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EXECUTIVE SUMMERY

INTRODUCTION OF CREDIT RATING :

Credit rating is the symbolic indicator of the current opinion of rating agencies regarding therelative capability of issuer of debt instrument, to service the debt obligations as percontract.The credit rating agencies today have ample opportunities to play a unique role instrengthening the capital market and building the investors confidence in the financial

system.

So, considering the importance of credit rating, the present research work has beenundertaken to study the regulatory environment affecting the credit rating activities in India,to examine the operational performance of four SEBI recognized credit rating agencies, viz.CRISIL, ICRA, CARE and FITCH, to assess the consistency in rating methodology and toexamine rating variability in grades assigned by these agencies, to study the post-ratingperformance of various companies rated by these agencies and to study the investors

opinion regarding the credit rating practices in India.

INTRODUCTION OF ICRA:

ICRA Ltd is one of the most experienced Credit Rating Agencies in India.The company rates rupee-denominated debt instruments issued by manufacturingcompanies, commercial banks, non-banking finance companies, financial institutions,public sector undertakings and municipalities.They also rates structured obligations and sector-specific debt obligations such asinstruments issued by Power, Telecom and Infrastructure companies.The other services offered by them include Corporate Governance Rating, StakeholderValue and Governance Rating, Credit Risk Rating of Debt Mutual Funds, Rating of ClaimsPaying Ability of Insurance Companies, Project Finance Rating, and Line of Credit Rating.

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HISTORY OF ICRA

ICRA Ltd was incorporated on January 16, 1991 by leading financial/investmentinstitutions, commercial banks and financial services companies as an independent andprofessional Investment Information and Credit Rating Agency with the name InvestmentInformation and Credit Rating Agency of India Ltd.

The company launched Credit Rating Service on September 1, 1991.In the year 1993, the company launched Investment Information Service and ResearchPublications and in the year 1995, they launched the services of Credit Assessment for

small and medium scale industries and Earning Prospects and Risk Analysis for EquityInvestor.

Introduction of icici bank

ICICI Bank started as a wholly owned subsidiary of ICICI Limited, an Indian financialinstitution, in 1994. Four years later, when the company offered ICICI Bank's shares to thepublic, ICICI's shareholding was reduced to 46%. In the year 2000, ICICI Bank offeredmade an equity offering in the form of ADRs on the New York Stock Exchange (NYSE),thereby becoming the first Indian company and the first bank or financial institution fromnon-Japan Asia to be listed on the NYSE. In the next year, it acquired the Bank of MaduraLimited in an all-stock amalgamation. Later in the year and the next fiscal year, the bankmade secondary market sales to institutional investors.

Introduction of kotak Mahindra bank:

Kotak Mahindra Bank (KMB) reported a good set of numbers for Q2FY12. Consolidatedearnings were higher by 20% y-o-y driven mainly by lower operating and provisioningexpenses. Capital market businesses continued to drag on overall profitability. Standaloneearnings for the bank grew by a strong 33.5% y-o-y driven by a sharp drop in provisions.Net interest income (NII) grew 20% y-o-y on a consolidated basis and about 11% y-o-y ona standalone basis. Advances growth was robust at 41% y-o-y. Asset quality on an

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absolute basis remained flat and improved even further as a percentage of advances.Overall, the banking business delivered a good performance which was dragged down on aconsolidated level by the other verticals.

ICRA Rating Methodology for Banks :

ICRA s rating assesses the credit risk of a bank which is a function of the business andfinancial risk as well as the likelihood of external support available to the bank in case ofany financial stress.

The report discusses the key parameters that ICRA uses for assessing the businessand financial risk of a bank.

ICRA makes use of publicly available financial data as well as the bank s own statisticalinformation for its credit evaluation.

ICRA makes appropriate adjustments to the financial data to ensure conformance withthe generally accepted accounting principles.

The key factors considered in the rating process are as follows:Business Risk

Financial Risk

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CHAPTER-1INTRODUCTION CREDIT

RATING:

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Credit rating is the symbolic indicator of the current opinion of rating agencies regardingthe relative capability of issuer of debt instrument, to service the debt obligations as percontract.

The credit rating agencies today have ample opportunities to play a unique role instrengthening the capital market and building the investors confidence in the financial

system. So, considering the importance of credit rating, the present research work has been

undertaken to study the regulatory environment affecting the credit rating activities inIndia, to examine the operational performance of four SEBI recognized credit rating

agencies, viz. CRISIL, ICRA, CARE and FITCH, to assess the consistency in rating methodology and

to examine rating variability in grades assigned by these agencies, to study the post-rating performance of various companies rated by these agencies and to study theinvestors opinion regarding the credit rating practices in India.

The credit rating agencies in India are regulated by the Securities and Exchange Board

of India under the SEBI (Credit Rating Agencies) Regulations, 1999 of the Securitiesand Exchange Board of India Act, 1992. As far as the consistency in rating methodologyof each rating agency by taking companies belonging to the same rating class isconcerned, it has been found that there has been consistency to a large extent in themethodology of all the rating agencies while assigning a particular rating grade whereasthere has been inconsistency in the methodology adopted by all the four rating agencieswhile assigning different rating grades.

The analysis provides that as far as the rating change ratio is concerned, the largestnumber of rating change cases is related to FITCH followed by CARE, ICRA andCRISIL.

However, the analysis regarding the post-rating performance of companies, rated by allthe agencies, reveals that the companies rated by CARE have shown more stability in

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their performance as compared to the companies rated by other rating agencies. Theleast stability was found in the performance of companies rated by ICRA.

The results of the study show that majority of the respondents have full awarenessabout the purpose of credit rating and a higher percentage of them was satisfied by theguidance of credit rating agencies

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CHAPTER - 2INTRODUCTION OF

ICRA:

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2.1 INTRODUCTION:-

ICRA Ltd is one of the most experienced Credit Rating Agencies in India.

The company rates rupee-denominated debt instruments issued by manufacturingcompanies, commercial banks, non-banking finance companies, financialinstitutions, public sector undertakings and municipalities.

They also rates structured obligations and sector-specific debt obligations such asinstruments issued by Power, Telecom and Infrastructure companies.

The other services offered by them include Corporate Governance Rating,Stakeholder Value and Governance Rating, Credit Risk Rating of Debt MutualFunds, Rating of Claims Paying Ability of Insurance Companies, Project FinanceRating, and Line of Credit Rating.

They are operating their business from their offices located in Delhi, Gurgaon,

Mumbai, Kolkata, Chennai, Ahmedabad, Bangalore and Pune.

2.2 HISTORY OF ICRA:

ICRA Ltd was incorporated on January 16, 1991 by leading financial/investmentinstitutions, commercial banks and financial services companies as an independent and

professional Investment Information and Credit Rating Agency with the nameInvestment Information and Credit Rating Agency of India Ltd.

The company launched Credit Rating Service on September 1, 1991.

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In the year 1993, the company launched Investment Information Service and ResearchPublications and in the year 1995, they launched the services of Credit Assessment forsmall and medium scale industries and Earning Prospects and Risk Analysis for EquityInvestor.

In the year 1996, they signed an agreement with Moody`s Risk Management Servicesto provide credit education, risk management software, credit research and consultingservices to commercial banks, financial and investment institutions, financial servicescompanies and mutual funds in India.

In the year 1997, the company launched ICRA Bulletin and in the year 1998, they

introduced a Rating Methodology for the Claims Paying Ability of General Insurancecompanies in India.In the year 1999, the company became the first Indian Rating Agency to rate all Non-Life Insurance companies in the country.

Also, they launched Rating service for Debt Fund Scheme and Grading Service forentities involved in construction projects.

In the year 2001, Moody`s Investment Company India (Pvt.) Ltd became the largestshareholder in the company. In the same year, the company launched their CorporateGovernance Ratings for the Indian Market.

Also, they joined with National Real Estate Development Council and launched theICRA-NAREDCO Grading System for real estate developers and projects.

In the year 2002, the company launched Grading scheme for Healthcare institutions inIndia and in the year 2003, they launched Project Finance Assessment/ Rating Service.

Also, the company entered into a shareholder and subscription agreement with OnlineIndia

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Capital.com.In the year 2004, the company launched the services of Grading of MutualFund Management Quality and Maritime Training Institutes in India.

In the year 2005, they launched NSIC-ICRA Performance and Credit Rating Scheme forSmall Scale Enterprises in India. In the year 2006, the company demerged theirConsulting Division and transferred to ICRA Management Consulting Services Ltd witheffect from April 1, 2005.

Also they acquired ICRA Online Ltd and Computer Exchange Pvt. Ltd which wasrenamed as ICRA Techno Analytics Ltd. During the year 2006-07, the companyacquired the balance shares of ICRA Online Ltd and converting ICRA Online Ltd to a

wholly-owned subsidiary company.During the year 2007-08, ICRA Techno Analytics Ltd, a wholly owned subsidiarycompany incorporated ICRA Techno Analytics, Inc in US and also acquired a Kolkatabased software services company namely, Axiom Technologies Pvt. Ltd.

ICRA Management Consulting Services Ltd, a wholly owned subsidiary companysigned a MOU with Dun & Bradstreet Philippines Inc. and Virtues Global Partners Inc.for offering advisory/consulting services in Philippines and USA respectively.

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2.3 INTRODUCTION OF ICICI BANK:

ICICI Bank started as a wholly owned subsidiary of ICICI Limited, an Indian financial

institution, in 1994. Four years later, when the company offered ICICI Bank's shares tothe public, ICICI's shareholding was reduced to 46%. In the year 2000, ICICI Bankoffered made an equity offering in the form of ADRs on the New York Stock Exchange(NYSE), thereby becoming the first Indian company and the first bank or financialinstitution from non-Japan Asia to be listed on the NYSE. In the next year, it acquiredthe Bank of Madura Limited in an all-stock amalgamation. Later in the year and the nextfiscal year, the bank made secondary market sales to institutional investors.

With a change in the corporate structure and the budding competition in the IndianBanking industry, the management of both ICICI and ICICI Bank were of the opinionthat a merger between the two entities would prove to be an essential step. It was in

2001 that the Boards of Directors of ICICI and ICICI Bank sanctioned the amalgamationof ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal FinancialServices Limited and ICICI Capital Services Limited, with ICICI Bank. In the followingyear, the merger was approved by its shareholders, the High Court of Gujarat at

Ahmedabad as well as the High Court of Judicature at Mumbai and the Reserve Bankof India.

Present ScenarioICICI Bank has its equity shares listed in India on Bombay Stock Exchange and theNational Stock Exchange of India Limited. Overseas, its American Depositary Receipts(ADRs) are listed on the New York Stock Exchange (NYSE). As of December 31, 2008,ICICI is India's second-largest bank, boasting an asset value of Rs. 3,744.10 billion andprofit after tax Rs. 30.14 billion, for the nine months, that ended on December 31, 2008.

Branches & ATMsICICI Bank has a wide network both in Indian and abroad. In India alone, the bank has1,420 branches and about 4,644 ATMs. Talking about foreign countries, ICICI Bank hasmade its presence felt in 18 countries - United States, Singapore, Bahrain, Hong Kong,Sri Lanka, Qatar and Dubai International Finance Centre and representative offices inUnited Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia andIndonesia. The Bank proudly holds its subsidiaries in the United Kingdom, Russia andCanada out of which, the UK subsidiary has established branches in Belgium andGermany.

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Products & Services

Personal Banking

* Deposits

* Loans* Cards* Investments* Insurance* Demat Services* Wealth Management

NRI Banking

* Money Transfer* Bank Accounts

* Investments* Property Solutions* Insurance* Loans

Business Banking

* Corporate Net Banking* Cash Management* Trade Services* SME Services* Online Taxes* Custodial Services

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2.4 Introduction of kotak Mahindra bank:

Kotak Mahindra Bank (KMB) reported a good set of numbers for Q2FY12. Consolidated

earnings were higher by 20% y-o-y driven mainly by lower operating and provisioningexpenses. Capital market businesses continued to drag on overall profitability.Standalone earnings for the bank grew by a strong 33.5% y-o-y driven by a sharp dropin provisions. Net interest income (NII) grew 20% y-o-y on a consolidated basis andabout 11% y-o-y on a standalone basis. Advances growth was robust at 41% y-o-y.

Asset quality on an absolute basis remained flat and improved even further as apercentage of advances. Overall, the banking business delivered a good performancewhich was dragged down on a consolidated level by the other verticals.

Investment analysis

Strong balance sheet growth supported by robust growth in advances KMB sawhealthy balance sheet growth with advances and deposits growing by 41% and 29% y-o-y respectively. Loan growth was driven by the corporate segment which grew by astrong 58% y-o-y while the retail book grew by 27% y-o-y CASA ratio fell by about100bps on a q-o-q basis on the back of faster growth in term deposits as compared toCASA deposits. CASA ratio stands at 26% for Q2FY12. Consolidated NIMs contractedby about 20bps q-o-q due to increasing cost of funds.

Asset quality continues to improve the bank reported GNPAs and NNPAs of 1.6% and0.6% respectively. GNPAs were lower by 27bps q-o-q while NNPAs were lower by10bps q-o-q. The bank saw some significant write back of provisions which resulted in anet positive number for provisioning expenses thereby giving a boost to the standalonebottom line. Restructured assets reduced to Rs720 MN from Rs1320 MN a year back.The bank is making a conscious effort to avoid exposure to certain sectors like infra,airlines and textiles.

Other business segments continue to drag on consolidated profitability Majority of they-o-y growth in consolidated earnings was driven by the financing segment. Capitalmarket related segments continued to show a flattish or negative performance.International subsidiaries saw their earnings being affected by MTM losses.

Savings rate deregulation With the RBI having deregulated savings deposit rates, themanagement indicated that they expect savings deposit rates to trend higher fromcurrent levels. KMB which has a small proportion of its total deposits as SA (10%) willsee an impact of 10bps if it hikes its savings deposit rate by 100bps.

Performance of bank:-Established in 1985, the Kotak Mahindra group has been one of India's most reputedfinancial conglomerates. In February 2003, Kotak Mahindra Finance Ltd, the group's

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flagship company was given the license to carry on banking business by the ReserveBank of India (RBI). This approval created banking history since Kotak MahindraFinance Ltd. is the first non-banking finance company in India to convert itself in to abank as Kotak Mahindra Bank Ltd. Today, the bank is one of the fastest growing bankand among the most admired financial institutions in India.

The bank has over 323 branches and a customer account base of over 2.7 million.Spread all over India, not just in the metros but in Tier II cities and rural India as well, itis redefining the reach and power of banking. Presently it is engaged in commercialbanking, stock broking, mutual funds, life insurance and investment banking. It caters tothe financial needs of individuals and corporates. The bank has an internationalpresence through its subsidiaries with offices in London, New York, Dubai, Mauritius,San Francisco and Singapore that specialize in providing services to overseas investorsseeking to invest into India.

Products and Services

The bank offers complete financial solutions for infinite needs of all individual andnon-individual customers depending on the customer's need - delivered through a stateof the art technology platform. Investment products like Mutual Funds, Life Insurance,retailing of gold coins and bars etc are also offered. The bank follows a mix of both openand closed architecture for distribution of the investment products. All this is backed bystrong, in-house research on Mutual Funds.

Apart from Phone banking and Internet banking, the Bank offers convenient bankingfacility through Mobile banking, SMS services, Nectar, Home banking and Bill Payfacility among others.

The Depository services offered by the Bank allows the customers to hold equityshares, government securities, bonds and other securities in electronic or Demat forms.

The Salary 2 Wealth offering provides comprehensive administrative solutions forCorporates with features such as easy and automated web based salary uploadprocess thereby eliminating the paper work involved in the process, a dedicatedrelationship manager to service the corporate account, customized promotions and tie -ups and many such unique features. The whole gamut of investment products andinvestment advisory services is available to the salary account holders as well.

For the business community, the bank offer comprehensive business solutions thatinclude the Current Account, Trade Services, Cash Management Service and CreditFacilities. The bank?s wholesale banking products offer business bankingsolutions for long-term investments and working capital needs, advice on mergers andacquisitions and equipment financing. To meet special needs of the rural market, thebank has dedicated business offerings for agricultural financing and infrastructure. Its

Agriculture Finance division delivers customised products for capital financing andequipment financing needs of our rural customers.

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For financial liquidity the bank offers loans that meet personal requirements withquick approval and flexible payment options. To complete the personal financialofferings space, the bank now offers Kotak Credit Card which is a hassle-free,transparent product that also happens to be the first vertical credit card in the industry.

Kotak Mahindra Bank addresses the entire spectrum of financial needs of Non-ResidentIndians. The bank has tie-up with the Overseas Indian Facilitation Centre (OIFC) as astrategic partner, which gives them a platform to share their comprehensive range ofbanking and investment products and services for Non Resident Indians (NRIs) andPersons of Indian Origin (PIOs). Their Online Account Opening facility and Live Chatservice helps to get in touch at the comfort of homes and at the convenience. Theseofferings are specifically designed to suit the overseas Indian's personal financial needsand give the global Indians a near to home feel.

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CHAPTER - 3REVIEW OF

LITERATURE

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Credit rating serves as a valuable input in the decision-making process of differentparticipants in the capital market including regulators, issuers and investors.

Therefore, it has been attracting the attention of thinkers in the field of finance to studyvarious dynamics of this fast emerging subject.

Various studies have been conducted in India as well as in different parts of the worldby different bodies and individuals and thus contributing a lot to explore new insightsinto the concept of credit rating.

The area of concern of the studies conducted so far has been mainly to find out therelevance of credit rating in the Indian context as well as at the global level and theextent of awareness among the investors, about the concept of credit rating.

I. Upadhye (2005) ,Changing Perspectives of Credit Rating in India, Punjab Journal of

Business Studies, Vol.1, No.1, April-September.in her study, concentrated on anoverview of credit rating system in India.

The paper explained the various factors being taken into consideration by ratingagencies which include past performance, profit turnover, cash flow and fund flow,nature of competition, etc. And various types of ratings being done by ICRA.

The paper also gave details of various Credit Rating Agencies in India like CRISIL,ICRA, CARE, and ONICRA.

The author criticized the working of these agencies and suggested that a standardizedfee structure and standardized rating grades should be adopted by all rating agencies inorder to simplify the procedures.

II. Guttler and Wahrenburg (2006) , The Adjustment of Credit Ratings in Advance ofDefaults, Finance and Accounting Working Paper Series 155, Department of Finance,

Goethe University, Frankfurt.in their working paper, made an attempt to examine the adjustment of credit ratings inadvance of defaults by taking evidence from issuers with multiple ratings by US ratingagencies including Moodys and Standard &Poors from 1997 to 2004.

The authors found that the Moodys adjusted its ratings to increasing default risk in atimelier manner than S&P.

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Moreover, there was no home biasness on the part of these US based rating agenciesto US or non-US issuers.

Further, the authors predicted that when any agency downgrades or upgrades certainissues, the second agency did the same action and that too with the greater magnitudein the short- term and the rating changes by the second rating agency were significantlymore likely after downgrades than after the upgrades by the first rating agency.

III. Cantor et al. (2007) The Use of Credit Rating in Investment Management in US andEurope, 16 February, ssrn abstract id 996133 .analyzed the behavior of various plan sponsors and investment managers regarding theuse of rating guidelines in the conduct of their investment activities.

For the purpose of study, 200 plan sponsors and investment managers of US and

Europe were taken as sample. They also investigated a number of important issues regarding the linkage between

market dynamics and use of credit rating. The authors revealed that the rating based guidelines were widespread but their forms

and motivations vary considerably but the usage of ratings appeared remarkably similarin US and Europe.

Further, they found that the adoption of rating based guidelines by investmentmanagers was dominated by client requirements rather than the regulatory needs.

They also highlighted that the market participants expressed a preference on moreaccuracy of ratings over more stability of ratings.

IV. Reddy and Gowda (2008) , Some Aspects of Credit Rating: A Case Study, TheManagement Accountant , Vol. 43, No. 6, June.in their paper, explained the importance and problems of credit rating in India.

They also highlighted the basis of credit rating and credit rating practices prevalent inIndia. For this purpose, the opinions of sample of investors from Hyderabad were taken.

The results of the study inferred that majority of the respondents were aware of theexistence of various credit rating agencies including CRISIL, CARE, ICRA, etc. About40 per cent (80 out of 200) of the respondents depend on credit rating for theirinvestment in debt instrument but more than 50 per cent from them (94 out of 180) relyon CRISIL for their investment than the other credit rating agencies.

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The study worked out that though there is confusion among various investors due toexistence of more than one credit rating agency but majority of them are satisfied withthe guidance of credit rating agencies.

V. Bhattacharyya (2009) ,( A Study of Issuer Rating Service with an Appraisal of ICRA sRating Model, Indian Journal of Accounting , Vol. XXXIX(2), June.)in her paper, evaluated the issuer rating system in India with special reference toICRA s issuer rating model, since ICRA introduced the iss uer rating services in India in2005.

The author identified various quantitative variables having major impact on the issuerrating along with their relative importance with the help of discriminant analysis.

The time period of the study is from the date when the issuer rating started in 2005 to

March 2008 and the sample consists of 17 companies which have been rated by ICRAduring this period.

The study highlighted that out of the ten variables being used by ICRA for issuer ratingthe PBIT & Debt plus net worth ratio, current ratio and net sales growth rate play animportant role but the qualitative factors can also affect the ratings at any time.

VI. Bheemanagauda and Madegowda (2010)( Performance of Credit Rating Agencies inIndia, The Indian Journal of Commerce , Vol. 63, No. 3, June-September.)Made an attempt to evaluate the performance of credit rating agencies in India includingCRISIL, ICRA, CARE and FITCH. Secondary data relating to long-term.

Debt instruments from time period 2000-08 has been used for the purpose of the study.The analysis of the study brings out that during the given period there is a substantialincrease in the rating business in India. During the study period, the maximumpercentage of instruments rated is assigned the investment grade rating. As far asrating revisions are concerned, the study depicts that the downgrades were more thandouble the upgrades both in terms of number of instruments and the volume of debt.This depicts that the ratings were issuer biased. So, the authors suggested thatstringent methods should be adopted to avoid frequent downgrades. The study further

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highlights that among the agencies which maintain the stability of ratings, Fitch IndiaRatings holds the top most position followed by CRISIL, ICRA and CARE in line.

Thus, it can be said at the end that many studies relating to credit rating have beenconducted in India as well as abroad but a glimpse of existing literature reflects thatdespite of the increasing importance of credit rating agencies as the informationproviders for credit related opinions, the comprehensive research pertaining to creditrating in Indian context is still limited.

Most of the studies conducted so far in India focused mainly upon the theoretical andconceptual framework of credit rating in India.

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CHAPTER - 4RESEARCH

METHODOLOGY

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4.1 NEED FOR THE STUDY

Credit Rating is used by the bank investors as indication of the likelihood of receiving

back the money invested by them, in accordance with the terms on which they invested. Credit ratings are opinions based on all information known to rating agency, includingpublicly available information and/or non-public documents and information provided tothe agency by an issuer and other parties.

The increasing numbers of scams and controversies have shaken the confidence ofbank investors in corporate instruments.

Therefore, considering the importance of credit rating, different aspects of credit rating

need to be studied deeply so that it can be of more help to the investors.

So, the present study is an attempt to ascertain the activities undertaken by ratingagencies (ICRA)on various parameters and to know the bank investors perceptionsregarding the rating agencies.

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4.2 OBJECTIVES OF THE STUDY

OBJECTIVE:

To study the credit rating process of ICRA and their rating grades between two banks.

Sub-objectives:

To assess the consistency in rating methodology and to examine rating variability byrating agencies for banks.

To examine the operational performance of various credit rating agencies.

Provide superior information to investors who invest in bank.

Low costinformation relating to risk, Return and tradeoff is provided to investors.

Improves a healthy discipline on borrowers.

Lends greater credence to financial and other representations.

To study the regulatory environment affecting the credit rating activities in India.

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Chapter5PROCESS OF ICRA

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PROCESS OF ICRAProcess of ICRA:(INVESTMENT INFORMATION AND CREDIT RATING

AGENCY OF INDIA LTD)

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5.1 Rating grade of two bank:

Bank Long-term

ICICI bank ICRAAAA

Kotak Mahindra bank ICRA AA+

5.2 ICRA Rating Methodology for Banks :

ICRA s rating assesses the credit risk of a bank which is a function of thebusiness and financial risk as well as the likelihood of external support availableto the bank in case of any financial stress.

The report discusses the key parameters that ICRA uses for assessing thebusiness and financial risk of a bank.

ICRA makes use of publicly available financial data as well as the bank s own

statistical information for its credit evaluation. ICRA makes appropriate adjustments to the financial data to ensure

conformance with the generally accepted accounting principles.

The ratings are determined on a going concern basis rather than on a mereassessment of the banks financials as on a particular date.

This note is not an exhaustive discussion on all the aspects that go into rating ofa bank, but outlines a broad framework that ICRA uses during the rating process.

The key factors considered in the rating process are as follows:

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Business Risk

o Operating and Regulatory Environmento Ownership Structure and Govt. Supporto Governance Structureo Franchiseo Management, Risk positioning, Systems and Strategy

Financial Risk

o Asset Qualityo Diversity of funding and Liquidity

o Profitabilityo Capital Adequacy

1.Operating Environment

The assessment of a banks operating environment is one of the most importantparameters for the credit risk evaluation of a bank, as it could affect growth, assetquality and its earnings.

The operating environment of a bank is studied through an analysis of theprevailing economic conditions; growth prospects (GDP growth rate); the likelydeposits and credit growth; structural constraints in the economy (such as a largefiscal deficit and the necessity of banks to invest in Statutory Liquidity Ratio(SLR) papers) as well as the impact of economic and regulatory environment onthe credit risk profile.

ICRA also evaluates the likely policy changes to combat these challenges. Additionally, political risks and the legal system of the country are also evaluatedto assess the asset quality of banks as well as their ability to recover fromdelinquent accounts.

An evaluation of the structure of the financial market; stages of development andintensity of competition forms an important part of the evaluation of abanks operating environment.

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2.Regulatory Environment

A well regulated and supervised system is the backbone for credibility andstability of banks even when the operating environment is unfavorable.

ICRA s evaluation of the regulatory system involves evaluation of norms relatedto capital and other countercyclical measures to absorb risk, prevent relatedparty transaction; the extent of regulatory supervision and regulatory changes inthe past in response to the macro environment; key norms (such as NPArecognition, provisioning, capital adequacy, liquidity, expansion and directedlending) and prospective regulatory changes (driven by financial sector reformsas well as international environment / leanings).

The degree to which the central bank is likely to allow new entrants in bankingand open the banking system to further disintermediation could increasecompetition from new banks and non-bank lenders. Further development of thecapital market could allow potential and existing clientele to access capitalmarkets directly, thus making product innovation an important criterion for futureperformance.

As for the international environment, the global meltdown has triggered several

regulatory changes for higher core capital and better liquidity under Basel III. ICRA also evaluates the likely impact of these changes on the business plans

and performance of banks.

3.Ownership Structure and Government Support

The Indian banking system consists of public sector banks, private sector banks,foreign banks, co-operative banks and regional rural banks.

While ICRA draws comfort from the sovereign ownership of public sector banks,the credit view on some of the private sector banks would depend on the abilityof the bank to raise capital from promoters / other key shareholders, as and whenrequired.

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ICRA views positively a public sector bank with GOI shareholding well in excessof 51%, as it would have greater flexibility to raise capital by diluting GOI s

shareholding. Apart from ownership, the banks importance in the domesticfinancial system has a bearing on the possibility of government support at timesof financial duress.

Apart from balance sheet size, proxies for a banks systemic importance couldinclude share of business in region of operation; participation in paymentsystems and scale of quasi-fiscal responsibilities (such as directed lending)carried out for the government.

ICRA focusses on the existence of explicit or implicit government guarantees todepositors against default or insolvency.

4.Governance Structure

ICRA factors a banks governance structure in the rating process by conducting anassessment of the structural and functional aspects of its Board and committees. ICRAbelieves that an appropriate governance structure is important to ensure that banksoperate independently, with the interest of deposit holders not being compromised forother stakeholders such as related party lending and lending to vulnerable sections.A

good governance structure also ensures that the powers given to line managers at abank are exercised in accordance with the established procedures and that theseprocedures conform to the broad policy guidelines and strategic objectives of the bank.

5.Franchise

The franchise strength of a bank determines its capacity to grow whilemaintaining reasonable risk adjusted returns and resilience of earnings.

ICRA evaluates the franchise strength of a bank in terms of scale of operationsand market share for various activities at the pan-India level or business niche;performance and strengths relative to competition; complexity of key segmentsand special government support or privileges relative to other banks.

ICRA also takes into account the brand recognition, history and background ofbanks under its franchise strength analysis.

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6. Management, Systems and Strategy and Risk Management

ICRA lays special emphasis on governance issues; quality of management;systems and policies; shareholder expectations; the strategy followed to managethese expectations and accounting quality, as these aspects form the foundationof a banks credit risk profile.

The importance of these factors is even higher for a new bank or one with ashorter track record. Usually, a detailed discussion is held with the banks management to understand its business objectives, plans and strategies, viewson past performance and outlook on the industry.

ICRA also assesses the shareholders expectations and their impact on thecredit profile of a bank. Some of the other points assessed are:

Experience and commitment of the promoter/management to the line of businessconcerned

Attitude of the management to risk taking and containment

The banks risk management policies (credit risk, market and operational risk)

The ability and willingness of the promoters to support the bank through

measures such as capital infusion, if required

In addition, ICRA also evaluates the quality, depth, timeliness and relevance ofinformation available to thebanks management.

Our analysis of system adequacy encompasses the quality of thecommunications network; levels of computerization and integration within thebank; systems for accounting control; management information for monitoring

performance; business development and statutory reporting. ICRA lays considerable emphasis on the effectiveness of the banks risk

management systems and systems for strategic planning. For accounting controlaspects such as accounting quality, balancing of books, inter-branch and inter-bank reconciliation, ICRA draws on sources such as the Long-form Audit Report

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and the RBI Inspection Report apart from reviewing thebanks internal reportsand controls.

5.3 Risk Management

A careful evaluation of the risk management policies of the bank is conducted, asit provides an important guidance for the future liquidity, profitability, asset qualityand capitalization of the bank concerned.

The risk management of the bank is evaluated for the following:Credit risk:

The risk of loss resulting from the failure of a client or counterparty to meet its

contractual obligations; this risk could arise from the credit book as well as theinvestment book

Market risk:

The risk of loss resulting from changes in market variables, mostly emanating frominvestment portfolio, although credit book could also contribute to it.

Operational risk:

The risk of loss resulting from inadequate or failed internal processes, people andsystems, or from external causes

The evaluation of a banks risk management focuses on its ability to assess, control /mitigate and disclose the aforesaid risks.This is done by evaluation of norms and tolerance limits, roles and responsibilities,relative importance and independence of risk function as compared to operating linesand systems to implement the risk management framework.

5.4 Financial Performance

Financial performance analysis is one of the key parameters used to compare a bank s

performance over a period of time and across its peer group.

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ICRA conducts a detailed financial analysis of the banks being rated. The keyparameters that ICRA focusses on include: Asset Quality

Liquidity

Profitability

1.Asset Quality

The asset quality of a bank is a reflection of its risk appetite; depth of its franchiseand effectiveness of its management, strategy, systems and processes.

Asset quality holds the potential to affect earnings (higher NPAs could dilute theyields and necessitate higher credit provisions) and capital (lower earnings could

slow down the internal capital generation or in extreme situations (loss) couldweaken the capital).

The asset quality evaluation includes the loan book as well as the non-SLRportfolio of a bank.

The key aspects of asset quality evaluation are discussed below ICRA assesses the quality of a banks credit appraisal process and lending /

investment norms; the riskiness of its loan mix; the availability of data to facilitate

credit decision-making and its track record in managing its loan book throughlifecycles.

Further, the extent of diversification is also an important indicator of abanks asset quality.

In assessing diversification, the common factors include loan mix, portfoliogranularity, geographical diversification and borrower profile.

Segmental and regional NPA analysis is performed to gauge the extent of thebanks credit concentration to a single company, group, industry or region.

High levels of diversification can shield a bank from the impact of downturn inany one segment.

At the same time, diversification into riskier segments may not improve resilienceand, therefore, may not translate into superior ratings.

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However, a banks ability to manage diversification, especially in multiplebusinesses and/or new geographies is as important an issue as managementdepth and ability to adopt the skills and techniques needed to run differentbusinesses.

ICRA also assesses the quality of credit administration as reflected in design andimplementation of appraisal and loan pricing methodologies and adherence toperiodic review.

ICRA assesses the risk of devolvement of obligations onto a bank from itsunderperforming subsidiaries.

The devolvement may arise legally or due to the publicly perceived moralobligation of a parent to support a subsidiary organization.

ICRA also studies the distribution of credit across various rating categories forcorporate credit to judge the likelihood of future NPA generation.

Asset classification: The advances are classified into standard and non-performing assets (NPAs). NPAs are further classified into substandard, doubtful and loss assets,

depending on the time period for which an asset has been an NPA.

ICRA examines the provisioning requirements (according to the RBI guidelines)versus provisions made by the bank as well as the expected quantum and timeframe of recovery.

The accent is on estimating prospects of recovery, or further deterioration, thateventually affects the bottom line and financial position of the bank. Key assetquality indicators for a bank are its Fresh NPA generation rate, Gross NPApercentage, Net NPA percentage and Net NPAs in relation to its net worth.

2.Diversity of Funding and Liquidity

ICRA conducts a study of the funding profile of the bank in terms of the sourcesand mix of funds as well as the cost of funds to the bank, along the followinglines:

Classification of deposits that is wholesale or retail:

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CDs and bulk deposits from the corporate and institutional depositors aretypically more volatile than retail and household deposits.

In its rating process. ICRA views positively a higher proportion of retail depositsin the total mix.

Demographic classification of deposits that is a proportion of rural, urban andmetropolitan deposits.

Typically, rural deposits display lower fluctuation than urban and metropolitandeposits, thus reflecting the lower availability of investment options as comparedto the options available in urban and metropolitan areas.

Cost of funds:The cost of funds is determined by the mix of deposits (current,savings and time deposits), the tenure of deposits and the banks market standingthat influences its interest rate structure. Other factors include the banks reliance onmoney market funding, (from call money markets, CDs, refinance lines and the like),and the money market conditions prevalent and foreseen in future. Paymentservices: The near-monopoly in operating the payment systems provides banks astable and low-cost base of settlement balances. ICRA assesses the banks ability tooffer value-added payment services (often driven by technology), which will hold thekey to a bank retaining the benefits from this natural service. ICRA attempts tocapture the liquidity of a bank by analyzing the following qualitative and quantitative

parameters: Market perceptions of the bank:

Perceptions affect a banks ability to access funds during a crisis.

An indicator of such perceptions could be relative cost of funds for a bank in theinter-bank market.

The degree of the banks reliance on volatile funds in relation to total assets:

Some short-term funding sources are more sensitive than others to adverse

developments. ICRA views inter-bank funding by domestic banks and domestic deposits by non-

bank depositors in descending order of confidence.

Banks liquidity position:

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ICRA studies factors such as the overall match between the maturity profile of itsassets and liabilities; the level of readily saleable securities and securities againstwhich repo facilities are available.

Committed lines of liquidity available that include revolving lines of credit andrefinance facilities

ICRA analyses the possibility of stakeholder support in case of a crisis. ICRAplaces considerable emphasis on the implicit backing arising from the significantshareholding of a strong entity in the bank.

This benefit naturally accrues to all nationalized banks, as the Government ofIndia has demonstrated its support over the years by infusion of equity ordirected measures to bail out banks

3.Earning Stability and Prospects

A banks ability to generate adequate returns is important from the perspective ofits shareholders as well as debt holders.

The purpose of ICRA s evaluation here is to assess the level of future earningsand quality of earnings of the Bank concerned by analyzing its interest spreads,fee income, operating expenses and credit costs.

The profitability of a bank is evaluated by analyzing its interest spreads (yieldsminus cost of funds) and the likely trajectory of the same in the light of thechanges in its operating environment, its liquidity position and its overall strategy.

ICRA also assesses the ability of the bank to complement its interest income withfee income.

A large fee income allows greater diversification, which in turn can improve abanks resilience of earnings and earning profile.

The trading income of the bank is also evaluated to assess the sustained level ofincome / losses under an adverse interest rate scenario.

After assessing the income stream, ICRA evaluates the Banks operatingefficiency (operating expenses in relation to total assets and cost-to-income ratio)and compares the same with that of its peers.

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Finally, the credit costs are estimated on the basis of the banks asset qualityprofile and the profitability indicators compared across peers. Importantly, a veryhigh return on equity may not necessarily translate into a high credit rating, giventhat the underlying risk could be very high or leveraging could be excessive aswell; and being so, it could be more volatile or difficult to predict.

4.Capital Adequacy

Capital provides the second level of protection to debt holders (earnings beingthe first) and, therefore, its quality and adequacy (in relation to the embeddedcredit, market, and operational risk) is an important consideration for ratings.

In evaluating the banks true capital in relation to the risks in its business, ICRA

focusses on the following aspects: Regulatory capital, risk-based approach and conformance with prescribed norms:

As per the guidelines of the Reserve Bank of India (RBI), banks are required toachieve and maintain the ratio of total capital funds to risk weighted assets (bothon and off balance sheet) at 9%.

Regulatory adequacy apart, the adequacy of capital is also assessed from otherstandpoints such as present and prospective asset quality, risk rating of the

portfolio, risk strategy or risk appetite of the bank and interest rate sensitivity ofthe balance sheet.

After the implementation of Basel II in India, the gap between risk-based capitaland regulatory capital has reduced.

Quality of capital and ability to raise capital: A higher percentage of core Tier Icapital is viewed more favorably, given its greater permanence, followed byhybrids and subordinated bonds. In addition to these, ICRA evaluated theinternal capital generation capacity of the bank and the leeway available toaugment capital to support growth or withstand the stress.

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CHAPTER 6 ANALYSIS

ANDINTERPRETATION

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INTRODUCTION OF RISK :

Risks are usually defined by the adverse impact on profitability of several distinct

sources of uncertainty. While the types and degree of risks an organization may beexposed to depend upon a number of factors such as its size, complexity businessactivities, volume etc, it is believed that generally the banks face Credit, Market,Liquidity, Operational, Compliance ,legal ,regulatory and reputation risks. RiskManagement is a discipline at the core of every financial institution and encompassesall the activities that affect its risk profile. It involves identification, measurement,monitoring and controlling risks to ensure that

a) The individuals who take or manage risks clearly understand it

.b) The organizations Risk exposure is within the limits established by Boardof

Directors.

c) Risk taking Decisions are in line with the business strategy and objectivesset byBOD.

d) The expected payoffs compensate for the risks taken

e) Risk taking decisions are explicit and clear.

f) Sufficient capital as a buffer is available to take risk

Risk assoc ia ted w hi le do ing c red i t r at ing

Credit Risk

Market Risk Operational Risk

Credit Concentration risk

Interest Rate Risk in the Banking Book (IRRBB)

Liquidity Risk

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Settlement Risk

Reputation risk

Strategic & Business Risk

Model Risk

Credi t r i sk

MEANING- Credit risk is the risk of lossthat may occur from the failure of any party to abide

by the terms and conditions of any financialcontract with us, principally the failureto make required payments on loans due to us.

The credit risk of kotak Mahindra bank is higher than the icici bank. Due to theyhave great capacity of recovering the loan and debt amount .npa ratio of icicibank is 0.64% is less than the kotak Mahindra bank that is 0.98%.

Credit risk is associated with different things like credit growth, capital adequacy,asset quality, credit recovery etc.performance of Icici bank is more favorablecompared to kotak Mahindra bank.SoIcra gives AAA to icici bank.

Credit Risk Assessment Procedures of icici bank:

In order to assess the credit risk associated with any financing proposal, ICICI Bankassesses a

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variety of risks relating to the borrower and the relevant industry. Borrower risk isevaluated byconsidering:

the financial position of the borrower by analyzing the quality of its financialstatements, its

past financial performance, its financial flexibility in terms of ability to raise capitaland its

cash flow adequacy

the borrower's relative market position and operating efficiency

the quality of management by analyzing their track record, payment record andfinancial

conservatism.

Industry risk is evaluated by considering:

certain industry characteristics, such as the importance of the industry to the

economy, its growth outlook, cyclicality and government policies relating to the industry

the competitiveness of the industry

certain industry financials, including return on capital employed, operatingmargins and

earnings stability.

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Credit risk management processes of kotak Mahindra bank: The Bank focuses on ensuring that credit risk taking is in line with approved

policies, while meeting risk-reward objectives.

The Bank expects to achieve its earnings objectives and to satisfy its customersneeds while maintaining a sound portfolio.

The Board has delegated credit approval authority to the ManagementCommittee, Credit Committee and other approval authorities.

Credit Committee may further delegate the responsibility as required from time totime. Credit Committee ensures that the credit processes are in compliance withregulatory and internal norms and are enforced across the Bank in a uniformmanner.

The Bank s credit process is divided into three stages - pre-sanction, sanctionand post -sanction.

At the pre-sanction stage, the independent credit function within respectivebusinesses conduct credit appraisal and assign a credit rating based on internalrating model.

Based on the independent credit risk assessment, appropriate credit decisionsare taken by the sanctioning authorities. The Bank has a tiered credit sanctionprocess where credit approvals are reported to the next higher level.

As part of the post sanction process, the credit administration team processesdocumentation, on the completion of which, credit is disbursed..

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market risk

Market risk is defined as the risk to earnings arising from the movement in market risk

factors, namely interest rates, foreign exchange rates, credit spreads or equity prices.For regulatory capital purposes, the Group calculates its market risk capitalrequirements according to the standardised methodology.

The capital market risk management policies and procedures are based on the producttraded.The Group s risks are managed through a framework that relates the Group s

integrated risk management policy to the Group s strategy and objectives .so icici bankfollow the icras management policy and their strategy and objective and kotak

Mahindra bank not fulfill these strategy and objective of the management .

The risk management framework lays emphasis on the Groups risk philosophy, properorganizational structure, risk and reward balance and is supported by dedicatedmonitoring and risk measurement mechanism. This framework for market riskmanagement ensures that appropriate controls, policies and senior management

oversight form the basis of the Group s approach to market risk management. Themarket risk for the Bank and each of its major subsidiaries is managed in accordancewith the investment policy, which is approved by the respective Boards. These policiesensure that transactions in capital and foreign exchange markets and derivatives areconducted in accordance with sound and acceptable business practices and are as perthe extant regulatory guidelines, laws governing transactions in financial markets andthe financial environment. The policies are reviewed regularly to incorporate changes inregulatory guidelines and business and economic environment. some riskmanagement objective fulfill by icici bank but to the some extent not kotak Mahindrabank. Achieving risk return balance , Managing and optimizing interest rate risk in bankingand trading book ,Ensuring that mismatches between rate sensitive assets and liabilitiesis kept within limits , Managing and optimizing currency and liquidity risk , Proper

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recognition, classification, measurement and accounting of investments ,Compliancewith regulatory guidelines,

Oversight over the operation and execution of market transactions .

Market Risk Management Procedures in ic ic i bank

The board of directors of ICICI Bank reviews and approves the policies for themanagement of market risk.

The board has delegated the responsibility for market risk management on thebanking

book to the Asset Liability Management Committee and the trading book to theCommittee of Directors, under the Risk Committee of the Board.

The Asset Liability Management Committee is responsible for approving policiesand managing interest rate risk on the banking book and liquidity risks reflectedin the balance sheet. The Committee of Directors is responsible for settingpolicies andapproving risk controls for the trading portfolio.

The Asset Liability Management Committee is chaired by the Joint ManagingDirector and all four Executive Directors are members of the Committee.

The Committee generally meets on amonthly basis and reviews the interest rateand liquidity gap positions on the banking book,formulates a view on interestrates, sets deposit and benchmark lending rates, reviews the businessprofile andits impact on asset liability management and determines the asset liabilitymanagement strategy, as deemed fit, in light of the current and expectedbusiness environment.

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The Committee reports to the Risk Committee. A majority of the members of theRisk Committee are independent directors and the committee is chaired by anindependent director.

The Balance Sheet Management Group, reporting to the Chief Financial Officer,is responsible for managing interest rate risk on thebanking book, and liquidity,under the supervision of the Asset Liability Management Committee.

Market Risk Management Procedures in kotak Mahind ra bank:

The Group s risk management architecture is overseen by the Board of Directorsand appropriate policies to manage risks are approved by the Board.

The Board is involved in defining risk appetite and capital at risk for the Group, atan integrated level, covering all activities of the Group. The Board has alsodelegated to the Group Head - Risk, the responsibility for middle office and risk

management. Risk Management department is entirely independent of Treasury Department.

The Group uses a comprehensive range of quantitative tools and metrics formonitoring and managing risks.

Some of these tools are common to a number of risk categories whereas theothers are tailored to address the particular features of specific risk categories.

Both with a view to bringing in risk sensitivity through policies and to duly meetthe regulatory requirements, the Group continually assesses the appropriatenessand the reliability of the quantitative tools and metrics in the light of the changingrisk environment.

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Operat ional Risk

Operational risk can result from a variety of factors, including failure to obtain properinternal authorizations, improperly documented transactions, failure of operational andinformation security procedures, computer systems, software control.Icici bank have incured Risk Management Committees to manage operational risks.Separate sub committees also exist in a few entities to screen all potential newmandates for profitability and to ensure that compliance, legal and reputational issuesare addressed before accepting any mandate. Hence, depending upon the size of thegroup entity, the operational risk governance structure is adequate to manage materialoperational risks.so the performance of the icici bank is high instead of kotak Mahindrabank.

The icici Bank has built into its operational process segregation of duties, clear reportingstructures, well defined processes, operating manuals, staff training, verification of highvalue transactions and strong audit trails to control and mitigate operational risks.

The icici Bank has in place a Risks and Controls Self Assessment programme for

formally assessing operational risks and related controls to mitigate these risks. The selfassessments are performed by individual business units and functions. As part of theannual Risks and Controls Self Assessment (RCSA) process, areas with high risk

potential are highlighted and business unit / function either proposes mitigatingmeasures to resolve the issue or provides a rationale for why the risk is acceptable.

ICICI Bank gives importance to computer security and has s a comprehensiveinformation

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technology security policy. Most of the information technology assets including criticalservers are hosted in centralized data centers which are subject to appropriate physicaland logical accesscontrols.

Liqu id i ty Risk

Liquidity risk arises in the funding of lending, trading and investment activitiesand in the management of trading positions.

The goal of liquidity management in icici bank is to be able, even underadverse

conditions, to meet all liability repayments on time, to meet contingent liabilities,and fund all investment opportunities.

Icici bank maintain diverse sources of liquidity to facilitate flexibility in meetingfunding requirements and fund thier operations principally by accepting depositsfrom retail and corporate depositors andthrough public issuance of bonds.

The icici Bank maintains a diversified funding profile with emphasis on buildingretail franchise to increase customer deposits. The Bank ensures that there is

sufficient liquidity headroom available, including liquid assets, at all times tomanage any contingency.

Icici bank also borrow in the short-term inter-bank market. Loan maturities,securitization of assets and loans, and sale of investments also provide liquidity.But kotak Mahindra bank not borrow short term inter bank market.

Interest Rate Risk

The amount charged, expressed as a percentage of principal, by a lender to aborrower for the use of assets. Interest rates are typically noted on an annualbasis, known as the annual percentage rate (APR).

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Interest rate of kotak Mahindra bank is 6% , and interest rate of icici bank is 4%which is less than kotak Mahindra bank it is beneficial to that bank only that theycan generate high revenue from this rates.

Recently, the Reserve Bank of India has authorized the dealing of foreigncurrency-rupee option by banks for hedging foreign currency exposures includinghedging of balance sheet exposures. icici have begun offering such products tocorporate clients and other inter-bank counterparties and are one of the largestparticipants in the currency options market accounting for a significant share ofdaily trading volume. Some extent this rule is also followed by kotak Mahindra

bank because it is benefited to stakeholders point of you and it is importantcriteria while credit rating is provided.

Icici bankKotak mahindrabank

Interest income Rs m 448,846 108,379Other income Rs m 293,198 51,124Interest expense Rs m 282,854 60,245

Net interestincome

Rs m 165,992 48,134

Interest income Rs m 448,846 108,379

criteria use by icra to give rating methodology to icici bank

and kotak Mahindra bank:

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ICICI Bank Limited

Rating of [ICRA] AAA (pronounced ICRA triple A) with stable outlook has been

assigned to the fresh Rs. 4000 crore Unsecured Redeemble Bonds Programmeof ICICI Bank Limited (IBL).

ICRA has also reaffirmed the [ICRA] AAA rating to the outstanding Lower Tier IIBonds Programme and Senior Long-Term Bonds Programme of IBL.

The ratings for the debts taken over by IBL from the erstwhile ICICI Limited anderstwhile The Bank of Rajasthan Limited have also been reaffirmed at [ICRA]

AAA with stable outlook. Further, ICRA has also reaffirmed the MAAA

(pronounced M triple A) rating to the Term Deposit Programme, and the [ICRA] A1+ (pronounced ICRA A one plus) rating to the Rs. 50,000 crore* Certificates ofDeposit Programme of IBL.

The highest credit quality ratings are supported by ICICIs position in the Indianfinancial system as the second largest commercial bank, strong operatingperformance over the last few quarters, its sound capitalization levels (CRAR :18.3%; Tier 1 capital :12.8%) as on September 30, 2012 and its extensivecorporate relationships, besides the its retail franchise.

Going forward, the ratings would be sensitive to the banks ability to maintainstable asset quality indicators, especially in the infrastructure sector given thechallenging operating environment.

Net Interest Margins of the bank registered an improvement from 2.34% duringFY11 to 2.44% during FY12, supported by improvement in the Credit to depositRatio, and steady CASA base. Overall, the increase in cost of deposits wasoffset by more than commensurate increase yield on advances resulting in

increase in Net Interest Margins in FY12. In H1FY13, the overall NIMs witnesseda ~20 bps increase marked by increase in NIM on domestic business, which wasin turn driven by lower cost of funds during the period due to the reduction in termdeposit rates since the beginning of the year.

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The benefits of expansion in domestic NIMs was offset in part by decline in NIMsin the international operations (international operations account for ~25% of theoverall business) on account of excess liquidity maintained in the internationalbusiness.

ICRA believes that lower cost of domestic funding (with CASA at ~41%), highshare of retail assets (~34%) along with expected improvement in internationalNIM; augur well for the margins going forward. Fee income of the bank declinedto 1.52% of average assets during FY12 as compared to 1.67% during FY11.The fee income profile of the bank has significant dependence on corporatelending related fees that slowed down during FY12, while fee income from retailbusiness continued to grow at a moderate pace. The fee income was maintained

at stable levels in H1FY13, with close to 50% of the fee income emanating fromretail segment, corporate fees including commercial banking accounting for closeto 40% while the balance being rural and SME related.

In H1FY13, the bank witnessed continued momentum in granular fee incomestreams such as transaction banking fees as well as retail asset fees. Theoperating expenses witnessed a marginal increase to 1.78% of average assetsduring FY12 as against 1.72% during FY11. As per the bank, it intends to

maintain cost to income ratio in the range of 40-42%. Credit provision as apercentage of average credit portfolio declined to 42bps in FY12 as compared to99 bps in FY11, with provisioning primarily on account of NPL/standard assetprovisioning. The provisioning expense continued at similar levels in H1FY13 aswell. In Q2-2013, despite provisioning on a media account (which has beenclassified as NPA and largely provided for) the overall provisions stood at ~Rs.500 crore on account of negligible incremental general provisioning being closeto zero and some write backs on retail portfolio (due to recovery in somesegments). Overall, the provisioning expense stood at ~40 bps in H1FY13.

Overall, FY12 was marked by strong operating performance for the bank, withcore operating profits (excluding treasury profits and provisioning expense)continuing to remain stable at ~ 2.4% of average assets in FY12. Driven by lowercredit provisioning expense, as a percentage of average assets the Net Profits

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stood at 1.47% of average assets in FY12 (1.34% in FY11). The return on networth stood at 10.70% in FY12 (9.35% in FY11). In H1FY13, the return on NetWorth stood at ~12%.

100 lakh = 1 crore = 10 million

The loan book of the bank stood at Rs. 2,53,727 crore as on March 31, 2012 asagainst Rs. 2,16,365 crore as on March 31, 2011, a reasonable YoY growth of17.27%. As on September 30, 2012,the loan book of the bank further stood atRs. 2,75,076 crore.

The broad portfolio break-up of the loan book as on Sep 30, 2012 is as follows:Retail business group (including builder funding and dealer loans)-34%, domesticcorporate- 28%, Overseas branches-26%, Rural -7%, SME-5%. As per IBL, the

domestic credit growth is likely to be much higher than the 5.1% CAGR seenover FY09-12, when the bank concentrated on improving its deposit franchise,keeping operating costs in check, improving asset quality and capitalpreservation. As per IBL, it expects domestic credit to register a 20% growth(with retail at 15%+) in FY13, while the International loans are expected to growmuch slower, at

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The deposit profile of the bank has changed significantly since Mar-09. Currentdistribution of wholesale deposits vs. retail deposits indicates a rising proportionof retail deposits, which is a marked shift from a lower level of retail depositsmaintained as on March 31, 2010 and earlier. IBL plans to take the total numberof branches to 4,000 by FY2015 (from current levels of ~2770 branches), whichis expected help the bank in maintaining strong CASA base. During the last 24months, the bank had embarked on a conscious strategy to improve its CASAbase. The CASA ratio, which stood at ~29% as on March 31, 2009, standssignificantly improved at ~41% as on Sep 30, 2012. As per IBL, it wouldendeavour to maintain average CASA at 38-40% for FY13. The banks depositfranchise is considerably strengthened due to less dependence on wholesale

deposits and a high proportion of savings-account deposits, which augurs well forNIM ahead. IBL's capital adequacy ratio stood at a comfortable 18.28% as onSep 30, 2012 (Tier I: 12.83%). During FY12, IBL received dividend from itssubsidiaries - Rs. 232 crore from ICICI Prudential Life Insurance Co. Ltd and Rs.122 crore from ICICI Bank UK. The solvency indicators for the bank as indicatedby Net NPAs/ Net worth ratio term stood at 3.31% as on Sep 30, 2012. Withcurrent comfortable CRAR and healthy accretion to reserves, the capitalization

level of the bank is likely to remain comfortable. IBLs ALM position remainscomfortable and has been improving over the past two years. Further the strongbrand name and franchise alleviate any liquidity concerns.

Bank Profile

IBL is the largest private sector bank and the second largest commercial bank inIndia. For the year ended March 31, 2012, IBL reported net profits of Rs. 6,465crore on total assets of Rs. 4.73 lakh crore and had a regulatory capitaladequacy of 18.52% (Tier I:12.68%).

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Kotak Mahindra Bank Limited

ICRA has reaffirmed the [ICRA]AA+ (pronounced ICRA double A plus) rating withstable outlook to Rs. 615 crore long-term Lower Tier II Bonds of Kotak MahindraBank Limited (KMBL). ICRA has also reaffirmed the [ICRA]AA (pronounced ICRAdouble A) rating with stable outlook to Rs. 136 crore Upper Tier II Bonds ofKMBL.

The rating indicates high degree of safety regarding timely servicing of financialobligations.* The one notch lower rating assigned to the Upper Tier II Bonds

reflects the specific features of these instruments wherein the debt servicing isadditionally linked to meeting the regulatory norms on capitalisation and reportedprofitability.

The domestic regulatory norms for hybrid debt capital instruments needregulatory approvals from Reserve Bank of India for debt capital instruments(including principal repayments) in case the bank were to report a loss and arenot liable to service the debt in case the bank breaches the minimum regulatorycapitalisation norms.

The ratings have been derived on the basis of the combined financials of theKotak Mahindra Group companies and their operational performance. Theratings reaffirmation reflect KMBLs continued strong capitalisation levels,

demonstrated ability to maintain net interest margins higher than industryaverage, diversified revenue profile as a group and improving asset qualityindicators.

The credit strengths are partially offset by groups relatively higher though

declining dependence on capital market related operations which is currentlygoing through a challenging phase and the banks relatively high proportion ofwholesale funding. In addition, the rating derives comfort from the operationalsynergies with its subsidiaries in Kotak Mahindra Group operating in carfinancing (Kotak Mahindra Prime Limited rated [ICRA]AA+ with Stable Outlook),

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capital market (Kotak Securities Limited rated [ICRA]AA with StableOutlook/[ICRA]A1+ and Kotak Mahindra Investments Limited rated [ICRA]AAwith Stable Outlook/[ICRA]A1+) and investment banking businesses.

KMBLs standalone credit portfolio registered a strong growth of 41% to Rs29,329 crore during FY10-11 compared to 25% growth reported during FY09-10.Net Interest Margins (NIM) remained one of the highest in the industry at 5.09%in FY10-11 (5.62% in FY09-10) with its large focus on Self Employed NonProfessional clientele and relatively lower borrowing with strong capital adequacyof 19.92% as on March 2011 (18.35% as on March 2010). With increased focusof the bank on secured advances and corporate loans and the higher cost offunds with elevated interest rate scenario the NIMs saw some decline; however;

remains above industry average at ~4.5% during 9MFY12. However, going forward, ICRA expects KMBLs NIMs to moderate with the

rationalization of excess capital and increasing share of corporate advances.During FY11 the bank saw strong growth in Commercial Vehicle (CV),Commercial Equipment (CE) as well as corporate and SME segment, while in9MFY12 the corporate and SME segment was the primary growth driver. Theretail lending portfolio which was ~74% (as on Mar 11) of the consolidated

advances in the past has declined to around 68% of the total portfolio as on Dec11.

Further, with the groups increased focus on the secured lending space thepersonal loan segment has declined from ~15% couple of years earlier to ~4%presently. The bank primarily caters to existing customers in its incrementaldisbursement in the unsecured lending space.

The asset quality indicators of the bank have been improving with lessincremental lending in the unsecured loan segment, lower delinquencies invarious asset classes as well as robust growth in advances. KMBLs asset quality

indicator (including stressed asset acquired by the bank) improved with GrossNPA and Net NPA at 1.1% and 0.5% as on Dec 11 (excluding acquired stressedassets) as compared to 1.7% and 0.6% as on Dec 10 (excluding acquired

stressed assets). KMBLs asset quality saw significant stress in FY09 with the

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gross NPA% and net NPA% increasing to 4.07% and 2.39% respectively as onMarch 31, 2009.

The deterioration in the asset quality earlier was largely driven by KMBLsunsecured loan portfolio which witnessed a sharp rise in NPAs, while KMBLcontinued to maintain a relatively better credit quality in its other segments ofcredit portfolio. KMBL has a low level of restructured loans portfolio at ~Rs 60crores (~0.1% of total advances) as on Dec 11.

Though bulk of the funds mobilized by KMBL are wholesale in nature raised inthe form of Certificate of Deposits and term deposits from corporate, the retaildeposit component has also shown a growth momentum over past few years asreflected in the low cost CASA deposit base which stood at 30.04% as on March

2011 (31.24% as on March 2010). Further, KMBL has ~6% of the total depositsin the form of sweep deposits, the cost of which is similar to saving bank depositscost. Combining the same, the overall low cost deposits for the bank is ~36% ason Dec 31, 2011. KMBL increased its branches at a moderate pace in 9MFY12on account of shift in technology platform for the Core Banking Solutions.

The outstanding branches as on Dec 11 are 330 and the bank plans to take thebranch count to 500 by CY13 end. Kotak Groups ALM profile is comfortable with

small mismatch in less than one year bucket. The excess SLR at 3-4% alsoprovides additional comfort to KMBLs liquidity profile. Supported by QIP of Rs.

1,366 crore in August, 2010, the capital adequacy has increased to over 19.92%with Tier I of 17.99% as on Mar-11.

KMBLs standalone regulatory capital adequacy ratio stands comfortable at17.50% with Tier-I at 15.60% as on Dec 31, 2011. In ICRAs view, KMBLscurrent capital adequacy ratio with high proportion of Tier-I capital would provideadequate room to scale up its lending operations while maintaining regulatorycapital requirement in addition to supporting the NIMs.

Kotak Bank, on standalone basis, improved upon its net interest income by 21%during FY11 led by a robust 40% growth in advances during the same period.The yield on advances continued to improve in 9MFY12 to 13.46% from 13.28%in FY11 (13.51% in FY10) on the back of rising interest rate scenario during the

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year. The average cost of funds increased more sharply to 7.37% in 9MFY12from 5.63% in FY11 (5.36% in FY10). Sharper increase in the cost of fundscompared to the increase in yield on earning assets led to decline in net interestmargins of the bank to 4.24% in 9MFY12 from 4.98% in FY11 (5.61% in FY10).

Its non-interest income also declined marginally to 1.54% in 9MFY12 ascompared to 1.64% in FY11 (1.62% in FY10). However, the non interest incomewas higher in the preceding years with relatively higher recovery from stressedassets. KMBLs operating expenses improved to 3.26% in 9MFY12 as compared

to 3.45% in FY11 (3.59% in FY10).

The compression in NIMs and the decline in operating expenses can be partlyexplained by the increased focus of the bank in corporate segment. Even whilethe operating expenses saw a marginal decline; on account of lower provisioningKMBL was able to report PAT/ ATA at similar levels at ~1.81% in 9MFY12. Inabsolute numbers KMBL reported net profits of Rs 788 crores in 9MFY12 ascompared to Rs 818 crores in FY11 ( Rs 561 crores in FY10).

About Kotak Mahindra Group :

Kotak Group is Indias leading full services financial conglomerate, withsignificant presence in securities and investment banking space while it is

currently growing its banking, asset management and insurance businesses. The group has a widespread presence across 370 cities and services close to

5.6 million customer accounts. Kotak Securities has a network of over 1400offices, KMBL has 330 branches, and Kotak Life has 204 branches. The groupderives synergies from its various platforms, given its presence across the

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financial spectrum. Kotak Securities has ~2.9% market share in overall marketvolumes at the exchanges and the group houses one of the prominent domesticinvestment bankers. KMBL began operations in 1986 as a bill discounting andleasing NBFC under Kotak Mahindra Finance and converted itself into a bank in2003.

Amongst commercial banks, KMBL is still at a nascent stage with less than 1%market share in advances. In the past, Kotak groups overall profitability used to

be highly dependent on capital market related business operations mainly equitybroking (retail and institutional) and investment banking making it vulnerable tothe cyclicality associated with the capital market.

The group had started focussing more on lending activities post the FY09

downturn in the capital markets. During 9MFY12 with relatively muted activity inthe capital markets and with the group increasing its presence in the lendingbusiness, the contribution of capital markets related businesses in Profits Beforetaxes have declined from ~33% in FY10 to around 10% in 9MFY12. Theadvances of Kotak Mahindra Bank (standalone) is Rs 39,772 crores as on Dec11 while that at Kotak Mahindra Prime is Rs 12,397 and Kotak Mahindra

Investments is Rs 730 crores.

Thus, at consolidated group level the advances of KMBL constitutes ~75% ofoverall advances. Going forward, ICRA expects the groups profitability to remain

comfortable with its lending operations providing a steady source of income andcapital market related operations providing an upside to groups overallprofitability when capital markets environment improve.

During the year ended March 31, 2011, KMBL, on standalone basis, reported netprofit of Rs. 818 crore on a total income of Rs. 4,937 crore as compared with netprofit of Rs. 561 crore on a total income of Rs. 3,884 crore respectively for FY09-10. KMBLs credit portfolio grew to Rs 29,329 crore as on March 31, 2011 from

Rs 20,775 crore as on March 31, 2010 while its deposit base increased to Rs29,261 crore from Rs 23,886 crore during the same period. As per BASEL II,KMBLs standalone capital adequacy ratio stood comfortable at 19.92% as on

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March 31, 2011. In 9MFY12, KMBL reported a PAT of Rs 788 crores on a totalincome of Rs 5,159 crores.

On a consolidated group basis, KMBL reported a rise in its net profit to Rs 1,569crore on a total income base of Rs 11,029 crore in FY10-11 from Rs 1,327 croreon a total income base of Rs 10,053 crore in FY09-10. In 9MFY12, KMBLreported a PAT of Rs 1,311 crores on a total income of Rs 9,237 crores.

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Balance sheet of icici bank:icicii bank Mar '13 Mar '12 Mar '11 Mar '10 Mar '09Capital and

Liabilities:

Total ShareCapital 1,153.64 1,152.77 1,151.82 1,114.89 1,463.29Equity ShareCapital 1,153.64 1,152.77 1,151.82 1,114.89 1,113.29Share

ApplicationMoney 4.48 2.39 0.29 0 0PreferenceShare Capital 0 0 0 0 350Reserves 65,547.84 59,250.09 53,938.82 50,503.48 48,419.73RevaluationReserves 0 0 0 0 0

Net Worth 66,705.96 60,405.25 55,090.93 51,618.37 49,883.02Deposits 292,613.63 255,499.96 225,602.11 ######## ########Borrowings 145,341.49 140,164.91 109,554.28 94,263.57 67,323.69Total Debt 437,955.12 395,664.87 335,156.39 ######## ########OtherLiabilities &Provisions 32,133.60 32,998.69 15,986.35 15,501.18 43,746.43TotalLiabilities 536,794.68 489,068.81 406,233.67 ######## ########

Assets

Cash &Balances with

RBI 19,052.73 20,461.29 20,906.97 27,514.29 17,536.33Balance withBanks,Money at Call 22,364.79 15,768.02 13,183.11 11,359.40 12,430.23Advances 290,249.44 253,727.66 216,365.90 ######## ########Investments 171,393.60 159,560.04 134,685.96 ######## ########Gross Block 4,647.06 4,614.69 4,744.26 7,114.12 7,443.71Accumulated 0 0 0 3,901.43 3,642.09

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Depreciation Net Block 4,647.06 4,614.69 4,744.26 3,212.69 3,801.62Capital WorkIn Progress 0 0 0 0 0Other Assets 29,087.07 34,937.10 16,347.47 19,214.93 24,163.62

Total Assets 536,794.69 489,068.80 406,233.67 ######## ########

ContingentLiabilities 802,383.84 923,037.16 931,651.64 ######## ########Bills forcollection 0 0 0 38,597.36 36,678.71Book Value(Rs) 578.21 524.01 478.31 463.01 444.94Source : Dion Global Solutions Limited

Balance sheet of kotak Mahindra bank:

katakmahindra

bank Mar '13 Mar '12 Mar '11 Mar '10 Mar '09Capital andLiabilities:

Total ShareCapital 373.3 370.34 368.44 348.14 345.67Equity ShareCapital 373.3 370.34 368.44 348.14 345.67ShareApplicationMoney 17.53 34.82 36.92 0 0PreferenceShare Capital 0 0 0 0 0Reserves 9,073.65 7,575.59 6,428.04 4,191.78 3,559.86RevaluationReserves 0 0 0 0 0

Net Worth 9,464.48 7,980.75 6,833.40 4,539.92 3,905.53Deposits 51,028.77 38,536.52 29,260.97 23,886.47 15,644.93Borrowings 20,410.62 16,595.52 11,723.95 6,140.51 5,904.07Total Debt 71,439.39 55,132.04 40,984.92 30,026.98 21,549.00OtherLiabilities &Provisions 2,789.81 2,553.67 3,032.36 2,869.42 3,257.34Total 83,693.68 65,666.46 50,850.68 37,436.32 28,711.87

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Liabilities

Assets

Cash &

Balances withRBI 2,207.90 2,016.49 2,107.72 2,085.67 995.35Balance withBanks,Money at Call 1,481.26 618.06 363.26 214.59 145.32Advances 48,468.98 39,079.23 29,329.31 20,775.05 16,625.34Investments 28,873.43 21,566.81 17,121.44 12,512.66 9,110.18Gross Block 464.42 449.97 425.61 745.34 460.61AccumulatedDepreciation 0 0 0 317.69 247.25

Net Block 464.42 449.97 425.61 427.65 213.36

Capital WorkIn Progress 0 0 0 0 0Other Assets 2,197.69 1,935.91 1,503.33 1,420.69 1,622.33Total Assets 83,693.68 65,666.47 50,850.67 37,436.31 28,711.88

ContingentLiabilities 42,117.47 40,052.52 35,422.71 4,156.15 4,486.28Bills forcollection 0 0 0 3,063.64 1,188.17Book Value(Rs) 126.53 107.28 92.23 130.4 112.98Source : Dion Global SolutionsLimited

Current valuation:Icici bank Kotak

Mahindra bankIcici

bank/kotakMahindra bank

p/E * 14.8 23.7 62.1%

p/BV * 2 3.9 52.6%

Dividendyield

% 1.7 0.1 1808.1%

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Financials:Equity share data:

Icici bank(mar-13)

KotakMahindra

bank(mar-13)

Icici bank/kotakMahindra bank

High Rs 1,214 694 174.8%Low Rs 782 525 149.0%Income per share Rs 389.1 145.2 268.1%Earnings per share Rs 83.3 29.3 284.0%Cash flow per share Rs 357.2 127.8 279.4%Dividends per share Rs 20.00 0.70 2,857.1%Avg Dividend yield % 2.0 0.1 1,745.5%Book value per share Rs 596.1 204.3 291.9%Shares outstanding m 1,153.46 746.61 154.5%Bonus/Rights/Conversions ESOS ESOP -Avg Price / Income ratio x 2.6 4.2 61.1%

Avg P/E ratio x 12.0 20.8 57.6%Avg P/CF ratio x 9.8 19.2 51.3%Avg Price/Bookvalue ratio x 1.7 3.0 56.1%Dividend payout % 24.0 2.4 1,005.9%Avg Mkt Cap Rs m 1,151,153 455,208 252.9%

No. of employees `000 62.1 23.5 264.1%Total wages & salary Rs m 56,333 17,735 317.6%Avg. income/employee Rs Th 7,231.9 4,611.9 156.8%Avg. wages/employee Rs Th 907.6 754.7 120.3%Avg. net profit/employee Rs Th 1,547.3 931.3 166.2%

Income data:Interest income Rs m 448,846 108,379 414.1%Other income Rs m 293,198 51,124 573.5%Interest expe