ICICI Bank 2007 Annual Report Download - page 57

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Annual Report 2006-2007
Contingent liabilities increased by 42.5% or Rs. 1,679.25 billion to Rs. 5,629.60 billion at year-end fiscal
2007 from Rs. 3,950.35 billion at year-end fiscal 2006 primarily due to a 35.4% increase in interest rate
swaps and currency options and a 45.0% increase in liability on account of outstanding forward exchange
contracts. The 47.3% increase in contingent liabilities to Rs. 3,950.35 billion at year-end fiscal 2006 from
Rs. 2,681.54 billion at year-end fiscal 2005 was primarily due to a 62.7% increase in interest rate swaps
and currency options.
Our contingent liabilities have been steadily increasing over the period from fiscal 2003. This increase is
primarily due to increase in foreign exchange and derivative transactions. The swap and forward exchange
contract market in India is a developing market. Market volumes have increased significantly in recent
years. As an active player and market maker in swap and forward exchange contract markets and due
to the fact that reduction in positions is generally achieved by entering into offsetting transactions rather
than termination/cancellation of existing transactions, we have seen substantial increase in notional
principal of our swap portfolio in recent years.
An interest rate swap does not entail exchange of notional principal and the cash flow arises on account
of the difference between interest rate pay and receive legs of the swaps which is generally much smaller
than the notional principal of the swap. A large proportion of interest rate swap, currency swap and
forward exchange contracts is on account of market making which involves providing regular two-way
prices to customers or inter-bank counter parties. The exposure due to these transactions is normally
reduced by entering into an off-setting transaction with another counter-party. This results in generation
of a higher number of outstanding transactions, and hence a large value of gross notional principal of the
portfolio. For example, if a transaction entered into with a customer is covered by an exactly opposite
transaction entered into with another counter-party, the net market risk of the two transactions will be
zero whereas, the notional principle of the portfolio will be sum of both the transactions.
Claims against the Bank not acknowledged as debts represents demands made by the Government of
India’s tax authorities in excess of the provisions made in our accounts, in respect of income tax, interest
tax, wealth tax and sales tax matters.
Guarantees
As a part of our project financing and commercial banking activities, we have issued guarantees to
enhance the credit standing of our customers. These generally represent irrevocable assurances that we
will make payments in the event that the customer fails to fulfill its financial or performance obligations.
Financial guarantees are obligations to pay a third party beneficiary where a customer fails to make
payment towards a specified financial obligation. Performance guarantees are obligations to pay a third
party beneficiary where a customer fails to perform a non-financial contractual obligation. The guarantees
are generally for a period not exceeding 10 years.
The credit risks associated with these products, as well as the operating risks, are similar to those relating
to other types of financial instruments.
We generally have collateral available to reimburse potential losses on the guarantees. Margins available
to reimburse losses realised under guarantees amounted to Rs. 11.93 billion at year end fiscal 2007 and
Rs. 10.29 billion at year-end fiscal 2006. Other property or security may also be available to us to cover
losses under guarantees.
Capital Commitments
We are obligated under a number of capital contracts. Capital contracts are job orders of a capital nature,
which have been committed. As of the balance sheet date, work had not been completed to this extent.
Estimated amounts of contracts remaining to be executed on capital account aggregated Rs. 3.43
billion at year-end fiscal 2007 compared to Rs. 1.13 billion at year-end fiscal 2006. Estimated amounts of
contracts remaining to be executed on capital account at year-end fiscal 2005 aggregated Rs. 0.70 billion
compared to Rs. 0.29 billion at year-end fiscal 2004 signifying the unpaid amount for acquisition of fixed
assets as per contracts entered into with suppliers.