Outlining the "deficiencies" in the quality of loan assets of ICICI, an RBI communication sent to ICICI managing director and CEO KV Kamath said: "There were instances where the amount disbursed to group companies were utilised for adjusting outstandings dues of other accounts of the group. In some cases, the limits were sanctioned to defaulting borrowers and amounts disbursed were adjusted towards their overdues."

The RBI findings relate to fiscal year 1999. The central bank carried out the financial inspection of ICICI under Section 45(N) of the RBI Act, 1934."Though the credit appraisal done in the institution is a detailed exercise, yet certain deficiences were observed in the area of pre-sanction appraisal.

In a few cases, the limits were sanctioned without ensuring whether the promoters have tied up their financial requirements in full," the RBI has observed. The central bank has also cited instances where repayment schedule of loans were extended while converting foreign-currency loans into rupee loans and vice-versa without downgrading the classification of assets.

In a faxed response, ICICI has clarified that "it has classified its loan assets in accordance with extant guidelines and a case-by-case explanation has been submitted to RBI in relation to specific cases identified by the inspecting team. We feel that no additional provisions are required in this regard and the same has also been confirmed by both our Indian GAAP and US GAAP auditors. The difference with respect to valuation of investments arises owing to the long-term nature of investments.

These investments are basically debentures for financing projects which are akin to long-term loans. The inclusion of items like debentures as practiced by ICICI has been disclosed in the annual report and is in line with the provisioning norms for debentures."

As regards the investment policy of ICICI, the RBI note said the classification of investments was not always right and the "valuation of debentures was done applying NPA norms even in cases of quoted debentures which are required to be valued as per the year-end market rates". The RBI team has detected shortfall of Rs 169.05 crore towards provisions for investments as on March 31, 1999.

On ICICI management, the RBI report said: "Though the reviews on important areas were put up to the board (of the institution), it was observed that some of the important reviews like movement of NPAs, status of sick/BIFR cases and major suit-filed cases were either not put up to the board or the detailed information was not furnished." ICICI has said that "with regard to post-sanction supervision and monitoring and delegation of powers, information flows to management and internal controls. ICICI has been continuously upgrading its processes in these areas. Progress in this regard has been reported to the RBI."

The RBI team has also found fault with ICICI's earnings and funds management.The profit after tax and other adjustments for 1998-99 at Rs 1,083.89 crore was virtually at the same level as in the previous year (Rs 1083.30 crore).

"The ICICI had capitalised interest on funds used for constructing new office premises with retrospective effect from the date of commencement of project payment. As a result, the profit after tax and surplus carried to balance sheet as on March 31, 1999, were higher by Rs 15.58 crore and Rs 71.44 crore, respectively (including Rs 55.86 crore being interest capitalised for previous years)," it said.

ICICI in its response has said that "Provisioning has been done strictly in accordance with RBI guidelines and as such the profits of the company have been correctly reported in the financials. The detailed case-by-case response given by ICICI to RBI bears out this fact. It may be noted that ICICI's asset portfolio has been subjected to a detailed analysis and review by US GAAP auditors as well."

Further, the net profit of ICICI would have been lower by Rs 403.01 crore had the shortfall arrived at by the PIO in the provisions on account of loan losses, depreciation in investment and other assets, been taken into account, the RBI note said adding: "The net interest income of the institution had decreased during the current year and the interest spread had fallen to 2.72 per cent during 1998-99 from 3.40 per cent during 1997-98."

The RBI inspection team has also found "substantial mismatches in the assets and liabilities" of ICICI in different time bands. Observing that "raising of resources in excess of its requirements was expensive for the institution," the RBI note said there was negative gap of 45 per cent between assets and liabilities in the short term band for three to six months and the yield on short-term deployments was less than the interest cost on borrowed funds.

Finally, ICICI has said that "in respect of ICICI holding a portfolio of its own bonds, we have clarified that this was as a result of our market making exercise to address liquidity concerns of bondholders.