828
Computation of Total Capital (TC)

Assessed Total capital (TC) [L + Q]

Risk Weighted Assets (RWAs)

T Risk Weighted Assets in respect of Pre-Basel Hl Treatment

U Risk Weighted Assets (RWAs)

W Adjustments I additions applied on RWAs following Inspection 49289

for Supervisory Evaluation (ISE) findin under RBS
1 Additional RWAs 49289
X Assessed RWAs [V + W] 5498247
Capital Ratios I Summary

EE Assessed Common Equity Tier 1 (CET1) Ratio [E/X*100%] 12.67%

FF Assessed Tier 1 (T1) or Core Capital Ratio 12.67%
4.20%
HH Assessed Total capital (TC) Ratio or CRAR [S/x*1 16.87%

6
 ICICI Bank - Annex to RAR

Annex 5: Assessment of Internal Generation of Capital

Sr Break-up of income and expenditure Current FY FY FY

T T-1 T-2
N (Mar-15) (Mar-14) (Mar-13)
0
Total Interest/discount Income (2+3+4+5)
1 477708 431850 388934

Interest/discount on advance/bills 356311 314279 273411

2
3 Income on investments 119446 115571 110093
4 Interest on balances with RBI 0 0 0
Interest on market lending! Income on other
5 interest earning assets 1951 2000 5430

Fee based & stable misc.

6 income [6(a)+6(b)
80245 71700 63460

6a Fee based income 65014 59350 51628

Misc. income from stable sources 15231 12350 11832
6b
7 Gross stable income (1+6) 557953 503550 452394
8 Interest Expended (9+10) 300515 277026 262092
Interest on deposits! all other interest expense 202939 178682 168889
9
10 Interest on borrowings 97576 98344 93203
11 Net Stable Income (7-8) 257438 226524 190302
12 Income from trading 15485 7654 4364
Realised gains on derivatives (P&L on forex
13 8050 6650 14650
operations)
14 Gains on sale of asset 69 1364 353
15 Recovery from w/offs 1564 1118 770
Extra-ordinary income! Dividend income &
16 other miscellaneous income 31116 26842 12452

Gross volatile income (12+13+14+15+16)

17 56284 43628 32589

Provisions and contingencies (excluding

18 tax) (19+20+21) 18609 2361 (1058)

19 Provisions for Loan losses 13925 371 (3832)

20 Provisions for depreciation in investments!NPI 1491 (576) 164
21 Other provisions 3193 2566 2610
22 Extra-ordinary expenses 0 0 0
23 Write-offs 21955 25021 19853

7
 ICiCI Bank - Annex to RAR

24 Net Volatile Income (17-18-22-23) 15720 16246 13794

Assessed provision by supervisor
25 18102 1240
(26+27+28+29+30+31+32+33) 26
26 Provisions for frauds - 4 1131
Provisions for understatement of NPAs and
27 other problem accounts - 17818 0
Provisions for divergence in evaluation of
investments and other assets between the
28 assessment made by the 26 275 110
bank and the supervisory officer

29 Provisions for un-reconciled entries - -

-
Provisions for claims not acknowledged as
30 - 5 -
debt
31 Provisions for derivatives - - .
Provisions for wage settlements, pension & ~
32 gratuity - - -

33 Other Provisions (Other Assets) - - -

34 Assessed net volatile Income (24-25)
15694 (1856) 12553
Reported net total income (11 +24)
35 273158 242770 204096

36 Assessed net total income (11 +34) 273132 224668 202855

Operational expenses (38+39+40) 114958 103089
37 90129
Staff expenses, Director's fees/Board 47506
38 42206 38937
Members' fees & expenses
39 Depreciation on bank's property and repairs 15252 13065 11563
I

40 Other Operating Expenses 52200 47818 39b'b-'

41 Provisions for tax 46446 41577 30712
42 Reported profit (35-37-41) 111754 98105 83255
43 Assessed profit (36-37-41) 111728 80002 82014
44 Dividend paid (excluding tax) 29014 26572 23074

45 Reported Retained Earnings (42-44) 82740 71533 60181

46 Assessed Retained Earnings (43-44) 82714 53430 58940

8
 ICiCI Bank - Annex to RAR

Earnings Stability' Volatility Assessment

Sr. Earnings' Profit Ratios Current FY T FYT-1 FYT-2

No (Mar 15) (Mar-14) (Mar-13)

47 Net Interest Income [1-8] (Nil Growth Rate) 177193 154824 126842

48 Share of Interest, Fee and Volatile Income

[1:6:17] 0.78:0.13:0.09 0.79:0.13:0.08 0.80:0.13:0.07

49 Gross Stable Income 'Interest Expended

[7/8*100%] 185.67% 181.77% 172.61%

50 Net Stable Income / Assessed Profit

[11/43*100%] 230.41% 283.15% 232.04%
1"--"'1
Gross Volatile Income / (Provisions &
Contingencies + Extraordinary Expenses +
Write-offs) [17/(18+22+23)*100%] 138.75% 159.33% 173.39%

52 Assessed Net Volatile Income / Assessed

Profit [34/43*100%] 14.04% (2.32%) 15.31%

53 Reported Retained earnings / Reported Profit

[45/42*100%] 74.04% 72.91% 72.29%

54 Assessed Retained earnings / Assessed Profit

[46/43*100%] 74.03% 66.79% 71.87%

55 Actual vs budgeted income [expressed as +ve /

-ve percentage] 2% 1% 6%

~ Actual vs budgeted profit [expressed as +ve /-

I ve percentage] (1%) (3%) 9%

9
 ICiCI Bank - Annex to RAR

Annex 6: Leverage Ratio under Basel III

Sr. Particulars Reported by Assessed by

No. Bank SSM
A Basel III Tier 1 Capital (T1) 696610 696584

B Leverage Ratio Exposures 8869756 8749541

On balance sheet (excluding derivatives 6461293 6461293

and Securities Financing Transactions)

Derivatives 122004 122004

Securities Financing Transactions - -

Off-balance sheet exposures 2286459 2286459

Any other component - (120215)

C Leverage Ratio (A/B*100%) 7.85% 7.96%

10