icici bank desert at ion

8/7/2019 Icici Bank Desert at Ion

1/58

O B J E C T I V E O F T H E P R O J E C T :

The main objective of the project is to interpret and analyze the intricacies involved in the

decision making process which a bank undergo while sanctioning a loan against an applicant

and to suggest any change which might make the entire process operate more efficiently,

impartially and economically resulting in customer satisfaction and better utilization ofresources available with the bank finally increasing its profit at the end of a financial year.

The project also intends to determine the market share owned by different financial

instruments of ICICI and discover any niche market along with its demand which is still

unattained by the existing financial instruments of different categories as well as to

determine the factors which provides products of other banks an upper hand over the existing

products of ICICI Bank in a particular product category for a given sample of population in a

particular area. Finally to frame certain marketing strategies on the basis of the information

derived out of survey to make the products of ICICI popular in its target segment.

ME T H O D I L O G Y U S E D :

The credit appraisal process is based Feasibility analysis which comprises of determining

Managerial Competence, Technical Feasibility, Commercial Viability and Financial Viability of

the loan proposal as per the guidelines of RBI. The bank uses feedback of organizations like

CRISIL, ICRA and NIBM for this purpose. While determining projected sales of the end

products of a term loan proposal the past growth of the organization becomes a significant

issue.

The Marketing of Bank Products involves a survey to determine the current market share ofthe products of bank and framing suitable marketing strategies to determine effective niche

markets and fulfill their demand.

F I N D I N G , C O N C L U S I O N A N D R E C OMME N D A T I O NS:

The credit appraisal procedure followed by ICICI Bank is very effective as it holds least Non-

Performing Assets and the products of ICICI Bank are much popular among people of the region

of survey.

The company should also opt for a rigorous market research in order to determine thereasons of unpopularity of its products and try to determine certain segments still uncovered

by the leading players in respective product category.

It is recommended that in order to establish ICICI as a bank of every INDIAN it should open its

branch at every corner of the country. For this purpose the rural areas should be targeted first.

Then need analysis of demands of people of those regions followed by designing products which

would furnish their needs effectively.


2/58

ICICI BANK -

C om p a n y b a c k g ro u n d : ICICI Bank is the largest private sector bank & the

seco nd larg es t bank in the cou ntry in terms of as set s . It i s a p a n-Ind ia p la yer

with around 950 bra nch es ( including rec e ntly a cq uire d Sang li bank). The bank

has boo ste d its overs e a s ope rat ion s in th e las t three ye ars and now ha s

presence in 18 countr ies ei ther through subsidiar ies or representat ive off ices

.Tog et he r with its su bs id ia rie s , ICICI Ba nk o ffers a com p le te sp e ctru m of

f inancial services & products ranging from commercial banking to investment

ba nking , m utu al fund to insura nce .

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81

billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year

ended March 31, 2010. The Bank has a network of 2,529 branches and 6,000 ATMs in India, and

has a presence in 19 countries, including India.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail

customers through a variety of delivery channels and through its specialised subsidiaries in the

areas of investment banking, life and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in

United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance

Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh,

Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and

Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock

Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New

York Stock Exchange (NYSE).

ICICI Bank and ICICI, along with other ICICI gro up co mpan ies, were opera ting as a

virtual universal bank, offering a wide range of financial products and services. The

merger of ICICI and two of its subs idiar ies with ICICI Bank has c o mbined two

organ izations with complementa ry strengths and products and similar p ro ce sses

and operating architecture. The merger has co mb ined the large capital ba se of

ICICI with the strong depo sit raising capability of ICICI Bank, giving ICICI Bank

improved ability to incr ease its market sha re in banking fee s and co mmissions, while

lowering the overall co st of funding through access to lower-cost retail depo sits. ICICI

Bank would now be able to fully leverage the stro ng corporate relat ionship s that ICICI

has built, seamlessly providing the whole range of financial pro du ct s and services to

corporate clients. The merger has also resulted in the integration of the retail

finance operations of ICICI, and its two merging subsidiaries, and ICICI Bank into

one entity, creating an opt imal structure for the retail bu siness and allowing the full


3/58

rang e of a ss et and liability products to be offered to all retail cu sto mers.

The share exchange ratio approved for the merger was one fully paid-up equity

share of ICICI Bank for two fully paid-up equity sh are s of ICICI. This was de term ined

on the basis of a comp rehensive valuation process incorporating international

best pract ices, carried out by two sepa ra te financial advisors and an independ entaccounting firm. The equity shares of ICICI Bank held by ICICI have not been

cance lled in the merger. In accordanc e with the provisions of the Sc heme of

Amalgamation, the se shar es have bee n trans ferred to a Trust to be divested by

appropriate placemen t. The pro ceed s of such divest ment would accrue to the

merge d entity. With the merger taking effec t, the paid-up share capital of the Bank

has increa sed to Rs. 6.13 billion, comprising 613 million sha re s of Rs.10 ea ch .

Inv e s tm e nt Rat iona le :

ICICI Bank will rem a in a o ne of th e m o st fa nc ie d stocks a mo ng the inves to rs

who be lie ve in Ind ia s long-term growth sto ry.

Retail ba nk ing though slow ed do w n will re m a in fo cu s area for ICICI Ba nk

Massive scale up in international banking

Inno vat e a pp ro ac h to tap pot e ntial in Rural & SME secto r

Robust no n-int ere st inco m e co m pe nsa ting for slow er growth in Ne t

Inte res t Incom e

Sangli Bank acqu isition will he lp t he ba n k to im pr ove CASA d e po sits .

B U S I N E S S R E V I E W -

Retail Banking

The retail bu siness is the key driver of ICICI Banks gro wth strategy, with the

object ive of diversifying the a ss et portfolio and building a low-co st stable resour ce

ba se . With a complete product suite across both ass et and liability pr o du ct s as well

as a wide range of banking ser vice s, ICICI Bank is today a retail financial

supermarket with the ability to cross-sell the entire range of credit and invest ment

pro du cts and other banking serv ices to our customers. The key dimensions of our retail

strategy are products, channe ls and pro cesses, unde rpinned by a strong customer

focus.

Changing demographics and the trend towards upward migration in income levels coupled

with existing low retail credit penetration levels have created a major growth

opportunity in retail finance. ICICI Banks retail assets business is capitalizing on this

opportunity with a competitive positioning and strategy comprising innovative products,

wide distribution, strong credit contro ls and high customer service standards and rapidly

growing volumes in each seg ment to achieve economies of scale. ICICI Banks retail


4/58

portfolio (including the portfolio of ICICI Home Finance Company Limited, its wholly-

owned subsidiary) at March 31, 2008 was over Rs. 86.00 billion, as co mpared to the

co mbined retail portfolio of ICICI and ICICI Bank of about Rs. 49.00 billion at March 31,

2009.

CREDIT APPRAISAL

Introduction: Credit Appraisal is a process to ascertain the risks associated with the extension

of the credit facility. It is generally carried by the financial institutions which are involved

in providing financial funding to its customers. Credit risk is a risk related to non repayment of

the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of

the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed

in order to measure the financial condition and the ability of the customer to repay back the

loan in future. Generally the credit facilities are extended against the security known as

collateral. But even though the loans are backed by the collateral, banks are normally interested

in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows areascertained to ensure the timely payment of the principal and the interest.

The key elements of loan appraisal are assessment of theapplicants:

Repayment Capacity: Done through Cash Flow Analysis.

Character or Personal Creditworthiness.

Capital and Collateral: Determined through a Balance Sheet.

These days banks generally prefer loans to be re-paid back along with interest than to

acquire the hypothecated assets of owner because the total process of auction of thehypothecated asset involves a cost for the bank which is both in form of monitory as well as

psychic cost. After incurring these costs there occurs no surety that the amount of unpaid loan

along with the interest applicable will be recovered because there is always a probability that

none of the participants in the auction process are ready to pay the amount bank need to recover.

It is also possible that there is no demand for the hypothecated asset in market due to the

particular asset getting backdated or due to lack of purchasing power of people (economic

depression).

In this connection the example of Subprime Crisis that prevailed in America during

F.Y.2008-09 is very relevant. During this crisis period the banks seized the assets (especiallyhouses) that were hypothecated to them as most of the people who purchased those assets

against loans from banks were unable to repay back the same even after repetitive repayment

scheduling due to economic depression. At the same time the unemployment problem was

so acute in USA that interested people were not even able to purchase those assets during

auctions at prices desired by banks to discount the loans outstanding against same assets. This

lead to accumulation of considerable amount of Nonperforming Assets(NPA) in the accounts

of banks and other lending institutions which further resulted the same organizations to seize

from extending loans for projects handled by different industries (especially automobile and


5/58

real-estate firms) which resulted in conversion of many reputed firms like General Motors to

sick organizations. This scenario has compelled the present American government to purchase

back the Toxic Assets (NPA) in hands of banks and lending institutions.

To avoid such situation an effective credit appraisal is always required for existence of any bank.The ICICI BANKBank and the ICICI bank has the lowest NPA among all banks in India which

further reflects the effectiveness of Credit Appraisal technique adopted by these banks.

The main goal of this report is to reveal the details of the Credit Appraisal system adopted by

ICICI Bank and to discover any limitation of this system along with remedy of the same

limitation so as to strengthen this system further in order to prevent any crisis related to

extension of credit to profitable projects by banks as well as to simultaneously eradicate chances

of any crisis like that of Subprime Crisis in America.

Different types of loans extended by ICICI Bank against which credit appraisal is conducted:

Term Loan for traders.

Project Finance. Loan to traders in order to meet Working Capital Requirements.

Housing Loans.

Educational Loans.

Car Loans.

Loan to professionals. Loan to Defence Personnel.

Appraisal for Term Loans:

Term loans are provided by ICICI Bank for an extended period of time and it has following

characteristics:

Term loans are sanctioned for acquiring fixed assets like land, building,

machinery, vehicles, etc. Normally payable in installments spread over a

period of three to ten years.

Repayment of term loans should be out of profit or cash inflows occurring out of

operations over a period of time in the pre-arranged schedule agreed beforehand.

However these days banks at times (on discretion of the bank authority) provide long term

loans to meet working capital requirements as well which indicates the distinct shift from the

traditional approach towards lending which negates the concept of working capital credit beingbranded strictly as a short term credit facility.

Term loans are generally made available in different forms statedas under:

1. Fund based term loans: The term loans provided for outright acquisition of capital goods.

2. Non Fund based term loans: Generally occur in the form of Deferred Payment

Guarantees (DPG) where the liability to make payment crystallizes after the bills against

such guarantees are presented for payment.


6/58

3. Underwrite equity issues floated by companies: By doing the same bank assumes long

term exposure in the company.

Hence term loan is a form of a participation loan which makes the lending institution a

stakeholder of the borrowing firm for a considerably long time period like other shareholders

and debenture holders of the firm. Longer the period of repayment, the riskier is the proposition,

and therefore any appraisal of term loan involves an inbuilt method of assessment of risk elements

involved therein.

General Guidelines for sanction of term loans by Banks

a. All banks together can provide term finance not exceeding Rs.500 crores for a

project (Not applicable for

power generation projects.).

b. For projects requiring term finance exceeding Rs.500 crores banks will participate

jointly with all India financial institutions subject to share of an individual bank not

exceeding its credit exposure limit and that of banking system not exceeding Rs.500

crores.

c. For projects in infrastructure sector (i.e. power, telecommunication, ports, and roads)

banks can provide term loan without any ceiling limit subject to credit exposure limit of

each bank.

d. The credit exposure limit of a bank towards infrastructure projects promoted by

single borrower should not exceed 25% of the banks net worth and to that of a group not

to exceed 60% of the banks net worth.

e. Refinance is available in respect to the term loan

From IDBI to industries with project cost not exceeding

Rs.500 lacs. From SIDBI to industries with project cost not

exceeding Rs.300 lacs. From NABARD to agro based

industries and rural industries in rural areas.

f. Banks prefer to sanction term loans which are eligible for refinance: To be eligible forrefinance, the term loan should be given as per the norms prescribed by RefinancingInstitution and the industry should not be one which is classified under negative list.

Fixed Assets- Accounting and Otheraspects

Valuation of fixed assets involves two common terms in banking parlance they are Gross Block

and Net Block. The gross block represents the original cost of fixed assets which includes land,

building, plant and machinery as well as other fixed assets while net block indicates the book

value (depreciated or otherwise) of these assets.


7/58

According to Accounting Standard 10(AS-10) issued by ICAI the original cost (Gross

Block) of a tangible fixed asset include the following prices:

The purchase price.

Import duties and other non-refundable taxes payable on purchase. On the other hand

any rebates or discount on purchases and refundable tax components like CENVAT are

excluded from the cost.

The expenses that have been incurred and can be directly attributed in bringing the

asset to its working condition for its intended use. These expenses may include

professional fees, cost of site preparation, cost of handling and initial delivery,

installation costs (e.g. special foundation for the plant) etc.

The start-up and commissioning expenses of the plants / fixed assets including the

cost of trial runs experimental production etc.

The cost of borrowing (interest) or the cost of financing the fixed assetsincurred during the

construction /installation period forms a part of original cost of fixed asset. In financial

parlance this is called capitalization of interest.

The administrative and other overheads specifically incurred for construction,

acquisition and installation of fixed assets also form part of the fixed assets.

However in case the entire machinery or some parts of the same or the entire plant if

imported from abroad then payment against the same might occur in two ways. One option is

the settlement of the cost of the import in cash immediately on delivery of the machinery at the

hands of the importer. In such case the original cost of machinery is the cost of the down

payment made. While the other option is acceptance of payment by the overseas supplier in

deferred installments and the importer is provided with a foreign currency loan. However in

such case there is every probability of occurrence of a consequent foreign exchange gain

or loss. The amount of gain or loss due to exchange fluctuation is added to the original cost to

determine the gross block of the imported asset.

In order to explain the above mentioned point let us consider ahypothetical example:

A company in India has entered into a contract for purchasing machinery worth US $ 2,

00,000 in four monthly installments of US $ 50,000 each. The exchange rates (Rs. per US $)

on the dates when the payments were made were 50, 50.25, 50.50, 50.75 respectively.

The import cost of the machinery in rupee terms can now be determined in thefollowing manner:

Mont

Payment (US$) Exchange Rate Amount in Rs.1. 50,00

50.00 250000

2. 50,00

50.25 2512503. 50,00

50.50 252500

4. 50,00

50.75 253750Total 10075000


8/58

The cost of the machine hence indicates an exchange fluctuation loss of Rs.75000/- incurred by

the promoter while making payment in four installments which has to be added to original cost of

the machinery.

Some distinguishing aspects about fixed assets which have bearing with total cost of fixed

assets as well as admissibility of the cost in balance sheet are discussed below:

Fixed assets are held with the intention of being used for the purpose of providing or

producing goods, services etc. Such assets are not held for the purpose of sale in

normal course of business (going concern concept) and are generally accounted on

historical cost basis with application of depreciation at the applicable rates. However

special considerations are applied in matter of computation of book value of the

following assets:

o Forests, plantations and similar regenerative natural resources.o Wasting assets including mineral rights, expenditure on the exploration for and

extraction of minerals, oils, natural gas, and similar regenerative resources.

o Expenditure on real estate.

o Livestock.

Business enterprises incur a considerable portion of their total expenditure for

improvement and repair of their existing fixed assets. However only that part of the

expenditure are added to gross block of fixed assets(capitalized to the gross

block) which contributes to improvement of performance (adds to future benefits)of

the same. Example of such expenses are:

o Modification of the items of plant to extend useful life, including an enhancementof capacity.

o Cost incurred in upgrading machine to achieve a substantial improvement in

quality of output.

o Expenses incurred in adaptation of new production process resulting in

reduction of operating expenses.

While the portion of the expenditure incurred in order to maintain the current

performance are considered to be of revenue nature expenses and are hence charged to

the Profit and Loss account as such expenses does not increase the gross value of the

capital asset.

Expenses incurred during the construction / project implementation period have a

bearing on the final cost of the capital asset. Hence, besides purchase price, import

duties and other non-refundable taxes any other costs which bring the capital asset to its

working condition for its intended use are added to gross block for the same. Example of

such expenses are:

o Expenses incurred against site preparation.

o Delivery and handling costs.

o Installation costs incurred.


9/58

o Professional fees, technical knowhow fees, fees of architects and fees of engineers.

Cost of term loan i.e. interest paid to the lending institution during construction

period is usually capitalized to the gross block of assets while any outstanding interest

against the same renders a term loan NPA as per the latest instructions issued by RBI

and such expenses are treated as deferred revenue expenditure and are to be amortized

within a period of 3 to 5 years.

CENVAT Credit

Cenvat credit is a form of refundable tax and hence the cost of capital asset as shown in balance

sheet does not include this amount. As per the norms of ICAI an enterprise may show cenvat

credit against capital assets as

a receivable asset if the following conditions are fulfilled:

1. The enterprise is entitled to CENVAT credit.

2. There is a reasonable certainty that the CENVAT credit would be utilized.

APPRAISAL FOR TERM LOANS METHODOLOGY

For any bank the basic purpose of appraisal of a proposal for extension of Term Loan facility is

to ensure that the applicant can acquire the proposed/stated fixed assets and can put them to

use in producing merchandise which would have market, and generate enough cash from

operations to repay the term loan and service the interest commitments thereon over the

stipulated period of repayment. It can therefore be claimed that the appraisal process

envisages a meticulous examination of all the relevant aspects of the economics of the

project.

While appraising a term loan few questions which often comes in the mind of Credit Analyst of

the bank are as given below:

Who are the promoters and what are their credentials? Does the available information

suggest that they will be capable of promoting and managing the project successfully?

Whether the finished goods produced would have an assured market (it involves athrough demand/supply analysis)?

Whether the technology proposed to be employed is adequate (in terms of

effectiveness and feasibility)?

Whether the plant capacity is adequate or in other words whether it will be

commensurate with existing and future demand pattern.Whether the projections relating to operations and profitability of the project over

the repayment period (as submitted by applicant) are realistic?

Whether the amount of proposed loan is adequate as per the term requirements of theproject?

Whether the projected cash generation is adequate to service the loan?

Last but the most important question- If the term loan is not repaid by the entrepreneur in

terms of the agreed schedule, whether proper risk hedging mechanism is in place so that

the interest of the lending institution is not jeopardized.


10/58

These are some of the indicative questions that must be answered in course of the termloan appraisal.

Hence it can be concluded that the entire process of term loan appraisal can be divided into

distinct appraisal areas in order to execute the entire process in a very structured and acceptable

manner. These areas are:

Human Appraisal or Appraisal of Managerial Competence. Appraisal of the market and economic scenario and examination of technical

feasibility aspects.

Examination of Financial and Commercial viability.

Risk appraisal of the proposal.Human Appraisal or Appraisal of Managerial Competence

A thorough study is required in order to determine the capability of entrepreneurs in

implementing and managing the project by examining the attributes mentioned below:

y Past Experience of bank about the Promoter- The bank officials (usually

credit analyst) try to investigate about the current creditworthiness of the

promoter/applicant by analyzing the repayment history of the same promoter

about other loans if any with the bank as well as the same for other banks. If the

applicant is a new customer then the bank officials ask for feedback from other

banks (where the applicant or his/her associates are having any term loan) regarding

creditworthiness of the customer. In other word the total debt history of the applicant

comes under scanner.

y Qualification of the applicant- The bank officials investigates the academic

background of the promoter in order to determine whether the promoter is

having sufficient knowledge to handle technical intricacies of the business against

which term loan has been sought for.

y Technical and Managerial skills-The bank officials in many cases encounter

situation where the promoter might not have required technical knowledge but has

long experience of the business against which term loan has been applied for and

in such situation after investigating the skill sets of the promoters and his

managers/ employees the bank officials might come to conclusion that their

experience is much desired for the said business to function effectively.

y Entrepreneurial Skills- To judge the same the bank officials try to analyze thefollowing attributes related to applicant ;

o Ambition.

o Tenacity

o Risk taking aptitude.

o Family Background.


11/58

y Character of the promoter/applicant- The analysis of character of applicant is

mainly based on the following:

Honesty.

Integrity.

y Capability of the promoter to arrange funds in contingencies.- Thecapability of promoter(applicant) to arrange for funds is done by analyzing the

capital structure of his/her company and capital reserves of the organization. Along

with this the credit analyst analyze the balance sheet of the company in order to

know the unsecured loans of the company as according to norms of ICICI BANK the

applicant cannot pay any principle or interest against unsecured loans (quasi

equities) without permission of the bank.

Hence, the most important and difficult of all the steps involved in an appraisal is accessing the

credibility of the man/lady behind the project and judging his/her competence in successfullypromoting/managing the project. As per the feedback from credit analyst of the bank it is quite

clear that one might acquire great skill in accurately forecasting the future behavior of a financial

parameter, or may have become well conversant with dynamics of a particular sector which

may result in excellent appraisal of technical, economic, financial and commercial aspects of

a credit proposal, but this provides no assurance that his/her assessment about promoters

would be correct.

From this above written feedback of the credit analyst of the bank (ICICI Bank) it is quite

clear that one of the most important reasons for huge accumulation ofNon Performing Assets

(NPA) in the hands of lending sector is poor human appraisal by credit analysts. However, quitefortunately with the passage of securitization bill and many bills on the cards, the incidence of

willful default may tilt downwards and

human appraisal may work out to be manageable exercise for the

lending bankers.

Support Extended By Finance Ministry towards Effective Human Appraisal

As per the directives of the Finance Ministry of India the RBImaintains an updated list of suit

filed accounts

(Rs. 1 crore and above) in its website (www.rbi.org.in). The credit analyst of the bank oftenbrowses through this site for preliminary appraisal whether the promoter or any of his/her

associates for the stated project figures in this list. Similarly, the RBI also circulates a list of

willful defaulters of Rs.25 lakhs and above to individual banks. As per guidelines of the bank

the credit analyst is bound to consult this list before he/she undertake technical, economic and

financial appraisals of the proposal.

Side by side with the emergence ofCredit Information Bureau of India Ltd. (CIBL)collection

of information related to creditworthiness of a promoter (applicant) is no longer a cumbersome


12/58

task. Banks need to subscribe for membership with the CIBL (ICICI BANK is already a member

of the same). This organization provides the desired

information in this regard to member banks (lending

institutions also).

Appraisal of Technical Feasibility AspectsExamination of technical feasibility aspects of a proposal is one of the most important areas

where any credit appraising officer has to satisfy him/her before going into the examination of the

financial viability of the same proposal. This part of credit appraisal has extra significance

because it is always possible that the credit analyst

may not have an in-depth knowledge of the technical process employed in the

proposed project.

How credit analysts at ICICI Bank deal with such a situation?

In case the promoter (applicant) opts for a change in existing technology being used in businessto a modern, effective and proven one then the credit analyst need not have to go for detailed

feasibility study.

However, in case the technology is new or emerging one then a detailed report on examination

of technical feasibility aspects is necessary. In such situations the credit analyst usually knocks

doors of outside agencies of proven competence like CSIR (Council of Scientific & Industrial

Research, Govt. of India).

These organizations (e.g. CSIR) have patented the process designs in their respective

activities and they actively associate themselves with industrial production of these products.These technological innovations made by these laboratories often suit the Indian conditions

better than latest foreign technologies in the same area of activity. However, the credit analyst

need to ensure effectiveness of the same technology under industrial conditions also side by

side with laboratory conditions and for ensuring the same he/she needs to

understand every lines of report submitted by the

CSIR.

Factors Ensure Technical Feasibility of a Project

Licenses, Permits Required-The credit analyst need to ensure that the proposedprojects and technologies to be employed are having required Licenses and Permits for

designated authorities.

Location of the ProjectThe location of a project with respect to structural, legal and

infrastructural aspects has considerable significance in project appraisal. A particular

location might have strategic advantage over others if it has ready accessibility to

critical inputs and utilities required for the product to be manufactured and marketed.

Hence, the credit analyst needs to investigate these aspects in depth before proceeding to

other phases of credit appraisal.


13/58

Product and Process The credit analyst is bound to tender undivided attention on

analysis of process adopted in terms of technology implemented (in comparison

with modern technology available) as well as the standing of supplier of technology and

his/her stake in the organization of the applicant. These days to ensure an effective

technical feasibility analysis the bank usually ask for performance guarantee from the

supplier of technology.Plant andMachinery The credit analyst need to personally investigate the plant and

machinery of the applicant in coordination with others having knowledge of the same.

The investigation generally

comprise of examination of suitability, capacity, standing of supplier of inputs

(especially raw materials). In order to ensure an effective technical feasibility

analysis and prevent chances of development of any NPA (non performing asset) at

any later stage (due to non-repayment of loan extended) the bank authority generally

seeks for a performance guarantee from the applicant of term loan. However this days

ICICI BANK has subscribed as a client ofCRISIL (CREDIT RATING

INFORMATION SERVICE OF INDIA LTD.)which does necessary vetting and

provides feedback about effectiveness of machineries used in different industries .

Energy Requirements During technical feasibility analysis the credit analyst need

to investigate about the type of the energy source (coal, natural gas, electricity, liquid

fuel etc.) needed as inputs for the production to commence and continue

uninterruptedly. The applicant needs to ensure local availability of the energy

requirements. The ICICI Bank prefers applicants with captive power generation

systems installed at their respective production units to ensure effective utilization of

by-products. Along with this the bank officials also ask for adequate availability of water

if found important for specific activities related to production and handlecontingencies like any accident in plant. Hence, during the course of technical

feasibility analysis the credit analyst ensure that the stated propositions fit well with

location aspects of the project.

Raw Material andManpower-The credit analyst need to investigate on quality, cost

and regularity of supply of raw material. The ICICI Bank prefer applicant with

dedicated supplier network present in vicinity of the project location. Along with this

proper workforce is another aspect of investigation as non availability of suitably

skilled workforce often works as a bottleneck for a project to continue.

Commercial Viability orMarket Appraisal

The viability of a credit proposal for providing long-term finance depends on whether the

enterprise is in a position to generate adequate surplus over a period of time. This, further,

depends on whether the production/sales of goods produced by the enterprise (applicant)

registers the desired rate of growth, on which its profit earning capacity depends. Validation of

the demand-supply gap and the estimated growth of demand for the product is therefore an

important aspect of proposal of term loan.


14/58

In ICICI BANK validation of projection/rate of growth of demand has been a bone of

contention amongst among the promoter (applicant) and credit analyst. However, till last few

couple of years a longstanding relationship with bank was the most important parameter which

had helped clients (applicant) in earning banks confidence. In other words, a long-standing

relationship of client with the bank enriches the probability that the credit analyst of the bank

would accept the projected growth rate submitted by the applicant, perhaps with minor changeif at all required. Though this days with advancement of dissemination of information in all areas

now the credit officer relay on a number of well research studies published by reliable agencies

having expertise in different industries..One of such agencies the ICICI BANK is subscribed

with is CRIS-INFAC which publishes its studies on major activities/industries e.g. cement,

steel, sugar etc. both in electronic form as well as hardcopy. These studies are based are based

on trend of actual historical data available for respective industries and domestic as well as

international market trend in the economy.

In addition to this ICICI BANK is having its own database of credit portfolio handled by them in

electronic form. The database contains historical data in relation in respect of sales and other

operational data of various units engaged in a particular business activity. The ICICI Bank

(ICICI BANK) estimates future sales on basis of given historical trend by incrementing

sales each year by 25% over that of previous yearestimate.

In short the major intricacies involved in determination of commercial viability of a product

i.e. market appraisal are as under (on the basis of information obtained from credit analyst of

ICICI BANK):

The credit analyst need to examine whether the goods can be sold in quantity and price asprojected by the applicant (entrepreneur) as unless the products are sold at or near the

projected level the expected cash flow will suffer and the unit will become sick causing a

rise in Nonperforming assets of the bank.

Estimation of futuristic demand of the product on basis of present demand of the same.

Knowledge of level of competition from similar products and substitutes and the

strength of the competitors. ICICI BANK makes extensive use of the prowess database in

this connection.

The capability of the product to penetrate the market. In order to ensure the same the

credit analyst need to keep market strategies of the entrepreneur under scanner. In

ICICI BANK preference is given to entrepreneurs with aggressive and innovative

marketing strategies.

The present stage in life cycle of the product. Products at growth stage (e.g.

laptops) have high demand while products at maturity stage (e.g. personal computers)

have a very stable demand with a constant rate of decline.

Price of the product with reference to the same of its competitors (substitutes) as well

as the price elasticity of demand. Price elasticity is a determinant of demand of a

particular product as it determines the percentage change in quantity of a product with


15/58

that of price of the same product. Generally in case of goods which people need in their day

to day life on a very regular basis (necessity goods) the no significant change in demand with

price is noticed (relatively inelastic) while for luxury goods the change in demand with price

is very significant (relatively elastic). Hence, price elasticity of demand is a determinant is

cash flow estimation.

Appraisal of Financial Feasibility aspects or Determination of Financial Viability of

Project

The technical feasibility study followed by a commercial viability analysis of a project reveals a

strong idea to credit analyst about whether the project passes the test of feasibility in respect of

technical, economic, market and demand-supply related aspects in long term context. The

next logical step in appraisal process is to examine the financial feasibility aspects of the

project. Appraisal of financial feasibility is however dependent on the feedback obtained from

next step of appraisal of term loan i.e. the determination of the cost of project and means of

financing the project.

In short it can be concluded that the Appraisal of Financial aspects of a Project is dependent

on analysis of following aspects by the credit analyst:

The credit analyst needs to be confident over the issue that the project is having sufficient

finance at a reasonable cost to continue execution in long run. The calculation of cost of a project

is determined by following parameters:

y Land and Buildings.

y Plant and Machinery.

y Technical Know-how, engineering and consultancy fees. Cost of technology.

Patents.

y Expenses on account of foreign technicians and training of Indian technicians abroad- if any.

y Miscellaneous fixed assets which may include boilers, power distribution system, electrical

installations, furniture, fixture etc.

y Preliminary and pre-operative expenses

y Salary,Interest on term loan before commencement of production.

y Provision for contingencies (unforeseen contingencies).

y Margin of Working Capital.

The distinct sources of finance are also a subject of analysis by the credit analyst. The distinct

sources of finance are as under:

y Owners Equity based finance.

y Preferential share capital.

y Quasi equities.

y Reserve and Surplus.

y Term credits.


16/58

After examination of the sources of finance for a project the credit analyst need to calculate the

debt- equity and ensure whether it is satisfactory as per the banks guidelines. If the debt-

equity ratio is found satisfactory then only the project is supposed to be financially viable.

The credit analyst need to ensure that the average cost of finance for the project is commensuratewith the return from the project.

Determination of Cost of the Project- Feedback to Financial Appraisal

Cost of Land and Buildings - The credit analyst at ICICI Bank mainly examines the legal status

of the land while performing the financial appraisal of the project. According to the credit analyst

at ICICI BANK if there occurs any legal dispute over the land on which the project is proposed t

be built then it would not only vitiate the prospect of smooth functioning of the project, but also

creates hurdles against providing a clear primary security to the lending banker against the term loan

provided by the same.However, for lease hold land the credit analyst has to perform a proper scrutiny of the

following aspects in order to protect the interest of lending bank:

y The terms of lease deed must provide for the mortgage of the lease rights in favor of

the lender.

y The unexpired lease period should be sufficiently long so that it is valid till the dues to

the lender/mortgagee are finally settled.

y The lease deed should not contain any clause which is prejudicial to the lenders rights.

The cost of the land include cost of registration, expenses incurred towards leveling the same

land, cost of fencing the compound wall as also the cost of fabrication and installing the gates. The

cost of land is often found to be one of the low cost elements of the project because from point

of view project appraisal no depreciation is charged against the cost of land and hence promoters

dont receive any tax incentive by employing more funds towards acquisition of the land and related

expenses.

If the land is leasehold, cost of land is recorded at capitalized value of future lease rentals. The

credit analyst however also consults the lease deed in order to determine cost of the leasehold land

as a part of the project cost.

The cost of building requirements and the cost of core building are always validated by a

reputed consultant (cost accountant) in order to eliminate any chances of overestimation.

Plant andMachinery From the point of view of the lending banker, plant and machinery is

perhaps the most important part of a project because they lend mostly against plant and machinery.

First of all the credit analyst need to validate the requirement of the machine in tune with the

observations made in the technical feasibility report of the project. In financial appraisal,

machinery procured indigenously and imported from abroad should be reported separately as

the imported machines include import duties as an extra cost of promoter.

However, promoters of the project import plant and machinery under the EPCC (Export Promotion

of capital goods) scheme under the EXIM policy of government. Such capital goods attract less


17/58

than usual custom duty, which is subject to the fulfillment of a specific quota of export obligations.

During financial appraisal the credit analyst need to ensure that such machines are used for

production of export goods only and not for production of domestic products because this would

lead to withdrawal of lower incidence of duty resulting in increase of project cost.

Technical Know-how, engineering and consultancy fees The component consultancy

fees includes expenses on account of foreign technicians working on the project in India as well astraining of Indian technicians abroad. For reasonable estimation of expenses on Technical

know-how, engineering and consultancy fees the credit analyst has to rely on different

contract document available with the promoter (applicant) of the project. In order to ensure that

expenses incurred on account of training Indian technicians abroad the credit analyst need to

understand the present trend in the same regard and decide accordingly. Apart from this the cost

of miscellaneous fixed assets are validated on the basis of invoices and comparison with cost

incurred on the specific assets in similar projects, if any.

Preliminary Expenses Preliminary expenses are those which are incurred before incorporationof a company. Such expenses are broadly in nature of flotation cost. These expenses include the

following:

Expense incurred on drafting and printing Memorandum and Article of association of the

company.

Consultancy charges in respect of preparation of project reports, feasibility reports, market

surveys etc.

Expenses on account of engineering services viz. design etc. relating to the project during the

initial stage.

Other incorporation charges incurred before the incorporation of the company including

registration charges, legal fees, travelling expenses, telephone bills and administrative

expenses during the pre-incorporation period.

Sometimes, capital issue expenses which includes fees of managers to public issue, underwriting

commission, brokerage and other issue expenses incurred by the company.

The preliminary expenses are usually written off/ amortized over a period of time by a company.

The balance of the preliminary expense appearing in the balance sheet is the unamortized

amount of preliminary expense. This expense does not create any physical or similar tangible assets

which can be charged to a lender. The expenses incurred on this account are usually met by

the promoter himself/herself.

In most cases the time by which the promoter approach the lending bank for financing their term

requirements, the preliminary expenses have already been incurred and statutory requirement

have been met.

Hence, the credit analyst need not have to validate the preliminary expenses as a part of the

project cost.


18/58

Pre-Operative Expenses Pre-operative expenses are incurred during post-incorporation period

but before commencement of the commercial production and has direct bearing with cost of

the fixed asset. The different components of Pre-Operative expenses are as under:

y Interest during the construction period.

y Cost on account of mortgaging/ charging the securities including immovable properties

in favor of lending bank.y Other miscellaneous expense incurred during the period includes insurance,

stationary, travelling expenses.

y Trial run expenses incurred before commencement of the commercial production.

Cost incurred in respect of a few components of pre-operative expenses (e.g. interest cost

during construction period) are capitalized i.e. added to fixed assets. Pre-Operative expenses have

a bearing on the future profitability of the project on account of the fact that there is a additional

depreciation cost per annum over the life of the assets.

Hence the pre-operative expenses impact the project in two ways:

1. The project cost.

2. The yearly cost of operation.

Hence, a proper estimation of pre-operative expenses is required to be done by the creditanalyst.

Provision For Contingencies In course of implementation, the cost of the project may

escalate on account of following reasons:

Cost of the main items including fixed assets may be subject to upward fluctuation due to

increase in basic prices, increase in various taxes like customs duty, excise tax and sales taxetc., transportation charges.

Where fixed assets or services are imported and the terms and conditions of the contract

include payment by the importer in foreign exchange over a period of time or in deferred terms,

the cost of the fixed asset may fluctuate on account of fluctuations in foreign exchange rates at the

time of making payments.

Implementation of a project may get delayed on account of technical factors, non availability

of certain key sanctions from the government departments and many other factors. A delay in

implementation automatically gets translated to escalation of project cost. Moreover, there might

be certain unforeseen expenses that were not initially envisaged as a part of project cost.

The RBI guidelines do not provide any standard prescription on what should be the right

amount of provision to e maintained against the above contingencies. However, provision for

contingencies should generally bear a reasonable proportion to the amount of non-firm items

(items which are subject to fluctuation) of the project cost. However, on the basis of information

obtained from the credit analyst of ICICI BANK it can be concluded that if the

provision for contingencies goes beyond 10-15 % of such items there is perhaps a reason to have

a re-look on the entire project cost.


19/58

Margin on Working Capital Margin on the working capital requirements is required to

be borne by the promoters. This is their stake in the process of building up current

assets required for long-term operations. In view of long term nature of this component,

the total margin requirements against the working capital requirements are included in

the total project cost. ICICI Bank include whole of the working capital requirements

as part of cost of the project. Though conventionally margin requirement againstworking capital corresponding to first full year of commercial production is

considered in the total project cost.

Projection and Analysis of the Profitability Statement

A credit analyst can declare a project as financially viable and suitable for being extended

with term loan facility only after the projections in respect of the various operating and financing

parameters are validated and the relative indicative ratios fall within the range of acceptability of

the lending bank.

The very first step in making financial projections for a project is firming up the acceptable level

of capacity utilization for various years, usually covering the proposed period of repayment of a

term loan. The sale value of production and the main items of expenses (directly related to

production) flow from the capacity utilization determined by the credit analyst.

The credit analyst calculates the indirect expenses like depreciation, interest on long term loan

and other loans, sales and administrative expenses separately. These expenses are then factored

on profitability projections to work out the accounting profit and profit after tax. The yearly cash

accruals are then calculated by adding back depreciation and other non-cash expenses.

The process of validation of repayment program is undergone at this stage. Usually the credit

analysts at Oriental Bank of Commerce perform a stress test method in order to project

the operation parameters. According to the stress testing method no price escalation is assumed

in respect of sale of goods produced by the borrowing unit, whereas moderate price rise is

assumed with respect procurement of raw materials and consumables and other services like

labor, power, fuel etc. This testing is done in order to project the operating parameters.

However, first of all the credit analyst need to design the Projected Profitability Statement on a

Restructured Financial Statement and then on the basis of the same projection the analysis of

financial parameters is done through Ratio Analysis.


20/58

Restructuring of Financial Statements

The restructuring of various items of financial statement submitted by the applicant is done in

order to have a format meaningful for the purpose of the credit analyst.

The very first step in this process is to classify various assets into current, noncurrent, fixed

and intangible assets. The liabilities are also classified into current, deferred, net worth etc.Classification of items in this manner helps the lending banker to rearrange the items as per its

priority.

The guidelines of RBI for Restructuring the Financial Statements are as under

(prescribed by Tandon Committee):

If investments are made in shares and advances to other firms which are not connected

with activity of the enterprise, such investments are classified as noncurrent expenses.

The deposits kept with public bodies (e.g. deposits made against telephone and powerconnections etc.) for normal business activities, security deposits kept by construction

companies and tender deposits etc., whether maturing within one or not should be treated

as non-current assets.

The slow moving or obsolete items of inventory (also known as dead items) should not be

classified as current assets.

In respect of construction companies and turnkey projects, the net work-in-progress, i.e.

gross work- in-progress minus the advance/progress payments outstanding, may be

considered as current assets/ liabilities, for the purpose of determining the promoters

contribution.

Deposits accepted from the dealers and selling agents etc. may be treated as term

liabilities irrespective of tenure, if such deposits are repayable only when the

dealership/agency is terminated. Others are treated as current liabilities.

Advance payments received from customers should be treated as current liabilities.

However, some enterprises (e.g. automobiles) may accept deposits while booking orders

for new vehicles. There may be statutory requirements which necessitate earmarking a

portion of such amount for investment in certain approved securities. In these cases,

such deposits may be treated as net of such investments and only the balance may be

classified as current liability.

Many other information carry important message to a credit analyst, though inclusion of such

information in the financial statement may not be an statutory requirement. Sometimes cleaver

accounting maneuvers are resorted in order to hide meaningful information behind

window-dressed financial statements. Before restructuring the credit analyst has to arrive at

the actual figures. According to the information obtained from the credit analyst at ICICI

BANK manipulations are usually seen in areas of sales, depreciation, valuation of

inventories, realization of receivables, investments on current assets, accounting of pro-period

expenses and income, recognition of not related business operation, valuation of fixed assets etc.


21/58

Hence, in order to recognize such hidden and fictitious information following actions are

taken by a credit analyst:

The portion of sales representing sale of raw materials should be deducted from

total sales. A corresponding amount should also be deducted from expenses againstconsumption of raw materials/consumables etc.

Generally, the analyst examines whether the management has adopted any change in

method of charging depreciation during the year. If any such change is done (usually

from SLM to WDV and vice-versa) and the new depreciation charged goes lower than

the earlier rate then the amount of depreciation written back by credit analyst should be

shown as below the line entry with a proper explanation.

Similarly, any sudden drop in the amount of depreciation charged during a year should

be critically examined. This becomes very relevant when the applicant shows net profit

but refrains from declaring dividend and also does not provide for managerial

remuneration in P/L account. The credit analyst needs to analyze this under

absorption of depreciation and managerial remuneration in order to calculate the

correct amount of profit earning.

Sometimes, grants from government representing capital subsidy are routed through

P/L account in order to improve reported profit earnings. The credit analyst usually

credits the same to balance sheet as a part of net worth of the company.

Prior period and extraordinary expenses if charged to P/L account are usually

adjusted as otherexpenses below the operating results.


22/58

Projected Profitability Statement

Projected Profitability Statement is to be prepared for all the years covering the repayment period of the

term loan. The Projected Profitability Statement along with Projected Cash Flow statement is used in

designing the furcated Balance Sheet. It helps in the determination of projected sales, different costs

involved, depreciation, etc.

Steps for designing the Projected Profitability Statement are as under:

1. The starting point for preparing a Projected Profitability Statement is estimation of sales in units

which is based on demand forecast. In ICICI Bank however the sales (in units) of future years (total

duration of repayment of term loan) are estimated on the basis of sales at the base year (year of

application for loans) guided by the growth of company in past (generally growth of the company over

last five years are taken into account). Usually if growth of company remains satisfactory then the

sales of future years is incremented by 20% over that of the preceding year. Hence, for ICICI BANK

the estimation of future sales of the enterprise (applicant) is determined by present sales and growth of

company in past.

2. After calculation of sales (in units) the capacity utilization of the machinery (against which term loan

has been provided) is calculated. As per the ICICI BANK guidelines the capacity utilization has to

remain within the range of 40%-45% initially. Then it should increase year after year to reach an

optimal level of around 75%-80%.

3.Then the amount of sales should be determined by multiplying the forecasted sales in units with the

current market price of the product. Banks uses the present market price of the product because the

increase in sales price will be offset by increase in cost and need not be taken into account.

4.The next step of Projected Profitability Statement is to determine all costs incurred in manufacturing

the end products. Raw material costs are kept constant i.e. calculated at the present actual cost while other

costs are incremented by 20% over that of its preceding year if the growth of the company remains

satisfactory as per the guidelines of ICICI Bank.

5.Wages are calculated by multiplying the number of workers with wages to be paid. Wages should

include bonus, perquisites, etc. to be paid. As per the information received from the credit analyst at

ICICI BANK the wage level should increase by a minimum of 5% to a maximum of 10% depending on

the growth of the enterprise.

6. While calculating the cost the Repair and Maintenance cost should be around 2% of the machinery

cost as per the ICICI BANK guidelines.

7. Other costs like the insurance, Rent, Stationary should be realistically projected for the first year and

then increased by 5% to 10% every year based on the growth of the company.8. Depreciation should be as per the actual calculation. Pre-Operative expenses and contingencies

involved in the project should be added proportionally to the fixed assets for calculating depreciation.

9. Interest on borrowing should be decided by the credit rating of the enterprise prescribed by CRISIL

and the repayment schedule should be decided in the next phase i.e. ratio analysis (based on the value of

DSCR). Preliminary expenses in excess of 2.5% of project cost should be added to machinery for

calculating depreciation.

10. The next step is to calculate Profit before Tax (PBT) and Profit after Tax (PAT).


23/58

Ratio Analysis

The relevant ratios analyzed by the credit analyst during the course of term loan appraisal are as under:

To Financial Ratio UsedLiquidity Current

Total Liabilities vis--vis the stake

of the Total Gearing Ratio.Term liability vis-a-vis the stake of the Debt-Equity Ratio.

Servicing capability to interest obligations. Interest Coverage Ratio.Whether the required margin is maintained

by the (Net fixed asset) / (Balance in the term loan

Servicing capability to repayment Debt Service coverage ratio.The extent to which the financials can bear

adverseimpact of movement in sale price, cost

Break EvenLevel, Margin


24/58

I/We submit our application for facilities as detailed below:

Tenure (Months):

Original Investment (cost / price) in Plant and Machinery (Rs. Lacs)... ...... ...... ...... ...... ...... .(If Applicable).

MOBILE NO :

:

:

:

12. Sales Tax registration date :


25/58

14. Details of Bank accounts of Entity not having credit facilities

15. Details of credit facilities enjoyed by the Entity from other institutions/banks

16. Details of existing credit facilit ies enjoyed by the Entity from ICICI Bank

17. Details of associate/group entities (Rs. in lacs)

18. Key Financial Information (Rs. in lacs)


26/58

APPRAISAL FOR PROJECT FINANCE

Project finance is the financing of long-term infrastructure and industrial projects

based upon a complex financial structure where project debt and equity are used to

finance the project, rather than the balance sheets of project sponsors. Usually, aproject financing structure involves a number of equity investors, known as

sponsors, as well as a syndicate of banks that provide loans to the operation.

The loans are most commonly non-recourse loans, which are secured by the project

assets and paid entirely from project cash flow, rather than from the general assets

or creditworthiness of the project sponsors, a decision in part supported by financial

modeling.

The financing is typically secured by all of the project assets, including the

revenue-producing contracts. Project lenders are given a lien on all of these assets,

and are able to assume control of a project if the project company has difficulties

complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding

other assets owned by a project sponsor from the detrimental effects of a project

failure. As a special purpose entity, the project company has no assets other than the

project.

Capital contribution commitments by the owners of the project company aresometimes necessary to ensure that the project is financially sound. Project finance

is often more complicated than alternative financing methods.

Traditionally, project financing has been most commonly used in the

mining, transportation, telecommunication and public utility industries. More

recently, particularly in Europe, project financing principles have been applied to

public infrastructure under public-private partnerships (PPP) or, in the UK, Private

Finance Initiative (PFI) transactions.

Risk identification and allocation is a key component of project finance. A project

may be subject to a number of technical, environmental, economic and political risks,

particularly in developing countries and emerging markets.

Financial institutions and project sponsors may conclude that the risks inherent in

project development and operation are unacceptable (non financeable). To cope with

these risks, project sponsors in these industries (such as power plants or railway


27/58

lines) are generally comprises of a number of specialist companies operating in a

contractual network with each other that allocates risk in a way that allows financing to

take place.

The various patterns of implementation are sometimes referred to as "project delivery

methods." The financing of these projects must also be distributed among multiple

parties, so as to distribute the risk associated with the project while simultaneously

ensuring profits for each party involved.A riskier or more expensive project may require limited recourse financing secured by

a surety from sponsors. A complex project finance structure may incorporate

corporate finance, securitization, options, insurance

provisions or other types of collateral enhancement to mitigate

unallocated risk.

APPRAISAL FOR WORKING CAPITAL

FINANCE Introduction

Working capital, also known as net working capital, is a financial metric which

represents operating liquidity available to a business. Along with fixed assets such as

plant and equipment, working capital is considered a part of operating capital. It is

calculated as current assets minus current liabilities. If current assets are less than

current liabilities, an entity has a working capital deficiency, also called a working

capital deficit.

Current assets and current liabilities include three accounts which are of

special importance. These accounts represent the areas of the business where managershave the most direct impact:

Account receivable (current asset)

Inventory (current assets), and

Accounts Payable (currentliability)

The current portion of debt (payable within 12 months) is critical, because it represents

a short-term claim to current assets and is often secured by long term assets. Common

types of short-term debt are bank loans and lines of credit.

An increase in working capital indicates that the business has either increased current

assets (that is received cash, or other current assets) or has decreased current

liabilities, for example has paid off some short-term creditors.

Implications on M&A: The common commercial definition of working capital for the


28/58

purpose of a working capital adjustment in an M&A transaction (i.e. for a working

capital adjustment mechanism in a sale and purchase agreement) is equal to:

Net Working Capital=Current Assets - Current Liabilities excluding deferred tax

assets/liabilities, excess cash, surplus assets and/or depositbalances.

Decisions relating to working capital and short term financing are referred to as

working capital management. These involve managing the relationship between a

firm's short-term assets and its short-term liabilities. The goal of working capital

management is to ensure that the firm is able to continue its operations and that it hassufficient cash flow to satisfy both maturing short-term debt and upcoming operational

expenses.

Decis

ion

crite

ria

By definition, working capital management entails short term decisions - generally,

relating to the next one year period - which is "reversible". These decisions are

therefore not taken on the same basis as Capital Investment Decisions rather they will

be based on cash flows and / or profitability.One measure of cash flow is provided by the cash conversion cycle - the net number of

days from the outlay of cash for raw material to receiving payment from the

customer. As a management tool, this metric makes explicit the inter-relatedness of

decisions relating to inventories, accounts receivable and payable, and cash.

Because this number effectively corresponds to the time that the firm's cash is tied

up in operations and unavailable for other activities, management generally aims at a

low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The

result is shown as a percentage, determined by dividing relevant income for the 12

months by capital employed; Return on equity (ROE) shows this result for the firm's

shareholders. Firm value is enhanced when, and if, the return on capital, which results

from working capital management, exceeds the cost of capital, which results from

capital investment decisions as above. ROC measures are therefore useful as a

management tool, in that they link short-term policy with long-term decision making.


29/58

Management of working capital

Guided by the above criteria, management will use a combination of policies and

techniques for the management of working capital. These policies aim at managing the

current assets (generally cash and cash equivalents, inventories and debtors) and the

short term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to

meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and minimizes

reordering costs - and hence increases cash flow.

Debtors management. Identify the appropriate credit policy, i.e. credit terms

which will attract customers, such that any impact on cash flows and the cash

conversion cycle will be offset by increased revenue and hence Return on Capital (or

vice versa).

Short term financing. Identify the appropriate source of financing, given the cash

conversion cycle: the inventory is ideally financed by credit granted by the supplier;

however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors

to cash" through "factoring".


30/58

MARKETING OF BANK PRODUCTS-

Channels

ICICI Bank has the following channels through which it offers its products and services toits customers.

yBranchesyATMsyInternet BankingyMobile BankingyPhone Banking

Products and Services

ICICI Bank offers a host of products and services to its clients, which include Deposits,

Loans, Cards, Investments, Insurance, Demat, NRI Services and Online Services etc.

Deposits

Following deposits are offered:

ySavings AccountyAdvantage DepositySpecial Savings AccountyLife Plus Senior Citizens Savings AccountyFixed Deposits

ySecurity DepositsyRecurring DepositsyTax-Saver Fixed DeposityYoung Stars Savings AccountyChild Education PlanyBank@CampusySalary AccountyAdvantage Woman Savings AccountyEEFC AccountyResident Foreign Currency (Domestic) AccountyPrivilege Banking

yRural Savings AccountyPeople's Savings AccountySelf Help Group AccountsyOutward RemittanceyFreedom Savings AccountyFamily Banking


31/58

Loans

ICICI Bank offers following loan facilities:

yHome LoansyLoan Against PropertyyPersonal LoansyCar Loans

yTwo Wheeler LoansyCommercial Vehicle LoansyLoans Against SecuritiesyLoan Against Gold OrnamentsyPre-approved Loans

Cards

ICICI Bank is India's largest issuer of credit cards. It also offers other types of cards. Thevarious cards offered by ICICI bank are as below:

y

Consumer CardsyCredit CardsyTravel CardsyDebit CardsyCommercial CardsyCorporate CardsyPrepaid CardsyPurchase CardsyDistribution CardsyBusiness CardsyMerchant Services

Investments

ICICI Bank facilitates a range of investment products including:

yICICI Bank Tax Saving BondsyMutual FundsyGovernment of India BondsyInitial Public Offers (IPO) by CorporatesyForeign Exchange ServicesyICICI Bank Pure Goldy

Senior Citizens Savings Scheme, 2004


32/58

Insurance

ICICI Bank offers various types of insurance. Customers can choose from the following:

yHome InsuranceyHealth InsuranceyHealth Advantage Plus

yFamily FloateryPersonal AccidentyTravel InsuranceyIndividual Overseas Travel InsuranceyStudent Medical InsuranceyMotor InsuranceyCar InsuranceyTwo Wheeler InsuranceyLife InsuranceyICICI Pru LifeTime GoldyICICI Pru LifeState RP

NRI Services

Following services are offered to the NRIs:

yMoney TransferyBank AccountsyInvestmentsyHome LoansyInsuranceyLoans Against FD


33/58

Marketing Strategy for Financial Products

The strategy implemented by ICICI Bankfor making its products acceptable to its target

customers is described in this section.

The products of the bank range from deposit accounts to insurance policies. The framing of

marketing strategy begins with discovering the target segment against the product proposed to

be introduced. In order to discover this segment banks go through an extensive survey usually

conducted by marketing research organizations like IMRB, AC NIELSON etc. These

surveys reveal not only the demographic conditions of the segment discovered but also

the need of that segment as well as the degree to which these needs have been fulfilled by the

similar products of other banks. In case it is discovered that needs of a considerable portion

of the target segment is still uncovered by existing products of the same product category then

only ICICI BANK plans to introduce a new product but before that it definitely analyses

whether it will be able to earn desired profit out of that product. For estimating the profit

they consider the stage of life cycle of the product as the same is a determinant of

revenue expected out of the product. For example DEMAT account is currently at growth stage

by virtue of the growing interest of people in the share market and so if any bank comes

up with some DEMAT account schemes they can definitely earn desired profit.

After determining the target segment for a particular financial product the next task is

promotion of the particular product. Promotion of the product include not only advertising

for the product but also making the product available to desired segment through distribution

channels (branches of the bank) and that to at a bearable investment from the target

customers. The advertising for financial products can be done through emails, websites of

bank, making customers aware of the product through telephonic conversation, organizing

stalls at road sides to draw attention of customers towards the products of bank, television. As

a result of these different promotion strategies an information set is developed in mind of

people from which one selects the

most suitable product as per onesrequirement.

Marketing Strategy for Deposit Accounts

The Deposit Accounts are categorized into Current Accounts and Savings Accounts. Thecurrent accounts are owned by different companies operated by various businessmen. In

case of these current accounts the customers generally get attracted to the same of a

particular bank usually on the basis of a long term relationship with the same bank.

Generally as derived out of the survey whenever a trader comes up with a new business unit

in an area he/she prefer to open a new current account for the new unit with a bank to which

he/she is already related as a customer rather than opting for a new bank mainly because


34/58

of a sense of reliability for the existing bank. Moreover, it is also easier for an existing

customer of a bank earn facilities like term loans and loans against working capital and also

to make rescheduling of repayment of existing loans compared to that of a new trader

because of strong relation of reliability which already stands between the bank and customer.

In case of both current account and savings account the new customer base is generally

created by reference from existing customers. To make these deposit accounts more lucrative

compared to other players the bank can consider proposals like proving better interest to

customers and proving some commission to existing customers who refer new customers by

crediting certain amount to their account.

Marketing Strategy for Insurance Products

In case of insurance products however the strategy should be targeting the rural

population. In cities the insurance products of organizations like Life Insurance Corporation

and SBI Life are mostly popular but in rural areas LIC is the only dominant player. In order

to make its insurance product popular the bank should recruit more and more agents in order

to strengthen its distribution channel and should provide better commission and other

facilities to its agents on successful closure of each deal but before this it should impart an

extensive training to its agents in order to make them capable of negotiating with rural people

and enhance their reliability among the same.

ICICI Lombard-

Family Floater Health Insurance

Family Floater Health Insurance from ICICI Lombard offers you the best of both worlds by

taking care of your familys health while helping you save on your taxable income.

Secure your family against financial emergencies during sudden illness, surgery and accidents as

well as against terrorist activities.

Family Floater Health Insurance plan lets you share the entire sum insured among the family

members covered under the policy, without any individual upper limits.

Policy Details

Key Benefitsy Comprehensive coverage for your family with floater benefity Cashless claims facility at over 4,000+ network hospitals across Indiay Continue to enjoy quality service even during claim settlements with - ICICI LombardHealth

Care - our own in-house health claim processing and wellness teamy No sub-limits on room rent, doctor fees, and hospital charges or for

any disease (except Cataract where 20,000 per eye is applicable).y No co-payments for any disease or any hospitalisation expensesy Now get a Free health check-up coupon for any one insured family member, valid forthe policy

period.


35/58

Individual Overseas Travel Insurance-

Single Round trip-

A comprehensive Travel Insurance policy that covers unexpected medical and non-

medical expenses when you are travelling abroad. Avail of benefits like Checked-in

Baggage loss/ delay and unique facilities such as Cashless hospitalisation, worldwide.

Our Travel Insurance plans are the most preferred among others because we coverPre-

Existing diseases in life-threatening emergency situations.

Frequent Flier (Multi-Trip)-

A comprehensive Travel Insurance policy that covers unexpected medical and non-

medical expenses when you are travelling abroad. Avail of benefits like Checked-in

Baggage loss/ delay and unique facilities such as Cashless hospitalisation, worldwide.

The Multi-Trip Plan is specially designed for the frequent international traveller. The

policy is valid for 1 year and you can choose between 2 options of 30 or 45 days as the

maximum duration per trip.

Our Travel Insurance plans are the most preferred among others because we cover Pre-

Existing diseases in life-threatening emergency situations.

MOTAR INSURANCE-

Car Insurance-

Car Insurance Premium is calculated based on the car's Model, Age and the Registration

City. Due to this Pricing Model, in some cases, the premium for similar cars could be

higher as well.

y A digitally signed policy is issued immediately through our online facility.y Access to over2700+ network garages for cashless claims servicing across India.y Optional Personal Accident cover of up to 2 Lakhs for co-passengers.y Doorstep surveyor facility to cover your car with a gap in insurance.

Two wheeler Insurance-A comprehensive Motor Insurance policy for your two-wheeler that keeps it secureagainst damage caused by natural and man-made calamities, including acts of terrorism.Avail of Own Damage, Personal Accident and Liability cover all in one policy.Policy Key Features

Key Benefits


36/58

y A digitally signed policy is issued immediately through our online facility.y Access to over 2700+ network garages for cashless claims servicing across India.y Optional Personal Accident cover for co-passengers

STUDENT MEDICAL INSURANCE-

Overseas Student Travel Insurance

ICICI Lombard provides you with medical and non-medical insurance coverage through

our Overseas Student Travel Insurance Plan. View the benefits which can make your stay

abroad a happier experience.

y Affordable Pricing: 1/3rd the cost of similar insurance policies bought abroad.y Accessibility: Database of over500 universities and issuance of instant digitally

signed policy.y Global Tie-ups: Tie-up with UnitedHealth International, the global arm ofUnitedHealth Group, one of the largest and most diverse health care companies in theUnited States.y Comprehensive Coverage: Overseas Student Travel Insurance plans introducedby ICICI Lombard cover unexpected medical and non-medical expenses during yourstudy abroad.y Non-medical benefits: Covers Study Interruption and provision for a Two-wayCompassionate Visit cover for parents.y Time saver: Saves time by enabling online extension of policy and quick cashlessclaim settlement through our tie-up's with a vast network of hospitals across the globe.

ICICI SECURITIES- For the purpose of sale of other financial products it has its

devision named as ICICI Securities under ICICI Bank.

CICI Securities Ltd is an integrated securities firm offering a wide range of services

including investment banking, institutional broking, retail broking, private wealth

management, and financial product distribution.

ICICI Securities sees its role as 'Creating Informed Access to the Wealth of the

Nation' for its diversified set of client that include corporates, financial institutions, highnet-worth individuals and retail investors.

Headquartered in Mumbai, ICICI Securities operates out of 66 cities and towns in India

and global offices in Singapore and New York.

ICICI Securities Inc., the stepdown wholly owned US subsidiary of the company is a

member of the Financial Industry Regulatory Authority (FINRA) / Securities Investors


37/58

Protection Corporation (SIPC). ICICI Securities Inc. activities include Dealing in

Securities and Corporate Advisory Services in the United States.

ICICI Securities Inc. is also registered with the Monetary Authority of Singapore (MAS)

and operates a branch office in Singapore.

ICICI Securities Institutional- CICI Securities facilitates access to capital for the growth

engine of the Indian economy which is the corporate sector including large, medium and small

enterprises; both from the public and private markets.

ICICI Securities Retail-ICICI Securities empowers over 2 million Indians to seamlessly

access the capital market with ICICIdirect.com, an award winning and pioneering online broking

platform.

PERFORMANCE OF ICICI (31 March 2010)

Performance Review Quarter and year ended March 31, 2010

y 35% year-on-year increase in standalone profit after tax to Rs. 1,006 crore for the

quarter ended March 31, 2010 from

Rs. 744 crore for the quarter ended March 31, 2009

y Highest ever consolidated profit after tax of Rs. 4,670 crore for the year ended

March 31, 2010;31% increase from Rs.

3,577 crore for the year ended March 31, 2009

y Current and savings account (CASA) ratio increased to 41.7% at March 31, 2010

from 28.7% at March 31, 2009

y Net non-performing asset ratio decreased to 1.87% at March 31, 2010 from 1.96%

at March 31, 2009 and 2.19% at

December 31, 2009

y Strong capital adequacy ratio of 19.4% and Tier-1 capital

icici bank desert at ion

Documents