Management's Discussion & Analysis

BUSINESS ENVIRONMENT

The global economic environment remained subdued during fiscal 2016. The U.S. Federal Reserve raised interest rates by 25 basis points in December 2015, while other advanced and emerging economies continued to pursue an accommodative monetary policy. The U.S. Federal Reserve thereafter kept interest rates stable in the subsequent monetary policy statement and indicated that the rate increase would be gradual. There was a slowdown in economic growth in China to 6.9% in calendar year 2015 compared to 7.3% in calendar year 2014, and a debrciation of the Chinese currency. Commodity prices continued to weaken given low demand and excess supply. The price of the benchmark Brent crude fell from US$ 55 per barrel at end-March 2015 to a low of US$ 28 per barrel around mid-January 2016 but recovered thereafter to US$ 40 per barrel at end-March 2016. Metal prices also declined during the year. These developments led to significant volatility in global financial markets. Several emerging market economies saw a debrciation of their currencies during the period.

In India, economic activity during the first nine months of fiscal 2016 showed a gradual improvement. India's gross domestic product grew by 7.5% during the first nine months of fiscal 2016, compared to growth of 7.4% during the first nine months of fiscal 2015. As per industry-wise growth estimates (gross value added), the agriculture sector grew by 0.6%, the industrial sector by 7.4% and the services sector by 9.2% during the first nine months of fiscal 2016 compared to 0.3%, 5.9% and 10.7%, respectively, during the corresponding period of fiscal 2015.

 Inflation remained moderate during fiscal 2016. Retail inflation, as measured by the Consumer Price Index (CPI), eased from 5.3% in March 2015 to a low of 3.7% in July-August 2015, and increased subsequently to 4.8% in March 2016. Core CPI inflation, excluding food and fuel products, increased from 4.2% in March 2015 to 4.7% in March 2016. Inflation, as measured by the Wholesale Price Index (WPI), remained negative through fiscal 2016 and was -0.9% in March 2016.

With inflation remaining within its target range, Reserve Bank of India (RBI) reduced the repo rate by 75 basis points during fiscal 2016 with a 25 basis points reduction from 7.50% to 7.25% in June 2015 and another 50 basis points reduction to 6.75% in September 2015. This took the cumulative reduction in the repo rate since January 2015, when the policy rate reduction cycle began, to 125 basis points. In April 2016, RBI has reduced the repo rate by a further 25 basis points to 6.50%.

Trends in merchandise trade remained muted during fiscal 2016. Exports declined by 15.6% to US$ 261.12 billion and imports declined by 15.3% to US$ 379.60 billion. The decline was primarily due to continued weak global demand and low global commodity prices. India's Current Account Deficit (CAD) was at 1.4% of gross domestic product during the first nine months of fiscal 2016. Foreign Direct Investment (FDI) improved to US$ 33.66 billion during the first nine months of fiscal 2016 compared to US$ 24.80 billion during the corresponding period of fiscal 2015. There was a net outflow of investments by Foreign Portfolio Investors (FPIs) of US$ 3.99 billion during the first nine months of fiscal 2016, with a net outflow of US$ 4.31 billion in equity markets and a net inflow of US$ 0.32 billion in debt markets. The benchmark S&P BSE Sensex declined by 9.4% during fiscal 2016 to close at 25,342. The Rupee debrciated from Rs. 62.3 per U.S. dollar at March 31, 2015 to Rs. 66.4 per U.S. dollar at March 31, 2016. Yields on the benchmark 10-year government securities remained in the range of 7.7% to 7.8% for most part of the year but eased towards the end of the year to 7.4% at March 31, 2016.

During fiscal 2016, the government announced several policy measures. A composite cap on foreign investments was introduced which is applicable across all sectors and has brought different kinds of foreign investments under a single combined limit. Further, the list of economic activities eligible for foreign investment under the automatic route was expanded. In the area of financial inclusion, apart from the Pradhan Mantri Jan Dhan Yojana which was announced in fiscal 2015, the government announced several new schemes including pension and insurance schemes and a financial scheme for micro, small and medium enterprises. A scheme to support start-ups was also announced. During the year, the first 20 cities to be converted into Smart Cities were identified. With regard to the financial sector, the 'Indradhanush' scheme for public sector banks was announced. Key proposals announced in the Union Budget for fiscal 2017 included a plan to introduce a Combrhensive Code on Resolution of Financial Firms which together with the Bankruptcy Code is expected to provide a strong resolution framework for banks; operationalising the Bank Board Bureau; and allowing foreign investment in the insurance and pension sectors under the automatic route.

With regard to trends in banking, non-food credit growth remained subdued during fiscal 2016. Growth moderated from 12.7% year-on-year at April 3, 2015 to 10.3% at April 1, 2016. Credit growth was mainly driven by the retail segment. Based on sector-wise credit deployment, growth in credit to industry was 2.7%, services 9.1%, retail 19.4% and agriculture 15.3% year-on-year at March 18, 2016. Deposit growth in the banking system also remained muted in the range of 9-12% during the year. Total deposits grew by 9.7% year-on-year at April 1, 2016 compared to a growth of 12.1% at April 3,2015. Demand deposits grew by 15.0% year-on-year at April 1, 2016 compared to a growth of 23.7% at April 3, 2015. Time deposits grew by 9.1% year-on-year at April 1, 2016 compared to a growth of 10.9% at April 3, 2015.

The operating environment for the Indian corporate sector continued to remain challenging in view o f t he subdued global scenario, gradual nature of the domestic economic recovery, continued weak corporate investment activity, delays and shortfalls in cash flow generation from investments and high leverage. The decline in commodity prices had an impact on borrowers in commodity-linked sectors, such as iron and steel. These conditions led to increasing levels of non performing loans for the Indian banking sector.

With regard to performance of the insurance sector, the first year retail brmium under written in the life insurance sector (on weighted received brmium basis) grew by 8.1% to Rs. 440.76 billion during fiscal 2016 compared to Rs. 407.65 billion in fiscal 2015. Gross brmium o f t h e non-life insurance sector (excluding specialised insurance institutions) grew by 13.6% to Rs. 915.72 billion during fiscal 2016 compared to Rs. 805.84 billion during fiscal 2015. The average assets under management of mutual funds increased by 13.9% from Rs. 11,886.90 billion for the three months ended March 31, 2015 to Rs. 13,534.43 billion for the three months ended March 31, 2016.

Some important regulatory measures announced during fiscal 2016 were:

• In April 2015, RBI issued revised guidelines on priority sector lending, based on the recommendations of the internal working group set up to revisit the priority sector lending guidelines. These revised priority sector guidelines are applicable from fiscal 2016. The overall target for priority sector lending would continue to be 40.0% of adjusted net bank credit. Sub-targets for direct and indirect lending to agriculture were combined and sub-targets of 8.0% for lending to small and marginal farmers and 7.5% lending target to micro-enterprises were introduced. These sub targets are to be achieved in a phased manner by March 2017. Sectors qualifying for priority sector lending have been broadened to include medium-size enterprises, social infrastructure and renewable energy. Priority sector lending achievements will be evaluated on a quarterly average basis from fiscal 2017. According to the guidelines, foreign banks with less than 20 branches will also now be required to meet priority sector lending targets of 40.0% of adjusted net bank credit, on par with domestic banks and foreign banks with 20 or more branches by fiscal 2020.

Further, in July 2015, RBI directed banks to maintain direct lending to non-corporate farmers at the banking system's average level for the last three years, failing which banks will attract penalties for the shortfall. The banking system's average level will be notified at the beginning of each year. The target for fiscal 2016 was set at 11.51%;

• In April 2015, RBI allowed banks to introduce an early withdrawal facility in term deposits as a distinguishing feature for offering differential rates of interest. All term deposits of individuals of Rs. 1.5 million and below will have a brmature withdrawal facility. For other term deposits, customers have the option to choose between term deposits either with or without brmature withdrawal facility;

• In May 2015, RBI allowed banks to sbrad the shortfall from the sale of non-performing assets to asset reconstruction companies over a period of two years, in the event the sale value is lower than the net book value. This dispensation is available only for non-performing assets sold upto March 31,2016;

• In May 2015, RBI issued draft guidelines on net stable funding ratio. According to the draft guidelines, the net stable funding ratio is defined as the amount of available stable funding required to cover the liquidity requirements and asset maturities coming up over the next year. Banks will be required to maintain a ratio of at least 100.0% on an ongoing basis. These guidelines are expected to be applicable from January 1, 2018;

• In May 2015, RBI introduced a framework for dealing with loan frauds. The guidelines relate to detection, reporting and monitoring of fraud accounts. They brscribe continuous monitoring and red flagging of accounts based on early warning signals for accounts above Rs. 500.0 million. Frauds have to be reported on RBI's central repository of information on large credits for dissemination to other banks and decision-making by the joint lenders' forum in case of consortium or multiple banking arrangements. Restructuring or grant of additional facilities would not be permitted in case of fraud or red flagged accounts;

• In June 2015, RBI issued guidelines on the compensation of non-executive directors of private sector banks. According to the guidelines, the board of directors, in consultation with its remuneration committee, should formulate and adopt a combrhensive compensation policy for the non-executive directors (other than the part-time non-executive chairman). In the policy, the board may provide for the payment of compensation in the form of a profit related commission, subject to the Bank making profits. Such compensation should not exceed Rs. 1.0 million per annum for each director. Further, private sector banks have to obtain prior approval of RBI for paying remuneration to the part time non-executive chairman;

• In June 2015, RBI permitted banks to invest in long term infrastructure bonds issued by other banks subject to certain conditions including (i) investments in these bonds cannot be considered as inter-bank assets for the purpose of the calculation of net demand and time liabilities, (ii) they cannot be held under the held-to-maturity category, (iii) a bank's investment in these bonds cannot exceed 2.0% of its Tier 1 capital or 5.0% o f t he issue size, whichever is lower, and (iv) aggregate holding in such bonds cannot exceed 10.0% of a bank's total non-statutory liquidity ratio investments;

• In June 2015, RBI issued guidelines on strategic debt restructuring. The guidelines provide for conversion of debt into equity and acquisition of majority ownership of the borrower by banks. On conversion of debt into equity, banks are allowed to continue with the current asset classification for an 18-month period. On transfer of ownership to a new sponsor, the asset can be upgraded to the standard category and refinancing of the debt is allowed without such refinancing being treated as a restructuring. However, in the event a new sponsor is not identified within the 18 month period, the Bank has to revert to the earlier asset classification norm as was applicable prior to the stand-still in asset classification. In September 2015, RBI expanded the eligibility for strategic debt restructuring to accounts where the corrective action plan has failed. In February 2016, RBI allowed banks to classify the asset as standard on divesting 26.0% of the shares of the company, lower than the earlier requirement of 51.0%. To avoid a sudden increase in provisioning in case the strategic debt restructuring fails, RBI has directed banks to increase provisions on such accounts to upto15.0% by the end of the 18 month stand-still period, to be made in equal installments over four quarters;

• In July 2015, RBI issued guidelines on the discount rate for computing the brsent value of future cash flows of a restructured account. The guideline brscribes that a rate equal to the actual interest rate charged to the borrower before restructuring may be used to discount the future cash flows for the purpose of determining the diminution of fair value of the loan on restructuring;

• In August 2015, the Insurance Regulatory and Development Authority of India issued regulations on registration of corporate agents for the sale of insurance products where an agent can tie up with up to three insurance companies each in life, non-life and health insurance sectors;

• Under the Framework for Revitalising Distressed Assets in the economy, in September 2015, RBI issued revisions to the guidelines on Joint Lenders' Forum and corrective action plan. According to the revisions, the Joint Lenders' Forum can initiate strategic debt restructuring in the event the corrective action plan fails. All lenders would have to provide additional finance once agreed by the Joint Lenders' Forum unless they exit. An empowered group of lenders would be formed which will approve the rectification/restructuring package under the corrective action plan.

In February 2016, a further revision was issued requiring that the corrective action plan be approved by 50% of the lenders, as compared to the earlier requirement of 60% of lenders;

• In October 2015, RBI issued directions to banks on the implementation of the Government of India's Gold Monetisation Scheme and the Sovereign Gold Bond Scheme;

• In November 2015, RBI issued a revised framework for external commercial borrowings. The key features of the revised framework include fewer restrictions on end-use, a liberal approach for Indian rupee denominated borrowings where the currency risk is borne by the lender, an expanded list of overseas lenders to include sovereign wealth funds, pension funds and insurance companies, and enhanced limits for small value external commercial borrowings with minimum average maturity of three years from US$ 20 million to US$ 50 million. The framework comprises three components or tracks: 1) medium-term foreign currency borrowing with minimum average maturity of three to five years; 2) long-term foreign currency borrowing with minimum average maturity of 10 years and 3) Indian rupee denominated borrowings with minimum average maturity of three to five years. Lending by overseas branches and subsidiaries of Indian banks is permitted only for medium term borrowings. Further, in March 2016, RBI issued amendments to the framework and allowed infrastructure NBFCs, asset finance NBFCs and core investment companies to raise ECBs under Track I of the framework with minimum average maturity period of five years subject to 100% hedging;

• In December 2015, RBI issued final guidelines on the computation of lending rates based on marginal cost of funds.

The Marginal Cost of funds based Lending Rate (MCLR) is applicable for loans made and credit limits renewed from April 1, 2016. It is a tenor linked benchmark. The methodology for computing the marginal cost of funds based lending rate comprises marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor brmium. The guideline has specified categories of loans which can be priced without linkage to the marginal cost of funds based lending rate. Banks have to review and publish their marginal cost of funds based lending rate every month on a br-announced date for different maturities ranging from overnight rate to up to one year. The periodicity of reset shall be one year or lower. Loans linked to the base rate can continue till repayment or renewal with existing borrowers having the option to move to the marginal cost of funds based lending rate linked loan at mutually acceptable terms. Earlier, banks were not permitted to extend fixed rate loans at a rate of interest lower than the base rate. This restriction no longer applies in the MCLR framework;

• During the three months ended December 31, 2015, RBI articulated the objective of early and conservative recognition of stress and provisioning, held discussions with and asked a number of Indian banks to review certain loan accounts and their classification over the three months ended December 31, 2015 and the three months ended March 31, 2016. As a result o f t he above factor, non-performing loans increased significantly in the banking system during the second half of fiscal 2016. RBI also directed banks to make an additional provision of 10% during the year ending March 31, 2017 in respect of restructured loan accounts highlighted by RBI;

• In March 2016, RBI issued guidelines expanding the eligibility for common equity Tier 1 capital to include 45.0% of revaluation reserves, which earlier qualified for inclusion in Tier 2 capital, and 75.0% of foreign currency translation reserves. The guidelines further allowed recognition of deferred tax assets arising due to timing differences, excluding accumulated losses, as Tier 1 capital up to 10.0% of a bank's common equity Tier 1 capital, in line with the guidelines o f t he Basel Committee on Banking Supervision (BCBS); and

• In March 2016, the Ministry of Finance revised the methodology for determining interest rates on various small savings schemes. As per the guidelines, interest rates of such savings schemes would be reset every quarter based on G-sec yields of the brvious three months.

STANDALONE FINANCIALS AS PER INDIAN GAAP

Summary

Over the past two years, the domestic economic recovery has been gradual and the global economic environment has become challenging. Fiscal 2016 witnessed a slowdown in global economic growth mainly on account of lower growth in China and emerging market economies, divergence in global monetary policy and significant decline in commodity prices including crude oil and metals. Due to the increased level of risks in the business environment, the Indian banking system in general has experienced an increase in the level of additions to non-performing loans including slippages from restructured loans. During three months ended December 31,2015, RBI articulated the objective of early and conservative recognition of stress and provisioning, held discussions with and asked a number of Indian banks to review certain loan accounts and their classification over the three months ended December 31, 2015 and three months ended March 31, 2016, through its Asset Quality Review. As a result of the above factors, non-performing loans of the Bank increased significantly in the second half of fiscal 2016.

Profit before collective contingency and related reserve and tax decreased marginally from Rs. 158.20 billion in fiscal 2015 to Rs. 157.96 billion in fiscal 2016. The decrease in profit before collective contingency and related reserve was mainly due to an increase in provisions for non-performing assets and a 10.3% increase in non-interest expenses, offset, in part, by an 11.5% increase in net interest income and a 25.8% increase in non-interest income.

Net interest income increased by 11.5% from Rs. 190.40 billion in fiscal 2015 to Rs. 212.24 billion in fiscal 2016 reflecting an increase of 11.1% in the average volume of interest-earning assets.

Non-interest income increased by 25.8% from Rs. 121.76 billion in fiscal 2015 to Rs. 153.22 billion in fiscal 2016 primarily due to an increase in income from treasury-related activities and fee income. Income from treasury-related activities for fiscal 2016 included gains of Rs. 33.74 billion from sale of stake in ICICI Prudential Life Insurance Company Limited and ICICI Lombard General Insurance Company Limited. Fee income increased by 6.4% from Rs. 82.87 billion in fiscal 2015 to Rs. 88.20 billion in fiscal 2016.

Non-interest expenses increased by 10.3% from Rs.114.96 billion in fiscal 2015 to Rs. 126.83 billion in fiscal 2016 primarily due to an increase in non-employee related expenses.

Provisions and contingencies (excluding collective contingency and related reserve and provision for tax) increased by Rs. 41.68 billion from Rs. 39.00 billion in fiscal 2015 to Rs. 80.67 billion in fiscal 2016. This increase was primarily due to an increase in provisions on non-performing assets. The net NPA ratio increased from 1.40% at March 31, 2015 to 2.67% at March 31, 2016. Provisions for non-performing assets are likely to remain elevated in the near term.

The weak global economic environment, the sharp downturn in the commodity cycle and the gradual nature of the domestic economic recovery has adversely impacted the borrowers in certain sectors such as iron and steel, mining, power, rigs and cement. While the banks are working towards resolution of stress on certain borrowers in these sectors, it may take some time for solutions to be worked out, given the weak operating and recovery environment. In view of the above, the Bank, on a prudent basis, has created a collective contingency and related reserve of Rs. 36.00 billion towards its exposures to these sectors.

The income tax expense (including wealth tax) decreased by 46.8% from Rs. 46.45 billion in fiscal 2015 to Rs. 24.70 billion in fiscal 2016 primarily due to lower applicable tax on sale of equity investments and set-off of carry forward capital losses pertaining to earlier periods.

The profit aftertax decreased by 13.0% from Rs. 111.75 billion in fiscal 2015 to Rs. 97.26 billion in fiscal 2016.

Net-worth increased from Rs. 804.29 billion at March 31,2015 to Rs. 897.36 billion at March 31, 2016 primarily due to accretion to reserves from profit for the year and creation of revaluation reserves on fixed assets. Total assets increased by 11.5% from Rs. 6,461.29 billion at March 31,2015 to Rs.7,206.95 billion at March 31, 2016. Total deposits increased by 16.6% from Rs. 3,615.63 billion at March 31, 2015 to Rs. 4,214.26 billion at March 31, 2016. Savings account deposits increased by 16.9% from Rs. 1,148.60 billion at March 31, 2015 to Rs. 1,342.30 billion at March 31, 2016. Current account deposits increased by 18.9% from Rs. 495.20 billion at March 31, 2015 to Rs. 588.70 billion at March 31, 2016. Term deposits increased by 15.8% from Rs. 1,971.83 billion at March 31, 2015 to Rs. 2,283.26 billion at March 31,2016. The current and savings account (CASA) ratio was 45.8% at March 31, 2016 compared to 45.5% at March 31, 2015. Total advances increased by 12.3% from Rs. 3,875.22 billion at March 31,2015 to Rs. 4,352.64 billion at March 31, 2016 primarily due to an increase in domestic advances. Retail advances increased by 23.3% from Rs. 1,644.41 billion at March 31, 2015 to Rs.2,027.90 billion at March 31,2016.

The Bank continued to expand its branch network in India. The branch network of the Bank in India increased from 4,050 branches at March 31, 2015 to 4,450 branches at March 31, 2016. The ATM network of the Bank increased from 12,451 ATMs at March 31,2015 to 13,766 ATMs at March 31, 2016.

The Bank is subject to the Basel III capital adequacy guidelines stipulated by RBI. The total capital adequacy ratio of the Bank at March 31, 2016 in accordance with RBI guidelines on Basel III was 16.64% with a Tier-1 capital adequacy ratio of 13.09% as compared to 17.02% with a Tier-1 capital adequacy ratio of 12.78% at March 31, 2015.

Net interest income increased by 11.5% from Rs. 190.40 billion in fiscal 2015 to Rs. 212.24 billion in fiscal 2016 reflecting an increase of 11.1% in the average volume of interest-earning assets.

The yield on average interest-earning assets decreased by 29 basis points from 8.96% in fiscal 2015 to 8.67% in fiscal 2016. The cost of funds decreased by 32 basis points from 6.17% in fiscal 2015 to 5.85% in fiscal 2016. The interest sbrad increased by 3 basis points from 2.79% in fiscal 2015 to 2.82% in fiscal 2016. Net interest margin increased marginally by 1 basis p o i n t from 3.48% in fiscal 2015 to 3.49% in fiscal 2016.

The net interest margin on domestic operations decreased by 7 basis points from 3.90% in fiscal 2015 to 3.83% in fiscal 2016 primarily due to a decrease in the yield on interest-earning assets, offset, in part, by a decrease in the cost of funds.

The yield on interest-earning assets decreased primarily due to a decrease in the yield on advances and investments, offset, in part, by an increase in the yield on other interest-earning assets. The cost of funds decreased primarily due to a decrease in cost of term deposits and cost of borrowings.

Net interest margin of overseas branches increased from 1.65% in fiscal 2015 to 1.86% in fiscal 2016 primarily due to a decrease in cost of funds. Cost of fund s decreased primarily due to re-pricing/brpayment of high-cost borrowings.

The yield on average interest-earning assets decreased primarily due to the following factors:

• The yield on average interest-earning assets decreased by 29 basis points from 8.96% in fiscal 2015 to 8.67% in fiscal 2016 primarily due to a decrease in yield on advances and yield on investments, offset, in part, by an increase in proportion of average advances in total interest-earning assets. The yield on average advances decreased by 48 basis points from 9.95% in fiscal 2015 to 9.47% in fiscal 2016 and yield on average investments decreased by 26 basis points from 7.87% in fiscal 2015 to 7.61% in fiscal 2016.

• The yield on advances was impacted by an increase in non-performing assets during fiscal 2016, as interest income is not accrued on non-performing assets. The yield on domestic advances decreased by 78 basis points from 11.85% in fiscal 2015 to 11.07% in fiscal 2016 primarily due to the above and a reduction in the base rate by 65 basis points during fiscal 2016. The yield on overseas advances decreased by 10 basis points from 4.44% in fiscal 2015 to 4.34% in fiscal 2016. However, the overall yield on average advances decreased by 48 basis points from 9.95% in fiscal 2015 to 9.47% in fiscal 2016 reflecting the positive impact of the increase in the proportion of domestic advances in total advances.

The Reserve Bank of India reduced the repo rate by 125 basis points from 8.00% to 6.75% in four phases on January 15, 2015, March 4, 2015, June 2, 2015 and September 29, 2015. The Bank reduced its base rate by 65 basis points from 10.00% to 9.35% in three phases - 25 basis points with effect from April 10,2015, 5 basis points with effect from June 26, 2015 and 35 basis points with effect from October 5, 2015.

• The yield on average interest-earning investments decreased from 7.87% in fiscal 2015 to 7.61% in fiscal 2016 primarily due to a decrease in the yield on Statutory Liquidity Ratio (SLR) investments. The yield on SLR investments decreased by 17 basis points from 8.01% in fiscal 2015 to 7.84% in fiscal 2016 primarily due to softening of yield on Government securities. The yield on non-SLR investments decreased by 66 basis points from 7.49% in fiscal 2015 to 6.83% in fiscal 2016 primarily due to a decrease in yield on bonds and debentures, certificate of deposits, pass through certificates (PTCs) and commercial paper reflecting softening of interest rates. In accordance with RBI circular dated July 16, 2015, deposits in the Rural Infrastructure Development Fund (RIDF) and other related deposits have been re-grouped from investments to other assets. Figures for brvious periods have also been re-grouped accordingly.

The above factors were offset, in part, by the following:

• The yield on other interest-earning assets increased from 5.20% in fiscal 2015 to 5.49% in fiscal 2016 primarily due to an increase in the yield on RIDF and other related deposits and a decrease in average term money lent from overseas locations which is low yielding.

• Interest on income tax refund was at Rs. 3.12 billion in fiscal 2016 (fiscal 2015: Rs.  2.71 billion). The receipt, amount and timing of such income depend on the nature and timing of determinations by tax authorities and are neither consistent nor brdictable.

The cost of funds decreased by 32 basis points from 6.17% in fiscal 2015 to 5.85% in fiscal 2016 primarily due to the following factors:

• The cost of average deposits decreased from 6.18% in fiscal 2015 to 5.88% in fiscal 2016 primarily due to a decrease in the cost of term deposits and an increase in proportion of CASA deposits. The cost of term deposits decreased by 39 basis points from 8.25% in fiscal 2015 to 7.86% in fiscal 2016 primarily due to a decrease in cost of domestic term deposits by 51 basis points from 8.61% in fiscal 2015 to 8.10% in fiscal 2016, offset, in part, by a decrease in the proportion of overseas term deposits in total term deposits. The proportion of average CASA deposits in the average deposits increased from 39.5% in fiscal 2015 to 40.7% in fiscal 2016.

• The cost of borrowings decreased by 39 basis points from 6.16% in fiscal 2015 to 5.77% in fiscal 2016. The cost of borrowings decreased primarily due to a decrease in the cost of call and term borrowings, cost of borrowing under the Liquidity Adjustment Facility of RBI and an increase in foreign currency term borrowings which are lower cost.

While the net interest margin for fiscal 2016 was 3.49%, the net interest margin for the three months ended March 31, 2016 was 3.37%, reflecting primarily the impact of non-accrual of income on the higher level of non-performing assets. Our interest income, yield on advances, net interest income and net interest margin are likely to continue to be impacted going forward, due to the increase in non-performing assets, increased proportion of retail advances in total advances and lending to higher rated corporates.

The average volume of interest-earning assets increased by 11.1% from Rs.  5,476.64 billion in fiscal 2015 to Rs.  6,084.83 billion in fiscal 2016. The increase in average interest-earning assets was primarily on account of an increase in average advances by Rs.  530.54 billion and average interest-earning investments by Rs.  51.55 billion.

Average advances increased by 14.8% from Rs.  3,579.93 billion in fiscal 2015 to Rs.  4,110.47 billion in fiscal 2016 primarily due to an increase in domestic advances.

Average interest-earning investments increased from Rs.  1,345.46 billion in fiscal 2015 to Rs.  1,397.00 billion in fiscal 2016, primarily due to an increase in SLR investments by 8.5% from Rs.  992.42 billion in fiscal 2015 to Rs.  1,076.45 billion in fiscal 2016, offset, in part, by a decrease in interest-earning non-SLR investments by 9.2% from Rs.  353.03 billion in fiscal 2015 to Rs.  320.55 billion in fiscal 2016. Average interest-earning non-SLR investments primarily include investments in corporate bonds and debentures, PTCs, commercial papers, certificates of deposits and investments in liquid mutual funds to deploy excess liquidity. Average interest-earning non-SLR investments decreased primarily due to a decrease in investment in certificates of deposit, brference shares, bonds and debentures, mutual funds and PTCs, offset, in part, by an increase in investment in commercial papers.

There was an increase in average other interest-earning assets by 4.7% from Rs.  551.25 billion in fiscal 2015 to Rs. Rs.  577.36 billion in fiscal 2016 primarily due to an increase in deposits with the RIDF and other related deposits and balances with RBI, offset, in part, by a decrease in call and term money lent.

Average interest-bearing liabilities increased by 10.7% from Rs.  4,870.63 billion in fiscal 2015 to Rs.5,391.57 billion in fiscal 2016 on account of an increase of Rs.  380.03 billion in average deposits and an increase of Rs. 140.91 billion in average borrowings.

Average deposits increased due to an increase in average CASA deposits by Rs.  193.46 billion and an increase in average term deposits by Rs. 186.57 billion.

Average borrowings increased by 8.9% from Rs. 1,585.11 billion in fiscal 2015 to Rs.  1,726.02 billion in fiscal 2016 primarily due to an increase in term borrowings, bond borrowings and refinance borrowings, offset, in part, by a decrease in borrowings under the Liquidity Adjustment Facility of RBI.

Non-interest income primarily includes fee and commission income, income from treasury-related activities, dividend from subsidiaries and other income including lease income. The non-interest income increased by 25.8% from Rs. 121.76   bill ion in fiscal 2015 to Rs.153.22 billion in fiscal 2016 primarily due to an increase in income from treasury-related activities, fee and commission income and other income.

Fee income

Fee income primarily includes fees from corporate clients such as loan processing fees and transaction banking fees and fees from retail customers such as loan processing fees, fees from credit cards business, account servicing charges and third party referral/distribution fees.

Fee income increased by 6.4% from Rs. 82.87 billion in fiscal 2015 to Rs.88.20 billion in fiscal 2016 primarily due to an increase in income from transaction banking fees and third party referral fees, offset, in part, by a decrease in lending linked fees.

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

Income from treasury-related activities includes income from sale of investments and revaluation of investments on account of changes in unrealised profit/(loss) in the fixed income, equity and brference share portfolio, units of venture funds and security receipts issued by asset reconstruction companies.

Profit from treasury-related activities increased from Rs. 16.93 billion in fiscal 2015 to Rs. 40.60 billion in fiscal 2016 primarily due to gains on sale of stake in ICICI Prudential Life Insurance Company Limited and ICICI Lombard General Insurance Company Limited amounting to Rs. 33.74 billion, offset, in part, by lower gains on government securities and other fixed income positions and provisioning on security receipts.

Dividend from subsidiaries

Dividend from subsidiaries decreased by 1.5% from Rs. 15.59 billion in fiscal 2015 to Rs. 15.35 billion in fiscal 2016. Dividend from subsidiaries in fiscal 2016 primarily included dividend of Rs. 8.74 billion from ICICI Prudential Life Insurance Company Limited, Rs. 1.61 billion from ICICI Securities Limited, Rs. 1.26 billion from ICICI Home Finance Company Limited and Rs. 1.22 billion from ICICI Securities Primary Dealership Limited. Dividend from subsidiaries in fiscal 2015 primarily included dividend of Rs. 6.17 billion from ICICI Prudential Life Insurance Company Limited, Rs. 1.87 billion from ICICI Bank UK, Rs. 1.86 billion from ICICI Securities Limited and Rs. 1.61 billion from ICICI Home Finance Company Limited.

Other income (including lease income)

Other income increased from Rs. 6.37 billion in fiscal 2015 to Rs. 9.07 billion in fiscal 2016 primarily due to an increase in exchange gains relating to overseas operations.

Non-interest expense

Non-interest expenses primarily include employee expenses, debrciation on assets and other administrative expenses. Non-interest expenses increased by 10.3% from Rs. 114.96 billion in fiscal 2015 to Rs. 126.83 billion in fiscal 2016. .

Payments to and provisions for employees

Employee expenses increased by 5.3% from Rs. 47.50 billion in fiscal 2015 to Rs. 50.02 billion in fiscal 2016 primarily on account of higher salary due to annual increments and promotions and an increase in average staff strength, offset, in part, by lower provision for retirement benefit obligations due to movement in the discount rate linked to the yield on government securities. The number of employees was 67,857 at March 31, 2015 and 74,096 at March 31, 2016 (average staff strength was 69,853 for fiscal 2015 and 71,810 for fiscal 2016). The employee base includes sales executives, employees on fixed term contracts and interns.

Debrciation

Debrciation on owned property increased by 8.9% from Rs. 6.24 billion in fiscal 2015 to Rs. 6.79 billion in fiscal 2016 due to an increase in fixed assets with higher debrciation rates. Debrciation on leased assets decreased from Rs. 0.35 billion in fiscal 2015 to Rs. 0.19 billion in fiscal 2016.

Other administrative expenses

Other administrative expenses primarily include rent, taxes and lighting, advertisement, sales promotion, repairs and maintenance, direct marketing expenses and other expenditure. Other administrative expenses increased by 14.7% from Rs. 60.87 bill ion in fiscal 2015 to Rs. 69.83 billion in fiscal 2016. The increase in other administrative expenses was primarily due to an increase in the Bank's branch and ATM network and retail business volumes. The number of branches in India increased from 4,050 at March 31, 2015 to 4,450 at March 31, 2016. The ATM network o f t h e Bank increased from 12,451 ATMs at March 31,2015 to 13,766 ATMs at March 31, 2016.

Provisions and contingencies (excluding provisions for tax)

Provisions are made b y t h e Bank on standard, sub-standard and doubtful assets at rates brscribed by RBI. Loss assets and the unsecured portion of doubtful assets are provided for/written off as required by RBI guidelines. For loans and advances of overseas branches, provisions are made as per RBI regulations or host country regulations whichever is higher. Provisions on retail non-performing loans are made at the borrower level in accordance with the retail assets provisioning policy of the Bank, subject to the minimum provisioning levels brscribed by RBI. The specific provisions on retail loans and advances held by the Bank are higher than the minimum regulatory requirement. Provision on loans and advances restructured/rescheduled is made in accordance with the applicable RBI guidelines on restructuring of loans and advances by banks. In addition to the specific provision on NPAs, the Bank maintains a general provision on standard loans and advances at rates brscribed by RBI. For standard loans and advances in overseas branches, the general provision is made at the higher of host country regulatory requirements and RBI requirements.

Provisions and contingencies (excluding collective contingency and related reserve and provisions for tax) increased from Rs. 39.00 billion in fiscal 2015 to Rs. 80.67 billion in fiscal 2016. This increase was primarily due to an increase in provisions on non-performing assets. Provision for non-performing and other assets increased from Rs.31.41 billion in fiscal 2015 to Rs. 72.16 billion in fiscal 2016 primarily due to an increase in additions to non-performing assets in the corporate and small and medium enterprises loan portfolio, including downgrades from the restructured loan portfolio. The provision coverage ratio at March 31, 2016 including cumulative technical/prudential write-offs was 61.0%. Excluding cumulative technical/prudential write-offs, the provision coverage ratio was 50.6%.

Provision for investments decreased from Rs. 2.98 billion in fiscal 2015 to Rs. 1.71 billion in fiscal 2016. Provision on standard assets decreased from Rs. 3.85 billion in fiscal 2015 to Rs. 2.97 billion in fiscal 2016.

The weak global economic environment, the sharp downturn in the commodity cycle and the gradual nature of the domestic economic recovery has adversely impacted the borrowers in certain sectors such as iron and steel, mining, power, rigs and cement. While the banks are working towards resolution of stress on certain borrowers in these sectors, it may take some time for solutions to be worked out, given the weak operating and recovery environment. In view of the above, the Bank, on a prudent basis, has created a collective contingency and related reserve of Rs. 36.00 billion towards its exposures to these sectors.

Tax expense

The income tax expense (including wealth tax) decreased by 46.8% from Rs. 46.45 billion in fiscal 2015 to Rs. 24.70 billion in fiscal 2016. The effective tax rate decreased from 29.4% in fiscal 2015 to 20.3% in fiscal 2016 primarily due to lower applicable tax on sale of equity investments and set-off of carry forward capital losses pertaining to earlier periods.

Financial condition

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 increased from Rs. 423.04 billion at March 31, 2015 to Rs. 598.69 billion at March 31, 2016 primarily due to an increase in money at call and short notice, balances with banks outside India and balances with RBI.

Investments

Total investments increased by 1.4% from Rs. 1,581.29 billion at March 31, 2015 to Rs.1,604.12 billion at March 31, 2016 primarily due to an increase in investments in government securities by Rs.50.38 billion, commercial paper by Rs. 18.91 billion and pass through certificates by Rs.10.64 billion, offset, in part, by a decrease in investments in bonds and debentures by Rs. 23.08 billion. At March 31, 2016, the Bank had an outstanding net investment of Rs. 7.91 billion in security receipts including application money issued by asset reconstruction companies compared to Rs. 8.41 billion at March 31, 2015.

Advances

Net advances increased by 12.3% from Rs. 3,875.22 billion at March 31, 2015 to Rs. 4,352.64 billion at March 31, 2016 primarily due to an increase in domestic advances. Domestic advances increased by 16.4% from Rs. 2,934.02 billion at March 31, 2015 to Rs. 3,414.52 billion at March 31, 2016. Net advances of overseas branches, in US dollar terms, decreased from US$ 15.1 billion at March 31, 2015 to US$ 14.2 billion at March 31, 2016. However, due to rupee debrciation from Rs. 62.50 per US dollar at March 31, 2015 to Rs. 66.26 per US dollar at March 31,2016, the decrease in rupee terms was lower, from Rs. 941.20 billion at March 31,2015 to Rs. 938.12 billion at March 31,2016.

Fixed and other assets

Fixed assets (net block) increased by 60.3% from Rs. Rs.47.26 billion at March 31, 2015 to Rs. 75.76 billion at March 31, 2016 primarily due to revaluation of brmises by Rs. 28.17 billion. Other assets increased from Rs.534.48 billion at March 31, 2015 to Rs. 575.74 billion at March 31,2016 primarily due to an increase in deferred tax assets and non-banking assets acquired in satisfaction of claims, offset, in part, by a decrease in mark-to-market and receivables on foreign exchange and derivative transactions. RIDF and other related deposits made in lieu of shortfall in directed lending requirements decreased from Rs. 284.51 billion at March 31, 2015 to Rs. 280.66 billion at March 31,2016. During fiscal 2016, the Bank acquired fixed assets amounting to Rs. 17.22 billion in satisfaction of claims under debt-asset swap transactions with certain borrowers.

Deposits

Deposits increased by 16.6% from Rs. 3,615.63 billion at March 31, 2015 to Rs. 4,214.26 billion at March 31, 2016. Term deposits increased by 15.8% from Rs. 1,971.83 billion at March 31, 2015 to Rs. 2,283.26 billion at March 31, 2016, while savings account deposits increased by 16.9% from Rs. 1,148.60 billion at March 31, 2015 to Rs. 1,342.30 billion at March 31, 2016 and current account deposits increased by 18.9% from Rs. 495.20 billion at March 31, 2015 to Rs. 588.70 billion at March 31, 2016. The current and savings account deposits increased from Rs. 1,643.80 billion at March 31, 2015 to Rs. 1,931.00 billion at March 31, 2016. Total deposits at March 31, 2016 constituted 70.7% of the funding (i.e., deposits and borrowings, other than brference share capital).

Borrowings

Borrowings increased by 1.4% from Rs. 1,724.18 billion at March 31, 2015 to Rs. 1,748.08 billion at March 31, 2016 primarily due to an increase in foreign currency bond borrowings, refinance borrowings and foreign currency term money borrowing, offset, in part, by a decrease in borrowings from RBI under Liquidity Adjustment Facility. Borrowings of overseas branches, in US dollar terms, decreased from US$ 15.30 billion at March 31, 2015 to US$ 14.70 billion at March 31,2016. However, due to rupee debrciation from Rs. 62.50 per US dollar at March 31,2015 to Rs. 66.26 per US dollar at March 31,2016, borrowings of overseas branches, in rupee terms, increased by 2.3% from Rs. 953.97 billion at March 31, 2015 to Rs. 976.35 billion at March 31, 2016.

Other liabilities

Other liabilities increased by 9.5% from Rs. 317.19 billion at March 31, 2015 to Rs. 347.25 billion at March 31, 2016 primarily due to an increase in the collective contingencies and related reserve, offset, in part, by a decrease in mark-to-market amount and payables on foreign exchange and derivatives transactions.

Equity share capital and reserves

Equity share capital and reserves increased from Rs. 804.29 billion at March 31, 2015 to Rs. 897.36 billion at March 31, 2016 primarily due to accretion to reserves from profit for the year and creation of revaluation reserve of Rs. 28.17 billion on fixed assets, offset, in part, by proposed dividend.

Off balance sheet items, commitments and contingencies

Contingent liabilities increased from Rs. 8,519.78 billion at March 31, 2015 to Rs. 9,007.99 billion at March 31, 2016 primarily due to an increase in notional principal amount of outstanding forward exchange contracts, offset, in part, by a decrease in notional amount of interest rate swaps and currency options. The notional principal amount of outstanding forward exchange contracts increased from Rs. 2,898.72 billion at March 31, 2015 to Rs. 3,567.73 billion at March 31, 2016.

Claims against the Bank, not acknowledged as debts, rebrsent demands made in certain tax and legal matters against the Bank in the normal course of business and customer claims arising in fraud cases. In accordance with the Bank's accounting policy and Accounting Standard 29, the Bank has reviewed and classified these items as possible obligations based on legal opinion/judicial brcedents/assessment by the Bank. No provision in excess of provisions already made in the financial statements is considered necessary.

The Bank enters into foreign exchange contracts in its normal course of business, to exchange currencies at a brfixed price at a future date. This item rebrsents the notional principal amount of such contracts, which are derivative instruments. With respect to the transactions entered into with its customers, the Bank generally enters into off-setting transactions in the inter-bank market. This results in generation of a higher number of outstanding transactions, and hence a large value of gross notional principal of the portfolio, while the net market risk is lower.

As a part of project financing and commercial banking activities, the Bank has issued guarantees to support regular business activities of clients. These generally rebrsent irrevocable assurances that the Bank will make payments in the event that the customer fails to fulfill its financial or performance obligations. Financial guarantees are obligations to pay a third party beneficiary where a customer fails to make payment towards a specified financial obligation, including advance payment guarantee. Performance guarantees are obligations to pay a third party beneficiary where a customer fails to perform a non-financial contractual obligation. The guarantees are generally issued for a period not exceeding ten years. The credit risks associated with these products, as well as the operating risks, are similar to those relating to other types of financial instruments. Cash margins available to reimburse losses realised under guarantees amounted to Rs. 77.78 billion at March 31, 2016 compared to Rs. 67.47 billion at March 31, 2015. Other property or security may also be available to the Bank to cover potential losses under guarantees.

The Bank is obligated under a number of capital contracts. Capital contracts are job orders of a capital nature, which have been committed. Estimated amounts of contracts remaining to be executed on capital account in domestic operations aggregated to Rs. 5.71 billion at March 31, 2016 compared to Rs. 5.39 billion at March 31, 2015.

Capital resources

The Bank actively manages its capital to meet regulatory norms, current and future business needs and the risks in its businesses. The capital management framework of the Bank is administered by the Finance Group and the Risk Management Group under the supervision of the Board and the Risk Committee. The capital adequacy position and assessment is reported to the Board and the Risk Committee periodically.

Regulatory capital

The Bank is subject to the Basel III guidelines issued by RBI, effective from April 1, 2013, which are being implemented in a phased manner by March 31, 2019 as per the transitional arrangement provided by RBI for Basel III implementation. The Basel III rules on capital consist of measures for improving the quality, consistency and transparency of capital, enhancing risk coverage, introducing a supplementary leverage ratio, reducing pro-cyclicality and promoting countercyclical buffers and addressing systemic risk and inter-connectedness.

At March 31, 2016, the Bank was required to maintain a minimum Common Equity Tier-1 (CET1) capital ratio of 6.13%, minimum Tier-1 capital ratio of 7.63% and minimum total capital ratio of 9.63%. The minimum total capital requirement includes a capital conservation buffer of 0.63%. Under Pillar 1 of RBI guidelines on Basel III, the Bank follows the standardised approach for measurement of credit risk, standardised duration method for measurement of market risk and basic indicator approach for measurement of operational risk.

On March 1, 2016, RBI made certain amendments to the treatment of certain balance sheet items for the purposes of determining bank's regulatory capital. As per the revised guidelines, Foreign Currency Translation Reserve (FCTR) and revaluation reserve are allowed to be considered under CET1 capital at a discount of 25% and 55% respectively. Further, aligning RBI guidelines with the Basel III guidelines, deferred tax assets arising due to timing differences are allowed to be recognised as CET1 capital up to 10% of a bank's CET1 capital and risk weighted at 250%, as compared to the earlier requirement of deduction of the entire deferred tax assets from CET1 capital.

Further, as per the framework issued for Domestic Systemically Important Banks (D-SIBs) in July 2014, RBI, on August 31, 2015, categorised ICICI Bank as a D-SIB in bucket 1 (lowest bucket) with an additional CET1 requirement as a percentage of Risk Weighted Assets (RWA) of 0.2%. This additional requirement is applicable from April 1, 2016 in a phased manner and would become fully effective from April 1, 2019. The additional CET1 requirement will be in addition to the capital conservation buffer. The additional CET1 requirement for fiscal 2017 will be 0.05% of RWA.

Movement in the capital funds and risk weighted assets from March 31, 2015 to March 31, 2016 as per Basel I I I norms

Capital funds (net of deductions) increased by Rs. 82.51 billion from Rs. 927.44 billion at March 31, 2015 to Rs. 1,009.95 billion at March 31, 2016 primarily due to inclusion of retained earnings for fiscal 2016, amendments in guidelines for recognition of FCTR at a discount of 25% and revaluation reserve at a discount of 55% in CET1 capital, risk weighting of deferred tax assets at 250% instead of full deduction from Tier-1 capital and lower deduction for investment in subsidiaries due to repatriation of capital from an overseas banking subsidiary and sale of shareholding in insurance subsidiaries, offset, in part, by a decrease in the eligible amount of non-common equity capital due to application of Basel III grandfathering rules. Credit risk RWA increased by Rs. 521.63 billion from Rs. 4,741.56 billion at March 31, 2015 to Rs. 5,263.19 billion at March 31, 2016 primarily due to an increase of Rs. 534.98 billion in RWA for on-balance sheet assets, offset, in part, by a decrease of Rs. 13.35 billion in RWA for off-balance sheet assets.

Market risk RWA decreased by Rs. 23.82 billion from Rs. 334.23 billion at March 31, 2015 to Rs. 310.41 billion at March 31, 2016 primarily due to a decrease in interest rate related positions.

Operational risk RWA increased by Rs. 124.36 billion from Rs. 373.17 billion at March 31, 2015 to Rs. 497.53 billion at March 31, 2016. The operational risk capital charge is computed based on 15% of the average o f t h e brvious three financial years' gross income and is revised on an annual basis at June 30. RWA is arrived at by multiplying the capital charge by 12.5.

Internal assessment of capital

The capital management framework o f t h e Bank includes a combrhensive internal capital adequacy assessment process conducted annually, which determines the adequate level of capitalisation necessary to meet regulatory norms and current and future business needs, including under stress scenarios. The internal capital adequacy assessment process is undertaken at both the standalone bank level and the consolidated group level. The internal capital adequacy assessment process encompasses capital planning for a four-year time horizon, identification and measurement of material risks and the relationship between risk and capital.

The capital management framework is complemented by the risk management framework, which covers the policies, processes, methodologies and frameworks established for the management of material risks. Stress testing, which is a key aspect o f t h e internal capital adequacy assessment process and the risk management framework, provides an insight into the impact of extreme but plausible scenarios on the Bank's risk profile and capital position. Based on the stress testing framework approved by the Board, the Bank conducts stress tests on various portfolios and assesses the impact on the capital ratios and the adequacy of capital buffers for current and future periods. The Bank periodically assesses and refines its stress testing framework in an effort to ensure that the stress scenarios capture material risks as well as reflect possible extreme market moves that could arise as a result of market conditions and the operating environment. The business and capital plans and the stress testing results of certain key group entities are integrated into the internal capital adequacy assessment process.

Based on the internal capital adequacy assessment process, the Bank determines the level of capital that needs to be maintained by considering the following in an integrated manner:

• strategic focus, business plan and growth objectives;

• regulatory capital requirements as per RBI guidelines;

• assessment of material risks and impact of stress testing;

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

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

The Bank continues to monitor relevant developments and believes that its current robust capital adequacy position and demonstrated track record of access to domestic and overseas markets for capital raising will enable it to maintain the necessary levels of capital as required by regulations while continuing to grow its business.

ASSET QUALITY AND COMPOSITION

Loan concentration

The Bank follows a policy of portfolio diversification and evaluate its total financing exposure to a particular industry in light of its forecasts of growth and profitability for that industry. The Bank's Credit Risk Management Group monitors all major sectors of the economy and specifically tracks industries in which the Bank has credit exposures. The Bank monitors developments in various sectors to assess potential risks in our portfolio and new business opportunities. The Bank's policy is to limit its exposure to any particular industry, except for the retail finance segment, to 15.0% of its total exposure.

The Bank's capital allocation framework is focused on higher growth in retail finance segment and lower growth in corporate lending with an increase in the proportion of higher rated exposures. Given the focus on the above priorities, gross retail finance advances increased by 22.7% in fiscal 2016 compared to an increase of 12.8% in total gross advances. As a result, the share of gross retail finance advances increased from 43.5% of gross advances at March 31, 2015 to 47.3% of gross advances at March 31, 2016. Further, the aggregate net increase in advances to power, roads, ports, telecom, urban development & other infrastructure, iron/steel & products, metal & products (excluding iron & steel) and mining sectors was primarily in the 'A- and above' category based on the Bank's internal ratings. The increase in advances to these sectors also included the impact of currency debrciation between March 31, 2015 and March 31, 2016, on the rupee equivalent of foreign currency denominated advances made by overseas branches of the Bank.

Directed Lending

RBI requires banks to lend to certain sectors of the economy. Such directed lending comprises priority sector lending and export credit.

Priority Sector Lending and Investment

RBI guidelines on priority sector lending require banks to lend 40.0% of their Adjusted Net Bank Credit (ANBC), to fund certain types of activities carried out by specified borrowers. The definition of ANBC includes bank credit in India adjusted by bills rediscounted with RBI and other approved financial institutions and certain investments and is computed with reference to the outstanding amount at March 31 of the brvious year as brscribed by RBI guidelines 'Master Circular - Priority Sector Lending - Targets and Classification'. Further, RBI allowed loans extended in India against incremental foreign currency non-resident (bank)/non-resident external deposits from July 26, 2013 and outstanding at March 7, 2014 to be excluded from ANBC. In May 2014, RBI issued guidelines allowing banks to include the outstanding investments in Rural Infrastructure Development Fund and other specified funds at March 31 of the fiscal year to be classified as "indirect agriculture" and count towards the overall priority sector target achievement. Such investments at March 31 of the brceding year are included in the ANBC which forms the base for computation of the priority sector and subsegment lending requirements. In fiscal 2015, RBI allowed banks to issue long-term bonds for financing infrastructure and low-cost housing. The amount raised by way of these bonds is permitted to be excluded from the ANBC for the purpose of computing priority sector lending targets.

The priority sectors include categories such as agriculture, micro and small enterprises, education, housing and other sectors as brscribed by RBI's Master Circular on 'Priority Sector Lending - Targets and Classification'. Out of the overall target of 40.0%, banks are required to lend a minimum of 18.0% of their ANBC to the agriculture sector and the balance to certain specified sectors. Banks are also required to lend 10.0% of their ANBC, to certain borrowers under the "weaker section" category.

In April 2015, RBI issued revised guidelines on priority sector lending. Under the revised guidelines, the overall target for priority sector lending continues to be 40% of the ANBC; sub-targets for direct and indirect lending to agriculture have been combined; and sub-targets of 8.0% for lending to small & marginal farmers and 7.5% lending target to microenterprises have been introduced. These sub-targets are to be achieved in a phased manner by March 2017. Sectors qualifying for priority sector lending have been broadened to include medium enterprises, social infrastructure and renewable energy. Priority sector lending achievement would be evaluated on a quarterly average basis from fiscal 2017 instead of only at the year-end. Further, in July 2015, RBI has directed banks to maintain direct lending to non-corporate farmers at the banking system's average level for the last three years, failing which banks will attract penalties for shortfall. RBI would notify the banks of the banking system's average level at the beginning of each year. RBI has notified a target level of 11.57% of ANBC for this purpose for fiscal 2016. RBI has also directed banks to maintain lending to borrowers who constituted the direct agriculture lending category under the earlier guidelines.

The Bank is required to comply with the priority sector lending requirements brscribed by RBI from time to time. The shortfall in the amount required to be lent to the priority sectors and weaker sections may be required to be deposited in funds with government sponsored Indian development banks like the National Bank for Agriculture and Rural Development, the Small Industries Development Bank of India, National Housing Bank, MUDRA Limited and other financial institutions as decided by RBI from time to time, based on the allocations made by RBI. These deposits have a maturity of up to seven years and carry interest rates lower than market rates. At March 31, 2016, the Bank's total investment in such bonds was t 280.66 billion, which was fully eligible for consideration in overall priority sector achievement.

The Bank's priority sector lending increased by 16.1% from t 1,130.07 billion at March 31, 2015 to t 1,311.90 billion at March 31, 2016, constituting 40.8% (March 31, 2015: 41.0%) of ANBC against the requirement of 40.0% of ANBC. The qualifying total agriculture loans increased from t 332.67 billion at March 31, 2015 to t 545.84 billion at March 31, 2016, constituting 17.0% (March 31,2015: 12.1%) of ANBC against the requirement of 18.0%. The advances to weaker sections increased from t 94.89 billion at March 31, 2015 to t 204.35 billion at March 31, 2016 constituting 6.3% (March 31, 2015: 3.4%) of ANBC against the requirement of 10.0% of ANBC. Lending to small and marginal farmers was t 125.51 billion constituting 3.9% of ANBC against the requirement of 7.0% of ANBC. The lending to micro enterprises was t 217.85 billion constituting 6.8% of ANBC against the requirement of 7.0% of ANBC.

Classification of loans

The Bank classifies its assets as performing and non-performing in accordance with RBI guidelines. Under RBI guidelines, an asset is classified as non-performing if any amount of 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 the account remains out of order for a period of 90 days and in respect of bills, if the account remains overdue for more than 90 days. In respect of borrowers where loans and advances made by overseas branches are identified as impaired as per host country regulations for reasons other than record of recovery, but which are standard as per RBI guidelines, the amount outstanding in the host country is classified as non-performing.

RBI has separate guidelines for classification of loans for projects under implementation which are based on the date of commencement of commercial production and date of completion of the project as originally envisaged at the time of financial closure. For infrastructure projects, a loan is classified as non-performing if it fails to commence commercial operations within two years from the documented date of commencement and for non-infrastructure projects, the loan is classified as non-performing if it fails to commence operations within 12 months from the documented date of such commencement.

RBI also has separate guidelines for restructured loans. Upto March 31, 2015, a fully secured standard asset could be restructured by re-schedulement of principal repayments and/or the interest element, but had to be separately disclosed as a restructured asset. The diminution in the fair value o f t h e restructured loan, if any, measured in brsent value terms, was either written off or a provision was made to the extent o f t h e diminution involved. Similar guidelines applied for restructuring of non-performing loans. Loans restructured after April 1, 2015 (excluding loans given for implementation of projects in the infrastructure sector and non-infrastructure sector and which are delayed up to a specified period) by re-schedulement of principal repayments and/or the interest element are classified as non-performing. For such loans, the diminution in the fair value of the loan, if any, measured in brsent value terms, has to be provided for in addition to the provisions applicable to non-performing loans.

From fiscal 2012, the Indian economy experienced a slowdown in growth, particularly in capital investments; high interest rates due to high inflation; and significant currency debrciation. Indian companies experienced a decline in sales and profit growth and also an elongation of working capital cycles and a high level of receivables. Given the concerns over growth, companies found it difficult to access other sources of funding, resulting in high leverage. As a result, the Indian banking sector, including the Bank, experienced a rise in non-performing assets and restructured loans. Over the past t w o years, the domestic economic recovery has been gradual and the global economic environment has become challenging. Fiscal 2016 witnessed a slowdown in global economic growth mainly on account of lower growth in China and emerging market economies, divergence in global monetary policy and significant decline in commodity prices including crude oil and metals. Due to the increased level of risks in the business environment, the Indian banking system in general has experienced an increase in the level of additions to non-performing loans including slippages from restructured loans into non-performing status. During three months ended December 31, 2015, RBI articulated the objective of early and conservative recognition of stress and provisioning, held discussions with and asked a number of Indian banks to review certain loan accounts and their classification over the three months ended December 31, 2015 and three months ended March 31, 2016, through its Asset Quality Review. As a result of the above factors, non-performing loans of the Bank increased significantly in the second half of fiscal 2016.

In fiscal 2016, the Gross additions to NPAs was Rs. 171.13 billion including slippages of Rs. 53.00 billion from the restructured loan portfolio. In fiscal 2016, the Bank recovered/upgraded non-performing assets amounting to Rs. 21.84 billion and written-off/sold non-performing assets amounting to Rs. 34.50 billion. As a result, gross NPAs (net of write-offs, interest suspense and derivatives income reversal) of the Bank increased from Rs. 152.42 billion at March 31, 2015 to Rs. 267.21 billion at March 31, 2016.

Net NPAs increased from Rs. 63.25 billion at March 31, 2015 to Rs. 132.97 billion at March 31, 2016. The ratio of net NPAs to net customer assets increased from 1.40% at March 31, 2015 to 2.67% at March 31, 2016. During fiscal 2016, the Bank wrote-off NPAs, including retail NPAs, of an aggregate amount of Rs. 30.05 billion compared to Rs. 17.03 billion during fiscal 2015.

The provision coverage ratio at March 31, 2016 including cumulative technical/prudential write-offs was 61.0%. Excluding cumulative technical/prudential write-offs, the provision coverage ratio was 50.6%.

The gross non-performing assets increased from Rs. 152.42 billion at March 31, 2015 to Rs. 267.21 billion at March 31, 2016 primarily due to additions in non-performing assets in iron/steel and products, construction and power sectors.

At March 31, 2016, net non-performing loans in the retail portfolio were 0.61% of net retail loans compared to 0.60% at March 31, 2015.

The gross outstanding loans to borrowers whose facilities have been restructured decreased from Rs. 119.46 billion at March 31, 2015 to Rs. 93.13 billion at March 31, 2016. During fiscal 2016, the Bank restructured loans of borrowers classified as standard, as well as made additional disbursements to borrowers whose loans had been restructured in prior years, aggregating Rs. 29.47 billion, as compared to Rs. 53.69 billion in fiscal 2015. Further, during fiscal 2016, restructured standard loans amounting to Rs. 53.00 billion slipped into the non-performing category as compared to slippages of Rs. 45.29 billion during fiscal 2015. The net outstanding loans to borrowers whose facilities have been restructured decreased from Rs. 110.17 billion at March 31, 2015 to Rs. 85.73 billion at March 31, 2016.

In fiscal 2016, RBI issued guidelines on Strategic Debt Restructuring (SDR) under which conversion of debt into equity and acquisition of majority ownership o f t h e borrower by banks is allowed. At March 31, 2016 the Bank had outstanding SDR loans of Rs. 29.33 billion comprising primarily loans already classified as non-performing loans or restructured loans.

Further, in fiscal 2015, RBI had issued guidelines permitting banks to refinance long-term project loans to infrastructure and other core industries at periodic intervals without such refinancing being considered as restructuring. Accordingly, the outstanding portfolio of such loans for which refinancing under the 5/25 scheme has been implemented was Rs. 42.39 billion at March 31,2016.

The Bank's aggregate net investments in security receipts including application money issued by asset reconstruction companies were Rs. 7.91 billion at March 31, 2016 as compared to Rs. 8.41 billion at March 31, 2015.

At March 31, 2016, the total general provision held against standard assets including general provision on restructured assets was Rs. 26.58 billion.

There are uncertainties in respect of certain sectors due to the weak global economic environment, sharp downturn in the commodity cycle, gradual nature of the domestic economic recovery and high leverage. The key sectors that have been impacted include power, mining, iron and steel, cement and rigs. At March 31, 2016, the Bank's exposure (comprising fund-based limits and non-fund based outstanding) to companies internally rated below investment grade (excluding borrowers classified as non-performing or restructured) was Rs. 119.60 billion (1.3% o f t he Bank's total exposure) in power sector, Rs. 90.11 billion (1.0%) in mining sector, Rs. 77.76 billion (0.8%) in iron & steel sector, Rs. 66.43 billion (0.7%) in cement sector and Rs. 25.13 billion (0.3%) in rigs sector. Further, the Bank's exposure (comprising fund-based limits and non-fund based outstanding) to promoter entities internally rated below investment grade where the underlying is partly linked to these sectors was Rs. 61.62 billion (0.7%). In view o f t he uncertainties relating to these sectors and the time that it may take to resolve exposures to these sectors, the Bank on a prudent basis made a collective contingency and related reserve of Rs. 36.00 billion towards its exposures to these sectors. This reserve is over and above the provisions required for nonperforming and restructured loans as per RBI guidelines. There can be no assurance that this reserve would be adequate to cover any future provisioning requirements in respect of these exposures or that non-performing loans will not arise from other sectors.

Segment information

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

The standalone segmental report for fiscal 2016, based on the segments identified and defined by RBI, has been brsented as follows:

• Retail Banking includes exposures o f t he Bank, which satisfy the four qualifying criteria of 'regulatory retail portfolio' as stipulated by RBI guidelines on the Basel III framework.

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

• Treasury includes the entire investment portfolio of the Bank.

• Other Banking includes leasing operations and other items not attributable 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 funds and lends to the business units at appropriate rates based on the relevant maturity of assets being funded after adjusting for regulatory reserve requirement and directed lending requirements.

Retail banking segment

The profit before tax o f t h e retail banking segment increased from Rs. Rs. 27.24 billion in fiscal 2015 to X 38.98 billion in fiscal 2016 due to an increase in net interest income and non-interest income, offset, in part, by an increase in non-interest expenses and higher provisions.

Net interest income increased by 28.7% from Rs. 71.42 billion in fiscal 2015 to Rs. 91.91 billion in fiscal 2016 primarily due to growth in the loan portfolio and an increase in average current account and savings account deposits.

Non-interest income increased by 14.6% from Rs. 42.77 billion in fiscal 2015 to Rs. 49.02 billion in fiscal 2016, primarily due to a higher level of loan processing fees, third party product distribution fees, fees from the credit cards business and transaction banking fees.

Non-interest expenses increased by 13.7% from Rs. 86.15 billion in fiscal 2015 to Rs. 97.97 billion in fiscal 2016, primarily due to an increase in the retail lending business and expansion in the branch network. Provision charge increased from Rs. 0.80 billion in fiscal 2015 to Rs. 3.99 billion in fiscal 2016.

Wholesale banking segment

The wholesale banking segment incurred a loss of Rs. 12.45 billion in fiscal 2016 primarily due to an increase in provisions.

Net interest income decreased by 1.0% from Rs. 84.47 billion in fiscal 2015 to Rs. 83.61 billion in fiscal 2016 primarily due to the higher additions to non-performing loans, on which interest income is not accrued, offset, in part, by an increase in net interest income on account of an increase in the portfolio size. Provisions increased from Rs. 35.39 billion in fiscal 2015 to Rs. 108.15 billion in fiscal 2016 primarily due to an increase in additions to non-performing assets and creation of a collective contingency and related reserve of Rs. 36.00 billion on a prudent basis during quarter ended March 31, 2016.

Treasury segment

The profit before tax of the treasury segment increased from Rs. 64.50 billion in fiscal 2015 to Rs. 90.97 billion in fiscal 2016 primarily due to an increase in non-interest income. The non-interest income was higher primarily due to profit on sale of stakes in subsidiaries, higher exchange rate gains on repatriation of retained earnings from overseas branches and higher gains on government securities and other fixed income securities.

Other banking segment

The profit before tax of the other banking segment increased from Rs. 4.22 billion in fiscal 2015 to Rs. 4.46 billion in fiscal 2016 primarily due to higher net interest income.

CONSOLIDATED FINANCIALS AS PER INDIAN GAAP

The consolidated profit before collective contingency and related reserve, tax and minority interest decreased by 2.4% from Rs. 183.39 billion in fiscal 2015 to Rs. 179.04 billion in fiscal 2016.

The consolidated profit aftertax decreased by 16.9% from Rs. 122.47 billion in fiscal 2015 to Rs. 101.80 billion in fiscal 2016 primarily due to a decrease in the profit of ICICI Bank, ICICI Bank UK PLC, ICICI Bank Canada, ICICI Securities Limited, ICICI Lombard General Insurance Company Limited and ICICI Securities Primary Dealership Limited, offset, in part, by an increase in the profit of ICICI Prudential Asset Management Company Limited and ICICI Prudential Life Insurance Company Limited.

At March 31, 2016, the consolidated Tier-1 capital adequacy ratio was 13.13% as against the regulatory requirement of 7.63% and the consolidated total capital adequacy ratio was 16.60% as against the current requirement of 9.63%.

The profit before tax of ICICI Prudential Life Insurance Company Limited increased from Rs. 16.34 billion in fiscal 2015 to Rs. 17.72 billion in fiscal 2016 primarily due to an increase in net brmium earned and investment income and a decrease in provision for policyholder liabilities, offset, in part, by an increase in transfer to linked funds and operating expenses. However, profit after tax increased only marginally from Rs. 16.34 billion in fiscal 2015 to Rs. 16.50 billion in fiscal 2016 due to a tax charge of Rs. Rs. 1.22 billion in fiscal 2016 as compared to nil tax charge in fiscal 2015.

The profit before tax of ICICI Lombard General Insurance Company Limited increased from Rs. 6.91 billion in fiscal 2015 to Rs. 7.08 billion in fiscal 2016 primarily due to an increase in net earned brmium and investment income, offset, in part, by an increase in claims and benefits paid and operating expenses. However, the profit after tax decreased from Rs. 5.36 billion in fiscal 2015 to Rs. 5.07 billion in fiscal 2016 due to a higher effective tax rate.

The profit after tax of ICICI Prudential Asset Management Company Limited increased from Rs. 2.47 billion in fiscal 2015 to Rs. 3.26 billion in fiscal 2016 primarily due to an increase in fee income, offset, in part, by an increase in other administrative expenses and staff cost.

The consolidated profit aftertax of ICICI Securities Limited and its subsidiaries decreased from Rs. 2.94 billion in fiscal 2015 to Rs. 2.39 billion in fiscal 2016 primarily due to a decrease in brokerage and fee income, reflecting lower trading volumes in the capital markets.

The profit after tax of ICICI Securities Primary Dealership Limited decreased from Rs. 2.17 billion in fiscal 2015 to Rs. 1.95 billion in fiscal 2016 primarily due to a decrease in trading gains, offset, in part, by an increase in net interest income.

The profit after tax of ICICI Home Finance Company Limited decreased from Rs. 1.98 billion in fiscal 2015 to Rs. 1.80 billion in fiscal 2016 primarily due to an increase in provisions and a decrease in non-interest income.

The profit after tax of ICICI Bank Canada decreased from Rs. 1.82 billion (CAD 33.7 million) in fiscal 2015 to Rs. 1.12 billion (CAD 22.4 million) in fiscal 2016 primarily due to an increase in provisions and a decrease in other income, offset, in part, by an increase in net interest income.

The profit after tax of ICICI Bank UK PLC decreased from Rs. 1.12 billion (US$ 18.3 million) in fiscal 2015 to Rs. 0.04 billion (US$ 0.5 million) in fiscal 2016 primarily due to an increase in provisions and a decrease in non-interest income, offset, in part, by an increase in net interest income.

The profit after tax of ICICI Venture Fund Management Company Limited decreased from Rs. 0.01 billion in fiscal 2015 to a loss after tax of Rs. 0.21 billion in fiscal 2016 primarily due to a decrease in income from operations and other income, offset, in part, by a decrease in staff costs and other administrative expenses.

The consolidated assets o f the Bank and its subsidiaries and other consolidating entities increased from Rs. Rs. 8,260.79 billion at March 31, 2015 to Rs. 9,187.56 billion at March 31, 2016 primarily due to an increase in the assets of ICICI Bank, ICICI Prudential Life Insurance Company Limited, ICICI Bank Canada and ICICI Bank UK. Consolidated advances increased from Rs. 4,384.90 billion at March 31, 2015 to Rs. 4,937.29 billion at March 31, 2016.