RESERVE BANK OF INDIA

ICICI Sank Ltd.

Assessment as on March 31, 2013

Risk Assessment Report

Findings on Capital and Earnings
Major Areas of Non Compliance
Table of Contents

I. RISK ASSESSMENT REPORT 2

II. FINDINGS ON CAPITAL AND EARNINGS 25

III. MAJOR AREAS OF NON-COMPLIANCE (REGULATORY GUIDELINES) 31

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 RISK ASSESSMENT REPORT

INTRODUCTION
The Risk Assessment of ICICI Bank Ltd. for 2012-13 under the Supervisory Program for
Assessment of Risk and Capital (SPARC) was completed with March 31, 2013 as the
reference date. The assessment has been made based on the off-site analysis of the
data and information furnished by the bank as well as the findings of the on-site
Inspection for Supervisory Evaluation (ISE) which was undertaken from September 23,
2013 to October 25, 2013. Based on the off-site and on-site evaluation, Preliminary Risk
Assessment Report was issued to the bank on December 03, 2013 and the issues
therein were discussed with the bank's top management on December 06, 2013. The
bank's submissions were taken into account and the Revised RAR was issued on
December 09, 2013. Deputy Governor discussed the major supervisory issues with the
MD & CEO on December 13, 2013.
Part I of this Risk Assessment Report highlights the quality of governance and oversight
at the bank level; risks inherent to the operations of the bank in different business areas
and the gaps observed in various controls put in place to manage those risks. Part II of
the report details the findings on Capital and Earnings. Part III of the report captures the
Major Areas of Non-Compliance.

PART I
A. SUMMARY OF AGGREGATE RISK
Inherent Risk Control Gap Aggregate Risk
Risk Category
A (1-4) 8 (1-4) 0.7A+ 0.38
Board 1.656
Senior Management 1.537
Risk Governance 1.513
Internal Audit 1.466

Credit Risk 2.689 1.823 2.429

Market Risk 2.169 1.257 1.895
Liquidity Risk 1.997 2.081 2.022
Operational (non-IT) Risk 2.256 1.657 2.076
Operational (IT) Risk 1.853 1.181 1.651
Other Pillar II Risk 1.992 1.436 1.825

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 BANK LEVEL AGGREGATE RISK 2.04
Medium Risk

The bank level aggregate risk was assessed at 2.04, indicative of 'Medium Risk'. The
supervisory stance pointed to 'Active Oversight'.

B. FINDINGS AND CONCLUSIONS

1. Governance and Oversight (Aggregate Score: 1.54)

Major findingsl observations

1.1 Board Score: 1.656

1.1.1 The bank has a well-functioning Board with adequate number of independent
directors. However, the Government of India nominee on the Board remained
absent in most Board meetings. He did not attend a single meeting of the Fraud
Monitoring Committee and Risk Committee, in which he was a member. Another
director attended just two out of five Board meetings.
1.1.2 The variable pay (bonus) was kept at 70% of the fixed pay, which is the
prescribed regulatory ceiling. By fixing the upper limit at the regulatory maximum,
the Board had set its risk appetite high in compensation matters.
1.1.3 Systems and processes were in place for the Board to ensure compliance with
regulatory and supervisory guidelines. However, regulatory fines imposed on the
bank almost every year did not speak well of overall compliance.
1.1.4 The effectiveness of the Board was assessed based on a survey that captured
Board members' response to a questionnaire. This survey was a biannual
exercise. It provided the members' views on the Board's functioning.
1.1.5 There was good progress in the implementation of the financial inclusion plan.
However, the coverage of villages at 13510 fell short of the targeted 14713.
1.1.6 The reporting framework was generally satisfactory. The risk dashboard
presented to the Risk Management Committee provided the level and direction
of risks. The risk view could be sharper with scientific methods of risk

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 aggregation, threshold fixation and better peer comparison.
1.1.7 The Board directions and their compliance status were monitored by the Board
through a standing agenda on the subject. However, the oldest direction yet to
be complied dated back to January 2010. It involved merger of ICICI KINFRA
Ltd. with one of the KINFRA companies in Kerala. The Board was periodically
appraised on the efforts made by the bank towards compliance.
1.1.8 There were several areas of executive discretion (described under Senior
Management and Risk Governance), which affected transparency in key areas.

1.2 Senior Management Score: 1.537

1.2.1 The organizational structure was generally well suited to the business
complexity. The Vigilance framework was yet to stabilize. It was effectively an
adjunct to the Internal Audit Department. Evaluation of key persons risk was not
adequate as 'key persons' was defined on the basis of designation rather than
the significance of their functions.
1.2.2 Business conduct of the bank was found to be inappropriate in pricing of
deposits of ~1 0 mn and above. Contrary to the regulatory prescription, the bank
did not disclose in advance, the schedule of interest rate in respect of deposits
eligible for differential rates. Besides, the system left scope for executive
discretion in deciding the interest rate.
Charts containing rates for wholesale deposits were circulated by the ALMGI
treasury group where number of bands for amounts (as many as 8 to 24 bands)
and tenor (as many as 21 to 31 bands) changed on day to day basis. Such
changes were carried out especially to accommodate discretionary behaviour
(e.g., a new band from ~1 0920 mn to ~1 0925 mn at 9.10% pa on January 08,
2013 was announced only because a deposit of ~1 0920 mn was collected at
9.10% pa from Infosys Ltd. The rates for two adjacent bands were at 8.90%.
Similarly, a separate 92 days band for ~700 mn to ~705 mn was created on
January 01, 2013 simply to accommodate discretionary rate of 8.50% on a
deposit of ~700 mn received from Humbold Wedag India. The rate for two
adjacent bands of 91 days and '93 to 120 days' was 8.25% for deposit of ~700

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 mn to ~705 mn).
Further, scrutiny of a sample of top 200 deposits indicated that the deposits were
collected at rates different (variation ranging from 10 bps to 40 bps) from
standard rates published by the ALMG/ treasury group.
1.2.3 Base rate was not arrived at in a transparent manner as indicated from the
following: i) Base rate was revised downwards by 25 bps in April 2012.
However, despite reduction in cost of funds by 72 bps (from 7.91 % to 7.19%)
during April 2012 to August, 2013, the base rate remained static at 9.75%
throughout the period. The base rate was unresponsive to the reduction in repo
rate during the year. ii) ALCO enjoyed discretion to round off the computed base
rate by (upto) 50 bps. By September 2012, the gap between the computed base
rate and approved base rate increased by more than 50 bps (mainly due to
reduction in cost of funds). At this stage, two new factors were brought in under
profit margin; viz., a fresh addition of 60 bps towards negative carry on priority
sector lending deficits and an increase in capital cost from 27bps to 40 bps
towards higher Basel III needs. By introducing these two factors, the bank
increased the spread under profit margin from 52 bps to 125 bps so as to keep
the base rate at the same level of 9.75%. The spread of 60 bps on account of
PSL deficit was arbitrary. The capital need was increased from 9% to 11 % while
reckoning the cost of capital in the profit margin. iii) While the spread towards
capital cost was actually arrived at 33 bps, it was reckoned at 40 bps; similarly, _/
overhead cost actually determined at 85 to 89 bps in quarterly reviews, was
reckoned at 100 bps.
1.2.4 CRISIL RAM rating of corporate accounts could be altered through overrides.
The extent of such overrides was high; 14% rated accounts underwent overrides.
Upgrades for the reasons of presence of corporate guarantee or other collateral
constituted 92% of total upgrades. Overrides could take place on very subjective
grounds too; viz., likely change in management, expectation that the group
(borrower) would pay even in difficult times if it had ever done so in the past, high
reputation of the promoter etc.

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 1.3 Risk Governance Score: 1.513

1.3.1 The framework for oversight of the Board and Board level Committees on risk
management was well in place from the point of view of an organizational
structure. However, risk appetite statement in the ICAAP did not contain granular
view of risk. It lacked in communicating the actual level of risk and its direction in
operationalising the bank's business strategy. The drill-down of the macro-level
risk appetite manifested only in describing the structure of limits, which being a
mere control framework, did not enrich the granular risk view.
1.3.2 In the absence of clear capital allocation between business groups through
ICAAP, risk taking did not follow a well-defined strategic path. Transfer Price
Mechanism (TPM) was also not used to demarcate lines of business to be
incentivized (except priority sector lending) in line with broad business strategy. It
was the annual budget allocation that provided broad targets to specific business
verticals.
1.3.3 TPM exercise had the following deficiencies: i) short term bid rate under TPM
was not market related ii) offer rate of certain long term assets like SRsNCs
were assigned one year deposit cost. iii) The bid-offer curve did not reflect any
adjustment pertaining to pre-mature withdrawal of term deposits and basis risk.
1.3.4 Interest charged on loans (other than retail) was based on a price calculator,
which considered risk-weight of a borrower as one of the inputs. However, the
price ultimately charged was not in line with rating. A sample of similarly rated
~ (BBB) accounts sanctioned in January 2013 indicated that the actual spread
applied to different clients differed by (-) 80 bps to 230 bps from the required
rate. Similar facilities with the same rating (BBB) were charged differently.
1.3.5 There was no rational explanation in respect of the elements used by the
calculator; viz., i) Negative carry on account of priority sector advances was
added over base rate although the same was already factored in the base rate
itself, ii) Additional spread was used in a discretionary manner for the purpose of
market alignment, iii) Credit spread based on risk-weight of unrated exposures
(which is uniformly 100%) was not a true representation of the underlying risk, iv)

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 Once the applicable rate was arrived at through the price calculator, the front
desk was encouraged to negotiate a price as high as possible over and above
the same. The actual spread over base rate was very high compared to the
applicable rate in funded facilities (e.g., corporate term loans: 2.32% against
1.59%, real estate term loan: 4.45% against 1.70%, project finance term loan:
2.04% against 1.85% etc.). However, non-fund facilities and most retail loans
recorded actual spread lower than the applicable spread.
1.3.6 The Risk Committee did not follow the practice of periodically reviewing the
performance of the Chief Risk Officer. There was also no evidence of a formal
review of resource and skill requirements in risk management.
1.3.7 The compliance framework envisaged noting and transmitting regulatory
instructions throughout the organization. However, regulatory fines were
imposed for key non-compliances.

1.4 Internal Audit Score: 1.466

1.4.1 The audit evaluations were not critical enough in areas like NPA identification
process, fictitious offers/ MLM activities and documentation.
1.4.2 While finalizing the audit plan, the process did not consider areas pertaining to
outstanding AFI observations (e.g., rating of borrowers, liability pricing,
divergence in NPA, gaps in KYC norms), long-pending references made by the
bank to regulators on various matters including their reasonability/ fallouts, areas
where penalty was imposed in the past etc.

2. Credit Risk (Aggregate Score: 2.429)

2.1 Inherent Risk Score: 2.689

Major findingsl observations

2.1.1 Significant areas contributing to exposure concentration were,
a) Some of the top 20 single borrowers did not belong to the higher rating
notches. While the exposure (top 20) accounted for 14.10% of total exposure,
it stood high in comparison at 9.97% in RWA terms. b) Exposure to top 10

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 groups constituted 20% of the total exposure. Out of the top ten group
borrowers, two belonged to BBB rating (Essar and Jaiprakash). c) About
21.3% of total exposure was concentrated in three industries, viz., Electronics
& Engineering (8.3%), Crude petroleum/refining (6.6%) and Power (6.4%). d)
Country risk was heightened due to exposure to countries in the medium and
worse risk categories like Indonesia (~14522.62 mn) followed by Bangladesh
(~9903.4 mn), Bahrain (~7771.04 mn) and Egypt (~7334.38 mn). e) Exposure
to the stressed sectors at 8% of total exposure was significant although
incremental exposure had decreased.
2.1.2 Sensitive sector exposure stood at 6.20% of total exposure. Capital market
exposure (CME) at 33.80% of networth was the highest among large Indian
banks; so too was commercial real estate exposure (CRE) at 3.67% of total
exposure. Incremental exposure to sensitive sector was about 8.89% of the
total incremental exposure.
The Essar Group accounted for the highest group exposure at ~248920 mn.
The Group constituted 24.51 % 1 of the bank's overall CME. It mainly comprised
pledge of shares and Non Disposal Undertaking - Power of Attorney (NDU-
PoA) arrangement. Such cover comprised mainly of company's own shares
and/ or the shares of its group companies.
The bank pursued the practice of obtaining NDU-PoA-shares as substitute for
security from large borrowers. The CME exposure under NDU-PoA stood at
~83448.42 mn to 28 borrowers. The highest such exposure was to Essar
Global Limited which formed 32.78% of the aggregate NDU-PoA.
2.1.3 Approximately one-third of the rated exposure remained around the hurdle-rate
raising questions about the riskiness of the rated credit portfolio. There was
significant downgrading of exposures over the previous year.
2.1.4 Non-investment grade (NIG) investment within non-SLR category was high
(4.85%) due to bank's residual outstanding investments in SRs, bonds and
preference shares acquired at the time of restructuring of advances.
2.1.5 Unsecured exposure was high at 43.98% of total exposure. The proportion of

1 Bank's data on CME

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 illiquid securities was high compared to readily redeemable ones. There was
no distinct record of primary and collateral security. The bank as a strategy did
not use enforcement of security for recovery of NPA and preferred settlement
route for recovery of dues. Security (land, building etc) was generally used as a
tool to extract better negotiated settlement. Yet sacrifice in OTS remained high
at 26% of the outstanding. High proportion of unapplied interest was also
waived. Overall, the inherent risk was enhanced due to the above strategy.
2.1.6 The weighted average residual maturity of loan exposures was 4.26 years.
Further, 81.32% of the project loans were under implementation. The weighted
average residual maturity of mortgage loan was 13.14 years and that of
stressed sectors was around 8.3 years. These aspects added tenor risk in the
bank's credit portfolio.
2.1.7 The total exposure in respect of restructured accounts increased by 53.8%
during the year. In terms of outstanding balances, addition to restructured
loans during the year was 31.14% of total restructured loans at March 31,
2013. Although restructured accounts constituted 1.82% of the loan book (as
on March 31, 2013) and looked better than that in public sector banks in
general, the composition indicated that the restructured portfolio mainly
comprised big-ticket loans (top 10 accounts amounting to 64.01 % of the
restructured portfolio). Vulnerability of big exposures to restructuring was
apparent from the current trend. Further, accounts in the pipeline for
restructuring were 18 in number aggregating ~48800 mn. Considering that
slippage during the year out of the restructured portfolio was 9.06%, the extent
of risk in the books looked heightened.
2.1.8 Incremental NPA (for advances as well as investments) was high at 36.24% of
NPA at the beginning of the period. Up-gradation from sub-standard assets at
the beginning of the year was low (15%). Two large accounts (Bharti Shipyard
Ltd. and Eastern Silk Industries Ltd.) were upgraded on implementation of
restructuring.
2.1.9 Fresh accretion to gross NPA (~35870.55 mn) was higher than reduction in
NPA (~34546.40 mn during the year. Recovery of NPA seemed to be fraught

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 with risks as revealed further by the recovery ratio (actual recovery to gross
NPA at the beginning of the year). Recovery ratio stood at 12.12% (a sharp fall
from 16.18% last FY), which compared adversely with the new private sector
banks group (14.54%) and the industry (17.13%).
2.1.10 Big-ticket NPA contribution i.e., outstanding balances above ~1000 mn formed
36.36% of fresh accretion to NPA during the year. The top five NPA2s at the
end of the current year were fresh additions of the current FY.
2.1.11 As on March 31, 2013, special mention accounts stood at 6.70% of gross
advance indicating high risk of default. SMA in some specific segments was; i)
Corporate: 10.12%, ii) small enterprises 11.99%, iii) SME - Agri: 6%, and iv)
Microfinance: 55.9%. Adverse pressure on asset quality was apparent in
specific sectors.
2.1.12 Out of the priority sector loan as on March 31, 2013, 22.96% was contributed
by outright purchases and IBPC. Strategy of inorganic expansion of priority
sector portfolio raised inherent risk outlook.
2.1.13 Minimum price quoted to a customer based on the price calculator contained
several adjustments to the cost of funds, which were discretionary and non-
transparent (as indicated under Risk Governance in this report). Effectively,
pricing was not linked to the credit risk rating of the borrowers (ostensibly due
to market competition).
2.1.14 The Structured Finance Group (SFG) primarily structures and finances merger

- & acquisition for companies. Since inception in 2005, the bank participated in
55 such deals amounting to USD 43390.30 mn. Out of total disbursal of USD
7068.40 mn, USD 2205.20 mn was outstanding as on March 31, 2013. The
deals pertained mainly to mining and metal sectors. Five deals amounting to
5.9% of the disbursals fell under watch category.
2.1.15 A new product (Three-in-One Mortgage product) launched recently
incorporated granting of loans for non-housing purposes against home equity.
Home equity loans given as top up loans are inherently riskier.

DECCAN CHRONICLE HOLDINGS LTD., SHALINI PROPERTIES & DEVELOPERS PVT LTD, SURYA VINAYAKA INDUSTRIES LIMITED
GLODYNE TECHNOSER VE INC, LILLIPUT KIDSWEAR LIMITED

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2.2 Control Gap I Score:1.823

Major findingsl observations

2.2.1 Threshold exposure of 5.25% for borrowers rated BBB-, BB & BBB+ was
exceeded by four borrowers; viz., i) Essar Oil (11.28%), ii) Jaypee Associates
(7.47%), iii) Essar Global (6.68%) and iv) JP power Ventures Ltd (5.38%).
Although approved by the Credit Committee, such large scale exceptions
rendered control limits less effective.
2.2.2 The rating model was fraught with several overrides as articulated under the
Section, 'Senior Management' above. Corporate guarantee was often the
reason for upgrading the rating. However, scrutiny of the corporate providing
such guarantee was absent especially to ascertain the kind of similar
guarantees the corporate might have already extended. Cases of downgrades
were noticed - this led to change in the sanctioning authority.
2.2.3 The review of intraday limits converted into inter-day exposure was put up to
CaE on monthly basis. Review for the month of March 2013 indicated such
irregularity in 16 accounts with amounts upto RS.973.60 mn. These irregularities
were regularized between the next working day and up to 21 days in some
cases. Large portion of intraday exposure not getting squared up during the
same day indicated deficiency in controls.
2.2.4 Collateral monitoring system was not yet centralized. CMOG acted as a
monitoring department for compliance with terms of sanction (Covenants) and
safe keeping of records and not for monitoring the value of collaterals. There
was no empanelment of approved valuers. For real estate loans of RS.500 mn
and above, the bank relied upon the valuation done by approved valuers of
ICICI HFC. For other project loans it solely relied on the security details given in
the audited balance sheet of the company. There was delay in achieving
security perfection.
2.2.5 Internal policy provided for valuing stock from stock statements older than six
months. Valuing on the basis of stock statements and/or balance sheet is not
prudent as it might affect its reliability. Further, No distinct record was

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 maintained on primary and collateral security - the entire security was clubbed
and reported even in case of NPA accounts. Once the account became NPA
the recovery of dues from current assets was unlikely.
2.2.6 There was negligible extent of recovery from out of Execution Petitions.
2.2.7 Although approval for OTS was taken from appropriate authorities, the actual
collection status was not reported to them. No limit had been fixed for different
types of collaterals. There was no limit on sacrifice amount on compromise and
settlements. Controls were envisaged only at the point of approval of OTS.
Further, there was no specific OTS policy to specify the controls. The NPV
calculation was left to individual business units. This could result in differential
discounting factors taken by various business teams for arriving at NPV of
.-.. similar assets.
2.2.8 Due diligence in acceptance of guarantees was found inadequate. The bank
generally went by the declaration of assets received in respect of personal
guarantees before executing the same. In case of corporate guarantee, the
balance sheet of the guarantor was the only source to rely upon.
2.2.9 In case of corporate loans, irregular accounts were identified by a software,
which uploaded data from three major systems of the bank. But in case of
devolved LCs and other non-fund limits, such aggregation was not straight
through.
2.2.10 The bank had automated the system of identification of NPA. However, the
following loopholes weakened the control on correct assessment of bad assets
and appraisal of actual levels of risk. a) NPA identification process showed that
some accounts were reported as SMA throughout the year with irregularity less
than 90 days. As NPA identification process was run in the system only at the
end of the quarter, there was a possibility that an account could remain
standard even though irregularity in the account would have crossed the 90 day
limit temporarily in the interregnum. If classified as NPA at the appropriate time,
an account would be upgraded to standard category only after recovery of all
overdue amounts; in the extant system, recovery of a critical minimum amount
could be used to keep the account irregular rather than NPA. b) Use of different

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 CBS systems in the bank resulting in multiple customer-IDs for the same
borrower posed difficulty in borrower-wise NPA classification.
2.2.11 Deviations were sanctioned only after approval but an aggregate view of
deviations was not available to the top management. This was pointed out by
the last AFI but there was no improvement.
2.2.12 Unrated exposure stood at 5% of the total exposure of the bank. There was no
specific control to monitor or manage these exposures other than annual review
of the accounts.
2.2.13 No direction/ comments were issued by the ACB on the 11 accounts mentioned
in the LFAR under Account Conduct Review. The LFAR also listed out large
number of guarantees invoked but not paid by the bank.
2.2.14 Internal policy permitted non-monitoring of end-use of funds for loan amounts
less than ~50.00 mn and due diligence for takeover of accounts of less than
~1 00.00 mn. Control gap risk increased due to such laxity. From LFAR 2013 it
was observed that the bank had sanctioned a loan to a promoter to enable him
to repay his dues in the company's account (Kemrock Industries & Exports Ltd.)
and another loan to a group company to repay dues of an associate company
(SBLC devolvement of Shalini Properties and Developers P Ltd. was routed to
Falcon Tyres Ltd.).
2.2.15 The mechanism to obtain a single aggregated view of exposure was deficient to
the extent that overseas exposure, if any, got manually integrated to the
domestic exposure. Further, there was no integrated view about the collateral
held against an exposure as there was no central database on collateral.

3. Market Risk (Aggregate Score: 1.895)

3.1 Inherent Risk Score: 2.169

Major findingsl observations

3.1.1 There was large investment in long term dated securities. More than 85% of the
PV01 of the fixed income position was contributed by long term investments over
5 years' maturity.

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3.1.2 Approximately 78% of the PV01 of the investment portfolio emanated from HTM
(SLR- ~754,888 mn). Under the current regulations, such investments enjoyed
MTM protection; however, this portfolio had already faced an economic loss of
~2153.45 mn as on March 31, 2013. Considering the fact that the bank also sold
from this portfolio, crystallization of market risk was a possibility.
3.1.3 Investment in long-term corporate bonds stood approximately at ~183,836.60 mn,
which contributed to higher credit spread risk. Further, almost 18% of these
bonds fell in BBB- and below rating category. Two accounts i.e. Tulip IT and
Lavasa Ltd. with investments aggregating ~3600.00 mn migrated more than 3
notches during 2012-13 alone.
3.1.4 The average beta of 1.11 indicated volatility in the market value of the equity
portfolio. In addition, value of equity charged to the bank as security as on March
31, 2013 in the lending portfolio was as high as ~189,209.69 mn, contributing to
latent equity risk.
3.1.5 The average utilization of forex VaR was low at 10 to 20% of the limit. However,
occasional peak VaR was 2 to 3 times the average forex VaR. Further, intra- day
forex open position was several times (10 times) the average NOOP utilization on
many occasions.
3.1.6 The bank was running higher gaps between the 4tn to 6tn buckets in the structural
liquidity profile leading to higher earnings at risk. In almost 27% of the large ticket
loans (more than ~1 Omn) there were instances of prepayment indicating
reasonably high prepayment risk.
3.1.7 The bank had sold certain cost reduction option structures to low rated (low
leveled) SME clients; such options nearer the strike rate and relatively longer
tenor had higher sensitivity of Greeks. Further, the average tenor for level 1 & 2
clients were at 1.3 and 2.2 years whereas the average tenor for level 4 & 5
clients were 2.8 and 2.6 years respectively. Lax applicability of suitability and
appropriateness of clients added to overall risks. Incidentally, two such SME
derivative clients had turned NPA during 2012-13.
3.1.8 There were valuation issues that could understate the levels of risk, viz., a)
Debentures and preference shares aggregating ~75.58 bn (approx.) were not

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 considered as plain vanilla in view of certain special features in respect of the
coupon and reference benchmarks like 'base rate'. Valuation of preference
shares (especially where dividend was in arrear), valuation of base-rate linked
bonds/ debentures on the basis of fixed spreads over the corresponding G-sec
yield suffered infirmities. b) There were certain instances of application money
outstanding for more than one to two years, but not considered as NPI; instead
these were valued as normal bonds. c) Valuation of SRs (~20,342.96 mn) was
based on the NAV received from ARCs. However, rationale for such NAV was
not obtained by the bank as per extant regulations issued by DNBS. d) The bank
invested in a Mauritius based Venture capital fund and categorized the same
under HTM thus taking protection of extant regulation of not marking to market
for three years. The VC fund was not exclusively India focused.

3.2 Control Gap Score:1.257

Major findingsl observations

3.2.1 The policy approved of exotic! structured derivative products viz. Asian options,
barrier options, digital option, range accruals, swaption etc. without regulatory
approvals. The Singapore branch of the bank had entered into certain structured
derivative products viz. exotic options, range accruals etc.
3.2.2 The valuation methodology was generally satisfactory. The bank used
assumptions, interpolation/ extrapolation for deriving certain investment's cash
flows, discount yield curve for non-traded instruments. For certain conditions like
put! call option in case of fixed income! base-rate linked securities, no standard
valuation methodology was followed. There were quite frequent changes in the
valuation methodology viz. discount rate, assumed cash flows (in case of non-
traded instruments) etc. for fixed income, preference shares, PTCs etc. during
2012-13.
3.2.3 The NOOP limit as sanctioned by RBI in 2007 continued at the same level
without review although the average NOOP utilization was only 10.36% of the
limit. There were breaches of NOOP sub-limits in Hong Kong and Singapore

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 branches. New York branch had also exceeded the investment limit once during
2012-13.
3.2.4 The back testing of risk limits indicated that, there were no breaches at bank
level. However, there were certain breaches at sub-group I desk level; especially
in case of MG-overseas (interest rate derivative, forex derivative), 6 breaches
were observed. Further, there were frequent changes in the risk limits both at
group and sub-group levels during the year.
3.2.5 Murex is an integrated treasury system. However, valuation of certain
investments were undertaken in excel sheet and then uploaded in Murex.

4. Liquidity Risk (Aggregate Score: 2.022)

4.1 Inherent Risk Score: 1.997

Major findingsl observations

4.1.1 The incremental average deposits and borrowings were at ~312,558.84 mn and
~157,408.77 mn respectively, whereas the incremental advances, SLR and non-
SLR investments were at ~434,502.04 mn, ~51 ,022.55 mn and ~23,723.29 mn
respectively. Two significant liquidity ratios tracked internally, viz., volatile
liabilities to assets and core assets to core liabilities stood at 0.33 and 1.10
respectively.
4.1.2 Dependence on short-term borrowing was high (daily average short term
borrowing was ~134,000 mn): a) Money market liabilities constituted a major part
(38%) of short term liabilities. b) Dependence on call money (average utilization
was 61 % of regulatory limit) was high. The bank was a net borrower in the call
money market all through the year. Average borrowing was twice the the average
liquid assets c) Borrowings to meet day-to-day liquidity deficits was mainly
through LAF and CBLO. Considering the cap on LAF borrowing and higher cost
of MSF, the bank's level of dependence on call money did not augur well from
liquidity management point of view.
4.1.3 Although CASA profile had improved in the medium term, CASA as at the end of
the year deteriorated from 43.50% to 41.80% (2012-13). There was high quarter-

Confidential Page 16 of 36
 to-quarter volatility (15-20%); the monthly average CASA decreased from
36.87% to 35.79% while the daily average CASA decreased from 34.58% to
33.51% over the last FY.
4.1.4 Wholesale deposits (excluding CDs) stood at 29% of total deposits. The term
deposit rates and the borrowing cost had wide volatility as compared to the
industry. The bank's dependence on wholesale funds was high at 53%. The
average cost of bulk deposits had increased from 9.06% to 9.29% and the
average cost of borrowing remained high at 9.25%.
4.1.5 Average Swap fund ratio stood at 68% as the bank used resources raised in
overseas jurisdictions for domestic operations.
4.1.6 Financing gap ratio increased from 2.22% to 2.80 % during 2012-13. Incremental
CD ratio stood at 105% - global and 98.99% - domestic.

4.2 Control Gap Score: 2.081

Major findingsl observations

4.2.1 Internal limits set for liquidity ratios under stock approach were high viz. the limits
for assets to volatile liabilities and core assets to core liabilities were fixed at 1.82
and 1.65 respectively.
4.2.2 Stress impact did not capture the combined effect of the six different scenarios
used by the bank (4 under bank specific, 2 under market specific) till September
2013. The combined impact was lower than the impact of the single factor stress
considered under the assumptions indicated by RBI (2007 guidelines). The bank
prepared its stress liquidity statement and related survival contingency plan upto
28 days instead of 90 days.
4.2.3 Liquidity Contingency Plan was in place. However, it considered assumptions like
unlimited availability of LAF and MSF as funding sources during stress. The bank
did not have any line of credit with any other bank! financial institution as a part of
the contingency plan. Net surplus holding of SLR securities was low - the gross
excess SLR was 5.58% whereas the net excess SLR stood at 1.29%. Further,
the low haircut of 10% for CP and all bonds including PTCs etc., made the

Confidential Page 17 of 36
 contingency plan less realistic.

4.2.4 Intraday facilities were getting rolled over (daily average amount being
approximately ~1 000 mn); however, neither any behavioral study was undertaken
in this regard nor were such rolled-over funds bucketed under 'next day' outflow
bucket in the structural liquidity statement.
4.2.5 The liquidity contingency plan envisaged a buffer of ~1 00 bn in the form liquid
assets which included AA and above rated corporate bonds. Considering the
shallow nature of corporate bond market in India, corporate bonds might not give
comfort in case of stress.

5. Operational (Non- IT) Risk (Aggregate Score: 2.076)

5.1 Inherent Risk Score: 2.256

Major findingsl observations

5.1.1 Regulatory penalties were imposed during the period for non-compliance with
KYC norms and for bouncing of securities in CSGL accounts. The bank was
issued stricture by Monetary Authority of Singapore (MAS) for erroneous
reporting of data. Penalty was also imposed by the Inland Revenue Authority,
Singapore. Such regulatory action indicated accentuated compliance risk.
5.1.2 Business verticals like the Financial Institutions Group and Corporate Group
accounted for high per-employee revenue and business respectively. Large
contribution by few business verticals to revenue/ business involved potential
vulnerabilities.
5.1.3 Dependence on outsourcing was evident from the number and cost of
outsourced activities. Susceptibility of the bank to greater people risk was also
evident from the incidence of frauds in credit cards, theft at ATMs and increased
complaints against outsourced employees.
5.1.4 Attrition level of front office employees was high at 37.33% and their average
tenure was falling. As this would put pressure on continuous replacement through
recruitment, the training requirement would go up for the new staff. Incidentally,
the training expense was generally low in the bank although training methodology

Confidential Page 18 of 36
 was not based on a brick-mortar class room model and was claimed to be cost
efficient.

5.1.5 There were many instances of damage to physical assets due to external events,
which mainly included damage to ATMs due to vandalism! attempts to loot.
5.1.6 Though number of frauds had declined, there was increase in large value frauds
indicating weaknesses in controls and monitoring.
5.1.7 The number of cases of non-compliance with KYC norms pointed out by the
internal audit decreased over the last year but continued to be high. The areas of
non-compliance pertained mainly to non-obtention of KYC documents in sale of
gold coins to non-customers and non-adherence to AML name screening in
respect of vostro accounts. Further, an instance came to light where inadequate
KYC documentation led to fraudulent opening of an account in the name of
Traffic Manager, Mumbai Port Trust. Such instances pointed to process
deficiencies.
5.1.8 In the last one year, several complaints were received from the bank's NRI
customers alleging mis-selling of wealth management products at overseas
branches. The complaints were triggered primarily by poor performance and
dismal returns to clients. The complaints pertained to transactions prior to 2008.
Such products could be continued after 2008 only after a regulatory approval
from RBI. Although the bank wrote to RBI in 2009, it did not discontinue
undertaking fresh transactions even though it had received no regulatory
affirmation in respect of the products. Valuation of the structured products lacked
transparency. There was no mechanism to review whether the companies! funds
had deviated from the objectives for which the products (distributed by the bank)
were floated.

5.2 Control Gap Score: 1.657

Major findingsl observations

5.2.1 No system was put in place for the legal audit of title deeds in respect of frauds of
~50 mn and above. Thus the controls fell short of extant regulatory requirement.

Confidential Page 19 of 36
 5.2.2 KYC exercise in respect of legacy accounts was very low and the coverage
achieved stood at meager 9.46%.
5.2.3 The bank had reported full coverage of UCIC, but the system in its existing form
suffered several loopholes and inadequacies. The second holder in a joint account
was not considered for allotment of UCIC. A joint account holder, also maintaining
an account in his individual capacity was not linked through UCIC. Further certain
asset side loan accounts and overseas accounts were yet to be covered. Four
parameters were used for de-duplication at the time of opening of an account; the
de-dupe exercise was not based on on-line tracking of data.
5.2.4 The AMLOCK software did not support application of UCIC from the front-end
rendering it difficult to track multiple accounts. STRs were generated based on
PAN rather than UCIC. The STR alerts were found to be triggered account-wise,
which effectively diluted tracking integrally connected transactions.
5.2.5 On an average, more than 70% of fraudulent loan accounts were detected after a
gap of one year from the date of occurrence. There was laxity in examining wilful
defaults and recognizing high value frauds.
5.2.6 The bank was still working on a formal documented process with regard to
insurance cover against external events.
5.2.7 It was observed that fraud risk and fraud loss data for March 2013 were assessed
and managed by FCPRMG independently and the assessment was found not to
have been routed through ORMG.
5.2.8 Certain accounting issues that showed weak areas of control were as follows: a)
.--. Regular account heads not designated to be in the nature of suspense accounts
were used to book transitory entries. Such entries escaped the rigor of monitoring
of suspense entries. b) Provision amount in certain cases of NPA was grouped
together with provision for frauds. c) Sundry Liabilities Interest Capitalization
Account (SLlCA) for FITL was not created in respect of standard accounts
restructured prior to 2008. d) SLiCA created after the year 2008 was in the nature
of provision for FITL accounts. The same was reflected as a deduction from term
loan under advances. This distorted the regulatory treatment of SLiCA. e) Certain
non-interest income was booked as 'Interest Income' under Schedule 13 of the

Confidential Page 200(36

 annual accounts; viz., late fee charges for Home Overdraft (~4 mn) and penal
interest income charged for non-creation of security (~550 mn). Further, interest
on Income Tax Refund amounting to ~2575 mn was taken as 'Other Interest
Income' boosting total interest income and eventually the net interest margin.
5.2.9 The NPA Tracker system offered scope for crucial manual interventions. The date
of NPA used for provisioning purpose was entered and approved by the NPA Cell.
Asset classification field was an editable field and could be changed by the NPA
Cell. As borrowers did not have unique customer code (UCC), identification of all
accounts of the same borrower for the purpose of NPA classification suffered
serious limitations.
The system allowed updating drawing power on retrospective basis. The statutory
auditors pointed out two instances where drawing power was not zeroised on non-
receipt of stock statements. There was another account in which such updation
was done for February 2013 much later in April 2013 (Vishal Infrastructure Ltd.).

6. Operational (IT) Risk (Aggregate Score: 1.651)

6.1 Inherent Risk Score: 1.853

Major findingsl observations

6.1.1 The extent of captive software packages used in the bank added vulnerabilities to
arbitrary/ non-negotiable escalation of cost. IT related expense pertaining to
maintenance contracts and depreciation was already high.
6.1.2 IT based products and services contributed well to non-interest income.
6.1.3 Downtime of ATM systems was significant during the year. Further, there were
106 occasions when internet banking went down. Even the longest downtime
recorded in respect of internet banking was high.
6.1.4 The number of independent reconciliation processes between subsidiary systems
and main accounting systems was high due to existence of multiple CBS and
other systems in the bank; the interfaces with up-stream and downstream systems
to core system was high. Frequency of back-end data intervention was also high.
6.1.5 The number of bugs detected in the banks IT systems mainly I-Core and I-Log (for

Confidential Page 21 of36

 temporary periods) was considered high. It was resolved by referring to vendor
through escalation channels upto SGM within the Group.

6.2 Control Gap Score: 1.181

Major findingsl observations

6.2.1 There was no documented IT strategy covering the next three to five years.
Multiple CBS platforms added to complexities. It was not using updated! latest
versions of certain applications! software (including critical software like
AMLOCK).
6.2.2 Financial impact of IT related issues was not analyzed in respect of non-fixing of
bugs in critical systems.

7. Pillar II Risk (Agg regate Score: 1.825)

7.1 Inherent Risk Score: 1.992

Major findingsl observations

7.1.1 Although performance targets were generally met, the bank faced severe
competition in retaining market share. Market share in CASA fell from 5.1 % to
4.9% during the year while the share in advances went up marginally from 4.0%
to 4.1 %. CASA as a percentage of total deposits at the end of the FY had
decreased from 43.45% to 41.89%.
7.1.2 Number of new legal cases filed by customers (4049 in number with a marginal
fall over the last FY) added to the level of risk since the verdict was found to be
against the bank in a large number of past cases.
7.1.3 The use of collateral in recoveries was dismally low - collaterals were sold in
respect of only two borrowers during the year. Collateral in one case involved
automobiles where the recovery through sale was just 40% of the reported
market value at the time of default. At the bank level (for exposures above ~1 0
mn), value of collateral at the time of default was found to be over 2.5 times the
value realized through sale of the same. There was significant residual risk in this

Confidential Page 220(36

 area.
7.1.4 The amount of securitized credit exposure where the bank had given credit
enhancement came down from 87% to 82%, but it continued to remain high.

7.1.5 The amount of devolved foreign currency guarantees increased sharply by 34%
from ~2840.83 mn to ~4293.63 mn signaling higher risk in such exposure.
7.1.6 Although investment in group entities decreased marginally, it stood at 15.05% of
the bank's capital funds.
7.1.7 The Bank had migrated to Risk Assessment Model developed by CRISIL in
October 2010 and had been carrying out ratings in RAM for the past three years.
In the first two years after implementation of RAM, the cases of default were less
in corporate segment. As this would not provide a meaningful back-testing for
refinement, the bank was building up default data for back testing.
7.1.8 Incentive scheme introduced recently to promote sale of wealth management
products was not in line with statutory principles and regulatory clarifications. The
risk appears heightened especially since mis-selling through flawed incentive
structures was one of the main factors that engaged supervisory attention in the
last few months.
7.1.9 Any customer contact was captured either as a service request (SR - request for
a service; say, issue of cheque book etc.) or critical request (CR - complaint
mainly about service deficiency). A critical request not closed within a day was
counted as a complaint. Turn-around time (TAT) for redressal and the course for
escalation for each customer contact varied depending on whether it was booked
as a CR or SR at inception. It was observed that several complaints were booked
as SRs thereby diluting the TAT and reporting requirements. Closure of critical
requests (within a day) underwent concurrent independent review but the
benchmarks were not formalised.
The complaints received at overseas branches were tracked separately. The
review to the Board on such complaints did not provide vintage (ageing).
The bank had a whistle blower policy which did not indicate about the role of
nodal agency (RBI) and that complaints under WBP could be addressed directly
to RBI.

Confidential Page 23 of36

 Facilities were yet to be provided adequately at branches! ATMs to take care of
the needs of physically challenged people.
7.1.10 Compensation policy allowed retention of ESOP even when an employee left the
bank and joined any group entity or an entity promoted by any subsidiary or by
the erstwhile ICICI. This was exercised during the year and certain employees
were extended the ESOP benefits. This was too liberal a policy and the risk-
remuneration link underlying the ESOP of the bank was diluted. It was explained
that ESOP in such cases was used as a tool to retain valuable officials, who
might otherwise leave.

7.2 Control Gap Score: 1.436

Major findingsl observations

7.2.1 Group Risk Policy framework was applicable to eleven entities out of 38 entities in
the group on the grounds of materiality of size.
7.2.2 The consolidated accounts of the bank was deficient as two entities, viz., 3i
Infotech and Com Trade were not consolidated on unconvincing grounds.

Confidential Page 240'36

\..._..
 PART II

FINDINGS ON CAPITAL AND EARNINGS

1. Capital & CRAR (Basel II)

Capital (in Rs. Billion)

Particulars Reported Assessed

Tier I 5656.16 5377.25

Tier II 2627.39 2627.39

CRAR (in %)
Particulars Reported Assessed
Tier I 12.80% 11.73%

Tier II 5.94% 5.74%

Total 18.74% 17.47%

2. Major Areas of financial divergence which have led to differences in reported and
assessed capital.
(Amount in ~ mn)
S.No. Areal Description Position as per Assessed Divergence
bank position
A. Divergence in
provisioning
l. Divergence in respect of
5615.0 6745.7 1130.7
two cases of loss asset
2. Divergence in NPI (Four
accounts) - application 221.4 169.8
111.6
money
B Divergence in capital
elements
Balance outstanding in
FITl for accounts
restructured prior to 538965.9 26650.0
565615.9
FY2008 deducted from
Tier-I capital
C. Divergence in RWA
Credit Risk RWA
(Additional RWA for 3,894,822.1 4,058,611.1 163789.0
regulatory retail, mortgage

Confidential Page 250(36

 portfolio and undrawn
commitment)
D. Priority sector
misclassification
1. Direct Agriculture
133983.8 130148.8 3835.0
2. Indirect Agriculture
57878.3 61713.3 (+)3835.0

3. Capital Managementand Planning

i) Capital Planning
The bank had a system of capital planning over a four year projected time horizon by "-
taking into account all material risks, stress testing of those risks and the relationship
between risk and capital. Financial projections approved by the Board constituted the
basis for capital planning for the bank and the Group under ICAAP. The base case
(normal state as distinguished from stress) scenario was built around an optimistic
assumption of GOP growth of 6.5% to 6.7%. No alternative scenario was built in the
projections under the base case.

ii) Internal Capital Ratio (ICR)

There was no internal minimum CRAR or trigger CRAR under ICAAP. Compliance with
the regulatory minimum was considered as the primary objective both under normal and
stress situations - a factor not in tune with supervisory expectations (Principle 3 of SRP
Principles under Basel II).

The bank had assessed ~123740.00 mn additional capital under various stress
scenarios. At the current level of RWA, this would reduce the CRAR by approximately
270 bps. However, the ICAAP drew comfort from the current (March 31, 2013) reported
CRAR of 18.74%. As the the bank was engaged in various para-banking activities
requiring it to operate at a higher regulatory minimum capital level of 11.00% rather than
9.00%, the targeted internal capital ratio should have subsumed the same.

Confidential Page 26 0(36

When the higher capital ratio of 11 % was applied to the bank's internal capital
assessment, it was found that the capital buffer withered away by 2017 in the base case
scenario and by 2016 in the stress-case scenario.

iii) Review of Quality of ICAAP and Use Test

The ICAAP of the bank was evolving in the right direction. However, there were
deficiencies as highlighted below:
• The risk appetite statement continued to be general in nature and lacked in
communicating to the business verticals, the extent and direction of risks in the
yearls ahead. The macro-level risk appetite was ostensibly contained in the risk
limits annexed to the risk appetite statement. However, it merely reiterated the
general control framework without enriching the granular risk view.
• The ICAAP document mentioned that capital allocation framework was designed
as a decision tool to facilitate structured decision making. However, this was
hardly demonstrated in the existing framework.
• The ICAAP projection of RWA and capital was granular. However, the assumed
CAGR of 18.5% for advances (with agriculture growing at a CAGR of 53.3%),
21.5% for CASA, 20.9% for PAT, etc. appeared ambitious in the given
environment. Tax benefit was assumed in 75% of the default cases without any
historical! behavioral justification. Further, the impact of CVA charge was not
taken into account while projecting market risk RWA. Incidentally, there was an
impact of ~15510.00 mn in capital due to CVA charge alone under 8asel-1I1
applicable from January 01, 2014. Although officials of the bank indicated that the
effect of CVA was a part of the credit risk RWA, the same could not be
demonstrated for verification.
• Certain Pillar 2 risks were not adequately captured: Credit risk concentration was
articulated in various dimensions (such as, business segment, industry, product
etc.) but followed no scientific method to define thresholds for internal capital
prescription. Collateral concentration risk was neither identified nor quantified for
its P&L impact. Legal risk was not assessed in a comprehensive manner. Zero
RWA was assigned in respect of huge undrawn commitment of ~1 ,780,179.84 mn,

Confidential Page 270f36

 simply on the basis of the 'unconditionally cancellable' clause in the loan
agreements. Although it might seem acceptable basis the Pillar 1 prescriptions, its
practicability in case of large business / corporate exposure required review. In the
absence of articulation of this risk in the ICAAP, the supervisory review identified
undrawn commitment of ~747697.00 mn for risk-weighting at 100% after applying
CCF of 20%.

• There was erroneous inclusion in regulatory retail portfolio. Further, a property

price index rather than the actual valuation was used to arrive at the LTV ratio and
resultant capital under Pillar 1. The supervisory review quantified the above two
deficiencies in Pillar 1 capital calculation by suggesting additional RWA of ~1725
mn and ~12515 mn respectively.

iv) Sustainability of internal sources to generate capital - quality of earnings

i) The net stable profit had increased from ~63049.00 mn in FY 2011 to ~72439.60
mn in FY 2013. However, net stable profit to assessed net profit ratio had declined from
131.89% in FY 2011 to 88.32% in FY 2013. This was mainly due to higher provisions
during FY 2011 and write back of provisions during the subsequent years, viz., FY 2012
and FY 2013. A major part of assessed net profit comprised stable profit.
ii) The proportion of fee-based income in gross stable income fell from 17.51% in
2011 to 11.99% in 2013. This fall reflected the business strategy of the bank, which
emphasized on core business of lending and investment.
iii) Gross stable income to total operational expenditure had declined from 133.57%
to 129.28% during 2011-13. However, the bank had sufficient cover for its operating
expenses under a normal scenario.
iv) The reported net volatile profit stood at ~1 0815.10 mn. However, it was assessed
at ~9574.70 mn during FY 2013 mainly on account of divergence in provisioning in case
of loss assets indicative of fraud and NPls amounting to ~1240.40 mn. The net volatile
profit was sufficient to cover the volatile expenses.
v) The ratio of the actual income to budgeted income stood at 1.10. This indicated
satisfactory ability to meet budgeted levels.

Confidential Page 28 of36

vi) The internal retention rate had increased from 66% to 72% and the dividend
payout ratio had declined from 34% to 28% during 2011-13. However, internal retention
rate was lower than that in peer group banks for which the ratio was ranging between 80-
85%.
vii) The quality of capital was diluted to the extent that overdue interest ({26650.00
mn) in the form of FITL was capitalized without creating corresponding sundry liability!
provision of equivalent value. This amount has been reduced from available capital under
the Pillar 2 assessment of capital.

v) Scope and ability to raise additional capital

i) Enough headroom was available both under Tier 1 and Tier 2 for raising additional
capital. The details of the available headroom as on March 31, 2013 are provided at
Annex-4.
ii) Considering the fact that the Alternate Tier-1 capital instruments (AT-1) are
expected to undergo equity conversion in case of need (so low market demand) and that
such instruments would eventually be phased out under Basel-III norms, the bank was
mainly dependent on infusion through common equity (now very limited headroom) and
internal generation of capital (growth 8-10%). The bank could earlier issue its authorised
capital at high premium, so the capability of further issuance of such capital from the
available headroom was considered adequate. Further, there was adequate headroom
for raising Tier-II capital in the form of Upper Tier-II ({171802mn) and subordinate debt
({76084mn) etc.

vi) Leverage ratio and Stress Testing

i) The leverage ratio of the bank as on March 31, 2013 was calculated at 7.33% against
the current regulatory limit of 4.5%.
ii) Review of stress testing
Certain risk factors reckoned for stress testing of various risks were found to be very
mild. Such stress tests and resultant internal capital requirement might not be
commensurate with the rigors of maintaining AAA rating of the bank. Some stress factors
required scientific basis for their selection. Comments on important aspects are as under:

Confidential Page 290f36

 • Concentration risk: Single and group borrower concentration risk was stressed by
merely applying one notch rating downgrade of the exposures. Situations like
increasing default due to sector I industry Icollateral Icountry concentration etc.
were not considered.
• In case of stress test of credit risk, only the quality of credit was stressed; it did not
capture the stress-impact on recovery (i.e. stressed LGD) and stressed exposure
(stressed EAD).
• The bank had taken 40% loss due to fall in gold prices in case of gold loan
exposure. However, it was not supported by historical LGD data.
• Considering the actual loss (>50%) in the SR portfolio, the stress assumption of
loss of 30% was not considered as sufficient.
• The basis risk stress scenarios were very straightforward i.e. parallel movement of
two reference curve for assets and liabilities. The hypothetical but plausible
scenarios like non-parallel or twisted yield curve kind of scenarios were not
considered.
• Under liquidity stress scenarios, drawl from large undrawn portion was not
considered as a plausible scenario.

The bank had taken the so" percentile out of the distribution of stress outcomes for
assessment of capital. However, the choice of the so" percentile was subjective.
There were just two back-testing exceptions - P&L effect in two stress testing scenarios
in case of IRBB and one scenario under credit risk. This indicated that the chosen stress
testing scenario were not severely adverse.

Confidential Page 30 of36

 PART III - MAJOR AREAS OF NON-COMPLIANCE

Regulation Regulation areal focus Current state Proposed action

Reference (Para & of for the bank
circular no.) compliance

i) DBS.FrMC.BC.No.11 Non-Classification of certain Not complied Additional

23.04.001/2012-13 accounts as fraud inspite of provision
dated July 2, 2012- indications (Biotor, Surya suggested.
MC on Frauds - para Vinayak Industries Ltd and Controls must
3.2 and 2.1(b), and 1.7 Deccan Chronicle Holding improve in
ii) DBS.CO.PPD.No. Ltd.). On an average, more examining
15106/11.01.005/2010 than 70% of fraudulent loan borrowers'
-11 Dated April 29, accounts were detected after financials.
2011 a gap of one year from the
date of occurrence
(ii) Confirmation of balances
- Scrutiny of financial
statements of borrowers.
DBOD. The bank's policy on Not complied Bank to amend
No.Dir.BC.3/13.03.001 unsecured exposure its policy on
2012-13 dated July 2, exempted advances extended unsecured
2012 MC - Exposure to banks and sovereign from exposure
Norms para 2.9.1. the computation of unsecured
exposure.
Mail Box clarification -
I ncentive scheme - Wealth Not complied Scheme to be
March 30, 2005 management sales staff were stopped
offered incentives based on
income garnered by them
A.P. (DIR Series) An SPY (Hetero Wind Power Not complied Bank to represent
Circular No.71 June Limited) was sanctioned ECB its case to FED
30, 2009 - para 2 (iv) guaranteed by the parent.
ECB under automatic route
should not have been allowed
as the sanction note
mentioned about CBI charge
sheet against the two
promoter due to
disproportionate asset and
attachment of FDs by the ED.
DBOD.No.BP.BC.9 NPA identification process Not Complied SMA recognition
121.04.048/2012-13 showed that some accounts process has to be
dated July 2, 2012- were reported as SMA revamped.
MC IRAC - para 2.1 throughout the year with
and 4.2.5 irregularity less than 90 days.

Confidential Page 31 0'36

 As NPA identification process
was run in the system AFTER
the end of the quarter, there
was a possibility that an
account could remain
standard even though
irregularity in the account
would have crossed the 90
day limit temporarily in the
interregnum (para 2.1 of the
MC). Further, such accounts
were treated as standard by
the bank by recovery of a
critical minimum amount
subsequently in order to
maintain the irregularity of
less than 90 days throughout
the year.
DBOD No. BP. BC.13 SGL transfer form issued by a Violation in Bank may
121 .04.141 12012-13 bank in favour of another bank March 2012 prevent the
dated July 2, 2012 MC should not bounce followed by recurrence of
- Investments - para penalty. such incident
1.1.3 (ii) through effective
mechanism in
place.
DBOD.No.BP.BC. The market-makers should A standard The standard
44/21.04.157/2011- 12 carry out proper due diligence format of format of Board
dated November regarding 'user Board resolution may be
2,2012 - appropriateness' and resolution was reviewed to
Comprehensive 'suitability' of products before received from reflect the risk
Guidelines on offering derivative products to all clients. understanding
Derivatives- para 8.4.4 users. and the unique
risk appetite of
each derivative '--
client.
DBOD No. BP. Classification as NPI Deviations Additional
BC.13/21.04.141/2012 observed. provision
-13 dated July 02, suggested.
2012 MC -
Investments para
3.10.2
DBOD. No. Dir. BC. 4 Loans exceeding RS.25 lakh Sanctioned by Such loans to be
113.03.00/2012-13 to firms where directors of the sanctioned by
dated July 2, 2012 other banks are interested Committee of Boardl Credit
MC- Loans and should be sanctioned by the Senior Committee.
Advances - Statutory Boardl Management Managers

Confidential Page 32 of 36
and Other Restrictions Committee of the Board. instead of
para 2.2.1.2 (c) Board/ Credit
Committee.
DBOD.No.DIR.BC.07/ The loan was sanctioned to a Not complied Better diligence
08.12.001/2012-13 builder without linking to in compliance.
dated July 2,2012 - specific project: Rohan
MC Housing finance- Developers Private Ud-
para 3.3 Term Loans sanctioned amount of Rs.
to Private Builders. 2000 mn out of which 900mn
was envisaged to be
disbursed upfront which would
be utilized for repayment of
short term loans taken for
construction of other projects
and only rest amount was for
one project (Trump Tower).
RPCD. CO. Plan.BC Loans to dairy cooperatives Not complied Better diligence
7/04.09.01/2004-05 treated as direct loans to in compliance.
dated July 20, 2004 - agriculture instead of indirect
MC on priority sector finance.
loan para 1.2.7(v) and
Para 1.2 of RBI's
guidelines on Priority
Sector Lending-
Targets and
Classification dated
October 17, 2012,
DBOD.No.Dir.BC. 5 The actual rate charged on The rates Better diligence
/13.03.00/ 2012-13 advances should be charged for in compliance.
dated July 2, 2012 MC transparent and non- same rated
- I nterest Rates on discretionary. borrowers
Advances- para 2.2.2 were non-
transparent
and
discriminatory
DBOD.Dir.BC.1 The bank should disclose in Not complied Better diligence
/13.03.00/ 2012-13 advance the schedule of in compliance.
dated July 2, 2012 MC interest rate payable and
- I nterest Rates on should not be subject to
Domestic deposits- negotiation.
para 2.26.c(ii)

Confidential Page 33 of 36
DBOD.IBD.BC.96/23.3 Issue of SBLC on behalf of Not complied Better diligence
7.001/2006-07dated first level step down in compliance.
May 10, 2007-
subsidiary
Extension of credit
Standby letter of credit
facilities to overseas
(SBLC) was issued favoring
step down subsidiaries
Comercia Bank, US towards
of Indian
the obligations of I M Global
corporate(para 2 & 3)
LLC, California, a first level
step down subsidiary of
RBEPL, to enable Commercia
bank provide working capital
facility to 1M Global, LLC.
However, the Indian company
held equity in the first level
step down subsidiary of
RBEPL less than 51 %.
DBOD. BP.BC.No.61/ Instead of monthly, review of Not complied Better diligence '---
21.04.103/ 2012-13 un-hedged exposure was in compliance.
dated November 21, done annually. The latest
2012-Para 2 annual review was carried out
in August 2013.

DBS circular dated System of legal audit of title Not complied Better diligence
June 07, 2013 on legal deeds in respect of loans of with in compliance.
audit Rs.5.00 crore and above.
DBOD.No.Leg.BC.21/ Treatment of Complaints Improper Better diligence
09.07.006/ 2012-13 recognition of in compliance.
dated July 02, 2012 of complaints as
MC on Customer many of them
Service in Banks - were recorded
para 16 as service
requests
DBOD.No.Leg.BC.21/ Providing facilities to persons Extent of Better diligence '--
09.07.006/ 2012-13 with disabilities compliance in compliance.
dated July 02, 2012 of with provision
MC on Customer of ramps at
Service in Banks - branches/ATM
para 9.5 s was very
low.
DBOD.AML.BC.No.11/ Non adherence to KYC norms The bank had Better diligence
14.01.001/2012- in respect of one account not taken in compliance.
13 dated July 2, 2012 (Traffic Manager, Mumbai Port second level
- MC on KYC norms - Trust) treated as proprietary identity proof
para 2.5 (viii) account by the bank. in respect of
an account in

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 this account.
DBOD.AML.BC.No.11/ Implementation of UCIC The bank had Though time
14.01.001/2012- not fully has been
13 dated July 2, 2012 implemented extended by
- MC on KYC norms - UCIC. DBOD from
para 2.4 (b) May 2013 to
March 2014 for
implementation
of UCIC, Better
diligence is
required in
compliance.
DBS.CO.PPD Lack of focused approach in Monitoring of Better diligence
5105/11.01.005/ 2011- handling lottery frauds/fictitious transactions in compliance.
12 dated October 10, offers despite large number vis-avis the
2011 (1722) of such cases observed account profile
in Delhi region alone. was
inadequate
despite a large
number of
fictitious
offer/lottery
frauds cases.

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