Professional Documents
Culture Documents
I I
Introduction................................................................................. 2
Part I: Preliminary Risk Assessment Report... ... ... ... ... 2
Summary of Aggregate Risk at Bank Level... . .. . .. . . . . .. ... .. 2
Findings on Risks and Control Gaps Assessed... 3
Governance & Oversight... . 3
Credit Risk... ... ... ... 6
Market Risk... .. . .. . . . . . . . . .. . . . . . . ...... . .. . . . . . . . .. 10
Liquidity Risk............... ...................................................... 14
Operational (Non-IT) Risk..................................................... 17
Operational (IT) Risk............................................................ 21
Pillar II Risks..................... ........................................ 22
Part II: Major Areas of Financial Divergence... 23
Part III: Findings on Capital and Earnings....................................... 24
Pillar I Capital & CRAR... . .. ... .. . . .. ... .. . ... ... ... ... . . . ... ... . .. . . . ... . . . ... 24
Capital Management, ICAAP and Stress Tests (including SREP)... 25
The risk assessment of ICICI Bank for 2013-14 under the Supervisory Program for
Assessment of Risk and Capital (SPARC) was completed with March 31, 2014 as th~
reference date. The assessment has been made based on the off-site analysis of the
data and information furnished by the bank as well as the findings of the on-site
Inspection for Supervisory Evaluation (ISE) undertaken from September 16, 2014 to
November 07, 2014 and various explanations offered by the bank in course of
inspection.
As per the SPARC process, the aggregate Risk Score of the bank is arrived at 2.194,
which is indicative of medium risk. On applying the assessed CRAR (17.02%) to the
aggregate risk score, the Risk of Failure score of the bank is arrived at 1.85.
Confidential Page 3 of 45
account of such transfers I sales. Although the numbers were reported in the
quarterly reviews of overseas operations, the Board was not apprised of the full
situation. The Board was informed about such transfers and about other
intense engagements with the MAS as late as in July 2014 following a direction
(April 2014) from the Board in this regard.
1.2.3 Overall priority sector lending (PSL) target was achieved in 2011, but the same
was missed in 2012 and 2013. Sub-targets including advances to direct
agriculture were missed continuously for the last three years. As regards the
current year (2014), overall PSL target was met (43.40% achieved), but
advances to direct agriculture could be achieved to the extent of only 6.30%
(target 13.5%) and that to weaker section, 2.70% (target 10%).
1.2.4 At the instance of the SSM's office, a strategy was drawn up by the bank to
realistically estimate the date by which PSL targets I sub-targets could be
achieved. In terms of this estimate, the target for direct agriculture would be
met by 2018 by growing at a CAGR of 44% while that for weaker sections has
no date for accomplishment even after a planned CAGR of 53% upto 2018.
Strategic plans to meet PSL targets needed to be integrated with the risk
appetite driven growth.
1.2.5 Discretion and arbitrariness in provisioning and valuation (details in market risk
- control gap) did not receive adequate attention of the senior management.
Same was the case for derivatives sold to SME customers and restructuring of
crystallized overdue. Client suitability of derivative products and meeting
minimum regulatory standards in dealing with crystallized amounts were
ignored.
1.3 Risk Governance Score: 1.733
I
1.3.1 With continuous supervisory engagement under RBS, significant issues of non-
compliance came to light during the off-site risk discovery process. It was found
that the compliance function essentially engaged itself in explaining to
supervisors, commissions and omissions by the business lines with little or no
involvement from the business functionaries. This did not indicate a healthy
compliance culture.
1.3.2 The Overseas Banking Unit (OBU) was hardly serving the purpose for which it
was started. Out of its total loan exposure of USD 420.00 mn, it had only 10%
loan exposure (USD 45.00 mn) to SEZ companies. Of late, it had reduced itself
Confidential Page 4 of 45
to a repository of inter-bank derivative deals and stressed loan transfers from
overseas branches. After the recent transfer of loan assets in December 2013
from Singapore branch, its exposure to domestic tariff area increased from
7.9% to 21.1 % of its total liabilities. Technicalities of compliance aside, the
Board was not adequately informed about the OBU's transformation from being
a catalyst in the SEZ to; a repository of bad assets transferred from other
jurisdictions and funding of the same through inter-branch borrowings.
1.3.3 Robustness of compliance certification was verified by looking into the
framework of transaction testing within the bank [by Internal Audit Department
(lAD) and compliance group (CG)]. Coordination between the two and stress on
the spirit of compliance rather than technical/ legal stance (by the CG) would
promote a desirable compliance culture. Some of the observations in this
regard are as follows:
• Non-compliance in certain aspects was under active supervisory
engagement, yet it was reported as 'complied' (risk categorization of
customers, automation of NPA identification, name-check by upfront
reference to the negative list in new accounts, achievement of PSL
targets, etc.);
• In several instances lAD found a regulatory instruction 'not complied'
based on sample verification, but CG certified the same as 'compliant'
merely because policy framework was put in place (information sharing
among banks, reporting of integrally connected cash transactions, PSL
classification of education loans, etc.). CG's certification was reflective of
mere technical compliance.
• Compliance certification was based on inadequate sample verification or
only on the basis of secondary reports (loan against NRE/ FCNR
deposit, ALM gaps, HFT sales, sale of products that can be
independently priced, reporting of frauds to police authorities, etc.).
1.3.4 Price calculator (used for loan pricing) determined the minimum quote to the
customer, which was then recorded as the extant base rate plus a resultant
spread. The spread did not represent risk premium nor did the base rate have
any connection with the price calculator. Base rate was set as a floor merely as
compliance to regulatory instructions. The real floor to the price-quote was the
marginal cost of one-year TO that went into the price calculator. The price
Confidential Page 5 of 45
calculator took into account cost of funds (methodology followed was different
from that under the base rate), overhead costs, expected loss and capital
charge in respect of a borrower. Different methodologies followed in arriving at
the base rate and price calculator limited the effectiveness of base rate as a
monetary policy transmission tool. Risk based differential pricing was less
evident as rating and pricing were not demonstrably correlated. The actual
quoted price was mainly dependent on competition and other relationships with
the client.
1.3.5 The price calculator contained an upward discretionary bias as evident from the
following: i) capital charge (unexpected loss charge) was set higher at 150% for
the clients for which the current capital charge was only 75% (CRE-RH cases),
ii) RoE, the most crucial element in the calculator, was taken as 16.5% while
the Board had approved targeted RoE of 14% in its strategy for the year.
1.3.6 The bank amended its existing guideline on product approval process in
February 2014 including compliance aspects. The effect of this change would
require close watch internally considering the fact that several rounds of
engagement during the last one year pertained to key issues of non-
compliance.
1.4 Internal Audit Score:1.723
1.4.1 The link between risk appetite and examination of internal controls through
internal audit function was not clear. There was no system of net risk based on
internal audit inputs.
1.4.2 Internal audit function had well-defined role and responsibilities. However, lAD
did not provide an aggregate view of control risks in major risk areas.
Confidential Page 11 of 45
earlier NPV calculation (that had recognized the premium) and the promoter
contribution based on it. Specific provision of 50% was made arbitrarily and
reversed after few months. Such specific provisions in respect of credit risk
were netted to reduce the book value whereas the market values were
calculated on gross book value. The matter was handled in most clumsy
manner with little senior management oversight.
3.2.2 There were cases of application money outstanding for more than one to two
years. Treating them as 'investments' and carrying out valuation through break-
up value, defied any rationale. Provision of 20% and 100% was made arbitrarily
for delay in issue of the security for more than one and two years respectively.
3.2.3 AFS securities were subjected to amortization based on assumption of keeping
the acquisition-time YTM fixed and holding the security till maturity. AFS being
a trading book, such assumption could not be right.
3.2.4 Risk monitoring (mid office), confirmation/settlement team and accounting team
were all part of treasury control services group (TCSG) reporting to the same
Joint General Manager.
3.2.5 There were 87 instances of execution errors in treasury deals during 2013-14.
As many as 13 instances of breaches of internal risk limits came to light in
treasury besides instances of breaches of overall Fx VaR and NOOP limit in
overseas branches. There were also several instances of breaches (5 in
January 2014) in deal size, which were approved with considerable delay.
3.2.6 The market risk group independently validated the models used for valuation of
various fixed income, forex and derivative products. However, valuation of
certain structured products was undertaken on excel sheets with cash flow and
discount factor assumptions, which gave rise to model/people risk in such
valuations. There was an independent third party review of these valuation
models during 2013-14. Out of 57 forex and derivative products, 6 products
entailed deviation of more than 1 % of notional value between the price of the
independent valuer and the value obtained through the model.
3.2.7 Stress testing of market risk factors was not a comprehensive exercise. In view
of the approx 16% forex movement during August 2013 within a short span of
15-20 days, the assumed 20% movement in 'severe' stress scenario did not
appear to be adequate. Further, market risk propelled credit risk stress
scenarios were not considered for their impact on the derivative portfolio.
The summary of major areas of financial divergence, including assessed risk weighted
assets, which determined assessed capital of the bank, is given below. Details are in
Annex-1.
(i) The bank had assessed ~128 bn additional capital under moderate stress scenario.
At the current level of RWA, this would reduce the CRAR by approximately 300 bps.
The ICAAP drew comfort from the current (March 31,2014) reported CRAR of 17.70%.
(c) ICAAP
(i) One of the six general risk appetite statements stated that the bank would endeavor
to maintain AAA rating from domestic rating agencies at all times. The statement
explained that rating agencies usually expect a minimum CRAR of 12% for the highest
rating. Internal capital planning kept the regulatory minimum as the anchor.
(ii) Risk appetite continued to be expressed in the form of risk limits for various risks
without a single metric or aggregated number (say, in the form of capital, CRAR, Nil,
VaR), which could be linked with the strategy of the bank. The bank had tried to link
the volatility in Nil as a factor to set exposure limits for various rating grades in the
corporate portfolio. Similarly, portfolio default rate had been used to decide the limit and
monitoring of exposure for various retail loan products.
(iii) Risk appetite and risk limits were inter-changeably used (i.e., they could not clearly
be told apart) although the latter was expected to be a tool to allocate risk appetite to
business lines. Risk appetite across all risk dimensions required to be disaggregated for
an effective comparison of 'risk profile' (representing a point-in-time net risk exposure)
against allocated risk appetite. The current quarterly risk-dial needed to distinctly
Borrower Name Date of Facili Net Ols Date of NPA Classification Security/valuatio Provision Remarks
Last ty
(Net of n details
Sanction Type
ECGS
Claims)
As per As per As per As per As per As per Held Requi- Short
Bank SSM Bank SSM Bank SSM red Fall
FB Promoters' contribution
19/06/ 28.06.
PSL Ltd & 5595 Std Sub Std 8833 8833 839 839 given in the form of land,
2013 2013
NFB not acceptable.
Promoters' Contribution
Tulip Telecom 25/03/ 25.03. not brought as unsecured
FB 4660 Std 0-1 5959 5959 1165 1165
Ltd 2013 2013 loan was not converted
into equity
Funding was done
through additional loans
25/09/ 29.03. and extension of abnormal
3i Infotech Ltd FB 6548 Std 0-2 12794 12794 2619 2619
2013 2012 advance payment for
services in order to keep
the account standard.
Hanjer Biotech 25/09/ 31.07. Std ,. Sub Std Bilateral Restructuring
FB 1119 1824 1824 168 168
Energies Pvt Ltd 2013 2013 during COR process
Y'brant Media 01/09/ 31.03. Principal and interest of
(- FB 300 Std ~Sub Std 5808 5808 45 45
Acquisition 2012 2014 Q3FY14 not paid
Continuously overdrawn
ABG Shipyard 06/03/ 14.09.
FB 8815 Std ~Sub Std 11005 11005 1322 1322 and NPA before COR
Ltd 2014 2013
reference date
Hanung Toys 23/12/ 27.10. Bilateral Restructuring
FB 2519 Std vSub Std 3285 3285 378 378
and Textiles Ltd 2013 2013 during COR process
Oceanic FB+ The crystallised MTM was
18/12/ 21.12.
Tropical Fruits O'tiv 710 Std. /' / Sub Std. 374 374 78 173 95 outstanding for more than
2013 2013
Ltd. e 90 days and later on
Micro,
Small &
2 Medium
- 388633 271 388362 - Reasons
Enterprises and list of
accounts
Weaker given
3 Section
232788 62782 0.3 62782 170006 separately
Education
4 Loans - 289 3 286 -
TOTAL 931156 1010304** 5733 1004570 -
*This does not include RIDF investments done by the Bank in order to meet the shortfall in
Agriculture target
** Includes the investments in RIDF to the tune of~ 208293.6 mn
'--
Sr.
Particulars Amount
No.
A Total Liabilities excluding capital & reserves as
5509849
on March 31, 2014
Upper Tier II Instruments 152091
Subordinated debt 216412
Deposits 3319137
Borrowings 1179088
Other liabilities and provisions 643121
B Internal Liabilities 136040
Provision for standard assets 19318
Provision for diminution in fair value of
13010
restructured accounts*
Provision for NPAs* 72077
Floating provision* 2
Provision for NPI* 4272
Provision for depreciation in investments* 19503
Any other (to be specified) -
Provision for assets on lease* 290
Provision for other assets* 2612
DICGC/ECGC claim received 36
Provision for securitization sell down 1541
Provision for contingencies 729
Provision for operational risk 288
Provision for country risk exposure 135
Reserve for Profit on sell down to ARCILlPhoenix 2198
Fraud Risk Recovery from staff 15
Other provisions 15
C Total outside liabilities [A-B] 5373809
* These provisions are netted off from the respective assets in the Balance Sheet.
Sr.
Particulars Amount
No.
A Paid up capital [including ESOP outstanding & interest
11616
free funds from H.O. (foreign banks)]
B Reserves and Surplus 720517
Statutory Reserve 135267
Share Premium 314976
Capital Reserve (excluding revaluation reserve) 22933
Special Reserve 54790
Revenue Reserve 96
General Reserve 35658
Investment Reserve Account 1270
Remittable surplus retained in Indian books [Foreign
banks] 0
Credit Balance in P&L Alc 133186
Any other free reserve (Foreign currency translation
reserve) 22342
C Intangible assets (including net deferred tax assets) &
7468
accumulated losses
D Net Worth (book value) [A+B-C] 724665
E Adjustments following inspection findings 62294
Investment Reserve Account 1270
Additional Loan Loss Provision and other items 38398
Additional provisions for NPI 275
Foreign currency translation reserve 22342
Any other Item ( other assets-4.4 mn and claim not
acknowledged as debt-4.8 mn 9
F Assessed net worth or real/exchangeable value of paid
up capital and reserves [D-E] 662371
G Reported net worth of the bank [if different from (D)]
KK 12.05%
LL 4.97%
MM 17.02%