ICICI Bank 2012 Annual Report Download - page 44

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Credit Risk: Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender.
All credit risk related aspects are governed by a credit and recovery policy which outlines the type of
products that can be offered, customer categories, targeted customer profile and the credit approval
process and limits. The credit and recovery policy is approved by our Board of Directors. In order to
assess the credit risk associated with any corporate financing proposal, we assess a variety of risks
relating to the borrower and the relevant industry. We have a structured and standardised credit approval
process which includes a well established procedure of comprehensive credit appraisal and credit
rating. We have developed internal credit rating methodologies for rating obligors. The rating factors
in quantitative and qualitative issues and credit enhancement features specific to the transaction. The
rating serves as a key input in the approval as well as post-approval credit processes. A risk based asset
review framework has also been put in place wherein the frequency of asset review would be higher
for cases with higher exposure and/or lower credit rating. Industry knowledge is constantly updated
through field visits and interactions with clients, regulatory bodies and industry experts.
The Bank has a strong framework for the appraisal and execution of project finance transactions that
involves a detailed evaluation of technical, commercial, financial, marketing and management factors
and the sponsor’s financial strength and experience. The Bank identifies the project risks, mitigating
factors and residual risks associated with the project. As a part of the due diligence process, the
Bank appoints consultants, including technical advisors, business analysts, legal counsel and insurance
consultants, wherever considered necessary, to advise the lenders. Risk mitigating factors in these
financings include creation of debt service reserves and channelling project revenues through a
trust and retention account. The Bank’s project finance loans are generally fully secured and have
full recourse to the borrower. In some cases, the Bank also takes additional credit comforts such as
corporate or personal guarantees from one or more sponsors of the project or a pledge of the sponsors’
equity holding in the project company. The Bank’s practice is to normally disburse funds after the entire
project funding is committed and all necessary contractual arrangements have been entered into.
In case of retail loans, sourcing and approval are segregated to achieve independence. The Credit
Risk Management Group has oversight on the credit risk issues for retail assets including vetting of all
credit policies/operating notes proposed for approval by the Board of Directors or forums authorised
by the Board of Directors. The Credit Risk Management Group is also involved in portfolio monitoring
for all retail assets and suggesting/implementing policy changes. The Retail Credit and Policy Group is
an independent unit which focuses on policy formulation and portfolio tracking and monitoring. This
group also includes the Credit Administration Unit that services various retail business units for credit
underwriting. In addition, we also have a Business Intelligence Unit to provide support for analytics,
score card development and database management.
Our credit officers evaluate retail credit proposals on the basis of the product policy approved by
the Committee of Executive Directors and the risk assessment criteria defined by the Credit Risk
Management Group. These criteria vary across product segments but typically include factors like
the borrower’s income, the loan-to-value ratio and demographic parameters. The technical valuations
in case of residential mortgages are carried out by empanelled valuers or technical teams. External
agencies such as field investigation agencies and credit processing agencies are used to facilitate
a comprehensive due diligence process including visits to offices and homes in the case of loans to
individual borrowers. Before disbursements are made, the credit officer checks a centralised delinquent
database and reviews the borrower’s profile. In making our credit decisions, we also draw upon reports
from credit information bureaus. We also use the services of certain fraud control agencies operating
in India to check applications before disbursement.
In addition, the Credit and Treasury Middle Office Groups and the Operations Group monitor operational
adherence to regulations, policies and internal approvals. We have centralised operations to manage
operational risk in most back office processes of the Bank’s retail loan business. The Fraud Prevention
Group manages fraud related risks through forensic audits and recovery of fraud losses. The segregation
of responsibilities and oversight by groups external to the business groups ensure adequate checks
and balances.
Business Overview