ICICI Bank Ltd

BUSINESS ENVIRONMENT

The Bank’s financial condition, loan portfolio and results of operations have beenand are in the future expected to be influenced by economic and financial conditions inIndia as well as globally, developments affecting the business activities of our corporatecustomers including increase in international commodity prices and regulatory developmentsin the financial sector.

During fiscal 2011, the recovery in economic activity witnessed in fiscal 2010 wassustained. Gross Domestic Product (GDP) increased by 8.6% during the first nine months offiscal 2011, compared to a growth of 7.4% in the corresponding period of fiscal 2010. Inaddition, growth was fairly broad-based across the agriculture, industry and servicessectors. Growth in the agriculture sector recovered to 5.7% during the first nine monthsof fiscal 2011 compared to 0.2% in the corresponding period of fiscal 2010. The servicessector continued to grow at over 9.0% during the year. Industrial growth remained strongduring the first half of fiscal 2011 with the Index of Industrial Production (IIP)recording an average growth of over 10.0%. However, there was some moderation during thesubsequent months, partly due to an adverse base effect. During April 2010 to February2011, total exports increased by 31.4% on a year-on-year basis. In view of the continuedmomentum in economic activity, the Central Statistical Organisation has estimated GDP togrow by 8.6% in fiscal 2011 compared to a growth of 8.0% in fiscal 2010.

Inflationary pressures continued to persist through fiscal 2011, with an increase inthe latter part of the fiscal year due to higher than anticipated rise in food and oilprices. Inflation, measured by the Wholesale Price Index (WPI), after declining from ahigh of 11.0% in April 2010 to about 8.1% in November 2010 continued to remain at elevatedlevels of about 8.0% for the remaining part of the fiscal year. Inflationary pressures,though largely emanating from food and fuel prices, became broad based as manufacturedproducts inflation showed an increase from February 2011. In view of the above, ReserveBank of India (RBI) continued its policy tightening and liquidity management stance.During fiscal 2011, the cash reserve ratio (CRR) was increased by 25 basis points from5.75% to 6.00%, the repo rate by 175 basis points from 5.00% to 6.75%, and the reverserepo rate by 225 basis points from 3.50% to 5.75%. In its annual policy statement forfiscal 2012, RBI further increased the repo rate by 50 basis points to 7.25% and set thereverse repo rate at 1.0% below the repo rate. In addition, during certain periods,liquidity was also impacted by events such as the auction of telecom spectrum and lowerthan anticipated government spending. Liquidity in the system continued to remain indeficit for a large part of fiscal 2011, particularly in the second half of the fiscalyear. Banks remained net borrowers from RBI under the Liquidity Adjustment Facility (LAF)with average borrowings of about Rs. 640.00 billion on a daily basis between June 1, 2010and March 31, 2011. The yields on 10 year government securities increased by about 17basis points to 7.99% at March 31, 2011 as compared to 7.82% at March 31, 2010. During thelatter part of fiscal 2011, RBI initiated several measures to ease systemic liquidityincluding decreasing the Statutory Liquidity Ratio (SLR) by 100 basis points from 25.0% to24.0% in December 2010, providing additional liquidity support under the LAF window,operation of a second LAF on a daily basis, and open market operations for purchase ofgovernment securities.

In response to tight systemic liquidity and the rising interest rate environment,scheduled commercial banks increased their deposit rates for various maturities by 75-250basis points between April 2010 and January 2011. The impact of rising cost of funds forbanks was also reflected in lending rates with banks increasing their base rates by 95-165basis points during the year. Banking system credit growth, after remaining subdued duringfiscal 2010 recovered in fiscal 2011, following the improvement in economic activity.Non-food credit growth was 21.2% at March 25, 2011 on a year-on-year basis, compared to17.1% at March 26, 2010. Based on sector-wise data, growth in non-food credit on ayear-on-year basis till February 25, 2011 was 22.8%, which was largely driven by growth incredit to industry at 26.5% and to the services sector at 24.2%. Within industry, loans tothe infrastructure sector increased by 39.7% led by power and telecommunications. Duringthe year, there was also some recovery in growth in the personal loans segment with ayear-on-year increase of 16.2% at February 25, 2011. However, deposit growth lagged creditgrowth in the system with total deposits increasing by 15.8% on a year-on-year basis atMarch 25, 2011 compared to 17.2% at March 26, 2010. The slower growth in deposits waslargely due to the decline in demand deposits by 1% on a year-on-year basis at March 25,2011 as compared to a growth of 23.4% at March 26, 2010.

Equity markets, while appreciating during fiscal 2011, continued to remain volatile asvarious events such as increased inflationary concerns, the European sovereign debt crisisand political events in the Middle East and North Africa impacted investor sentiments. Onan overall basis, the benchmark equity index, the BSE Sensex, increased by 10.9% from17,528 at March 31, 2010 to 19,445 at March 31, 2011. Foreign institutional investmentflows into India continued to remain strong during the first ten months of the year beforedeclining significantly during the last quarter of fiscal 2011. In addition, continuedrevival in external trade contributed to a surplus of US$ 11.0 billion in India’sbalance of payments during the nine months of fiscal 2011. The rupee appreciated by 1.1%against the US dollar from Rs. 45.14 per US dollar at March 31, 2010 to Rs. 44.65 per USdollar at March 31, 2011.

Tight liquidity and the rising interest rate environment combined with the impact ofregulatory changes, led to lower mobilisation under savings and investment products duringfiscal 2011. First year retail premium underwritten in the life insurance sector decreasedby 8.5% (on weighted received premium basis) to Rs. 503.68 billion in fiscal 2011 from Rs.550.24 billion in fiscal 2010. The average assets under management of mutual fundsdecreased by 6.3% from Rs. 7,475.25 billion in March 2010 to Rs. 7,005.38 billion in March2011. However, gross premium of the non-life insurance sector (excluding specialisedinsurance institutions) grew by 21.7% to Rs. 425.69 billion in fiscal 2011.

There were a number of key regulatory developments in the Indian financial sectorduring fiscal 2011:

• In December 2010, RBI imposed a regulatory ceiling on the loan-to-value ratio inrespect of housing loans at 80%. However, small value loans of less than Rs. 2.0 millionwere permitted to have a loan to value ratio not exceeding 90%. Further, the risk weightfor residential loans of Rs. 7.5 million and above was set at 125% irrespective of theloan to value ratio, as against the earlier mandated 100% for a loan to value ratio ofabove 75%. With respect to loans outstanding under special housing loan products withlower interest rates in initial years, the standard asset provisioning was increased from0.4% to 2.0%.

• In February 2011, RBI issued guidelines declassifying loans sanctioned tonon-banking finance companies (NBFCs) for on-lending to individuals and entities againstgold jewellery as direct agriculture lending under priority sector requirements.Similarly, investments made by banks in securitised assets originated by NBFCs, where theunderlying assets were loans against gold jewellery and purchase/assignment of gold loanportfolio from NBFCs were also made ineligible for classification under agriculture sectorlending.

• RBI advised banks to henceforth not issue Tier-1 and Tier-2 capital instrumentswith step-up options so that these instruments remain eligible for inclusion in the newdefinition of regulatory capital under the Basel III framework.

• In the Union Budget for fiscal 2012, the government enhanced priority sectoreligibility ceiling for housing loans for dwelling units from Rs. 2.0 million to Rs. 2.5million.

• In May 2010, RBI permitted infrastructure NBFCs to avail of external commercialborrowings for on-lending to the infrastructure sector. Further, in July 2010, guidelineswere issued to permit take-out financing arrangement through the external commercialborrowing route for refinancing of rupee loans availed for financing infrastructureprojects particularly in the areas of seaports, airports, roads and power. In the UnionBudget for fiscal 2012, the limit for investment by Foreign Institutional Investors (FIIs)in corporate bonds with residual maturity of over five years issued by companies ininfrastructure sector, was raised by US$ 20 billion, taking the limit to US$ 25 billion.Further, it was also proposed to create special vehicles in the form of notifiedinfrastructure debt funds with lower withholding tax on their interest payments and taxexemptions on their incomes.

• In August 2010, the RBI issued a discussion paper on entry of new banks in theprivate sector. In January 2011, RBI also released a discussion paper on the presence offoreign banks in India.

• In June 2010, the Insurance Regulatory and Development Authority (IRDA)introduced revisions to the regulations governing unit linked insurance products such asincrease in the lock-in period from three years to five years, increase in minimummortality cover, cap on surrender and other charges and minimum guaranteed return onpension annuity products.

• In March 2011, IRDA conducted an audit of the third party motor insurance pooland concluded that the pool reserves needed to be enhanced significantly. Accordingly,IRDA stipulated that all general insurance companies should increase these reserves basedon a provisional loss ratio of 153% for the pool for all years commencing from the yearended March 31, 2008, with the final loss ratio to be determined through a further reviewin fiscal 2012.

Introduction of Base Rate system

Historically, interest rates on loans extended by banks were linked to the primelending rate (PLR) of each bank. With effect from July 1, 2010, RBI implemented a new baserate mechanism, requiring each bank to set and publicly disclose its minimum rate or"Base Rate" for all new loans and advances and renewal of existing facilities,subject to certain limited exceptions. While existing loans based on the Benchmark PrimeLending Rate (BPLR) system would continue to be linked to BPLR till their maturity, theexisting borrowers have an option to migrate to the Base Rate system before the expiry ofexisting contracts on mutually agreed terms. Except certain categories of loans asspecified by RBI, banks are not allowed to lend below the Base Rate. Under the regulation,banks must review their base rates at least once every quarter.

The Asset Liability Management Committee (ALCO) of the Bank at its meeting on June 30,2010, set the Base Rate of ICICI Bank, called "I-Base", at 7.50% p.a. witheffect from July 1, 2010. I-Base was increased by 175 basis points, in four phases, thelast such increase being to 9.25% p.a. with effect from May 7, 2011.

Change in Methodology for Computing Interest Payable on Savings Deposits

RBI had prescribed an interest rate of 3.50% on savings deposits and upto March 31,2010 banks were required to pay this interest on the minimum outstanding balance in asavings deposit account between the tenth day and the end of the month. Effective April 1,2010, RBI changed the methodology of computation of the interest payable and banks wererequired to pay interest on the daily average balance maintained in a savings depositaccount. The change in methodology resulted in increase in cost of savings accountdeposits for banks. RBI has increased the interest rate on savings account deposits to4.00% with effect from May 3, 2011.

Amalgamation of The Bank of Rajasthan

On May 23, 2010, the Board of Directors of ICICI Bank and the Board of Directors of TheBank of Rajasthan Limited (Bank of Rajasthan), an old private sector bank, at theirrespective meetings approved an all-stock amalgamation of Bank of Rajasthan with ICICIBank at a share exchange ratio of 25 shares of ICICI Bank for 118 shares of Bank ofRajasthan. The shareholders of ICICI Bank and Bank of Rajasthan approved the scheme ofamalgamation at their respective extra-ordinary general meetings. RBI approved the schemeof amalgamation with effect from close of business on August 12, 2010.

We have issued 31.3 million shares in August 2010 and 2.9 million shares in November2010 to shareholders of Bank of Rajasthan. The total assets of Bank of Rajasthanrepresented 4.0% of total assets of ICICI Bank at August 12, 2010. At August 12, 2010,Bank of Rajasthan had total assets of Rs. 155.96 billion, deposits of Rs. 134.83 billion,loans of Rs. 65.28 billion and investments of Rs. 70.96 billion. It incurred a loss of Rs.1.02 billion in fiscal 2010. The results for fiscal 2011 include results of Bank ofRajasthan for the period from August 13, 2010 to March 31, 2011. The assets andliabilities of Bank of Rajasthan have been accounted at the values at which they wereappearing in the books of Bank of Rajasthan at August 12, 2010 and provisions were madefor the difference between the book values appearing in the books of Bank of Rajasthan andthe fair value as determined by ICICI Bank.

The amalgamation was part of our strategy to expand our branch network with a view togrowing our deposit base. We believe that the combination of Bank of Rajasthan’sbranch franchise with our strong capital base would enhance the ability of the combinedentity to capitalise on the growth opportunities in the Indian economy.

STANDALONE FINANCIALS AS PER INDIAN GAAP

Summary

During fiscal 2011, we focused on leveraging our rebalanced funding mix and strongcapital position to grow our loan portfolio, while substantially reducing our provisionsfor loan losses to improve our profitability.

Our profit after tax increased by 28.0% from Rs. 40.25 billion in fiscal 2010 to Rs.51.51 billion in fiscal 2011. The increase in profit after tax was mainly due to a 47.9%decrease in provisions and contingencies (excluding provisions for tax) from Rs. 43.87billion in fiscal 2010 to Rs. 22.87 billion in the fiscal 2011. The decrease in provisionsand contingencies (excluding provisions for tax) was primarily due to a reduction inprovisions for retail non-performing loans, as accretion to retail non-performing loansdeclined sharply in fiscal 2011. Net interest income increased by 11.1% from Rs. 81.14billion in fiscal 2010 to Rs. 90.17 billion in fiscal 2011.

The decrease in provisions and contingencies and increase in net interest income waspartly offset by an 11.1% decrease in non-interest income from Rs. 74.78 billion in fiscal2010 to Rs. 66.48 billion in fiscal 2011. The decrease in non-interest income wasprimarily due to a decrease in income from treasury-related activities by Rs. 13.96billion from a gain of Rs. 11.81 billion in fiscal 2010 to a loss of Rs. 2.15 billion infiscal 2011. The higher income from treasury-related activities in fiscal 2010 includedreversal of provision against credit derivatives due to softening of credit spreads andhigher realised profit on government securities and other fixed income positions. Feeincome increased by 13.6% from Rs. 56.50 billion in fiscal 2010 to Rs. 64.19 billion infiscal 2011.

In fiscal 2011, non-interest expenses increased by 12.9% from Rs. 58.60 billion infiscal 2010 to Rs. 66.17 billion in fiscal 2011 primarily due to an increase in employeeexpenses partly offset by a decrease in other administrative expenses.

Total assets increased by 11.8% from Rs. 3,634.00 billion at March 31, 2010 to Rs.4,062.34 billion at March 31, 2011. Total deposits increased by 11.7% from Rs. 2,020.17billion at March 31, 2010 to Rs. 2,256.02 billion at March 31, 2011. Current and savingsaccount (CASA) deposits increased by 20.7% from Rs. 842.16 billion at March 31, 2010 toRs. 1,016.47 billion at March 31, 2011 while term deposits increased marginally from Rs.1,178.01 billion at March 31, 2010 to Rs. 1,239.55 billion at March 31, 2011. The ratio ofCASA deposits to total deposits increased from 41.7% at March 31, 2010 to 45.1% at March31, 2011. Total advances increased by 19.4% from Rs. 1,812.06 billion at March 31, 2010 toRs. 2,163.66 billion at March 31, 2011 primarily due to an increase in domestic corporateloans, overseas corporate loans and loans taken over from Bank of Rajasthan. Netnon-performing assets decreased by 37.0% from Rs. 39.01 billion at March 31, 2010 to Rs.24.58 billion at March 31, 2011 and the net non-performing asset ratio decreased from 1.9%at March 31, 2010 to 0.9% at March 31, 2011.

We continued to expand our branch network in India. Our branch network in Indiaincreased from 1,707 branches and extension counters at March 31, 2010 to 2,529 branchesand extension counters at March 31, 2011. We also increased our ATM network from 5,219ATMs at March 31, 2010 to 6,104 ATMs at March 31, 2011. These include branches and ATMs ofBank of Rajasthan. The total capital adequacy ratio of ICICI Bank on a standalone basis atMarch 31, 2011 in accordance with the RBI guidelines on Basel II was 19.5% with a tier Icapital adequacy ratio of 13.2% compared to a total capital adequacy of 19.4% and tier Icapital adequacy of 14.0% at March 31, 2010.

Operating results data

The following table sets forth, for the periods indicated, the operating results data.

1. Includes merchant foreign exchange income and margin on customer derivativetransactions.

2. Represents commissions paid to DMAs for origination of retail loans. Thesecommissions are expensed upfront.

3. All amounts have been rounded off to the nearest Rs. 10.0 million.

4. Prior period figures have been re-grouped/re-arranged, where necessary.

Key ratios

The following table sets forth, for the periods indicated, the key financial ratios.

1. Return on average equity is the ratio of the net profit after tax to the quarterlyaverage equity share capital and reserves.

2. Return on average assets is the ratio of net profit after tax to average assets. Theaverage balances are the averages of daily balances, except averages of foreign brancheswhich are calculated on a monthly basis till October 31, 2010 and on a fortnightly basisthereafter.

3. Cost represents operating expense including DMA cost which is expensed upfront butexcluding lease depreciation. Income represents net interest income and non-interestincome and is net of lease depreciation.

Net interest income and spread analysis

The following table sets forth, for the periods indicated, the net interest income andspread analysis.

1. The average balances are the averages of daily balances, except averages of foreignbranches which are calculated on monthly basis till October 31, 2010 and on a fortnightlybasis thereafter.

2. All amounts have been rounded off to the nearest Rs. 10.0 million.

Net interest income increased by 11.1% from Rs. 81.14 billion in fiscal 2010 to Rs.90.17 billion in fiscal 2011 reflecting an increase in net interest margin from 2.5% infiscal 2010 to 2.6% in fiscal 2011 and a 4.9% increase in the average volume ofinterest-earning assets.

Net interest margin increased from 2.5% in fiscal 2010 to 2.6% in fiscal 2011 primarilydue to a decrease in cost of deposits from 5.8% in fiscal 2010 to 4.9% in fiscal 2011,offset, in part by decrease in yield on interest-earning assets from 7.9% in fiscal 2010to 7.6% in fiscal 2011.

The following table sets forth, for the periods indicated, the trend in yield, cost,spread and margin.

Yield on interest-earning assets decreased from 7.9% in fiscal 2010 to 7.6% in fiscal2011 primarily due to a decrease in yield on advances. The decrease in yield on advanceswas primarily due to a decrease in the proportion of the high-yielding unsecured retailportfolio in total advances and decrease in yield on domestic non-retail advancesreflecting the declining trend in interest rates during fiscal 2010 which continued in thefirst half of fiscal 2011.

Yield on average interest-earning investments increased to 6.4% in fiscal 2011 comparedto 6.2% in fiscal 2010 primarily due to an increase in yield on average interest-earningnon-SLR investments, offset, in part, by a marginal decrease in yield on average SLRinvestments. The yield on average interest-earning non-SLR investments increased from 5.8%in fiscal 2010 to 6.6% in fiscal 2011, primarily due to an increase in investment inhigher-yielding credit substitutes like corporate bonds and debentures, certificate ofdeposits and commercial paper.

Interest income also includes interest on income tax refund of Rs. 1.65 billion infiscal 2011 compared to Rs. 1.21 billion in fiscal 2010. The receipt, amount and timing ofsuch income depends on the nature and timing of determinations by tax authorities and isnot consistent or predictable.

RBI increased the CRR by 75 basis points to 5.75% in February 2010 and further by 25basis points to 6.00% effective April 24, 2010. As CRR balances do not earn any interestincome, these increases had a negative impact on yield on interest-earning assets infiscal 2011. During fiscal 2011, interest income was also impacted by losses onsecuritised pools of assets (including credit losses on pools securitised in earlieryears) of Rs. 5.49 billion as compared to Rs. 5.09 billion in fiscal 2010.

The cost of funds decreased from 5.8% in fiscal 2010 to 5.4% in fiscal 2011 primarilydue to decrease in cost of deposits, offset, in part by an increase in cost of borrowings.

The decrease in cost of deposits in fiscal 2011 as compared to fiscal 2010 was due tothe higher proportion of low-cost current and savings deposits and reduction in cost ofterm deposits. The proportion of current and savings accounts deposits to total depositsincreased from 41.7% at March 31, 2010 to 45.1% at March 31, 2011. Cost of term depositsdecreased from 7.7% in fiscal 2010 to 6.5% in fiscal 2011. The cost of savings depositsincreased due to RBI guidelines requiring banks to pay interest on the daily averagebalances in savings account deposits. Cost of borrowings increased from 5.6% in fiscal2010 to 6.1% in fiscal 2011 primarily on account of an increase in cost of call and termborrowings and bond borrowings.

Interest rates moved up significantly during fiscal 2011, especially in the second halfof the year. In response to tight systemic liquidity and the rising interest rateenvironment, scheduled commercial banks increased their deposit rates for variousmaturities. The full impact of increase in deposit rates will reflect in fiscal 2012. Theincrease in deposit rates also reflected in an increase in lending rates in the bankingsystem. During the year, we increased the base rate (I-Base) from 7.50% at July 1, 2010 to8.75% at March 31, 2011 and further to 9.25%, with effect from May 7, 2011.

The following table sets forth, for the period indicated, the trend in averageinterest-earning assets and average interest-bearing liabilities:

1. Average investments and average borrowings include average short-term re-purchasetransactions.

2. Average balances are the averages of daily balances, except averages of foreignbranches which are calculated on a monthly basis till October 31, 2010 and on afortnightly basis thereafter.

3. Borrowings exclude preference share capital.

The average volume of interest-earning assets increased by 4.9% from Rs. 3,259.66billion in fiscal 2010 to Rs. 3,418.59 billion in fiscal 2011. The increase in averageinterest-earning assets was primarily on account of an increase in averageinterest-earning investments by Rs. 191.37 billion.

Average interest-earning investments increased by 18.3% from Rs. 1,046.05 billion infiscal 2010 to Rs. 1,237.42 billion in fiscal 2011, primarily due to an increase inaverage interest-earning non-SLR investments by 45.4% from Rs. 313.21 billion in fiscal2010 to Rs. 455.34 billion in fiscal 2011. Average SLR investments increased by 6.7% fromRs. 732.84 billion in fiscal 2010 to Rs. 782.07 billion in fiscal 2011. Interest-earningnon-SLR investments primarily include investments in corporate bonds and debentures,certificates of deposits, commercial paper, Rural Infrastructure Development Fund (RIDF)and other related investments and investments in liquid mutual funds to deploy excessliquidity.

Average advances increased marginally from Rs. 1,915.39 billion in fiscal 2010 to Rs.1,926.52 billion in fiscal 2011 which includes advances taken over from Bank of Rajasthan.Retail advances increased by 5.8% from Rs. 790.62 billion at March 31, 2010 to Rs. 836.75billion at March 31, 2011. In US dollar terms, the net advances of overseas branchesincreased by 22.8% from US$ 10.1 billion at March 31, 2010 to US$ 12.4 billion at March31, 2011. In rupee terms, the net advances of overseas branches increased by 22.1% fromRs. 451.37 billion at March 31, 2010 to Rs. 550.97 billion at March 31, 2011.

Average interest-bearing liabilities increased by 3.7% from Rs. 3,054.87 billion infiscal 2010 to Rs. 3,168.26 billion in fiscal 2011 on account of increase of Rs. 75.44billion in average deposits and an increase of Rs. 37.96 billion in average borrowings.The increase in average deposits was primarily due to increase in average CASA deposits.The ratio of average CASA deposits to average deposits increased from about 32.5% infiscal 2010 to about 39.1% in fiscal 2011. The increase in average borrowings was due toan increase in average capital eligible borrowings, in the nature of subordinated debt, byRs. 64.66 billion.

Non-interest income

The following tables set forth, for the periods indicated, the principal components ofnon-interest income.

1. Includes merchant foreign exchange income and income on customer derivativetransactions.

Non-interest income primarily includes fee and commission income, income fromtreasury-related activities and lease and other income. During fiscal 2011, the decreasein non-interest income was primarily on account of a decrease in income fromtreasury-related activities. During fiscal 2011, there was an increase in fee income andincome by way of dividends included in lease and other income. Overall there was a netdecrease in non-interest income by 11.1% from Rs. 74.78 billion in fiscal 2010 to Rs.66.48 billion in fiscal 2011.

Fee income

Fee income primarily includes fees from corporate clients such as loan processing fees,transaction banking fees and structuring fees and fees from retail customers such as loanprocessing fees, fees from credit cards business, account service charges and third partyreferral fees. Fee income increased from Rs. 56.50 billion in fiscal 2010 to Rs. 64.19billion in fiscal 2011 primarily due to an increase in corporate fees, offset, in part, bydecline in retail fees. Higher credit demand and increased business activity in thecorporate sector due to economic recovery resulted in an increase in loan processing feesand transaction banking related fees from corporate clients.

Income from foreign exchange transactions with clients and from margins on derivativestransactions with clients increased by 17.3% from Rs. 6.78 billion in fiscal 2010 to Rs.7.95 billion in fiscal 2011.

Profit/(loss) on treasury-related activities (net)

Income from treasury-related activities includes income from sale of investments andrevaluation of investments on account of changes in unrealised profit/(loss) in the fixedincome, equity and preference share portfolio, units of venture funds and securityreceipts.

Profit on treasury-related activities decreased from a gain of Rs. 11.81 billion infiscal 2010 to a loss of Rs. 2.15 billion in fiscal 2011. Treasury income for fiscal 2011primarily includes loss on investments in government of India securities and loss onsecurity receipts, offset, in part, by gains on equity investments. The higher income fromtreasury-related activities in fiscal 2010 included reversal of provision against creditderivatives due to softening of credit spreads, higher profit on government of Indiasecurities and other fixed income instruments and in equity investments offset, in part,by a loss on mark-to-market/realised loss on security receipts.

During fiscal 2010, we had capitalised on certain market opportunities to realise gainsfrom sale of our government and other domestic fixed income positions. During fiscal 2011,the government securities portfolio was impacted by increase in interest rates whichresulted in a loss for fiscal 2011 as compared to gains in fiscal 2010.

The equity markets remained volatile due to global and domestic developments includingthe political unrest in the Middle East and concerns on global recovery due to possibleimpact on crude oil prices, and continued high levels of inflation in India and resultantmonetary tightening. These factors impacted market sentiment resulting in decline inrealised/unrealised profit on equity investments for fiscal 2011 as compared to fiscal2010.

During fiscal 2010, softening of credit spreads had resulted in reversal of provisionheld against the credit derivatives portfolio amounting to Rs. 3.97 billion. During fiscal2011, there was a profit on credit derivatives portfolio amounting to Rs. 0.15 billion.

At March 31, 2011, we had an outstanding net investment of Rs. 28.31 billion insecurity receipts issued by asset reconstruction companies in relation to sale ofnon-performing assets. At the end of each reporting period, security receipts issued byasset reconstruction companies are valued as per net asset value obtained from the assetreconstruction company from time to time. During fiscal 2011, the impact of these securityreceipts on the income from treasury-related activities was a loss of Rs. 2.31 billioncompared to a loss of Rs. 2.12 billion in fiscal 2010.

Lease and other income

Lease and other income primarily includes dividend from subsidiaries, lease rentals andprofit on sale of fixed assets. Lease and other income decreased from Rs. 6.47 billion infiscal 2010 to Rs. 4.44 billion in fiscal 2011. During fiscal 2010, the Bank and FirstData, a global leader in electronic commerce and payment services, formed a merchantacquiring alliance and a new entity, 81.0% owned by First Data. This entity acquired ICICIBank’s merchant acquiring operations through transfer of assets, primarily comprisingfixed assets, receivables and payables, and assumption of liabilities, for a totalconsideration of Rs. 3.74 billion. We realised a profit of Rs. 2.03 billion from thistransaction in fiscal 2010.

Non-interest expense

The following chart depicts the trends in cost to average assets over the last threeyears.

The following table sets forth, for the periods indicated, the principal components ofnon-interest expense.

Non-interest expenses primarily include employee expenses, depreciation on assets,direct marketing agency expenses and other administrative expenses. In fiscal 2011,non-interest expenses increased by 12.9% from Rs. 58.60 billion in fiscal 2010 to Rs.66.17 billion in fiscal 2011 primarily due to an increase in employee expenses partlyoffset by a decrease in other administrative expenses and a decrease in depreciation onleased assets.

Payments to and provisions for employees

Employee expenses increased by 46.3% from Rs. 19.26 billion in fiscal 2010 to Rs. 28.17billion in fiscal 2011. Employee expenses increased primarily due to addition of employeesof Bank of Rajasthan, annual increase in salaries and provision for payment of performancebonus and performance-linked retention pay during the period and increase in the employeebase, including sales executives, employees on fixed term contracts and interns, from41,068 employees at March 31, 2010 to 56,969 employees at March 31, 2011 (includingemployees of Bank of Rajasthan).

Depreciation

Depreciation on owned property increased by 1.3% from Rs. 4.78 billion in fiscal 2010to Rs. 4.84 billion in fiscal 2011 primarily due to increase in the branch and ATM networkand capitalisation of the Bank’s new building in Hyderabad, offset, in part, by saleof assets of merchant acquiring operations and other properties. Depreciation on leasedassets decreased from Rs. 1.42 billion in fiscal 2010 to Rs. 0.79 billion in fiscal 2011due to a reduction in leased assets.

Other administrative expenses

Other administrative expenses primarily include rent, taxes and lighting, advertisementand publicity, repairs and maintenance and other expenditure. Other operating expensesdecreased by 3.4% from Rs. 31.89 billion in fiscal 2010 to Rs. 30.80 billion in fiscal2011. The decrease in other operating expenses was primarily due to our overall costreduction initiatives. There was a reduction in retail business expenses, law charges andexpenses on account of postage and communication expenses in fiscal 2011 which was partlyoffset by an increase in rent, taxes and lighting and repairs and maintenance expenses dueto an increase in our branch and ATM network. The number of branches and extensioncounters (excluding foreign branches and offshore banking units) increased from 1,707 atMarch 31, 2010 to 2,529 at March 31, 2011. We also increased our ATM network from 5,219ATMs at March 31, 2010 to 6,104 ATMs at March 31, 2011. These figures include branches andATMs of Bank of Rajasthan.

Direct marketing agency expenses

Direct marketing agency expenses increased from Rs. 1.25 billion in fiscal 2010 to Rs.1.57 billion in fiscal 2011. The increase in direct marketing expenses was primarily dueto higher retail loan disbursements. We use marketing agents, called direct marketingagents or associates, for sourcing our retail assets. We include commissions paid to thesedirect marketing agents in non-interest expense. In line with the RBI guidelines, thesecommissions are expensed upfront and not amortised over the life of the loan.

Provisions and contingencies (excluding provisions for tax)

The following tables set forth, for the periods indicated, the components of provisionsand contingencies.

1. Includes restructuring related provision.

Provisions are made by us on standard, sub-standard and doubtful assets at ratesprescribed by RBI. Loss assets and unsecured portions of doubtful assets areprovided/written off as required by extant RBI guidelines. Subject to the minimumprovisioning levels prescribed by RBI, provisions on retail non-performing loans are madeat the borrower level in accordance with our retail assets provisioning policy. Thespecific provisions on retail loans held by us are higher than the minimum regulatoryrequirement.

Provisions and contingencies (excluding provisions for tax) decreased by 47.9% from Rs.43.87 billion in fiscal 2010 to Rs. 22.87 billion in fiscal 2011 primarily due to areduction in provisions for retail non-performing loans. The reduction in provisionagainst retail non-performing loans was primarily due to a sharp reduction in accretion toretail non-performing loans in fiscal 2011.

In the second quarter review of monetary policy for fiscal 2010, RBI directed banks toensure that their total provisioning coverage ratio was not less than 70% by end-September2010. On December 1, 2009, RBI issued detailed guidelines on provisioning coverage foradvances by banks. In March 2010, RBI permitted us to reach the stipulated provisioningcoverage ratio of 70% in a phased manner by March 2011. Our provisioning coverage ratio atMarch 31, 2011 computed as per the above mentioned RBI guidelines was 76.0%.

No additional general provision was required on standard assets during fiscal 2011. RBIguidelines do not permit write-back of excess provisions already made and therefore weheld a cumulative general provision of Rs. 14.80 billion at March 31, 2011 compared to thegeneral provision requirement as per the revised guidelines of about Rs. 10.86 billion.

Tax expense

The income tax expense (including wealth tax) increased by 22.0% from Rs. 13.20 billionin fiscal 2010 to Rs. 16.10 billion in fiscal 2011. The effective tax rate of 23.8% infiscal 2011 was lower compared to the effective tax rate of 24.7% in fiscal 2010 primarilydue to change in mix of taxable profits with a higher component of exempt income in thecurrent fiscal year and tax benefits from the amalgamation of Bank of Rajasthan.

Assets

The following table sets forth, at the dates indicated, the principal components ofassets.

1. Government and other approved securities qualifying for SLR. Banks in India arerequired to maintain a specified percentage, currently 24.0%, of their net demand and timeliabilities by way of liquid assets like cash, gold or approved unencumbered securities.

2. Investments made in RIDF and other such entities in lieu of shortfall in the amountrequired to be lent to certain specified sectors called priority sector as per RBIguidelines.

3. All amounts have been rounded off to the nearest Rs. 10.0 million.

The total assets increased by 11.8% from Rs. 3,634.00 billion at March 31, 2010 to Rs.4,062.34 billion at March 31, 2011 (including Rs. 155.96 billion of Bank of Rajasthan atAugust 12, 2010), primarily due to increase in investments and advances. Investmentsincreased by 11.4% from Rs. 1,208.93 billion at March 31, 2010 to Rs. 1,346.86 billion atMarch 31, 2011. The net advances increased by 19.4% from Rs. 1,812.06 billion at March 31,2010 to Rs. 2,163.66 billion at March 31, 2011.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and balances with RBI and other banks,including money at call and short notice. Cash and cash equivalents decreased from Rs.388.73 billion at March 31, 2010 to Rs. 340.90 billion at March 31, 2011. The decrease wasprimarily due to a decrease in balances with RBI from Rs. 241.73 billion at March 31, 2010to Rs. 171.23 billion at March 31, 2011 due to higher than stipulated CRR balancemaintained at March 31, 2010.

Investments

Total investments increased by 11.4% from Rs. 1,208.93 billion at March 31, 2010 to Rs.1,346.86 billion at March 31, 2011 (including Rs. 70.96 billion of Bank of Rajasthan atAugust 12, 2010), primarily due to an increase in investment in corporate bonds anddebentures by Rs. 125.1 1 billion, RIDF and other related investments in lieu of shortfallin directed lending requirements by Rs. 49.70 billion (including Rs. 21.34 billion of Bankof Rajasthan at August 12, 2010) and investments in commercial paper and certificate ofdeposits by Rs. 31.21 billion. The investment in pass-through certificates decreased byRs. 15.93 billion at March 31, 2011 compared to March 31, 2010. At March 31, 2011, we hadan outstanding net investment of Rs. 28.31 billion in security receipts issued by assetreconstruction companies in relation to sale of non-performing assets compared to Rs.33.94 billion at March 31, 2010. At March 31, 2011, we had a gross portfolio of fundedcredit derivatives of Rs. 10.60 billion and non-funded credit derivatives of Rs. 28.17billion, which includes Rs. 0.22 billion as protection bought by us.

Advances

Net advances increased by 19.4% from Rs. 1,812.06 billion at March 31, 2010 to Rs.2,163.66 billion at March 31, 2011 primarily due to increase in domestic corporate loans,overseas corporate loans and loans taken over from Bank of Rajasthan amounting to Rs.65.28 billion at August 12, 2010. Net retail advances increased by 5.8% from Rs. 790.62billion at March 31, 2010 to Rs. 836.75 billion at March 31, 2011. In rupee terms, netadvances of overseas branches (including offshore banking unit) increased by 22.1% fromRs. 451.37 billion at March 31, 2010 to Rs. 550.97 billion at March 31, 2011.

Fixed and other assets

Fixed assets increased by 47.7% from Rs. 32.13 billion at March 31, 2010 to Rs. 47.44billion at March 31, 2011 (including Rs. 5.15 billion of Bank of Rajasthan at August 12,2010) primarily due to part capitalisation of the Bank’s new building in Hyderabadand increase in the branch network and other offices. Other assets decreased by 14.9% fromRs. 192.15 billion at March 31, 2010 to Rs. 163.48 billion at March 31, 2011.

Liabilities

The following table sets forth, at the dates indicated, the principal components ofliabilities (including capital and reserves).

1. Included in Schedule 4 - "Borrowings" of the balance sheet.

2. Includes application money of Rs. 25.00 billion received towards subordinated debtissued on April 5, 2010.

3. All amounts have been rounded off to the nearest Rs. 10.0 million.

Total liabilities (including capital and reserves) increased by 11.8% from Rs. 3,634.00billion at March 31, 2010 to Rs. 4,062.34 billion at March 31, 2011 (including Rs. 155.96billion of Bank of Rajasthan at August 12, 2010), primarily due to an increase in depositsand borrowings. Deposits increased from Rs. 2,020.17 billion at March 31, 2010 to Rs.2,256.02 billion at March 31, 2011.

Deposits

The following chart depicts the trends in current and savings account deposits over thelast three years.

Deposits increased by 11.7% from Rs. 2,020.17 billion at March 31, 2010 to Rs. 2,256.02billion at March 31, 2011 (including Rs. 134.83 billion of Bank of Rajasthan at August 12,2010). Term deposits increased from Rs. 1,178.01 billion at March 31, 2010 to Rs. 1,239.55billion at March 31, 2011 (including Rs. 88.02 billion of Bank of Rajasthan at August 12,2010), while savings deposits increased from Rs. 532.18 billion at March 31, 2010 to Rs.668.69 billion at March 31, 2011 (including Rs. 34.48 billion of Bank of Rajasthan atAugust 12, 2010) and current deposits increased from Rs. 309.98 billion at March 31, 2010to Rs. 347.78 billion at March 31, 2011 (including Rs. 12.32 billion of Bank of Rajasthanat August 12, 2010). Total deposits at March 31, 2011 formed 67.4% of the funding (i.e.deposits and borrowings, other than preference share capital). During fiscal 2010 andfiscal 2011, we focussed on our strategy of increasing the share of current and savingsaccount deposits in total deposits and re-balancing our funding mix. The current andsavings account deposits increased from Rs. 842.16 billion at March 31, 2010 to Rs.1,016.47 billion at March 31, 2011 (including Rs. 46.80 billion of Bank of Rajasthan atAugust 12, 2010) and the ratio of current and savings account deposits to total depositsincreased from 41.7% at March 31, 2010 to 45.1% at March 31, 2011.

Borrowings (including sub-ordinated debt and preference share capital)

Borrowings increased by 16.2% from Rs. 942.64 billion at March 31, 2010 to Rs. 1,095.54billion at March 31, 2011 primarily due to an increase in call and term borrowings and anincrease in capital-eligible borrowings in the nature of sub-ordinated debt. Thecapital-eligible borrowings in the nature of sub-ordinated debt increased to Rs. 363.91billion at March 31, 2011 compared to Rs. 329.67 billion at March 31, 2010. RBI issuedguidelines, effective April 1, 2010, which require market repurchase transactions(previously accounted for as sale and repurchase) to be accounted for as borrowing andlending. The transactions with RBI under LAF which are accounted for as sale and purchasetransactions.

Equity share capital and reserves

Equity share capital and reserves increased from Rs. 516.18 billion at March 31, 2010to Rs. 550.91 billion at March 31, 2011 (including statutory reserve of Rs. 2.00 billiontaken over from Bank of Rajasthan at August 12, 2010) primarily due to allotment of sharesto the shareholders of Bank of Rajasthan and annual accretion to reserves out of profit.Excess of paid-up value of equity shares issued over the fair value of the net assetsacquired in the amalgamation and amalgamation expenses, amounting to Rs. 2.10 billion havebeen adjusted against the securities premium account.

Off balance sheet items, commitments and contingencies

The following table sets forth, for the periods indicated, the principal components ofcontingent liabilities.

We enter into foreign exchange forwards, options, swaps and other derivative productsto enable customers to transfer, modify or reduce their foreign exchange and interest raterisk and to manage our own interest rate and foreign exchange positions. We manage ourforeign exchange and interest rate risk with reference to limits set by RBI as well asthose set internally. An interest rate swap does not entail exchange of notional principaland the cash flow arises on account of the difference between interest rate pay andreceive legs of the swaps which is generally much smaller than the notional principal ofthe swap. With respect to the transactions entered into with customers, we generally enterinto off-setting transactions in the inter-bank market. This results in generation of ahigher number of outstanding transactions and hence a large value of gross notionalprincipal of the portfolio, while the net market risk is low. For example, if atransaction entered into with a customer is covered by an exactly opposite transactionentered into with counter-party, the net market risk of the two transactions will be zerowhereas the notional principal which is reflected as an off-balance sheet item will be thesum of both the transactions.

As a part of project financing and commercial banking activities, we have issuedguarantees to support regular business activities of clients. These generally representirrevocable assurances that we will make payments in the event that the customer fails tofulfill its financial or performance obligations. Financial guarantees are obligations topay a third party beneficiary where a customer fails to make payment towards a specifiedfinancial obligation. Performance guarantees are obligations to pay a third partybeneficiary where a customer fails to perform a non-financial contractual obligation. Theguarantees are generally for a period not exceeding ten years The credit risks associatedwith these products, as well as the operating risks, are similar to those relating toother types of financial instruments. In majority of the cases, we have collateralavailable to reimburse potential losses on the guarantees. Cash margins available toreimburse losses realised under guarantees amounted to Rs. 24.39 billion at March 31, 2011and Rs. 17.69 billion at March 31, 2010. Other property or security may also be availableto us to cover losses under guarantees.

The table below sets forth, for the periods indicated, the principal components ofguarantees.

1. Outstanding is net of cash margin.

At March 31, 2011, total guarantees amounted to Rs. 826.27 billion comprising Rs.230.27 billion of financial guarantees and Rs. 596.00 billion of performance guarantees.

Claims against the Bank, not acknowledged as debts represents demands made in certaintax and legal matters against the Bank in the normal course of business. In accordancewith our accounting policy and Accounting Standard 29, we have reviewed the demands andclassified such disputed tax issues as possible obligation based on legal opinion/judicial precedents. No provision in excess of provisions already made in the financialstatements is considered necessary.

We are obligated under a number of capital contracts. Capital contracts are job ordersof a capital nature, which have been committed. Estimated amounts of contracts remainingto be executed on capital account in domestic operations aggregated to Rs. 3.58 billion atMarch 31, 2011 compared to Rs. 5.28 billion at March 31, 2010 primarily on account of newbranches and capitalisation of the Bank’s new building in Hyderabad.

Capital Resources

We actively manage our capital to meet regulatory norms and current and future businessneeds considering the risks in our businesses, expectations of rating agencies,shareholders and investors and the available options for raising capital. Our capitalmanagement framework is administered by the Finance Group and the Risk Management Groupunder the supervision of the Board and the Risk Committee. The capital adequacy positionand assessment is reported to the Board and the Risk Committee periodically.

Regulatory capital

We are subject to the Basel II capital adequacy guidelines stipulated by RBI witheffect from March 31, 2008. RBI guidelines on Basel II require us to maintain a minimumcapital to risk-weighted assets ratio of 9.0% and a minimum Tier-1 capital adequacy ratioof 6.0% on an ongoing basis. Under Pillar 1 of the RBI guidelines on Basel II, we followthe Standardised approach for measurement of credit and market risks and Basic Indicatorapproach for measurement of operational risk.

RBI has also stipulated that banks shall maintain capital at higher of the minimumcapital required as per Basel II or 80% of the minimum capital required as per Basel I. AtMarch 31, 2011, the prudential floor at 80% of the minimum capital requirement under BaselI was Rs. 283.84 billion and was lower than the minimum capital requirement of Rs. 307.35billion under Basel II. Hence, we have maintained capital adequacy at March 31, 2011 asper the Basel II norms.

The following table sets forth, at the dates indicated, the capital adequacy ratioscomputed in accordance with the RBI guidelines on Basel I and Basel II.

Movement in our capital funds and risk weighted assets from March 31, 2010 to March 31,2011 (as per RBI guidelines on Basel II)

During the year ended March 31, 2011, capital funds increased by Rs. 96.22 billionprimarily due to profit after tax earned for the year of Rs. 51.51 billion, incrementalnotional tax payable on special reserves of Rs. 1.74 billion, the issuance of lower TierII debt capital of Rs. 59.79 billion and reduction in deduction on account ofsecuritization exposures of Rs. 25.06 billion, offset, in part, by an increase indeduction on account of deferred tax assets of Rs. 6.14 billion and proposed dividend forthe year.

Credit risk RWA increased by Rs. 424.20 billion from Rs. 2,485.59 billion at March 31,2010 to Rs. 2,909.79 billion at March 31, 2011 primarily due to increase of Rs. 310.19billion in RWA for loans and advances and increase of Rs. 115.99 billion in RWA foroff-balance sheet credit exposures (including increase of Rs. 105.99 billion in RWA fornon-fund based facilities and increase of Rs. 29.39 billion in RWA for undrawncommitments).

Market risk RWA increased by Rs. 34.46 billion from Rs. 221.06 billion at March 31,2010 to Rs. 255.52 billion at March 31, 2011. The general market risk RWA increased by Rs.42.86 billion (capital charge of Rs. 3.86 billion) primarily due to increase in theinvestment book and duration of interest rate related instruments.

The operational risk RWA at March 31, 2011 was Rs. 249.67 billion (capital charge ofRs. 22.47 billion). The operational risk capital charge is computed based on 15% ofaverage of previous three financial years’ gross income and is revised on an annualbasis at June 30.

Internal assessment of capital

Our capital management framework includes a comprehensive internal capital adequacyassessment process conducted annually, which determines the adequate level ofcapitalisation necessary to meet regulatory norms and current and future business needs,including under stress scenarios. The internal capital adequacy assessment process isformulated at both the standalone bank level and the consolidated group level. The processencompasses capital planning for a certain time horizon, identification and measurement ofmaterial risks and the relationship between risk and capital.

The capital management framework is complemented by the risk management framework,which includes a comprehensive assessment of all material risks. Stress testing, which isa key aspect of the capital assessment process and the risk management framework, providesan insight into the impact of extreme but plausible scenarios on the risk profile andcapital position. Based on our Board-approved stress testing framework, we conduct stresstests on our various portfolios and assess the impact on our capital ratios and theadequacy of our capital buffers for current and future periods. We periodically assess andrefine our stress tests in an effort to ensure that the stress scenarios capture materialrisks as well as reflect possible extreme market moves that could arise as a result ofmarket conditions. Internal capital adequacy assessment process at the consolidated levelintegrates the business and capital plans and the stress testing results of the groupentities.

Based on the internal capital adequacy assessment process, we determine our capitalneeds and the optimum level of capital by considering the following in an integratedmanner:

• strategic focus, business plan and growth objectives;

• regulatory capital requirements as per RBI guidelines;

• assessment of material risks and impact of stress testing;

• perception of credit rating agencies, shareholders and investors;

• future strategy with regard to investments or divestments in subsidiaries; and

• evaluation of options to raise capital from domestic and overseas markets, aspermitted by RBI from time to time.

We formulate our internal capital level targets based on the internal capital adequacyassessment process and endeavour to maintain the capital adequacy level in accordance withthe targeted levels at all times.

Basel III

In order to strengthen the resilience of the banking sector to potential future shocks,together with ensuring adequate liquidity in the banking system, the Basel Committee onBanking Supervision (BCBS) issued the Basel III proposals on December 17, 2009. Followinga consultation phase on these proposals, the final set of Basel III rules were issued onDecember 16, 2010. The Basel III rules on capital consist of measures on improving thequality, consistency and transparency of capital, enhancing risk coverage, introducing asupplementary leverage ratio, reducing pro-cyclicality and promoting countercyclicalbuffers, and addressing systemic risk and interconnectedness. The Basel III rules onliquidity consist of a measure of short-term liquidity coverage ratio aimed at buildingliquidity buffers to meet stress situations, and a measure of long-term net stable fundingratio aimed at promoting longer term structural funding. Some of the Basel III measureswill be phased-in between January 1, 2013 and January 1, 2019. BCBS has stipulated aphased implementation of the Basel III framework between January 1, 2013 and January 1,2019

Guidlines on Basel III framework for the Indian banking system are awaited from RBI. Wecontinue to monitor developments on the Basel III framework and believe that our currentrobust capital adequacy position, adequate headroom currently available to raisehybrid/debt capital, demonstrated track record of access to domestic and overseas marketsfor capital raising and adequate flexibility in our balance sheet structure and businessmodel will enable us to adapt to the Basel III framework along with any amendments by RBI,as and when they are implemented.

ASSET QUALITY AND COMPOSITION

Loan Concentration

We follow a policy of portfolio diversification and evaluate our total financing in aparticular sector in light of our forecasts of growth and profitability for that sector.Between 2003 and 2006, the banking system as a whole saw significant expansion of retailcredit, with retail loans contributing for a major part of overall systemic credit growth.Accordingly, during these years, we increased our focus on retail finance. In view of highasset prices and the increase in interest rates since the second half of fiscal 2008, wefollowed a conscious strategy of moderation of retail disbursements, especially in theunsecured retail loans segment. Following this trend, our gross retail finance loans andadvances declined from 49.3% of our total gross loans and advances at year-end fiscal 2009to 44.4% at year-end fiscal 2010 and further to 39.7% at March 31, 2011.

Our Credit Risk Management Group monitors all major sectors of the economy andspecifically tracks sectors in which we have loans outstanding. We seek to respond to anyeconomic weakness in an industrial segment by restricting new exposures to that segmentand any growth in an industrial segment by increasing new exposures to that segment,resulting in active portfolio management.

The following tables set forth, at the dates indicated, the composition of our grossadvances (net of write-offs).

1. Includes home loans, automobile loans, commercial business loans, two wheeler loans,personal loans and credit cards. Also includes dealer funding portfolio and developerfinancing portfolio.

2. Other industries primarily include automobiles, cement, drugs and pharmaceuticals,FMCG, gems and jewellery, manufacturing products excluding metal, metal and products(excluding iron and steel) and shipping etc.

The following table sets forth, at the dates indicated, the composition of our gross(net of write-offs) outstanding retail finance portfolio.

1. Includes developer financing.

2. Includes dealer financing portfolio.

Directed Lending

RBI requires banks to lend to certain sectors of the economy. Such directed lendingcomprises priority sector lending, export credit and housing finance.

RBI guidelines require banks to lend 40.0% of their adjusted net bank credit, or creditequivalent amount of off-balance sheet exposure, whichever is higher, to certain specifiedsectors called priority sectors. The definition of adjusted net bank credit does notinclude certain exemptions and includes certain investments and is computed with referenceto the outstanding amount at March 31 of the previous year. Priority sector includes smallenterprises, agricultural sector, food and agri-based industries, small businesses andhousing finance up to certain limits. Out of the 40.0%, banks are required to lend aminimum of 18.0% of their adjusted net bank credit to the agriculture sector and thebalance to certain specified sectors, including small enterprises (defined as enterprisesengaged in manufacturing/production, processing and services businesses with a certainlimit on investment in plant and machinery), small road and water transport operators,small businesses, professional and self-employed persons, all other service enterprises,micro credit, education loans and housing loans up to Rs. 2.0 million to individuals forpurchase/construction of a dwelling unit per family.

In its letter dated April 26, 2002 granting its approval for the amalgamation of ICICILimited and ICICI Bank Limited, RBI stipulated that since the loans of erstwhile ICICILimited (ICICI) transferred to us were not subject to the priority sector lendingrequirement, we are required to maintain priority sector lending of 50.0% of our adjustednet bank credit on the residual portion of our advances (i.e. the portion of our totaladvances excluding advances of ICICI at year-end fiscal, 2002, referred to as"residual adjusted net bank credit"). This method of computation will applyuntil such time as our aggregate priority sector advances reach a level of 40.0% of ouradjusted net bank credit or review of this stipulation by RBI. As required by RBIguidelines, we are also required to lend 10.0% of the residual adjusted net bank credit orcredit equivalent amount of off-balance sheet exposures, whichever is higher, to weakersections. RBI’s existing instructions on sub-targets under priority sector lendingand eligibility of certain types of investments/funds for qualification as priority sectoradvances apply to us.

We are required to comply with the priority sector lending requirements at the last‘reporting Friday’ of each fiscal year.

The shortfall in the amount required to be lent to the priority sectors and weakersections may be required to be deposited with government sponsored Indian developmentbanks like the National Bank for Agriculture and Rural Development, the Small IndustriesDevelopment Bank of India and the National Housing Bank. These deposits have a maturity ofup to seven years and carry interest rates lower than market rates. At year-end fiscal2011, our total investments in such bonds were Rs. 150.80 billion (including Rs. 21.34billion of Bank of Rajasthan at August 12, 2010).

At March 25, 2011, the last reporting Friday for fiscal 2011, our priority sector loanswere Rs. 551.73 billion, constituting 53.1% of our residual adjusted net bank creditagainst the requirement of 50.0%. At that date, qualifying agriculture loans were 14.0% ofour residual adjusted net bank credit as against the requirement of 18.0%. Our advances toweaker sections were Rs. 34.43 billion constituting 3.3% of our residual adjusted net bankcredit against the requirement of 10.0%. The Bank has based its classifications ofpriority sector loans, including loans to weaker sections and agriculture loans, inaccordance with the guidelines and certain clarifications received from RBI during theyear.

Classification of loans

We classify our assets as performing and non-performing in accordance with RBIguidelines. Under these guidelines, an asset is classified as non-performing if any amountof interest or principal remains overdue for more than 90 days, in respect of term loans.In respect of overdraft or cash credit, an asset is classified as non-performing if theaccount remains out of order for a period of 90 days and in respect of bills, if theaccount remains overdue for more than 90 days. In compliance with regulations governingthe presentation of financial information by banks, we report non-performing assets net ofcumulative write-offs in our financial statements.

RBI has separate guidelines for restructured loans. A fully secured standard asset canbe restructured by reschedulement of principal repayments and/or the interest element, butmust be separately disclosed as a restructured asset. The diminution in the fair value ofthe loan, if any, measured in present value terms, is either written off or a provision ismade to the extent of the diminution involved. Similar guidelines apply to sub-standardloans. The substandard or doubtful accounts which have been subject to restructuring,whether in respect of principal installment or interest amount are eligible to be upgradedto the standard category only after the specified period, i.e., a period of one year afterthe date when first payment of interest or of principal, whichever is earlier, falls due,subject to satisfactory performance during the period.

The following table sets forth, at March 31, 2010 and March 31, 2011, informationregarding the classification of our gross customer assets (net of write-offs, interestsuspense and derivatives income reversal).

1. Customer assets include advances, lease receivables and credit substitutes likedebentures and bonds but exclude preference shares.

2. All amounts have been rounded off to the nearest Rs. 10.0 million.

The following table sets forth, at the dates indicated, information regarding ournon-performing assets (NPAs).

1. Net of write-offs, interest suspense and derivatives income reversal.

2. Customer assets include advances and credit substitutes like debentures and bondsbut exclude preference shares.

3. All amounts have been rounded off to the nearest Rs. 10.0 million.

At March 31, 2011, the gross non-performing assets (net of write-offs, interestsuspense and derivatives income reversal) were Rs. 101.14 billion compared to Rs. 96.27billion at March 31, 2010. The increased level of non-performing assets was after takinginto consideration the additions to gross NPA (Rs. 4.11 billion) arising out of theamalgamation of Bank of Rajasthan with effect from close of business at August 12, 2010.Net non-performing assets were Rs. 24.58 billion at March 31, 2011 compared to Rs. 39.01billion at March 31, 2010. The ratio of net non-performing assets to net customer assetsdecreased from 1.87% at March 31, 2010 to 0.94% at March 31, 2011. During fiscal 2011, wewrote-off NPAs, including retail NPAs, with an aggregate outstanding of Rs. 2.29 billionagainst Rs. 28.48 billion during fiscal 2010.

The following chart depicts the trends in the net non-performing assets ratio over thelast three years.

Our provision coverage ratio (i.e. total provisions made against non-performing assetsas a percentage of gross non-performing assets), at year-end fiscal 2011 was 76.0%. Wehave been permitted by RBI to achieve the stipulated level of provision coverage ratio of70% in a phased manner by March 31, 2011, which was achieved at December 31, 2010. AtMarch 31, 2011, total general provision held against standard assets was Rs. 14.80 billioncompared to the general provision requirement as per the RBI guidelines of about Rs. 10.86billion. The excess provision was not reversed in line with the RBI guidelines.

At March 31, 2011, the net non-performing loans in the retail portfolio were 1.5% ofnet retail loans as compared with 3.1% at March 31, 2010. The decrease in the ratio wasprimarily on account of sharp decline in accretion to retail NPAs and higher provisioningagainst retail loans. At March 31, 2011, the net non-performing loans in thecollateralised retail portfolio were 1.2% of the net collateralised retail loans and netnon-performing loans in the non-collateralised retail portfolio (including overdraftfinancing against automobiles) were about 5.6% of net non-collateralised retail loans.

Our aggregate investments in security receipts issued by asset reconstruction companieswere Rs. 28.31 billion at March 31, 2011 as compared to Rs. 33.94 billion at March 31,2010.

Classification of Non-Performing Assets by Industry

The following table sets forth, at March 31, 2010 and March 31, 2011, the compositionof gross non-performing assets by industry sector.

1. Includes home loans, automobile loans, commercial business loans, two wheeler loans,personal loans and credit cards. Also includes NPAs in dealer funding and developerfinance portfolios.

2. Other industries primarily include construction, drugs and pharmaceuticals,agriculture and allied activities, FMCG, gems and jewellery, manufacturing productsexcluding metal, crude petroleum/refining and petrochemicals, mining, cement, etc.

3. All amounts have been rounded off to the nearest Rs. 10.0 million.

Segment Information

RBI in its guidelines on "segmental reporting" has stipulated specifiedbusiness segments and their definitions, for the purposes of public disclosures onbusiness information for banks in India.

The standalone segmental report for the year ended March 31, 2011, based on thesegments identified and defined by RBI, has been presented as follows:

• Retail Banking includes exposures of the Bank, which satisfy the four qualifyingcriteria of ‘regulatory retail portfolio’ as stipulated by the RBI guidelines onthe Basel II framework.

• Wholesale Banking includes all advances to trusts, partnership firms, companiesand statutory bodies, by the Bank which are not included in the Retail Banking segment, asper the RBI guidelines for the Bank.

• Treasury includes the entire investment portfolio of the Bank.

• Other Banking includes hire purchase and leasing operations and other items notattributable to any particular business segment of the Bank.

Framework for Transfer Pricing

All liabilities are transfer priced to a central treasury unit, which pools all fundsand lends to the business units at appropriate rates based on the relevant maturity ofassets being funded after adjusting for regulatory reserve requirements and directedlending requirements.

Retail Banking Segment

The loss in the retail banking segment decreased from Rs. 13.34 billion in fiscal 2010to Rs. 5.14 billion in fiscal 2011, primarily due to decline in provisions for loan lossesin the unsecured portfolio, partly offset by decline in net interest income and feeincome.

Net interest income decreased by 11.7% from Rs. 37.59 billion in fiscal 2010 to Rs.33.20 billion in fiscal 2011 primarily due to reduction in the retail loan portfolio andthe impact of increased cost of savings account deposits with effect from April 1,2010.

Non-interest income decreased by 19.2% from Rs. 26.19 billion in fiscal 2010 to Rs.21.16 billion in fiscal 2011, primarily due to reduction in credit card related feesfollowing our conscious strategy of reducing the portfolio. Further, during fiscal 2010,we had sold our merchant acquiring operations through a transfer of assets, primarilycomprising fixed assets, receivables and payables and assumption of liabilities to ICICIMerchant Services resulting in profit of Rs. 2.03 billion in our Retail Banking segment.Further, the fees from distribution of third-party products were impacted by regulatorychanges in the life insurance sector which led to decline in market volumes, changes inproduct mix and lower distributor payouts.

Provisions decreased by 58.9% from Rs. 33.56 billion in fiscal 2010 to Rs. 13.81billion in fiscal 2011, primarily due to decline in provisions for loan losses in theunsecured retail portfolio. We have been taking various measures to contain thenon-performing asset (NPA) accretion in retail portfolio over the last two years. This hasreflected in a sharp reduction in provision requirements.

Wholesale Banking Segment

Profit before tax of the wholesale banking segment increased from Rs. 36.45 billion infiscal 2010 to Rs. 49.00 billion in fiscal 2011 primarily due to increase in fee incomeand decline in provisions offset, in part, by increase in non-interest expenses.

Net interest income increased by 8.5% from Rs. 31.07 billion in fiscal 2010 to Rs.33.72 billion in fiscal 2011 primarily due to higher business volumes.

Non-interest income increased by 41.9% from Rs. 28.08 billion in fiscal 2010 to Rs.39.85 billion in fiscal 2011. Fee income increased due to our increased participation infinancing to corporates for their term loan, working capital and project financingrequirements. During the year, there was an increase in loan processing related fees andtransaction banking related fees from corporate clients.

Provisions decreased from Rs. 10.34 billion in fiscal 2010 to Rs. 6.34 billion infiscal 2011. Provisions were higher for fiscal 2010 on account of the significantly higherrestructuring of corporate loans during the period.

Treasury Banking Segment

Profit before tax of the treasury segment decreased from Rs. 27.89 billion in fiscal2010 to Rs. 22.01 billion in fiscal 2011, primarily due to lower gains fromtreasury-related activities, offset, in part, by increase in net interest income.

Other Banking Segment

Profit before tax of other banking segment decreased from Rs. 2.45 billion in fiscal2010 to Rs. 1.74 billion in fiscal 2011.

CONSOLIDATED FINANCIALS AS PER INDIAN GAAP

The consolidated profit after tax including the results of operations of oursubsidiaries and other consolidating entities increased from Rs. 46.70 billion in fiscal2010 to Rs. 60.93 billion in fiscal 2011 mainly due to improved financial performance ofICICI Bank and ICICI Prudential Life Insurance Company Limited offset, in part, by declinein profits of certain subsidiaries and net loss of ICICI Lombard General Insurance CompanyLimited. The consolidated return on average equity increased from 9.6% in fiscal 2010 to11.6% in fiscal 2011.

Profit after tax of ICICI Bank UK PLC decreased marginally from Rs. 1.76 billion infiscal 2010 to Rs. 1.67 billion in fiscal 2011 primarily due to decrease in fee income,lower mark-to-market (MTM) gains on derivatives and lower gains realised on buyback ofbonds in fiscal 2011, offset, in part, by increase in net interest income due to anincrease in net interest margin and lower operating expenses.

Profit after tax of ICICI Bank Canada decreased marginally from Rs. 1.54 billion infiscal 2010 to Rs. 1.45 billion in fiscal 2011 primarily due to decrease in non-interestincome offset, in part, by increase in net interest income due to an increase in netinterest margin and lower operating expenses.

Profit after tax of ICICI Bank Eurasia Limited Liability Company decreased from Rs.0.53 billion in fiscal 2010 to Rs. 0.21 billion in fiscal 2011 primarily due to decreasein net interest income, non-interest income and reduction in overall business levels.

Profit after tax of ICICI Prudential Life Insurance Company Limited increased from Rs.2.58 billion in fiscal 2010 to Rs. 8.08 billion in fiscal 2011 due to an increase in netpremium earned, fund management fees and policy fees and lower operating and commissionexpenses. Net premium earned increased by 8.1% from Rs. 164.76 billion in fiscal 2010 toRs. 178.17 billion in fiscal 2011 primarily due to increase in single premium businessfrom Rs. 2.75 billion in fiscal 2010 to Rs. 21.69 billion in fiscal 2011. Operatingexpenses (other than staff cost) decreased by 18.6% from Rs. 14.17 billion in fiscal 2010to Rs. 11.53 billion in fiscal 2011 due to space rationalisation initiatives, decrease inpolicy related expenses and other branch related expenses.

ICICI Lombard General Insurance Company Limited had a loss of Rs. 0.80 billion infiscal 2011 as compared to a profit of Rs. 1.44 billion in fiscal 2010. In accordance withIRDA guidelines, ICICI Lombard General Insurance Company Limited, together with all othergeneral insurance companies participates in the Indian Motor Third Party Insurance Pool(‘the Pool’), administered by the General Insurance Corporation of India(‘GIC’) from April 1, 2007. The Pool covers reinsurance of third party risks ofcommercial vehicles. Based on an analysis of the performance of the Pool by an independentconsultant, IRDA has instructed all general insurance companies to provide at a higherprovisional loss ratio of 153.0% (for each of the four years from fiscal 2008 to fiscal2011) in the financial results for fiscal 2011. Accordingly, the loss before tax of ICICIGeneral for fiscal 2011 includes the impact of the additional pool losses of Rs. 2.72billion.

Profit after tax of ICICI Securities Limited decreased marginally from Rs. 1.23 billionin fiscal 2010 to Rs. 1.13 billion in fiscal 2011 primarily due to decrease in brokerageincome on account of market conditions and increase in staff cost.

Profit after tax of ICICI Securities Primary Dealership Limited decreased from Rs. 0.85billion in fiscal 2010 to Rs. 0.53 billion in fiscal 2011 as fixed income markets offeredlimited opportunities for trading profits during fiscal 2011 and higher funding costsreduced the net interest income.

Profit after tax of ICICI Home Finance Company Limited increased from Rs. 1.61 billionin fiscal 2010 to Rs. 2.33 billion in fiscal 2011 primarily due to increase in netinterest income following an increase in net interest margin and decrease in staff cost,administrative costs and lower provisions. Provisions on loans and advances decreased by20.7% from Rs. 0.29 billion in fiscal 2010 to Rs. 0.23 billion in fiscal 2011 primarilydue to decrease in the size of the loan book.

Profit after tax of ICICI Prudential Asset Management Company Limited decreased fromRs. 1.28 billion in fiscal 2010 to Rs. 0.72 billion in fiscal 2011 primarily due to thedecrease in management fees on account of decrease in average assets under management andhigher administrative expenses.

Profit after tax of ICICI Venture Funds Management Company Limited increased from Rs.0.51 billion in fiscal 2010 to Rs. 0.74 billion in fiscal 2011 primarily due to increasein management fees on account of increase in carry income from funds and lower marketingand financial expenses in fiscal 2011.

Consolidated assets of the Bank and its subsidiaries and other consolidating entitiesincreased from Rs. 4,893.47 billion at year-end fiscal 2010 to Rs. 5,337.68 billion atMarch 31, 2011. Consolidated advances of the Bank and its subsidiaries increased from Rs.2,257.78 billion at March 31, 2010 to Rs. 2,560.19 billion at March 31, 2011.

The following table sets forth, for the periods indicated, the profit/(loss) of ourprincipal subsidiaries.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Convergence with International Financial Reporting Standards (IFRS), issued by theInternational Accounting Standards Board (IASB) is gaining the attention of companies,regulators and investing communities across the world.

Based on the recommendations of a Core Group set up to facilitate IFRS convergence inIndia, the Ministry of Corporate Affairs (MCA), in consultation with RBI, has announcedthe approach and timelines for achieving convergence by financial institutions includingbanks, insurance companies and NBFCs. As per the roadmap, all scheduled commercial bankswill need to convert their opening balance sheet as at April 1, 2013 in compliance withthe IFRS converged Indian Accounting Standards. MCA has recently placed 35 IndianAccounting Standards (IND AS), converged with IFRS, on its website.

Currently, IASB has undertaken a project which will replace the current standards onfinancial instruments, particularly IAS 39, in a phased manner. As a part of this project,IASB has issued IFRS 9 – "Financial Instruments" which introduces a newclassification and measurement regime for financial assets within its scope. Additionally,the IASB has released exposure drafts on various aspects related to financial instrumentswhich include ‘amortised cost and impairment of financial assets’,‘derecognition’, ‘fair value option for financial liabilities’,‘hedge accounting’, ‘asset and liability offsetting’ and ‘fairvalue measurement’. These revisions are expected to be significantly different fromexisting IAS 39 as issued by IASB and AS 30 as issued by ICAI. To enable the Indian banksto transition to IFRS converged Indian Accounting Standards, RBI is working actively withthe banks in such areas as identifying the major impact areas for banking industry, impacton existing regulatory guidelines and arriving at an industry-wide common approach totransition issues to the extent possible.

Currently, we report our financials under Indian GAAP and also report a reconciliationof shareholders’ equity and net profit under Indian GAAP to US GAAP. We are awaitingfurther clarity on the final transition to IFRS in order to assess the impact on ouraccounting systems and processes and financial reporting.