Background

ICICI, originally called the Industrial Credit and Investment Corporation of India, (ICIJF/Bombay, IBN/NYSE) is the second largest bank in India, and the largest in the private sector, with total assets values at approximately Rs. 1 trillion. The bank was initially set up to fund industrial development in India and has evolved into a major player in the Indian financial services community, serving both consumer and corporate clients. ICICI took advantage of the decision in April 2000 of the central bank of India, the Reserve Bank of India (RBI), to allow development financial institutions (DFIs) to become commercial banks. ICICI was one of four DFIs (the others are the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI) and the Housing and Development Finance Company (HDFC)) and this move by the RBI allowed it to transform itself into a diversified financial institution.

In May 2002, the merger of ICICI, ICICI PFS and ICICI Capital with ICICI Bank was realized, creating what is now referred to simply as ICICI. According to the ICICI’s 2001-2002 Annual Report, the merger of ICICI and its subsidiaries with ICICI Bank created a combined entity “with complementary strengths and products and similar processes and operating architecture. The merger has combined the large capital base of ICICI with the strong deposit raising capability of ICICI Bank, giving ICICI Bank improved ability to increase its market share in banking fees and commissions, while lowering the overall cost of funding through access to lower-cost retail deposits. ICICI Bank would now be able to fully leverage the strong corporate relationships that ICICI has built, seamlessly providing the whole range of financial products and services to corporate clients. The merger has also resulted in the integration of the retail finance operations of ICICI, and its two merging subsidiaries, and ICICI Bank into one entity, creating an optimal structure for the retail business and allowing the full range of asset and liability products to be offered to all retail customers”. The merger joined India’s largest financial institution with the country’s largest private-sector bank. The new entity has been structured to be responsive to the needs of the new combined firm, to be able to support the needs of a company of significant size while remaining nimble enough to respond quickly to market demands. ICICI states in its 2001-20022 Annual Report that “[o]ur organizational structure is designed to support our business goals, and is flexible while at the same time ensuring effective control and supervision and consistency in standards across business groups”. The organization structure of ICICI is divided into five principal groups – Retail Banking, Wholesale Banking, Project Finance & Special Assets Management, International Business and Corporate Centre.

Today, the bank has approximately 540 branches and over 1000 ATM machines. ICICI offers diversified financial services at both the corporate and retail level. In addition, it has specialised subsidiaries that offer non-life insurance, venture capital, asset management, investment and information technology services. Since the mid-1990s ICICI has been developing the necessary subsidiaries and growing the services that will allow it to be a universal bank, capitalising on economies of scale and synergies to strengthen its competitive advantage. ICICI uses its diversification to serve its clients, attracting customers through its diversification and its ability to offer advantages to clients who take advantage of multiple services, e.g., ICICI could offer preferential lending terms to a company that also uses its asset management services or offers its employees ICICI insurance. ICICI has also moved away from the long-term lending associated with the DFIs, offering more short-term products and creating a selection of debt products for its clients. ICICI has recognised the needs of the market, which is demanding more financing options. In 1999-2000, corporate finance rose to 47% of ICICI's total lending portfolio from 36% in 1998-99. Furthermore, lending to manufacturing industries (not including infrastructure, oil and gas, and petrochemicals) accounted for only 14% of the portfolio in that same year, down from 25% a year previously.

ICICI has experienced its recent success within the framework of a troubled economy. India’s economy, like those of other emerging markets, has been affected by the economic down-turn of the past three years. India has witnessed a decrease in the inflow in foreign capital and has seen its access to international capital restricted as capital markets contracted. India’s economy has not been as adversely affected as that of other emerging countries and saw growth in its GDP as well as fiscal growth in 2001. India’s recent growth has been partly a result of the success of the services industries, of which financial services (consumer) and information technology, both areas in which ICICI is involved, played a significant role. Although there have been contractions in corporate financial services, consumer financial services remained relatively strong.

India’s Banking Industry

In the past three or four years, the Indian banking sector has seen consolidation as both local banks and international banks doing business in India have undergone mergers and acquisitions. The RBI has encouraged consolidation in the hope that it will create a more robust banking sector. ICICI has been active in this trend, acquiring the Bank of Madura on February 1, 2001, through a share swap (2:1 ICICI:Madura). This move allowed ICICI to obtain an immediate presence in South India (increasing its customer base by 1.2m and adding 263 branches) and to expand its base in order to offer the diversified basket of financial services on which it is building its business. It has also allowed ICICI to increase its non-interest income. This merger was a major step in ICICI’s attack on the market share of the large nationalised banks, which have been facing a serious challenge from the private sector financial services firms since the mid-1990s. ICICI, like other private sector banks in India, is offering customers a more efficient, nimble and technologically advanced banking option while also increasing value for its shareholders.

ICICI’s Innovations

ICICI is a company that has been recognised for a number of “firsts”. Notably, it was the first Indian company to list on the NYSE in September, 1999. As of March 31, 2002, Foreign Institutional Investors owned 38.4% of ICICI’s shares.

On April 23, 2003, the domestic shares opened trading at Rs. 132.50, with a 52-week high of Rs. 164.40 and a 52-week low of Rs. 109.40. On the same date, the ADS (American Depository Shares) opened trading on the NYSE at $5.99, with a 52-week high of $8.31 and a 52-week low of $4.70.

Free from the restraints of the past, i.e., government interference, ICICI (and some of its competitors, like HDFC Bank) is bringing a new way of doing business to the financial services industry. ICICI has broken free from the socialist influence that had limited the firm’s ability to act in the best interest of its stakeholders and has been successful in targeting the top companies doing business in India (and Indian companies doing business globally) as well as the potential of the growing Indian middle class. The firm’s success is based on a strategy that focuses on technology, low-cost branches and strong management. ICICI and its competitors are educating its customers to redefine their expectations from financial services firms, setting a new standard for customer service.

Technology is a very important aspect of ICICI's innovations, as the firm has taken advantage of the affordability of technology to enhance its business. The financial services company has allied itself with a number of other companies in order to offer innovative services. They have partnered with Orange and Airtel to provide WAP-based m-commerce (mobile/telephone banking), with Compaq to develop a payment gateway, with Yahoo! to provide on-line financial information, and with Satyam Infoway to offer retail financial products over the Internet. ICICI and its subsidiaries have portals that allow its customers to access accounts and products on-line, offering cutting-edge webbased tools. ICICI was the first of the Indian financial services firms to aggressively pursue an e-commerce strategy and has established a reputation as the leader in this area. The firm has invested in the development of its e-commerce group and has dedicated resources to using their technological advantage to great better customer service and increased internal efficiencies.

ICICI’s electronic services are of the highest calibre, giving its customers access to their accounts 24-hours a day, seven days a week. ICICI has been able to guide its clients away from uniquely branch-based banking to using the more efficient and less costly computer-based banking. In some rural areas ICICI’s ATMs are the only “branches” to which customers have access, allowing ICICI to expand into these markets without prohibitive investments in infrastructure. ICICI has been very successful in expanding its non-branch banking channels, reporting in 2002 that only 35% of customer-initiated transactions were branch based. ICICI has also created a multilingual ATM network that is highly compatible with those of other banks, accepting Master, Cirrus and Maestro cards, thus giving its customers (and other users, i.e., potential customers) a high degree of ease-of-use. In addition to traditional banking functions, ICICI’s ATMs are set up for paying bills and even for recharging pre-paid mobile telephones.

ICICI has also utilized the technology of call-centers to enhance its customer service. The company has the largest call-centre in the industry and it can be accessed by customers in over one hundred cities. The service integrates automated and customer service technician services, serving a complete range of products. ICICI uses the most advanced technology at the call-centre, i.e., bleeding-edge voice-over Internet-protocol technology and the most advanced desktop applications, to cross-sell products from its various subsidiaries and to facilitate the customers’ banking experience. In addition, ICICI offers mobile banking services, allowing its customers to use mobile devices to perform some of their banking functions, e.g., checking balances, paying bills and ordering cheque books. Finally, ICICI offers fully comprehensive on-line trading services at www.ICICIdirect.com. As described in the Annual Report, “ICICIdirect provides complete end-to-end integration for seamless electronic trading on the stock exchanges and has been rated “TxA1” by CRISIL, indicating highest ability to service broking transactions. ICICIdirect has also launched India’s first Digitally Signed Contract Notes (DSCN), which allows a customer to view and print their contract notes online”.

Retail Banking

Retail banking is at the heart of ICICI’s growth strategy and one of the main reasons behind the firm’s impressive results. ICICI sells itself as a firm that is highly focused on the customer, defying the traditional behaviour patterns associated with banking in India. The demographic changes in India are at the core of ICICI’s decision to focus on offering strong retail banking. As more Indians enter the higher income brackets there is an increased need for financial services, and a demand for high level service and attentiveness to customer needs. ICICI is positioning itself to capitalize on the needs of this upwardly mobile group and is seeking to establish a strong competitive advantage through its innovative products, wide distribution, strong credit controls, customer service standards. ICICI is investing in all of its retail areas so as to achieve economies of scale and further increase its advantage. According to its 2001-2002 Annual Report, ICICI Bank’s retail portfolio (including the portfolio of ICICI Home Finance Company Limited, its wholly-owned subsidiary) at March 31, 2002 was over Rs. 76.00b, as compared to the combined retail portfolio of ICICI and ICICI Bank of about Rs. 29.00b at March 31, 2001. The firm’s retail asset products include mortgages, automobile and two-wheeler loans, commercial vehicles and construction equipment financing, consumer durable loans, personal loans and credit cards.

ICICI offers is retail customers a diverse selection of products and the firm has focused on expanding its retail services and on accessing the huge potential of small retail loans, which has accounted for its impressive growth in net income, which has increased 2.5-times since March, 2002. Retail loans account fro 25% of total customer assets and 15% of the bank’s total assets. The main driver behind these loans is mortgages, which are 48% of retail loans. ICICI reported the highest mortgage disbursements is the Indian retail bank sector (Rs. 22.7b in 3Q03).

The Indian Diaspora

A final area of interest is how ICICI has in a very focused manner targeted the Indian Diaspora as potential clients. In discussions with Ms. Lalita Gupta in March 2003, she laid out the basic framework for this aspect of ICICI’s international business strategy. Ms. Gupta stated that the firm was opening branches abroad (e.g., at a prime location in London) and was selling the firm abroad by focusing on ICICI as a means by which to obtain financial services in India while doing business with Indian companies both domestically and abroad. ICICI has invested heavily in revamped its retail strategy, establishing a very visible presence in India and increasing its exposure abroad, in particular targeting Diaspora Indians of high worth. ICICI’s marketing strategy has been very aggressive, with the companies name plastered across India and across internet sites that attract the Indian demographic both at domestically and internationally (Cricinfo.com, the premier on-line crocket site, is a prime example of such a site).

ICIC’s Future

ICICI has been very successful in transforming itself into a truly universal financial services firm but the question must be asked as to whether the company will be able to weather the current recession and continue with the growth that it witnessed since its reinvention. A look at the firm’s financials illustrates the success that ICICI has experienced. Between FY1996 and FY2000, total income rose 291% to Rs. 84.6b profit after tax rose 276% to Rs. 12.06b and total assets climbed 280% to Rs. 653.9b. During the same period, disbursements grew 363% to Rs. 258.36b. ICICI Bank’s total assets increased to Rs. 1,041.10b at March 31, 2002 compared to Rs. 197.37b at March 31, 2001 (this was due primarily to the merger with the Bank of Madura; furthermore, the increase in investments and cash and balances with RBI was due to compliance with SLR and Cash Reserve Ratio (CRR) requirements on ICICI’s liabilities. Total deposits increased 95.9% to Rs. 320.85b at March 31, 2002 from Rs. 163.78b at March 31, 2001. According to the company’s Annual Report, “this increase was achieved through a strong focus on deposit mobilization and fully leveraging the branch network acquired in the amalgamation of Bank of Madura, supported by migration of customer transaction volumes to non-branch channels”. In addition, savings account deposits increased 32.7% to Rs. 24.97b in fiscal 2002 from Rs. 18.81b in fiscal 2001. Time deposits also increased 126.1% in fiscal 2002.

During the year that ended March 31 2000, there was a 28% rise in profit before tax and provisions, a 21 % rise in profits after tax, and a 26% increase in net income. Notably, these figures are better than those of two other former DFIs, IDBI and IFCI. ICICI bank’s operating profit increased 87.9% to Rs. 5.45b in fiscal 2002 as compared to Rs. 2.90b in fiscal 2001. ICICI Bank’s profit after tax increased 60.3% to Rs. 2.58b in fiscal 2002 from Rs. 1.61b in fiscal 2001. The profit after tax for fiscal 2002 includes about Rs. 0.08b attributable to ICICI, ICICI PFS and ICICI Capital for March 30 and 31, 2002.

ICICI went through significant restructuring at the beginning of the 2003 fiscal year which was intended to help the firm better deal with the challenges of a growing universal financial services company deal. One of the issues facing India’s banks is the amount of bad loans, which are estimated at 11.4% of total loans, and otentially as high as 18%. The legal procedures available to the creditors are cumbersome and problematic, although the government is taking steps to ease the problem, including the establishment of an asset-restructuring company. ICICI has had to deal with the negative impact of non-performing assets and any move by the Indian government to assist creditors should be reflected in the share price. Furthermore, giving creditors a quicker and more efficient means by which to deal with clients that have defaulted will help to attract more foreign investors — and their much needed capital— to India. Although India has experienced volatile equity capital markets in FY2002, and of particular significance was the downward trend of trend of technology stocks, overall there has been an increase in foreign investment in the country. It is against this backdrop that ICICI reported relatively attractive multiples, with overall improvements over FY2001.

The expectation for the Indian Financial Services Industry is for rapid growth in the consumer markets, with a general improvement in the quality of assets. ICICI has positioned itself to take advantage of this growth and, assuming that it continues to be aggressive in building client bases both at home and abroad, it should be able to continue to post solid returns and to obtain consistent growth. Furthermore, should ICICI’s move to establish a presence abroad be successful, there is huge potential for the firm as foreign investment in India continues to increase. If ICICI can establish a leadership position as the bank with which Indian nationals living abroad conduct business, it can tap into a very lucrative market. Although this is a small part of ICICI’s business as compared to its domestic market, combined success in both domains can help ICICI’s continued growth. ICICI has adopted an aggressive and focused approach to obtaining its goal, i.e., to be the premier universal financial services firm in India, offering both cutting-edge products services and the highest level of customer service.

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