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Icici Bank
20-F 2019-03-31 Annual: 2019-03-31
20-F 2018-03-31 Annual: 2018-03-31
20-F 2017-03-31 Annual: 2017-03-31
20-F 2016-03-31 Annual: 2016-03-31
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IBN 2019-03-31
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Icici Bank Earnings 2019-03-31

IBN 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 dp109139_20f.htm FORM 20-F

As filed with the Securities and Exchange Commission on July 31, 2019

 

 

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

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2019.

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from                           to                          .

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report                                  

 

Commission file number: 001-15002

 

ICICI BANK LIMITED
(Exact name of Registrant as specified in its charter)

 

Vadodara, Gujarat, India
(Jurisdiction of incorporation or organization)

 

ICICI Bank Towers
Bandra-Kurla Complex
Mumbai 400051, India
(Address of principal executive offices)

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

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
Equity Shares of ICICI Bank Limited(1) New York Stock Exchange
American Depositary Shares, each representing two  Equity Shares of ICICI Bank Limited, par value
Rs. 2 per share
New York Stock Exchange

 

__________________

(1)Not for trading, but only in connection with the registration of American Depositary Shares representing such Equity Shares pursuant to the requirements of the Securities and Exchange Commission.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

 

 

[None]

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

[None]

 

The number of outstanding Equity Shares of ICICI Bank Limited as of March 31, 2019 was 6,446,239,653.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☒                  No

 

 

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes                  No

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes                  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer Accelerated Filer Non-accelerated Filer

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP

 

International Financial Reporting Standards as issued by the International Accounting Standards Board

 

Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes No

 

 

 

 

table of contents

 

Page

 

Cross Reference Sheet 1
Certain Definitions 4
Forward-Looking Statements 5
Market Price Information 6
Risk Factors 7
Business 44
Overview 44
History 45
Shareholding Structure and Relationship with the Government of India 45
Strategy 47
Overview of Our Products and Services 47
Funding 62
Risk Management 64
Loan Portfolio 89
Classification of Loans 96
Subsidiaries, Associates and Joint Ventures 110
Technology 112
Competition 116
Employees 118
Properties 119
Legal and Regulatory Proceedings 120
American Depository Receipt Fees and Payments 126
Selected Consolidated Financial and Operating Data 128
Operating and Financial Review and Prospects 133
Management 221
Overview of The Indian Financial Sector 235
Supervision and Regulation 251
Exchange Controls 303
Restriction On Foreign Ownership of Indian Securities 306
Dividends 310
Taxation 311
Presentation Of Financial Information 317
Exhibit Index 320

 

i

Cross Reference Sheet

 

Form 20-F

Item Number and Caption

Location

 
       
Part – I      
1 Identity of Directors, Senior Management and Advisers Not applicable  
       
2 Offer Statistics and Expected Timetable Not applicable  
       
3 Key Information Selected Consolidated Financial and Operating Data 128
    Risk Factors 7
       
4 Information on the Company Business 44
    Operating and Financial Review and Prospects 133
    Overview of the Indian Financial Sector 235
    Supervision and Regulation 251
    Business—Subsidiaries, Associates and Joint Ventures 110
    Business—Properties 119
    Schedule 18B Note 5 in Notes to Consolidated Financial Statements F-112
       
4A Unresolved Staff Comments None  
       
5 Operating and Financial Review and Prospects Operating and Financial Review and Prospects 133
    Business—Risk Management 64
    Business—Funding 62
       
6 Directors, Senior Management and Employees Management 221
    Business—Employees 118
       
7 Major Shareholders and Related Party Transactions Business—Shareholding Structure and Relationship with the Government of India 45
    Operating and Financial Review and Prospects—Related Party Transactions 206
    Management—Compensation and Benefits to Directors and Officers—Loans 230
    Schedule 18. Note 3 in Notes to Consolidated Financial Statements F-47
       
8 Financial Information Report of Independent Registered Public Accounting Firm F-2
    Consolidated Balance Sheet F-5

 

 

1

Form 20-F

Item Number and Caption

Location

 
    Operating and Financial Review and Prospects—Executive Summary 133
    Business—Legal and Regulatory Proceedings 120
    Dividends 310
       
9 The Offer and Listing Market Price Information 6
       
10 Additional Information Additional Information 318
    Exchange Controls 303
    Taxation 311
    Restriction on Foreign Ownership of Indian Securities 306
    Dividends 310
    Business—Subsidiaries, Associates and Joint Ventures 108
       
11 Quantitative and Qualitative Disclosures About Market Risk Business—Risk Management—Quantitative and Qualitative Disclosures About Market Risk 72
       
12 Description of Securities Other than Equity Securities Business—American Depository Receipt Fees and Payments 126
       
Part – II      
13 Defaults, Dividend Arrearages and Delinquencies Not applicable  
       
14 Material Modifications to the Rights of Security Holders and Use of Proceeds Not applicable  
       
15 Controls and Procedures Business—Risk Management—Controls and Procedures 88
       
16 [Reserved] Not applicable  
       
16A Audit Committee Financial Expert Management—Corporate Governance—Audit Committee 226
       
16B Code of Ethics Management—Corporate Governance—Code of Ethics 229
       
16C Principal Accountant Fees and Services Management—Corporate Governance—Principal Accountant Fees and Services 229

 

 

2

Form 20-F

Item Number and Caption

Location

 
       
16D Exemptions from the Listing Standards for Audit Committees Not applicable  
       
16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers Business—Shareholding Structure and Relationship with the Government of India 45
16F Change in Registrant’s Certifying Accountant Not applicable  
16G Corporate Governance Management—Summary Comparison of Corporate Governance Practices 229
       
Part – III      
17 Financial Statements See Item 18  
       
18 Financial Statements Report of Independent Registered Public Accounting Firm F-2
       
    Consolidated Balance Sheet F-5
19 Exhibits Exhibit Index and Attached Exhibits 320

 

 

3

 

Certain Definitions

 

In this annual report, all references to “we”, “our”, and “us” are to ICICI Bank Limited and its consolidated subsidiaries and other consolidated entities under generally accepted accounting principles in India (“Indian GAAP”). In the financial statements contained in this annual report and the notes thereto, all references to “the Company” are to ICICI Bank Limited and its consolidated subsidiaries and other consolidated entities under Indian GAAP.

 

References to specific data applicable to particular subsidiaries or other consolidated entities are made by reference to the name of that particular entity. References to the “amalgamation” are to the amalgamation of ICICI, ICICI Personal Financial Services and ICICI Capital Services with ICICI Bank. References to “Sangli Bank” are to The Sangli Bank Limited prior to its amalgamation with ICICI Bank, effective April 19, 2007. References to “Bank of Rajasthan” are to the Bank of Rajasthan Limited prior to its amalgamation with ICICI Bank, effective from the close of business at August 12, 2010.

 

References to “ICICI Bank” and “the Bank” are to ICICI Bank Limited on an unconsolidated basis. References to “ICICI” are to ICICI Limited and its consolidated subsidiaries and other consolidated entities under Indian GAAP prior to the amalgamation of ICICI Limited, ICICI Personal Financial Services Limited and ICICI Capital Services Limited with ICICI Bank Limited, which was effective March 30, 2002 under Indian GAAP. References to a particular “fiscal” year are to the year ended on March 31 of such a year. Unless otherwise indicated, all references to the “Board of Directors” and the “Board” are to the board of directors of ICICI Bank.

 

All references to the “Companies Act”, the “Banking Regulation Act” and the “Reserve Bank of India Act” are to the Companies Act, 2013, the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 as passed by the Indian Parliament and as amended from time to time. All references to “RBI” and the “Reserve Bank of India” are to the central banking and monetary authority of India.

 

Pursuant to the issuance and listing of our securities in the United States under registration statements filed with the United States Securities and Exchange Commission, we file annual reports on Form 20-F which must include financial statements prepared under generally accepted accounting principles in the United States (U.S. GAAP), or financial statements prepared according to a comprehensive body of accounting principles with a reconciliation of net income and stockholders’ equity to U.S. GAAP. When we first listed our securities in the United States, Indian GAAP was not considered a comprehensive body of accounting principles under the United States securities laws and regulations. Accordingly, our annual reports on Form 20-F for fiscal years 2000 through 2005 included U.S. GAAP financial statements. However, pursuant to a significant expansion of Indian accounting standards, Indian GAAP constitutes a comprehensive body of accounting principles. Accordingly, we have included in this annual report, as in the annual reports for fiscal years 2014 through 2018, consolidated financial statements prepared according to Indian GAAP, with a reconciliation of net income and stockholders’ equity to U.S. GAAP and a description of significant differences between Indian GAAP and U.S. GAAP.

 

Our annual report prepared and distributed to our shareholders under Indian law and regulations include unconsolidated Indian GAAP financial statements, management’s discussion and analysis of the Bank’s results of operations and financial condition based on the Bank’s unconsolidated Indian GAAP financial statements and our consolidated Indian GAAP financial statements.

 

The economic and industry data and information presented in this document are sourced from government statistical releases, press releases and notifications by the Government of India, the Reserve Bank of India and other regulators, data available on the websites of the Government of India, Reserve Bank of India, other regulators and industry bodies.

 

4

Forward-Looking Statements

 

We have included statements in this annual report which contain words or phrases such as “will”, “would”, “aim”, “aimed”, “will likely result”, “is likely”, “are likely”, “believe”, “expect”, “expected to”, “will continue”, “will achieve”, “anticipate”, “estimate”, “estimating”, “intend”, “plan”, “contemplate”, “seek to”, “seeking to”, “trying to”, “target”, “propose to”, “future”, “objective”, “goal”, “project”, “should”, “can”, “could”, “may”, “will pursue” and similar expressions or variations of such expressions that may constitute “forward-looking statements”. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results, opportunities and growth potential to differ materially from those suggested by the forward-looking statements. These risks and uncertainties include, but are not limited to, the actual growth in demand for banking and other financial products and services in the countries in which we operate or where a material number of our customers reside; future levels of non-performing and restructured loans and any increased provisions and regulatory and legal changes relating to those loans; our exposure to securities of asset reconstruction companies; our ability to successfully implement our strategies, including our retail deposit growth strategy, our strategic use of technology and the internet and our strategy to reduce our net non-performing assets; the continued service of our senior management; the outcome of any legal, tax or regulatory proceedings in India and in other jurisdictions in which we are or become a party to; the outcome of any internal or independent enquiries or regulatory or governmental investigations; our rural expansion; our exploration of merger and acquisition opportunities; our ability to integrate recent or future mergers or acquisitions into our operations and manage the risks associated with such acquisitions to achieve our strategic and financial objectives; our ability to manage the increased complexity of the risks that we face following our international growth; our growth and expansion in domestic and overseas markets; our status as a systemically important bank in India; our ability to maintain enhanced capital and liquidity requirements; the adequacy of our allowance for credit and investment losses; our ability to market new products; investment income; cash flow projections; the impact of any changes in India’s credit rating; the impact of any new accounting standards or new accounting framework; our ability to implement our dividend payment practice; the impact of changes in banking and insurance regulations and other regulatory changes in India and other jurisdictions on us, including changes in regulatory intensity, supervision and interpretations; the state of the global financial system and systemic risks; the bond and loan market conditions and availability of liquidity amongst the investor community in these markets; the nature of credit spreads and interest spreads from time to time, including the possibility of increasing credit spreads or interest rates; our ability to roll over our short-term funding sources and our exposure to credit, market, liquidity and reputational risks. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date thereof.

 

In addition, other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this annual report include, but are not limited to, the monetary and interest rate policies of India and the other markets in which we operate, general economic and political conditions in India, southeast Asia, and the other countries which have an impact on our business activities or investments, , political or financial instability in India or any other country caused by any factor including regional hostilities ,terrorist attacks or social unrest, man-made or natural disasters and catastrophes, , inflation, deflation, unanticipated turbulence in interest rates, changes or volatility in the value of the rupee, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in general, 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 a further discussion of the factors that could cause actual results to differ, see the discussion under “Risk Factors” contained in this annual report.

 

5

Market Price Information

 

Equity Shares

 

Our outstanding equity shares are currently listed and traded on the BSE Limited under the number 532174, and the National Stock Exchange of India Limited under the symbol ICICIBANK.

 

At June 30, 2019, total 6,452,596,296 equity shares were outstanding. The prices for equity shares as quoted in the official list of each of the Indian stock exchanges are in Indian rupees.

 

At June 30, 2019 there were 860,488 holders of record of our equity shares, of which 1,385 had registered addresses in the United States and held an aggregate of 1,345,794 equity shares.

 

ADSs

 

Our ADSs, each representing two equity shares, were originally issued in March 2000 in a public offering and are listed and traded on the New York Stock Exchange under the symbol IBN. The equity shares underlying the ADSs are listed on the BSE Limited and the National Stock Exchange of India Limited.

 

At June 30, 2019, we had approximately 772 million ADSs, equivalent to about 1,544 million equity shares, outstanding. At June 30, 2019, there were 89,328 record holders of our ADSs, out of which 108 have registered addresses in the United States.

 

See also “Risk Factors—Risks Relating to ADSs and Equity Shares—Conditions in the Indian securities market may adversely affect the price or liquidity of our equity shares and ADSs”.

 

6

Risk Factors

 

You should carefully consider the following risk factors as well as other information contained in this annual report in evaluating us and our business.

 

Risks Relating to India and Other Economic and Market Risks

 

A prolonged slowdown in economic growth or rise in interest rates in India could cause our business to suffer.

 

We are heavily dependent upon the state of the Indian economy, and a slowdown in growth in the Indian economy could adversely affect our business, our borrowers and our contractual counterparties, especially if such a slowdown were to be continued and prolonged. India’s gross domestic product grew by 8.0% in fiscal 2016, 8.2% in fiscal 2017 and 7.2% in fiscal 2018. In fiscal 2019, India’s gross domestic product grew by 6.8%. The agriculture sector grew by 2.9%, the industrial sector by 6.9% and the services sector by 7.5% in fiscal 2019 compared to a growth of 5.0%, 5.9% and 8.1% respectively in fiscal 2018. The agriculture sector accounted for 14.4% of gross value added, while industry and services accounted for 31.3% and 54.3%, respectively in fiscal 2019.

 

From fiscal 2012, the Indian corporate sector experienced several challenges which led to lower than projected cash flows for corporates and the progress in reducing leverage in the corporate sector remained slow. The Reserve Bank of India initiated several measures from fiscal 2016 to accelerate recognition and increase provisioning towards stressed accounts in the corporate sector. As a result, there was a significant increase in the level of additions to non-performing loans, including slippages from restructured loans into non-performing status, for the banking sector, including us. In fiscal 2018, the Reserve Bank of India introduced a new framework for the resolution of stressed assets and withdrew the existing schemes for resolution, resulting in accelerated classification of assets under the resolution schemes of the Reserve Bank of India as non-performing. Subsequently, a revised prudential framework for resolution of stressed assets was announced which retained the withdrawal status of schemes for resolution. While additions to non-performing assets of the banking sector, including us, moderated during fiscal 2019, provisions made by banks, including us, continued to be elevated, as banks continued to make additional provisions on their existing portfolios of non-performing loans. During the year, challenges emerged for non-banking financial companies and housing finance companies following a default by a large non-banking financial company involved primarily in the infrastructure sector. This resulted in tightening liquidity conditions and increase in yields on the debt of non-banking financial companies and housing finance companies, leading to funding and growth challenges. Further, challenges emerged in certain sectors and borrower groups, such as real estate developers, and borrower groups that had borrowed against their shareholding in listed group companies and faced refinancing challenges. See also “—Risks Relating to Our Business—Our level of non-performing assets is elevated, and if the level of our non-performing assets increases further and the overall quality of our loan portfolio continues to deteriorate, our business will suffer”.

 

Economic data for recent periods indicate a moderation in economic activity and consumption, with a lower rate of growth of the gross domestic product as well as a decline in high frequency indicators like vehicle sales. This could result in lower demand for credit from the banking system and also adversely impact the quality of the existing portfolio. In addition, the challenges faced by non-banking financial companies and housing finance companies have led to a slowdown in lending by these companies, which could result in refinancing risks for borrowers and adversely impact the quality of the existing portfolio.

 

The Indian economy in general, and the agricultural sector in particular, are impacted by the level and timing of monsoon rainfall. See also, “—Risks that arise as a result of our presence in a highly regulated sector—We are subject to the directed lending requirements of the Reserve Bank of India, and any shortfall in meeting these requirements may be required to be invested in Government schemes that yield low returns, thereby impacting our profitability. We may also experience a higher level of non-performing assets in our directed lending portfolio, which could adversely impact the quality of our loan portfolio, our business and the prices of our equity shares and ADSs”. Investments by the corporate sector in India are impacted by demand conditions in the global and Indian economy and government policies and decisions including policies and decisions regarding awards of licenses, access to land, access to natural resources and the protection of the environment. Economic growth in India is also influenced by inflation, interest rates, external trade and capital flows. The level of inflation or depreciation of the Indian rupee may limit monetary easing or cause monetary tightening by the Reserve Bank of India. Any increase in inflation, due to increases in domestic food prices or global prices of commodities, including crude oil, the impact of currency depreciation on the prices of imported commodities and additional pass through of higher fuel prices to consumers, or otherwise, may result in a tightening of monetary policy. For instance, following an increase in inflation, the repo rate was increased by 50 basis points during the initial part of fiscal 2019, but was subsequently reduced by 75 basis points with the last reduction of 25 basis points to 5.75% in June 2019. India has, in the past, experienced sustained periods of high inflation. A return to high rates of inflation with a resulting rise in interest rates, and any corresponding tightening of monetary policy may have an adverse effect on economic growth in India.

 

7

Adverse changes to global liquidity conditions, comparative interest rates and risk appetite could lead to significant capital outflows from India. For instance, due to concerns regarding withdrawal of quantitative easing in the U.S. in June 2013, India saw an outflow of foreign institutional investments from the debt market of about US$ 7.5 billion during June-July 2013. Similarly, a slowdown in global growth may impact India’s exports and, in the event of over-supply or sharp and sustained price reductions of globally traded commodities such as metals and minerals, may negatively impact our borrowers in these sectors. Global trade disputes and protectionist measures and counter-measures could impact trade and capital flows and negatively affect the Indian economy.

 

A continuation of the slowdown in the rate of growth in the Indian economy and adverse movements in global capital, commodity and other markets could result in further reduction of demand for credit and other financial products and services, increased competition and higher defaults among corporate, retail and rural borrowers, which could adversely impact our business, our financial performance, our stockholders’ equity, our ability to implement our strategy and the prices of our equity shares and ADSs.

 

Financial instability in other countries, particularly emerging market countries and countries where we have established operations, could adversely affect our business and the prices of our equity shares and ADSs.

 

Although the proximate cause of the 2008-2009 financial crisis, which was deeper than other financial crises, was the U.S. residential mortgage market, investors should be aware that there is a recent history of financial crises and boom-bust cycles in multiple markets in both the emerging and developed economies which leads to risks for all financial institutions, including us. Developments in the Eurozone, including concerns regarding sovereign debt default, negotiations between the United Kingdom and European policymakers and delays in ratifying the withdrawal agreement following the United Kingdom’s vote to withdraw from the European Union, the exit of any other country from the European Union, recessionary economic conditions as well as concerns related to the impact of tightening monetary policy in the U.S. and a trade war between large economies may lead to increased risk aversion and volatility in global capital markets.

 

More specifically, on June 23, 2016, the United Kingdom held a remain-or-leave referendum on its membership within the European Union, the result of which favored the exit of the United Kingdom from the European Union (“Brexit”). A process of negotiation will determine the future terms of the United Kingdom’s relationship with the European Union, as well as whether the United Kingdom will be able to continue to benefit from the European Union’s free trade and similar agreements. Given the lack of precedent, it is unclear how the United Kingdom’s exit from the European Union would affect the fiscal, monetary and regulatory landscape within the United Kingdom, the European Union and globally. The political and economic instability created by Brexit has caused and may continue to cause significant volatility in global financial markets. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Furthermore, uncertainty around these and related issues could lead to adverse effects on the economy of the United Kingdom and the other economies in which we operate. The uncertainty before, during and after the period of negotiation may also create a negative economic impact and increase volatility in global markets. Such volatility and negative economic developments could, in turn, materially adversely affect our business, prospects, financial conditions or results of operations.

 

A loss of investor confidence in the financial systems of India or other markets and countries or any financial instability in India or any other market may cause increased volatility in the Indian financial markets and, directly or indirectly, adversely affect the Indian economy and financial sector, our business and our future financial performance. See also “—Risks Relating to Our Business—Our international operations increase the complexity of the risks that we face”. We remain subject to the risks posed by the indirect impact of adverse developments in the global economy and the global banking environment, some of which cannot be anticipated and the vast majority of which are not under our control. We also remain subject to counterparty risk to financial institutions that fail or are otherwise unable to meet their obligations to us.

 

Any downgrade of India’s debt rating by an international rating agency could adversely affect our business, our liquidity and the prices of our equity shares and ADSs.

 

We are rated by Moody’s and Standard and Poor’s. While Standard & Poor’s and Moody’s currently have stable outlooks on their sovereign ratings for India, they may lower their sovereign ratings for India or the outlook on such ratings, which would also impact our ratings. Rating agencies may also change their methodology for rating banks which may impact us. For instance, in April 2015, Moody’s revised its bank rating methodology and the assessment of government support to banks, following which the rating of several banks globally were revised, including Indian banks. The Bank’s senior unsecured debt rating was downgraded by one level to Baa3 following the methodology change. Any adverse revisions to India’s credit ratings for domestic and international debt by international rating

 

8

agencies may adversely impact our business and limit our access to capital markets and adversely impact our liquidity position. Following the significant increase in non-performing loans in the Indian banking sector, including for us, rating agency Moody’s revised the rating of a few public sector banks and the outlook for some public and private sector banks. While Moody’s reaffirmed the Bank’s senior unsecured debt rating at Baa3, the baseline credit assessment of the Bank was lowered from baa3 to ba1 and the outlook on the Bank’s senior unsecured debt was changed from positive to stable in July 2017. Any changes to ratings for India, the Indian banking system or unsolicited ratings of ICICI Bank by rating agencies from whom we have not obtained ratings, may also impact investor perception of the Bank.

 

The rating of our foreign branches is impacted by the sovereign rating of the country in which the branch is located, particularly if the rating is below India’s rating. Any revision to the sovereign rating of the countries in which we operate to below India’s rating could impact the rating of our foreign branch in the jurisdiction and the bonds issued from these branches. See also “—Risks Relating to Our Business—Our inability to effectively manage credit, market and liquidity risk and inaccuracy of our valuation models and accounting estimates may have an adverse effect on our earnings, capitalization, credit ratings and cost of funds”.

 

A significant increase in the price of crude oil could adversely affect the Indian economy, which could adversely affect our business.

 

India imports a majority of its requirements of petroleum oil and petroleum products, with crude oil comprising around 27% of total imports in fiscal 2019. The Government of India has deregulated prices and has been reducing the subsidy in respect of certain oil products, resulting in international crude prices having a greater effect on domestic prices of petroleum products. The increase in global crude oil prices in fiscal 2018 and fiscal 2019, led to an increase in India’s trade and current account deficits. Elevated oil price levels or volatility in oil prices, as well as the impact of currency depreciation, which makes imports more expensive in local currency, and the pass-through of such increases to Indian consumers or an increase in subsidies (which would increase the fiscal deficit) could have a material adverse impact on the Indian economy and the Indian banking and financial system, including through a rise in inflation and market interest rates, higher trade and fiscal deficits and currency depreciation. A prolonged period of elevated global crude oil prices could also adversely affect our business including our liquidity, the quality of our assets, our financial performance, our stockholders’ equity, our ability to implement our strategy and the prices of our equity shares and ADSs.

 

Current account deficits, including trade deficits, and capital flow and exchange rate volatility could adversely affect our business and the prices of our equity shares and ADSs.

 

India’s trade relationships with other countries and its trade deficit, may adversely affect Indian economic conditions and the exchange rate for the rupee. The current account deficit as a proportion of India’s gross domestic product had improved significantly from a high of 4.7% in fiscal 2013 to 1.3% in fiscal 2015, 1.1% in fiscal 2016 and 0.7% in fiscal 2017, which was driven primarily by the sharp decline in crude oil and commodity prices and a slowdown in non-oil imports. The current account deficit increased in fiscal 2018 to 1.9% of India’s gross domestic product and further to 2.2% in fiscal 2019, following the increase in global prices of crude oil and other commodities, combined with the growth in non-oil imports. Rising volatility in capital flows due to changes in monetary policy in the United States or other economies or a reduction in risk appetite or increase in risk aversion among global investors and consequent reduction in global liquidity may impact the Indian economy and financial markets. For instance, during the first half of fiscal 2014, emerging markets including India witnessed significant capital outflows on account of concerns regarding the withdrawal of quantitative easing in the U.S. and other domestic structural factors such as the high current account deficit and lower growth outlook. In fiscal 2019, concerns regarding India’s current account deficit increased following the sharp rise in global oil prices and the possibility of a trade war between large economies. There was an outflow of foreign portfolio investments and the exchange rate depreciated, partly offset by, the strong inflow of foreign direct investments during the year along with stable foreign exchange reserves.

 

Exchange rates are impacted by a number of factors including volatility of international capital markets, interest rates and monetary policy stance in developed economies like the United States, level of inflation and interest rates in India, the balance of payment position and trends in economic activity. From the beginning of fiscal 2013 through fiscal 2016, the rupee depreciated 30.4% against the U.S. dollar. In fiscal 2017, the rupee appreciated by about 2.1% against the U.S. dollar followed by a depreciation of 0.4% in fiscal 2018. In fiscal 2019, the rupee depreciated by 14.2% against the U.S. dollar between April 1, 2018 and October 9, 2018 following an increase in global crude oil prices and concerns regarding the increase in India’s current account deficit. The exchange rate subsequently appreciated by 7.0% between October 9, 2018 and March 31, 2019.

 

If the current account and trade deficits increase, or are no longer manageable because of factors impacting the trade deficit like a significant rise in global crude oil prices or otherwise, the Indian economy, and therefore our

 

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business, our financial performance and the prices of our equity shares and ADSs could be adversely affected. Any reduction of or increase in the volatility of capital flows may impact the Indian economy and financial markets and increase the complexity and uncertainty in monetary policy decisions in India, leading to volatility in inflation and interest rates in India, which could also adversely impact our business, our financial performance, our stockholders’ equity, and the prices of our equity shares and ADSs.

 

Further, any increased intervention in the foreign exchange market or other measures by the Reserve Bank of India to control the volatility of the exchange rate, may result in a decline in India’s foreign exchange reserves and reduced liquidity and higher interest rates in the Indian economy. For instance, following the depreciation of the rupee between August 2018 and October 2018, the Reserve Bank of India implemented several measures including, intervention in the foreign exchange market, which resulted in a temporary decline in foreign exchange reserves. Prolonged periods of volatility in exchange rates, reduced liquidity and high interest rates could adversely affect our business, our future financial performance and the prices of our equity shares and ADSs. A sharp depreciation in the exchange rate may also impact some corporate borrowers having foreign currency obligations that are not fully hedged. See also “—Risks Relating to Our Business—We and our customers are exposed to fluctuations in foreign exchange rates”.

 

Financial difficulty and other problems in the Indian financial system could adversely affect our business and the prices of our equity shares and ADSs.

 

We were declared a systemically important bank in India by the Reserve Bank of India in August 2015, and have continued to be categorized as a systemically important bank in India in subsequent years. See also “Overview of the Indian Financial Sector”. We are not treated as a globally systemically important bank, either by the FSB or the Reserve Bank of India. As a systemically important Indian bank, we are exposed to the risks of the Indian financial system which may be affected by the financial difficulties faced by certain Indian financial institutions because the commercial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships. This risk, which is sometimes referred to as systemic risk, may adversely affect financial intermediaries, such as clearing agencies, banks, securities firms and exchanges with which we interact on a daily basis. Any such difficulties or instability of the Indian financial system in general could create an adverse market perception about Indian financial institutions and banks and adversely affect our business. For instance, in fiscal 2019 a large systemically important non-deposit taking non-banking financial company defaulted on its repayments on short-term market instruments leading to adverse market reactions including a sharp drop in share prices of non-banking financial companies, increase in yields on their debt and tightening liquidity conditions leading to refinancing challenges for these companies. This has resulted in a slowdown in lending by these companies which could lead to financing and refinancing challenges for their customers, who may also be customers of banks, including us. The overall impact of these developments on credit markets is uncertain and there could be an adverse impact on the loan portfolios of banks, including us, if customers are no longer able to access financing or refinancing from these entities or replace such financing or refinancing from other sources, thereby impacting their ability to conduct operations or meet their financial obligations. Our transactions with these financial institutions expose us to credit risk in the event of default by the counterparty, which can be exacerbated during periods of market illiquidity. See also “—Risks Relating to Our Business—There is operational risk associated with the financial industry which, when realized, may have an adverse impact on our business”.

 

As the Indian financial system operates in an emerging market, we face risks of a nature and extent not typically faced in more developed economies, including the risk of deposit runs notwithstanding the existence of a national deposit insurance scheme. For instance, in April 2003, unsubstantiated rumors alleged that we were facing liquidity problems. Although our liquidity position was sound, we witnessed higher than normal deposit withdrawals on account of these unsubstantiated rumors for a few days in April 2003. In 2008, following the bankruptcy of Lehman Brothers and the disclosure of our exposure to Lehman Brothers and other U.S. and European financial institutions, negative rumors circulated about our financial position which resulted in concerns being expressed by depositors and higher than normal transaction levels on a few days. We controlled the situation in these instances, but any failure to control such situations in the future could result in high volumes of deposit withdrawals, which would adversely impact our liquidity position, disrupt our business and, in times of market stress, undermine our financial strength.

 

We could also face risks from the inability of Indian banks in general to resolve non-performing loans and take timely decisions, particularly in the case of borrowers that may have taken loans from multiple banks. The Reserve Bank of India is addressing credit and concentration risks through measures like limiting the banking system’s exposure to large borrowers, enabling a comprehensive assessment of leverage by requiring all exposures to borrowers above a specified threshold to be reported by banks into a common database, and guidelines for identifying stress in borrower accounts at an early stage and implementing a resolution plan for any overdue account within specified timelines. While these steps will reduce potential problems in borrower accounts and improve credit decisions among banks, there can be no assurance that in the event of stress, banks will be able to make timely decisions and agree on a resolution plan within prescribed timelines which could significantly reduce the value of these assets and recovery for

 

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banks. See also “—Risks Relating to Our Business—Our level of non-performing assets is elevated, and if the level of our non-performing assets increases further and the overall quality of our loan portfolio continues to deteriorate, our business will suffer”.

 

Our risk profile is linked to the Indian economy and the banking and financial markets in India which are still evolving.

 

Our credit risk may be higher than the credit risk of banks in some developed economies. Our access to information about the credit histories of our borrowers, especially individuals and small businesses, may be limited relative to what is typically available for similar borrowers in developed economies with more established nation-wide credit bureaus. In addition, the credit risk of our borrowers is often higher than borrowers in more developed economies due to the evolving Indian regulatory, political, economic and industrial environment. The directed lending norms of the Reserve Bank of India require us to lend a certain proportion of our loans to “priority sectors”, including agriculture and small enterprises, where we are less able to control the portfolio quality and where economic difficulties are likely to affect our borrowers more severely. Any shortfall may be required to be allocated to investments yielding sub-market returns. See also “—Risks that arise as a result of our presence in a highly regulated sector—We are subject to the directed lending requirements of the Reserve Bank of India, and any shortfall in meeting these requirements may be required to be invested in Government schemes that yield low returns, thereby impacting our profitability. We may also experience a higher level of non-performing assets in our directed lending portfolio, which could adversely impact the quality of our loan portfolio, our business and the prices of our equity shares and ADSs” and “Business—Loan Portfolio—Directed Lending”. Several of our corporate borrowers have suffered from low profitability because of increased competition from liberalization, delays in project completion and cash flow generation, movements in commodity prices, high debt burden and high interest rates, and other factors. An economic slowdown and a general decline in business activity in India could impose further stress on these borrowers’ financial soundness and profitability and thus expose us to increased credit risk. Developments in the Indian economy have led to a rise in non-performing and restructured assets of Indian banks, including us, since fiscal 2014. Such conditions may lead to an increase in the level of our non-performing assets and there could be an adverse impact on our business, our future financial performance, our stockholders’ equity and the prices of our equity shares and ADSs.

 

In addition to credit risks, we also face additional risks as compared with banks in developed economies. We pursue our banking, insurance and other activities in India in a developing economy with all of the risks that come with such an economy. Our activities in India are widespread and diverse and involve employees, contractors, counterparties and customers with widely varying levels of education, financial sophistication and wealth. Although we seek to implement policies and procedures to reduce and manage marketplace risks as well as risks within our own organization, some risks remain inherent in doing business in a large, developing country. We cannot eliminate these marketplace and operational risks, which may lead to or exacerbate legal or regulatory actions, negative publicity or other developments that could reduce our profitability. In the aftermath of the financial crisis, regulatory scrutiny of these risks is increasing. See also “—Risks that arise as a result of our presence in a highly regulated sector—The enhanced supervisory and compliance environment in the financial sector increases the risk of regulatory action, whether formal or informal. Following the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past”, “—We are at increased risk for inquiries or investigations by regulatory and enforcement authorities, which may adversely affect our reputation, lead to increased regulatory scrutiny, cause us to incur additional costs or adversely affect our ability to conduct business” “—The value of our collateral may decrease or we may experience delays in enforcing our collateral when borrowers default on their obligations to us which may result in failure to recover the expected value of collateral security exposing us to a potential loss” and “-Entry into new businesses or rapid growth in existing loan portfolios may expose us to increased risks that may adversely affect our business”.

 

Changes in the regulation and structure of the financial markets in India may adversely impact our business.

 

The Indian financial markets have in recent years experienced, and continue to experience, changes and developments aimed at reducing the cost and improving the quality of service delivery to users of financial services. We may experience an adverse impact on the cash float and fees from our cash management business resulting from the development and increased usage of payment systems, as well as other similar structural changes. Some structural changes in banking transactions in India include free access for a customer of any bank to ATMs of all other banks with restrictions on the amount and number of transactions. Furthermore, the Reserve Bank of India, from time to time, also imposes limits on transaction charges levied by banks on customers, including those on cash and card transactions. Banks were directed to remove foreclosure charges on home loans and floating rate term loans given to individual borrowers. Banks were prohibited from levying penalty on non-operative accounts for non-maintenance of minimum balance. Such developments may adversely impact the profitability of banks, including us, by reducing float balances and fee incomes, and increasing costs. See also “—Risks that arise as a result of our presence in a highly regulated sector—The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment”. Our subsidiaries are also subject to similar risks. For instance, in the Union Budget for fiscal 2015, the Finance Minister announced an increase in the long-term capital gains tax rate on investments in debt mutual funds from 10% to 20% and also increased the minimum holding period

 

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for qualification as a long-term investment from 12 months to 36 months. Starting from April 2015, the Association of Mutual Funds of India has introduced a cap of 100 basis points on upfront commissions for all mutual fund schemes and from fiscal 2019, the government has introduced a tax on distributed income by equity oriented mutual funds at the rate of 10.0%. Further, the Reserve Bank of India has rationalized the Merchant Discount Rate for debit card transactions, effective from January 1, 2018. The guidelines replaced the earlier slab-rate based Merchant Discount Rate on transaction value to a merchant turnover based Merchant Discount Rate structure, for which merchants have been suitably categorized, and has specified a ceiling on the maximum permissible Merchant Discount Rate. The Reserve Bank of India has announced the introduction of an electronic trading platform for buying/selling foreign exchange by retail customers of banks, aimed at enhancing transparency and competition and lowering costs for retail customers. The Government of India in its budget for fiscal 2020 has proposed that business establishments above a certain size should offer low cost digital modes of payment, with no charges being levied on the customers or the merchants. These changes may affect our fee income and have an impact on the inflows and earnings of asset management companies, including our asset management subsidiary. See also “—Risks relating to our Business—While our insurance businesses are an important part of our business, there can be no assurance of their future rates of growth or levels of profitability”.

 

A significant change in the Indian government’s policies could adversely affect our business and the prices of our equity shares and ADSs.

 

Our business and customers are predominantly located in India or are related to and influenced by the Indian economy. The Indian government has traditionally exercised, and continues to exercise, a dominant influence over many aspects of the economy. The Indian Government’s policies could adversely affect business and economic conditions in India, our ability to implement our strategy, the operations of our subsidiaries and our future financial performance. Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector and encouraging the development of the Indian financial sector. While a single party achieved majority in the general elections in fiscal 2015 and fiscal 2020, India has been governed by coalition governments in previous years. The leadership of India and the composition of the government are subject to change, and election results are sometimes not along expected lines. It is difficult to predict the economic policies that will be pursued by governments in the future. In addition, investments by the corporate sector in India may be impacted by government policies and decisions, including with respect to awards of licenses and resources, access to land and natural resources and policies with respect to protection of the environment. Such policies and decisions may result in delays in execution of projects, including those financed by us, and also limit new project investments, and thereby impact economic growth.

 

The pace of economic liberalization could change, and specific laws and policies affecting banking and finance companies, foreign investment, currency exchange and other matters affecting investment in our securities could change as well. For instance, the Government of India has introduced a uniform Goods and Services Tax system, which has an impact on the way in which we are taxed and may have an impact on the operations and cash flows of our borrowers. There could also be one-time decisions by the Government of India that could impact our business and financial performance. For instance, the government’s decision in the second half of fiscal 2017 to withdraw legal tender status of high denomination currency notes led to an increase in costs associated with the transition and the reduction in revenues due to accompanying measures such as the reduction or waiver of transaction charges for ATM and card transactions for the specified period. There was also a surge in low cost deposits resulting in a significant increase in liquidity in the banking system and a reduction in cost of funds. During fiscal 2018, the Reserve Bank of India identified specific accounts and required banks to either commence proceedings under the Insolvency and Bankruptcy Code or finalise resolution plans within specified timelines and also required banks to make higher provisions for these accounts. A new framework for the resolution of stressed assets was also introduced during the year (and subsequently modified in fiscal 2020), withdrawing existing resolution schemes and resulting in classification of majority of loans under these schemes as non-performing in fiscal 2018. Any such changes in regulations or significant change in India’s economic policies or any market volatility as a result of uncertainty surrounding India’s macroeconomic policies or the future elections of its government could adversely affect business and economic conditions in India generally and our business in particular and the prices of our equity shares and ADSs could be adversely affected.

 

Natural calamities, climate change and health epidemics could adversely affect the Indian economy, or the economy of other countries where we operate, our business and the prices of our equity shares and ADSs.

 

India has experienced natural calamities such as earthquakes, floods and droughts in the past few years. The extent and severity of these natural disasters determine their impact on the Indian economy. In particular, climatic and weather conditions, such as the level and timing of monsoon rainfall, impact the agricultural sector, which constituted approximately 14.4% of India’s gross value added in fiscal 2019. Prolonged spells of below or above normal rainfall or other natural calamities, or global or regional climate change, could adversely affect the Indian economy and our business, especially our rural portfolio. Similarly, global or regional climate change in India and other countries where

 

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we operate could result in change in weather patterns and frequency of natural calamities like droughts, floods and cyclones, which could affect the economy of India, the countries where we operate and our operations in those countries.

 

Health epidemics could also disrupt our business. In 2018, there were outbreaks of nipah virus, in certain regions of southeast Asia, including India and several countries in which we operate. Any future outbreak of health epidemics may restrict the level of business activity in affected areas, which may in turn adversely affect our business and the prices of our equity shares and ADSs could be adversely affected.

 

If regional hostilities, terrorist attacks, or social unrest in India or elsewhere increase, our business and the prices of our equity shares and ADSs could be adversely affected.

 

India has from time to time experienced social and civil unrest and hostilities both internally and with neighboring countries. In the past, there have been military confrontations between India and Pakistan, and border disputes with neighboring countries. India has also experienced terrorist attacks in some parts of the country, including in Mumbai, where our headquarters are located. India could also be impacted by intensifying trade wars between large economies, like the U.S. increasing trade tariffs on goods imported from China, or possible import restrictions on Indian goods by trading partners that could have an adverse impact on India’s trade and capital flows, exchange rate and macroeconomic stability. In addition, geopolitical events in the Middle East, Asia and Eastern Europe or terrorist or military action in other parts of the world may impact prices of key commodities, financial markets and trade and capital flows. These factors and any political or economic instability in India could adversely affect our business, our future financial performance and the prices of our equity shares and ADSs.

 

Uncertainty about the future of LIBOR may adversely affect our business.

 

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London Interbank Offered Rate or LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. In June 2019, the Financial Conduct Authority asked banks and markets to stop using the LIBOR as a basis for pricing contracts. These announcements indicate that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans or other financial arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and other interest rates. In the event that a published LIBOR rate is unavailable after 2021, the value of such securities, loans or other financial arrangements may be adversely affected, and, to the extent that we are the issuer of or obligor under any such instruments or arrangements, our cost thereunder may increase. Currently, the manner and impact of this transition and related developments, as well as the effect of these developments on our funding costs, investment and trading securities portfolios and business, is uncertain.

 

Risks that arise as a result of our presence in a highly regulated sector

 

If regulatory and legal changes continue to impose increasingly stringent requirements regarding non-performing loans and provisioning for such loans, our business will suffer.

 

The Reserve Bank of India has substantially expanded its guidance relating to the identification and classification of non-performing assets over the last five years, which has resulted in an increase in our loans classified as non-performing and an increase in provisions. Nevertheless, these provisions may not be adequate to cover further increases in the amount of non-performing loans or further deterioration in our non-performing loan portfolio. In addition, the Reserve Bank of India’s annual supervisory process may assess higher provisions than we have made.

 

Effective April 1, 2014, the Reserve Bank of India issued guidelines which included a framework for early identification and resolution of stressed assets. The guidelines introduced an asset classification category of “special mention accounts”, which comprised cases that were not yet restructured or classified as non-performing but which exhibited early signs of stress, as determined by various parameters. Banks were required to share data with each other on a category of special mention accounts, form joint lenders’ forums and devise action plans for the joint resolution of these accounts. Any failure to do so within stipulated timeframes could result in accelerated provisioning for such cases and could materially and adversely impact our business and future financial performance. From April 1, 2015 onwards, loans that were restructured (other than due to a delay in project implementation up to specified periods) have to be classified as non-performing assets. Loans to projects under implementation that are restructured due to a delay in implementation of the project (up to a specified period) enjoy forbearance in classification as non-performing assets,

 

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subject to the fulfillment of certain conditions stipulated by the Reserve Bank of India. During the three months ended December 31, 2015, against the backdrop of continuing challenges in the corporate sector, the Reserve Bank of India articulated an objective of early and conservative recognition of stress and provisioning and held discussions with and asked a number of Indian banks, including us, to review certain loan accounts and their classification over the six months ended March 31, 2016. As a result of the challenges faced by the corporate sector and the discussions with and review by the Reserve Bank of India, non-performing loans increased significantly for the banking system, including us, during the second half of fiscal 2016. In April 2017, the Reserve Bank of India directed banks to put in place board-approved policies for making provisions for standard assets at rates higher than those prescribed by the Reserve Bank of India, based on industry sectors and an assessment of sectoral risks and trends.

 

In April 2017, the Reserve Bank of India required banks to disclose the divergence in asset classification and provisioning between what banks report and what the Reserve Bank of India assesses through the Reserve Bank of India’s annual supervisory process. The disclosure was required if either the additional provisioning requirement assessed by the Reserve Bank of India exceeds 15.0% of the published net profits after tax for the period, or the additional gross non-performing assets identified by the Reserve Bank of India exceeds 15.0% of the published incremental gross non-performing assets for the reference period, or both. In April 2019, the Reserve Bank of India revised the disclosure requirement for divergence in asset classification and provisioning. The disclosure is required if either the additional provisioning requirement assessed by the Reserve Bank of India exceeds 10.0% of the published profits before provisions and contingencies for the period, or the additional gross non-performing assets identified by the Reserve Bank of India exceeds 15.0% of the published incremental gross non-performing assets for the reference period, or both. For fiscal 2016, as compared to our assessment, the Reserve Bank of India’s assessment of gross non-performing assets was Rs. 51.0 billion higher, net non-performing assets were Rs. 40.3 billion higher and provisions for non-performing assets were Rs. 10.7 billion higher. After adjusting for these divergences, our net profit after tax for the year ended March 31, 2016 would have been Rs. 90.3 billion rather than Rs. 97.3 billion. For fiscal 2017 and fiscal 2018, the assessment of divergence in asset classification and provisioning, conducted by the Reserve Bank of India in fiscal 2018 and fiscal 2019 respectively, was lower than the prescribed thresholds and did not require any additional disclosures. For further information, see also Note 18 to Schedule 18 “Notes Forming part of the Accounts” to the standalone financial statements. There can be no assurance that such disclosures in the future will not impact us, our reputation, our business and future financial performance. There could be a possibility of the Reserve Bank of India or other regulatory bodies also taking enforcement action based on divergences in the assessment of asset classification and provisioning. Our subsidiaries are also regulated by their respective regulatory bodies. Similar to us, there may arise a requirement for additional disclosures from our subsidiaries in the future, which may have an adverse impact on us.

 

In June 2017, the Reserve Bank of India directed banks to commence proceedings under the Insolvency and Bankruptcy Code, enacted in 2016, in respect of certain corporate borrowers. Under the Insolvency and Bankruptcy Code, a resolution plan for these borrowers would be required to be finalized within specified timeframes, failing which the borrowers would go into liquidation. The Reserve Bank of India also specified higher provisions in respect of loans to these borrowers. In August 2017, the Reserve Bank of India identified additional accounts and directed banks to initiate insolvency resolution process under the provisions of the Insolvency and Bankruptcy Code by December 31, 2017 if a resolution plan where the residual debt was rated investment grade by two external credit rating agencies was not implemented by December 13, 2017. Further, on February 12, 2018, the Reserve Bank of India issued a revised framework for resolution of stressed assets, which required commencement of proceedings under the Insolvency and Bankruptcy Code in respect of borrowers where a resolution satisfying specified criteria could not be achieved within a prescribed timeframe. Certain borrowers and industry associations representing affected firms filed petitions challenging the Reserve Bank of India’s revised framework for resolution of stressed assets dated February 12, 2018 in various High Courts. Subsequently, the Reserve Bank of India petitioned the Supreme Court to transfer all such petitions filed before various High Courts to the Supreme Court. On September 11, 2018, the Supreme Court, while allowing the Reserve Bank of India’s transfer petition, passed an order transferring all such petitions pending before various High Courts to itself and requiring the status quo as on that date to be maintained. In April 2019, the Supreme Court declared the Reserve Bank of India circular on revised framework for resolution of stressed assets, dated February 12, 2018 as unconstitutional. Following this judgement, in June 2019, the Reserve Bank of India issued a revised prudential framework for resolution of stressed assets which allows the lenders to decide on the resolution plan and does not mandate commencement of proceedings under the Insolvency and Bankruptcy Code. Additional provisions are required in the absence of a resolution plan or initiation of insolvency proceedings. Further, the guideline requires banks to identify borrowers in financial difficulty, indications of which may include defaults, projections of cash-flows, status of accounts, etc. This could create challenges for such borrowers, including some facing temporary difficulties, in raising finances for growth and impact their repayment ability.

 

In August 2017, the Securities and Exchange Board of India issued a circular requiring listed companies to disclose to the stock exchanges, within one working day, any event of default in payment of interest on installment obligations on debt securities including commercial paper, medium term notes, loans from banks and financial institutions, external

 

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commercial borrowing and other forms of debt. The circular was to be effective from October 1, 2017, but has been deferred.

 

We are subject to the directed lending requirements of the Reserve Bank of India, and any shortfall in meeting these requirements may be required to be invested in Government schemes that yield low returns, thereby impacting our profitability. We may also experience a higher level of non-performing assets in our directed lending portfolio, which could adversely impact the quality of our loan portfolio, our business and the prices of our equity shares and ADSs.

 

Under the directed lending norms of the Reserve Bank of India, banks in India are required to lend 40.0% of their adjusted net bank credit to certain eligible sectors, categorized as priority sectors. Of this, banks have sub-targets for lending to key segments or sectors. A proportion of 8.0% of adjusted net bank credit is required to be lent to small and marginal farmers and 7.5% to micro-enterprises. The balance of the priority sector lending requirement can be met by lending to a range of sectors, including small businesses, medium-sized enterprises, renewable energy, social infrastructure and residential mortgages satisfying certain criteria. The Reserve Bank of India has directed banks to maintain direct lending to non-corporate farmers at the banking system’s average level for the last three years and has notified a target of 12.0% of adjusted net bank credit for this purpose for fiscal 2019. Loans to identified weaker sections of society must comprise 10.0% of adjusted net bank credit. From fiscal 2017, these requirements are assessed on a quarterly average basis compared to the earlier requirement of meeting as of the last reporting Friday of the fiscal year with reference to the adjusted net bank credit of the previous fiscal year.

 

These requirements apply to ICICI Bank on a standalone basis. Total average priority sector lending in fiscal 2019 was Rs. 1,891.7 billion constituting 41.5% of adjusted net bank credit against the requirement of 40.0% of adjusted net bank credit. The average lending to the agriculture sector was Rs. 749.8 billion constituting 16.5% of adjusted net bank credit against the requirement of 18.0% of adjusted net bank credit. The average advances to weaker sections were Rs. 403.5 billion constituting 8.9% of adjusted net bank credit against the requirement of 10.0% of adjusted net bank credit. Average lending to small and marginal farmers was Rs. 307.7 billion constituting 6.8% of adjusted net bank credit against the requirement of 8.0% of adjusted net bank credit. The average lending to micro enterprises was Rs. 360.1 billion constituting 7.9% of adjusted net bank credit against the requirement of 7.5% of adjusted net bank credit. The average lending to non-corporate farmers was Rs. 496.1 billion constituting 10.9% of adjusted net bank credit against the requirement of 12.0% of adjusted net bank credit.

 

The Reserve Bank of India has from time to time issued guidelines on priority sector lending requirements that restrict the ability of banks to meet the directed lending obligations through lending to specialized financial intermediaries, specified criteria to be fulfilled for investments by banks in securitized assets and outright purchases of loans and assignments to be eligible for classification as priority sector lending and regulate the interest rates charged to ultimate borrowers by the originating entities in such transactions. Any revision in the definition or classification of segments eligible for priority sector lending could also impact our ability to meet priority sector lending requirements. In September 2013, the Reserve Bank of India set up a committee on comprehensive financial services for small businesses and low income households which, among other recommendations, proposed a new methodology for computation of priority sector targets based on district-level credit penetration and other criteria. This recommendation has not been implemented thus far.

 

Any shortfall in meeting the priority sector lending requirements may be required to be invested at any time, at the Reserve Bank of India’s request, in Government of India schemes that yield low returns, determined depending on the prevailing bank rate and on the level of shortfall, thereby impacting our profitability. The aggregate amount of funding required by such schemes is drawn from banks that have shortfalls in achievement of their priority sector lending targets, with the amounts drawn from each bank determined by the Reserve Bank of India. At March 31, 2019, our total investments in such schemes on account of past shortfalls in achieving the required level of priority sector lending were Rs. 292.6 billion. These investments count towards overall priority sector target achievement. Investments at March 31 of the preceding year are included in the adjusted net bank credit which forms the base for computation of the priority sector and sub-segment lending requirements. The Reserve Bank of India has also allowed banks to sell and purchase priority sector lending certificates in the event of excess/shortfall in meeting priority sector targets, which may help in reducing the shortfall in priority sector lending. However, this would depend on the availability of such certificates for trading. Our investments in Government of India schemes are expected to increase in view of the continuing shortfall in agriculture lending sub-targets and weaker section loans. See also “Supervision and Regulation—Directed Lending”.

 

As a result of priority sector lending requirements, we may experience a higher level of non-performing assets in our directed lending portfolio, particularly due to loans to the agricultural sector and small enterprises, where we are less able to control the portfolio quality and where economic difficulties are likely to affect our borrowers more severely. The Bank’s gross non-performing assets in the priority sector loan portfolio were 2.2% each in fiscal 2016, fiscal 2017 and fiscal 2018 and 1.9% in fiscal 2019. In fiscal 2018 and fiscal 2019, some states in India announced

 

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schemes for waiver of loans taken by farmers. While the cost of such schemes is borne by the state governments, such schemes or borrower expectations of such schemes have resulted in higher delinquencies in the kisan credit card portfolio for banks, including us. Under the Reserve Bank of India’s guidelines, these and other specified categories of agricultural loans are classified as non-performing when they are overdue for more than 360 days, as compared to 90 days for loans in general. Thus, the classification of overdue loans as non-performing occurs at a later stage in respect of such loans than the loan portfolio in general. Any future changes by the Reserve Bank of India to the directed lending norms may result in our continued inability to meet the priority sector lending requirements as well as require us to increase our lending to relatively riskier segments and may result in an increase in non-performing loans.

 

In addition to the directed lending requirements, the Reserve Bank of India has mandated banks in India to have a financial inclusion plan for expanding banking services to rural and unbanked centers and to customers who currently do not have access to banking services. Further, since August 2014, the Indian government has launched a financial inclusion mission which involves opening a bank account for every household along with credit and insurance facilities. The expansion into these markets involves significant investments and recurring costs. The profitability of these operations depends on our ability to generate business volumes in these centers and from these customers, and the level of non-performing loans in the portfolio of loans to such customers.

 

We are subject to capital adequacy requirements stipulated by the Reserve Bank of India, including Basel III, as well as general market expectations regarding the level of capital adequacy large Indian private sector banks should maintain, and any inability to maintain adequate capital due to changes in regulations, a lack of access to capital markets, or otherwise may impact our ability to grow and support our businesses.

 

Banks in India are subject to the Basel III capital adequacy framework as stipulated by the Reserve Bank of India. The Basel III guidelines, among other things, establish common equity Tier 1 as a new tier of capital; impose a minimum common equity Tier 1 risk-based capital ratio of 5.5% and a minimum Tier 1 risk-based capital ratio of 7.0% while retaining the minimum total risk-based capital ratio of 9.0%, and maintain a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets above the minimum requirements to avoid restrictions on capital distributions and discretionary bonus payments. The guidelines also establish eligibility criteria for capital instruments in each tier of regulatory capital, require more stringent adjustments to and deductions from regulatory capital, provide for more limited recognition of minority interests in the regulatory capital of a consolidated banking group, and modify the Reserve Bank of India’s Basel II guidelines with respect to credit risk, including counterparty credit risk and credit risk mitigation, and market risk. The Basel III guidelines were to be fully implemented by year-end fiscal 2019. However, the Reserve Bank of India deferred the implementation of the last tranche of 0.625% of capital conservation buffer from March 31, 2019 to March 31, 2020. Accordingly, the minimum capital conservation ratios as applicable from March 31, 2018 are applicable from March 31, 2019 until the capital conservation buffer attains the level of 2.5% on March 31, 2020. In June 2019, the Reserve Bank of India issued guidelines requiring banks to maintain a minimum leverage ratio of 4.0% for domestic systemically important banks and 3.5% for other banks with effect from October 1, 2019. Applying the Basel III guidelines, our capital ratios on a consolidated basis at March 31, 2019 were: common equity Tier 1 risk-based capital ratio of 13.42%; Tier 1 risk-based capital ratio of 14.73%; and total risk-based capital ratio of 16.47%.

 

The capital regulations continue to evolve, both globally and in India. The Reserve Bank of India requires additional capital to be held by banks as a systemic buffer. For instance, in July 2014, the Reserve Bank of India issued guidelines requiring additional common equity Tier 1 capital requirements ranging from 0.2% to 0.8% of risk-weighted assets for domestic banks that are identified as systemically important. The systemic importance of a bank would be determined based on the size, inter-connectedness, substitutability and complexity of the bank, with a larger weightage given to size. We were declared a systemically important bank in India by the Reserve Bank of India in August 2015 and in subsequent years, and were placed in the first bucket, which requires us to maintain additional common equity Tier 1 capital of 0.2% in a phased manner from April 19, 2016. Further, the Reserve Bank of India also released guidelines on implementation of counter cyclical capital buffers which propose higher capital requirements for banks, ranging from 0% to 2.5% of risk-weighted assets, during periods of high economic growth. The capital requirement would be determined based on certain triggers such as deviation of long-term average credit-to-GDP ratio and other indicators. While these guidelines are already effective, the Reserve Bank of India has stated that current economic conditions do not warrant activation of the counter cyclical capital buffer. In addition, with the approval of the Reserve Bank of India, banks in India may migrate to advanced approaches for calculating risk-based capital requirements in the medium term. The Reserve Bank of India has indicated that it would increase the risk weight on unrated exposures to corporates and infrastructure financing non-banking finance companies from 100.0% to 150.0% if the aggregate exposure of the banking system exceeds Rs. 2.0 billion. This was expected to be effective from June 30, 2017, but was deferred and is effective from April 1, 2019. In April 2018, the Reserve Bank of India advised banks to create an Investment Fluctuation Reserve from fiscal 2019 with the aim of building adequate reserves to protect against sudden increase in government bond yields. A minimum amount equal to either the net profit on sale of investments during the year or net profit for the year excluding mandatory appropriations, whichever is lower, would have to be transferred to

 

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the Investment Fluctuation Reserve and would cover at least 2.0% of the held-for-trading and available-for-sale portfolio of the bank, on a continuing basis. This reserve would be eligible for inclusion in tier 2 capital. In fiscal 2019, we transferred Rs. 12.69 billion from tier 1 capital to the investment fluctuation reserve, which is reckoned under tier 2 capital.

 

In December 2018, the Reserve Bank of India proposed a minimum level of loan component on fund-based working capital limits for large borrowers with the remaining to be drawn in the form of cash credit, and a mandatory credit conversion factor of 20.0% for the undrawn portion of cash credit/overdraft limits. Such regulatory changes and evolving regulations may impact the amount of capital that we are required to hold. Our ability to grow our business and execute our strategy is dependent on our level of capitalization and we typically raise resources from the capital markets to meet our capital requirements. Further, there are uncertainties on the likely impact of the guideline on the working capital management of the corporate borrower, and there could be temporary cash-flow mismatches for the borrowers, resulting in delayed repayments to banks including us.

 

In December 2013, the Reserve Bank of India issued guidelines on stress testing according to which banks have to carry out stress tests for credit risk and market risk to assess their ability to withstand shocks. Banks are classified into three categories based on size of risk-weighted assets and banks with risk-weighted assets of more than Rs. 2,000.0 billion are required to carry out stress testing. The Reserve Bank of India has also issued a leverage ratio framework which is effective from April 1, 2015 and is measured as the ratio of a bank’s Tier 1 capital and total exposure.

 

Debt and equity investors, rating agencies, equity and fixed income analysts, regulators and others would likely expect us to maintain capital adequacy ratios well above the regulatory stipulations, reflecting our position as a large private sector bank.

 

Any reduction in our regulatory capital ratios, increase in capital requirements applicable to us on account of regulatory changes or otherwise, or inability to access capital markets may limit our ability to grow our business or adversely impact our profitability and our future performance and strategy.

 

We are subject to liquidity requirements of the Reserve Bank of India, and any inability to maintain adequate liquidity due to changes in regulations, a lack of access to capital markets, or otherwise may impact our ability to grow and support our businesses.

 

In June 2014, the Reserve Bank of India released guidelines on liquidity coverage ratio requirements under the Basel III liquidity framework. These guidelines require banks to maintain and report the Basel III liquidity coverage ratio, which is a ratio of the stock of high quality liquid assets and total net cash outflows over the next 30 calendar days. The Reserve Bank of India has also defined categories of assets qualifying as high quality liquid assets and mandated a minimum liquidity coverage ratio of 60.0% from January 1, 2015, which has been increased in a phased manner to a minimum of 100.0% from January 1, 2019. Further, the Reserve Bank of India has issued final guidelines on the net stable funding ratio for banks and would require banks to maintain sufficient funds that are considered as reliable to cover the liquidity requirements and asset maturities coming up over the next one year on an ongoing basis. The guidelines on net stable funding ratio are applicable from April 1, 2020. These requirements together with the existing liquidity and cash reserve requirements may result in Indian banks, including us, holding higher amounts of liquidity, thereby impacting profitability. Any sudden increase in the demand for liquidity by banks to meet these regulatory liquidity requirements could have an adverse impact on the financial markets, and result in a sharp increase in short-term borrowing costs and a sudden increase in the cost of funding for banks, including us.

 

Any reduction in our liquidity coverage or net stable funding ratios, increase in liquidity requirements applicable to us on account of regulatory changes or otherwise, changes in the composition of liquidity and any inability to access capital markets may limit our ability to grow our business or adversely impact our profitability and our future performance and strategy.

 

In addition, as we and other banks manage these various liquidity requirements, there could be a sudden increase in demand for liquidity in the banking system which could have an adverse impact in the financial markets, and result in an increase in our short term borrowing costs and a sudden increase in the bank’s cost of funds. Further, any tightening of liquidity and volatility in international markets may limit our access to international bond markets and result in an increase in our cost of funding for our international business. Continued volatility in international markets could constrain and increase the cost of our international market borrowings and our ability to replace maturing borrowings and fund new assets. Our overseas banking subsidiaries are also exposed to similar risks.

 

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The opportunities for growth in our international operations and our ability to repatriate capital from these operations may be limited by the local regulatory environments.

 

Our banking subsidiaries in the United Kingdom and Canada have in the past focused primarily on leveraging their deposit franchises in these markets to extend financing to Indian companies for their operations in India and globally, including the financing of overseas acquisitions by Indian companies through structured transactions. In view of regulatory limitations on cross-border financing of this nature, these subsidiaries have experienced a reduction in their business, impacting their profitability and resulting in a sharp reduction in the return on the capital invested in these businesses. While both these subsidiaries are focused on growing their business within the current regulatory framework, the opportunities to do so may be limited. Further, while both these subsidiaries are focused on optimizing their capital base and have repatriated capital and made dividend payments to ICICI Bank in the past, such initiatives are subject to regulatory approvals. There can be no assurance regarding the timing or grant of such approvals in the future. We are repositioning our international business strategy to sharpen our focus on the non-resident Indian community and on India-linked trade. There can be no assurance of our successful execution of this strategy. Our overseas branches are also subject to respective local regulatory requirements, including any requirements related to liquidity, capital and asset classification and provisioning.

 

Our asset management, private equity, insurance and securities subsidiaries have retail and corporate customers and are subject to extensive regulation and supervision which can lead to increased costs or additional restrictions on their activities that adversely impact the Bank.

 

Our asset management subsidiary, ICICI Prudential Asset Management Company, is subject to supervision and regulation by the Securities and Exchange Board of India. For instance, in fiscal 2019, our asset management subsidiary, based on communication from the regulator, paid compensation with interest to certain schemes of ICICI Prudential Mutual Fund in connection with shares allotted to these schemes in the initial public offering of ICICI Securities Limited in March 2018, and also compensated the investors in these schemes who had redeemed their units since the March 2018 allotment. In the same matter, an adjudication proceeding was initiated by the Securities and Exchange Board of India, which was disposed of pursuant to an application for settlement of proceedings and payment of settlement charges by our asset management subsidiary. Further, certain investors of a real estate investment fund, registered in Mauritius, which is an investor in a real estate fund in India managed by ICICI Venture Funds Management Company Limited, our private equity subsidiary, have initiated legal proceedings in Mauritius alleging mis-selling and mismanagement. In the same matter, ICICI Venture Funds Management Company has received a notice from the Securities and Exchange Board of India, and is pursuing closure of the matter. See also “Business – Legal and Regulatory Proceedings”.

 

Our insurance subsidiaries are also subject to extensive regulation and supervision by India’s insurance regulators. The subsidiaries also have a large number of retail and corporate clients, from whom claims may arise which could be determined in courts or also by regulators and result in determination against our insurance subsidiaries or us or our or our insurance subsidiaries’ management and employees. The Insurance Regulatory and Development Authority of India has the authority to modify and interpret regulations regarding the insurance industry, including regulations governing products, selling commissions, solvency margins and reserving, which can lead to additional costs or restrictions on our insurance subsidiaries’ activities.

 

Further, our insurance and securities broking subsidiaries are now publicly listed companies on the Indian stock exchanges, which has resulted in enhanced compliance requirements and regulatory oversight. There can be no assurance that increased regulatory scrutiny of our insurance and securities subsidiaries and stringent requirements, including additional disclosures, will not have a material adverse impact on the Bank. There could be instances where the regulator may find that we are not in compliance with applicable laws and regulations pertaining to listed companies or their relationship with the parent or other group companies, or with the regulators’ interpretations of laws and regulations, and may take formal or informal actions against us and our subsidiaries.

 

The enhanced supervisory and compliance environment in the financial sector increases the risk of regulatory action, whether formal or informal. Following the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past.

 

We are subject to a wide variety of banking, insurance and financial services laws, regulations and regulatory policies and a large number of regulatory and enforcement authorities in each of the jurisdictions in which we operate. Since the global financial crisis, regulators in India and in the other jurisdictions in which we operate have intensified their review, supervision and scrutiny of many financial institutions, including us. Since the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past, in a range of areas. This increased review and scrutiny or any changes in the existing regulatory supervision framework, increases the possibility that we will face adverse legal or regulatory actions. In the face of difficulties in the Indian

 

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banking sector, the Reserve Bank of India has been increasing the intensity of its scrutiny of Indian banks and has been imposing fines and penalties on Indian banks that are larger than the historic norms. The Reserve Bank of India and other regulators regularly review our operations, and there can be no guarantee that all regulators will agree with our internal assessments of asset quality, provisions, risk management, capital adequacy and management functioning, other measures of the safety and soundness of our operations or compliance with applicable laws, regulations, accounting and taxation norms, listing norms or regulatory policies. See also “—Risks that arise as a result of our presence in a highly regulated sector—If regulatory and legal changes continue to impose increasingly stringent requirements regarding non-performing loans and provisioning for such loans, our business will suffer”. Regulators, including among others the Reserve Bank of India and the Securities and Exchange Board of India (SEBI), may find that we are not in compliance with applicable laws, regulations, accounting and taxation norms, listing norms or regulatory policies, or with the regulators’ revised interpretations of such laws, regulations or regulatory policies, and may take formal or informal actions against us. Such formal or informal actions might force us to make additional provisions for our non-performing assets or otherwise, divest our assets, adopt new compliance programs or policies, remove personnel including senior executives, reduce dividend or executive compensation, provide remediation or refunds to customers or undertake other changes to our business operations. Any of these changes, if required, could reduce our profitability by restricting our operations, imposing new costs or harming our reputation. Recently, pursuant to judicial orders, the Reserve Bank of India has provided copies of its supervisory inspection reports for certain banks, including us, for earlier years to an external party. The consequences of these reports being available in the public domain are uncertain. See also “—Risks that arise as a result of our presence in a highly regulated sector—The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environmentand Supervision and Regulation”.

 

If we fail to manage our legal and regulatory risk in the many jurisdictions in which we operate, our business could suffer, our reputation could be harmed and we would be subject to additional legal and regulatory risks. This could, in turn, increase the size and number of claims and damages asserted against us and/or subject us to regulatory investigations, enforcement actions or other proceedings, or lead to increased supervisory concerns. We may also be required to spend additional time and resources on remedial measures and conducting enquiries, beyond those already initiated and ongoing, which could have an adverse effect on our business.

 

Despite our best efforts to comply with all applicable regulations, there are a number of risks that cannot be completely controlled. Our international expansion has led to increased legal and regulatory risks. Regulators in every jurisdiction in which we operate or have listed our securities have the power to restrict our operations, stipulate higher capital and liquidity requirements or bring administrative or judicial proceedings against us (or our employees, representatives, agents and third-party service providers), which could result, among other things, in suspension or revocation of one or more of our licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary action which could materially harm our reputation, results of operations and financial condition.

 

The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment.

 

The global financial crisis has led to significant and unprecedented changes in the laws, regulations and regulatory policies of India and the other jurisdictions in which we operate. Changes in laws, regulations or regulatory policies, including changes in the interpretation or application of such laws, regulations and regulatory policies, may adversely affect the products and services we offer, the value of our assets or the collateral available for our loans or our business in general. Recent regulatory changes as well as changes currently under discussion, such as changes with respect to Basel III risk-based and leverage capital requirements, Basel III liquidity requirements; restrictions on cross-border capital flows; enhanced emphasis on local lending obligations in overseas jurisdictions; changes in directed lending regulations in India; using national benchmark indices for pricing bank products; fixing the proportion of loans in working capital limits approved to corporates, changes with regard to concentration of large exposures in banks and collateral management; changes in the resolution of stressed assets; continuous licensing of universal banks; and discussions on management compensation, board governance, consumer protection and risk management, among other areas, are expected to have an impact on our business and our future strategy. These changes could require us to reduce or increase our business in specific segments, increase competition, impact our overall growth and impact our return on capital.

 

Changes in laws, regulations and regulatory policies, or the interpretation or application thereof, have and we expect will continue to lead to enhanced regulatory oversight and scrutiny and increased compliance costs. In the aftermath of the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past. This increased scrutiny increases the possibility that we will face adverse legal or regulatory actions. The Reserve Bank of India and other regulators regularly review our operations, and there can be no guarantee that any regulator will agree with our internal assessments of asset quality, provisions, risk management, capital adequacy, management functioning or other measures of the safety and soundness of our operations. See also “—Risks that arise as a result of our presence in a highly regulated sector—If regulatory and legal changes continue to impose increasingly stringent requirements regarding non-performing

 

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loans and provisioning for such loans, our business will suffer”. In addition, regulators may find that we are not in compliance with applicable laws, regulations or regulatory policies, or with the regulators’ revised interpretations of such laws, regulations or regulatory policies, and may take formal or informal actions against us. Our ability to predict future legal or regulatory changes is limited and we may face enhanced legal or regulatory burdens without advance notice. For instance, the Reserve Bank of India, in its guidelines for private sector banking licenses issued in February 2013, has mandated that banks established pursuant to the issuance of such licenses be set up under a financial holding company structure. In the future, such requirements may be extended to existing banks in India, including us. Also, the Reserve Bank of India has released a discussion paper on a new banking structure in India. See also “Overview of the Indian Financial Sector—Structural Reforms”. Any such regulatory or structural changes may result in increased expenses, operational restrictions, increased competition or revisions to our business operations, which may reduce our profitability or force us to forego potentially profitable business opportunities. In April 2017, the Reserve Bank of India revised its Prompt Corrective Action framework for banks and included indicators to be tracked, like capital adequacy, asset quality, profitability and leverage, with specified risk thresholds that would result in invocation of prompt corrective action. The revised framework stipulates actions like restriction on dividend distribution/remittance of profits, restriction on branch expansion; domestic and/or overseas, higher provisions as part of the coverage regime, and restriction on management compensation and directors’ fees. At year-end fiscal 2019, the Bank’s financial indicators did not breach the risk thresholds prescribed by the Reserve Bank of India. There can be no assurance that we will always remain within the thresholds prescribed by the Reserve Bank of India in the future. See also “—Risks that arise as a result of our presence in a highly regulated sector—The enhanced supervisory and compliance environment in the financial sector increases the risk of regulatory action, whether formal or informal. Following the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past”.

 

Risks Relating to Our Business

 

Our level of non-performing assets is elevated, and if the level of our non-performing assets increases further and the overall quality of our loan portfolio continues to deteriorate, our business will suffer.

 

As a result of widespread economic challenges faced by the Indian economy in general and the corporate sector in particular, as well as changes to Reserve Bank of India policies and guidelines related to non-performing and restructured loans and other changes to the law affecting non-performing and restructured loans, the non-performing loans and provisions of a number of Indian banks, including us, increased significantly in fiscal 2016, fiscal 2017 and fiscal 2018. In fiscal 2019, the level of non-performing assets declined for the banking system, including us, following a reduction in additions to non-performing loans during the year. During fiscal 2019, challenges emerged for non-banking financial companies and housing finance companies following a default by a large non-banking financial company involved primarily in the infrastructure sector. This resulted in tightening liquidity conditions and increase in yields on the debt of non-banking financial companies and housing finance companies, leading to funding and growth challenges for these companies. This has resulted in a slowdown in lending by these companies which could lead to financing and refinancing challenges for their customers, who may also be customers of banks, including us. The overall impact of these developments on credit markets is uncertain and there could be an adverse impact on the loan portfolios of banks, including ours, if customers of the affected non-bank financial companies and housing finance companies are no longer able to access financing or refinancing from these entities or replace such financing or refinancing from other sources, thereby impacting their ability to conduct operations or meet their financial obligations. In recent years, banks, including us, have focused on growing their retail (including lending to self-employed borrowers) and small business lending portfolio. While we expect the retail and small business segment to remain a key drivers of growth, a slowdown in economic growth, investment, consumption or employment or any increase in unemployment could have an adverse impact on the quality of our retail loan portfolio. Our portfolio includes purchases of retail asset pools of home finance companies and non-banking finance companies, that may expose us to additional risks, including the failure of the underlying borrowers to perform as anticipated, risks arising out of weakness in the financial position or operations of the originators, who are generally responsible for collections and servicing, and additional mark-to-market provisions where the purchases are structured as securitized instruments classified as investments. In addition, challenges have emerged in recent years in certain sectors and borrower groups, such as real estate developers, and for borrower groups that had borrowed against their shareholding in listed group companies and faced refinancing challenges. The inability of real estate developers to complete and deliver residential properties for which we have provided loans to customers, may impact the repayment behavior of the customers and result in higher delinquencies and non-performing loans. See also “—Risks Relating to India and Other Economic and Market Risks—A prolonged slowdown in economic growth or rise in interest rates in India could cause our business to suffer” and “—Risks Relating to India and Other Economic and Market Risks—A significant change in the Indian government’s policies could adversely affect our business and the prices of our equity shares and ADSs”.

 

The corporate credit market in India is still evolving. The Reserve Bank of India has in recent years announced several measures to improve transparency and accountability. The Reserve Bank of India is addressing credit and concentration risks through measures like limiting the banking system’s exposure to large borrowers, enabling a

 

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comprehensive assessment of borrowing levels and payment performance by requiring all exposures to borrowers above a specified threshold to be reported by banks into a common database, and providing guidelines for identifying stress in borrower accounts at an early stage and implementing a resolution plan for overdue accounts within specified timelines, or initiating insolvency proceedings in respect of such borrowers. Additional provisions are required in the absence of a resolution plan or initiation of insolvency proceedings. Further, large corporations with exposure above certain thresholds to the banking system are required to raise a certain proportion of incremental borrowings from the capital market. These steps are changing the dynamics of banking in the country and are aimed at strengthening the credit markets in the long run by improving transparency and making the credit markets more efficient. However, in the interim, as corporates and banks are adjusting to the new borrowing and lending environment, challenges could emerge and lead to potential financing difficulties for overdue borrowers and accelerated provisioning for lenders.

 

Any adverse economic, regulatory and legal developments could cause the level of our non-performing assets to increase further and adversely impact the quality of our loan portfolio. If the level of our non-performing assets increases further and the overall quality of our loan portfolio deteriorates, our provisioning costs could increase, our net interest income and net interest margin could be negatively impacted due to non-accrual of income on non-performing loans, our credit ratings and liquidity may be adversely impacted, we may become subject to enhanced regulatory oversight and scrutiny, and our reputation, our business, our future financial performance and the prices of our equity shares and ADSs could be adversely impacted. While we expect our levels of non-performing loans and provisions to decrease going forward, any adverse economic, regulatory and legal developments could cause further increases in the level of our non-performing assets or restrict the anticipated reduction in the level of non-performing loans and provisions and have a material adverse impact on the quality of our loan portfolio.

 

See also “—Risks that arise as a result of our presence in a highly regulated sector—If regulatory and legal changes continue to impose increasingly stringent requirements regarding non-performing loans and provisioning for such loans, our business will suffer, “—Our loan portfolio includes long-term project finance loans, which are particularly vulnerable to completion and other risks” and “—We have a high concentration of loans to certain customers, borrower groups and sectors and if a substantial portion of these loans become non-performing, the overall quality of our loan portfolio, our business and the prices of our equity shares and ADSs could be adversely affected”.

 

Our loan portfolio includes long-term project finance loans, which are particularly vulnerable to completion and other risks.

 

The quality of our project finance portfolio could be adversely impacted by several factors. The viability of these projects depends upon a number of factors, including market demand, government policies, the processes for awarding government licenses and access to natural resources and their subsequent judicial or other review, the financial condition of the government or other entities that are the primary customers for the output of such projects and the overall economic environment in India and the international markets. These projects are particularly vulnerable to a variety of risks, including risks of delays in regulatory approvals, environmental and social issues, completion risk and counterparty risk, which could adversely impact their ability to generate revenues. In the past, we have experienced a high level of default and restructuring in our industrial and manufacturing project finance loan portfolio as a result of the downturn in certain global commodity markets and increased competition in India. Our loans to the power sector were 5.6% of our total loans at March 31, 2016, 5.8% at March 31, 2017, 4.8% at March 31, 2018 and 3.1% at March 31, 2019. Power projects face a variety of risks, including access to fuel such as coal and gas, volatility in pricing of power and off-take of the power produced. Coal based power projects in India have experienced delays primarily due to environmental concerns around coal mining and the de-allocation of coal blocks allocated to companies. In addition, power projects inherently have high leverage levels and volatility in capital markets and concerns about the implementation of these projects and their future cash flows may constrain the availability of equity funding for such projects. Any reduction in the output of operational power plants or the projected output of newly commissioned or under-implementation power projects due to lower availability of fuel, higher fuel costs that cannot be passed through to purchasers and inability of state-owned power distribution utilities to purchase or pay for power due to their financial condition, or a decline in the price of power, may have an adverse impact on the financial condition of power producers and their ability to service their debt obligations, including to us. We cannot be sure that these projects will begin operations as scheduled or perform as anticipated. A change in the ownership and management of these projects could further delay the commencement of operations. We may see an increase in our non-performing assets or restructured assets in case of delays from the scheduled commercial date of operations of such projects, which are longer than that permitted by the Reserve Bank of India guidelines.

 

Our loan portfolio also includes project finance, corporate finance, and working capital loans to commodity-based sectors such as iron and steel and mining, which are subject to similar and additional risks, as well as global commodity price cycles. For instance, during fiscal 2016, due to a slowdown in global demand for steel, there was a sharp decline in global steel prices, which in turn impacted Indian steel companies. Capacity utilization of steel companies declined

 

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and profitability came under pressure. The Government of India announced certain policy measures, including a minimum price for procuring steel from overseas markets, which have benefited the Indian steel sector. However, we cannot be certain that such or any other measures will continue to be introduced by the government in the future. A slowdown in the Indian and global economy may exacerbate the risks for the projects that we have financed. Future project finance losses or high levels of loan restructuring could have a materially adverse effect on our profitability and the quality of our loan portfolio and the prices of our equity shares and ADSs.

 

We have a high concentration of loans to certain customers, borrower groups and sectors and if a substantial portion of these loans become non-performing, the overall quality of our loan portfolio, our business and the prices of our equity shares and ADSs could be adversely affected.

 

Our loan portfolio and non-performing asset portfolio have a high concentration in certain types of customers. ICICI Bank’s policy is to limit its exposure to any particular industry, other than retail loans, to 15.0% of its total exposure. Our loans and advances to the retail finance segment constituted 57.8% of our gross loans and advances at March 31, 2019. Our loans and advances to the services-finance sector were 7.0%, to the infrastructure sector (excluding power) were 4.4%, to the power sector were 3.1%, to the non-finance services sector were 2.8%, and to the iron and steel sector were 2.6% of our gross loans and advances at March 31, 2019.

 

There are uncertainties in respect of certain sectors due to global and domestic economic conditions and high corporate leverage. The Bank’s fund-based and non-fund based outstanding (excluding banks and fund-based outstanding to non-performing assets) to companies in the corporate and SME sectors internally rated below investment grade were Rs. 175.3 billion at March 31, 2019. Our consolidated net loans to accounts internally rated below investment grade (including net non-performing and restructured loans) were Rs. 283.0 billion at March 31, 2019.

 

Pursuant to the guidelines of the Reserve Bank of India, the Bank’s credit exposure to an individual borrower must not exceed 15.0% of its capital funds, unless the exposure is with regards to an infrastructure project. Capital funds refer to Tier 1 and Tier 2 capital after regulatory adjustments as per the Reserve Bank of India guideline ‘Master Circular - Basel III Capital Regulations’. ICICI Bank’s exposure to a group of companies under the same management control generally must not exceed 40.0% of its capital funds unless the exposure is towards an infrastructure project, as per the Reserve Bank of India guidelines. Banks may, in exceptional circumstances, with the approval of their boards, enhance the exposure by 5.0% of capital funds (i.e., aggregate exposure can be 20.0% of capital funds for an individual borrower and aggregate exposure can be 45.0% of capital funds for a group of companies under the same management). At March 31, 2019, our largest non-bank borrower accounted for approximately 9.6% of our capital funds. The largest group of companies under the same management control accounted for approximately 23.2% of our capital funds. At March 31, 2019, the Bank’s exposure to its 20 largest borrowers (including banks) was approximately 11.9% of our total exposure, and our credit exposure to our 20 largest borrowers (including banks) was approximately 12.1% of the Bank’s total credit exposure.

 

In December 2016, the Reserve Bank of India released a framework for large exposures with limits on exposure of banks to single counterparty and a group of connected counterparties. As per this framework, the sum of all the exposure values of a bank to a single counterparty must not be higher than 20% of the bank’s available eligible capital base at all times and the sum of all the exposure values of a bank to a group of connected counterparties must not be higher than 25% of the bank’s available eligible capital base at all times. This framework has been fully implemented since April 1, 2019.

 

In August 2016, the Reserve Bank of India issued guidelines proposing that large borrowers should reduce reliance on banks for their additional funding and access market borrowings and other funding sources. The exposure of the banking system to large borrowers would attract higher risk weights and provisioning. Borrowers to be considered for this purpose would be those having an aggregate fund-based credit limit of Rs. 250.0 billion at any time during fiscal 2018 and gradually reduced to Rs. 150.0 billion in fiscal 2019 and to Rs. 100.0 billion from fiscal 2020 onwards. Loans from banks in excess of 50.0% of the incremental funds raised by these borrowers attracts higher risk weights and provisioning since April 1, 2018. Further, in November 2018, the Securities and Exchange Board of India released a framework that requires a company rated AA and above and with an outstanding long term borrowing of Rs. 1.00 billion and above at March 31 in any given year, to necessarily raise 25% of its incremental borrowings for the following year through the bond market. This is effective from April 1, 2019.

 

These guidelines, and our focus on controlling and reducing concentration risk, may restrict our ability to grow our business with some customers, thereby impacting our earnings. The Bank has significantly strengthened its enterprise risk management and risk appetite framework since fiscal 2016 for managing concentration risk, including limits/thresholds with respect to single borrower and group exposure. There can be no assurance that our strategy of reducing concentration risk will be successful and that we will be able to successfully grow our operating profits while controlling non-performing loans and provisions through this approach.

 

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Our exposure to the securities of asset reconstruction companies could generally affect our business, financial condition and results of operations.

 

We also have investments in security receipts arising from the sale of non-performing assets by us to reconstruction companies registered with the Reserve Bank of India. At March 31, 2019, the Bank had an outstanding net investment of Rs. 32.9 billion in security receipts issued by asset reconstruction companies. See also “Business—Classification of Loans”. In September 2016, the Reserve Bank of India issued a framework for sale of stressed assets. As per this framework, with effect from April 1, 2017, provisions held for investment in security receipts is subject to a floor rate applicable to the underlying loans (the provisions the bank would have had to make if the loans had continued to be held in its books), if more than 50% of the security receipts are held by the bank that sold the loans. The threshold of 50% was reduced to 10% from April 1, 2018 as per the framework. Further, the framework requires banks to maintain an internal list of stressed assets identified for sale and review assets classified as ‘doubtful’ above a threshold amount on a periodic basis with a view to consider a sale or other disposition. There can be no assurance that reconstruction companies will be able to recover these assets and redeem our investments in security receipts and that there will be no reduction in the value of these investments. Any such inability to recover assets or redeem our investments without a diminution in value could generally affect our business, financial condition and results of operations.

 

The value of our collateral may decrease or we may experience delays in enforcing our collateral when borrowers default on their obligations to us which may result in failure to recover the expected value of collateral security exposing us to a potential loss.

 

A substantial portion of our loans to corporate and retail customers is secured by collateral. See also “Business—Loan Portfolio—Collateral—Completion, Perfection and Enforcement”. Changes in asset prices may cause the value of our collateral to decline, and we may not be able to realize the full value of our collateral as a result of delays in bankruptcy and foreclosure proceedings, delays in the creation of security interests, defects or deficiencies in the perfection of collateral (including due to inability to obtain approvals that may be required from various persons, agencies or authorities), fraudulent transfers by borrowers and other factors, including depreciation in the value of the collateral and illiquid market for disposal of and volatility in the market prices for the collateral, current legislative provisions or changes thereto and past or future judicial pronouncements.

 

In India, foreclosure on collateral consisting of property can be undertaken directly by lenders by fulfilling certain procedures and requirements (unless challenged in courts of law) or otherwise by a written petition to an Indian court or tribunal. An application, when made (or a legal challenge to the foreclosure undertaken directly), may be subject to delays or administrative requirements that may result in, or be accompanied by, a decrease in the value of collateral. These delays can last for several years and might lead to deterioration in the physical condition or market value of the collateral. In the event a corporate borrower is in financial difficulty and unable to sustain itself, it may opt for the process of voluntary winding up. If a company becomes a “sick unit” (as defined under Indian law, which provides for a unit to be so categorized based on the extent of its accumulated losses relative to its stockholders’ equity), foreclosure and enforceability of collateral is stayed. In some cases, we may repossess collateral in lieu of principal and interest dues but may experience delays in liquidating the collateral.

 

The Insolvency and Bankruptcy Code enacted in 2016 provides for a time-bound mechanism to resolve stressed assets. Further, the new prudential framework for resolution of stressed assets, initially introduced in February 2018 and subsequently amended in June 2019 by the Reserve Bank of India, requires banks to implement a plan to resolve any overdue account within timelines as approved by the board and may include legal proceedings for insolvency or recovery. The process of resolution of accounts referred under the Insolvency and Bankruptcy Code is still evolving, with periodic amendments being incorporated in the framework through both legislation and judicial decisions. A few large accounts were resolved under the Code during fiscal 2019. However, uncertainties continue and there are delays in the resolution of accounts referred under the Code. Should the resolution of accounts not be achieved and the borrowers go into liquidation, the market value of the collateral may come down thus impacting the recovery of dues by lenders. There can be no assurance of the level of recovery even in cases where a resolution is achieved. In a recent judgment, the National Company Law Appellate Tribunal has treated secured and unsecured financial creditors to a borrower referred under the Code similarly with respect to the level of recovery, and has also held that there should be equal distribution of resolution proceeds between operational and financial creditors under a resolution plan. The government has, subsequently, proposed to amend the Code and among other measures also empower the Committee of Creditors, which comprises of all financial creditors, to decide on the manner of distribution of resolution proceeds.

 

In addition, for collateral we hold in jurisdictions outside India, the applicable laws and regulations in such jurisdictions may impact our ability to foreclose on collateral and realize its value. Failure to recover the expected value of collateral could expose us to potential losses, which could adversely affect our future financial performance, our stockholders’ equity and the prices of our equity shares and ADSs.

 

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Our banking and trading activities are particularly vulnerable to interest rate risk and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our income from treasury operations, the quality of our loan portfolio and our financial performance.

 

Interest rates in India are impacted by a range of factors including inflation, fiscal deficit and government borrowing, monetary policy and market liquidity. For instance, in July 2013, with a view to manage the volatility in the exchange rate, the Reserve Bank of India introduced measures to reduce liquidity in the Indian banking system and increase the cost of borrowing from the Reserve Bank of India.

 

As a result of certain reserve requirements of the Reserve Bank of India, we are more structurally exposed to interest rate risk than banks in many other countries. See also “Supervision and Regulation—Legal Reserve Requirements”. These requirements result in our maintaining a large portfolio of fixed income Government of India securities, and we could be materially adversely impacted by a rise in interest rates, especially if the rise were sudden or sharp. Realized and marked-to-market gains or losses on investments in fixed income securities, including Government of India securities, are an important element of our profitability and are impacted by movements in market yields. A rise in yields on government securities reduces our profits from this activity and the value of our fixed income portfolio. In fiscal 2019, yields on government securities increased sharply due to tight liquidity conditions between September and December 2018. This resulted in significant losses in the treasury book for most Indian banks, including for us, during the quarter ended December 31, 2018. In April 2018, the Reserve Bank of India advised banks to create an Investment Fluctuation Reserve, equivalent to at least 2.0% of the held-for-trading and available-for-sale portfolio, on a continuing basis, from fiscal 2019. The requirement to maintain a large portfolio of government securities also has a negative impact on our net interest income and net interest margin because we earn interest on a portion of our assets at rates that are generally less favorable than those typically received on our other interest-earning assets. As required by the Reserve Bank of India guidelines, we transferred Rs. 12.69 billion from tier 1 capital to the investment fluctuation reserve in fiscal 2019, which is reckoned under tier 2 capital.

 

We are also exposed to interest rate risk through our treasury operations as well as the operations of certain of our subsidiaries, including ICICI Lombard General Insurance Company, which has a portfolio of fixed income securities, and ICICI Securities Primary Dealership, which is a primary dealer in Government of India securities. In our asset management business, we manage money market mutual funds whose performance is impacted by a rise in interest rates, which adversely impacts our revenues and profits from this business. See also “—Risks Relating to India and Other Economic and Market Risks—A prolonged slowdown in economic growth or rise in interest rates in India could cause our business to sufferand —Risks Relating to India and Other Economic and Market Risks—Current account deficits, including trade deficits, and capital flow and exchange rate volatility could adversely affect our business and the prices of our equity shares and ADSs”.

 

If the yield on our interest-earning assets does not increase at the same time or to the same extent as our cost of funds, or if our cost of funds does not decline at the same time or to the same extent as the decrease in yield on our interest-earning assets, our net interest income and net interest margin would be adversely impacted. Any systemic decline in low cost funding available to banks in the form of current and savings account deposits would adversely impact our net interest margin. A slower growth in low cost deposits compared to total deposits would result in an increase in the cost of funds and could adversely impact our net interest margin if we are not able to pass on the increase to borrowers. The Reserve Bank of India has deregulated the interest rate on savings deposits, following which some banks in India are offering higher interest rates on their savings deposit accounts. If other banks with whom we compete similarly raise their savings account deposit rates, we may also have to do so to remain competitive and this would adversely impact our cost of funds. During fiscal 2019, the growth in deposits in the banking system was slower compared to the growth in credit, leading to tight liquidity conditions and an increase in the credit-deposit ratio, particularly during the latter part of the year. This resulted in an increase in the cost of funds for banks, but was offset by an increase in lending rates. At the same time, some banks continue to offer higher interest rates on savings bank accounts or higher interest rates on accounts with higher balances. Such revisions in deposit interest rates, or introduction of higher interest rates, by banks with whom we compete may also lead to revisions in our deposit rates to remain competitive and this could adversely impact our cost of funds.

 

In December 2015, the Reserve Bank of India released guidelines on computation of lending rates based on the marginal cost of funds methodology which is applicable on incremental lending from April 1, 2016. This change in the methodology for calculating cost of funds led to lower lending rates, and led to more frequent revisions in lending rates due to the prescribed monthly review of cost of funds. In October 2017, the Reserve Bank of India released the report of an internal study group which has proposed a revision to the methodology for pricing of bank loans and has recommended referencing lending rates to an external benchmark and increasing the periodicity of reset of interest rates to once a quarter. In February 2018, the Reserve Bank of India proposed to harmonize the methodology of determining benchmark rates by linking the base rate to the marginal cost based lending rate. Further, in December 2018, the Reserve Bank of India announced the linking of new floating rate retail loans and floating rate loans to micro and small

 

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enterprises to an external benchmark. While this was expected to be applicable from April 1, 2019, further discussions are being held with stakeholders and final guidelines in this regard are awaited. See also “Business—Loan Portfolio—Loan Pricingand Supervision and Regulation—Regulations Relating to Advancing Loans”. A large public sector bank has linked the interest rates on its home loans and savings account deposits to the repo rate. The impact of this change on the overall market for loans and deposits is uncertain. Since our funding is primarily fixed rate, volatility in benchmarks underlying loan pricing may cause volatility in or compress our net interest margin. If there are increases in our cost of funds and if we are unable to pass on the increases fully into our lending rates, our net interest margins and profitability would be adversely impacted. Such revisions in benchmark lending rates may impact the yield on our interest-earning assets, our net interest income and net interest margin.

 

High and increasing interest rates or greater interest rate volatility would adversely affect our ability to grow, our net interest margins, our net interest income, our income from treasury operations and the value of our fixed income securities portfolio.

 

Our inability to effectively manage credit, market and liquidity risk and inaccuracy of our valuation models and accounting estimates may have an adverse effect on our earnings, capitalization, credit ratings and cost of funds.

 

Our risk management strategies may not be effective because in a difficult or less liquid market environment other market participants may be attempting to use the same or similar strategies to deal with difficult market conditions. In such circumstances, it may be difficult for us to reduce our risk positions due to the activity of such other market participants. Our derivatives businesses may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses or enhanced regulatory scrutiny. Severe declines in asset values, unanticipated credit events, or unforeseen circumstances that may cause previously uncorrelated factors to become correlated may create losses resulting from risks not appropriately taken into account in the development, structuring or pricing of a derivative instrument. In addition, some derivative transactions are not cleared and settled through a central clearing house or exchange, and they may not always be confirmed or settled by counterparties on a timely basis. In these situations, we are subject to heightened credit and operational risk, and in the event of a default, we may find the contract more difficult to enforce. Further, as new and more complex derivative products are created, disputes regarding the terms or the settlement procedures of the contracts could arise, which could force us to incur unexpected costs, including transaction and legal costs, and impair our ability to manage effectively our risk exposure to these products. Many of our hedging strategies and other risk management techniques have a basis in historic market behavior, and all such strategies and techniques are based to some degree on management’s subjective judgment. To the extent any of the instruments and strategies we use to hedge or otherwise manage our exposure to market or credit risk are not effective, we may not be able to mitigate effectively our risk exposures in particular market environments or against particular types of risk. Our balance sheet growth is dependent upon economic conditions, as well as upon our ability to securitize, sell, purchase or syndicate particular loans or loan portfolios. Our trading revenues and interest rate risk are dependent upon our ability to properly identify, and mark-to-market, changes in the value of financial instruments caused by changes in market prices or rates. Our earnings are dependent upon the effectiveness of our management of migrations in credit quality and risk concentrations, the accuracy of our valuation models and our critical accounting estimates and the adequacy of our allowances for loan losses.

 

To the extent our assessments, assumptions or estimates prove inaccurate or not predictive of actual results, we could suffer higher than anticipated losses and enhanced regulatory scrutiny. The successful management of credit, market and operational risk is an important consideration in managing our liquidity risk because it affects the evaluation of our credit ratings by domestic and international rating agencies. Rating agencies may reduce or indicate their intention to reduce the ratings at any time. See also “—Risks Relating to India and Other Economic and Market Risks—Any downgrade of India’s debt rating by an international rating agency could adversely affect our business, our liquidity and the prices of our equity shares and ADSs”. The rating agencies can also decide to withdraw their ratings altogether, which may have the same effect as a reduction in our ratings. Any reduction in our ratings (or withdrawal of ratings) may increase our borrowing costs, limit our access to capital markets and adversely affect our ability to sell or market our products, engage in business transactions particularly longer-term, and derivatives transactions, or retain our customers. Conditions in the international and Indian debt markets may adversely impact our access to financing and liquidity. This, in turn, could reduce our liquidity and negatively impact our operating results and financial condition. For more information, relating to our ratings, see also “Business—Risk Management—Quantitative and Qualitative Disclosures about Market Risk—Liquidity Risk”.

 

We and our customers are exposed to fluctuations in foreign exchange rates.

 

Several of our borrowers enter into derivative contracts to manage their foreign exchange risk exposures. Volatility in exchange rates may result in increased mark-to-market losses in derivative transactions for our clients. Upon the maturity or premature termination of the derivative contracts, these mark-to-market losses become receivables owed to

 

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us. Consequently, we become exposed to various kinds of risks including but not limited to credit risk, market risk and exchange risk.

 

As discussed above, in the past, concerns over India’s current account deficit and changes in capital flows due to changes in U.S. monetary policy have caused the rupee to depreciate against the U.S. dollar. During the nine months ended December 31, 2018, India’s current account deficit increased to 2.6% of gross domestic product primarily due to an increase in global crude oil prices. The rupee depreciated by 14.2% against the U.S. dollar between April 1, 2018 to October 9, 2018. The exchange rate subsequently appreciated by 7.0% between October 9, 2018 and March 31, 2019. See—Risks relating to India and Other Economic and Market Risks—Current account deficits, including trade deficits, and capital flow and exchange rate volatility could adversely affect our business and the prices of our equity shares and ADSs”. Some of our borrowers with foreign exchange and derivative exposures may be adversely impacted by the depreciation of the rupee. These include borrowers impacted by higher rupee denominated interest or principal repayment on unhedged foreign currency borrowings; increases in the cost of raw material imports where there is limited ability to pass through such escalations to customers; and the escalation of project costs due to higher imported equipment costs; and borrowers that may have taken adverse positions in the foreign exchange markets. The failure of our borrowers to manage their exposures to foreign exchange and derivative risk, particularly adverse movements and volatility in foreign exchange rates, may adversely affect our borrowers and consequently the quality of our exposure to our borrowers and our business volumes and profitability.

 

In January 2014, the Reserve Bank of India issued guidelines requiring higher capital and provisioning requirements for banks on their exposures to companies having unhedged foreign currency exposure, based on an assessment of likely loss on such exposures compared to the earnings of the corporate. An increase in non-performing or restructured assets on account of our borrowers’ inability to manage exchange rate risk and any increased capital or provisioning requirement against such exposures may have an adverse impact on our profitability, our business and the prices of our equity shares and ADSs. We have adopted certain risk management policies to mitigate such risk. However, there is no assurance that such measures will be fully effective in mitigating such risks.

 

We plan to expand our branch network and any inability to use these branches productively may have an adverse impact on our growth and profitability.

 

The branch network of ICICI Bank in India increased significantly from 3,100 branches at year-end fiscal 2013 to 4,850 branches at year-end fiscal 2017 and then marginally to 4,874 branches at March 31, 2019. We plan to expand our branch network to support growth in our business in fiscal 2020 and in subsequent years. Our new branches typically operate at lower productivity levels, as compared to our existing branches. See also “—We may seek opportunities for growth through acquisitions, divest our existing businesses, or be required to undertake mergers by the Reserve Bank of India and could face integration and other acquisitions risks”. We also have a substantial branch network in rural and semi-urban areas and have also established branches in villages that did not have any banking services. Any inability to achieve or substantial delays in achieving desired levels of deposits, advances and revenues from the new branches would have an adverse impact on our growth and profitability and the prices of our equity shares and ADSs.

 

Our funding is primarily short-term and if depositors do not roll over deposited funds upon maturity, our business could be adversely affected.

 

Most of our incremental funding requirements are met through short-term funding sources, primarily in the form of deposits including deposits from corporate customers and inter-bank deposits. Our customer deposits generally have a maturity of less than one year. However, a large portion of our assets have medium- or long-term maturities, creating the potential for funding mis-matches. For instance, our project finance loans typically have longer-term maturities compared to our funding profile. We have significantly expanded our branch network in recent years. See also “Supervision and Regulation—Regulations Relating to the Opening of Branches”. Our new branches typically operate at lower efficiency levels, as compared to our existing branches, and although we intend to increase their efficiency over time, any inability to use these branches productively, or substantial delays in achieving desired levels of productivity, may have an impact on our ability to grow our deposit base to the desired extent.

 

Negative rumors have been previously circulated about our financial position which resulted in concerns being expressed by depositors and higher than normal withdrawal levels for a few days. Furthermore, a part of our loan and investment portfolio, consisting primarily of the loan and investment portfolios of our international branches and subsidiaries is denominated in foreign currencies, including the U.S. dollar. Our international branches are primarily funded by debt capital market issuances and syndicated/bilateral loans, while our international subsidiaries generally raise deposits in their local markets. Volatility in the international debt markets may constrain our international capital market borrowings. There can be no assurance that our international branches and subsidiaries will be able to obtain funding from the international debt markets or other sources in a timely manner on terms acceptable to them or at all.

 

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This may adversely impact our ability to replace maturing borrowings and fund new assets. In addition, borrowers who have taken foreign currency loans from us may face challenges in meeting their repayment obligations on account of market conditions and currency movements. See also “—Risks Relating to India and Other Economic and Market Risks—Financial instability in other countries, particularly emerging market countries and countries where we have established operations, could adversely affect our business and the prices of our equity shares and ADSs”, “—Risks Relating to India and Other Economic and Market Risks—Financial difficulty and other problems in the Indian financial system could adversely affect our business and the prices of our equity shares and ADSs” and “—Our international operations increase the complexity of the risks that we face”.

 

The exposures of our international branches and subsidiaries could generally affect our business, financial condition and results of operations.

 

The loan portfolio of our international branches and subsidiaries includes foreign currency loans to Indian companies for their Indian operations (where permitted by regulation) as well as for their overseas ventures, including cross-border acquisitions. This exposes us to specific additional risks including the failure of the acquired entities to perform as expected, and our inexperience in various aspects of the economic and legal framework in overseas markets. We are, through our international branches and subsidiaries, also exposed to a variety of local market credit risks, where our expertise and experience may be limited. Our banking subsidiaries in the United Kingdom and Canada are involved in corporate lending, insured and conventional uninsured mortgages in Canada and loans against property in the United Kingdom. Our international branches also have credit exposures to international companies. We are also subject to the risks posed by the indirect impact of adverse developments in the global banking environment, and any international bank failure, some of which cannot be anticipated and the vast majority of which are not under our control. See also “—Our international operations increase the complexity of the risks that we face”.

 

The classification of the loan portfolio of our overseas branches and subsidiaries is also subject to the regulations of respective local regulators. Such loans that are identified as impaired as per host country regulations for reasons other than record of recovery, but which are standard as per the current Reserve Bank of India guidelines, are classified as non-performing to the extent of the amount of outstanding loan in the host country. Overseas regulators may also require higher provisions against loans held in their jurisdictions. Further, some of our branches and subsidiaries have commenced preparation of financial statements under International Financial Reporting Standards, including International Financial Reporting Standard 9—Financial Instruments, or under Indian accounting standards converging with this standard, from fiscal 2019, which has impacted asset classification and provisioning. Such classification of loans as non-performing based on host country regulations may lead to an adverse impact on our business, our future financial performance and the prices of our equity shares and ADSs.

 

Our international operations increase the complexity of the risks that we face.

 

Our international profile in multiple jurisdictions exposes us to a variety of regulatory and business challenges and risks, including cross-cultural risk and has increased the complexity of our risks in a number of areas including price risks, currency risks, interest rate risks, credit risk, compliance risk, regulatory and reputational risk and operational risk. In the aftermath of the financial crisis and in light of enhanced regulations in many countries, we expect to face additional scrutiny in all of these areas and in the management of our international operations. We also face risks arising from our ability to manage inconsistent legal and regulatory requirements in the multiple jurisdictions in which we operate. Our businesses are subject to changes in legal and regulatory requirements and it may not be possible to predict the timing or nature of such changes. See also “—The opportunities for growth in our international operations and our ability to repatriate capital from these operations may be limited by the local regulatory environments”. Business opportunities in these jurisdictions will also determine the growth in our operations.

 

The loan portfolio of our international branches and subsidiaries exposes us to specific additional risks including the failure of the acquired entities to perform as expected, and our inexperience in various aspects of the economic and legal framework in overseas markets. See also “—The exposures of our international branches and subsidiaries could generally affect our business, financial condition and results of operations”. Regulatory changes globally and in specific markets, including increased regulatory oversight following the global financial crisis, may impact our ability to execute our strategy and deliver returns on capital invested in our international subsidiaries.

 

There could be risks arising from political changes in the jurisdictions in which we operate, such as the election by a majority of voters in the United Kingdom to withdraw from the European Union in a national referendum in June 2016. While uncertainties continue on the relationship between the United Kingdom and the European Union and the final negotiations on Brexit are yet to be concluded, our subsidiary in the United Kingdom has obtained a third-country license for its branch in Germany, which would be effective post-Brexit. During fiscal 2019, our subsidiary in the United Kingdom closed its branch in Belgium. Further, recent global developments including a trade war by the United States with key large economies are expected to impact economic growth in Canada and the United Kingdom, which in

 

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turn could impact the business of our banking subsidiaries in these countries. See also “—Risks that arise as a result of our presence in a highly regulated sector—The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment”. Our overseas branches and banking subsidiaries undertake select local banking businesses, including lending to multinational and local corporations, small businesses, property backed lending and insured and other mortgages, and in the event of these corporations being impacted by global and local economic conditions it could have an adverse impact on our business. They have also made investments in bonds, certificates of deposit, mortgage backed securities, treasury bills and asset-backed commercial paper. We are repositioning our international business strategy to sharpen our focus on the non-resident Indian community and on India-linked trade. There can be no assurance of our successful execution of this strategy. The global financial and economic crisis resulted in mark-to-market and realized losses on our overseas and other subsidiaries’ investment and derivative portfolios, increased the regulatory scrutiny of our international operations, constrained our international debt capital market borrowings and increased our cost of funding. If we are unable to manage these risks, our business would be adversely affected.

 

We may be subject to fines, restrictions or other sanctions for past instances of regulatory failures, which may adversely affect our financial position or our ability to expand our activities.

 

Failure to comply with applicable regulations in various jurisdictions, including unauthorized actions by employees, representatives, agents and third parties, suspected or perceived failures and media reports, and ensuing inquiries or investigations by regulatory and enforcement authorities, has resulted, and may result in the future, in regulatory actions, including financial penalties and restrictions on or suspension of the related business operations. Following the release on the internet in March 2013 of videos forming part of a sting operation on banks and insurance companies in India that purported to show the Bank’s frontline branch employees engaging in conversations that would violate our Group’s Code of Business Conduct and Ethics and could have, if any transactions had been consummated, led to violations of anti-money laundering and ‘know-your-customer’ norms, the Reserve Bank of India undertook investigations at ICICI Bank and over 30 other banks in India. While the Reserve Bank of India’s investigations did not reveal any prima facie evidence of money laundering, the Reserve Bank of India imposed an aggregate penalty of Rs. 665 million on 31 Indian banks, including Rs. 10 million on ICICI Bank, for instances of violation of applicable regulations, which we have paid. In February 2015, a penalty was imposed on several banks including ICICI Bank by the Financial Intelligence Unit, India for a failure to report attempted suspicious transactions, with respect to the incidents concerning the media sting operation in June 2013. The Bank was levied a penalty of Rs. 1.4 million, which was paid, and an appeal was filed against the penalty with the Appellate Tribunal. In June 2017, the Appellate Tribunal ruled that the penalty was not sustainable and asked the appellant banks to report such matters in the future. In March 2018, the Reserve Bank of India imposed a penalty of Rs. 589 million on ICICI Bank for non-compliance with directions issued by it on the sale of securities from the held-to-maturity portfolio and specified disclosure in this regard.

 

We are at increased risk for inquiries or investigations by regulatory and enforcement authorities, which may adversely affect our reputation, lead to increased regulatory scrutiny, cause us to incur additional costs or adversely affect our ability to conduct business.

 

A failure to comply with the applicable regulations in various jurisdictions by our employees, representatives, agents and third-party service providers either in or outside the course of their services, or suspected or perceived failures by them, may result in further inquiries or investigations by regulatory and enforcement authorities and in additional regulatory or enforcement action against either us, or such employees, representatives, agents and third-party service providers. Such additional actions may further impact our reputation, result in adverse media reports, lead to increased or enhanced regulatory or supervisory concerns, cause us to incur additional costs, penalties, claims and expenses or impact adversely our ability to conduct business. See also “—The board of directors of the Bank has, pursuant to an independent enquiry, headed by a former Supreme Court Judge, taken action against the former MD and CEO, Ms. Chanda Kochhar. In the event the Bank is found by any of the enquiries in the matter by government and regulatory agencies to have violated applicable laws or regulations, the Bank could become subject to legal and regulatory sanctions that may materially and adversely affect our results of operations or financial condition and reputation.” and “—We are investigating certain allegations that the Bank incorrectly classified certain assets due to claimed irregular transactions in borrower accounts, incorrectly accounted for interest income and recoveries from non-performing assets as fees, and improperly valued loan collateral”.

 

We cannot predict the timing or form of any current or future regulatory or law enforcement initiatives, which are increasingly common for international banks and financial institutions.

 

The board of directors of the Bank has, pursuant to an independent enquiry, headed by a former Supreme Court Judge, taken action against the former MD and CEO, Ms. Chanda Kochhar. In the event the Bank is found by any of the enquiries in the matter by government and regulatory agencies to have violated applicable laws or

 

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regulations, the Bank could become subject to legal and regulatory sanctions that may materially and adversely affect our results of operations or financial condition and reputation.

 

The Audit Committee of the Bank under direction given by the Board of Directors instituted an independent enquiry by a former Supreme Court Judge, Hon’ble Mr. Justice B. N. Srikrishna (Retd.), to consider various allegations relating to the former Managing Director and Chief Executive Officer, Ms. Chanda Kochhar. The allegations were levelled against Ms. Kochhar in media articles, a whistleblower complaint and complaints written by a private individual to senior government officials and regulators. The allegations included nepotism, quid pro quo and claims that Ms. Kochhar, by not disclosing conflicts of interest caused by certain transactions between certain borrowers of the Bank and entities controlled by Ms. Kochhar’s spouse, committed infractions under applicable regulations and the Bank’s Code of Conduct. The independent enquiry was supported by an independent law firm and a forensic firm.

 

Ms. Kochhar proceeded on a leave of absence following the institution of the independent enquiry. In the interim, Mr. Sandeep Bakhshi was appointed as wholetime Director and Chief Operating Officer and reported directly to the Board of Directors during her absence. On October 4, 2018, the Board of Directors of the Bank, accepted the request of Ms. Kochhar to seek early retirement from the Bank at the earliest. The Board accepted this request with immediate effect, while noting that the enquiry instituted by the Board would remain unaffected by this and certain benefits would be subject to the outcome of the enquiry. Ms. Kochhar also relinquished office from the boards of the Bank’s subsidiaries. The Board decided to appoint Mr. Sandeep Bakhshi as Managing Director and Chief Executive Officer, which was approved by the Reserve Bank of India for a period of three years with effect from October 15, 2018.

 

The board of directors considered the enquiry report on its receipt at the board meeting held on January 30, 2019. The enquiry report concluded, primarily on account of ineffectively dealing with conflict of interest and due disclosure or recusal requirements, that Ms. Chanda Kochhar was in violation of the ICICI Bank Code of Conduct, its framework for dealing with conflict of interest and fiduciary duties, and in terms of applicable Indian laws, rules and regulations. It also concluded that her lack of diligence with respect to annual disclosures as required by the Bank in terms of its internal policies, the ICICI Bank Code of Conduct and applicable Indian laws, rules and regulations on her interests (direct or indirect) towards avoidance of conflict of interest, when considered that the Bank’s processes were dependent solely on the directors discharging their fiduciary duty to recuse themselves and avoid conflict, implies that the Bank’s then processes were rendered ineffective by her approach to such disclosures and avoidance of conflict. Following the receipt of the enquiry report, the board of directors decided to treat the separation of Ms. Chanda Kochhar from the Bank as a ‘Termination for Cause’ under the Bank’s internal policies, schemes and the Code of Conduct, with all attendant consequences (including revocation of all her existing and future entitlements such as any unpaid amounts, unpaid bonuses or increments, unvested and vested and unexercised stock options, and medical benefits), and require the clawback of all bonuses paid from April 2009 until March 2018.

 

Enquiries by government and regulatory agencies in the matter are continuing. SEBI issued a show-cause notice to Ms. Kochhar and to the Bank in May 2018 in relation to the allegations. The Bank has responded to the relevant allegations in the notice which pertain to the Bank. The Central Bureau of Investigation (“CBI”) had also initiated a preliminary enquiry against various individuals and firms including unknown officers and/or officials of the Bank. In January 2019, the CBI filed a first information report against Ms. Chanda Kochhar, her spouse and certain borrowers of the Bank and their promoters, accusing them of cheating the Bank. The first information report states that certain individuals, who were on the board of directors of the Bank when the alleged transactions occurred and were part of committees that sanctioned credit facilities to the concerned borrower group, may also be investigated. These include the present Managing Director and Chief Executive Officer of the Bank and the present Managing Director of the Bank’s life insurance subsidiary.

 

In the event that the Bank is found by the SEBI enquiry or the CBI investigation or any other investigation by any other agency to have violated applicable laws or regulations, the Bank could become subject to legal and regulatory sanctions that may materially and adversely affect our reputation and may impact results of operations or financial condition. In the event Ms. Chanda Kochhar contests the actions taken by the Board of Directors of the Bank in a court of competent jurisdiction, the Bank could incur additional costs, negative publicity and be subject to the outcome of judicial review of such actions.

 

We are investigating certain allegations that the Bank incorrectly classified certain assets due to claimed irregular transactions in borrower accounts, incorrectly accounted for interest income and recoveries from non-performing assets as fees, and improperly valued loan collateral.

 

The Bank became aware in March 2018 of an anonymous whistleblower complaint alleging incorrect asset classifications stemming from claimed irregular transactions in borrower accounts, incorrect accounting of interest income and non-performing asset recoveries as fees, and overvaluation of collateral securing corporate loans. The allegations related to fiscal 2016 and earlier. The Bank conducted an internal enquiry of these allegations under its

 

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Whistle Blower Policy, which was carried out by the Head of the Internal Audit Group and supervised directly by the Audit Committee, without the involvement of any other member of the Bank’s senior management. The enquiry resulted in an Interim Report that was reviewed in detail by the Audit Committee and was disclosed to the statutory auditors before the finalization of the accounts for the year ended March 31, 2018 and has been submitted to the Reserve Bank of India. In certain loan accounts, transactions were observed that may have delayed the classification of the account as non-performing in earlier years. Therefore, the Audit Committee of the Board directed the Bank to review certain additional accounts for any similar irregular transactions as alleged in the complaint. Based on the Interim Report and review undertaken for additional loan accounts, the Bank concluded that the likely impact of these allegations was not material to the financial statements for the year ended March 31, 2018 or earlier periods included in that annual report. The Bank has, since April 2016, implemented enhanced internal controls, relating to review of loan accounts which satisfy certain threshold parameters, primarily relating to size, credit rating and days-past-due, for identification of non-performing assets. Since then, the Bank has received some additional information relating to these matters. The Bank has assessed and concluded that the likely impact of this additional information is not material to the financial statements for the year ended March 31, 2019 or earlier periods presented in this Annual Report. The Bank, at the direction of the Audit Committee and with the assistance of external counsel, is continuing to investigate all of the allegations, including the additional information. In the event that the Bank or individuals associated with the Bank are found to have violated applicable laws or regulations, the Bank or individuals associated with the Bank could become subject to legal claims and regulatory sanctions that may materially and adversely affect our results of operations, financial condition and reputation.

 

In addition, as a large and internationally active bank with operations and listing of its equity and debt instruments in multiple jurisdictions, the Bank is regularly engaged with regulators, including the United States Securities and Exchange Commission (“SEC”), on a range of matters, including regarding the above allegations. Even before these allegations, the Bank has been responding to requests for information from the SEC investigatory staff regarding an enquiry relating to the timing and amount of the Bank’s loan impairment provisions taken under U.S. GAAP. The Bank evaluates loans for impairment under U.S. GAAP for the purpose of preparing the annual footnote reconciling the Bank’s Indian GAAP financial statements to U.S. GAAP. The Bank has voluntarily complied with all requests of the SEC investigatory staff for information and continues to cooperate with the SEC on the matter. In the event that the Bank is found by the SEC to have violated federal securities laws or regulations, the Bank could become subject to legal and regulatory sanctions that may materially and adversely affect our results of operations, financial condition and reputation.

 

We depend on the accuracy and completeness of information about customers and counterparties.

 

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We may also rely on certain representations as to the accuracy and completeness of that information and, with respect to financial statements, on reports of their independent auditors. For instance, in deciding whether to extend credit, we may assume that a customer’s audited financial statements conform to generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively affected by relying on financial statements that do not comply with generally accepted accounting principles or other information that is materially misleading. According to data published by the Reserve Bank of India, frauds reported in the Indian banking sector have shown an increasing trend in recent years, and the composition of the fraud amount reported is largely dominated by frauds related to loans and advances. In addition, our access to information about the credit histories of our borrowers, especially individuals and small businesses, may be limited, relative to what is typically available for similar borrowers in developed economies with more established nation-wide credit bureaus. This may affect the quality of information available to us about the credit history of our borrowers, especially individuals and small businesses. As a result, our ability to effectively manage our credit risk may be adversely affected.

 

Commission, exchange and brokerage income, profit on foreign exchange transactions and other sources of fee income are important elements of our profitability, and regulatory changes and market conditions could cause these income streams to decline and adversely impact our financial performance.

 

We earn commission, exchange and brokerage income from a variety of activities, including loan processing, syndication and advisory services for corporate clients with respect to their acquisition and project financing, distribution of retail investment and insurance products, transaction banking and retail credit products. Our commission, exchange and brokerage income is therefore impacted by the level of corporate activity including new financing proposals, the demand for retail financial products and the overall level of economic and trade activity. Our commission, exchange and brokerage income is also impacted by applicable regulations governing various products and segments of financial services and changes in these regulations may adversely impact our ability to grow in this area. For instance, in May 2014, the Reserve Bank of India directed banks to remove foreclosure charges on floating

 

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rate term loans given to individual borrowers and prohibited them from levying a penalty for non-maintenance of minimum balance in inoperative accounts. The securities regulator has issued regulations restricting charges that may be levied on depositary accounts and upfront commission paid to distributors of mutual funds. The profit on foreign exchange transactions is dependent on regulations governing foreign exchange dealings, foreign exchange market conditions and the risk management strategies of corporate clients. The Reserve Bank of India has announced the introduction of an electronic trading platform for buying/selling foreign exchange by retail customers of banks, aimed at enhancing transparency and competition and lowering costs for retail customers. The Government of India in its budget for fiscal 2020 has proposed that business establishments above a certain size should offer low cost digital modes of payment, with no charges being levied on the customers or the merchants. Such measures could adversely impact our fee income streams in the future and adversely affect our financial performance. Volatile market conditions may also have an adverse impact on mergers and acquisitions activity by Indian companies, affecting our fee and other incomes related to such activity. Our commission, exchange and brokerage income is also impacted by the level of corporate investment activity and new financing proposals. Our fee income from distribution of third party financial products is dependent on applicable regulations, the demand for these products and our distribution strategy for banking and third party products.

 

Negative publicity could damage our reputation and adversely impact our business and financial results and the prices of our equity shares and ADSs.

 

Reputation risk, or the risk to our business, earnings and capital from negative publicity, is inherent in our business. The reputation of the financial services industry in general has been closely monitored as a result of the financial crisis and other matters affecting the financial services industry. Negative public opinion about the financial services industry generally or us specifically could adversely affect our ability to keep and attract customers, and expose us to litigation and regulatory action. Negative publicity can result from our actual or alleged conduct in any number of activities, including lending practices and specific credit exposures, the level of non-performing loans, corporate governance, regulatory compliance, mergers and acquisitions, and related disclosure, sharing or inadequate protection of customer information, and actions taken by government, regulators, investigative agencies and community organizations in response to that conduct. The media coverage and public scrutiny of our business practices, our board of directors, key management personnel, policies and actions has increased significantly over the past few months. Although we take steps to minimize reputation risk in dealing with such events, we, as a large financial services organization are inherently exposed to this risk.

 

We have experienced negative publicity with respect to the allegations levelled against Ms. Kochhar and her spouse and the whistleblower complaints regarding alleged incorrect asset classification and other allegations. See also “—The board of directors of the Bank has, pursuant to an independent enquiry, headed by a former Supreme Court Judge, taken action against the former MD and CEO, Ms. Chanda Kochhar. In the event the Bank is found by any of the enquiries in the matter by government and regulatory agencies to have violated applicable laws or regulations, the Bank could become subject to legal and regulatory sanctions that may materially and adversely affect our results of operations or financial condition and reputation.” and “—We are investigating certain allegations that the Bank incorrectly classified certain assets due to claimed irregular transactions in borrower accounts, incorrectly accounted for interest income and recoveries from non-performing assets as fees, and improperly valued loan collateral”. We cannot be certain how the investigations by the government and regulatory agencies will end and it is possible that the conclusions of these investigations could lead to more negative publicity.

 

Any continued unfavorable publicity may adversely impact investor confidence and affect the prices of our equity shares and ADSs. Our subsidiaries’ businesses include mutual fund, portfolio and private equity fund management, which are exposed to various risks including diminution in value of investments and inadequate liquidity of the investments. We also distribute products of our insurance, asset management and private equity subsidiaries. Investors in these funds and schemes may allege mismanagement or weak fund management as well as mis-selling and conflicts of interest which may impact our overall reputation as a financial services group and may require us to support these businesses with liquidity and may result in a reduction in business volumes and revenues from these businesses. We are also exposed to the risk of litigation by customers across our businesses.

 

We may seek opportunities for growth through acquisitions, divest our existing businesses, or be required to undertake mergers by the Reserve Bank of India and could face integration and other acquisitions risks.

 

We may seek opportunities for growth through acquisitions or be required to undertake mergers mandated by the Reserve Bank of India under its statutory powers. We have undertaken mergers and acquisitions in the past. In the most recent acquisition of the Bank of Rajasthan, a private sector bank, merged with us effective August 12, 2010. In the past, the Reserve Bank of India has ordered mergers of weak banks with other banks primarily in the interest of depositors of the weak banks. More recently, the Government of India has indicated that public sector banks should pursue consolidation to create fewer banks that would be individually larger in scale. We may in the future examine

 

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and seek opportunities for acquisitions in countries where we currently operate. Our non-banking subsidiaries in India may also undertake mergers, acquisitions and takeovers. Any future acquisitions or mergers or takeovers, both Indian or international, may involve a number of risks, including the possibility of a deterioration of asset quality, financial impact of employee related liabilities, diversion of our management’s attention required to integrate the acquired business and the failure to retain key acquired personnel and clients, leverage synergies or rationalize operations, or develop the skills required for new businesses and markets, or unknown and known liabilities including any ongoing litigation, claims or disputes concerning such acquisition, merger, its shareholders, share capital or its legal and regulatory compliance obligations or practices, some or all of which could have an adverse effect on our business.

 

We may also sell all or part of one or more of our businesses, including our subsidiaries, for a variety of reasons including changes in strategic focus, redeployment of capital, contractual obligations and regulatory requirements. See also “Business—Overview of Our Products and Services—Insurance”.

 

Entry into new businesses or rapid growth in existing loan portfolios may expose us to increased risks that may adversely affect our business.

 

The rapid growth of our retail loan business and our rural initiative exposes us to increased risks within India including higher levels of non-performing loans in our unsecured retail credit portfolio, increased operational risk, increased fraud risk and increased regulatory and legal risk. Since fiscal 2012 we have focused on scaling up our retail lending volumes and since fiscal 2015, we have also seen an increase in our retail unsecured portfolio and our lending to small businesses and entrepreneurs. Our net domestic retail loan portfolio grew by 21.7% in fiscal 2019 compared to an increase of 16.9% in our total domestic loan portfolio. Retail lending has been an important driver of growth for the Indian banking system as well, and in the last three years unsecured retail credit has grown at a rapid pace. Further, we are also focusing on scaling up our business and distribution network in rural areas. Recently, we have entered into partnerships with technology companies with large customer bases to offer co-branded credit products and as well as with non-banking financial companies for co-origination and/ or purchases of loans. We intend to continue to pursue similar partnerships.

 

While we have taken measures to address the risks in these businesses, there can be no assurance that the businesses would perform according to our expectations or that there would not be any adverse developments in these businesses in the future. We use data analytics extensively in our lending to retail and small business customers, and there can be no assurance that these analytical models will perform as intended. Our recent focus on partnerships with other entities to grow our portfolio may not yield the desired results and may lead to additional risks. Our inability to manage such risks may have an adverse impact on our future business and strategy, our asset quality and profitability and the prices of our equity shares and ADSs.

 

Our industry is very competitive and our strategy depends on our ability to compete effectively.

 

Within the Indian market, we face intense competition from other commercial banks, investment banks, insurance companies, non-bank finance companies, new private sector banks like payments banks and small finance banks and non-bank entities offering retail payments services. Some Indian public and private sector banks have experienced higher growth and increase in market shares relative to us. The Reserve Bank of India has issued licenses to two new private sector banks, and in-principle licenses to 10 small finance banks and 11 payments banks. While all the small finance banks have begun operations, only seven payments banks have begun operations and three payments banks have surrendered, or announced their intention to surrender, their licenses. Recently, a payment bank that had begun operations voluntarily decided to wind up its operations. The Reserve Bank of India has also issued guidelines with respect to a continuous licensing policy for universal banks in the private sector. The expansion of existing competitors or the entry of new competitors could increase competition. In addition, the moderation of growth in the Indian banking sector may lead to greater competition for business opportunities.

 

Further, technology innovations in mobility and digitization of financial services require banks and financial services companies to continuously develop new and simplified models for offering banking products and services. Innovations in the payments system and increasing use of mobile banking are leading to emergence of new platforms for cashless payments. This can also lead to new types of banks expanding their presence in other financial products like insurance and mutual funds. These trends in technology could increase competitive pressures on banks, including us, to adapt to new operating models and upgrade back-end infrastructure on an ongoing basis. There is no assurance that we will be able to continue to respond promptly to new technology developments, and be in a position to dedicate resources to upgrade our systems and compete with new players entering the market. Recently, non-financial companies, particularly international technology companies including large e-commerce players, are increasing their presence in the financial sector and are offering payment platforms and select services. We are currently partnering with some of these entities to jointly offer payment and credit products and services. Some or all of these entities, which have substantially more resources than us and other Indian banks, may eventually seek a larger share of the

 

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banking and financial services market in India and compete with us. Our subsidiaries also face similar risks, including enhanced competition from new, technology-led players with disruptive business models that may result in a loss of market share or reduced profitability or both, for existing players.

 

We face competition from non-banking finance companies that are lending in segments in which banks also have a presence, including home loans and vehicle loans. Their presence in the market may grow during periods when banks are unable to grow their advances due to challenges and stress in other businesses. There is no assurance that we will be able to effectively compete with these non-banking finance companies at all times. Further, changes in the banking sector structure due to consolidation as well as entry of new competitors may lead to volatility and new challenges and may increase pressure on banks to remain competitive.

 

In October 2013, the Reserve Bank of India completely deregulated branch licensing requirements and banks are permitted to open branches across Tier 1 to Tier 6 centers without the prior approval of the Reserve Bank of India, subject to them maintaining a prescribed proportion of 25% of their incremental branches in rural and semi-urban areas. Banks are also allowed to merge, close or shift a branch in metropolitan and urban centers without prior approval. See also “Supervision and Regulation—Regulations Relating to the Opening of Branches”. In March 2017, the Reserve Bank of India issued revised guidelines on the rationalization of branch authorization. As per the revised guidelines, banks are permitted to open, unless otherwise specifically restricted, banking outlets in Tier 1 to Tier 6 centers without the need to obtain the Reserve Bank of India’s permission. The opening of banking outlets during a financial year will be subject to condition that at least 25% of the total number of banking outlets opened during a financial year should be opened in unbanked rural centers. In May 2017, the description of a branch was broadened to include all service delivery points of a bank, including branches and business correspondent outlets.

 

The Reserve Bank of India has also released the framework for the presence of foreign banks in India, and has proposed according treatment substantively similar to domestic banks for foreign banks, based on the principles of reciprocity and subsidiary mode of presence. In May 2014, the Reserve Bank of India released the report of the committee constituted to review the governance of boards of banks in India which, among others, has proposed several measures aimed at improving the governance, ownership and board oversight of public sector banks. Following these recommendations, the Government of India split the position of chairman and managing director in public sector banks such that one person is no longer permitted to hold both positions. Any changes in the banking structure in India, including the entry of new banks, greater competition between existing players and improvement in the efficiency and competitiveness of existing banks, may have an adverse impact on our business. Due to competitive pressures, we may be unable to successfully execute our growth strategy or offer products and services at reasonable returns and this may adversely impact our business. See also “Business—Competition” and “Overview of the Indian Financial Sector—Commercial Banks—Foreign Banks”.

 

In our international operations we also face intense competition from the full range of competitors in the financial services industry, both banks and non-banks and both Indian and foreign banks. We remain a small to mid-size player in the international markets and many of our competitors have resources much greater than our own.

 

Additional capital requirements of our insurance subsidiaries or our inability to monetize a part of our shareholding in these subsidiaries may adversely impact our business and the prices of our equity shares and ADSs.

 

Although our insurance businesses are profitable and we currently do not anticipate they would require capital, additional capital may be required to support the business which may, among other reasons, arise due to regulatory requirements or increased opportunities for growth. For instance, in the past, in accordance with an order of the Insurance Regulatory and Development Authority of India, all general insurance companies in India, including our general insurance subsidiary, ICICI Lombard General Insurance Company Limited, were required to provide for losses on the third-party motor pool (a multilateral arrangement for insurance in respect of third-party claims against commercial vehicles, the results of which were shared by all general insurance companies in proportion to their overall market share). Since the losses were allocated to general insurance companies based on their overall market shares, the profitability and solvency ratio of our general insurance subsidiary were adversely impacted. Accordingly, we invested Rs. 740.0 million of capital into our general insurance subsidiary in fiscal 2013. Our ability to invest additional capital in these businesses is subject to the Reserve Bank of India’s regulations on capital adequacy and its para-banking guidelines that prescribe limits for our aggregate investment in financial sector enterprises. All such investments require prior approval of the Reserve Bank of India. See also “—Loss reserves for our general insurance business are based on estimates as to future claims liabilities and adverse developments relating to claims could lead to further reserve additions and materially adversely affect the operation of our general insurance subsidiary”.

 

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Any additional capital requirements of our insurance subsidiaries and restrictions on our ability to capitalize them could adversely impact their growth, our future capital adequacy, our financial performance and the prices of our equity shares and ADSs.

 

The Insurance Laws (Amendment) Act, 2015, increased the foreign shareholding limit in insurance companies from 26.0% to 49.0%, subject to the companies being Indian-owned and controlled, and to regulatory approval. During fiscal 2016, we sold a 6.0% stake in our life insurance subsidiary, ICICI Prudential Life Insurance Company Limited, to financial investors, thereby reducing our share ownership in ICICI Prudential Life Insurance Company Limited from approximately 74% to 68%. In fiscal 2017, we sold a further 12.63% out of our shareholding in ICICI Prudential Life Insurance Company Limited through an offer for sale in an initial public offering of its shares. ICICI Prudential Life Insurance Company Limited was listed on the National Stock Exchange of India Limited and the BSE Limited on September 29, 2016. During fiscal 2019, we sold an additional 2.0% out of our shareholding in ICICI Prudential Life Insurance Company through an offer for sale by promoters through stock exchange mechanism. Our current shareholding in our life insurance subsidiary stands at 52.88%. During fiscal 2016, Fairfax Financial Holdings and ICICI Bank agreed that Fairfax Financial Holdings (through its affiliate) would increase its shareholding in ICICI Lombard General Insurance Company by 9.0%. The transaction was completed in March 2016, resulting in our share ownership in ICICI Lombard General Insurance Company Limited reducing to 63%. In September 2017, we sold 7.0% out of our shareholding in ICICI Lombard General Insurance Company Limited in an initial public offering by the Company. ICICI Lombard General Insurance Company was listed on the National Stock Exchange of India Limited and the BSE Limited in September 2017. Further, in November 2017, the Board of Directors of the Bank approved the sale of a part of our shareholding in ICICI Securities in an initial public offering. Subsequently, in March 2018, we sold 20.78% out of our shareholding in ICICI Securities in an initial public offering by the Company. ICICI Securities was listed on the National Stock Exchange of India Limited and the BSE Limited in April 2018. In its budget for fiscal 2019, the Government of India has proposed that SEBI should consider increasing the minimum public shareholding requirement in listed companies to 35.0% from 25.0%, which may require us to sell additional shares of our life insurance and securities subsidiaries. There is no assurance that we will be able to undertake further monetization of our investments in our subsidiaries, through public offering or otherwise, or of the level of valuation of the subsidiaries at which such monetization may take place. See also “Business—Overview of Our Products and Services—Insurance” and “—While our insurance businesses are an important part of our business, there can be no assurance of their future rates of growth or levels of profitability”.

 

While our insurance businesses are an important part of our business, there can be no assurance of their future rates of growth or levels of profitability.

 

Our life insurance and general insurance businesses are an important part of our business. See also “Business—Overview of Our Products and Services—Insurance”. These businesses have experienced volatility in growth rates in the past and there can be no assurance of their future rates of growth or profitability.

 

The Indian life insurance sector has experienced significant regulatory changes in recent years. See also “Supervision and Regulation—Regulations Governing Insurance Companies”. The regulatory changes, apart from impacting the business strategy, have also resulted in reduced profit margins on life insurance products. In fiscal 2015, the Insurance Laws (Amendment) Act, 2015, amended the existing statute to provide that no policy of life insurance shall be called in to question on any grounds, including misstatement of facts or fraud, at any time after three years from the date of the policy, i.e., from the date of issuance of the policy, commencement of risk, revival of the policy or the rider to the policy, whichever is later. The total premium of our life insurance subsidiary, ICICI Prudential Life Insurance Company Limited, increased by 14.3% from Rs. 270.7 billion in fiscal 2018 to Rs. 309.3 billion in fiscal 2019. The retail renewal premium increased from Rs. 175.0 billion in fiscal 2018 to Rs. 202.3 billion in fiscal 2019 and retail new business premium decreased from Rs. 84.0 billion in fiscal 2018 to Rs. 81.4 billion in fiscal 2019.

 

The growth of our life insurance subsidiary was relatively lower than some of its key competitors in fiscal 2019. Our life insurance subsidiary’s strategy emphasizes unit-linked, pure protection and annuity products. The demand for unit-linked products may be influenced by any volatility or downturn in capital markets. Further, our life insurance subsidiary is primarily focused on growth in the value of new business, as a key profitability metric. ICICI Bank is a corporate agent of its insurance subsidiaries and accounts for a significant portion of the business volumes of its life insurance subsidiary. The growth of the life insurance subsidiary’s business is thus significantly dependent on the Bank’s distribution strategy with respect to banking products and third party products. There can be no assurance of the continued growth of the subsidiary’s business and profitability, including the business generated by the Bank.

 

ICICI Lombard General Insurance Company’s gross direct premium income was Rs. 144.9 billion in fiscal 2019, a growth of 17.3% over fiscal 2018. ICICI Lombard General Insurance Company’s growth and profitability depend on various factors, including the proportion of certain profitable products in its portfolio, the maintenance on its relationship with key distribution partners and reinsurers, continuation of support by the Government of India of certain

 

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insurance schemes, regulatory changes, and market movements. There can be no assurance of the future rates of growth in the insurance business. While this subsidiary has been making profits since fiscal 2013, there can be no assurance of the future profitability or rates of growth in the insurance business. See also “—Additional capital requirements of our insurance subsidiaries or our inability to monetize a part of our shareholding in these subsidiaries may adversely impact our business and the prices of our equity shares and ADSs” and “Supervision and Regulation—Regulations Governing Insurance Companies”.

 

Further, the Insurance Regulatory Development Authority of India has from time to time proposed changes to the regulations governing distribution of insurance products by corporate agents, including banks. Any future regulatory changes or restrictions may require our insurance subsidiaries to change their distribution strategies, which may result in increased costs and lower business volumes, as well as impacting ICICI Bank’s distribution of their products and the associated fee income. A slowdown in growth in the Indian economy, further regulatory changes or customer dissatisfaction with our insurance products could adversely impact the future growth of these businesses. See also “—Risks that arise as a result of our presence in a highly regulated sector—The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment”. Any slowdown in these businesses could have an adverse impact on our business and the prices of our equity shares and ADSs.

 

Actuarial experience and other factors could differ from assumptions made in the calculation of life actuarial reserves and other actuarial information.

 

The assumptions our life insurance subsidiary makes in assessing its life insurance reserves and computing other actuarial information may differ from what it experiences in the future. These assumptions include the assessment of the long-term development of interest rates, investment returns, the allocation of investments between equity, fixed income and other categories, persistency, mortality and morbidity rates, policyholder lapses, policy discontinuation and future expense levels. In addition, there is a risk that the model used to estimate life and health insurance reserves based on such assumptions could be incorrect.

 

Our life insurance subsidiary monitors its actual experience of these assumptions and to the extent that it considers any deviation from assumption to continue in the longer term, it refines its long-term assumptions. Changes in any such assumptions may lead to changes in the estimates of life and health insurance reserves and other actuarial information. Such changes may also impact the valuation of our life insurance subsidiary by existing or potential investors, and the valuation at which any future monetization of our shareholding in the life insurance subsidiary may take place, if at all.

 

Loss reserves for our general insurance business are based on estimates as to future claims liabilities and adverse developments relating to claims could lead to further reserve additions and materially adversely affect the operation of our general insurance subsidiary.

 

In accordance with the general insurance industry practice and accounting and regulatory requirements, our general insurance subsidiary establishes reserves for loss and loss adjustment expenses related to its general insurance business. Reserves are based on estimates of future payments that will be made in respect of claims, including expenses relating to such claims. Such estimates are made on both a case-by-case basis of claims that have been reported but not settled, based on the facts and circumstances available at the time the reserves are established, as well as in respect of losses that have been incurred but not reported. These reserves represent the estimated ultimate cost necessary to bring all pending claims to final settlement.

 

Reserves are subject to change due to a number of variables which affect the ultimate cost of claims, such as changes in claims handling procedures, legal environment, social attitudes, results of litigation, costs of repairs, changing trends in medical costs, minimum wages and other factors such as inflation and exchange rates. Our general insurance subsidiary’s reserves for environmental and other latent claims are particularly subject to such variables. The results of operations of our general insurance subsidiary depend significantly upon the extent to which its actual claims experience is consistent with the assumptions it uses in setting the prices for products and establishing the liabilities for obligations for technical provisions and claims. To the extent that its actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, it may be required to increase its reserves, which may materially adversely affect its results of operations.

 

Established loss reserves estimates are periodically adjusted in the ordinary course of settlement, using the most current information available to management, and any adjustments resulting from changes in reserve estimates are reflected in current results of operations. Our general insurance subsidiary also conducts reviews of various lines of business to consider the adequacy of reserve levels. Based on current information available and on the basis of internal procedures, the management of our general insurance subsidiary considers that these reserves are adequate. However, because the establishment of reserves for loss and loss adjustment expenses is an inherently uncertain process, there can be no assurance that ultimate losses will not materially exceed the established reserves for loss and loss adjustment

 

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expenses and have a material adverse effect on the results of operations of our general insurance subsidiary. See also “—Additional capital requirements of our insurance subsidiaries or our inability to monetize a part of our shareholding in these subsidiaries may adversely impact our business and the prices of our equity shares and ADSs”.

 

The financial results of our insurance subsidiaries could be materially adversely affected by the occurrence of a catastrophe.

 

Portions of our general insurance subsidiary’s business may cover losses from unpredictable events such as hurricanes, windstorms, monsoons, earthquakes, fires, industrial explosions, floods, riots and other man-made or natural disasters, including acts of terrorism. The incidence and severity of these catastrophes in any given period are inherently unpredictable.

 

In addition, our life insurance subsidiary’s operations are also exposed to claims arising out of catastrophes due to increased mortality and morbidity claims of affected customers. In addition, catastrophes could result in losses in the investment portfolios of our life insurance subsidiary due to, among other reasons, the failure of its counterparties to perform their obligations or significant volatility or disruption in the financial markets.

 

Although our subsidiaries monitor their overall exposure to catastrophes and other unpredictable events in each geographic region and determine their underwriting limits related to insurance coverage for losses from catastrophic events, the subsidiaries generally seek to reduce their exposure through the purchase of reinsurance, selective underwriting practices and by monitoring risk accumulation. Claims relating to catastrophes may result in unusually high levels of losses and may require additional capital to maintain solvency margins and could have a material adverse effect on our financial position or results of operations.

 

There is operational risk associated with the financial industry which, when realized, may have an adverse impact on our business.

 

We, like all financial institutions, are exposed to many types of operational risk, including the risk of fraud or other misconduct by employees or outsiders, unauthorized transactions by employees and third parties (including violation of regulations for prevention of corrupt practices, and other regulations governing our business activities), misreporting or non-reporting with respect to statutory, legal or regulatory reporting and disclosure obligations, or operational errors, including non-compliance with internal processes, clerical or recordkeeping and reconciliation errors or errors resulting from faulty computer or telecommunications systems. We have experienced significant growth in a fast changing environment, and management as well as our regulators, are aware that this may pose significant challenges to our control framework. As a result of our internal evaluations, we and our regulators have noted certain areas where our processes and controls could be improved. Our growth, particularly in retail lending, our rural initiative, our international business and our insurance businesses, exposes us to additional operational and control risks. Regulatory scrutiny of areas related to operational risk, including internal audit information, systems and data processing is increasing. The large size of our treasury and retail operations, which use automated control and recording systems as well as manual checks and recordkeeping, exposes us to the risk of errors in control, recordkeeping and reconciliation. The increasing size of our insurance business and the complexities of the products expose us to the risk that the models set up on actuarial software to compute the actuarial liabilities and deferred acquisition cost may contain errors or may require continuous improvement over a period of time. Given our high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, our dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws, employee tampering, manipulation of those systems and deficiency in access control management will result in losses that are difficult to detect. We may also be subject to disruptions of our operating systems, arising from events that are wholly or partially beyond our control (including, for instance, computer viruses or electrical or telecommunication outages), which may give rise to deterioration in customer service and to loss or liability to us.

 

We also outsource some functions, like collections, sourcing of retail loans and management of ATMs to other agencies and hence also exposed to the risk that external vendors may be unable to fulfil their contractual obligations to us (or will be subject to the same risk of fraud or operational errors by their respective employees as we are), and to the risk that our (or our vendors’) business continuity and data security systems prove not to be sufficiently adequate. We also face the risk that the design of our controls and procedures proves inadequate, or is circumvented, thereby causing delays in detection or errors in information. We are also exposed to operational risks from transactions with other financial institutions and intermediaries. Although we maintain a system of controls designed to keep operational risk at appropriate levels, like all banks and insurance companies we have suffered losses from operational risk and there can be no assurance that we will not suffer losses from operational risks in the future that may be material in amount, and our reputation could be adversely affected by the occurrence of any such events involving our employees, customers or third parties.

 

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In addition, regulators or legal authorities may also hold banks, including us, liable for losses on account of customer errors such as inadvertent sharing of confidential account related information. There are inherent limitations to the effectiveness of any system especially of controls and procedures, including the possibility of human error, circumvention or overriding of the controls and procedures, in a fast changing environment or when entering new areas of business or expanding geographic reach. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. We are committed to continuing to implement and improve internal controls and our risk management processes, and this remains a key priority for us. If, however, we are unable to manage operational risk in India and in the other jurisdictions in which we operate, or if we are perceived as being unable to manage such risk, we may be subject to enhanced regulatory oversight and scrutiny. For a discussion of how operational risk is managed, see also “Business—Risk Management—Operational Risk”.

 

We face security risks, including denial of service attacks, hacking, social engineering attacks targeting our colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure.

 

Our businesses rely on our secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks and in the computer and data management systems and networks of third parties. To access our products and services, our customers may use personal smartphones, tablets, laptops, PCs, and other mobile devices that are beyond our control systems and subject to their own cybersecurity risks. Given our reliance and focus on technology and presence in diverse geographies, our technologies, systems, networks, and our customers’ devices are subject to security risks and are susceptible to cyber-attacks (such as, denial of service attacks, hacking, terrorist activities or identity theft) that could negatively impact the confidentiality, integrity or availability of data pertaining to us or our customers, which in turn may cause direct loss of money to our customers or to us, damage to our reputation and adversely impact our business and financial results. Third parties with which we do business or that facilitate our business activities could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

 

We, our customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in our systems or the systems of third parties or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of ours, our employees, our customers or of third parties, damage our systems or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. Like many other large global financial institutions, we have also experienced a distributed denial of services attack which was intended to disrupt customer access to our main portal. While our monitoring and mitigating controls were able to detect and effectively respond to this incident, there can be no assurance that these security measures will be successful in the future. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

 

We have a governance framework in place for security and have implemented information security policies, procedures and technologies. However, considering that technology is currently in a phase of rapid evolution and that the methods used for cyber-attacks are also changing frequently or, in some cases, are not recognized until an actual attack, we may not be able to anticipate or to implement effective preventive measures against all security breaches. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.

 

Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and "spear phishing" attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of our systems to disclose sensitive information in order to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change

 

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frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to our data may not be disclosed to us in a timely manner.

 

We also face indirect technology, cybersecurity and operational risks relating to clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis.

 

Any third-party technology failure, cyber-attack or other information or security breach, termination or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our business. Cyber-attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause us serious negative consequences, including our loss of customers and business opportunities, costs associated with maintaining business relationships after an attack or breach; significant business disruption to our operations and business, misappropriation, exposure, or destruction of our confidential information, intellectual property, funds, and/or those of our customers; or damage to our or our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition. Our insurance coverage may be insufficient to cover all losses.

 

System failures could adversely impact our business.

 

Given the large share of retail products and services and transaction banking services in our total business, the importance of systems technology to our business has increased significantly. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control, such as surges in customer transaction volume, utility disruptions or failures, natural disasters, diseases pandemics, events arising from political or social matters and terrorist attacks. While we have procedures to monitor for and prevent system failures, and to recover from system failures in the event they occur, there is no guarantee that these procedures will successfully prevent a system failure or allow us to recover quickly from a system failure. In the event that our data center is severely impacted, while we have a secondary disaster recovery data center, recovery of some of our systems and services may be delayed, thereby adversely impacting our operations and customer service levels. Any failure in our systems, particularly for retail products and services and transaction banking, could significantly affect our operations and the quality of our customer service and could result in enhanced regulatory scrutiny and business and financial losses that would adversely affect the prices of our equity shares and ADSs. Regulatory scrutiny in this area is increasing. See also “—Risks that arise as a result of our presence in a highly regulated sector—The enhanced supervisory and compliance environment in the financial sector increases the risk of regulatory action, whether formal or informal. Following the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past”.

 

Our business may be adversely affected by computer, internet and telecommunications fraud.

 

Our business operations are based on a high volume of transactions. Although we take adequate measures to safeguard against system-related and other frauds, there can be no assurance that we would be able to prevent fraud. Our reputation could be adversely affected by fraud committed by employees, customers or outsiders, or by our perceived inability to properly manage fraud-related risks. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing and other dishonest acts. Our inability or perceived inability to manage these risks could lead to enhanced regulatory oversight and scrutiny. Our branch network expansion, our rural initiative, our international growth and our expansion to product lines such as insurance may create additional challenges with respect to managing the risk of fraud due to increased geographical dispersion and use of intermediaries. See also “Operating and Financial Review and Prospects—Provisions and Contingencies (excluding tax provisions)—Provisions for Non-performing Assets and Restructured Loans” and “Business—Risk Management—Operational Risk”.

 

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A determination against us in respect of disputed tax assessments may adversely impact our financial performance.

 

We are regularly assessed by the Government of India’s tax authorities, and on account of outstanding tax demands we have included in contingent liabilities Rs. 63.0 billion in additional taxes in excess of our provisions at March 31, 2019. These additional tax demands mainly relate to income tax, service tax, sales tax and value added tax demands by the Government of India’s tax authorities for past years. We have appealed against each of these tax demands. The tax related inquiries are not included in contingent liabilities as we believe that such proceedings are likely to be dropped by the tax authorities or will not be upheld by judicial authorities. As such, no provision has been made in the accounts for these contingent liabilities. The amount of Rs. 63.0 billion included in our contingent liabilities does not include further disputed tax assessments amounting to Rs. 42.2 billion, of which Rs. 28.4 billion mainly relates to bad debts written off and penalties levied, where the possibility of liability arising has been considered remote based on favorable Supreme Court decisions in other similar cases, and Rs. 12.9 billion relating to short credit of taxes paid and rectifiable errors. See also “Business—Legal and Regulatory Proceedings”. During fiscal 2019, the tax authorities issued notices to banks, including us, regarding levy of service tax on free services provided by banks to customers maintaining specified minimum balances in their deposit accounts. The banking industry has initiated legal proceedings to contest this notice.

 

We have appealed all of these demands. While we expect that no additional liability will arise out of these disputed demands based on our consultations with tax counsel and favorable decisions in our own and other cases, there can be no assurance that these matters will be settled in our favor or that no further liability will arise out of these demands. Any additional tax liability may adversely impact our financial performance and the prices of our equity shares and ADSs.

 

We are involved in various litigations. Any final judgment awarding material damages against us could have a material adverse impact on our future financial performance and our stockholders’ equity.

 

We and our group companies, or our or their directors or officers, are often involved in litigations (civil and criminal) in India and in the other jurisdictions in which we operate for a variety of reasons, which generally arise because we seek to recover our dues from borrowers or because customers seek claims against us. The majority of these cases arise in the normal course of business and we believe, based on the facts of the cases and consultation with counsel, that these cases generally do not involve the risk of a material adverse impact on our financial performance or stockholders’ equity. We estimate the probability of losses that may be incurred in connection with legal and regulatory proceedings as of the date on which our unconsolidated and consolidated financial statements are prepared. We recognize a provision when we have a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. We determine the amount of provision based on our estimate of the amount required to settle the obligation at the balance sheet date, supplemented by our experience in similar situations. We review provisions at each balance sheet date and adjust them to reflect current estimates. In cases where the available information indicates that a loss is reasonably possible but the amount of such loss cannot be reasonably estimated, we make a disclosure to this effect in the unconsolidated and consolidated financial statements. In certain instances, present and former employees have instituted legal and other proceedings against us alleging irregularities. When there is only a remote risk of loss, we do not recognize a provision nor do we include a disclosure in the unconsolidated and consolidated financial statements. See also “Business—Legal and Regulatory Proceedings”. We cannot guarantee that the judgments in any of the litigation in which we are involved would be favorable to us and if our assessment of the risk changes, our view on provisions will also change.

 

We depend on the knowledge and skills of our senior management. Any inability to attract and retain them and other talented professionals may adversely impact our business.

 

Our continued success depends in part on the continued service of key members of our management team and our ability to continue to attract, train, motivate and retain highly qualified professionals. This is a key element of our strategy and we believe it to be a significant source of competitive advantage. The successful implementation of our strategy depends on the availability of skilled management, both at our head office and at each of our business units and international locations, continuity in the service of our directors, executives and senior managers, and our ability to attract and train young professionals.

 

The appointment of individuals in certain positions is subject to regulatory and shareholder approvals. Any stringent requirements by our regulator for appointing key members in the management may require us to reorganize our management structure and may affect our ability to identify, hire and appoint suitable professionals for various roles.

 

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The loss of any member from our senior management, including directors and key personnel, can have a material impact on our business, our financial performance, our stockholders’ equity, our ability to implement our strategy and the prices of our equity shares and ADSs. If we or one of our business units or other functions fail to staff operations appropriately, or lose one or more key senior executives or qualified young professionals and fail to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including our control and operational risks, may be adversely affected. Likewise, if we fail to attract and appropriately train, motivate and retain young professionals or other talent, our business may likewise be affected. We have recently made several changes to our human resource management practices, including key performance indicators, unit-level operating flexibility and accountability and a shift from grades to functional designations at senior levels, aimed at greater agility and synergy across the organization. There can be no assurance that these measures will be successful in meeting the desired objectives.

 

A substantial portion of our compensation structure for middle and senior management is in the form of employee stock options, and dependent on the market price of our equity shares. Depending on market and business conditions, we may decide to reduce our employee strength in certain of our businesses. Increased competition, including the entry of new banks into an already competitive sector, may affect our ability to hire and retain qualified employees. See also “Business—Employees”.

 

Adoption of a different basis of accounting or new accounting standards may result in changes in our reported financial position and results of operations for future and prior periods.

 

The financial statements and other financial information included or incorporated by reference in this annual report are based on our unconsolidated and consolidated financial statements under Indian GAAP. The Ministry of Corporate Affairs, which is the law making authority for adoption of accounting standards in India, has issued a roadmap for transition to Ind AS (a revised set of accounting standards, which largely converges the Indian accounting standards with International Financial Reporting Standards) by Indian companies in a phased manner starting from April 1, 2016. For banking companies, the implementation of Ind AS, which was earlier to begin from April 1, 2018, was deferred until further notice as recommended legislative amendments were still under the consideration of the Government of India. For insurance companies the implementation of Ind AS will begin from April 1, 2020. Some of our group companies have begun reporting their financials as per Ind AS from April 1, 2018.

 

Ind AS 109 - Financial Instruments (Standard equivalent to International Financial Reporting Standard 9) would have a significant impact on the way financial assets and liabilities are classified and measured, resulting in volatility in profit or loss and equity. See also “Operating and Financial Review and Prospects—Convergence of Indian accounting standards with International Financial Reporting Standards”.

 

Further, banks migrating to the advanced measurement approach for operational risk and internal ratings-based approaches for credit risk under Basel II are required to follow the prescribed minimum loss given default levels for capital adequacy computation and treat restructured assets as nonperforming assets for capital adequacy purposes. Compliance with these new standards may result in an increase in loans classified as non-performing and provisioning costs, and a reduction in capital adequacy for banks, including us.

 

Risks Relating to ADSs and Equity Shares

 

You will not be able to vote your ADSs and your ability to withdraw equity shares from the depositary facility is subject to delays and legal restrictions.

 

Our ADS holders have no voting rights unlike holders of our equity shares who have voting rights. For certain information regarding the voting rights of the equity shares underlying our ADSs, see also “Business—Shareholding Structure and Relationship with the Government of India”. If you wish, you may withdraw the equity shares underlying your ADSs and seek to exercise your voting rights under the equity shares you obtain from the 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 also “Restriction on Foreign Ownership of Indian Securities”.

 

Your holdings may be diluted by additional issuances of equity and any dilution may adversely affect the market prices of our equity shares and ADSs.

 

In fiscal 2008, we concluded a capital raising exercise comprising a public offering in India and an ADS offering aggregating Rs. 199.7 billion. We may conduct additional equity offerings to fund the growth of our business, including our international operations, our insurance business or our other subsidiaries. In addition, up to 10.0% of our issued equity shares from time to time, may be granted in accordance with our Employee Stock Option Scheme. Any

 

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future issuance of equity shares or ADSs or exercise of employee stock options would dilute the positions of investors in equity shares and ADSs and could adversely affect the market prices of our equity shares and ADSs.

 

You may be unable to exercise preemptive rights available to other shareholders.

 

A company incorporated in India must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate number of shares to maintain their existing ownership percentages prior to the issuance of any new equity shares, unless these rights have been waived by at least 75.0% of the company’s shareholders present and voting at a shareholders’ general meeting. United States investors in ADSs may be unable to exercise these preemptive rights for equity shares underlying ADSs unless a registration statement under the Securities Act of 1933, as amended (the “Securities Act”) is effective with respect to such rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement will depend on the costs and potential liabilities associated with any such registration as well as the perceived benefits of enabling investors in ADSs to exercise their preemptive rights and any other factors we consider appropriate at such time. To the extent that investors in ADSs are unable to exercise preemptive rights, their proportional ownership interests in us would be reduced.

 

Your ability to sell in India any equity shares withdrawn from the depositary facility, the conversion of rupee proceeds from such sale into a foreign currency and the repatriation of such foreign currency may be subject to delays if specific approval of the Reserve Bank of India is required.

 

ADS holders seeking to sell in India any equity shares withdrawn upon surrender of ADSs, convert the rupee proceeds from such sale into a foreign currency or repatriate such foreign currency may need the Reserve Bank of India’s approval for each such transaction. See also “Restriction on Foreign Ownership of Indian Securities”. We cannot guarantee that any such approval will be obtained in a timely manner or at terms favorable to the investor. Because of possible delays in obtaining the requisite approvals, investors in equity shares may be prevented from realizing gains during periods of price increases or limiting losses during periods of price declines.

 

Restrictions on deposit of equity shares in the depositary facility could adversely affect the price of our ADSs.

 

Under current Indian regulations, an ADS holder who surrenders ADSs and withdraws equity shares may deposit those equity shares again in the depositary facility in exchange for ADSs. An investor who has purchased equity shares in the Indian market may also deposit those equity shares in the ADS program. However, the deposit of equity shares may be subject to securities law restrictions and the restriction that the cumulative aggregate number of equity shares that can be deposited as of any time cannot exceed the cumulative aggregate number represented by ADSs converted into underlying equity shares as of such time. These restrictions increase the risk that the market price of our ADSs will be below that of the equity shares.

 

Certain shareholders own a large percentage of our equity shares and their actions could adversely affect the prices of our equity shares and ADSs.

 

The Life Insurance Corporation of India, the General Insurance Corporation of India and other government-owned general insurance companies, all of which are directly controlled by the Indian government, are among our principal shareholders. At June 30, 2019, the Life Insurance Corporation of India held 7.9% and the General Insurance Corporation of India and other government-owned general insurance companies held 2.7% of our outstanding equity shares. See also “Business—Shareholding Structure and Relationship with the Government of India”. Any substantial sale of our equity shares by these or other large shareholders could adversely affect the prices of our equity shares and ADSs. The Reserve Bank of India, in exercise of powers conferred by the Banking Regulation Act has notified a ceiling on voting rights in a banking company for single shareholder of 15.0%. Deutsche Bank Trust Company Americas held approximately 23.9% of our equity shares at June 30, 2019 as depositary for ADS holders and currently votes on only 15.0% of these shares as per the ceiling notified by the Reserve Bank of India. In addition, under the terms of our deposit agreement, Deutsche Bank Trust Company Americas must vote these shares as directed by our Board of Directors. See also “Overview of the Indian Financial Sector—Structural Reforms—Amendments to the Banking Regulation Act”.

 

Conditions in the Indian securities market may adversely affect the price or liquidity of our equity shares and ADSs.

 

The Indian securities markets are smaller and more volatile than securities markets in developed economies. In the past, the Indian stock exchanges have experienced high volatility and other problems that have affected the market price and liquidity of the listed securities, including temporary exchange closures, broker defaults, settlement delays and strikes by brokers. In April 2003, the decline in the price of the equity shares of a leading Indian software company created volatility in the Indian stock markets and created temporary concerns regarding our exposure to the equity markets. On May 17, 2004, the S&P BSE Sensex fell by 565 points from 5,070 to 4,505, creating temporary concerns

 

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regarding our exposure to the equity markets. Both the BSE Limited and the National Stock Exchange of India Limited halted trading on the exchanges on May 17, 2004 in view of the sharp fall in prices of securities. The Indian securities markets experienced rapid appreciation during fiscal 2006 but underwent a sharp correction in May 2006. The markets experienced a recovery thereafter and the S&P BSE Sensex reached an all-time high of 20,873 on January 8, 2008 but subsequently experienced a sharp correction, with the S&P BSE Sensex declining to 8,160 on March 9, 2009. In the 24 months since then, the equity markets had recovered with the S&P BSE Sensex at 19,445 at year-end fiscal 2011. However, the European debt crisis, volatile crude oil prices and concerns on growth in India caused a decline in the domestic equity markets with the S&P BSE Sensex at 17,404 at March 30, 2012. The markets have recovered subsequently and at year-end fiscal 2019 the S&P BSE Sensex was at 38,673. In recent years, there have been changes in laws and regulations regulating the taxation of dividend income, which have impacted the Indian equity capital markets. See also “Dividends”. Similar problems or changes in the future could adversely affect the market price and liquidity of our equity shares and ADSs.

 

We are subject to regulatory restrictions on the payment of dividend to shareholders. Any change in such restrictions or increase in capital requirements may have an impact on our dividend payout to our equity share and ADS holders.

 

The Reserve Bank of India has prescribed limits on the dividend payout ratio of banks in India linked to certain parameters such as the risk-based capital ratio and net non-performing assets ratio. Under the Reserve Bank of India’s Basel III guidelines, banks are subject to higher minimum capital requirements and must maintain a capital conservation buffer above the minimum requirements to avoid restrictions on capital distributions and discretionary bonus payments. Any change in restrictions on payment of dividend or capital requirements may limit our ability to pay dividends to our equity share and ADS holders.

 

Settlement of trades of equity shares on Indian stock exchanges may be subject to delays.

 

The equity shares represented by ADSs are currently listed on the BSE Limited and the National Stock Exchange of India Limited. Settlement on those stock exchanges may be subject to delays and an investor in equity shares withdrawn from the depositary facility upon surrender of ADSs may not be able to settle trades on such stock exchanges in a timely manner. See also “—Conditions in the Indian securities market may adversely affect the price or liquidity of our equity shares and ADSs”.

 

Changes in Indian regulations on foreign ownership, a change in investor preferences or an increase in the number of ADSs outstanding could adversely affect the prices of our equity shares and ADSs.

 

ADSs issued by companies in certain emerging markets, including India, may trade at a discount or a premium to the underlying equity shares, in part because of the restrictions on foreign ownership of the underlying equity shares. See also “Restriction on Foreign Ownership of Indian Securities”. Historically, our ADSs have generally traded at a small premium to the trading price of our underlying equity shares on the Indian stock exchanges. See also “Market Price Information”. We believe that this price premium resulted from the limited portion of our market capitalization represented by ADSs, restrictions imposed by Indian law on the conversion of equity shares into ADSs and an apparent preference among some investors to trade dollar-denominated securities. In fiscal 2006 and fiscal 2008, we conducted offerings of ADSs which increased the number of outstanding ADSs and we may conduct similar offerings in the future. Also, over time, some of the restrictions on the issuance of ADSs imposed by Indian law have been relaxed. As a result, any premium enjoyed by ADSs as compared to the equity shares may be reduced or eliminated as a result of offerings made or sponsored by us, changes in Indian law permitting further conversion of equity shares into ADSs or a change in investor preferences.

 

Because the equity shares underlying ADSs are quoted in rupees in India, you may be subject to potential losses arising out of exchange rate risk on the Indian rupee.

 

Investors who purchase ADSs are required to pay for ADSs in U.S. dollars and are subject to currency fluctuation risk and convertibility risks since the equity shares underlying ADSs are quoted in rupees on the Indian stock exchanges on which they are listed. Dividends on the equity shares will also be paid in rupees and then converted into U.S. dollars for distribution to ADS investors. Investors who seek to convert the rupee proceeds of a sale of equity shares withdrawn upon surrender of ADSs into foreign currency and repatriate the foreign currency may need to obtain the approval of the Reserve Bank of India for each such transaction. See also “—Your ability to sell in India any equity shares withdrawn from the depositary facility, the conversion of rupee proceeds from such sale into a foreign currency and the repatriation of such foreign currency may be subject to delays if specific approval of the Reserve Bank of India is required” and “Exchange Rates”.

 

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You may be subject to Indian taxes arising out of capital gains.

 

In certain circumstances, capital gains arising on the sale of the underlying equity shares are subject to Indian capital gains tax. Investors are advised to consult their own tax advisors and to carefully consider the potential tax consequences of owning ADSs or underlying equity shares. See also “Taxation—Indian Tax”.

 

There may be less company information available in Indian securities markets than in securities markets in the United States.

 

There is a difference between India and the United States in the level of regulation and monitoring of the securities markets and the activities of investors, brokers and other market participants. SEBI is responsible for improving disclosure and regulating insider trading and other matters for the Indian securities markets. There may, however, be less publicly available information about Indian companies than is regularly made available by public companies in the United States.

  

 

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Business

 

Overview

 

We are a diversified financial services group offering a wide range of banking and financial services to corporate and retail customers through a variety of delivery channels. Apart from banking products and services, we offer life and general insurance, asset management, securities broking and private equity products and services through our specialized subsidiaries. Our total assets at year-end fiscal 2019 were Rs. 12,387.9 billion. Our consolidated capital and reserves at year-end fiscal 2019 were Rs. 1,142.5 billion and our consolidated net profit for fiscal 2019 was Rs. 42.5 billion.

 

Our primary business consists of commercial banking operations for Indian corporate and retail customers. We provide a range of commercial banking products and services, including loan products, fee and commission-based products and services, deposit products and foreign exchange and derivatives products to India’s leading corporations, middle market companies and small and medium enterprises. Our commercial banking operations for retail customers consist of retail lending and deposit taking and distribution of third party insurance and investment products. We also offer agricultural and rural banking products. We deliver our products and services through a variety of channels, including bank branches, ATMs, call centers, the internet and mobile phones. ICICI Bank had a network of 4,874 branches and 14,987 ATMs in India at year-end fiscal 2019.

 

In our international banking operations, our primary focus is on offering products and services to persons of Indian origin, Indian businesses, select local businesses and multi-national corporations with a focus on trade finance and commercial banking products, insured and other mortgage products in our Canadian subsidiary, as well as deposit and remittance products to the larger community. Our overseas branches take deposits, raise borrowings and make loans to Indian companies for their overseas operations as well as for their foreign currency requirements in India, global multi-national corporations and local companies in their jurisdiction. They also engage in advisory and syndication activities for fund-raising by Indian companies and their overseas operations. At year-end fiscal 2019, we had banking subsidiaries in the United Kingdom and Canada, branches in China, Singapore, Dubai International Finance Centre, Sri Lanka, Hong Kong, the United States, South Africa and Bahrain and representative offices in the United Arab Emirates, Bangladesh, Malaysia and Indonesia. Our subsidiary in the United Kingdom has a branch in Frankfurt, Germany. Our subsidiaries in the United Kingdom and Canada and our branches in Bahrain, Dubai, Singapore and Hong Kong have the largest share of our international assets and liabilities. See also “Risk factors—Risks Relating to Our Business—Our international operations increase the complexity of the risks that we face”.

 

Our treasury operations include the maintenance and management of regulatory reserves, proprietary trading in equity and fixed income and a range of foreign exchange and derivatives products and services for corporate customers, such as forward contracts and interest rate and currency swaps. We take advantage of movements in markets to earn treasury income. Our overseas branches and subsidiaries also have investments in bonds of non-India financial institutions and in asset-backed securities.

 

We are also engaged in insurance, asset management, securities business and private equity fund management through specialized subsidiaries. Our subsidiaries ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company and ICICI Prudential Asset Management Company provide a wide range of life and general insurance and asset management products and services to retail and corporate customers. ICICI Prudential Life Insurance Company is one of the large private sector life insurance companies in India, with a market share of 10.3% in new business written (on retail weighted received premium basis) during fiscal 2019 according to the Life Insurance Council. During fiscal 2017, ICICI Prudential Life Insurance Company was listed on the National Stock Exchange of India Limited and the Bombay Stock Exchange Limited, following the sale of 12.63% shareholding in the company by ICICI Bank through an offer for sale in an initial public offering by the company. ICICI Prudential Pension Funds Management Company Limited, a 100% subsidiary of ICICI Prudential Life Insurance Company, is one of the fund managers for the pension assets of Indian citizens (other than the mandated pension funds of government employees) under the National Pension System for the private sector. This pension scheme was launched by the Indian government in 2004 for all citizens on a voluntary basis, and has allowed professional fund managers to invest the scheme’s funds since 2008. ICICI Lombard General Insurance Company was the largest private sector general insurance company in India during fiscal 2019, with a market share of 8.5% on a gross direct premium income basis according to the General Insurance Council. In September 2017, ICICI Lombard General Insurance Company was listed on the National Stock Exchange of India Limited and BSE Limited following the sale of shares (including sale of 7.0% shareholding in the company by ICICI Bank) through an initial public offering. ICICI Prudential Asset Management Company manages the ICICI Prudential Mutual Fund, which was the second largest mutual fund in India in terms of average funds under management for the three months ended March 31, 2019 according to the Association of Mutual Funds in India. We cross-sell the products of our insurance and asset management subsidiaries and of other asset management companies to our retail and corporate customers. Our subsidiaries ICICI Securities Limited and ICICI Securities Primary

 

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Dealership Limited are engaged in equity underwriting and brokerage and primary dealership in government securities and fixed income market operations, respectively. ICICI Securities owns icicidirect.com, an online brokerage platform. ICICI Securities Limited has a subsidiary in the United States, ICICI Securities Holdings Inc. that in turn has an operating subsidiary in the United States, ICICI Securities Inc., which is engaged in brokerage services. In March 2018, we sold 20.78% shareholding in ICICI Securities Limited through an offer for sale in an initial public offering. ICICI Securities Limited was listed on the National Stock Exchange of India Limited and Bombay Stock Exchange of India Limited in April 2018. Our private equity fund management subsidiary ICICI Venture Funds Management Company, manages funds that make private equity investments. In fiscal 2013, ICICI Bank, in partnership with domestic and international banks and financial institutions, launched India’s first infrastructure debt fund, India Infradebt Limited, structured as a non-banking finance company in which ICICI Bank has a shareholding of 42.3% at March 31, 2019.

 

Our legal name is ICICI Bank Limited, but we are known commercially as ICICI Bank. We were incorporated on January 5, 1994 under the laws of India as a limited liability corporation. The duration of ICICI Bank is unlimited. Our principal corporate office is located at ICICI Bank Towers, Bandra-Kurla Complex, Mumbai 400 051, India, our telephone number is +91 22 3366 7777 and our website address is www.icicibank.com. None of the contents of our and our subsidiaries’ websites are incorporated in this annual report. Our agent for service of process in the United States is Mr. Akashdeep Sarpal, Country Head, ICICI Bank Limited, New York Branch, 500 Fifth Avenue, Suite 2830, New York, New York 10110.

 

History

 

ICICI was formed in 1955 at the initiative of the World Bank, the government of India and Indian industry representatives. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. Until the late 1980s, ICICI primarily focused its activities on project finance, providing long-term funds to a variety of industrial projects. With the liberalization of the financial sector in India in the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services provider that, along with its subsidiaries and other group companies, offered a wide variety of products and services. As India’s economy became more market-oriented and integrated with the world economy, ICICI capitalized on the new opportunities to provide a wider range of financial products and services to a broader spectrum of clients. ICICI Bank was incorporated in 1994 as a part of the ICICI group.

 

The issue of universal banking, which in the Indian context meant conversion of long-term lending institutions such as ICICI into commercial banks, had been discussed at length in the late 1990s. Conversion into a bank offered ICICI the ability to accept low-cost demand deposits and offer a wider range of products and services, and greater opportunities for earning non-fund based income in the form of banking fees and commissions. ICICI Bank also considered various strategic alternatives in the context of the emerging competitive scenario in the Indian banking industry. ICICI Bank identified a large capital base and size and scale of operations as key success factors in the Indian banking industry. In view of the benefits of transformation into a bank and the Reserve Bank of India’s pronouncements on universal banking, ICICI and ICICI Bank merged in 2002.

 

Shareholding Structure and Relationship with the Government of India

 

The following table sets forth, at June 30, 2019, certain information regarding the ownership of our equity shares.

 

   Percentage of Total Equity Shares Outstanding  Number of Equity Shares Held
Government Controlled Shareholders:          
Life Insurance Corporation of India    7.9    508,824,087 
General Insurance Corporation of India and government-owned general insurance companies    1.2    79,912,844 
UTI and UTI Mutual Fund    1.2    76,690,262 
Other government-controlled institutions, mutual funds, corporations and banks    0.3    19,680,440 
Total government-controlled shareholders    10.6    685,107,633 
Other Indian investors:          
Individual domestic investors(1),(2)    6.9    446,772,218 
HDFC Trustee Co. Ltd. (Various mutual fund accounts)/HDFC Large Cap Fund    4.0    258,078,728 
SBI Mutual Fund/SBI Dual Advantage Fund and various other mutual fund accounts    2.8    179,682,984 
ICICI Prudential Mutual Fund (Various mutual fund accounts)    2.3    147,879,167 

   

 

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   Percentage of Total Equity Shares Outstanding  Number of Equity Shares Held
Aditya Biarla Sun Life Trustee Pvt. Ltd.    2.0    126,873,460 
Reliance Capital Trustee CO. Ltd./Reliance ETF/Reliance Emergent India Fund (Various mutual fund accounts).    2.0    130,065,875 
Kotak capital fund (Various mutual fund accounts)    1.4    88,510,988 
Other mutual funds and banks (other than government-controlled mutual funds and banks)    6.0    385,681,381 
Other Indian corporations and others    4.8    308,936,159 
Investor education protection fund   0.1    6,036,343 
Total other Indian investors    32.3    2,078,517,303 
Total Indian investors    42.9    2,763,624,936 
Foreign investors:          
Deutsche Bank Trust Company Americas, as depositary for ADS holders   23.9    1,544,078,751 
Dodge and Cox International Stock Fund    3.7    241,112,376 
Government of Singapore    1.3    83,205,994 
Other foreign institutional investors, foreign banks, overseas corporate bodies, foreign companies, foreign nationals, foreign institutional investors and non-resident Indians(2)    28.2    1,820,574,239 
Total foreign investors    57.1    3,688,971,360 
Total    100.0%   6,452,596,296 
 
(1)Executive officers and directors (including non-executive directors) as a group held about 0.03% of ICICI Bank’s equity shares at June 30, 2019.

(2)No single shareholder in this group owned 5.0% or more of ICICI Bank’s equity shares as of this date.

 

The holding of government-controlled shareholders was 10.6% at June 30, 2019 against 12.4% at June 30, 2018 and 13.3% at June 30, 2017. The holding of Life Insurance Corporation of India was 7.9% at June 30, 2019 against 9.4% at June 30, 2018 and 10.4% at June 30, 2017.

 

We operate as an autonomous commercial enterprise and the Indian government has never directly held any of our shares. We are not aware of or a party to any shareholders’ agreement or voting trust relating to the ownership of the shares held by the government-controlled shareholders. We do not have any agreement with our government-controlled shareholders regarding management control, voting rights, anti-dilution or any other matter. Our Articles of Association provide for the government of India to appoint, pursuant to the provisions of guarantee agreements between the government of India and ICICI, a representative to our Board. The government of India has appointed one representative to our Board. We have generally invited a representative of Life Insurance Corporation of India to join our Board. Mr. V. K. Sharma, Chairman of Life Insurance Corporation, our largest shareholder, was a member of our Board till March 31, 2019. Following the completion of his prescribed primary tenure under the Companies Act, 2013 with the Bank, and his superannuation from the Life Insurance Corporation of India, he ceased to be a director on our Board. See also “Management—Directors and Executive Officers” for a discussion of the composition of our Board of Directors.

 

The holding of other Indian investors was 32.3% at June 30, 2019 against 27.3% at June 30, 2018 and 26.3% at June 30, 2017. The total holding of Indian investors was 42.9% at June 30, 2019 against 39.7% at June 30, 2018 and 39.6% at June 30, 2017. The holding of foreign investors was 57.1% at June 30, 2019 against 60.3% at June 30, 2018 and 60.4% at June 30, 2017. See also “Supervision and Regulation—Ownership Restrictions”. Deutsche Bank Trust Company Americas holds the equity shares represented by 772 million American Depositary Receipts outstanding as depositary on behalf of the holders of the American Depositary Shares. The American Depositary Shares are listed on the New York Stock Exchange. The Reserve Bank of India, exercising its powers under the Banking Regulation Act has notified a ceiling of 15.0% on the voting rights of a single shareholder in a banking company. Therefore, Deutsche Bank Trust Company Americas (as depositary), which held approximately 23.9% of our equity shares at June 30, 2019 can only vote 15.0% of our equity shares. In addition, under the terms of our deposit agreement, Deutsche Bank Trust Company Americas must vote these shares as directed by our Board of Directors. Our ADS holders themselves have no voting rights unlike holders of our equity shares who have voting rights. Except as stated above, no shareholder has differential voting rights. See also “Overview of the Indian Financial Sector—Structural Reforms— Amendments to the Banking Regulation Act”.

 

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Strategy

 

Our objective during fiscal 2019 was to focus on risk-calibrated profitable growth in business. We continued to grow our credit portfolio with a focus on granularity and improvement in the credit rating profile. We made progress in improving the portfolio mix by lending to higher rated well-established corporates and reducing concentration risks. We continued to see healthy growth across retail portfolio. We maintained our efforts on recovery and resolution of the non-performing assets. The additions to non-performing loans during the year reduced significantly, while provisions remained elevated. As a result, the provision coverage ratio improved substantially. The Bank maintained a strong capital position with capital adequacy ratios significantly above regulatory requirements.

 

Going forward, our strategic focus of growing the core operating profits in a risk calibrated and granular manner would continue. The Bank seeks to build scalable and resilient businesses while operating within the guardrails of risk management. Continuing to strengthen our deposit franchise is a key strategic priority. We would seek to contain credit losses within the levels set by our enterprise risk management framework. A customer-centric approach with ownership of growing the core operating profit at every level within the organization would be an important driver in meeting our strategic objectives.

 

We would leverage our extensive geographical reach, comprehensive range of products and services and state-of-the-art technology for providing superior customer experience. We believe that there are significant opportunities across customer segments and their ecosystems. We will aim to provide a comprehensive suite of financial services while profitably maximizing our share of these opportunities, including by entering into mutually beneficial partnerships. We are leveraging technology and analytics for deeper insights into customer needs and behavior and making customer onboarding and transacting smooth and frictionless. We would continue to invest in technologies to provide superior offerings to customers.

 

We aim to be the trusted financial services provider of choice for our customers and deliver products and services that create value. We will focus on consistent execution of strategy, enhancing stakeholder confidence and shareholder value.

 

Overview of Our Products and Services

 

We offer products and services in the commercial banking area to corporate and retail customers, both domestic and international. We also undertake treasury operations and offer treasury-related products and services to our customers. We are also engaged in insurance, asset management, securities business and private equity fund management through specialized subsidiaries.

 

Commercial Banking for Retail Customers

 

Our commercial banking operations for retail customers consist of retail lending and deposits, credit, debit and prepaid cards, depositary share accounts, distribution of third party investment and insurance products, other fee-based products and services, and the issuance of unsecured redeemable bonds.

 

Retail Lending Activities

 

Our retail lending activities include home loans, automobile loans, commercial business loans, business banking loans (including dealer funding and small ticket loans to small businesses), personal loans, credit cards, loans against time deposits, loans against securities, loans against jewelry and retail lending in rural markets. We also fund dealers who sell automobiles and commercial vehicles.

 

Our retail strategy focuses on leveraging the branch network, digital channels, partnerships and presence in various ecosystems to expand our customer base. Our suite of products and services to retail customers include savings, investment, credit and protection products based on customer needs, along with convenient payment and transaction banking services. Cross-selling appropriate products to existing customers based on analytics is a key element of this strategy.

 

Our retail portfolio increased from Rs. 3,207.9 billion constituting 54.0% of gross loans at year-end fiscal 2018 to Rs. 3,937.9 billion constituting 57.8% of gross loans at year-end fiscal 2019. Including non-fund based outstanding, the proportion of retail portfolio to total portfolio was 46.4% at March 31, 2019. Our secured retail portfolio constitutes 85.9% of the total retail portfolio with growth driven by categories like mortgages, business banking loans, commercial business loans and loans to rural segments. Our unsecured products portfolio has recorded strong growth in fiscal 2019 driven by personal loans which grew by 48.5% year-on-year and credit cards portfolio which grew by 31.8%.

 

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The following table sets forth, at the dates indicated, the break-down of our gross retail finance portfolio.

 

   At March 31,
   2017  2018  2019  2019  2019
   (Rs. in billions)  (% share)  (US$ in millions)
Home loans   Rs.1,528.4   Rs.1,765.1   Rs.2,091.9    53.1%  US$30,247 
Automobile loans    256.1    294.9    318.8    8.1    4,610 
Commercial business loans    150.3    173.2    227.2    5.8    3,285 
Business banking(1)    77.4    113.5    161.7    4.1    2,337 
Others(2),(3)    379.9    462.3    582.6    14.8    8,425 
Total secured retail finance portfolio    2,392.1    2,809.0    3,382.2    85.9%   48,904 
Personal loans    143.7    211.8    314.6    8.0    4,549 
Credit card receivables    75.5    96.6    127.3    3.2    1,840 
Business banking(1)    49.5    61.7    74.9    1.9    1,084 
Others(2)    28.8    28.8    38.9    1.0    562 
Total unsecured retail finance portfolio    297.5    398.9    555.7    14.1%   8,035 
Total retail finance portfolio   Rs.2,689.6   Rs.3,207.9   Rs.3,937.9    100.0%  US$56,939 
 
(1)Includes dealer financing and small ticket loans to small businesses.

(2)Includes rural loans.

(3)Includes loans against foreign currency non-resident (bank) deposits of Rs. 64.5 billion at March 31, 2019.

 

Home loans

 

Our home loan portfolio includes both loans for the purchase and construction of homes as well as loans against property. Our policies for home loans are based on certain stipulated ratios such as the loan-to-value ratio and the ratio of fixed debt obligations to a borrower’s income. The Reserve Bank of India has stipulated the loan-to-value ratios for small size loans and capped the loan-to-value ratio at 90% for home loans up to Rs. 3.0 million, and at 80% for home loans between Rs. 3.0 million and Rs. 7.5 million. Loans above Rs. 7.5 million have a maximum loan-to-value ratio of 75.0%. The initial repayment term of such loans is 15 to 20 years with payments in the form of equated monthly installments. We follow robust credit appraisal processes for loan-against-property. The average ticket size of the loan-against-property portfolio is low and the loan-to-values are conservative. Lending is based on cash flows of business/individuals and not just the value of the collateral. We also provide loans to customers belonging to economically weaker sections and customers buying homes in the low-cost affordable housing segment. The loan amount under this segment is generally up to Rs. 3.0 million.

 

Our home loan portfolio primarily comprises floating rate loans, where any change in the benchmark rate to which the rate of interest on the loan is referenced is passed on to the borrower on the interest reset date at periodic intervals. Any decrease in the rate of interest payable on floating rate home loans is generally implemented by an acceleration of the repayment schedule, keeping the monthly installment amount unchanged. Any increase in the rate of interest payable on floating rate home loans is generally effected in the first instance by an extension of the repayment schedule, keeping the monthly installment amount unchanged. See also “Risk Factors—Risks Relating to Our Business—Our banking and trading activities are particularly vulnerable to interest rate risk and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our income from treasury operations, the quality of our loan portfolio and our financial performance”.

 

We offer home loan products primarily in India through ICICI Bank and our wholly owned subsidiary, ICICI Home Finance Company Limited. The loan portfolio of our housing finance subsidiary includes home loans, loan-against-property, consumer durable loans and loans to developers among others. ICICI Home Finance Company Limited has been growing its loan portfolio, primarily home and loan-against-property. The loan portfolio of ICICI Home Finance Company Limited increased from Rs. 96.5 billion at March 31, 2018 to Rs. 133.3 billion at March 31, 2019. ICICI Home Finance Company Limited raises funds through bonds and debentures, commercial papers, fixed deposits and refinance from National Housing Bank. In fiscal 2019, it also raised funds through external commercial borrowings. At March 31, 2019, ICICI Home Finance Company Limited, had a branch network of 105 standalone branches.

 

Our banking subsidiary in Canada offers residential mortgages in the local market. At year-end fiscal 2019, ICICI Bank Canada held total residential mortgages amounting to CAD 3,548 million (Rs. 182.9 billion) at year-end fiscal 2019 as compared to CAD 3,388 million (Rs. 174.6 billion) at year-end fiscal 2018. This includes mortgages of CAD

 

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2,795 million (Rs. 144.1 billion) at year-end fiscal 2019 as compared to CAD 2,832 million (Rs. 146.0 billion) at year-end fiscal 2018 securitized under the Canadian National Housing Act —Mortgage Backed Securities program or through participation in the Canada Mortgage Bonds program.

 

Automobile loans

 

We finance the purchase of new and used automobiles. Automobile loans are fixed rate products repayable in equal monthly installments. The interest rate is based on factors such as customer relationship, car segment and tenure of loan, among others, for new automobiles and age and segment of car, tenure of loan and product variant like top up or refinance, for used automobiles. Our automobile loans typically range from Rs. 200,000 to Rs. 5,000,000 in size with tenors in the range of 23 to 84 months and yields ranging from 9.3%-15.0%.

 

Commercial business loans

 

We finance the purchase of commercial vehicles and equipment. Commercial business loans are fixed rate products repayable in equal monthly installments. Our commercial business customers include large fleet operators in the medium commercial vehicle and heavy commercial vehicle categories.

 

Business banking

 

We see business banking as a segment with high potential for growth, given our historically small credit portfolio in this segment relative to other banks. Our business banking customers include proprietorship firms, partnership firms and private limited companies. The average ticket size of loans in this segment is about Rs. 10.0-15.0 million. The loans are generally secured by collateral in the form of property apart from a charge on current assets. We also fund dealers who sell automobiles and commercial vehicles.

 

Personal loans and credit cards

 

We also offer unsecured products such as personal loans and credit cards to our customers. In fiscal 2008, following the global financial crisis leading to increase in interest rates, tightening liquidity and challenging macro-economic environment and changes in regulations pertaining to the use of recovery agents by banks, we witnessed higher than anticipated losses in the unsecured retail portfolio. We reduced incremental lending in personal loans and credit card issuances, resulting in a decline in the overall unsecured retail lending portfolio. Since fiscal 2013, we have been growing our personal loans and credit card lending portfolio, primarily by offering these products to our existing customers. During fiscal 2019, ICICI Bank’s personal loan disbursements, at Rs. 215.7 billion, were about 15.3% of total retail loan disbursements. Our personal loans typically range from Rs. 50,000 to Rs. 4,000,000 in size with tenors of one to five years and yields ranging from 11-22%. Our personal loans portfolio increased from Rs. 211.8 billion at year-end fiscal 2018 to Rs. 314.6 billion at year-end fiscal 2019. The number of outstanding credit cards increased from around 5.0 million at year-end fiscal 2018 to about 6.6 million at year-end fiscal 2019. The credit card receivables portfolio increased from Rs. 96.6 billion at year-end fiscal 2018 to Rs. 127.3 billion at year-end fiscal 2019. The proportion of unsecured retail loans in the total retail portfolio was 14.1% at year-end fiscal 2019 compared to 12.4% at year-end fiscal 2018.

 

Retail lending for rural customers

 

Our rural banking operation caters to the financial requirements of customers in rural and semi-urban locations. We offer a product suite covering the rural value chain including farmers, commodity traders, seed and farm input dealers, processors, consumer product dealers and rural entrepreneurs. Our products include working capital loans for growing crops, financing post-harvest activities, farm equipment loans, financing against warehouse receipt and loans against gold jewelry along with personal loans, affordable housing finance and auto loans. We also provide consumption loans for low-income customers. We offer financial solutions to micro-finance institutions, self-help groups, co-operatives constituted by farmers, corporations and medium enterprises engaged in agriculture-linked businesses.

 

We provide financing to farmers for agriculture and allied activities in the form of working capital loans through the kisan credit card. Our kisan credit card portfolio at year-end fiscal 2019 was Rs. 190.2 billion. In fiscal 2018 and fiscal 2019, some state governments announced agriculture loan waiver schemes for farmers which resulted in non-repayment of loans by some farmers residing in those states. While the cost of such schemes is borne by the state governments, such schemes or borrowers’ expectations of such schemes have resulted in higher delinquencies in the kisan credit card portfolio for banks, including us. See also “—Loan Portfolio—Directed Lending”.

 

Rural banking services are offered through multiple channels including branches, micro ATMs, point of sale terminals and mobile branches. Our rural customers can also avail themselves of basic banking facilities at retail outlets

 

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like grocery shops and customer service points through business correspondents. In fiscal 2017, the Bank launched a mobile application, Mera iMobile, which allows users, including non-ICICI Bank customers, in rural areas to access banking services as well as information on agricultural services, crop prices, news and weather. This application provides around 135 services and is available in English and several Indian regional languages.

 

Rural banking presents significant challenges in terms of geographical coverage and high unit transaction costs. We continuously explore various models for operating through cost effective structures in rural locations, including technology-based channels and have opened 556 branches in villages that were previously unbanked. See also “Risk Factors—Risks Relating to Our Business—Entry into new businesses or rapid growth in existing loan portfolios may expose us to increased risks that may adversely affect our business”. We have also pursued initiatives focused on building banking habits and creating wealth for rural customers. We have pursued initiatives to empower villages, along with ICICI Foundation for Inclusive Growth, that has focused on promoting a cashless ecosystem and skill development of villagers. On a cumulative basis, the ICICI Foundation for Inclusive Growth has provided skill development training to eligible residents in over 1,200 villages till fiscal 2019.

 

Retail Deposits

 

Our retail deposit products include time deposits and savings account deposits. We also offer targeted products to specific customer segments such as high net worth individuals, defense personnel, trusts and businessmen. We also offer corporate salary account products and current account (i.e., checking accounts for businesses) products to our small enterprise customers, who maintain balances with us. Further, we offer an international debit card in association with VISA International. At year-end fiscal 2019, we had a debit card base in excess of 44 million cards.

 

We continuously focus on increasing our current and savings account deposit and retail term deposit base. Our endeavour is to maintain a healthy and stable funding profile and our competitive advantage in cost of funds. We have been expanding our offerings through mobile phones, including mobile banking applications for account access and various transactions and services. We open new customer accounts by using tablets to capture customer information digitally. By offering our products and services through technology-enabled channels, we aim to improve the customer experience as well as the efficiency of our operations. In fiscal 2019, we launched the ‘Advantage Woman Aura Savings Account’, an account exclusively for working women in India and ‘The One’, a premium savings account for salaried and self-employed professionals in the age group of 35-50 years. These products offer a bouquet of benefits to meet the life-stage needs of the customers. We also launched ‘FD Xtra’, a fixed/recurring deposit product offering a bouquet of additional benefits like monthly income, life insurance cover, systematic investments and credit card.

 

For a description of the Reserve Bank of India’s regulations applicable to deposits in India and required deposit insurance, see “Supervision and Regulation—Regulations Relating to Deposits” and “Supervision and Regulation—Deposit Insurance”. For more information on the type, cost and maturity profile of our deposits, see “—Funding

 

Fee-Based Products and Services

 

Through our distribution network, we offer various products including government of India savings bonds, insurance policies, bullion and public offerings of equity shares and debt securities by Indian companies. We offer several card-based products such as credit cards, debit cards, prepaid cards, travel cards and commercial cards. We also offer a variety of mutual fund products. We levy services charges on deposit accounts.

 

We also offer foreign exchange products to retail customers including sale of currency notes, traveler’s checks and travel cards. We also facilitate retail inward remittances from foreign geographies. In fiscal 2019, we enabled blockchain-based processing for outward remittance from India to Canada.

 

As a depositary participant of the National Securities Depository Limited and Central Depository Services (India) Limited, we offer depositary share accounts to settle securities transactions in a dematerialized mode. Further, we are one of the banks designated by the Reserve Bank of India for issuing approvals to non-resident Indians and overseas corporate bodies to trade in shares and convertible debentures on the Indian stock exchanges.

 

Commercial Banking for Small and Medium Enterprises

 

We offer a comprehensive suite of banking products and solutions to small and medium enterprises. We are also providing tailored products and services for enabling wide-ranging support to small and medium enterprises. We have strengthened our capabilities in assessing credit risks across various sectors with risk management practices focused on enhancing the portfolio quality by reducing concentration risk and to focus on granular and collateralized-lending based growth. With a view to increasing the risk adjusted operating profit from the portfolio, reliance is also placed on harnessing opportunities across transaction banking, foreign exchange and personal banking solutions with the small and medium enterprises.

 

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We offer online end-to-end supply chain financing solutions and vendor bill discounting through funding to the channel partners of large corporate clients to meet the working capital needs of small businesses. We are offering transaction banking, foreign exchange and personal banking solutions to small and medium enterprises. In fiscal 2019, we launched several digital products for meeting the business and transaction banking requirements of small and medium enterprises, including digital opening of current accounts, instant digitally processed overdraft facilities, enhancements in the digital trade platform ‘Trade Online’ and ‘Corporate Internet Banking’ enabling general banking transactions and export-import transactions online without visiting the branch. We also launched a digital financial supply chain platform with integrated payment solutions that helps in streamlining delivery systems across the entire value chain of companies. We are also focusing on harnessing available digital data and scaling-up digital lending to small and medium enterprises. We have specialized teams for current accounts (i.e. checking accounts), trade finance, cash management services and door-step banking. We have recently reorganized our small and medium enterprises business to improve our focus and ability to meet their financial requirements. We have divided the small and medium enterprises on the basis of turnover, with enterprises having a turnover of less than Rs. 2.5 billion to be focused upon by the retail business group and enterprises with turnover greater than Rs. 2.5 billion to be focused upon by the wholesale business group.

 

We are also proactively reaching out to small and medium enterprises through various initiatives. We conduct knowledge sessions and have created a platform “Beyond Banking” that gives exposure to sectoral insights, global best practices, business expansion opportunities and media recognition. “SME Empower” is an online business-to-business marketplace that enables them to buy and sell products online; the “SME toolkit” is an online business and advisory resource for small and medium enterprises; and the “Emerging India Awards” and “SME Elite 50”—a recognition platform for small and medium enterprises.

 

Commercial Banking for Corporate Customers

 

We provide a range of commercial and investment banking products and services to India’s leading corporations and middle market companies. Our product suite includes working capital and term loan products, fee and commission-based products and services, deposits and foreign exchange and derivatives products. The Corporate Banking Group focuses on origination and coverage of all corporate clients. The Corporate Banking Group comprises relationship and credit teams. The Commercial Banking Group is responsible for growing the trade services and transaction banking business through identified branches, while working closely with the corporate relationship teams. The Markets Group provides foreign exchange and other treasury products to corporations. The Project Finance Group focuses on management of the project finance portfolio and evaluation of new project financing proposals. We seek to syndicate corporate debt among domestic and international banks and institutions.

 

Corporate Loan Portfolio

 

Our corporate loan portfolio consists of project and corporate finance (including structured finance and cross-border acquisition financing) and working capital financing. For further details on our loan portfolio, see “—Loan Portfolio—Loan Concentration”. For a description of our credit rating and approval system, see “—Risk Management—Credit Risk”.

 

Historically, project financing has constituted a significant portion of our loan portfolio, though we have now adopted a cautious and selective approach to project financing. Our project finance portfolio consists principally of extending medium-term and long-term rupee and foreign currency loans to the manufacturing and infrastructure sectors. We also provide financing by way of investment in marketable instruments such as fixed rate and floating rate debentures. We generally have a security interest and first charge on the fixed assets of the borrower. Our working capital financing consists mainly of cash credit facilities, overdraft, demand loans and non-fund based facilities including bill discounting, letters of credit and guarantees.

 

From fiscal 2012, the Indian corporate sector experienced several challenges, after a previous cycle of sharp growth in corporate loans, including in the infrastructure and commodity sectors. The Indian economy experienced challenges in terms of high inflation, higher interest rates and currency depreciation. The corporate sector experienced a decline in sales and profit growth, an elongation of working capital cycles and a high level of receivables, and significant challenges in project completion and cash flow generation, due to policy changes, delays in approvals and judicial decisions. Indian corporations, especially in the infrastructure and industrial sectors, had limited ability to access capital in view of the macroeconomic environment and volatility in global and domestic financial markets. From fiscal 2014 onwards, these developments led to an increase in non-performing and restructured corporate loans in the Indian banking sector, including us, and a substantial moderation in overall loan growth, driven primarily by lower growth in credit to the corporate sector. The significant decline in global commodity prices in fiscal 2015 and fiscal 2016, including metals, coal and crude oil, negatively impacted borrowers in commodity-linked sectors. Capital investments in the economy remained subdued, impacting corporations in investment-linked sectors like construction.

 

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Due to lower than projected cash flows, the progress in reducing leverage in the corporate sector was slow. Further, from fiscal 2016, the Reserve Bank of India initiated several measures to accelerate recognition and increase provisioning towards stressed accounts in the corporate sector. As a result, there was a significant increase in the level of additions to non-performing loans, including slippages from restructured loans into non-performing status for the banking sector, including us, from fiscal 2016. The revised framework for resolution of stressed assets, released by the Reserve Bank of India in February 2018, accelerated the recognition of stressed accounts as non-performing in fiscal 2018. During fiscal 2019, the additions to non-performing loans, for the banking system, including us, moderated and a few large accounts referred under the Insolvency and Bankruptcy Code were resolved during the year.

 

We have adopted a cautious approach in incremental lending by focusing on lending to higher rated corporates and adopting a revised framework for management of concentration risk. We believe that the significant improvement in our deposit franchise and funding costs in the last five years enables us to pursue lending to higher rated corporates profitably. We continue to focus on financing opportunities in the corporate sector based on appropriate risk assessment and pricing. For more details on our credit risk procedures, see “—Risk Management—Credit Risk”. See also “Risk Factors—Risks Relating to Our Business—Our level of non-performing assets is elevated, and if the level of non-performing assets increases further and the overall quality of our loan portfolio continues to deteriorate, our business will suffer” and “Business—Strategy” and “Operating and Financial Review and Prospects—Executive Summary—Business environment—Trends in fiscal 2019”.

 

Fee and Commission-Based Activities

 

We generate fee income through our lending, transaction banking, syndication and foreign exchange related solutions provided to our corporate customers. We also offer our corporate customers a wide variety of fee and commission-based products and services including documentary credits and standby letters of credit (called guarantees in India).

 

We offer commercial banking services such as cash management services (such as collection, payment and remittance services), escrow, trust and retention account facilities, online payment facilities, custodial services and tax filing and collection services on behalf of the government of India and the governments of Indian states. At year-end fiscal 2019, total assets held in custody on behalf of our clients (mainly foreign institutional investors, offshore funds, overseas corporate bodies and depositary banks for GDR investors) were Rs. 3,226.8 billion. As a registered depositary participant of National Securities Depository Limited and Central Depository Services (India) Limited, the two securities depositaries operating in India, we also provide electronic depositary facilities to investors.

 

Corporate Deposits

 

We offer a variety of deposit products to our corporate customers including current accounts, time deposits and certificates of deposits. For more information on the type, cost and maturity profile of our deposits, see “—Funding”.

 

Foreign Exchange and Derivatives

 

We provide customer specific products and services, which cater to risk hedging needs of corporations at domestic and international locations, arising out of currency and interest rate fluctuations. The products and services include:

 

·Foreign Exchange Products

 

Products include cash, tom, spot and forwards transactions. We offer customized hedging and trading solutions to clients, on the basis of their business needs. These products are offered in India and across our international locations.

 

·Derivatives

 

We offer derivative products including interest rate swaps, currency swaps and options in all major currencies.

 

Commercial Banking for International Customers

 

Our strategy for growth in international markets is based on leveraging home country links and technology for international expansion in selected international markets. Our international strategy has focused on building a retail deposit franchise in geographies where we have such licenses, making loans to global multi-national corporations, meeting the foreign currency needs of our Indian corporate clients, taking select non-India trade finance exposures, and lending to corporations in the local jurisdiction. We have also focused on building stable wholesale funding sources and strong syndication capabilities to support our corporate and investment banking business, and to expand private banking operations for India-centric asset classes. We are repositioning our international business strategy to sharpen our focus on the non-resident Indian community and India-linked trade.

 

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At March 31, 2019, we had subsidiaries in the United Kingdom and Canada, branches in Bahrain, Dubai International Finance Center, Hong Kong, China, Singapore, Sri Lanka, South Africa and the United States and representative offices in Bangladesh, Indonesia, Malaysia and the United Arab Emirates. Our subsidiary in the United Kingdom had established one branch each in Antwerp, Belgium and Frankfurt, Germany under the European Union Passporting Arrangement. Following the United Kingdom voting to withdraw from the European Union, and while negotiations are yet to be concluded, our subsidiary has obtained a third-country license for its branch in Frankfurt, Germany. The subsidiary closed its branch in Belgium during fiscal 2019.

 

Many of the commercial banking products that we offer through our overseas branches and subsidiaries, as well as to international customers from our domestic network, such as debt financing, trade finance and letters of credit, are similar to the products offered to our customers in India. Some of the products and services that are unique to international customers are:

 

·Remittance services: We continue to maintain a significant position in remittances from abroad through our diversified products and service offerings to meet the requirements of the non-resident Indian diaspora. We have been expanding access to services through our wide branch network, internet-based remittance solutions and new partnerships and channels with correspondents all over the world. We have partnerships with over 200 correspondent banks and exchange houses across 40 countries worldwide to facilitate inward remittances into India. We have pursued greater integration of our systems with our partners to enable seamless processing and faster fund transfers. In fiscal 2016, we launched “Money2World”, a fully-online outward remittance service. Through this service, even non-account holders of ICICI Bank can transfer money online from any bank account in India to any bank account overseas in 16 major currencies. The Bank’s key platform for inward remittances, Money2India, has a host of features to make the platform more user friendly, reduce transaction time and offer seamless experience on a single interface (login) for non-resident Indians customers to transfer money to India. ICICI Bank became the first bank in India and one of the first few globally to successfully execute remittance transactions using blockchain technology.

  

·TradeWay: An Internet-based document collection product to provide correspondent banks access to real-time online information on the status of their export bills collections routed through us.

 

·Remittance Tracker: An Internet-based application that allows a correspondent bank to check on the status of its payment instructions and to get various information reports online.

 

·Offshore banking deposits: Multi-currency deposit products in U.S. dollar, pound sterling and Euro.

 

·Foreign currency non-resident deposits: Foreign currency deposits offered in nine main currencies—U.S. dollar, pound sterling, Euro, yen, Canadian dollar, Singapore dollar, Australian dollar, Hong Kong dollar and Swiss franc.

 

·Non-resident external fixed deposits: Deposits maintained in Indian rupees.

 

·Non-resident external savings account: Savings accounts maintained in Indian rupees.

 

·Non-resident ordinary savings accounts and non-resident ordinary fixed deposits.

 

Total assets (net of inter-office balances) of ICICI Bank’s overseas branches at year-end fiscal 2019 were Rs. 890.5 billion and total advances were Rs. 630.3 billion compared to total assets of Rs. 931.4 billion and total advances of Rs. 644.3 billion at year-end fiscal 2018. Our overseas branches are primarily funded by bond issuances, syndicated loans from banks, money market borrowings, inter-bank bilateral loans and borrowings from external commercial agencies. See also “Risk Factors—Risks Relating to Our Business—Our funding is primarily short-term and if depositors do not roll over deposited funds upon maturity, our business could be adversely affected”.

 

Our subsidiaries in the United Kingdom and Canada are full service banks offering retail and corporate banking services. These subsidiaries offer direct banking using the internet as the access channel. Our subsidiary in the United Kingdom offers loans to corporate businesses, including to Europe-based multinational corporations which have active trade and investment flows with India, large businesses owned by persons of Indian origin and for Indian corporations seeking to develop their overseas businesses. Our subsidiary in Canada originates residential mortgages, primarily those insured and qualifying for federal government insurance and offers loans to Indian corporations seeking to develop their business overseas, and both Canadian and US corporations.

 

At year-end fiscal 2019, ICICI Bank UK PLC had eight branches in the United Kingdom and a branch in Germany. At year-end fiscal 2019, the total assets of ICICI Bank UK PLC were US$ 3.8 billion. ICICI Bank UK PLC incurred a net loss of US$ 53 million during fiscal 2019, compared to a net loss of US$ 26 million during fiscal 2018.

 

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At year-end fiscal 2019, loans and advances of ICICI Bank UK PLC were US$ 2.4 billion and investments were US$ 0.9 billion.

 

At year-end fiscal 2019, ICICI Bank Canada had eight branches and total assets of CAD 6.6 billion. ICICI Bank Canada earned a net profit of CAD 52 million in fiscal 2019 as compared to a net profit of CAD 44 million in fiscal 2018. At year-end fiscal 2019, loans and advances of ICICI Bank Canada were CAD 5.8 billion and investments were CAD 0.6 billion. Loans and advances includes CAD 3.5 billion of residential mortgages, of which CAD 2.9 billion was insured mortgages.

 

See alsoRisk Factors—Risks Relating to India and Other Economic and Market Risks—Financial instability in other countries, particularly emerging market countries and countries where we have established operations, could adversely affect our business and the prices of our equity shares and ADSs” and “Risk Factors—Risks Relating to Our Business—Our international operations increase the complexity of the risks that we face”.

 

Delivery Channels

 

We deliver our products and services through a variety of channels, ranging from traditional bank branches to ATMs, call centers, the Internet and mobiles. At year-end fiscal 2019, we had a network of 4,874 branches across several Indian states.

 

The following table sets forth the number of branches broken down by area at year-end fiscal 2019.

 

   At March 31, 2018  At March 31, 2019
  

Number of branches and extension counters(1)

  % of total 

Number of branches and extension counters(1)

  % of total
Metropolitan    1,443    29.6%   1,438    29.5%
Urban    991    20.4    991    20.3 
Semi-urban    1,449    29.8    1,453    29.8 
Rural    984    20.2    992    20.4 
Total branches and extension counters    4,867    100.0%   4,874    100.0%
 
1.Classification of branches as per population census 2011.

 

As a part of its branch licensing conditions, the Reserve Bank of India has stipulated that at least 25.0% of our new banking outlets must be located in tier 5 and tier 6 centers defined on the basis of the population size according to the 2011 census. See also “Supervision and Regulation—Regulations Relating to the Opening of Branches”. At year-end fiscal 2019, we were in compliance with this condition. At year-end fiscal 2019, we had 14,987 ATMs, of which 5,237 were located at our branches. We view our branch as key points of customer acquisition and service. The branch network serves as an integrated channel for deposit mobilization and selected retail asset origination.

 

We believe that developments in technology are changing the way customers engage with banks and meet their banking needs. We offer our products and services through a number of technology-enabled channels. We are expanding our suite of services through mobile telephones, including mobile banking applications for account access and various transactions, and a mobile wallet. Our mobile banking application, iMobile, offers more than 250 services which are available across all mobile platforms. During fiscal 2019, we enhanced the features in our mobile banking application by introducing an intuitive interface, ‘Discover’, which enables customers to track personal spends and deliverables. The mobile application, iMobile was also enhanced to enable setting limits on cards, get instant digital credit of up to Rs. 20,000 and save frequently made transactions as favorites. The mobile application also allows customers to manage their entire investment journey through ‘Money Coach’, an automated personal finance management and mutual fund platform. Our customers can perform a wide range of transactions at our ATMs. We are also deploying automated devices, such as cash acceptance machines and insta-banking kiosks to improve customer experience as well as efficiency of our operations. Our employees open new customer accounts by using tablets to capture customer information digitally. Through our website, www.icicibank.com, we offer our customers, both retail and corporate, online access to account information, payment and fund transfer facilities and various other services including purchase of investment and insurance products. We provide telephone banking facilities through our call centers. Our customers can also access their accounts and perform transactions via social media platforms. During fiscal 2017, we introduced Chatbots, an artificial intelligence enabled chat feature to perform various banking transactions. iPal, an artificial intelligence powered virtual personal assistant was launched by us in fiscal 2018, which is available on both website and mobile application.

 

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We worked closely with the National Payments Corporation of India for the development of the Unified Payment Interface, a payment platform which allows instant fund transfer to any bank account using a virtual payment address, without requiring bank account details. The Unified Payment Interface has been promoted by us through various platforms, such as our mobile application and our digital wallet. In fiscal 2018, we entered into an arrangement as a financial partner with web-based service providers, such as cab aggregators and an online food delivery platform, for enabling digital transactions for customers through our mobile application, iMobile, and digital wallet, Pockets. We developed a mobile application for merchants in India, ‘Eazypay’, which allows merchants to accept payments on mobile phones through multiple modes including credit/debit cards of any bank, internet banking and our digital wallet. See also “—Technology”.

 

Investment Banking

 

Our investment banking operations principally consist of ICICI Bank’s treasury operations and the operations of ICICI Securities Primary Dealership Limited and ICICI Securities Limited.

 

Treasury

 

Through our treasury operations, we seek to manage our balance sheet, including the maintenance of required regulatory reserves, and to optimize profits from our trading portfolio by taking advantage of market opportunities. Our domestic trading and securities portfolio includes our regulatory reserve portfolio, as there is no restriction on active management of our regulatory reserve portfolio. Our treasury operations include a range of products and services for corporate and small enterprise customers, such as forward contracts and interest rate and currency swaps, and foreign exchange products and services. See also “—Commercial Banking for Corporate Customers—Foreign Exchange and Derivatives”.

 

Our treasury undertakes liquidity management by seeking to maintain an optimum level of liquidity, complying with the cash reserve ratio requirement and seeking to maintain the smooth functioning of all our branches. We maintain a balance between interest-earning liquid assets and cash to optimize earnings and undertake reserve management by maintaining statutory reserves, including the cash reserve ratio and the statutory liquidity ratio. At year-end fiscal 2019, ICICI Bank was required to maintain the statutory liquidity ratio requirement percentage at 19.25% of its domestic net demand and time liabilities by way of approved securities such as government of India securities and state government securities. We maintain the statutory liquidity ratio through a portfolio of government of India securities that we actively manage to optimize the yield and benefit from price movements. Further, as a prudent liquidity management strategy, we generally maintain excess investments in securities eligible for classification under the statutory liquidity ratio requirement. We maintain liquidity coverage ratio, as required under Basel III, both on a standalone basis and at the group level. The minimum requirement is 100% since January 1, 2019. The liquidity coverage ratio requirement is met by investment in high quality liquid assets which are primarily in the form of government securities and better-rated corporate bonds. During fiscal 2019, we maintained a liquidity coverage ratio on a standalone basis and at the group level above the stipulated requirements. See also “Supervision and Regulation—Legal Reserve Requirements”.

 

ICICI Bank engages in domestic investments and foreign exchange operations from a centralized trading floor in Mumbai. As a part of our treasury activities, we also maintain proprietary trading portfolios in domestic debt and equity securities and in foreign currency assets. Our treasury manages our foreign currency exposures and the foreign exchange and risk hedging derivative products offered to our customers and engages in proprietary trading in currencies. Our investment and market risk policies are approved by the Board of Directors.

 

ICICI Bank’s domestic investment portfolio is classified into three categories —held-to-maturity, available-for-sale and held-for-trading. Investments are classified as held-to-maturity subject to the current regulation issued by the Reserve Bank of India. Investments acquired by us with the intention to trade by taking advantage of the short-term price/interest rate movements are classified as held-for trading. The investments which do not fall in the above two categories are classified as available-for-sale. Investments under the held-for-trading category should be sold within 90 days. Under each category the investments are classified under (a) government securities (b) other approved securities (c) shares (d) bonds and debentures (e) subsidiaries and joint ventures and (f) others. Investments classified under the held-to-maturity category are not marked to market and are carried at acquisition cost, unless the acquisition cost is more than the face value, in which case the premium is amortized over the period until maturity of such securities. At year-end fiscal 2019, 77.0% of ICICI Bank’s government securities portfolio was in the held-to-maturity category. Any premium over the face value of investments in government securities, classified as available-for-sale, is amortized over the period until maturity of such securities. The individual securities in the available-for-sale category are marked to market. Investments under this category are valued security-wise and depreciation/appreciation is aggregated for each classification. Net depreciation, if any, is provided for. Net appreciation, if any, is ignored. The individual securities in the held-for-trading category are accounted for in a similar manner as those in the available-for-sale category.

 

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The following tables set forth, at the dates indicated, certain information related to our available-for-sale investments portfolio.

 

   At March 31, 2017
   Amortized cost  Gross
unrealized gain
  Gross
unrealized loss
  Fair value
   (in millions)
Corporate debt securities   Rs.73,836   Rs.2,198   Rs.(368)  Rs.75,666 
Government securities    287,716    1,137    (48)   288,805 
Other debt securities    166,709    1,189    (495)   167,403 
Total debt securities    528,261    4,524    (911)   531,874 
Equity securities    86,066    34,703    (14,786)   105,983 
Other investments(1)    68,550    13,579    (984)   81,145 
Total   Rs.682,877   Rs.52,806   Rs.(16,681)  Rs.719,002 
 
(1)Includes preference shares, mutual fund units, venture fund units and security receipts.

 

 

   At March 31, 2018
   Amortized cost  Gross
unrealized gain
  Gross
unrealized loss
  Fair value
   (in millions)
Corporate debt securities   Rs.157,992   Rs.1,461   Rs.(1,664)  Rs.157,789 
Government securities    350,051    821    (716)   350,156 
Other debt securities    193,298    115    (1,301)   192,112 
Total debt securities    701,341    2,397    (3,681)   700,057 
Equity securities    109,138    40,839    (18,615)   131,362 
Other investments(1)    70,657    11,410    (4,568)   77,499 
Total   Rs.881,136   Rs.54,646   Rs.(26,864)  Rs.908,918 
 
(1)Includes preference shares, mutual fund units, venture fund units and security receipts.

 

 

   At March 31, 2019
   Amortized cost  Gross
unrealized gain
  Gross
unrealized loss
  Fair value
   (in millions)
Corporate debt securities   Rs.155,043   Rs.2,392   Rs.(1,139)  Rs.156,296 
Government securities    348,982    1,855    (106)   350,732 
Other debt securities    197,290    2,625    (886)   199,028 
Total debt securities    701,315    6,872    (2,131)   706,056 
Equity securities    129,583    34,546    (26,518)   137,611 
Other investments(1)    61,590    5,980    (1,998)   65,573 
Total   Rs.892,488   Rs.47,398   Rs.(30,647)  Rs.909,240 

 

The investments in corporate debt securities decreased from Rs. 158.0 billion at year-end fiscal 2018 to Rs. 155.0 billion at year-end fiscal 2019, primarily due to a decrease in investment in debt securities by ICICI Bank, offset, in part, by an increase in investments in debt securities by ICICI Bank UK. The investment in government securities decreased marginally from Rs. 350.1 billion at year-end fiscal 2018 to Rs. 349.0 billion at year-end fiscal 2019. Investments in other debt securities increased from Rs. 193.3 billion at year-end fiscal 2018 to Rs. 197.3 billion at year-end fiscal 2019, primarily due to an increase in investment in bankers’ acceptance by ICICI Bank Canada and investments in pass through certificates by ICICI Bank, offset, in part, by a decrease in investment in commercial papers and certificate of deposits by ICICI Bank. Investments in equity shares increased from Rs. 109.1 billion at year-end fiscal 2018 to Rs. 129.6 billion at year-end fiscal 2019 primarily due to an increase in the equity portfolio of ICICI Prudential Life Insurance Company Limited. Other investments decreased from Rs. 70.7 billion at year-end fiscal 2018 to Rs. 61.6 billion at year-end fiscal 2019.

 

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Net unrealized gain on debt investments was Rs. 4.7 billion at year-end fiscal 2019 compared to net unrealized loss of Rs. 1.3 billion at year-end fiscal 2018. Net unrealized gain on corporate debt securities was Rs. 1.3 billion at year-end fiscal 2019 compared to net unrealized loss of Rs. 0.2 billion at year-end fiscal 2018. Net unrealized gain on other debt securities was Rs. 1.7 billion at year-end fiscal 2019 compared to net unrealized loss of Rs. 1.2 billion at year-end fiscal 2018. Net unrealized gain on government securities increased from Rs. 0.1 billion at year-end fiscal 2018 to Rs. 1.7 billion at year-end fiscal 2019. The yields on the benchmark 10-year government securities increased from 7.4% at year-end fiscal 2018 to over 8.0% at September 2018 and subsequently declined to 7.4% at year-end fiscal 2019. Net unrealized gain on equity securities decreased from Rs. 22.2 billion at year-end fiscal 2018 to Rs. 8.0 billion at year-end fiscal 2019 primarily due to decrease in market value of equity portfolio for ICICI Bank, ICICI Lombard General Insurance Company Limited and ICICI Prudential Life Insurance Company Limited. Net unrealized gain on other investments decreased from Rs. 6.8 billion at year-end fiscal 2018 to Rs. 4.0 billion at year-end fiscal 2019 primarily due to a decrease in net unrealized gain on security receipts issued by asset reconstruction companies, offset, in part, by decrease in net unrealized loss on preference shares.

 

The following table sets forth, for the periods indicated, income from available-for-sale securities.

 

   Year ended March 31,
   2017  2018  2019  2019
   (in millions)
Interest   Rs.34,736   Rs.37,152   Rs.43,040   US$622 
Dividend    1,416    1,322    1,721    25 
Total   Rs.36,152   Rs.38,474   Rs.44,761   US$647 
                     
Gross realized gain    14,489    41,715    32,690   US$473 
Gross realized loss    (2,721)   (3,934)   (7,823)   (113)
Total   Rs.11,768   Rs.37,781   Rs.24,867   US$360 

 

Interest and dividend income from our available-for-sale securities portfolio increased from Rs. 38.5 billion in fiscal 2018 to Rs. 44.8 billion in fiscal 2019. The net realized gain from our available-for-sale securities decreased from Rs. 37.8 billion in fiscal 2018 to Rs. 24.9 billion in fiscal 2019. Net realized gain in fiscal 2018 included gain of Rs. 17.1 billion on sale of equity shares of ICICI Lombard General Insurance Company Limited through its initial public offer.

 

The following table sets forth, at the date indicated, an analysis of the maturity profile of our investments in debt securities classified as available-for-sale investments, and yields thereon. This maturity profile is based on repayment dates and does not reflect re-pricing dates of floating rate investments.

 

   At March 31, 2019
   Up to one year  One to five years  Five to ten years  More than ten years
   Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield
   (in millions, except percentages)
Corporate debt securities   Rs.12,634    7.4%  Rs.111,044    8.0%  Rs.25,758    6.4%  Rs.5,608    9.1%
Government securities    145,589    5.7    155,486    6.9    46,531    7.1    1,377    7.9 
Other securities    113,915    7.5    62,301    8.8    9,257    8.9    11,815    8.8 
Total amortized cost of interest-earning securities(1)   Rs.272,138    6.5%  Rs.328,831    7.7%  Rs.81,546    7.1%  Rs.18,800    8.8%
Total fair value   Rs.272,820        Rs.331,296        Rs.82,772        Rs.19,168      
 
(1)Includes securities denominated in different currencies.

 

The amortized cost of our held-to-maturity portfolio increased from Rs. 1,529.4 billion at year-end fiscal 2018 to Rs. 1,714.1 billion at year-end fiscal 2019 primarily due to an increase in investment in government securities and corporate debt securities. Net unrealized gain on held-to-maturity portfolio was Rs. 18.1 billion at year-end fiscal 2019 compared to net unrealized loss of Rs. 4.3 billion at year-end fiscal 2018 primarily due to a decrease in yield on government securities. While the yield on the benchmark 10-year Government security was at similar levels (around 7.40%) at the end of both fiscal year 2018 and fiscal year 2019, yields were much higher through most of the fiscal year

 

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2019, with the benchmark 10-year going as high as 8.18% in September 2018. The government securities purchased at these elevated yields resulted in the higher unrealized gain at the end of the fiscal year 2019. Further, the yield on 5-year and shorter duration government securities decreased during the year resulting in marked-to-market gains on this portfolio. Interest income on held-to-maturity debt portfolio increased from Rs. 100.5 billion in fiscal 2018 to Rs. 115.7 billion in fiscal 2019 due to an increase in average investment portfolio under held-to-maturity and an increase in yield on government securities portfolio. The yield on government securities increased due to investment in government securities at higher yields and a reset of rate of interest on floating rate bonds at higher levels.

 

Investments in held-for-trading debt securities decreased from Rs. 326.8 billion at year-end fiscal 2018 to Rs. 259.8 billion at year-end fiscal 2019 primarily due to a decrease in investment in government securities, commercial papers, certificate of deposit and corporate debt securities. Interest and dividend income on held-for-trading securities decreased from Rs. 22.2 billion in fiscal 2018 to Rs. 20.5 billion in fiscal 2019 primarily due to decrease in held-for-trading portfolio. Net realized and unrealized gain on the held-for-trading portfolio was Rs. 0.6 billion in fiscal 2019 compared to net realized and unrealized loss of Rs. 1.2 billion in fiscal 2018 primarily due to decrease in unrealized loss on investment in government securities.

 

At year-end fiscal 2019, we had investments in equity shares amounting to Rs. 139.8 billion. The Reserve Bank of India restricts investments in equity securities by banks by prescribing limits linked to capital funds. See also “Supervision and Regulation—Regulations Relating to Investments and Capital Market Exposure Limits”.

 

In general, we pursue a strategy of active management of our long-term equity portfolio to maximize our return on investment. To reinforce compliance with the Securities and Exchange Board of India’s insider trading regulations, all dealings in our equity and debt investments in listed companies are undertaken by our treasury’s equity and corporate bonds dealing desks, which are segregated from both the other groups and desks in the treasury and from our other business groups, and which do not have access to unpublished price sensitive information about these companies that may be available to us as a lender.

 

We deal in several major foreign currencies and take deposits from non-resident Indians in major foreign currencies. We also manage onshore accounts in foreign currencies. The foreign exchange treasury manages our portfolio through money market and foreign exchange instruments to optimize yield and liquidity.

 

We provide a variety of risk management products to our corporate and small and medium enterprise clients, including foreign currency forward contracts and currency and interest rate swaps. We control market risk and credit risk on our foreign exchange trading portfolio through an internal model which sets counterparty limits, stop-loss limits and limits on the loss of the entire foreign exchange trading operations and exception reporting. See also “—Risk Management—Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risk”.

 

Through our branches and subsidiaries outside India and our offshore banking unit in Mumbai, we have made investments in corporate and financial sector bonds and debt securities and mortgage and asset backed securities outside India.

 

The following table sets forth, at the date indicated, investments in corporate and financial sector debt securities and mortgage and asset backed securities by our overseas branches and banking subsidiaries by region and the mark-to-market and realized losses thereon.

 

  

At March 31, 2018

         
  

Asset backed securities (1),(2)

 

Bonds(2),(3)

 

Others

 

Total

         
  

Trading

 

Available-for-sale and held-to-maturity

 

Trading

 

Available-for-sale and held-to-maturity

 

Trading

 

Available-for-sale and held-to-maturity

 

Trading

 

Available-for-sale and held-to-maturity

 

Mark-to-market gain/ (loss) in fiscal 2018

 

Realized gain/(loss)/ Impairment loss in income statement for fiscal 2018

 

Mark-to-market gain/ (loss) at March 31, 2018

   (Rs. in millions)
U.S.                2,284                2,284    (75)   12    (78)
Canada                28,923                28,923    (1)   31    - 
Europe        3,192        612                3,804    (42)   35    (909)
India                35,942                35,942    (237)   (431)   (438)
Rest of Asia                323        4,235        4,558    (9)   -    (7)
Total portfolio        3,192        68,084        4,235        75,511    (364)   (353)   (1,432)

 
(1)Includes residential mortgage backed securities, commercial mortgage backed securities and other asset backed securities.

(2)Includes asset backed securities and bonds classified under loans and receivable by our UK subsidiary including those transferred in fiscal 2009 from investment to loans and receivables pursuant to Accounting Standard Board issuing amendments to FRS 26 – ‘Financial Instruments: Recognition and Measurement’ which permitted reclassification of financial assets in certain circumstances from ‘held-for-trading’ and ‘available-for-sale categories’ to the ‘loans and receivables’ category.

(3)Includes corporate bonds classified under loans and receivables by our Canadian subsidiary during fiscal 2014.

 

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   At March 31, 2019         
   Asset backed securities (1),(2)  Bonds(2),(3)  Others  Total         
   Trading  Available-for-sale and held-to-maturity  Trading  Available-for-sale and held-to-maturity  Trading  Available-for-sale and held-to-maturity  Trading  Available-for-sale and held-to-maturity  Mark-to-market gain/ (loss) in fiscal 2019  Realized gain/(loss)/ Impairment loss in income statement for fiscal 2019  Mark-to-market gain/ (loss) at March 31, 2019
   (Rs. in millions)
U.S.                691                691    65    (210)   (18)
Canada                32,579                32,579    -    38    - 
Europe        3,047        543                3,590    47    -    (917)
India                38,371                38,371    331    (6)   (52)
Rest of Asia                1,334        4,494        5,828    14    (102)   6 
Total portfolio        3,047        73,518        4,494        81,059    457    (280)   (981)

 

 
(1)Includes residential mortgage backed securities, commercial mortgage backed securities and other asset backed securities.

(2)Includes asset backed securities and bonds classified under loans and receivable by our UK subsidiary including those transferred in fiscal 2009 from investment to loans and receivables pursuant to Accounting Standard Board issuing amendments to FRS 26 – ‘Financial Instruments: Recognition and Measurement’ which permitted reclassification of financial assets in certain circumstances from ‘held-for-trading’ and ‘available-for-sale categories’ to the ‘loans and receivables’ category.

(3)Includes corporate bonds classified under loans and receivables by our Canadian subsidiary in fiscal 2014.

 

Investments in corporate and financial sector debt securities and mortgage and asset backed securities by our overseas branches and banking subsidiaries increased from Rs.75.5 billion at year-end fiscal 2018 to Rs. 81.1 billion at year-end fiscal 2019. At year-end fiscal 2019, our investments in Europe were Rs. 3.6 billion as compared to Rs. 3.8 billion at year-end fiscal 2018. The majority of our investments in Europe are in the United Kingdom.

 

The mark-to-market losses on the investment portfolio of our overseas branches and subsidiaries were Rs. 1.4 billion at year-end fiscal 2018 and Rs. 1.0 billion at year-end fiscal 2019. During fiscal 2019, there was mark-to-market gain of Rs. 0.5 billion compared to loss of Rs. 0.4 billion during fiscal 2018. Net realized gain/(loss) and impairment loss was a net loss of Rs. 0.3 billion during fiscal 2019 as compared to a net loss of Rs. 0.4 billion during fiscal 2018.

 

The following table sets forth a summary of the investment portfolio of our overseas branches and banking subsidiaries based on the category of investments.

 

   At March 31
Category  2018  2019
   (in millions)
Bonds      
Banks and financial institutions   Rs.18,740   Rs.18,464 
Corporate    49,344    55,054 
Total bonds    68,084    73,518 
Asset backed securities    3,192    3,047 
Others(1)    4,235    4,494 
Total   Rs.75,511   Rs.81,059 
 
(1)Includes investments in certificates of deposits.

 

Our overseas branches and banking subsidiaries’ investments in securities of banks and financial institutions are spread over a number of banks and of this the investment in the top 10 banks account for 100% of the total investments

 

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in banks and financial institutions at year-end fiscal 2019 and 2018. Approximately 35.3% of our investment in securities of corporate entities was India-linked at year-end fiscal 2019 as compared to approximately 34.8% at year-end fiscal 2018.

 

Our overseas branches and banking subsidiaries’ total investment in asset backed securities represents less than 0.5% of our total assets at year-end fiscal 2019. The portfolio size of such securities was Rs. 3.0 billion and primarily comprised retail mortgage backed securities. The retail mortgage backed securities portfolio consists primarily of UK residential mortgage backed securities backed by prime and buy-to-let mortgages.

 

At year-end fiscal 2019, the fair value of investments in the government securities held by our overseas branches and banking subsidiaries was Rs. 62.3 billion, which was primarily in Canada.

 

The investments in these securities are governed by the respective investment policies of ICICI Bank and its banking subsidiaries. To mitigate significant concentrations in credit risk, the investment policy lays down a number of limits that need to be adhered to before investments can be made. The investment policy lays down rating and issuer wise investment limits at each of these units. Further, there are counterparty limits for individual banks and financial institutions. Country exposure limits have also been established for various countries. In addition, ICICI Bank monitors the credit spread risk arising out of such investments while ICICI Bank UK has instituted credit spread sensitivity limits on its portfolio. Any exceptions to the above limits are made with due approvals from the appropriate forums. ICICI Bank has not bought credit protection against any of its international investments.

 

ICICI Securities Limited

 

ICICI Securities Limited is engaged in investment banking, broking and financial product distribution. ICICI Securities Limited has an online trading portal called icicidirect.com. ICICI Securities Limited has a subsidiary in the United States, ICICI Securities Holdings Inc., which in turn has a subsidiary in the United States, ICICI Securities Inc., which is registered as a broker dealer with the Securities and Exchange Commission. ICICI Securities Inc., which is a member of the Financial Industry Regulatory Authority in the United States; also has a branch office in Singapore that is registered with the Monetary Authority of Singapore where it holds a capital markets services license for dealing in securities in Singapore. ICICI Securities Inc. is also registered as an international dealer in Canada in the provinces of British Columbia, Ontario and Quebec. ICICI Securities Limited (consolidated) earned a net profit of Rs. 4.9 billion in fiscal 2019 compared to a net profit of Rs. 5.6 billion in fiscal 2018. ICICI Securities Limited was listed on the National Stock Exchange of India Limited and Bombay Stock Exchange Limited on April 04, 2018 following an offer for sale in an initial public offering of the company. After this sale, our share ownership in ICICI Securities Limited came down from 100% to 79.22% at year-end fiscal 2019.

 

ICICI Securities Primary Dealership

 

ICICI Securities Primary Dealership is engaged in the primary dealership of Indian government securities. It also deals in other fixed income securities. In addition to this, it has underwriting, portfolio management services and placement of debt and money market operations. ICICI Securities Primary Dealership earned a net profit of Rs. 0.6 billion in fiscal 2019 compared to a net profit of Rs. 1.1 billion in fiscal 2018. The revenues of the business are directly linked to conditions in the fixed income market.

 

Private Equity

 

Our subsidiary ICICI Venture Funds Management Company Limited is a diversified specialist alternative asset manager with a presence across private equity, real estate, infrastructure and special situations. During fiscal 2019, ICICI Venture concluded eight new investments involving an aggregate capital outlay of USD 565 million (including co-investments) across India Advantage Fund Series 4, iREIF (a real estate fund), AION (a strategic partnership between ICICI Venture and Apollo Global Management in the area of special situations) and Resurgent Power (a power platform company co-sponsored by ICICI Venture and Tata Power). ICICI Venture also concluded nine full or partial exits across various funds for an aggregate realization of USD 300 million. During fiscal 2019, the subsequent closings of its third real estate fund iREIF was concluded. ICICI Venture reported a net profit of Rs. 0.7 billion in fiscal 2019 compared to Rs. 0.1 billion in fiscal 2018.

 

Asset Management

 

We provide asset management services through our subsidiary, ICICI Prudential Asset Management Company. ICICI Prudential Asset Management Company is a joint venture with Prudential PLC of the United Kingdom. We have 51.0% interest in the entity. ICICI Prudential Asset Management Company also provides portfolio management services and advisory services to clients. ICICI Prudential Asset Management Company had average mutual fund assets

 

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under management of Rs. 3,207.9 billion during fiscal 2019. ICICI Prudential Asset Management Company earned a net profit of Rs. 6.9 billion during fiscal 2019 compared to a net profit of Rs. 6.3 billion during fiscal 2018.

 

Insurance

 

We provide a wide range of insurance products and services through our subsidiaries ICICI Prudential Life Insurance Company Limited and ICICI Lombard General Insurance Company Limited. ICICI Prudential Life Insurance Company Limited is a joint venture with Prudential Corporation Holding Limited, a part of the Prudential PLC group of the United Kingdom. ICICI Lombard General Insurance Company Limited was formed as a joint venture with Fairfax Financial Holdings of Canada. The joint venture was terminated on July 3, 2017.

 

In fiscal 2015, the Indian parliament approved legislation increasing the foreign shareholding limit in the insurance sector from 26.0% to 49.0%, and removing the requirement that Indian promoters of insurance companies eventually reduce their shareholding to 26.0% following the completion of 10 years of commencement of business by the insurance company. Final regulations were issued by the government of India in fiscal 2016. Subsequently, we sold 6.0% stake in our life insurance subsidiary, ICICI Prudential Life Insurance Company Limited, during fiscal 2016. In September 2016, we sold a further of 12.6% out of our shareholding in ICICI Prudential Life Insurance Company Limited through an offer for sale in an initial public offering of the company’s shares. ICICI Prudential Life Insurance Company Limited was listed on the National Stock Exchange of India Limited and BSE Limited on September 29, 2016. In June 2018, we sold an additional 2.0% of our shareholding in ICICI Prudential Life Insurance Company Limited through an offer for sale. After these sales, our share ownership in ICICI Prudential Life Insurance Company Limited has now decreased from 73.71% at year-end fiscal 2015 to 52.87% at year-end fiscal 2019.

 

ICICI Prudential Life Insurance Company Limited had a market share of 10.3% based on retail weighted new business received premium basis in fiscal 2019. It also had a market share of 17.7% in the private sector based on retail weighted new business premium in fiscal 2019 compared to 20.9% in fiscal 2018 according to the Life Insurance Council. The total premium increased by 14.3% from Rs. 270.7 billion in fiscal 2018 to Rs. 309.3 billion in fiscal 2019. The retail renewal premium increased by 15.6% from Rs. 175.0 billion in fiscal 2018 to Rs. 202.3 billion in fiscal 2019. The retail new business premium declined from Rs. 84.0 billion in fiscal 2018 to Rs. 81.4 billion in fiscal 2019. ICICI Prudential Life Insurance Company Limited earned a net profit of Rs. 11.4 billion during fiscal 2019 compared to a net profit of Rs. 16.2 billion during fiscal 2018. The growth in retail weighted new business premium of our life insurance subsidiary was relatively lower than some of its key competitors in fiscal 2019. Our life insurance subsidiary’s strategy emphasizes unit-linked, pure protection and annuity products, and does not prioritize non-unit linked insurance products. The demand for unit-linked products may be influenced by any volatility or downturn in capital markets. Further, our life insurance subsidiary is primarily focused on growth in the value of new business, as a key profitability metric.

 

ICICI Prudential has a wholly owned subsidiary, ICICI Prudential Pension Funds Management Company Limited, one of the fund managers for the pension assets of Indian citizens (other than the mandated pension funds of government employees) under the National Pension System.

 

See also “Risk Factors—Risks Relating to Our Business—While our insurance businesses are an important part of our business, there can be no assurance of their future rates of growth or levels of profitability” and “Operating and Financial Review and Prospects—Segment Revenues and Assets—Life Insurance”.

 

We also sold a 9.0% stake in our general insurance company, ICICI Lombard General Insurance Company, during fiscal 2016 to our then joint venture partner, Fairfax Financial Holdings (through its affiliate). Following the transaction, the share ownership in ICICI Lombard General Insurance Company of ICICI Bank and Fairfax Financial Holdings Limited was approximately 64% and 35%, respectively. In July 2017, Fairfax Financial Holdings (through its affiliate) sold equity shares comprising 12.18% of the issued and paid-up capital of the company to three investors. On July 3, 2017 our joint venture agreement with Fairfax Financial Holdings was terminated. In September 2017, we sold a further 7% of our shareholding and Fairfax Financial Holdings (through its affiliate) further sold 12% of its shareholding in ICICI Lombard General Insurance Company Limited through an offer for sale in an initial public offering of the company’s shares. ICICI Lombard General Insurance Company Limited was listed on the National Stock Exchange of India Limited and BSE Limited on September 27, 2017. After this sale, our share ownership in ICICI Lombard General Insurance Company Limited came down from 63.82% at year-end fiscal 2016 to 55.87% at year-end fiscal 2019.

 

ICICI Lombard General Insurance Company’s gross direct premium income was Rs. 144.9 billion during the year-ended fiscal 2019, a growth of 17.3% compared to the year ended fiscal 2018. ICICI Lombard General Insurance Company Limited was the largest private general insurer with an overall industry market share of about 8.5% in gross direct premium income amongst all general insurance companies during the year-ended fiscal 2019 according to the General

 

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Insurance Council of India. ICICI Lombard General Insurance Company Limited earned a net profit of Rs. 10.5 billion in fiscal 2019 compared to a net profit of Rs. 8.6 billion in fiscal 2018.

 

The Insurance Regulatory and Development Authority of India has issued guidelines on bancassurance (i.e., the practice of banks selling insurance products in a marketing arrangement with insurance companies). As per the guidelines, banks can partner with three insurance companies each in life, non-life and health insurance sectors. We distribute life and general insurance products through our branches, phone banking and digital channels. We have entered into an agreement with our insurance subsidiaries, ICICI Prudential Life Insurance Company Limited and ICICI Lombard General Insurance Company Limited, and operate as a corporate agent for these companies. ICICI Bank earns commissions and fees from these subsidiaries as a distributor for sales of life and general insurance products. ICICI Bank accounts for a significant portion of the business volumes of its life insurance subsidiary. The growth of the life insurance subsidiary’s business is thus significantly dependent on the Bank’s distribution strategy, including the Bank’s choice of and focus on specific life insurance products, and the relative emphasis on sales of insurance and banking products.

 

Funding

 

Our funding operations are designed to ensure stability of funding, minimize funding costs and effectively manage liquidity. Our primary source of domestic funding is deposits raised from both retail and corporate customers. We also raise funds through short-term rupee borrowings and domestic or overseas bond offerings. Our domestic bond borrowings include long-term bond borrowings for financing infrastructure projects and low-cost housing in accordance with the Reserve Bank of India guidelines.

 

Our overseas branches are primarily funded by bond issuances, syndicated loans from banks, money market borrowings, inter-bank bilateral loans and borrowings from external commercial agencies. See also “Risk Factors—Risks Relating to Our Business—Our funding is primarily short-term and if depositors do not roll over deposited funds upon maturity, our business could be adversely affected”. Our subsidiaries in the United Kingdom and Canada fund themselves primarily through retail deposits. Our Canadian subsidiary also funds itself through securitization of insured mortgages.

 

Our deposits were 55.0% of our total liabilities at year-end fiscal 2019 compared to 52.1% of our total liabilities at year-end fiscal 2018. Our borrowings were 17.0% of our total liabilities at year-end fiscal 2019 compared to 20.4% of our total liabilities at year-end fiscal 2018. Our deposits increased by 16.3% from Rs. 5,858.0 billion at year-end fiscal 2018 to Rs. 6,813.2 billion at year-end fiscal 2019. Our borrowings decreased by 8.3% from Rs. 2,294.0 billion at year-end fiscal 2018 to Rs 2,103.2 billion at year-end fiscal 2019 primarily due to a decrease in borrowings with the Reserve Bank of India under liquidity adjustment facility, foreign currency term money borrowings, borrowings under collateralized lending and borrowing obligations and subordinated bond borrowings, offset, in part, by an increase in foreign currency call money borrowings and refinance borrowings.

 

The following table sets forth, at the dates indicated, the composition of deposits by type of deposit.

 

  

At March 31,

  

2017

 

2018

 

2019

  

Amount

 

% of total

 

Amount

 

% of total

 

Amount

 

% of total

   (in millions, except percentages)
Current account deposits   Rs.767,900    15.0%  Rs.913,654    15.6%  Rs.968,050    14.2%
Savings deposits    1,790,098    34.9    2,092,910    35.7    2,355,306    34.6 
Time deposits    2,567,875    50.1    2,851,397    48.7    3,489,813    51.2 
Total deposits   Rs.5,125,873    100.0%  Rs.5,857,961    100.0%  Rs.6,813,169    100.0%

  

The following table sets forth, for the periods indicated, the average volume and average cost of deposits by type of deposit.

 

   Year ended March 31,
   2017  2018  2019
   Amount 

Cost(1)

  Amount 

Cost(1)

  Amount  Amount 

Cost(1)

   (in millions, except percentages)
Interest-bearing deposits:                                   
Savings deposits   Rs.1,474,489    3.8%  Rs.1,724,268    3.6%  Rs.1,974,902   US$28,556    3.5%
Time deposits    2,546,886    6.9    2,750,981    6.4    3,123,282    45,160    6.4 
Non-interest-bearing deposits:                                   
Other demand deposits    476,799        563,057        627,266    9,070     
Total deposits   Rs.4,498,174    5.2%  Rs.5,038,306    4.7%   5,725,449   US$82,786    4.7%
 
(1)Represents interest expense divided by the average balances.

 

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Our average deposits increased from Rs. 5,038.3 billion at an average cost of 4.7% in fiscal 2018 to Rs. 5,725.4 billion at an average cost of 4.7% in fiscal 2019. Our average savings deposits increased from Rs. 1,724.3 billion at an average cost of 3.6% in fiscal 2018 to Rs. 1,974.9 billion at an average cost of 3.5% in fiscal 2019. The cost of savings deposits decreased from 3.6% in fiscal 2018 to 3.5% in fiscal 2019 primarily due to a reduction of savings deposit rates by 50 basis points on deposits below Rs. 5 million by ICICI Bank in August 2017. Our average time deposits increased from Rs. 2,751.0 billion at an average cost of 6.4% in fiscal 2018 to Rs. 3,123.3 billion at an average cost of 6.4% in fiscal 2019. Our savings deposits include retail savings deposits accepted by ICICI Bank UK PLC. See also “Operating and Financial Review and Prospects—Financial Condition—Liabilities and Stockholders’ Equity—Deposits”.

 

The following table sets forth, at the date indicated, the contractual maturity profile of deposits, by type of deposit.

 

   At March 31, 2019
   Up to one year  After one year
and within
three years
  After three years  Total
   (in millions)
Interest-bearing deposits:                    
Savings deposits   Rs.2,355,306   Rs.   Rs.   Rs.2,355,306 
Time deposits    2,740,056    631,569    118,189    3,489,813 
Non-interest-bearing deposits:                    
Other demand deposits    968,050            968,050 
Total deposits   Rs.6,063,412   Rs.631,569   Rs.118,189   Rs.6,813,169 
 
(1)Savings and other demand deposits are payable on demand and hence are classified in the ‘Up to one year’ bucket.

 

The following table sets forth, at the date indicated, the maturity profile of our rupee term deposits of Rs. 10 million or more.

 

   At March 31,   
   2018  2019  % of total
deposits
   (in millions, except percentages)   
Less than three months   Rs.488,750   Rs.554,076   US$8,012    8.1%
Above three months and less than six months    226,739    248,631    3,595    3.6 
Above six months and less than 12 months    382,672    616,647    8,916    9.1 
More than 12 months    104,881    67,707    979    1.0 
Total deposits of Rs. 10 million and more   Rs.1,203,042   Rs.1,487,062   US$21,502    21.8%
                     

Rupee term deposits of Rs. 10 million or more increased from Rs. 1,203.0 billion at year-end fiscal 2018 to Rs. 1,487.1 billion at year-end fiscal 2019.

 

The following table sets forth, for the periods indicated, average outstanding rupee borrowings and the percentage composition by category of borrowing. The average cost (interest expense divided by average balances) for each category of borrowings is provided in the footnotes.

 

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   At March 31,
   2017  2018  2019
   Amount  % of total  Amount  % of total  Amount  Amount  % of total
   (in millions, except percentages)
Money market borrowings(1),(2)   Rs.224,819    26.9%  Rs.189,597    21.9%  Rs.203,306   US$2,940    21.2%
Other borrowings(3),(4)    609,683    73.1    675,922    78.1    754,153    10,904    78.8 
Total   Rs.834,502    100.0%  Rs.865,519    100.0%  Rs.957,459   US$13,844    100%
 
(1)Includes call market, refinance and transactions with the Reserve Bank of India under the liquidity adjustment facility.

(2)With an average cost of 6.7% in fiscal 2017, 6.1% in fiscal 2018 and 6.5% in fiscal 2019.

(3)Includes publicly and privately placed bonds, borrowings from institutions and inter-corporate deposits.

(4)With an average cost of 10.1% in fiscal 2017, 8.9% in fiscal 2018 and 9.0 % in fiscal 2019.

 

The following table sets forth, at the dates indicated, certain information related to short-term rupee borrowings.

 

  

At March 31, (1)

   2017  2018  2019
   (in millions, except percentages)
Year-end balance   Rs.106,591   Rs.313,595   Rs.177,200 
Average balance during the year    224,819    189,597    203,306 
Maximum quarter-end balance    233,533    313,595    193,842 
Average interest rate during the year (2)    6.7%   6.1%   6.5%
Average interest rate at year-end (3)    6.6%   6.2%   7.0%
 
(1)Short-term borrowings include borrowings in the call market, refinance, repurchase agreements and transactions with the Reserve Bank of India under the liquidity adjustment facility.

(2)Represents the ratio of interest expense on short-term borrowings to the average balances of short-term borrowings

(3)Represents the weighted average rate of the short-term borrowings outstanding at fiscal year-end.

 

Our short term rupee borrowings decreased from Rs. 313.6 billion at year-end fiscal 2018 to Rs. 177.2 billion at year-end fiscal 2019 primarily due to a decrease in borrowings with the Reserve Bank of India under liquidity adjustment facility, offset, in part, by an increase in foreign currency call money borrowings and refinance borrowings.

 

The following table sets forth, for the periods indicated, the average outstanding volume of foreign currency borrowings based on average balances by source and the percentage composition by source. The average cost (interest expense divided by average balances) for each source of borrowings is provided in the footnotes.

 

   For year ended March 31,
   2017  2018  2019
   Amount  % of total  Amount  % of total  Amount  Amount  % of total
   (in millions, except percentages)
Bond borrowings (1)   Rs.558,214    43.0%  Rs.475,562    41.0%  Rs.473,656   US$6,849    39.7%
Other borrowings (2)    739,383    57.0    683,828    59.0    720,144    10,413    60.3 
Total   Rs.1,297,597    100.0%  Rs.1,159,390    100.0%  Rs.1,193,800   US$17,261    100.0%
 
(1)With an average cost of 4.6% in fiscal 2017, 3.9% in fiscal 2018 and 4.1% in fiscal 2019.

(2)With an average cost of 1.8% in fiscal 2017, 2.2% in fiscal 2018 and 3.0% in fiscal 2019.

 

At year-end fiscal 2019, the outstanding debt capital instruments were Rs. 293.1 billion. The outstanding debt capital instruments include debt that is classified either as Additional Tier I or Tier II capital in calculating the capital adequacy ratio as per the grandfathering rules in accordance with the Reserve Bank of India’s regulations on capital adequacy as per Basel III. See also “Supervision and Regulation—Reserve Bank of India Regulations”.

 

Risk Management

 

As a financial intermediary, we are exposed to risks that are particular to our lending, transaction banking and trading businesses and the environment within which we operate. Our goal in risk management is to ensure that we

 

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understand, measure, monitor and manage the various risks that arise and that the organization adheres to the policies and processes, which are established to address these risks.

 

The key principles underlying our risk management framework are as follows:

 

·The Board of Directors has oversight of all the risks assumed by us.

 

·Specific committees of the Board have been constituted to facilitate focused oversight of various risks. For a discussion of these and other committees, see “Management”.

 

·The Risk Committee reviews risk management policies in relation to various risks (including credit risk, market risk, liquidity risk, interest rate risk and operational risk), key risk indicators and risk profile (covering areas including credit risk, market risk, liquidity risk, operational risk, technology risk, reputation risk, compliance risk, capital at risk, management risk and group risk). The Committee reviews the stress-testing framework that includes a wide range of institution-specific and market (systemic) scenarios. The Risk Committee also assesses our capital adequacy position, based on the risk profile of our balance sheet and reviews the implementation status of capital regulations. The Committee also reviews the risk profile of key subsidiaries.

 

·The Credit Committee reviews the credit quality of the major portfolios, developments in key industrial sectors and exposure to these sectors and exposures to large borrower groups in addition to approving certain exposures as per the credit approval authorization policy approved by the Board of Directors.

 

·The Audit Committee of the Board provides direction to and monitors the quality of the internal audit function, oversees the financial reporting process and also monitors compliance with inspection and audit reports of the Reserve Bank of India, other regulators and statutory auditors. The Fraud Monitoring Committee reviews frauds above certain values, suggests corrective measures to mitigate fraud risks and monitors the efficacy of remedial actions.

 

·The Information Technology Strategy Committee approves strategy for information technology and policy documents, ensures that information technology strategy is aligned with business strategy, reviews information technology risks, ensures proper balance of information technology investments for sustaining our growth, oversees the aggregate funding of information technology, ascertains if the management has resources to ensure the proper management of information technology risks and reviews contribution of information technology to our business.

 

·Policies approved from time to time by the Board of Directors form the governing framework for each type of risk. The business activities are undertaken within this policy framework.

 

·Independent groups and sub-groups have been constituted across our organization to facilitate independent evaluation, monitoring and reporting of various risks. These groups function independent of the business groups/sub-groups.

 

The risk management framework forms the basis for developing consistent risk principles across the Bank and its overseas banking subsidiaries. The Board of Directors approves the Enterprise Risk Management and Risk Appetite Framework and thresholds/limits structure under which various business lines operate.

 

We are primarily exposed to credit risk, market risk, liquidity risk, operational risk, technology risk, compliance risk and reputation risk. We have centralized groups, the Risk Management Group, the Compliance Group, the Corporate Legal Group, the Financial Crime Prevention and Reputation Risk Management Group and the Internal Audit Group with a mandate to identify, assess and monitor all of our principal risks in accordance with well-defined policies and procedures. In addition, the Credit Monitoring Group, Treasury Control and Services Group and the Operations Group monitor operational adherence to regulations, policies and internal approvals.

 

The Risk Management Group is further organized into the Credit Risk Management Group, Market Risk Management Group, Operational Risk Management Group and Information Technology Risk Management Group. The Risk Management Group reports to the Risk Committee of the Board of Directors. The Compliance Group and the Internal Audit Group report to the Audit Committee of the Board of Directors. The Risk Management Group, Compliance Group and Internal Audit Group have administrative reporting to an Executive Director. Treasury Control and Services Group, Credit Middle Office Group and Operations Group report to an Executive Director. These groups are independent of the business units and coordinate with representatives of the business units to implement our risk management methodologies.

 

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Credit Risk

 

Credit risk is the risk of loss that may occur from the failure of any party to abide by the terms and conditions of any contract, principally the failure to make required payments of amounts due to us. In its lending operations, ICICI Bank is principally exposed to credit risk.

 

The credit risk is governed by the Credit and Recovery Policy (credit policy) approved by the Board of Directors. The Credit and Recovery Policy outlines the type of products that can be offered, customer categories, the targeted customer profile and the credit approval process and limits.

 

ICICI Bank measures, monitors and manages credit risk at an individual borrower level and at the portfolio level for non-retail borrowers. The credit risk for retail borrowers is managed at a portfolio level. ICICI Bank has a structured and standardized credit approval process, which includes a well-established procedure of credit appraisal. The Country Risk Management Policy addresses the recognition, measurement, monitoring and reporting of country risk.

 

The risk environment is currently volatile due to factors such as slowdown in the private sector capital expenditure cycle in India, high leverage in some corporate groups and event risks. Considering these aspects, we have established a risk appetite and limit structure, with respect to credit risk, and specifically concentration risk.

 

We have taken the following key measures:

 

·limits and thresholds for group and borrower exposures based on rating and track record;

 

·rating based limits with respect to incremental asset origination in the corporate portfolio;

 

·establishment of a separate credit monitoring group to enhance focus on monitoring of borrowers and to facilitate proactive action wherever required; and

 

·enhanced monitoring of retail product portfolios through periodic reviews and vintage curve analysis.

 

The credit committee of the Board reviews the portfolio and large exposure groups.

 

Credit Approval Authorities

 

The Board of Directors has delegated credit approval authority to various committees, forums and individual officers under the credit approval authorization policy. The credit approval authorization policy is based on the level of risk and the quantum of exposure, and is designed to ensure that transactions with higher exposure and higher levels of risk are sent to a correspondingly higher forum/committee for approval.

 

The Bank has established several levels of credit approval authorities for its corporate banking activities - the Credit Committee, the Committee of Executive Directors, the Committee of Senior Management, the Committee of Executives, Corporate Lending Forum and Regional Committees. For certain exposures to small and medium enterprises and rural and agricultural loans under programs, approval under joint authorization framework have been established. These forums sanction programs formulated through a cluster-based approach wherein a lending program is implemented for a homogeneous group of individuals or business entities that comply with certain norms. To be eligible for funding under the programs, borrowers need to meet the stipulated credit norms and obtain a minimum score on a scoring model. We have incorporated control norms, borrower approval norms and review triggers in all such programs. The Corporate Lending Forum, which comprises personnel from business groups and credit risk management group, was introduced during fiscal 2019 to approve credit proposals for higher rated corporates (internal rating A- & above) and up to a certain exposure limit.

 

Retail credit facilities are required to comply with approved product policies. All products policies are approved by the Committee of Executive Directors. The individual credit proposals are evaluated and approved by individual officers/forums on the basis of the product policies.

 

Credit Risk Assessment Methodology for Standalone Entities

 

All credit proposals other than retail products, program lending, score card-based lending to small and medium enterprises and agri-businesses and certain other specified products are rated internally by the Credit Risk Management Group, prior to approval by the appropriate forum.

 

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The Credit Risk Management Group rates proposals, carries out industry analysis, tracks the quality of the credit portfolio and reports periodically to the Credit Committee and the Risk Committee. For non-retail exposures, the Credit Monitoring Group verifies adherence to the terms of the approval prior to the commitment and disbursement of credit facilities. We also manage credit risk through various limit structures, which are in line with the Reserve Bank of India’s prudential guidelines. The Bank has set up various exposure limits, including the single borrower exposure limit, the group borrower exposure limit, the industry exposure limit, the unsecured exposure limit, and limits on exposure to sensitive sectors such as capital markets, non-banking finance companies and real estate. Rating-based thresholds, hard limits for group and borrower exposures based on rating and track record and limits on incremental sanctions have also been put in place. Limits on countries and bank counterparties have also been stipulated.

 

ICICI Bank has an established credit analysis procedure leading to appropriate identification of credit risk both at the individual borrower and the portfolio level. Appropriate appraisal and credit rating methodologies have been established for various types of products and businesses. The methodology involves assessment of quantitative and qualitative parameters. For example, for any large corporate, the rating methodology entails a comprehensive evaluation of the industry, borrower’s business position in the industry (benchmarking), financial position and projections, quality of management, impact of projects being undertaken by the borrower and structure of the transaction.

 

Borrower risk is evaluated by considering:

 

·the risks and prospects associated with the industry in which the borrower is operating (industry risk);

 

·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 (financial risk);

 

·the borrower’s relative market position and operating efficiency (business risk);

 

·the quality of management by analyzing their track record, payment record and financial conservatism (management risk); and

 

·the risks with respect to specific projects, both pre-implementation, such as construction risk and funding risk, as well as post-implementation risks such as industry, business, financial and management risks related to the project (project risk).

 

After conducting an analysis of a specific borrower’s risk, the Credit Risk Management Group assigns a credit rating to the borrower. We have a scale of 12 ratings ranging from AAA to B. A borrower’s credit rating is a vital input for the credit approval process. The borrower’s credit rating and the default pattern corresponding to that credit rating, forms an important input in the risk-based pricing framework of the Bank. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the Credit Risk Management Group before being submitted for approval to the appropriate approval authority. The approval process for non-fund facilities is similar to that for fund-based facilities. The credit rating for every borrower is reviewed periodically. We also review the ratings of our borrowers in a particular industry upon the occurrence of any significant event impacting that industry.

 

On our current rating scale, ratings of below BBB- (i.e., BB and B ratings) are considered to be relatively high-risk categories. Our current credit policy does not expressly provide a minimum rating required for a borrower to be considered for a loan. All corporate loan proposals with an internal rating of below BBB- are sent to our Credit Committee for its approval.

 

The following table sets forth a description of our internal rating grades linked to the likelihood of loss:

 

Grade

Definition

 (I) Investment grade Entities/obligations are judged to offer moderate to high protection with regard to timely payment of financial obligations.
  AAA, AA+, AA, AA- Entities/obligations are judged to offer high protection with regard to timely payment of financial obligations.
  A+, A, A- Entities/obligations are judged to offer an adequate degree of protection with regard to timely payment of financial obligations.
  BBB+, BBB and BBB- Entities/obligations are judged to offer moderate protection with regard to timely payment of financial obligations.
 (II) Below investment grade (BB and B) Entities/obligations are judged to carry inadequate protection with regard to timely payment of financial obligations.

  

 

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Our consolidated net loans to accounts internally rated below investment grade (including net non-performing and restructured loans) were Rs. 281.8 billion at year-end fiscal 2019, constituting about 4.4% of our total net loans. Our consolidated net loans to accounts internally rated below investment grade (excluding net non-performing and restructured loans) were Rs. 134.7 billion at year-end fiscal 2019, constituting about 2.1% of our total net loans.

 

Working capital loans are generally approved for a period of 12 months for facilities internally rated A- or below and 24 months for transaction for facilities internally rated A or above. At the end of the 12-month validity period, we review the loan arrangement and the credit rating of the borrower. On completion of this review, a decision is made on whether to renew the working capital loan arrangement.

 

The following sections detail the risk assessment process for various business segments:

 

Assessment of Project Finance Exposures

 

ICICI Bank has a framework for the appraisal and execution of project finance transactions. We believe that this framework creates optimal risk identification, allocation and mitigation and helps minimize residual risk.

 

The project finance approval process begins with a detailed evaluation of technical, commercial, financial, marketing and management factors and the sponsor’s financial strength and experience. Once this review is completed, an appraisal memorandum is prepared for credit approval purposes. As part of the appraisal process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and residual risks associated with the project. The appraisal memorandum analyzes the risk matrix and establishes the viability of the project. After credit approval, a letter of intent is issued to the borrower, which outlines the principal financial terms of the proposed facility, sponsor obligations, conditions precedent to disbursement, undertakings from and covenants on the borrower. After completion of all formalities by the borrower, a loan agreement is entered into with the borrower.

 

In addition to the above, in the case of structured project finance in areas such as infrastructure, oil, gas and petrochemicals, as a part of the due diligence process, we appoint consultants, wherever considered necessary, to advise the lenders, including technical advisors, business analysts, legal counsel and insurance consultants. These consultants are typically internationally recognized and experienced in their respective fields. Risk mitigating factors in these financings include creation of debt service reserves and channeling project revenues through a trust and retention account.

 

ICICI Bank’s project finance loans are generally fully secured and have full recourse to the borrower. In most cases, ICICI Bank has a security interest and first lien on all the fixed assets. Security interests typically include property, plant and equipment as well as other tangible assets of the borrower, both present and future. ICICI Bank’s borrowers are required to maintain comprehensive insurance on their assets where ICICI Bank is recognized as payee in the event of loss. In some cases, ICICI Bank also takes additional credit comforts such as corporate or personal guarantees from one or more sponsors of the project or a pledge of the sponsors’ equity holding in the project company. In certain industry segments, ICICI Bank also takes security interest in relevant project contracts such as concession agreements, off-take agreements and construction contracts as part of the security package.

 

ICICI Bank generally disburses funds after the entire project funding is committed and vital contractual arrangements have been entered into. Funds are disbursed in tranches to pay for approved project costs as the project progresses. When we appoint technical and market consultants, they are required to monitor the project’s progress and certify all disbursements. We also require the borrower to submit periodic reports on project implementation, including orders for machinery and equipment as well as expenses incurred. Project completion is contingent upon satisfactory operation of the project for a certain minimum period and, in certain cases, the establishment of debt service reserves. We continue to monitor the credit exposure until our loans are fully repaid.

 

Historically, project financing has constituted a significant portion of our loan portfolio, though we have now adopted a cautious and selective approach to project financing.

 

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Assessment of Corporate Finance Exposures

 

As part of the corporate loan approval procedures, ICICI Bank carries out a detailed analysis of funding requirements, including normal capital expenses, long-term working capital requirements and temporary imbalances in liquidity. ICICI Bank’s funding of long-term core working capital requirements is assessed on the basis, among other things, of the borrower’s present and proposed level of inventory and receivables. In case of corporate loans for other funding requirements, we undertake a detailed review of those requirements and an analysis of cash flows. Corporate finance loans are generally secured by a first charge on fixed assets, which normally consists of property, plant and equipment. We may also take as security a pledge of financial assets, such as marketable securities, and obtain corporate guarantees and personal guarantees wherever appropriate. In certain cases, the terms of financing include covenants relating to sponsors’ shareholding in the borrower and restrictions on the sponsors’ ability to sell all or part of their shareholding. We also provide unsecured loans to higher rated, well-established corporate borrowers.

 

The focus of ICICI Bank’s structured corporate finance products is on cash flow-based financing. We have a set of distinct approval procedures to evaluate and mitigate the risks associated with such products. These procedures include:

 

·carrying out a detailed analysis of cash flows to forecast the amounts that will be paid and the timing of the payments based on an exhaustive analysis of historical data;

 

·conducting due diligence on the underlying business systems, including a detailed evaluation of the servicing and collection procedures and the underlying contractual arrangements; and

 

·paying particular attention to the legal, accounting and tax issues that may impact the structure.

 

Our analysis enables us to identify risks in these transactions. To mitigate risks, we use various credit enhancement techniques, such as collateralization, cash collateralization, creation of escrow accounts and debt service reserves. We also have a monitoring framework to enable continuous review of the performance of such transactions.

 

With respect to financing for corporate mergers and acquisitions, we carry out detailed due diligence on the acquirer as well as the target’s business profile. The key areas covered in the appraisal process include:

 

·assessment of the industry structure in the target’s host country and the complexity of the business operations of the target;

 

·financial, legal, tax, technical due diligence (as applicable) of the target;

 

·appraisal of potential synergies and likelihood of their being achieved;

 

·assessment of the target company’s valuation by comparison with its peer group and other transactions in the industry;

 

·analysis of regulatory and legal framework of the overseas geographies with regard to security creation, enforcement and other aspects;

 

·assessment of country risk aspects and the need for political insurance; and

 

·the proposed management structure of the target post-takeover and the ability and past experience of the acquirer in completing post-merger integration.

 

Assessment of Working Capital Finance Exposures

 

We carry out a detailed analysis of borrowers’ working capital requirements. Credit limits are established in accordance with the credit approval authorization approved by the Bank’s Board of Directors. Once credit limits are approved, we calculate the amounts that can be lent on the basis of monthly statements provided by the borrower and the margins stipulated. Quarterly information statements are also obtained from borrowers to monitor the performance on a regular basis. Monthly cash flow statements are obtained where considered necessary. Any irregularity in the conduct of the account is reported to the appropriate authority on a regular basis. Credit limits are reviewed on a periodic basis.

 

Working capital facilities are primarily secured by inventories, receivables and other current assets. Additionally, in certain cases, these credit facilities are secured by personal guarantees of directors, or subordinated security interests in the tangible assets of the borrower including plant and machinery and covered by personal guarantees of the promoters.

 

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Assessment of Retail Loans

 

The sourcing and approval of retail credit exposures are segregated to achieve independence. The Credit Risk Management Group, Credit and Policy Group and credit teams are assigned complementary roles to facilitate effective credit risk management for retail loans.

 

The Credit and Policy Group is responsible for preparing credit policies/operating policies. The Credit Risk Management Group oversees the credit risk issues for retail assets including the review of all credit policies and operating policies proposed for approval by the Board or forums authorized by the Board. The Credit Risk Management Group is involved in portfolio monitoring of all retail assets and in suggesting and implementing policy changes. Independent units within retail banking, focus on customer-segment specific strategies, policy formulation, portfolio tracking and monitoring, analytics, score card development and database management. The credit team, which is independent from the business unit, oversees the underwriting function and is organized geographically to support the retail sales and service structure.

 

Our customers for retail loans are primarily middle and high-income, salaried and self-employed individuals. Except for personal loans and credit cards, ICICI Bank requires a contribution from the borrower and its loans are secured by the asset financed.

 

The Bank’s credit officers evaluate credit proposals on the basis of operating policies approved by the Committee of Executive Directors. The criteria vary across product segments but typically include factors such as the borrower’s income, the loan-to-value ratio and demographic parameters. External agencies such as field investigation agencies facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans made to retail borrowers. In making its credit decisions, ICICI Bank draws upon a centralized database on delinquent loans and reports from the credit bureau to review the borrower’s profile. For mortgage loans and used vehicle loans, a valuation agency or an in-house technical team carries out the technical valuations. In the case of credit cards, in order to limit the scope of individual discretion, ICICI Bank has implemented a credit-scoring program that assigns a credit score to each applicant based on certain demographic and credit bureau variables. The credit score then forms one of the criteria for loan evaluation. For loans against gold ornaments and gold coins, emphasis is given on ownership and authenticity (purity and weight) of the jewelry for which an external appraiser is appointed by the Bank. Norms with respect to the loan-to-value ratio have been laid down.

 

As part of digital credit lending, ICICI Bank has scaled up offerings to bank customers over a period of time. As part of its strategy, the Bank uses multi-dimensional credit filters by using different data-sets to optimize risk. The portfolio level built-up strategy is based on utilizing the pre-approved customer database for sourcing in key retail asset products, namely, personal loans and credit cards, wherein, major incremental sourcing is from existing liability customer relationships.

 

The Bank undertakes portfolio buyouts of receivables arising out of various retail assets products, to meet its priority sector lending target and extending its reach to new customer segments. The portfolio is selected by applying selection filters like tenure, ticket size, loan to value ratio and location, and meeting regulatory requirements with regard to minimum holding period and minimum retention requirement by the seller. The portfolio buyouts are done in the form of direct assignment or by way of investment in pass through certificates. ICICI Bank has lending programs for business banking customers, based on various financial and non-financial parameters and target market norms. The program criteria are approved by the Committee of Executive Directors and individual credit proposals are assessed by the credit team based on these approved criteria. The Committee of Executive Directors of ICICI Bank reviews the portfolio on a periodic basis. The renewal of programs is approved by the Committee of Executive Directors.

 

We have established centralized operations to manage operating risk in the various back-office processes of our retail loan business except for a few operations, which are decentralized to improve turnaround time for customers. A separate team under the Credit and Policy Group undertakes review and audits of credit quality and processes across different products. The Bank also has a debt services management group structured along various product lines and geographical locations, to manage debt recovery. The group operates under the guidelines of a standardized recovery process. A Financial Crime Prevention Group has been established as a dedicated and independent group, overseeing/handling the fraud prevention, detection, investigation, monitoring, reporting and awareness creation functions.

 

Assessment Procedures for Small Enterprises Loans

 

ICICI Bank finances small enterprises, which include individual cases and financing dealers and vendors of companies by implementing structures to enhance the base credit quality of the vendor/dealer. Small enterprise credit also includes financing extended directly to small enterprises as well as financing extended on a cluster-based approach in which credit is extended to small enterprises that have a homogeneous profile. The risk assessment of such a cluster

 

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involves the identification of appropriate credit norms for the target market, the use of scoring models for enterprises that satisfy these norms and a comprehensive appraisal of those enterprises which are awarded a minimum required score in the scoring model. A detailed appraisal is performed based on the financial as well as non-financial parameters to identify the funding needs of the enterprise in all the cases. The group also finances small businesses based on analysis of the business and financials. The assessment includes a scoring model with a minimum score requirement before appraisal of these enterprises is conducted.

 

ICICI Bank also finances small and medium enterprises, dealers and vendors linked to these entities by implementing structures to enhance the base credit quality of the vendor or dealer. The process involves an analysis of the base credit quality of the vendor or dealer pool and an analysis of the linkages that exist between the vendor or dealer and the company.

 

The risk management policy also includes setting up of portfolio control norms, continuous monitoring renewal norms as well as stringent review and exit triggers to be followed while financing such clusters or communities.

 

Assessment Procedures for Rural and Agricultural Loans

 

The rural and agricultural portfolio consists of loans to retail customers in the rural sector through programs and direct loans to corporations, small & medium enterprises and intermediaries linked to these entities. The programs offered include lending to farmers for crop cultivation and other allied agricultural activities (in the form of Kisan credit cards and agricultural term loans), farm equipment financing (for purchase of equipment such as tractors and harvesters), lending to self-help groups, loans against gold ornaments and gold coins, commodity based funding and rural business enterprise credit. We have adopted specific risk assessment methodologies for each of these segments.

 

The sales and approval functions are segregated to achieve independence in retail loan assessment procedures. The Credit and Policy Group is responsible for preparing credit policies/operating policies. The Credit Risk Management Group oversees the credit risk issues for retail agricultural assets including the review of all credit policies and operating policies proposed for approval by the Board of Directors or forums authorized by the Board. The Credit Risk Management Group monitors portfolio trends and suggests and implements policy changes. The credit team, which is independent from the business unit, oversees the underwriting function and is organized geographically in line with the rural sales and service structure.

 

Rural and agriculture credit also includes financing extended on a cluster-based approach in which credit is extended to borrowers that have a homogeneous profile. The risk assessment of such a cluster involves the identification of appropriate credit norms for the target market, the use of scoring models for enterprises that satisfy these norms and a comprehensive appraisal of those enterprises which are awarded a minimum required score in the scoring model. For corporations, borrower risk is evaluated by analyzing the industry risk, the borrower’s market position, financial performance, cash flow adequacy and the quality of management. The credit risk of intermediaries (including vendors, dealers, harvester & transporter, seed organizers, micro finance institutions) and retail customers is evaluated by analyzing the base credit quality of such borrowers or the pool of borrowers and also the linkages between the borrowers and the companies to which they are supplying their produce.

 

For loans against gold ornaments and gold coins, the credit norms focus on establishing ownership and authenticity (purity and weight) of the jewelry for which an external appraiser is appointed by us. Norms with respect to loan-to-value ratio have been laid down.

 

Commodity based financing caters to the needs of farmers, aggregators & processors, where the facility is based on collateral of the commodity pledged in favor of the Bank and stored in designated warehouses. The credit norms focus on the quality, quantity and price volatility of the underlying commodity. A dedicated group evaluates the quantity and quality of the commodity at the time of funding, directly or through the agencies appointed by it, and also undertakes periodic checks post funding. ICICI Bank also has a centralized system for daily monitoring of the prices of the commodities funded by it and raising a margin call in case of a shortfall in margins due to decline in the prices. Various norms like initial margins and the price caps for various commodities have been set to reduce the risk arising out of price volatility of the underlying commodities.

 

See also “Risk Factors—Risks Relating to Our Business— Entry into new businesses or rapid growth in existing loan portfolios may expose us to increased risks that may adversely affect our business”.

 

Risk Monitoring and Portfolio Review

 

We monitor credit facilities through a risk-based asset review framework under which the frequency of asset review is higher for cases with higher outstanding balances and/or lower credit ratings. For corporate, small enterprises and agri-business related borrowers, the Credit Middle-Office Group verifies adherence to the terms of the credit

 

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approval prior to the commitment and disbursement of credit facilities. These borrower accounts are generally reviewed at least once a year.

 

The Credit Monitoring Group/Operation Groups monitors compliance with the terms and conditions for credit facilities prior to disbursement. It also reviews the completeness of documentation, creation of security and insurance policies for assets financed.

 

An analysis of our portfolio composition based on our internal rating is carried out and is submitted to the Risk Committee of the Board on a quarterly basis as part of the risk dashboard. This facilitates the identification and analysis of trends in the portfolio credit risk.

 

The Credit Committee of the Bank, apart from approving proposals, regularly reviews the credit quality of the portfolio and various sub-portfolios. A summary of the reviews carried out by the Credit Committee is submitted to the Board for its information.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices. Our exposure to market risk is a function of our trading and asset-liability management activities and our role as a financial intermediary in customer-related transactions. These risks are mitigated by the limits stipulated in the Investment Policy, Asset Liability Management Policy and Derivatives Policy, which are approved and reviewed by the Board of Directors.

 

Market Risk Management Procedures

 

Market risk policies include the Investment Policy, the Asset Liability Management Policy and the Derivative Policy. The policies are approved by the Board of Directors. The Asset Liability Management Policy stipulates liquidity and interest rate risk limits and Asset Liability Management Committee reviews adherence to limits and determines the strategy in light of the current and expected environment. The Investment Policy addresses issues related to investments in various treasury products. The Derivatives Policy is formulated in line with the comprehensive guidelines issued by Reserve Bank of India on derivatives for banks and defines the overall framework within which the Bank conducts its derivatives business and controls the risks associated with the same. The policies are designed to ensure that operations in the securities and foreign exchange and derivatives areas are conducted in accordance with sound and acceptable business practices and are as per current regulatory guidelines, laws governing transactions in financial securities and the financial environment. The policies contain the limit structures that govern transactions in financial instruments. The Board has authorized the Asset Liability Management Committee and Committee of Executive Directors (Borrowing, Treasury and Investment Operations) to grant certain approvals related to treasury activities, within the broad parameters laid down by policies approved by the Board.

 

The Asset Liability Management Committee, comprising the Managing Director & CEO, wholetime directors and senior executives, meets periodically and reviews the positions of trading groups, interest rate and liquidity gap positions on the banking book, sets deposit and benchmark lending rates, reviews the business profile and its impact on asset liability management and determines the asset liability management strategy, as deemed fit, taking into consideration the current and expected business environment. The Asset Liability Management Policy provides guidelines to manage liquidity risk and interest rate risk in the banking book.

 

The Market Risk Management Group is responsible for the identification, assessment and measurement of market risk. Risk limits including position limits and stop loss limits are reported on a daily basis by the Treasury Control and Services Group and reviewed periodically. Foreign exchange risk is monitored through the net overnight open foreign exchange limit. Interest rate risk in banking book is measured through the use of re-pricing gap/ duration analysis. Interest rate risk is further monitored through interest rate risk limits approved by the Board of Directors.

 

Interest Rate Risk

 

Our core business is deposit taking, borrowing and lending in both Indian Rupees and foreign currencies as permitted by the Reserve Bank of India. These activities expose us to interest rate risk.

 

Our balance sheet consists of Indian Rupee and foreign currency assets and liabilities, with a predominantly higher proportion of Rupee-denominated assets and liabilities. Thus, movements in Indian interest rates are our main source of interest rate risk.

 

Interest rate risk is measured through earnings at risk from an earnings perspective and through duration of equity from an economic value perspective. Further, exposure to fluctuations in interest rates is also measured by way of gap

 

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analysis, providing a static view of the maturity and re-pricing characteristics of balance sheet positions. An interest rate sensitivity gap report is prepared by classifying all rate sensitive assets and rate sensitive liabilities into various time period categories according to contracted/behavioral maturities or anticipated re-pricing date. The difference in the amount of rate sensitive assets and rate sensitive liabilities maturing or being re-priced in any time period category, gives an indication of the extent of exposure to the risk of potential changes in the margins on new or re-priced assets and liabilities. We monitor interest rate risk through the above measures on a bi-monthly basis. The duration of equity and interest rate sensitivity gap statements are submitted to the Reserve Bank of India on a monthly basis. These interest rate risk limits are approved by the Board of Directors/Asset Liability Management Committee. We also monitor Greeks of our interest rate options portfolio.

 

ICICI Bank’s primary source of funding is deposits and, to a smaller extent, borrowings. In the rupee market, most of our deposit taking is at fixed rates of interest for fixed periods, except for savings account deposits and current account deposits, which do not have any specified maturity and can be withdrawn on demand. Current account deposits in the domestic operations are non-interest bearing. The Reserve Bank of India has deregulated interest rates on saving account deposits from October 25, 2011. The rate of interest on savings account deposits currently offered by ICICI Bank is 3.50% for end of day balance of below Rs. 5 million and 4.00% for end of day balance of Rs. 5 million and above. We usually borrow for a fixed period, with certain borrowings qualifying as capital instruments, having European call options attached to them, exercisable by us only on specified dates. However, we have a mix of floating and fixed interest rate assets. Our loans are generally repaid gradually, with principal repayments being made over the life of the loan.

 

As required by the Reserve Bank of India guidelines effective July 1, 2010, ICICI Bank priced its loans with reference to a base rate, called the ICICI Bank Base Rate until March 31, 2016. The Asset Liability Management Committee sets the ICICI Bank Base Rate based on ICICI Bank’s current cost of funds, likely changes in the Bank’s cost of funds, market rates, interest rate outlook and other systemic factors. Pricing for new rupee floating rate proposals and renewal of rupee facilities until March 31, 2016 were linked to the ICICI Bank Base Rate and comprised the ICICI Bank Base Rate, transaction-specific spread and other charges. The Reserve Bank of India also stipulated that a bank’s lending rates for rupee loans cannot be lower than its base rate, except for certain categories of loans as may be specified by the Reserve Bank of India from time to time.

 

Based on the revised guidelines of the Reserve Bank of India, all rupee loans sanctioned and credit limits renewed with effect from April 1, 2016 are priced with reference to a Marginal Cost of funds based Lending Rate. Banks are required to publish Marginal Cost of funds based Lending rate for various tenures such as overnight, one month, three months, six months and one year. The Marginal Cost of funds based Lending Rate includes marginal cost of funds, negative carry on cash reserve ratio and operations cost and tenure premium/discount for various tenures. The Asset Liability Management Committee sets the ICICI Bank Marginal Cost of funds based Lending Rate. As required by the Reserve Bank of India guidelines, we publish the ICICI Bank Marginal Cost of funds based Lending Rate for various tenures on a monthly basis. Pricing for floating rate approvals and renewal of rupee facilities are linked to the ICICI Bank Marginal Cost of funds based Lending Rate and comprise the ICICI Bank Marginal Cost of funds based Lending Rate and spread. The Reserve Bank of India has also stipulated that a bank’s lending rates for rupee loans cannot be lower than its Marginal Cost of funds based Lending Rate, except for certain exemptions. As prescribed in the Reserve Bank of India guidelines, existing borrowers will also have the option to move to the Marginal Cost of funds based Lending Rate linked loan at mutually acceptable terms. Any change in the Marginal Cost of funds based Lending Rate is generally passed on to borrowers under various facilities at different periodicities, of up to one year. All loans approved before April 1, 2016, and where the borrowers choose not to migrate to the Marginal Cost of funds based Lending Rate system, would continue to be based on the earlier benchmark rate regimes.

 

In February 2018, the Reserve Bank of India proposed to harmonize the methodology of determining benchmark rates by linking the base rate to the marginal cost based lending rate. Final instructions/guidelines in this regard are awaited. Further, in December 2018, a Report of the Internal Study Group to Review the Working of the Marginal Cost of Funds based Lending Rate (MCLR) System recommended the use of external benchmarks by banks for floating rate loans instead of the present system of internal benchmarks. As a step in that direction, it was proposed that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 would be benchmarked to one of the specified external benchmarks. On implementation, the Bank will be exposed to greater interest rate risk since liabilities may be fixed rate or linked to different benchmark. However, the Reserve Bank of India in the First Bi-monthly Monetary Policy Statement for 2019-20 in April 2019 decided to defer the implementation and conduct further consultations with stakeholders. Final instructions/guidelines in this regard are awaited.

 

Pursuant to regulatory reserve requirements, we maintain a large part of our assets in government of India securities and in interest-free balances with the Reserve Bank of India, which are funded mainly by deposits and

 

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borrowings. This exposes us to the risk of differential movement in the yield earned on statutory reserves and the related funding cost.

 

We use the duration of our government securities portfolio as a key variable for interest rate risk management. We increase or decrease the duration of our government securities portfolio to increase or decrease our interest rate risk exposure. In addition, we also use interest rate derivatives to manage interest rate risk. We are an active participant in the interest rate swap market and are one of the largest counterparties in India.

 

Almost all foreign currency loans in the overseas branches of the Bank are floating rate loans. These loans are generally funded with foreign currency borrowings and deposits in our overseas branches. We generally convert all foreign currency borrowings into floating rate dollar liabilities through the use of interest rate and currency swaps with leading international banks. Our overseas subsidiaries in the UK and Canada have fixed rate retail term deposits and fixed/floating rate wholesale borrowings as their funding sources. They also have fixed and floating rate assets. Interest rate risk is generally managed by increasing/decreasing the duration of investments and/or by entering into interest rate derivatives whenever required.

 

For a discussion of our vulnerability to interest rate risk, see “Risk Factors—Risks Relating to Our Business—Our banking and trading activities are particularly vulnerable to interest rate risk and volatility in interest rates could adversely affect our net interest margin, the value of our fixed income portfolio, our income from treasury operations, the quality of our loan portfolio and our financial performance” and “Risk Factors—Risks Relating to Our Business—Our inability to effectively manage credit, market and liquidity risk and inaccuracy of our valuation models and accounting estimates may have an adverse effect on our earnings, capitalization, credit ratings and cost of funds”.

 

The following table sets forth, at the date indicated, our asset-liability gap position.

 

  

At March 31, 2019(1)

   Less than or equal to one year  Greater than one year and up to five years  Greater than five years  Total
   (in millions)
Loans, net   Rs.5,507,504   Rs.920,913   Rs.41,200   Rs.6,469,617 
Investments    657,488    1,017,062    2,307,458    3,982,008 
Other assets(2)    543,979    182,711    1,115,434    1,842,124 
Total assets    6,708,971    2,120,686    3,464,092    12,293,749 

 

 

  

At March 31, 2019(1)

   Less than or equal to one year  Greater than one year and up to five years  Greater than five years  Total
   (in millions)
Stockholders’ equity and preference share capital            1,142,534    1,142,534 
Borrowings    1,153,806    670,812    278,623    2,103,241 
Deposits    3,546,993    3,046,966    219,211    6,813,170 
Other liabilities    9,202        2,319,792    2,328,994 
Total liabilities    4,710,001    3,717,778    3,960,160    12,387,939 
Total gap before risk management positions    1,998,970    (1,597,092)   (496,068)   (94,190)
Off-balance sheet positions(3)    (213,183)   110,943    77,171    (25,069)
Total gap after risk management positions   Rs.1,785,787   Rs.(1,486,149)  Rs.(418,897)  Rs.(119,259)
 
(1)Assets and liabilities are classified into the applicable categories based on residual maturity or re-pricing whichever is earlier. Classification methodologies are generally based on Asset Liability Management Guidelines, including behavioral studies, as per local policy/regulatory norms of the entities. Items other than current and savings account deposits that neither re-price nor have a defined maturity are included in the ‘greater than five years’ category. This includes investments in the nature of equity, cash and cash equivalents and miscellaneous assets and liabilities. Fixed assets (other than leased assets) have been excluded from the above table. Current and savings account deposits are classified based on behavior study.

(2)Includes cash and balances with the Reserve Bank of India, balances with banks and money at call and short notice and other assets.

(3)Off-balance sheet positions comprise notional amount of derivatives, including foreign exchange forward contacts.

 

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The following table sets forth, at the date indicated, the amount of our loans with residual maturities greater than one year that had fixed and variable interest rates.

 

   At March 31, 2019
   Fixed
rate loans
  Variable
rate loans
  Total
   (in millions)
Loans   Rs.1,075,983   Rs.3,430,030   Rs.4,506,013 

 

The following table sets forth, using the balance sheet at year-end fiscal 2019 as the base, one possible prediction of the impact of adverse changes in interest rates on net interest income for fiscal 2020, assuming a parallel shift in the yield curve at year-end fiscal 2019.

 

   At March 31, 2019
   Change in interest rates (in basis points)
   (100)  (50)  50  100
   (in millions)
Rupee portfolio  Rs.(7,768)  Rs.(3,884)  Rs.3,884   Rs.7,768 
Foreign currency portfolio   (810)   (405)   405    810 
Total  Rs.(8,578)  Rs.(4,289)  Rs.4,289   Rs.8,578 

 

Based on our asset and liability position at year-end fiscal 2019, the sensitivity model shows that net interest income from the banking book for fiscal 2020 would rise by Rs. 8.6 billion if interest rates increased by 100 basis points. Conversely, the sensitivity model shows that if interest rates decreased by 100 basis points, net interest income for fiscal 2020 would fall by an equivalent amount of Rs. 8.6 billion.

 

Based on our asset and liability position at year-end fiscal 2018, the sensitivity model showed that net interest income from the banking book for fiscal 2019 would rise by Rs. 6.7 billion if interest rates increased by 100 basis points. Conversely, the sensitivity model showed that if interest rates decreased by 100 basis points, net interest income for fiscal 2019 would fall by an equivalent amount of Rs. 6.7 billion.

 

Sensitivity analysis, which is based upon static interest rate risk profile of assets and liabilities, is used for risk management purposes only and the model above assumes that during the course of the year no other changes are made in the respective portfolios. Actual changes in net interest income will vary from the model.

 

Price Risk (Trading Book)

 

The following table sets forth, using the fixed income portfolio at year-end fiscal 2019 as the base, one possible prediction of the impact of changes in interest rates on the value of our fixed income held-for-trading portfolio, assuming a parallel shift in interest rate curve.

 

   At March 31, 2019
   Change in interest rates (in basis points)
   Portfolio Size  (100)  (50)  50  100
   (in millions)
Indian government securities   Rs.112,644   Rs.3,284   Rs.1,657   Rs.(1,657)  Rs.(3,284)
Corporate debt securities    130,076    1,378    698    (697)   (1,376)
Total   Rs.242,720   Rs.4,662   Rs.2,355   Rs.(2,354)  Rs.(4,661)

 

   At March 31, 2019
   Change in interest rates (in basis points)
   Portfolio Size  (100)  (50)  50  100
   (in millions)
Foreign government securities   Rs.17,091   Rs.25   Rs.13   Rs.(13)  Rs.(25)

 

At year-end fiscal 2019, the total value of our fixed income trading portfolio, including foreign government securities was Rs. 259.8 billion. The sensitivity model shows that if interest rates increase by 100 basis points, the value of this portfolio would fall by Rs.4.7 billion. Conversely, if interest rates fall by 100 basis points, the value of this portfolio would rise by Rs.4.7 billion. At year-end fiscal 2018, the total value of our fixed income trading portfolio was

 

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Rs. 331.3 billion. The sensitivity model showed that if interest rates increased by 100 basis points, the value of this portfolio would fall by Rs. 6.4 billion. Conversely, if interest rates fell by 100 basis points the value of this portfolio would rise by Rs. 6.4 billion.

 

The total outstanding notional principal amount of our trading interest rate derivatives portfolio increased from Rs. 11,470.6 billion at year-end fiscal 2018 to Rs. 17,938.6 billion at year-end fiscal 2019. The sensitivity model shows that if interest rates increase by 100 basis points, the value of this portfolio would fall by Rs. 0.2 billion. The total outstanding notional principal amount of our trading currency derivatives (such as futures, options and cross currency interest rate swaps) increased from Rs. 995.8 billion at year-end fiscal 2018 to Rs. 1,159.2 billion at year-end fiscal 2019. The sensitivity model showed that if interest rates increased by 100 basis points, the value of this portfolio would rise by Rs. 0.6 billion. The total outstanding notional principal amount of our trading foreign exchange portfolio increased from Rs. 4,184.5 billion at year-end fiscal 2018 to Rs. 4,337.6 billion at year-end fiscal 2019. The sensitivity model showed that if interest rates increased by 100 basis points, the value of this portfolio would fall by Rs. 54.5 million.

 

Equity Risk

 

We assume equity risk both as part of our investment book and our trading book. At year-end fiscal 2019, we had a total equity investment portfolio of Rs. 139.8 billion, primarily comprising Rs. 25.0 billion of investments by ICICI Bank and Rs. 112.4 billion of investments by our insurance subsidiaries. Additionally, ICICI Securities and ICICI Securities Primary Dealership also have a small portfolio of equity derivatives. The equity investments of ICICI Bank include the equity portfolio of its proprietary trading group amounting to Rs. 1.8 billion and other equity investments amounting to Rs. 23.2 billion. These other equity investments are acquired primarily from loan conversion and also include investment in unlisted equity which are long-term in nature. We also invest in private equity funds, primarily those managed by our subsidiary ICICI Venture Funds Management Company. These funds invest in equity and equity linked instruments. Our investments through these funds are similar in nature to our other equity investments and are subject to the same risks. In addition, they are also subject to risks in the form of changes in regulation and taxation policies applicable to such equity funds. For further information on our trading and available-for-sale investments, see “—Overview of Our Products and Services—Investment Banking—Treasury”.

 

The risk in the equity portfolio of the proprietary trading group, which manages the equity trading book of ICICI Bank, is controlled through a value-at-risk approach and stop loss limits, as stipulated in the Investment Policy. Value-at-risk measures the statistical risk of loss from a trading position, given a specified confidence level and a defined time horizon.

 

ICICI Bank computes value-at-risk using historical simulation model for limit monitoring purposes. The value-at-risk is calculated using the previous one-year market data at a 99% confidence level and a holding period of one day.

 

The following table sets forth the high, low, average and period-end value-at-risk for fiscal 2019.

 

   High  Low  Average  At March 29, 2019
   Rs. in million
Value-at-risk    165.4    4.2    31.9    118.7 

 

We monitor the effectiveness of the value-at-risk model by regularly back-testing its performance. Statistically, we would expect to see losses in excess of value-at-risk only 1% of the time over a one-year period. During fiscal 2019, hypothetical loss exceeded the value-at-risk estimates for one day. An analysis of this outlier revealed that the loss occurred on the day when actual movement in the stocks for the day was more than the scenario used to compute value-at-risk for the day.

 

The following table sets forth a comparison of the hypothetical daily profit/(loss), computed on the assumption of no intra-day trading, and value-at-risk calculated using the historical simulation model during fiscal 2019.

 

   Average  At March 29, 2019
    Rs. in million 
Hypothetical daily profit/(loss)    0.9    10.7 
Value-at-risk    31.9    118.7 

  

The high and low hypothetical daily profit/(loss) during fiscal 2019 was Rs. 62.1 million and Rs. (45.9) million respectively.

 

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While value-at-risk is an important tool for measuring market risk under normal market conditions, it has inherent limitations that should be taken into account, including its inability to accurately predict future losses when extreme events are affecting the markets, because it is based on the assumption that historical market data is indicative of future market performance. Moreover, different value-at-risk calculation methods use different assumptions and hence may produce different results, and computing value-at-risk at the close of the business day would exclude intra-day risk. There is also a general possibility that the value-at-risk model may not fully capture all the risks present in the portfolio.

 

Exchange Rate Risk

 

We offer instruments like swaps, forwards, and currency options to clients, which are primarily banks and corporate customers. We use cross currency swaps, forwards, and options to hedge against risks arising out of these transactions and for foreign currency loans that are originated in currencies different from the currencies of borrowings supporting them. Some of these transactions may not meet the hedge accounting requirements and are subject to mark-to-market accounting. Trading activities in the foreign currency markets expose us to exchange rate risks. This risk is mitigated by setting counterparty limits, stipulating forex overnight and intra-day position limits, daily/quarterly/yearly cumulative stop-loss limits and engaging in exception reporting.

 

The Bank offers foreign currency-rupee options for hedging foreign currency exposures including hedging of balance sheet exposures to the users which include corporate clients and other inter-bank counterparties. All the options positions are maintained within the limits specified in the Investment Policy. The trading activities in the foreign currency markets expose us to exchange rate risks. The foreign exchange rate risk is monitored through the net overnight open position limit approved by the Board and intra-day foreign exchange position limits.

 

Assuming 1% increase/decrease in each of the foreign currencies against the respective base currency, our exchange rate sensitivity comes to Rs. 26.7 million at year-end fiscal 2019 compared to Rs. 8.1 million at year-end fiscal 2018. The above numbers are without any netting benefit across base currencies. We also monitor Greeks of our currency options.

 

Derivative Instruments Risk

 

The Bank offers various derivative products, including options and swaps, to clients for their risk management purposes. Profits or losses on account of market movements on these transactions are borne by the clients. For the transactions which are not covered in the inter-bank market, the Bank runs open positions within the limits prescribed in its Investment Policy. The derivative transactions are subject to counterparty risk to the extent particular obligors are unable to make payment on contracts when due.

 

The Bank also enters into interest rate and currency derivative transactions for the purpose of hedging interest rate and foreign exchange mismatches and also engages in trading of derivative instruments on its own account.

 

Credit Spread Risk

 

Credit spread risk arises out of investments in fixed income securities. Hence, volatility in the level of credit spreads would impact the value of these portfolios held by the Bank. We closely monitor our portfolio and risk is monitored by setting investment limits, rating-wise limits, single issuer limit, maturity limits and stipulating daily and cumulative stop-loss limits.

 

The following table sets forth, using our held-for-trading portfolio at year-end fiscal 2019 as the base, one possible prediction of the impact of changes in credit spreads on the value of the trading portfolio, assuming a parallel shift in credit spreads.

 

   At March 31, 2019
   Change in credit spread (in basis points)
   Portfolio Size  (100)  (50)  50  100
   (in millions)
Corporate debt securities   Rs.130,076   Rs.1,378   Rs.698   Rs.(697)  Rs.(1,376)

 

At year-end fiscal 2019, our held-for-trading portfolio (excluding government securities) was Rs. 130.1 billion. The sensitivity model shows that if credit spreads increase by 100 basis points, the value of this portfolio would fall by Rs. 1.4 billion. Conversely, if credit spreads fall by 100 basis points, the value of this portfolio would rise by Rs. 1.4 billion. At year-end fiscal 2018, our held-for-trading portfolio (excluding government securities) was Rs. 153.6 billion. The sensitivity model showed that if credit spreads increase by 100 basis points, the value of this portfolio would fall

 

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by Rs. 1.5 billion. Conversely, if credit spreads fall by 100 basis points, the value of this portfolio would rise by Rs. 1.5 billion.

 

Liquidity Risk

 

Liquidity risk is the current and prospective risk arising out of an inability to meet financial commitments as they fall due, through available cash flows or through the sale of assets at fair market value. It includes both, the risk of unexpected increases in the cost of funding an asset portfolio at appropriate maturities and the risk of being unable to liquidate a position in a timely manner at a reasonable price.

 

The goal of liquidity management is to ensure that the Bank is always in a position to efficiently meet both expected and unexpected current and future cash flow and collateral needs without negatively affecting either the Bank’s daily operations or financial conditions.

 

We manage liquidity risk in accordance with our Asset Liability Management Policy. This policy is framed as per the current regulatory guidelines and is approved by the Board of Directors. The Asset Liability Management Policy is reviewed periodically to incorporate changes as required by regulatory stipulation or to realign the policy with changes in the economic landscape. The Asset Liability Management Committee of the Bank formulates and reviews strategies and provides guidance for management of liquidity risk within the framework laid out in the Asset Liability Management Policy. The Asset Liability Management Committee comprises managing director, wholetime directors and senior executives. The Risk Committee of the Board, a Board Committee, has oversight of the Asset Liability Management Committee.

 

The Bank uses various tools for the measurement of liquidity risk including the statement of structural liquidity, dynamic liquidity cash flow statements, liquidity ratios and stress testing through scenario analysis. The statement of structural liquidity is used as a standard tool for measuring and managing net funding requirements and the assessment of a surplus or shortfall of funds in various maturity buckets in the future. The cash flows pertaining to various assets, liabilities and off-balance sheet items are placed in different time buckets based on their contractual or behavioural maturity. The statement of structural liquidity of rupee currency for domestic operations, and statement of structural liquidity of all currencies together for international operations of the Bank (country-wise and in aggregate) are prepared on daily basis. The statement of structural liquidity of foreign currency for domestic operations, consolidated statement for domestic operations and for the Bank as a whole are prepared on fortnightly basis. The utilization against gap limits laid down for each bucket is reviewed by Asset Liability Management Committee of the Bank.

 

We also prepare dynamic liquidity cash flow statements, which in addition to scheduled cash flows, also consider the liquidity requirements pertaining to incremental business and the funding thereof. The dynamic liquidity cash flow statements are prepared in close coordination with the business groups, and cash flow projections based on the statements are periodically presented to the Asset Liability Management Committee. As a part of the stock and flow approach, we monitor various liquidity ratios, and limits are laid down for these ratios in the Asset Liability Management Policy. We also monitor liquidity coverage ratio which has been applicable from January 1, 2015.

 

The Bank has diverse sources of liquidity to allow for flexibility in meeting funding requirements. For the domestic operations, current accounts and savings deposits payable on demand form a significant part of the Bank’s funding and the Bank is implementing its strategy to sustain and grow this segment of deposits along with retail term deposits. These deposits are augmented by wholesale deposits, issuance of Certificate of Deposits, borrowings and through the issuance of bonds and subordinated debt from time to time. Loan maturities and sale of investments also provide liquidity. The Bank holds unencumbered, high quality liquid assets and has certain mitigating measures to protect against stress conditions.

 

For domestic operations, the Bank has the option of managing liquidity by borrowing in the inter-bank market on a short-term basis. The overnight market, which is a significant part of the inter-bank market, is susceptible to volatile interest rates. To limit the reliance on such volatile funding, the Asset Liability Management Policy stipulates limits for borrowing and lending in the inter-bank market.

 

For our overseas branches, the Bank has a well-defined borrowing program. In order to maximize borrowings at a reasonable cost through its branches, liquidity in different markets and currencies is targeted. The wholesale borrowings are in the form of bond issuances, syndicated loans from banks, money market borrowings and interbank bilateral loans. The Bank also raises refinance from other banks against eligible trade assets. Those loans that meet the Export Credit Agencies’ criteria are refinanced as per the agreements entered into with these agencies. The Bank also mobilizes deposits liabilities, in accordance with the regulatory framework in place in the respective host country.

 

The Bank maintains prudential levels of liquid assets in the form of cash, balances with the central bank and government securities, money market and other fixed income securities. As stipulated by the regulator, banks in India

 

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are required to maintain statutory liquidity ratio at a level of 19.25% at March 31, 2019 of their net demand and time liabilities in India and cash reserve ratio at a level of 4.0% of their net demand and time liabilities in India as of June 30, 2019. During December 2018, in order to align the statutory liquidity ratio with the liquidity coverage ratio requirement, the Reserve Bank of India announced reduction in the statutory liquidity ratio by 0.25% every calendar quarter until the statutory liquidity ratio reaches 18.0% of net demand and time liabilities. The first reduction of 0.25% took effect in the quarter commencing January 2019. Accordingly, as of June 30, 2019, statutory liquidity ratio is 19.0%. The Bank generally holds additional securities over and above the stipulated level. The Bank is subject to a liquidity coverage ratio requirement in a phased manner as per the Reserve Bank of India guidelines from January 1, 2015. As per Reserve Bank of India guidelines, effective January 1, 2016, a liquidity coverage ratio is applicable to Indian banks on a consolidated basis. Banks in India were required to maintain a liquidity coverage ratio at a minimum of 90.0% for the calendar year 2018. Effective January 1, 2019, the liquidity coverage ratio requirement increased to 100.0%. The liquidity coverage ratio requirement is met by investment in high quality liquid assets which are primarily in the form of government securities, in excess of mandatory statutory liquidity ratio, specified portion of government securities held by the bank within the mandatory statutory liquidity ratio requirement in the form of facility to avail liquidity for liquidity coverage ratio and marginal standing facility, and better-rated corporate bonds.

 

At March 31, 2019, out of the statutory liquidity ratio requirement of 19.25% of net demand and time liabilities in India, up to 15.5% (13.0% in the form of facility to avail liquidity for liquidity coverage ratio, 2.0% under marginal standing facility and up to 0.5% in the form of additional facility to avail liquidity under liquidity coverage ratio) is counted towards the high quality liquid assets under the liquidity coverage ratio. Additional facility of 0.5% was permitted by the Reserve Bank of India until March 31, 2019 against incremental outstanding credit to non-banking finance companies and housing finance companies, over and above the amount of credit to these entities outstanding at October 19, 2018.

 

Additionally, Reserve Bank of India during April 2019 decided to permit banks to reckon an additional 2.0% (0.50% each on April 4, 2019, August 1, 2019, December 1, 2019 and April 1, 2020) of Government securities within the mandatory statutory liquidity ratio requirement, as facility to avail liquidity for liquidity coverage ratio for the purpose of computing liquidity coverage ratio, in a phased manner from the earlier 13.0% of net demand and time liabilities to 15.0% of net demand and time liabilities by April 1, 2020. Accordingly, at June 30, 2019, out of the statutory liquidity ratio requirement of 19.0% of net demand and time liabilities in India, 15.5% (13.5% in the form of facility to avail liquidity for liquidity coverage ratio and 2.0% under marginal standing facility) is counted towards the high quality liquid assets under liquidity coverage ratio.

 

Further, Reserve Bank of India on July 5, 2019 decided that, with immediate effect, banks will be permitted to frontload the phased increase in facility to avail liquidity for liquidity coverage ratio of 1.0% which was originally effective from August 1, 2019 and December 1, 2019. This frontloading was to the extent of incremental outstanding credit to non-banking finance companies and housing finance companies over and above the amount of credit to non-banking finance companies/housing finance companies outstanding as on date. The frontloading of facility to avail liquidity for liquidity coverage ratio of 1.0%, exclusively meant for incremental exposure to non-banking finance companies/housing finance companies, will form part of general facility to avail liquidity for liquidity coverage ratio as and when the increase in facility to avail liquidity for liquidity coverage ratio takes place as per original schedule on August 1 and December 1, 2019.

 

During fiscal 2019, the Bank maintained a liquidity coverage ratio above the stipulated level. The Reserve Bank of India on May 17, 2018 issued final guidelines on the Basel III framework on liquidity standards – net stable funding ratio. This guideline ensures a reduction in funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. As per the guidelines, the net stable funding ratio should be equal to at least 100% on an ongoing basis. As per circular dated November 29, 2018 these guidelines will be applicable for Indian banks at the individual as well as consolidated level effective April 1, 2020.

 

We have a Board approved liquidity stress testing framework, under which we estimate the Bank’s liquidity position under a range of stress scenarios, and consider possible measures we could take to mitigate the outflows under each scenario. These scenarios cover bank specific, market-wide and combined stress situations and have been separately designed for the domestic and international operations of the Bank. Each scenario included in the stress-testing framework covers a time horizon of 30 days. The stress-testing framework measures the impact on profit due to liquidity outflows for each scenario, considering possible measures that we could take to mitigate the stress. The impact on profits is subject to a stress tolerance limit specified by the Board of Directors. The results of liquidity stress testing are reported to the Asset Liability Management Committee on a monthly basis. During fiscal 2019, the results of each of the stress scenarios were within the Board-approved limits.

 

The Risk Committee of the Board has approved a liquidity contingency plan, which lays down a framework for ongoing monitoring of potential liquidity contingencies and an action plan to meet such contingencies. The liquidity

 

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contingency plan lays down several liquidity indicators, which are monitored on a pre-defined (daily or weekly) basis and also defines the protocol and responsibilities of various teams in the event of a liquidity contingency.

 

Similar frameworks to manage liquidity risk have been established at each of the overseas banking subsidiaries of the Bank addressing the risks they run as well as incorporating host country regulatory requirements as applicable.

 

Our subsidiary in the United Kingdom has diverse sources of liquidity to allow for flexibility in meeting funding requirements. It raises funding through wholesale and retail sources. Wholesale sources comprise issuance of bonds through a Medium Term Note programme, bilateral and club loans and, short term borrowings through interbank money market, bankers’ acceptances and repo channels. It also raises funding through eligible central bank facilities. In the retail segment, it offers current and savings deposits products through its branch network as well as savings deposits through its internet platform. A buffer of high quality liquid assets/central bank reserves is maintained against these deposits. Our subsidiary in Canada is funded through diversified funding sources from retail as well as wholesale sources like borrowings through securitization of insured mortgages across tenor buckets.

 

The Prudential Regulation Authority issued a new policy statement on Capital Requirements Directive IV: Liquidity Requirements in June 2015, which was supplemented by supervisory statement on Prudential Regulation Authorities approach to supervising liquidity and funding risk. The new guidelines were applicable from October 1, 2015. As per the guidelines banks were required to maintain Liquidity Coverage Ratio, calculated as per the methodology provided in the Delegated Act issued by European Banking Authority in October 2014, at 100% as Pillar 1 liquidity requirements. Prudential Regulation Authority has also adopted a Pillar 2 approach for liquidity requirements, in which banks are required to hold high quality liquid assets for specified risks, which are not captured in Liquidity Coverage Ratio. During fiscal 2019, ICICI Bank UK PLC maintained Liquidity Coverage Ratio above the stipulated level and complied with Pillar 2 liquidity requirements specified by Prudential Regulation Authority.

 

In November 2014, The Office of Superintendent of Financial Institutions revised the Liquidity Adequacy Requirements to incorporate Liquidity Coverage Ratio requirements for banks in Canada. The requirements expect banks to have an adequate stock of unencumbered high quality liquid assets that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. The standard requires that, absent a situation of financial stress, the value of the coverage ratio of high quality liquid assets to total net cash outflows be no lower than 100%. The Office of Superintendent of Financial Institutions expects each Canadian bank to have an internal liquidity policy articulating and defining the role of liquid assets within the bank’s overall liquidity management system and establishing minimum targets for liquid asset holdings. ICICI Bank Canada has a Liquidity Management Policy and Market Risk Management Policy that are approved by its Board of Directors. These policies require ICICI Bank Canada to maintain a certain percentage of its customer liabilities in liquid assets and to maintain sufficient liquidity to cover net outflows in the “up to 30 days” maturity bucket. These limits are monitored at least monthly by the Asset Liability Management Committee. ICICI Bank Canada has complied with these requirements throughout fiscal 2019.

 

In addition, Net Cumulative Cash Flow information on a monthly basis is shared with the Office of Superintendent of Financial Institutions consisting details of maturity pattern of assets and liabilities and net cash flows.

 

See also “Operating and Financial Review and Prospects—Liquidity Risk”.

 

Operational Risk

 

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal risk but excludes strategic and reputational risks. Legal risk includes, but is not limited to, exposure to fines, penalties or punitive damages resulting from supervisory actions, as well as private settlements.

 

The management of operational risk is governed by the Operational Risk Management Policy approved by the Board of Directors. The Policy is applicable across the Bank including overseas branches, ensuring a clear accountability and responsibility for management and mitigation of operational risk, developing a common understanding of operational risk and assisting the business and operation groups units to improve internal controls. The Board has constituted an Operational Risk Management Committee for analyzing and monitoring the risks associated with the various business activities of the Bank. The principal objective of the Committee is to mitigate operational risk within the Bank by creation and maintenance of explicit operational risk management process. The Operational Risk Management Committee reviews the risk profile of various functions, the tools used for management of operational risk and implementation of the operational risk management policies and framework as approved by the Board. The Board has also approved a framework for approval of all new products/processes, which requires all processes pertaining to products or product variants to be assessed from an operational risk perspective by the Product and Process Approvals Committee.

 

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Operational risk can result from a variety of factors, including failure to obtain proper internal authorizations, improperly documented transactions, failure of operational and information security procedures, computer systems, software or equipment, fraud, inadequate training and employee errors. Operational risk is sought to be mitigated by maintaining a comprehensive system of internal controls, establishing systems and procedures to monitor transactions, maintaining key back-up procedures and undertaking regular contingency planning. The key elements in the operational risk management process in the Bank are risk identification and assessment, risk measurement, risk monitoring and risk mitigation.

 

In each of the banking subsidiaries, local management is responsible for implementing operational risk management framework through the operational risk management policy approved by their respective Boards.

 

A brief on the management of operational controls and procedures in the various business of the Bank is summarized below:

 

Operational Controls and Procedures in Retail and Rural Banking

 

Retail banking is organized into a zonal structure and each of the zones is headed by a senior official of the Bank. The Bank has separate products, sales, credit and operations teams which ensures that there are adequate checks and balances for the product and service offering to the customers. The branches are supported by regional/centralized processing centers and retail asset processing centers which are designed to ensure adequate operational controls.

 

The Bank has put in place comprehensive operating manuals detailing procedures for the processing of various banking transactions and for the sale and servicing of third party products. Amendments to these manuals are implemented through circulars, which are accessible to branch employees on the intranet. The branches are complemented by the product and sales teams. The banking transactions relating to customer accounts are processed based on built-in system checks and authorization procedures. There are also adequate safeguards in the sale of third party products to check that the prescribed sales guidelines are adhered to. Transactions over a specified limit are subjected to enhanced scrutiny to avoid potential money laundering. The adherence to the processes and guidelines by the branches is overseen through risk monitoring, concurrent audits and internal audits.

 

The core banking application software has multiple security features to protect the integrity of applications and data.

 

The Bank’s rural and inclusive banking activities cater to the financial requirement of customers residing in rural & semi-urban locations. The services are offered through the designated branches of the Bank and there are well-defined products, sales and credit structure for customer sourcing and servicing. Activities pertaining to rural banking are supported by regional/centralized processing centers. In addition, there are various pre-defined tasks being performed by independent teams which review the process and service quality such as hind-sighting, quality of commodities pledged, title of the land considered as collateral, etc. The Bank also facilitates the enrollment of beneficiaries under various government social schemes, including financial inclusion.

 

Operational Controls and Procedures in the Regional Processing Centers and Central Processing Center

 

The Bank has designated regional processing centers located at various cities across the country. These regional processing centers engage in activities like processing check clearing and inter-branch transactions, outstation check collections, and engage in back-office activities for account opening, renewal of deposits and salary transaction processing of corporations. There are currency chests and cash processing centers located at 40 locations in various cities across India, which cater to the cash requirements of branches and ATMs.

 

The Bank has two centralized processing centers, one each in Mumbai and Hyderabad, processing transactions on a nationwide basis for production & dispatch of physical deliverables like cards, check books, statements, personal identification number for cards, issuance of passwords to internet banking customers etc. Centralized processing centers also manage the activities like electronic payments, activation of newly opened accounts and account servicing.

 

Operational Controls and Procedures in Retail Asset Operations

 

The Bank has designated decentralized asset processing centers located at various cities across the country. These decentralized asset processing centers engage in activities of loan disbursement and regular banking activity related to retail loans with internal checks and controls.

 

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The Bank has three central asset operation units located in Mumbai, Hyderabad and Noida. These central units support operations relating to retail asset products across the country and carry out activities like loan accounts maintenance, issuance of credit card or prepaid card, accounting and reconciliation, payouts and repayment management activities for all retail asset products.

 

Operational Controls and Procedures in Treasury

 

The Bank has put in place internal controls with respect to its treasury operations, which include the segregation of duties between treasury front-office and treasury control and services group, automated control procedures, continuous monitoring procedures through detailed reporting statements, and a well-defined code of conduct for dealers. We have also set up limits in respect of treasury operations including deal size limits and product-wise limits. In order to mitigate the potential mis-selling risks, if any, a customer suitability and appropriateness policy has been implemented. Similarly, in order to mitigate potential contractual risks, if any, negotiations for deals are recorded on a voice recording system. Some of the control measures include independence of deal validation, deal confirmation, documentation, limits monitoring, treasury accounting, settlement, reconciliation and regulatory compliance. Treasury Control and Services Group reviews the unconfirmed, unsettled deals if any, on a regular basis and follows up for timely confirmation or settlement. There is a mechanism of escalation to senior management in case of delays in settlement or confirmation beyond a time period. In addition to the above, concurrent and internal audits are also conducted independently in respect of treasury operations on a periodic basis. The control structure in treasury operations is designed to prevent errors and potential fraud and provide early-warning signals.

 

Operational Controls and Procedures for Corporate and Commercial Banking

 

Corporate banking is also organized into a zonal structure. The front office is responsible for sourcing clients and performing a credit analysis of the proposal. The credit risk is also independently evaluated by the credit risk management group. The Bank has set-up a credit monitoring group in order to strengthen the ability to develop early warning mechanisms for management and full scale monitoring across the life time of the loans. The credit middle office group conducts verification and scrutiny of the loan documents vis-à-vis sanction terms, monitoring important covenants of the terms of sanction to mitigate post-approval risks and adherence to the terms of approval by periodically publishing compliance monitoring reports. The key processes and their ownership are documented through process notes which are reviewed periodically. The back-office for corporate operations is responsible for the execution of trade finance, cash management and general banking transactions based on the requests and instructions initiated through channels including branches.

 

Commercial banking products and services are offered through identified commercial and retail branches, which are spread across all major business centers throughout the country. The commercial branches are led by regional heads, who are experienced commercial bankers. The transactions initiated at the commercial branches are processed by independent and centralized operation units responsible for the execution of trade finance, cash management and general banking transactions.

 

Operational Controls and Procedures for Internet Banking

 

The Bank has put in place adequate authentication and authorization controls for transactions through online/internet banking. The internet banking infrastructure is secured through the multi-layer information security controls, including firewalls, intrusion prevention systems and network level access controls. These are supplemented by periodic penetration tests, vulnerability assessments and continuous security incident monitoring of internet banking servers. In addition to login password, transactions are required to be authorized with random grid value authentication (a grid is a set of numbers printed on the reverse side of the debit card). Additionally, one-time password authentication is required in case we identify a change in the customer’s device fingerprint. The one-time password is sent to the customer’s mobile number registered with the Bank. To add a payee for transfer of funds, the customer is required to validate a unique registration number that is sent to the customer’s mobile number registered with us. Internet transactions using credit cards require additional one-time password authentication besides other authentications present on the card. Alerts are also sent to the customer for every internet-based transaction.

 

The Bank has put in place adequate authentication and authorization controls for transactions through iMobile application. The iMobile infrastructure is secured through the multi-layer information security controls, including HTTPS/TLS encryption throughout the session and details stored in encrypted DB format. These are supplemented by periodic security audits, application penetration tests, security vulnerability test and network penetration/ application spoofing test. Customers can activate the iMobile app only on their registered mobile number. We also have SUSD (Single User Single Device) in place, where a customer can download the app only on one handset at a time. At the time of activation, UserID-Password or MPIN and grid card authentication is taken as two-factor authentication. For

 

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transactions, UserID-Password or MPIN and device id is taken as two-factor authentication. To add a payee for transfer of funds, the customer is required to validate a unique registration number that is sent to the customer’s mobile number registered with us. Alerts are also sent to the customer for every internet-based transaction.

 

To create awareness among customers about phishing, vishing and other internet-related frauds, we regularly send communications to customers.

 

Information technology risk

 

The cyber security threat landscape for banks and financial institutions globally is constantly evolving and threats such as phishing, distributed denial of service (DDoS) attacks, leakage of sensitive data, malware, ransomware and exploitation of ATM vulnerabilities or vulnerabilities in systems provided to banks by software vendors are currently prevalent across the world.

 

The Bank has a governance framework for information security with oversight from the Information Technology Strategy Committee which is a Board-level Committee chaired by an Independent Director. The security strategy at the Bank is based on the principle of defense in depth and the IT risk framework of the Bank enunciates three lines of defense with clearly defined roles and responsibilities. The Bank has dedicated units responsible for information security and financial crime prevention, which are independent of the business units. In the endeavor towards providing high availability and continuity of services to its customers, including high availability of customer facing IT systems, the Bank has a Board-approved Business Contingency Plan which includes plans for recovery of its IT systems in the event of any disaster or contingency. In addition to the Information Security Policy, the Bank also has a Board approved Cyber Security Policy which incorporates a cyber-crisis management plan. The Bank also conducts vulnerability assessment and penetration testing periodically to mitigate the risk that may arise from security vulnerabilities.

 

The IT systems of the Bank are continuously monitored by dedicated teams such as the IT Command Center (which includes Network Operation Center) and the Security Operations Center. The Bank has laid down processes for change management, identify management, access management and security operations and these processes are periodically reviewed and refined to keep them abreast of emerging risks and to implement commensurate controls to mitigate such risks. The Bank has the appropriate cyber insurance policy to mitigate the financial risk arising out of various cyber security related incidents.

 

See also “Risk Factors—Risks Relating to Our Business—We face security risks, including denial of service attacks, hacking, social engineering attacks targeting our colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure”.

 

Anti-Money Laundering Controls

 

The Bank has implemented Know Your Customer/Anti-Money Laundering/Combating of Financing of Terrorism guidelines in accordance with the provisions under Prevention of Money Laundering Act, 2002, rules promulgated thereunder and guidelines issued by the regulators from time to time.

 

Implementation of these guidelines includes the formulation of a Group Anti-money Laundering Policy with the approval of the Board of Directors of the Bank which also covers the overseas branches; oversight by the Audit Committee on the implementation of the Anti-Money Laundering framework; appointment of a senior level officer as the principal officer who has the day-to-day responsibility for implementation of the anti-money laundering framework; implementation of adequate Know Your Customer procedures based on risk categorization of customer segments, screening of names of customers with negative lists issued by the regulators and customer risk categorization for classifying the customers as high, medium and low risk; risk-based transaction monitoring and regulatory reporting procedures through automated applications; implementing appropriate mechanisms to train employees’ and to creating customer awareness on this subject.

 

The Bank adopts a risk based approach and conducts customer risk assessment with simplified due diligence for low risk, normal due diligence for medium risk and enhanced due diligence for high risk customers pursuant to the Reserve Bank of India guidelines.

 

The Bank also adheres to the anti-money laundering requirements as specified by the regulators of respective geographies. The Bank’s anti-money laundering framework is subject to audit by the Internal Audit Department and their observations are reported to the Audit Committee at regular intervals.

 

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Our life insurance subsidiary has implemented Know-Your-Customer/Anti-Money Laundering/Combating of Financing of Terrorism guidelines issued according to the Prevention of Money Laundering Act, 2002 and guidelines issued by Insurance Regulatory and Development Authority of India from time to time. An Anti-Money Laundering/Combating of Financing of Terrorism Policy has been approved by the Board of Directors of the life insurance subsidiary. The policy is also in accordance with the Group Anti-Money-Laundering policy and includes oversight by the Audit Committee on the implementation of the anti-money laundering framework. It provides for appointment of a senior level officer as the principal officer who, has the responsibility for overseeing compliance with the obligations imposed under the Prevention of Money Laundering Act, 2002 and the rules made thereunder.

 

In July 2014, the Reserve Bank of India imposed a penalty, for violation of instructions /directions/guidelines issued by the Reserve Bank of India, on 12 Indian banks, including us, following its scrutiny of the loan and current accounts of a corporate borrower with these banks. The penalty imposed on us was Rs. 4 million.

 

In December 2014, the Reserve Bank of India imposed penalties on two Indian banks, including us, for non-compliance with the know your customer/anti-money laundering directions/guidelines issued by the Reserve Bank of India in respect of fraudulent opening of fictitious accounts with certain banks. The penalty imposed on us was Rs. 5 million.

 

The Reserve Bank of India had initiated an inspection on know your customer/anti-money laundering aspects across various banks including ICICI Bank. Based on the inspection, the Reserve Bank of India sought explanations on certain matters in April 2016. ICICI Bank responded to the explanation and the Reserve Bank of India has accepted the Bank’s responses in the matter.

 

In November 2017, an overseas regulator imposed a total sum of approximately US$ 0.59 million for non-adherence of rules under anti-money laundering regulations at one of ICICI Bank’s overseas branches, resulting from a regulatory inspection conducted in 2013 and pursuant to a consultant’s review of records, relating to the period of May 2012 to April 2014. There were no dealings with sanctioned entities and the remediation primarily required improvement to the branch’s anti-money laundering/combating of financing of terrorism controls, which has since been undertaken. The local regulator in that jurisdiction has also acknowledged the efforts undertaken by the branch in addressing the issues identified in these reports.

 

In December 2017, the Bank received three notices from Unique Identification Authority of India for non-compliance of guidelines under Aadhaar (Authentication) Regulations, 2016. The key non-compliance stated in the notices included obtaining universal consent from customers for use of Aadhaar details of customers to authenticate the customer with Unique Identification Authority of India in respect of all products and services offered by its Group companies even if these products and services are not availed/intended to be availed by the customers, sharing of Aadhaar details between the Bank and the group companies, over-writing of customers’ previous bank account with ICICI Bank which results in transfer of various Aadhaar linked subsidies to the customer’s account with the Bank, and non-conformity with standard application programming interfaces and specifications laid down by Unique Identification Authority of India and Aadhaar (Authentication) Regulations, 2016. The Bank has since responded to the notices and is awaiting further communication from Unique Identification Authority of India in this regard.

 

See also “Risk Factors— Risks that arise as a result of our presence in a highly regulated sector—The enhanced supervisory and compliance environment in the financial sector increases the risk of regulatory action, whether formal or informal. Following the financial crisis, regulators are increasingly viewing us, as well as other financial institutions, as presenting a higher risk profile than in the past” and “Risk Factors—Risks Relating to Our Business—Negative publicity could damage our reputation and adversely impact our business and financial results and the prices of our equity shares and ADS.”.

 

Audit

 

The Internal Audit Group, governed by a Group Audit Charter and Internal Audit Policy approved by the Board of Directors, provides independent, objective assurance on the effectiveness of internal controls, risk management and corporate governance and suggests improvements. It helps us accomplish our objectives by evaluating and improving the effectiveness of risk management, internal controls and governance processes, through a systematic and disciplined approach. The Internal Audit Group acts as an independent entity and reports to the Audit Committee of the Board.

 

The Internal Audit Group maintains staff with sufficient knowledge, skills, experience and professional certifications. It deploys audit resources with expertise in audit execution and adequate understanding of business activities. The processes within Internal Audit Group are certified under ISO 9001-2015. Further, an assessment of the quality of assurance provided by the Internal Audit Group is conducted through an independent external firm once in three years.

 

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The Internal Audit Group has adopted a risk based audit methodology in accordance with the Reserve Bank of India guidelines. The risk-based audit methodology is outlined in the Internal Audit Policy. An annual risk-based audit plan is drawn up based on the risk-based audit methodology and is approved by the Audit Committee of the Board. Accordingly, the Internal Audit Group undertakes a comprehensive audit of all branches, business groups and other functions in accordance with the risk-based audit plan. Resources required for implementing the risk based audit plan are also approved by the Audit Committee.

 

The Internal Audit Group also has a dedicated team responsible for information technology security audits. The annual audit plan covers various components of information technology including applications, infrastructure, information technology governance/risk management and information technology general controls. Cyber security is a key focus area for audit, and activities undertaken by the information security function are also subjected to audit.

 

The Reserve Bank of India requires banks to have a process of concurrent audits at business groups dealing with treasury functions, branches handling large volumes, to cover a minimum of 50.0% of credit, deposits and other risk exposures of the Bank, head office functions and information technology data centers. In compliance with the requirements, the Internal Audit Group has formulated an approach for concurrent audits at treasury related functions and at select branches. Concurrent audits are also carried out at centralized and regional processing centers and at centralized operations units with a focus on areas that are identified as needing transaction testing and also to test the existence of and adherence to internal controls. The information technology data center and some of the head office functions are also under purview of concurrent audit. The details of the concurrent audit coverage are outlined in the annual risk based audit plan.

 

The audit of overseas banking subsidiaries and domestic non-banking subsidiaries is carried out by a dedicated team of resident auditors attached to the respective subsidiaries. These audit teams functionally report to the Audit Committees of the respective subsidiary and to the Internal Audit Group. The audit of overseas branches and representative offices is carried out by audit teams consisting of auditors from India as well as a resident auditor based at the Singapore branch. International operations outsourced to India are audited by a team of auditors in India.

 

Legal and Regulatory Risk

 

We are involved in various litigations and are subject to a wide variety of banking and financial services laws and regulations in each of the jurisdictions in which we operate. We are also subject to a large number of regulatory and enforcement authorities in each of these jurisdictions. The uncertainty of the enforceability of the obligations of our customers and counter-parties, including the foreclosure on collateral, creates legal risk. Changes in laws and regulations could adversely affect us. Legal risk is higher in new areas of business where the law is often untested by the courts. We seek to minimize legal risk by using stringent legal documentation, employing procedures designed to ensure that transactions are properly authorized and consulting internal and external legal advisors. See also “Risk Factors—Risks Relating to Our Business—We are involved in various litigations. Any final judgment awarding material damages against us could have a material adverse impact on our future financial performance and our stockholders’ equity”, “Risk Factors— Risks that arise as a result of our presence in a highly regulated sector—The regulatory environment for financial institutions is facing unprecedented change in the post-financial crisis environment”, and “—Legal and Regulatory Proceedings”.

 

Risk Management Framework for International Operations

 

We have adopted a risk management framework for our international banking operations, including overseas branches, our International Financial Services Centre Banking Unit and Offshore Banking Unit. Under the framework, the Bank’s credit, investment, asset liability management and anti-money laundering policies apply to all the overseas branches, our International Financial Services Centre Banking Unit and Offshore Banking Unit, with modifications to meet local regulatory or business requirements. These modifications may be made with the approval of our Board of Directors or the committees designated by the Board of Directors. The Board of Directors/designated committee of the Board approve their respective risk management policies, based on applicable laws and regulations as well as the Bank’s corporate governance and risk management framework. Policies at the overseas banking subsidiaries are approved by Board of Directors of the respective subsidiaries and are framed in consultation with the related groups in the Bank as per the risk management framework.

 

The Compliance Group oversees regulatory compliance at the overseas branches, its International Financial Services Centre Banking Unit and Offshore Banking Unit. Compliance risk assessment along with the key risk indicators pertaining to our domestic and international banking operations are presented to the Risk Committee of our Board of Directors on a periodic basis. Management of regulatory compliance risk is considered as an integral component of the governance framework at the Bank and its subsidiaries along with the internal control mechanisms.

 

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We have therefore adopted an appropriate framework for compliance, by formulating the Group Compliance Policy, which is approved by the Board of Directors and is reviewed from time to time. The Group Compliance Policy outlines a framework for identification and evaluation of the significant compliance risks, on a consolidated basis, in order to assess how these risks might affect our safety and soundness.

 

Risk Management in Key Subsidiaries

 

ICICI Bank UK PLC

 

The key material risks to which ICICI Bank UK is exposed to include credit risk (including concentration risk and political risk), market risk (including interest rate and credit spread risks), liquidity risk and operational risk (including compliance, legal risk and conduct risks).

 

The Board of Directors of ICICI Bank UK is responsible for oversight and control of the functioning of ICICI Bank UK and approves all major policies and procedures. The Board is assisted by its sub-committees, the Audit Committee, Governance Committee, Risk Committee, Conduct Risk Committee and Credit Committee which have been constituted to facilitate focused oversight on various risks. ICICI Bank UK’s risk appetite and policies approved by the Board/or the Board’s committees form the governing framework for each type of risk. Business activities are undertaken within the approved risk appetite and policy framework.

 

All credit risk related issues are governed by ICICI Bank UK’s Credit Risk Management Policy. ICICI Bank UK takes a two-tier approach to assessment of credit risk. The first review is carried out by the commercial officer proposing the transaction and the second review comprises of an independent review and assessment by an officer from the risk team. Credit risk is also managed at the portfolio level by monitoring the key parameters of risk concentration such as industry exposures, country exposures, rating category based exposures, product specific exposures and large exposures.

 

ICICI Bank UK has a Board approved Internal Liquidity Adequacy Assessment process (ILAAP) document, which outlines the liquidity management process of the Bank. The Bank uses various tools for measurement of liquidity risk including the statement of structural liquidity, liquidity ratios and stress testing through scenario analysis. In line with its liquidity risk appetite, ICICI Bank UK maintains adequate high quality liquid assets/central bank reserves to cover projected stressed outflows under various scenarios. ICICI Bank UK maintains high quality liquid assets to comply with the liquidity coverage requirements stipulated by the Prudential Regulation Authority.

 

ICICI Bank UK has Board/Board committee approved policies for managing market risk such as its treasury policy manual and mandate, valuation policy, model validation policy and independent price verification policy. For monitoring and managing market risk, it uses various risk metrics, including the duration of equity, earnings at risk, portfolio limits, price value of one basis point change in interest rate, price value of one basis point change in credit spread, stop loss limits and value at risk limits.

 

The management of operational risk (including fraud risk) is governed by the Operational Risk Management Policy approved by the Board Risk Committee. Operational risk elements covered in the Operational Risk Management Policy include operational incident management, techniques for risk identification and measurement, monitoring through key risk indicators and risk mitigation techniques.

 

The Bank’s Conduct Risk Appetite Framework is approved by the Board of the Bank and reviewed and approved on an annual basis by the Board Risk Committee. The Bank’s Conduct Risk Appetite is closely aligned to the FCA requirements and expectations. It balances the need of all stakeholders by acting as both a governor of risk and driver of current and future business strategy, with particular focus on delivering fair outcomes to the Bank’s customers. The Bank has also established a Conduct Risk Policy, which is aligned with the Conduct Risk Appetite Framework and ensures that effective governance arrangements are in place for managing and monitoring conduct risk exposure of the Bank.

 

The Bank has established an Information Security Risk Management Framework for the management of information security related risks including cyber risk at the Bank, within the guidelines of the Group Information Security Policy. The Bank has implemented an integrated approach to security and made significant progress in enhancing its Information Security governance through monitoring at the Information Security Committee. Additionally, periodic presentations are made to the Board Risk Committee on cyber threats and various measures taken by the Bank mitigating cyber security risks and threats. The various measures include periodic vulnerability and penetration testing, application security life cycle assessment for critical applications, information security awareness programs and cyber incident management. During the year, the Bank renewed its “Cyber Essentials” certificate and badge which demonstrated that the Bank’s Information Security processes and procedures meet the UK market baseline standards.

 

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ICICI Bank Canada

 

ICICI Bank Canada is exposed to risks such as credit risk, market risk, operational risk, structural interest rate risk, liquidity risk, compliance and reputation risk. ICICI Bank Canada has developed an Enterprise Risk Management Framework designed to ensure that the risks are identified, measured and monitored effectively. The framework also requires the establishment of policies and procedures to monitor and mitigate the risks.

 

The Board of Directors of ICICI Bank Canada has oversight on all risks assumed by ICICI Bank Canada. The Board has established committees and assigned specific mandates to the committees for providing oversight for the various risks facing it. The policies approved by the Board create the governing framework for managing various risks faced by ICICI Bank Canada. Business activities are undertaken within this policy framework.

 

The Risk Committee of the Board has delegated the operational responsibility for credit risk management to the Management Credit Committee within the broad parameters and limits laid down in the Corporate & Commercial Credit and Recovery Policy, Retail Credit Recovery Policy, and Residential Mortgage Underwriting Policy. The Management Credit Committee approves credit proposals before recommending them to Risk Committee, which manages the credit risk on a portfolio basis and reviews asset quality and portfolio quality on a monthly basis.

 

The Risk Committee has delegated operational responsibility for market risk management, structural interest rate risk management and liquidity risk management to the Asset Liability Committee within the broad parameters and limits laid down in the Market Risk Management Policy and Liquidity Management Policy respectively. The Asset Liability Committee reviews matters pertaining to Investment and Treasury operations and the implementation of risk mitigation measures and recommends major policy changes governing treasury activities to the Risk Committee. Asset Liability Committee reviews adherence to market risk and liquidity risk requirements of the Office of the Superintendent of Financial Institutions (Canada’s banking regulator), internal control guidelines and limits.

 

The Risk Committee has delegated operational responsibility for management of operational risk to the Operational Risk Committee under the Management Committee. Operational Risk Committee is responsible for managing operational risks in the day-to-day operations of ICICI Bank Canada. The Operational Risk Committee under the oversight of Management Committee reviews the Operational Risk Management implementation and operational risk profiles on a monthly basis.

 

ICICI Securities Primary Dealership

 

ICICI Securities Primary Dealership is a primary dealer and has government of India securities as a significant proportion of its portfolio. The Corporate Risk Management Group at ICICI Securities Primary Dealership has developed comprehensive risk management policies which seek to manage the risks generated by the activities of the organization. The Corporate Risk Management Group develops and maintains models to assess market risks which are constantly updated to capture the dynamic nature of the markets and in this capacity, participates in the evaluation and introduction of new products and business activities.

 

ICICI Securities Primary Dealership has an internal Risk Management Committee which is chaired by an Independent Director and comprises members of its Board of Directors. The Risk Management Committee is responsible for analyzing and monitoring the risks associated with the different business activities of ICICI Securities Primary Dealership and overseeing adherence to the risk and investment limits set by its Board of Directors.

 

ICICI Prudential Life Insurance Company

 

The risk governance structure of ICICI Prudential Life Insurance Company consists of the Board, Board Risk Management Committee, Executive Risk Committee and its sub-committees. The Board, on the recommendation of Board Risk Management Committee, has approved the risk policy which covers the identification, measurement, monitoring and control standards relating to various individual risks, namely investment (market, credit and liquidity), insurance and operational risks. The risk policy sets out the governance structure for risk management in ICICI Prudential Life Insurance Company.

 

The Board Risk Management Committee, which consists of non-executive directors, formulates the risk management policy, including asset liability management, monitors all risks across various lines of business and establishes appropriate systems to mitigate such risks. The Board Risk Management Committee also defines ICICI Prudential Life Insurance Company’s risk appetite and risk profile, oversees the effective operation of the risk management system and advises the Board on key risk issues.

 

The Executive Risk Committee, which comprises senior management, is responsible for assisting the Board and the Board Risk Management Committee in their risk management duties by guiding, coordinating and overseeing

 

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compliance with the risk management policies and, in particular, is responsible for the approval of all new products launched by ICICI Prudential Life Insurance Company.

 

The risk management model of ICICI Prudential Life Insurance Company comprises a four-stage continuous cycle, namely identification and assessment, measurement, monitoring and control of risks. ICICI Prudential Life Insurance Company’s risk policy details the strategy and procedures adopted to follow the risk management cycle at the enterprise level. A risk report detailing the key risk exposures faced by ICICI Prudential Life Insurance Company and mitigation measures is placed before the Board Risk Management Committee on a quarterly basis.

 

ICICI Lombard General Insurance Company

 

ICICI Lombard General Insurance Company is principally exposed to risks arising out of the nature of business underwritten and credit risk on its total investment assets as well as the credit risk it carries on its reinsurers. In respect of business risk, ICICI Lombard General Insurance Company seeks to diversify its insurance business across product classes, industry sectors and geographical regions. ICICI Lombard General Insurance Company focuses on achieving a balance between the corporate and retail business mix to achieve favorable claim ratio and risk diversification. ICICI Lombard General Insurance Company has a risk retention and reinsurance policy whereby tolerance levels are set as per risk and on a per event basis. ICICI Lombard General Insurance Company also has the ability to limit its risk exposure by way of re-insurance arrangements. Investments of the company are governed by the investment policy approved by its Board of Directors within the norms stipulated by the Insurance Regulatory and Development Authority of India. As per the Insurance Regulatory and Development Authority of India Investment Regulations, the Company is required to invest a certain portion of its investment assets in central government securities and state government securities/loans. The regulations also have a stipulation to invest in AAA or equivalent rating debt instruments. The Investment Committee oversees the implementation of this policy and reviews it periodically. Exposure to any single non-government issuer is restricted to maximum 5.0% of the total investment assets, by cost. The regulatory stipulation for such exposure is capped at 10.0% of the investment assets. The Company invests a minimum of 5.0% of its investment assets in money market instruments to ensure adequate liquidity in the investment portfolio.

 

Controls and Procedures

 

We have carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act at year-end fiscal 2019.

 

As a result, it has been concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in the reports we file and submit under the Securities Exchange Act is recorded, processed, summarized and reported as and when required.

 

However, as a result of our evaluation, we noted certain areas where our processes and controls, including information technology related processes and controls, could be improved. The Audit Committee monitors the resolution of any identified significant process and control improvement opportunities to a satisfactory conclusion. Like all financial institutions, we nevertheless believe there is room for further improvement. We are committed to continuing to implement and improve internal controls and our risk management processes, and this remains a key priority for us. We also have a process whereby business and financial officers throughout the Bank attest to the accuracy of reported financial information as well as the effectiveness of disclosure controls, procedures and processes.

 

There are inherent limitations to the effectiveness of any system, especially of disclosure controls and procedures, including the possibility of human error, circumvention or overriding of the controls and procedures, in a fast-changing environment or when entering new areas of business or expanding geographic reach. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

We have experienced significant growth in a fast-changing environment, and management is aware that this may pose significant challenges to the control framework. See also “Risk Factors—Risks Relating to Our Business—There is operational risk associated with the financial industries which, when realized, may have an adverse impact on our business”.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act). Our internal control system has been designed to provide reasonable assurance regarding the reliability of financial reporting and preparation and fair presentation of our published Indian GAAP consolidated financial statements and disclosures relating to U.S. GAAP net income

 

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reconciliation, stockholders’ equity reconciliation and other disclosures as required by U.S. Securities and Exchange Commission and applicable GAAP.

 

Management maintains an internal control system intended to ensure that financial reporting provides reasonable assurance that transactions are executed in accordance with the authorizations of management and directors, assets are safeguarded and financial records are reliable.

 

Our internal controls include policies and procedures that:

 

·pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the transactions and dispositions of our assets;

 

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with authorizations of management and the executive directors; and

 

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

All internal control systems, no matter how well-designed, have inherent limitations, and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Management assessed the effectiveness of internal control over financial reporting at year-end fiscal 2019 based on criteria set by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on the assessment, management concluded that our internal control over financial reporting was effective at year-end fiscal 2019. Effectiveness of our internal control over financial reporting at year-end fiscal 2019 has been audited by KPMG, an independent registered public accounting firm, as stated in their attestation report, which is included herein. See also “—Legal and Regulatory Proceedings”.

 

Change in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting occurred during the period covered by this annual report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

Loan Portfolio

 

Our gross loan portfolio increased by 14.6% from Rs. 5,944.3 billion at year-end fiscal 2018 to Rs. 6,814.4 billion at year-end fiscal 2019. At year-end fiscal 2019, approximately 81.8% of our gross loans were rupee loans.

 

Loan Portfolio by Categories

 

The following table sets forth, at the dates indicated, our gross rupee and foreign currency loans by business category.

 

   At March 31,
   2015  2016  2017  2018  2019  2019
   (in millions)
Consumer loans and credit card receivables(1)  Rs.1,762,154   Rs. 2,153,561   Rs.2,446,478   Rs.2,924,289   Rs.3,578,558   US$51,743 
Rupee    1,534,281    1,895,734    2,259,184    2,735,592    3,330,733    48,160 
Foreign currency(2)   227,873    257,827    187,294    188,697    247,825    3,583 
Commercial(3)    2,745,376    2,944,355    2,906,744    3,018,836    3,234,407    46,767 
Rupee    1,493,578    1,631,734    1,729,028    1,971,895    2,243,023    32,432 
Foreign currency    1,251,798