Banking Industry:

The banking industry is the lifeline of any modern economy. It is one of the
important financial pillars of the financial system, which plays a vital role in the
success/failure of an economy. The banking system is the fuel injection system that
spurs economic efficiency by mobilizing savings and allocating them to high return
investment.

The Indian banking can be broadly categorized into nationalized, private banks
and specialized banking institutions. The Reserve Bank of India acts as a
centralized body monitoring any discrepancies and shortcoming in the system. It is
the foremost monitoring body in the Indian financial sector. The nationalized
banks (i.e. government-owned banks) continue to dominate the Indian banking
arena. Industry estimation indicates that out of 274 commercial banks operating
in India, 223 banks are in the public sector and 51 are in the private sector. The
private sector bank grid also includes 24 foreign banks that have started their
operations here. Under the ambit of the nationalized banks came the specialized
banking institutions. These co-operatives, rural banks focus on areas of
agriculture, rural development etc.

Paradigm Shift:

Globalization, financial deregulation and improvement in technology have had

a profound effect on the financial landscape in recent years. These developments
have intensified competition and resulted in financial engineering through product
innovation and business strategies. While market participants have now greater
scope to diversify risk and manage it efficiently, this has also posed new risks and
challenges to the financial system. Growth of financial firms across different
business lines and across national boundaries has made the task of designing
appropriate policies are more challenging. Regulatory and supervisory policies are,
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therefore, constantly assessed regarding their capabilities to meet the challenges of

containing systemic risk in the financial system. The main challenge for the

supervisory authority has been to maintain financial stability without curtailing the
incentive to innovate.

The Indian banking saw dramatic changes in the last decade or so ever
since the advent of liberalization and India’s integration with the world economy.
These economic reforms and the entry of private players saw nationalized banks
revamp their service and product portfolio to incorporate new, innovative
customer-centric schemes. The Indian banking finally woke up to the surging
demands of the ever-discerning Indian consumer. The need to become highly
customer focused (generated by high competitive levels) forced the slow-moving
public sector banks to adopt a fast track approach.

Taking a leaf out of the private sector banks, the public sector banks too
went for major image changes and customer friendly schemes. These customer
friendly programs included revamping of the product and service portfolio by
introducing new product & service schemes (like credit cards, hassle-free housing
loan schemes, educational loans and flexi-deposit schemes) integration of the
branch network by using advance networking technology and customer
personalization programs (through ATMs and anytime banking etc.).

Marketing and brand building programs were also given a new thrust in the new
liberalized banking scenario. To meet the personalized needs of the customer and
in order to differentiate its services, banks repositioned themselves in specialized
fields, like housing loans, car finance, educational loans etc. to optimally services
to the customer.

Two basic types of Banking finance

1. Retail financing

2. Commercial financing
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 Project finance

Working capital finance

The entire banking finance can be classified as retail financing and commercial
financing (corporate financing). Retail financing means lending to individuals,
which currently is the bread and butter of the banks. Here the risk is spread over a
number of individuals. The increase in the purchasing power and changing life
styles are giving impetus to this. On the other hand, commercial financing means
lending to companies. Companies were provided credit for different aspects of
business. The NBFC’s are leading in this type of finance

Retail financing

Banks are fundamentally in the business of lending. But until recently in India,
with almost no incremental demand for loans from corporate, banks had to be
content with investing depositors’ money in government bonds (gilts). The only
other profitable investment opportunity was lending to small customers. Whether
it was loans to buy durables, two-wheelers, car or homes, retail lending was the
most promising game in town. Retail lending is now not an option but an
imperative. The margins are better in retail, plus the risks get spread out over a
basket of borrowers. It’s a growth area with tremendous scope.

In this type of financing, bank have to conduct a field verification to

ascertain whether the people who apply for loans actually live and work where they
claim to. Especially, it is important in ‘un seasoned Credit’ (Refer key terms)

Commercial financing

The commercial financing model in Indian banking can be broadly categorized into
project finance and working capital finance. These two segments form the pivot
 4

around which banks operate. Various requirements of the businesses are served
through this type of finance.

Project finance

Project finance may be defined as an arrangement of financing of financing

long term capital projects, large in scale, long in life and generally high in risk.
Banks also offer short terms loans to business houses, corporations to set up their

projects. These loans are disbursed after the approval from the banks’ core credit
validating committee. In India, there are 11 national level land 46 state levels
financial and investment institutions that cater to long term funding requirements
of the industry. The project finance segment is highly competitive with various
players offering innovative schemes to entice corporate.

Working capital finance

In order to meet the diverse needs and requirements of the business

community, banks offer working capital funds to corporate. Working capital
finance is specialized line of business and is largely dominated by the commercial
banks.

Working capital loans are tailored to suit the precise requirements of the client, in
any of the various instruments available or structured as a combination of cash
credit, demand loan, bill financing and non-funded facilities. The bank’s
accomplished credit crew will gauge the credit needs of each client and frame the
exact solutions. Working capital finance limits are normally valid for one year and
repayable on demand. Specific, self-liquidating loans are linked to the natural
tenor of the transaction (bill finance, export credit etc.).

Future challenges
The three C’s
The four transitions to be made
The three C’s
 5

Capital: Most Indian banks now have adequate capital. They however, need large
extra capital to grow in future. The big issue is whether the government or
domestic equity investors can do the job (Or) is foreign money needed at once.
Credit: Banks have fought shy of lending to the commercial sector till recently.
Now credit is picking up. But with the best companies using internal cash or
borrowing abroad, can banks tap new clients profitably-especially farmers and
small and medium enterprises
Consolidation: Indian banks have to merge if they are to face up to foreign
competition. That’s what government wants. However, these mergers should be
driven by market logic rather than government fiat. Size alone will not be the
panacea.

The four transitions to be made:

 From branch based banking to hybrid channels (including micro credit
groups)
 From manpower intensive to technology intensive delivery
 From a product driven to a customer driver approach
 From single products to multiple products

Future opportunities
• Venture capital finance
• Consumer credit finance
• Micro finance
The major growth is going to be mostly in venture capital finance and
consumer credit, especially in micro finance. Some of the emerging financial
opportunities for the banks are:
Venture capital finance
Venture capital is known as the capital investment in a start-up enterprise,
which carries highest element of risk and uncertainty. Venture capital is one of the
 6

most important sources for financing innovation and creating wealth in an

economy. In India, it took off late and only after the liberalization of the economy.
Many financial institutions, though lately, started to find the right
entrepreneurs. ICICI is showing keen interest especially in the area. Its Chairman
K.V.Kamath, in a recent interview to The Economic Times, opined that he is
optimistic about its future. The leading public sector bank SBI, is about to launch a
venture capital scheme. As the SEBI and RBI policies are becoming more favorable
to venture capital funding, it is only a matter of time for the entrepreneurial boom
to evolve in this country. The dearth of capital for the entrepreneur in the rural
areas is a great opportunity for the venture capitalists.
Consumer credit finance
It includes all asset-based financing plans offered to primarily individuals to
acquire an asset. In this transaction, consumer pays the amount with interest over
a period of time. From a modest beginning in the early eighties, the consumer
credit has emerged as an important asset-based financial service in India. Whether
it is loans to buy durables, two wheelers, car (or) homes, retail lending is the most
profitable investment opportunity.
Micro finance
Micro finance (refer key terms), till now is a branch of consumer credit
finance. But, it is soon emerging as a specialized activity on its own. India’s 60% of
its population is in rural areas. The liberalized economy had not brought much
change to rural economy. Till now, the credit finance is limited to urban people.
The situation in this region is making financial institutes to look for unwind
markets. The rural India spawns enormous opportunities for this micro finance.
For several decades, many economies, including the Indian, experimented with
subsidized credit for the poor. But the only tangible outcome was to increase in
non performing assets (NPA). Then came the realization that the core issue for the
poor was access to credit rather than cost of credit. Banks and other financial
 7

institutions gradually are looking at micro finance as an excellent way of

generating revenue.

The Need of the hour

The one big lesson that the world’s policy elite learned after 1997 and 1998
was that you cannot have a strong economy without a strong banking system. The
central bank have to concentrate on the most important components of banking
reform-accounting norms, corporate governance, norms on exposure to individual
sectors, etc. With out this Indian economy cannot grow at 7 per cent a year in a
sustained manner. Large parts of the economy will be starved of bank credit unless
financial capacity is increased manifold. It means more banking capital. The
current short fall in banking capital is estimated between $6 billion and $8 billion.
And the short fall will grow as banks try to step up their lending to a booming
economy.

But who brings the capital is of less importance. If it’s foreign banks and
investors, then so be it. Hence the rising enthusiasm to bring down the
government’s stake in listed public sector banks.

Task before Central bank

The acid test for the central bank will be the next generation of bank reforms.
Indian banks have to deal with many issues ranging from capital adequacy to
globalization. They will also have to ensure that small companies and farmers, who
form the bedrock of the Indian economy in terms of output, employment and
exports, are not starved of credit.
And this lending should be done in a way that earns profits. It will be a
balancing act that will be worth watching in the years to come.
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Performance of banks in 2007

1.36 Bank deposits as well as credit recorded a strong growth during the fiscal
year 2006-07. Bank deposits and bank credit increased by Rs.1,85,244 crore (8.8
per cent) and Rs.1,36,643 crore (9.1 per cent), respectively, during the fiscal year
2006-07 (up to October 13, 2006) so far as compared with Rs.1,15,309 crore (6.5
per cent) and Rs.1,19,168 crore (10.3 per cent),respectively, during the
corresponding period of 2005-06. Demand for bank credit continued to remain
high in view of strong macroeconomic activity. Scheduled commercial banks’ non-
food credit, on a year-on-year basis, expanded by 30.5 per cent as on October 13,
2006 on top of the increase of 31.8 per cent a year ago. Provisional information on
sectoral deployment of bank credit indicates that retail lending rose by 47.0 per
cent at end-June 2006, year-on-year, with growth in housing loans being 54.0 per
cent. Loans to commercial real estate grew by 102.0 per cent. The year-on-year
growth in credit to industry and agriculture was 27.0 per cent and 37.0 per cent,
respectively, at end-June 2006.
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Title
A case study of Credit appraisal mechanism and Credit risk evaluation at ICICI.

Aim of project

This project is an attempt to understand the various concepts of credit risk

management and its policy. It aims at highlighting the importance of credit risk
management for banks. With increasing competition, credit risk management
should be the thrust area for banks. Apart from setting acceptable levels for credit
risks, a quality index for credit approvals should also be generated, since a sound
credit policy will always be a competitive advantage to the banks.

OBJECTIVES
To study and understand credit appraisal, sanction, monitoring mechanism and
explore the causes leading to NPA’s.

1. To study different types of risk examined in credit Appraisal.

2. To study Credit Evaluation process.
3. To study different Credit evaluation techniques used in home loans.
4. To identify the credit worthiness of the borrower
5. To find the risk involved in loan repayment.
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NEED FOR STUDY:

The need of the study to know the techniques that are applied in ICICI bank
for appraisal of credit and reduce the risk of default.
SCOPE OF STUDY (Boundary of the study):

The boundary of the study is restricted to the information given by the

company officer, the guides and various websites relating to this topic and RBI
guidelines.

METHODOLOGY AND DESIGN:

The study ahs been conducted in following manner

1. Credit Approval procedure of ICICI Bank has been closely observed.
2. Post sanction monitoring of the credit has been observed.
3. Primary and Secondary information so gathered has been analyzed.
4. Various regulatory procedures issued by RBI have been studied.

PERIOD OF STUDY
The period of study is limited for 1 year of Company details.

SOURCES OF DATA:
The data is collected from both primary and Secondary method.

TECHNIQUES
1) Loan to value (LTV)
2) Fixed Obligation on to Income Ratio (FOIR)
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3) Installment next to salary ratio(INSR)

LIMITATIONS
 Confidential information of the organization cannot be disclosed as the
matter of policy of organization.
 As the project was limited for only two months, in-depth analysis of each
subject could not be done.
 The project is limited to the data provided by company.

Conclusion

The Indian banking has come from a long way from being a sleepy business
institution to a highly proactive and dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms that
allowed banks to explore new business opportunities rather than generating
revenues from conventional streams (i.e. borrowing and lending). The banking in
India is highly fragmented with 30 banking units contributing to almost 50% of
deposits and 60% of advances. Indian nationalized banks continue to be the major
lenders in the economy due to their sheer size and penetrative networks which
assures them high deposit mobilization.

Indian banks have three things before the advent of another round of reforms.
First, they will have to strengthen their capital base. Second, they will have to
improve their operating efficiency since high intermediation costs remain a big
problem in India. Third, they will have to target new business opportunities that lie
 12

beyond the bread and butter business like working capital and trade finance:
personal financial services, treasury and risk management. They have to keep
capital to cover three types of risks: Credit risk, Market risk and operational risk.
So, every thing from loan default to computer fraud has to be taken into account.
And credit risk has to be dealt more sophisticatedly.
The biggest benefit that government has to do is to implement credit risk
transfer mechanism. The thrust for new markets, where there is a huge gap of
demand and supply will make the banks to be imperative to be competitive and
assertive by being attentive. At the same time, banks have to be professional in
their approach. Already there are complaints about some companies for creating
an environment of financial terrorism. This kind of approach will only lead to
financial earthquake

COMPANY PROFILE

Overview

ICICI Bank is India's second-largest bank with total assets of about Rs.
2,513.89 bn (US$ 56.3 bn) at March 31, 2007 and profit after tax of Rs. 25.40 bn
(US$ 569 mn) for the year ended March 31, 2007 (Rs. 20.05 bn (US$ 449 mn) for
the year ended March 31, 2006). ICICI Bank has a network of about 614 branches
and extension counters and over 2,200 ATMs. 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 specialized subsidiaries and affiliates
in the areas of investment banking, life and non-life insurance, venture capital and
asset management. ICICI Bank set up its international banking group in fiscal
 13

2002 to cater to the cross border needs of clients and leverage on its domestic
banking strengths to offer products internationally. ICICI Bank currently has
subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore,
Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and
representative offices in the United States, United Arab Emirates, China, South
Africa and Bangladesh. Our UK subsidiary has established a branch in Belgium.
ICICI Bank is the most valuable bank in India in terms of market capitalization.

ICICI Bank's equity shares are listed in India on the 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).

At June 5, 2006, ICICI Bank, with free float market capitalization* of

about Rs. 480.00 billion (US$ 10.8 billion) ranked third amongst all
the companies listed on the Indian stock exchanges.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian

financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in
ICICI Bank was reduced to 46% through a public offering of shares in India in
fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal
2000, ICICI Bank's acquisition of Bank of Madurai Limited in an all-stock
amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional
investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative
of the World Bank, the Government of India and representatives of Indian
industry. The principal objective was to create a development financial institution
for providing medium-term and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services group
 14

offering a wide variety of products and services, both directly and through a
number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the
first Indian company and the first bank or financial institution from non-Japan
Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context

of the emerging competitive scenario in the Indian banking industry, and the move
towards universal banking, the managements of ICICI and ICICI Bank formed the
view that the merger of ICICI with ICICI Bank would be the optimal strategic
alternative for both entities, and would create the optimal legal structure for the
ICICI group's universal banking strategy. The merger would enhance value
forICICI shareholders through the merged entity's access to low-cost deposits,
greater opportunities for earning fee-based income and the ability to participate in
the payments system and provide transaction-banking services. The merger would
enhance value for ICICI Bank shareholders through a large capital base and scale
of operations, seamless access to ICICI's strong corporate relationships built up
over five decades, entry into new business segments, higher market share in
various business segments, particularly fee-based services, and access to the vast
talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors
of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned
retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI
Capital Services Limited, with ICICI Bank. The merger was approved by
shareholders of ICICI and ICICI Bank in January 2002, by the High Court of
Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at
Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger,
the ICICI group's financing and banking operations, both wholesale and retail,
have been integrated in a single entity.

LOANS & ADVANCES

 15

ICICI Bank offers wide variety of Loans Products. Coupled with convenience of
networked branches/ ATMs and facility of E-channels like Internet and Mobile
Banking.

Home Loans

ICICI is No. 1 Home Loans Provider in the country, Loans offers some
unbeatable benefits to its customers - Doorstep Service, Simplified
Documentation and Guidance throughout the Process.

Car Loans

 ICICI the No 1 financier for car loans in the country. Network of more than
1500 channel partners in over 780 locations. Tie-ups with all leading
automobile manufacturers to ensure the best deals. Flexible schemes &
quick processing. Hassle-free application process on the click of a mouse.

Commercial Vehicle Loans

 16

 Range of services on existing loans & extended products like funding of new
vehicles, refinance on used vehicles, balance transfer on high cost loans, top
up on existing loans, Extend product, working capital loans & other banking
products.

Two Wheeleeler loans

 ICICI offers competitive interest rates from the No 1 Financier for Two
Wheeler Loans in the country. Finance facility up to 90% of the On Road
Cost of the vehicle, repayable in convenient repayment options and
comfortable tenors from 6 months to 36 months .
 17

Farm Equipment Loans

 Preferred financier for almost all leading tractor manufacturers in the

country. Flexible repayment options in tandem with the farmer's seasonal
liquidity. Monthly, Quarterly and Half-yearly repayment patterns to choose
from. Comfortable repayment tenures from 1 year to 9 years.

Risk

Risk is inherent in all aspects of a commercial operation and covers areas

such as customer services, reputation, technology, security, human resources,
market price, funding, legal, and regulatory, fraud and strategy. Risk has been
present always in the banking business but the discussion on managing the same
has gained prominence only lately. Bankers world-wide have come to realize that
the growing deregulation of local markets and their gradual integration with global
markets have deepened their anxieties. With growing sophistication in banking
operations, while lending and deposit-taking have continued to remain the
mainstay of a majority of commercial banks

However, for banks and financial institutions, credit risk is the most important
factor to be managed. Credit risk is defined as the possibility that a borrower or
counter party will fail to meet its obligations in accordance with agreed terms.
Credit risk, therefore, arises from the banks' dealings with or lending to a
 18

corporate, individual, another bank, financial institution or a country.

Managing risk is increasingly becoming the single most important issue for the
regulators and financial institutions. These institutions have over the years
recognized the cost of ignoring risk. However, growing research and improvements
in information technology have improved the measurement and management of
risk. It’s but natural therefore, capital adequacy of a bank has become an important
benchmark to assess its financial soundness and strength. The idea is that banks
should be free to engage in their asset-liability management as long as a level of
capital sufficient to cushion their potential losses backs them. In other words,
capital requirement should be determined by the risk profile of a bank.

CREDIT RISK

Credit risk to an individual borrower or counter-party is measured as a sum

total of all exposures to that borrower or counter-party, in whatever forms the
exposure arises. These could be loans, advances, bills discounting, undrawn loan
commitments, investments, securitized lending, contingent lending, commitments
and guarantees, comfort letters in whatever form, interest receivable, fees
receivable or derivatives’ replacement costs receivable, etc.

Credit Risk of the Bank is made up of the concentration risk in its portfolio
and the intrinsic risk from individual credit exposures in the portfolio. The credit
risk of the Bank’s portfolio is dependent on factors external and internal to the
Bank. The external factors being the state of the economy, volatility in
commodity/equity prices, foreign exchange rates, interest rates, trade restrictions,
economic sanctions, government policies, etc. The internal factors are in the nature
of deficiencies in appraising, approving and managing individual credits,
deficiencies in or non-compliance with credit policies / process / limits, inadequate
 19

monitoring and control systems, slackness in remedial management, etc.

The components of credit risk are:

• Credit growth in the organization and composition of the credit folio in

terms of sectors, centers and size of borrowing activities so as to assess the
extent of credit concentration.

• Credit quality in terms of standard, sub-standard, doubtful and loss-making

assets.

• Extent of the provisions made towards poor quality credits.

• Volume of off-balance-sheet exposures having a bearing on the credit

portfolio.

Thus credit involves not only funds outgo by way of loans and advances and
investments, but also contingent liabilities. Therefore, credit risk should cover the
entire gamut of an organization’s operations whose ultimate ‘loss factor’ is
quantifiable in terms of money

Need for Credit Risk Management:-

Credit risk is most simply defined as the potential that a bank borrower or
counter party will fail to meet its obligations in accordance with agreed terms. The
goal of credit risk management is to maximize a bank's risk-adjusted rate of return
by maintaining credit risk exposure within acceptable parameters. Banks need to
manage the credit risk inherent in the entire portfolio as well as the risk in
individual credits or transactions. Banks should also consider the relationships
between credit risk and other risks. The effective management of credit risk is a
critical component of a comprehensive approach to risk management and essential
to the long-term success of any banking organization.
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Sub-Classification of Credit Risk:-

a.) Direct Lending Risk - The risk that actual customer obligations will not be
repaid on time. This occurs in products ranging from advances / overdrafts to bills
discounting. It exists for the entire life of the transaction.

b.) Contingent Lending Risk - The risk that potential customer obligations will
become actual obligations and will not be repaid on time. This risk occurs in
products like Letters of Credit and Guarantees and exists for the entire life of the

Transaction.

c.) Issuer Risk - The risk that the market value of a security or other debt
instrument that the Bank intends to hold for a short period of time may change
when the perceived or the actual credit standing of the issuer changes, thereby
exposing the Bank to a financial loss. It also occurs in underwriting and
distribution activities, when the Bank commits to purchase a security or other debt
instrument from an issuer or seller, and there is a risk that the Bank may not be
able to sell the instrument within a predetermined holding period to an investor or
purchaser. In this event, the Bank is exposed to direct lending risk and unintended
price risk as the holder of the instrument.

d.) Pre-settlement Risk - The risk that a customer with whom the Bank has
reciprocal agreement may default on a contractual obligation before settlement of
the contract. The risk is ideally measured in terms of the current economic cost to
replace the defaulted contract with another (known as current mark to market -
 21

CMTM), plus the possible increase in the economic replacement cost due to future
market volatility (known as the Maximum Likely Increase in Value -MLIV). As a
proxy, this risk is often calculated as a specified percentage of the contractual
obligation or using volatilities based on historical data/ simulations, etc

e.) Settlement Risk - This risk occurs when the Bank simultaneously exchanges
value with counter-party for the same value date and the Bank is not able to verify
that payment has been received until after the Bank has paid or delivered the
Bank’s side of the transaction. The risk is that the Bank delivers but does not
receive delivery and therefore, is exposed to direct lending risk.

f.) Clearing Risk - This occurs when the Bank simultaneously acts on the
customer’s instructions to transfer or to order the transfer of funds before the Bank
is reimbursed.

Categorization of Credit Risk:

a.)Sovereign Risk - Risk dependent on a country’s current financial standing vis-

à-vis foreign exchange controls, economy, political stability and focuses across the
ability of the country to repay its obligations.

b.)Industry Risk - Risk dependent on the economic climate relating to individual

industries.

c.)Issuer Risk - The risk that an individual, company, bank, etc., may be unable
to repay its debts.

IMPORTANCE OF RISK MANAGEMENT

Risk Management does not aim at risk reduction. Risk Management enables banks
to bring their risk levels to manageable proportions without severely reducing their
 22

income. It enables a bank to take the required level of exposures in order to meet
its profits targets. This balancing act between the risk levels and profits needs to be
well planned.

Risk Management is important in:

• Implementation of strategy

• Development of competitive advantages

• Measurement of capital adequacy and solvency

• Aiding decision making

• Aiding pricing decisions

• Reporting and controlling of risks

• Management of portfolio transaction

RISK MANAGEMENT BASICALLY IS A FOUR STEP PROCESS WHICH

INVOLVES:

• Risk Identification

• Risk Assessment for decision making

• Fixing credit price

• Risk control

Risk Identification: For a firm operating in a dynamic and multidimensional

economic scenario, it is not possible to predict with 100% certainty about its future
sales, cost and profitability aspects. However, it is possible to identify the critical
elements, which will adversely affect the future outcome, if an analysis of the
environment in which the company is operating is undertaking, different
components of business are identified.
 23

Risks involved in various facets/ stages of business include

1. Pre-operative stage: Inadequate market study leading to wrong demand-

supply gap identification, unsuitable product and technology selection
leading to early obsolescence, poor site selection, lack of co-ordination and
management, inability to establish financials and other linkages to ensure
adequate finance in time, leading to time and cost over runs.

2. Operational Stage : Lack of measures to supply inputs like raw-materials,

utilities, labour etc. in the right time, right place, at the right price and in
right quality, low capacity utilization, low productivity, interruptions in
production process and finally failure to maintain quality requirements

Marketing Stage : Non-achievements of sales targeted, inadequate marketing

efforts, price fluctuations, competition, government polices like

3.import/ exports policy, forex market changes etc

4.Finance Stage: Failure to supply timely and adequate finance to ensure

liquidity, efficient use of costly inputs to match with change in interest rate, to
meet commitments and finally failure to generate reasonable surplus for the
stake holders.

Risk Assessment for Decision Making: This part of risk management is

difficult due to variety of available methods, degree of sophistication and element
of subjectivity involved in some areas. Many banks adopt credit scoring/ rating
which is essential a for a default risk analyses or assessing the credit worthiness of
the borrower for the purpose of granting/ rejecting his credit proposal and fixing
interest rate based on rating. Under this process each type of risk is again divided
under few key parameters and each parameter is assigned scores as per their
degree of presence or absence over a scale.
 24

The key components identified with each risk area normally comprises of:

1.Managerial Risk

• Promoters’ integrity/ background

• Experience

• Conduct with others/ litigation pending

• Professionalism in management

System and procedure and compliance thereto

2. Operational Risk

• Technology and process

• Capacity utilization

• Availability of inputs like raw materials and utilities

• Availability of labour and productivity

3.Commercial Risk

• Product viability- life cycle status

• Competition and future prospects

• Customer and market share trend

• Expected change in government policy affecting business

• Dependence on exchange rate changes- import/ export oritented units

4.Financial Risk

• Liquidity position (current ratio)

• Solvency ( Debt Equity Ratio or Total indebtedness ratio)

• Margin maintenance (Net working Capital / Working Capital Gap)

 25

• Gross profit margin

• Market command indicator( receivables/ sales vs. payables/ purchases)

5.Transaction Risk / Portfolio Risk

• Compliance of terms and conditions regarding documentation

• Fulfillment of repayment obligations

• Timely retirement of bills/ honoring of cheque

• Development of LC or Invocation of BG resulting in irregularity in funded

facility

• Total exposure in the related sector vis-à-vis tolerance level prescribed

In addition to these risks factors that are somehow measurable there may be some
“passive risk” which entails risk or loss arising from crime, errors, frauds omission/
negligence, damage of assets or business interruptions etc.

The factors stated above are illustrative and not exhaustive. However, to make
the process simple and practicable at field level many banks have devised credit
scoring/ risk rating on selected parameters. Further, all the parameters are not
truly objective. Some of them are objective. Some of them are subjective.
Accordingly, in order to instill objectivity in the assessment, all the parameters
need to be quantified against a benchmark or a scale (say 0-6) depending upon
pre-defined range of variation from the benchmark or degree of attributes.

In Case of some parameters where no benchmark is available like profit margin

etc., time series analysis may reveal a trend and accordingly score may be assigned.
Aggregate credit-rating score signifying credit worthiness of risk rating score

reveals degree of risk in the unit and it helps the bank in the following aspects:

1. To assess the borrowers credit risks

 26

2. To make distinction between good and bad borrowers

3. To take a decision whether to lend or not on the basis of cut off-

score

4. To fix the interest rates, margin requirement, collateral security

and also to prescribe the non-monetary terms in sanction

Fixing Credit Price

When a bank decides to extend lending support on the basis of risk / credit score,
the next step should be to set risk based loan pricing, i.e., interest rates on the basis
of basic principle of risk-return trade-off.
After liberalization, banks in India have been permitted to structure interest
rates in this line, for advances above Rs. 2 lakhs.
The base rate, i.e., the rate available to the prime borrowers having zero /
negligible risk is Prime Lending Rate (PLR) and as the risk becomes higher a risk
premium is added to the PLR to determine the rate applicable for the unit.
Interest rate chargeable = PLR + Risk Premium

The higher the aggregate credit score, the better is the credit worthiness and lesser
is the risk. Accordingly, interest rate becomes higher with decline in score. The
scoring reviewed with each annual review of the account.

As per the banks' policy and perception, a bank may be:

a) Risk friendly
b) Risk averse
c) Pay-off oriented / gambling and
d) Conservative / continuity oriented
 27

Risk Control: Risk is inherent in all lending decisions and cannot be eliminated
completely. But control of the impact of risk in unfavorable situations can be
understand in the business

The control mechanism has two dimensions:

1. Ensuring adequate managerial control by imposing necessary additional

monitoring terms and adhering to straight and continuous follow up and
supervision measures as also counseling with the borrower, if needed.

2. Adopting available risk mitigating measures like insurance cover of

assets against loss, damage, calamity, etc.

Risk Management therefore cannot be a static activity in the current dynamic

environment and hence needs regular evaluation.

Credit Risk Policy:

• Every bank should have a credit risk policy approved by the board. The
document should include Risk identification, risk measurement, risk
grading/ aggregation techniques, reporting and risk control/ mitigation
techniques, documentation, legal issues and management of problems
loans.

For controlling credit risk, Corporate Risk will, with the approval of the Board,
establish suitable credit policies and procedures. The credit policies and processes
will spell out the prudential exposure ceilings, the quantum and nature of exposure
that can be taken on a borrower, the credit

• standards that a credit should meet, the appraisal, approval & monitoring
systems to be followed, the pricing & security framework of a credit, the
remedial actions to be taken, etc., in managing credit.
 28

• The credit risk policies approved by the Board should be communicated to

branches/ controlling offices. All managers and senior managers should
clearly understand the bank's approach for credit sanction and should be
held accountable for complying with established policies and procedures.

• Corporate Risk along with Corporate Banking and the Branch Heads will
ensure compliance, by all concerned functionaries, with these policies in
order to inculcate a sound credit risk management attitude. Aggregate
credit risk will be contained within the risk appetite of the Bank. The Bank
will price an exposure and set aside loan loss reserves appropriate to the
expected loss from the credit risk position assumed. It will maintain
adequate capital to cushion the estimated unexpected loss for that risk
position.

• The policies and procedures will be in keeping with the growth strategy,
changing business conditions, the structure and needs of the organization
and the Bank’s appetite for risk. These policies and procedures will be
implemented consistently and conservatively and will ideally envisage an
annual review.

Objective of Credit risk Management:-

For most banks, loans are the largest and most obvious source of credit risk;

however, other sources of credit risk exist throughout the activities of a bank,
including in the banking book and in the trading book, and both on and off the
balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in
various financial instruments other than loans, including acceptances, interbank
transactions, trade financing, foreign exchange transactions, financial futures,
 29

swaps, bonds, equities, options, and in the extension of commitments and

guarantees, and the settlement of transactions.

Since exposure to credit risk continues to be the leading source of problems in

banks world-wide, banks and their supervisors should be able to draw useful
lessons from past experiences. Banks should now have a keen awareness of the
need to identify, measure, monitor and control credit risk as well as to determine
that they hold adequate capital against these risks and that they are adequately
compensated for risks incurred. The Basel Committee is issued the document in
order to encourage banking supervisors globally to promote sound practices for
managing credit risk. Although the principles contained in those papers are most
clearly applicable to the business of lending, they should be applied to all activities
where credit risk is present.

Credit Risk Management Strategy:-

• Building and sustaining a high quality of credit portfolio giving an

improving risk-adjust yield to the Bank.

• Limiting the Bank's exposure to certain categories of risk, which it

understands and is in a position to manage within its risk appetite.

Developing greater ability to recognize and avoid & manage potential

problems.

The functions of Credit Risk Management will essentially be to:

• Identify measure, monitor and control the credit risk of the Bank.

• Enforce implementation of the credit risk policy / strategy approved by the

Board.

• Develop credit policies and procedures.

• Design and validate risk measurement systems, capital allocation models

 30

and pricing frameworks

• Monitor and protect portfolio quality

• Undertake loan reviews

• Identify risk opportunities and challenges.

• Ensure that the credit granting function conforms to the strategy, policy and
limits set by the Board and that the role-responsibilities for line
management are clearly spelt out.

• Propagate a healthy credit culture across the Bank.

• Independently assess individual risk exposures being assumed by business

units (through Credit Risk Managers).

• Conduct industry and sectoiral studies on an on-going basis, including

impact analysis on specific sectors (by Industry Risk Managers).

Steps required for proper management of credit risk:

Keeping in view the foregoing, a bank should have the following in place: -

1. Dedicated policies and procedures to control exposures to designated higher

risk sectors such as capital markets, aviation, shipping, property
development, defense equipment, highly leveraged transactions, bullion etc.

2. Sound procedures to ensure that all risks associated with requested credit
facilities are promptly and fully evaluated by the relevant lending and credit
officers.

3. Systems to assign a risk rating to each customer/borrower to whom credit

Facilities have been sanctioned.

4. A mechanism to price facilities depending on the risk grading of the

 31

customer, and to attribute accurately the associated risk weightings to the

facilities.

5. Efficient and effective credit approval process operating within the approval
limits authorized by the Boards.

6. Procedures and systems which allow for monitoring financial performance

of customers and for controlling out standings within limits.

7. Systems to manage problem loans to ensure appropriate restructuring

schemes. A conservative policy for the provisioning of non-performing
advances should be followed.

8. A process to conduct regular analysis of the portfolio and to ensure on-going

control of risk concentrations.

Basel Committee on Credit Risk Management

Sound credit risk assessment and valuation for loans

Principle 1

A bank’s board of directors and senior management are

responsible for ensuring that the bank has appropriate credit risk
assessment processes and effective internal controls commensurate
with the size, nature and complexity of its lending operations to
consistently determine provisions for loan losses in accordance with
the bank’s stated policies and procedures, the applicable accounting
framework and supervisory guidance.

Principle 2
 32

A bank should have a system in place to reliably classify loans on the

basis of credit risk.

Principle 3

A bank’s policies should appropriately address validation of any

internal credit risk assessment models.

Principle 4

A bank should adopt and document a sound loan loss methodology,

which addresses risk assessment policies, procedures and controls,
for assessing credit risk, identifying problem loans and determining
loan loss provisions in a timely manner.

Principle 5

A bank’s aggregate amount of individual and collectively assessed

loan loss provisions should be adequate to absorb estimated credit
losses in the loan portfolio.

Principle 6

A bank’s use of experienced credit judgment and reasonable estimates

are an essential part of the recognition and measurement of loan
losses.
 33

Principle 7

A bank’s credit risk assessment process for loans should provide

the bank with the necessary tools, procedures and observable data to
use for assessing credit risk, accounting for loan impairment and
determining regulatory capital requirements.

Principle 8

Banking supervisors should periodically evaluate the effectiveness of

a bank’s credit risk policies and practices for assessing loan quality.

Principle 9

Banking supervisors should be satisfied that the methods employed

by a bank to calculate loan loss provisions produce a reasonable and
prudent measurement of estimated credit losses in the loan portfolio
that are recognised in a timely manner.

Principle 10
 34

Banking supervisors should consider credit risk assessment and

valuation policies and practices when assessing a bank’s capital
adequacy.

INTRODUCTION

Risk is an inherent part of ICICI Bank’s business, and effective Risk Compliance &
Audit Group is critical to achieving financial soundness and profitability. ICICI
Bank has identified RISK COMPLIANCE & AUDIT GROUP as one of the core competencies
for the next millennium. The Risk Compliance & Audit Group (RC & AG) at
ICICI Bank benchmarks itself to international best practices so as to optimise
capital utilisation and maximise shareholder value. With well defined policies and
procedures in place, ICICI Bank identifies, assesses, monitors and manages the
principal risks:
 35

Credit risk (the possibility of loss due to changes in the quality of

counterparties)
Market Risk (the possibility of loss due to changes in market prices and rates of
securities and their levels of volatility)
Operational risk (the potential for loss arising from breakdowns in policies and
controls, human error, contracts, systems and facilities)

The ability to implement analytical and statistical models is the true test of a risk
methodology. In addition to three departments within the Risk Compliance &
Audit Group handling the above risks, an Analytics Unit develops quantitative
techniques and models for risk measurement

Credit Risk Management

Credit risk, the most significant risk faced by ICICI Bank, is managed by the
Credit Risk Compliance & Audit Department (CRC & AD) which evaluates
risk at the transaction level as well as in the portfolio context. The industry analysts
of the department monitor all major sectors and evolve a sectoral outlook, which is
an important input to the portfolio planning process. The department has done
detailed studies on default patterns of loans and prediction of defaults in the
Indian context. Risk-based pricing of loans has been introduced.

The functions of this department include:

Review of Credit Origination & Monitoring

• Credit rating of companies/structures

• Default risk & loan pricing
• Review of industry sectors
• Review of large exposures in industries/ corporate groups/ companies
 36

• Ensure Monitoring and follow-up by building appropriate systems such as

CAS

Design appropriate credit processes, operating policies & procedures

Portfolio monitoring

• Methodology to measure portfolio risk

• Credit Risk Information System (CRIS)

Focussed attention to structured financing deals

Pricing, New Product Approval Policy, Monitoring

Monitor adherence to credit policies of RBI

During the year, the department has been instrumental in reorienting the credit
processes, including delegation of powers and creation of suitable control points in
the credit delivery process with the objective of improving customer response time
and enhancing the effectiveness of the asset creation and monitoring activities.

Availability of information on a real time basis is an important requisite for sound

risk management. To aid its interaction with the strategic business units, and
provide real time information on credit risk, the CRC & AD has implemented a
sophisticated information system, namely the Credit Risk Information
System. In addition, the CRC & AD has designed a web-based system to render
information on various aspects of the credit portfolio of ICICI Bank

Market Risk Compliance & Audit Group

 37

ICICI Bank is exposed to all categories of Market Risk, viz.,

Interest Rate Risk (risk due to changes in interest rates)

Exchange Rate Risk (risk due to changes in exchange rates)

Equity Risk (risk due to change in equity prices)

Liquidity Risk (risk due to deterioration in market liquidity

for tradable instruments)

The Market Risk Compliance & Audit Department evaluates tests and
approves market risk methodologies developed by the Treasury. It also participates
in the new product approval process on a firm-wide basis and evaluates all new
products from a market risk perspective

Operational Risk Management

ICICI Bank, like all large banks, is exposed to many types of operational risks.
These include potential losses caused by events such as breakdown in information,
communication, transaction processing and settlement systems/ procedures.

The Audit Department, an integral part of the Risk Compliance & Audit Group,
focuses on the operational risks within the organisation. In recent times, there has
been a shift in the audit focus from transactions to controls. Some examples of
this paradigm shift are:
 38

Adherence to internal policies, procedures and documented processes

Risk Based Audit Plan

Widening of Treasury operations audit coverage

Use of Computer Assisted Audit Techniques (CAATs)

Information Systems Audit

Plans to develop/ buy software to capture the workflow of the Audit Department

Before commencement of my project I compared home loans

providers like ICICI& HDFC, I came to know that ICICI is best in home
loan providing. The comparisons are given below

COMPARISON BETWEEN ICICI & HDFC

Eligibility criteria for Resident Indians:

ICICI:

• Minimum age is 21 years.

 39

• Applicant must be salaried or Self-employed.

• For availing land loans, the property should be for residential use and
purchased from a development authority or a registered co-operative
society. The land in question must be for construction of a house, with
clearly marked boundaries, leaving no room for legal wrangle on this count

• For purchase/construction or extension of a non-residential property, the

applicants has to be professionally qualified, self employed individuals with
3-years' work experience.

HDFC

• Stability and continuity of occupation and savings history

• Repayment capacity takes into consideration factors such as income,

number of dependants, spouse's income, assets, liabilities

• The applicant should have a steady source of income.

Eligibility criteria for NRIs:

ICICI:

• Minimum age for loan application is 21 years.

• For Repayment tenor between 11-15 years, the loan applicant should be a
Post Graduate or professionally qualified.

HDFC:

• Loan eligibility subject to 85% of the cost of the property

 40

• Repayment capacity assesses factors such as income, age, qualifications,

number of dependants, spouse's income, assets, liabilities

• Stability and continuity of occupation and savings history

Loan Amount:

ICICI:

ICICI Bank offers home loans for purchase or construction of house and the loan
amount to the extent of 85% of the cost of the property including the stamp duty
and registration. The loan starts from 2 lakhs.

The maximum loan that can be granted to an NRI for home loans is INR 1 crore
while the minimum is INR 5 lakhs.

HDFC:

HDFC finances up to a maximum of 85% of the cost of the property inclusive of

agreement value, stamp duty and registration charges. HDFC's Home
Improvement Loan facilitates internal and external repairs and other structural
improvements. HDFC finances up to 85% of the cost of renovation. For Land
Purchase Loan, HDFC finances up to 70% of the cost of the land.

Repayment:

ICICI
Maximum loan tenure is of 20 years. The loan must terminate before or when the
borrower turns 65 years of age or before retirement, whichever is earlier.
Repayment tenure for Salaried NRI applicants is up to 15 years and for Self-
employed is up to 10 yrs for purchase or construction of a new home. Maximum
loan eligibility is 85% of the total cost of the property.

HDFC
 41

In case of home loans to purchase, home improvement loan (or) construct houses,
the maximum period of repayment is 15 years or retirement age, whichever is
earlier. For home extension maximum term is 20 years subject to your retirement
age.

Loan Processing Charges:

ICICI:
0.5618% of loan amount is charged towards Administrative fee or Rs.2,000
whichever is higher.

HDFC:
1% of the loan amount applied plus applicable service taxes and cess.

INTEREST RATES:

ICICI:

Fixed: up to 20lakhs 10.5%, more than 20lakhs 13%.

Floating: up to 20lakhs 9.5%, more than 20lakhs 12%.

HDFC:

Fixed: 13.25%.

Floating: 11.25%.

HOME LOANS

TYPES
 42

• Home Loans
• Office Premises Loans
• Loan Against Property
• Property Overdraft
• Part Fixed, Part Floating Home Loan
• SmartFix Home Loans

Eligibility

Home loan

 Applicant must be at least 21 years of age when the loan is sanctioned.

 The loan must terminate before or when you turn 65 years of age or before
retirement, whichever is earlier.
 Applicant must be employed or self-employed with a regular source of
income.

Land loan

 Applicant must be at least 21 years of age when the loan is sanctioned.

 The loan must terminate before or when you turn 65 years of age or before
retirement, whichever is earlier.
 Applicant must be employed or self-employed with a regular source of
income.
 Applicant must be purchasing a plot of land for residential use.
 43

 The purchase has to be from a development authority or from a registered

co-operative society.
 The purchase of the land must be for the construction of a house.
 The plot of land must be clearly demarcated with clear boundaries.

Office premise loan

 Applicant must be at least 21 years of age when the loan is sanctioned.

 The loan must terminate before or when you turn 65 years of age.
 Applicant must be self-employed with a regular source of income.
 The loan can be for the purchase / construction / extension of a non-
residential property.
 A loan for renovation or improvement will be given only at the time of
acquisition of property.
 Professionally qualified and self-employed individuals (doctors,
pathologists, chartered accountants, cost accountants, company secretaries,
architects, engineers, consultants, lawyers, chemists) can apply.
 A minimum of 3 year's work experience is a must.

Home Equity Loans

 Applicant must be at least 21 years of age when the loan is sanctioned.

 The loan must terminate before or when you turn 65 years of age or before
retirement, whichever is earlier.
 44

 Applicant must be employed or self-employed with a regular source of

income.

 Applicant must be the owner of a self-occupied property.

Loan Amount

A number of factors are taken into account when assessing your repayment
capacity.

• Applicant income
• Age
• Number of dependants.
• Qualifications.
• Assets and liabilities.
• Stability/ continuity of employment.
• Business.

However, there are ways by which applicant can enhance his eligibility.

 If his spouse is earning, put him/her as a co-applicant. The additional

income shall be included to enhance his loan amount. Incidentally, if there
are any co-owners they must necessarily be co-applicants.
 Applicant fiancée's income can also be considered for sanctioning the loan
on combined income? The disbursement of the loan, however, will be done
only after applicant submit proof of his marriage.
 45

 Providing additional security like bonds, fixed deposits and LIC policies
may also help to enhance eligibility.

 While there is no need for a guarantor, it could be that having one might
enhance applicant credibility with ICICI.

The final amount to be sanctioned will depend on applicant repayment capacity.

However, what applicants ultimately are entitled to will have to conform within the
limits fixed for each loan also when the company looks at the total cost, registration
charges, transfer charges and stamp duty costs are included.

Sanctioning

Documents
Bank statement for the last six months.
 Income Documents e.g. Latest Form 16, Certified IT returns for latest 3
years.
 Admin Fee cheque.
 Loan Enclosure letter.

Other Documents for Individual Borrowers:

 Photo Id Proof.
 Residence Address Proof.

For Non Individual Borrowers:

 Id Proof.
 Office Address Proof.
Disbursement
 46

 Applicant loan will be disbursed after he identify and select the property or
home that you are purchasing and on your submission of the requisite legal
documents.
 The 230 A Clearance of the seller and / or 37I clearance from the
appropriate income tax authorities (if applicable) is also needed.
 On satisfactory completion of the above, on registration of the conveyance
deed and on the investment of applicant own contribution, the loan amount
(as warranted by the stage of construction) will be disbursed by ICICI Bank.

List of documents for disbursement

Standard documents:
 Loan Agreements
 Disbursement Requests
 Post-dated cheques
 Personal guarantor's documents

Home Loan Interest Rates for Resident Indians

• Adjustable Rate Home Loan

• Fixed Rate Home Loan
• Part fixed
• Part Floating Rate Home Loan
• Smartfix Home Loan
• Balance Transfer of your existing home loan from other banks.

The interest rate on ICICI Bank Home Loans is linked to the ICICI
Bank Floating Reference Rates are 9.5 & 12%. Fixed rates are 10.5 & 13%.

Description of Charges Home Loans

 47

Loan Processing Charges / Home Loans : 0.5618% processing /admin fee or

Renewal Charges Rs. 2000/- whichever is higher Loan OD against
Property or Office Premises Loans : 1% of loan
amount or Rs. 2,000/- whichever is higher
Prepayment 2 % on the principal outstanding on full prepayment
Charges
Solvency Certificate NA
Charges for late payment Home Loans : 2% per month Home OD : 1.5% of the
(loans) outstanding amount subject to minimum of Rs.
500/- & Maximum of Rs.5000/-
Charges for changing from 1.75% on principal outstanding
fixed to floating rates of
interest
Charges for changing from 1.75% on principal outstanding
floating to fixed rates of
interest
Cheque Swap Rs. 500/-
Charges
Document Retrieval Rs. 500/-
Charges
Cheque bounce charges Rs. 200/-

Service Tax and other govt. taxes, levies, etc. as per prevailing rate is charged over
and above these charges

Standard Interest Rates for Resident Indians

The interest rate on ICICI Bank Home Loan is linked to the ICICI Bank Floating
Reference Rate (FRR)/PLR. As mentioned in the press release, the FRR/PLR has
gone up by 0.5%. Consequently interest rate for all customers under Adjustable
Rate Home Loans (ARHL) will go up by 0.5%. To know the impact of change in
FRR on your existing Home Loan Tenure
 48

Repayment tenure:

 Home Equity Loans - Maximum loan tenure of 15 years.

 Office premise loan - Maximum loan tenure of 15 years.
 Home loan – Maximum loan tenure of 20 years.

Loan repayment procedure:

 All loan repayments are done via equated monthly installments (EMI).

EMI procedure:

 An EMI refers to an equated monthly installment. It is a fixed amount

which you pay every month towards your loan. It comprises of both,
principal repayment and interest payment.

Commencement of repayment:

 EMI payments start from the month following the month in which the full
disbursement has been made.

Pay mode of EMI:

 The EMI is to be paid every month through post-dated cheques (PDCs) or

Electronic Clearing System (ECS)*. If you are opting for PDCs, then you will
have to provide 36 PDCs upfront. The PDCs are to be dated on the 1st of
 49

every month. However, if applicants receive his salary a few days later,
ICICI provide the flexibility of dating the cheques for the 7th of the month.

If a PDC bounces:

 In the case of a bounced cheque or delayed payment, charges and

outstanding dues will be charged as per the prevailing company policy. You
can replace old PDCs with new ones within 5 - 7 working days.

Pre-EMI interest:
 In the case of part disbursement of the loan, monthly interest is payable
only on the disbursed amount. This interest is called pre-EMI interest
(PEMI) and is payable monthly till the final disbursement is made, after
which the EMIs would commence.

Pay mode of PEMIs:

 The first PEMI is payable by cheque by the end of the month in which the
disbursement is made and each subsequent PEMI at the end of every month
till the commencement of EMI.

Insurance Plans for Home Loan

Home Insurance plans, provide cover to Home loan in the face of any
unforeseen event happening to life. In case of any of these happenings, family will
have the support of the insurance cover to pay for the outstanding Home loan,
without being burdened by the loan EMI's.
 50

ICICI Bank Home Loans has “Home Safe Plus“ & “Home Assure/Health
Assure“ two exclusive and innovative insurance plans to insure Home Loan.

HomeSafePlus*

Key Benefits of HomeSafePlus

• No medical checkup
• Comprehensive insurance plan for individual, home and its contents
• Single premium long-term insurance plan
• Premium paid for the Critical Illness cover is eligible for tax benefits u/s
80D of the Income Tax Act
• Sum Insured remains constant throughout the policy period (loan O/S
amount to come to bank, rest goes to individual)
• Multiple applicants can be covered under the same loan
• Simple application form

Home Assure/Health Assure#

Key Benefits of Home Assure/Health Assure

• Life Cover from Home Assure for the entire home loan tenure
• Critical Illness cover from life threatening illnesses like cancer, coronary
artery bypass, heart attack, kidney failure, stroke, major organ transplant
• Special non-medical limits only for ICICI Bank Home Loans customers
• Dual benefit to customers, Life Cover from Home Assure and Critical Illness
Cover from Health Assure
• Dual tax benefits, Section 80C benefits under Home Assure, Section 80D
benefits under Health Assure
• Simplified claim procedure
 51

As a part of my project work the following work is done by me at ICICI

Firstly I seen files of different types of individuals for home loans

INDIVIDUALS HOMELOAN
 52

SALARIED SELF EMPLOYED PROFESSIONAL SELF EMPLOYED NON

PROFESSIONAL

DOMESTIC NRI

And then the credibility and worthiness is evolved by the following procedure and
tests.
PROCEDURE:

CREDIT APPRAISAL MEMO

BANK STATEMENT ANALYSIS

 Number of cheque bounces

 Number of minimum balance charges
 Front page of pass book
 All bank Accounts are ok
 Is the latest salary slip credit is as per salary slip
 Any regular debits

Obligation summary

PARTICULARS APPLICA CO-

NT APPLICANT
All documents as per norms Y/N Y/N
 53

Not a negative profile Y/N Y/N

Age norm met Y/N Y/N
Minimum qualification norm met Y/N Y/N
Number of dependents norm met Y/N Y/N
Minimum employment norm met Y/N Y/N
Minimum income norm met Y/N Y/N
Ownership grid norm met Y/N Y/N
Special norm for defense Y/N Y/N
Software category norm met Y/N Y/N
Personal guarantee not required Y/N Y/N

After seeing that all the norms are met then field investigation is done for the
following

• Residence
• Office
• Tele verification
• Property verification

The field investigator gives his report and then the information given by the
customer is matched with these reports to conform the following

 Residence not in negative area

 Property not in negative area
 Office not in negative area
 Residence with in geographical limits
 Property with in geographical limits
 Office with in geographical limits

Applicant should qualify the following

 Qualification ------- minimum SSC

 Number of dependents ------- maximum 5
 54

 Accommodation ------- owned/rented/company

 Company type ------- GOVT/PSU/MNC/PVT
 Years in current employment
 Years in total employment

Then document check is done

1. Application form with photo & sign

2. Age proof as per norms (document SSC)
3. Salary slips or salary certificates
4. Bank statement start date end date
5. Signature verification document

Additional documents if relevant

 If cash salary secondary income proof

 Annual benefit proof
 Job conformation proof if applicant < 23 years
 Company particulars if private limited
 Variable income proof (latest four months salary slips)
 Existing loan repayment record

Some important terms and formula used in calculation of amount to be

issued.

FOIR (fixed obligation income ratio)

= EMI + loan obligation/gross salary

 55

INSR (income net salary ratio)

= EMI + loan obligation/net salary

LTV (loan to value)

= loan amount/ property cost

Loan amount possible

= eligible salary/EMI factor

Calculation of eligible salary

7500 to 8000 ----- 45%

8000 to 25000 ----- 50%

25000 and above ----55%

It is also dependent on service left in organization

Maximum period is for 20 years

EMI factor is calculated on basis of ROI and tenure of loan

CALCULATION OF LOAN AMOUNT TO BE ISSUED

CASE 1 SALARIED

LOCATION: WARANGAL

NAME: XYZ (NOT REVIELED DUE TO PRIVACY REASONS)

 56

LOAN SCHEME: FIXED 14%

TERM : 15YEARS

Income computation

Basic 100% 13000

DA 100% 750

HRA 1000

CEA 1000

EA 250

Total 16000

Net salary as per salary slips 13000

(-) Appraised obligations -------

Applicable FOIR 50% 8000

Loan amount possible 600000

Loan amount as per loan to value (LTV) 680000

CASE 2 SALARIED

LOCATION : WARANGAL

NAME: ABC (NOT REVIELED DUE TO PRIVACY REASONS)

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LOAN SCHEME : VARIABLE 12%

TERM : 12YEARS

Income computation

Basic 100% 14000

DA 100% 1000

Total 15000

Net Salary 10500

(-) Appraised obligations -------

Applicable FOIR 50% 7500

Loan amount possible 510000

Loan amount as per loan to value (LTV) 585000

CASE 3 SELF EMPLOYED NON PROFESSION

LOCATION : WARANGAL
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NAME: (NOT REVIELED DUE TO PRIVACY REASONS)

LOAN SCHEME : VARIABLE 12.5%

TERM :12YEARS

Income computation 2005-2006 2006-2007

NET PROFIT 250000 350000

ELLIGIBILE INCOME p.m 25000

(-) Appraised obligations -------

Applicable FOIR 50% 13750

Loan amount possible 1317000

Loan amount as per loan to value (LTV) 1350000