89
Report No. 1736A-IN FILECOPY India: Appraisal of a Loan to Finance State Joint/Public Sector Industrial Projects through the Industrial Development Bank of India January 5, 1978 Industrial Developmentand Finance Division South Asia Projects FOR OFFICIAL USE ONLY Document of the WorldBank Thisdocument has a restricted distributionand may be used by recipients only in the performance of their official duties. Its contentsmaynot otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

  • Upload
    lylien

  • View
    244

  • Download
    2

Embed Size (px)

Citation preview

Page 1: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

Report No. 1736A-IN FILE COPYIndia: Appraisal of a Loan to Finance StateJoint/Public Sector Industrial Projects through theIndustrial Development Bank of IndiaJanuary 5, 1978

Industrial Development and Finance DivisionSouth Asia ProjectsFOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Page 2: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

CURRENCY EQUIVALENTS(as of December 29, 1977)

US$1.00 Rs 8.42Rs 1.00 = US$0.1188Rs 1 million = US$118,800

(Prior to September 24, 1975, the Rupee wasofficially valued at a fixed Pound Sterlingrate. Since then, it has been fixed relativeto a "basket" of currencies. As these curren-cies are now floating, the US Dollar/Rupee ex-change rate is subject to change. Conversionsin the appraisal report were made at US$1 toRs 9.00, which was the short-term average atthe time of preparation.)

FISCAL YEAR

GOI and SIDCs - April 1 - March 31IDBI - July 1 - June 30

Page 3: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

FOR OFFICIAL USE ONLY

LIST OF ACRONYMS

DAF - Development Assistance FundDFC - Development Finance CompaniesDRC - Domestic Resource CostGOI - Government of India

ICICI - Industrial Credit and Investment Corporation of IndiaIDBI - Industrial Development Bank of IndiaIFCI - Industrial Finance Corporation of IndiaIERR - Internal Economic Rate of ReturnIIG - Inter-Institutional GroupIIT - Inter-Institutional MeetingIRCI - Industrial Reconstruction Corporation of IndiaKITCO - Kerala Industrial and Technical Consultancy OrganizationLIC - Life Insurance CorporationHaTP - Monopolies and Restrictive Trade Practices ActNEITCO - North Eastern Industrial & Technical Consultancy

OrganizationNNP - Net National ProductNSIC - National Small Industries CorporationRBI - Reserve Bank of IndiaSBI - State Bank of India

SFCs - State Financial CorporationsSIDCs - State Industrial Development CorporationsSIICs - State Industrial Investment CorporationsSISI - Small Industries Services InstituteSSI - Small Scale IndustriesSSICs - State Small Industries CorporationsSSIDCs - State Small Industries Development CorporationsUTI - Unit Trust of India

This document has a restricted distribution and may be used by recipients only in the performanceot their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Page 4: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial
Page 5: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDIA

APPRAISAL OF A LOAN TO FINANCE STATEJOINT/PUBLIC SECTOR INDUSTRIAL PROJECTS THROUGH THE

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ............................ i-ii

I. INTRODUCTION ....................................... 1

II. THE INDUSTRIAL SECTOR AND THE TARGET GROUP .... ..... 2

The Industrial Sector and Focus of the Loan ... 2The Role of the State Joint/Public Industrial

Sector ..................................... 2

III. STATE INDUSTRIAL DEVELOPMENT/INVESTMENTCORPORATIONS (SIDCs/SIICs) ......................... 6

IV. IDBI - INSTITUTIONAL ASPECTS ....................... 9

General ................................. 9Ownership and Organization ............ .. 11Procedures and Standards ......... .. .......... 12Operating Policies and Results .. .............. 13

V. IDBI's FINANCIAL POSITION .......................... 14

Quality of Portfolio ........... .. ............. 14Audit .................... ..................... 15Financial Performance ......................... 15

VI. IDBI's BUSINESS PROSPECTS .......................... 17

Business Forecasts ...... ...................... . 17Resource Requirements ............ ............. 17Financial Projections ..... .................... 18

VII. FEATURES OF THE PROPOSED LOAN ...................... 19

This report is based on the findings of an appraisal mission consisting ofMessrs. E. Elejalde, W. Schaefer, D. Groves and E. Nassim which visited Indiain December 1976.

Page 6: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

-2-

ANNEXES

1. Industrial Sector and FinanceAttachment 1 - Operations of Industrial Financing

InstitutionsAttachment 2 - Selective Borrowing and Lending Rates,

FY73 to August 22, 19772. Role of the Public/Joint Industrial Sectors in Madhya Pradesh,

Gujarat, and Andhra PradeshAttachment 1 - MADHYA PRADESH

MPIDC Target Group Project Pipelineas at September 30, 1976

Attachment 2 - GUJARAT

GIIC Target Group Project Pipelineas of November 30, 1976

Attachment 3 - ANDHRA PRADESH

APIDC Target Group Project Pipelineas of September 30, 1976

3. Technical Assistance Fund4. Direct Project Assistance by IDBI to Target Group5. Target Group's Past Performance

Attachment 1 - Comparison of Performance by ExistingPublic/Joint Sector Projects with PrivateSector Projects in the same Industrieswhich have been in Existence for ComparableTime

6. Highlights of Scheme for IDBI Refinance Assistance to SIDCs/SIICs7. Public Financial Institutions Law (Amendment) Act

(IDBI Amendment Act) Main Effects on IDBI8. Board of Directors and Executive Committee as of June 30, 19779. Staffing Situation10. IDBI - Staffing of SFCs Department and Other Loans Departments11. IDBI's Structure of Interest Rates12. IDBI's Role in the Economy

Attachment I - Sanctions, Commitments, Disbursements andRepayments

13. Aging of Arrears14. Characteristics of IDBI's Arrears as of June 30, 1977

(Direct Loans Excluding Export Finance)15. Summary of Equity Investments held as of September 30, 197716. Income Statement for Years Ending June 30, 1973 - June 30, 197717. Cash-flow Statements, Years Ending June 30, 1973 - June 30, 197718. Balance Sheets, June 30, 1973-197719. Comparative Operational Ratios, FY73-FY7720. Forecasts of Approvals, Commitments and Disbursals21. Investment Program for the Target Group

Appendix 1 - Geographical Distribution of Projects inthe Target Group Proposed by StateGovernments

Page 7: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

-.3-

22. Projected Income Statement, FY78-FY8123. Projected Balance Sheets FY78-FY8124. Projected Cash Flow Statements, FY78-FY8125. Projected Comparative Operational Ratios, FY78-FY8126. IDBI's Strategy Statement27. Estimated Disbursement Schedule for Proposed Loan

ORGANIZATION CHART

Chart (No. 16896) - Organization Chart as of November 30, 1976

MAP

IBRD No. 3873R

Page 8: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial
Page 9: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDIA

APPRAISAL OF A LOAN TO FINANCE STATEJOINT/PUBLIC SECTOR INDUSTRIAL PROJECTS THROUGH THE

INDUSTRIAL DEVELOPMENT BANK OF INDIA

SUMMARY AND CONCLUSIONS

i. The Industrial Development Bank of India (IDBI), which is fullyowned by the Government of India (GOI), has requested a line of credit tofinance state ioint/public industrial enterprises in India. IDBI was estab-lished in 1964, and has since become India's largest institutional source offinance for industry, and a major promoter of industrial development. IDBIundertakes a wide variety of activities including direct lending, refinance,rediscounting, export finance, guarantees, investments in shares and deben-tures and underwriting. It also acts as the apex institution for all indus-trial term-lending institutions, and provides capital to financial intermed-iaries at both the national and state level. This report recommends a $25million loan for IDBI's direct lending to state government sponsored joint/public sector enterprises.

ii. The proposed loan would complement World Bank lines of credit tothe Industrial Credit and Investment Corporation of India (ICICI) and throughIDBI to the State Financial Corporations (SFCs) which are primarily directedto the private industrial sector. The proposed loan has been designed toassist medium sized industrial projects (defined in this report as those in-volving fixed assets excluding land between Rs 10 million and Rs 200 million)sponsored by the state governments and their agencies (State IndustrialDevelopment/Investment Corporations, SIDCs/SIICs). The loan would be re-stricted to financing projects sponsored as state majority (i.e., 51% equityor more held by the state government or its agency) or joint sector (i.e., atleast 26% equity held by the state government or its agency and upto 25% ofequity held by a private entrepreneur partner with the balance held by thepublic at large).

iii. The concept of the state joint/public industrial sector which evolvedin the early 1960s has received attention particularly after 1971. The stategovernments use the joint sector as a promotional tool to attract privatesector investments into high priority projects which often focus on improvedutilization of natural resources in the states. It is designed to encourageprivate firms to take up novel investment opportunities through provision ofpart of the equity resources and sharing of risks with the states while takingadvantage of private sector management. Entrepreneurs from more developedareas are thereby encouraged to invest in the less developed ones, whereentrepreneurship is often lacking. GOI has designated IDBI as the centralfinancial institution with the principal role in development of this sector.

iv. IDBI will be able to make a substantial contribution to the states'efforts in promoting industrial development by improving the selection ofhigh priority state sponsored projects, ensuring coordination of state indus-trial development plans, preparing, commissioning, and/or assisting SIDCs/SIICs

Page 10: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- ii -

in preparing sector studies, and implementing upgrading programs for the SIDCs/SIICs. This complements IDBI's present relationship with the SIDCs/SIICs inconnection with IDBI's recent decision to extend to them its refinance facility.Most of the SIDCs/SIICs are not at the present time fully equipped to providea second tier of intermediation for IBRD funds and IDBI will be responsibledirectly for appraising and supervising the projects sponsored from the pro-posed loan. This loan also provides an opportunity to continue a dialoguebetween IBRD and IDBI about IDBI's overall lending policies and organizationwhich had been initiated in connection with earlier operations with IDBI.

v. IDBI is a mature development finance company with qualified manage-ment and staff. With the transfer of IDBI's ownership from the Reserve Bankof India (RBI) to GOI, IDBI's role as the apex institution for industrialfinancing was enhanced and IDBI has taken up the responsibility for refinanceof SIDCs/SIICs and for modernization schemes. Thus the scope and level ofits activities have been growing relatively rapidly. To cope more effectivelywith these increased responsibilities, IDBI has been implementing a majorreorganization since March 1976. IDBI's standards for appraisal and follow-up in its direct lending operatiDns are adequate.

vi. IDBI's financial situation is satisfactory. However, arrears onIDBI's direct loan portfolio have increased over the past few years, but thisis expected to improve with the recent pickup in industrial activity.

vii. Nine tenths of the proposals in the pipeline of state joint/publicsector medium-scale projects are in the joint sector. The emphasis is onchemical projects (about one-third) and the remainder in a wide variety ofindustries, many of which involve exploitation of natural resources. As muchas 70% of the projects are in the 14 less developed states and in the long-run, this implies a marked shift into less developed states and backwardareas. The pipeline comprises about 220 projects costing Rs 12 billion equiv-alent, with foreign exchange requirements of Rs 2.2 billion (US$250 million).However, not all of these projects are at a bankable stage and several maynot be economically justified. It would be IDBI's function to screen thispipeline and select high priority projects (approximately 15 to 20) requiringforeign exchange amounting to or exceeding US$25 million over the next 2years, for financing under this proposed loan. An upper limit of US$4 millionfrom the loan to any one subproject is proposed.

viii. The first project, not being a free-limit project, from each of thefirst six states would be reviewed for approval by IBRD in addition to allprojects requiring IDBI funds of US$3 million or more. This free limit wouldenable IBRD to review for approval some 50% by number and 70% by amount of theprojects financed under the proposed loan.

Page 11: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDIA

APPRAISAL OF A LOAN TO FIN4ANCE STATEJOINT/PUBLIC SECTOR INDUSTRIAL PROJECTS THROUGH THE

INDUSTRIAL DEVELOPMENT BANK OF INDIA

I. INTRODUCTION

1.01 The Industrial Development Bank of India (IDBI), now fully owned bythe Government of India (GOI), has requested a loan to finance state joint andpublic sector industrial enterprises in India. IDBI was established in 1964,and has since become the largest institutional source of finance for industry.IDBI undertakes a wide variety of activities, including direct lending, re-finance, rediscounting, export finance, guarantees, investments in shares anddebentures, and underwriting. It also acts as the apex institution for allindustrial term-lending institutions, and provides capital to financial inter-mediaries at both the national and state level. This report recommends a$25 million loan for IDBI's direct lending to a selected size group of stategovernment sponsored projects.

1.02 The Bank Group has already been involved with IDBI through two linesof credit in 1973 and 1976 totalling $65 million, channelled through IDBI to18 State Financial Corporations (SFCs). IDBI was also one of the channels usedfor $28 million out of a $105 million IDA Credit for fertilizers in 1975.Aside from direct loans for steel, coal and fertilizer, and for import credits,the Bank Group's other involvement in the Indian industrial sector has beenthrough twelve loans to the Industrial Credit and Investment Corporation ofIndia (ICICI) amounting to $506 million (net of cancellations), used forfinancing medium and large-scale industries mainly in the private sector, andto a limited extent in the joint sector (para 1.03).

1.03 The proposed loan would complement the existing IDBI/SFCs and ICICIoperations both of which are primarily directed to the private sector, by pro-viding IDBI with funds to finance directly medium sized industrial projectssponsored by the state governments and their agencies (State Industrial Devel-opment/Investment Corporations, SIDCs/SIICs). Therefore, the loan would berestricted to financing projects sponsored as state majority (i.e, 51% equityor more held by the state government or its agency) or joint sector (i.e., atleast 26% equity held by the state government or its agency and up to 25% ofequity held by a private partner with the balance held by the public at large).

1.04 The objectives of the proposed loan would be to help IDBI in itsefforts to (i) improve the preparation and implementation of high priorityprojects in the target group; (ii) assist more effectively in the preparationof industrial sector studies focussed on the joint sector and in their coordi-nation; and (iii) implement institutional upgrading programs for the SIDCs/SlICs. IBRD's role would be in particular, to ensure high standards throughreview of appraisal reports on subloans exceeding the free limit; comment onthe preparation of industrial sector studies; and review, and agree on, theSIDC/SIIC institutional upgrading programs. This project will also provide

Page 12: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

-2

IBRD with the opportunity to continue the dialogue initiated with earlierIBRD/IDA operations on IDBI's overall activities and policies.

II. THE INDUSTRIAL SECTOR AND THE TARGET GROUP

The Industrial Sector and Focus of the Loan

2.01 Annex 1 contains an assessment of the current situation, policiesand financial system of India's industrial sector. It describes the recentgrowth of industrial production estimated at 10% during FY77, compared with5.5% in FY76, 2.5% in FY75, and 1% in FY74. Industrial export performance hasalso improved. However, growth is highly uneven among the different Indianstates and among different industrial subsectors. For example, the demandfor electrical motors, jeeps, railway wagons, and diesel engines, as well ascotton textiles continues to be sluggish. As discussed in Annex 1, GOI hasrecently taken a number of measures to boost industrial growth, includingliberalization of licensing procedures, relaxation of import and other con-trols, fiscal incentives, and more emphasis on exports and on industrialmodernization. While these measures are encouraging, it is not yet clearwhether this will prove enough for sustained growth. In the longer run,growth will depend on a continued rise in the final demand both for investmentand for consumption, which will in turn depend on the buoyancy of investmentin more efficient plants. Thus, the focus of this loan will be on investmentpromotion at the state level to exploit opportunities for economically effi-cient projects, particularly in the less developed states.

The Role of the State Joint/Public Industrial Sector

2.02 Background. The promotion of state level industry dates back to theearly 1960s and has received increased emphasis since 1971. The SIDCs/SIICsare generally responsible for the promotion of industries at the state-level(para 3.01 to 3.10). SIDCs/SIICs, on behalf of state governments, sometimesimplement projects on their own by paying in 51% or more of the share capital(with the rest being sold to the general public), where a private partner isnot forthcoming. In most cases, the state-sponsored projects are implementedin the joint sector. A joint sector unit is defined as an undertaking inwhich the state holds at least 26% of the equity, 1/ with a private collabo-rator, who provides the management, holding up to 25% and with the balanceheld by the public at large. Originally, GOI looked upon the joint sectorconcept as an approach to curb the concentration of economic power by restrict-ing the growth of "large houses". However, this concept has been evolving 2/,

1/ In most cases, the SIDCs/SIICs subscribe on behalf of the stategovernment.

2/ In fact, in some states some "large houses" are being selected as theprivate sector partner.

Page 13: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

-3-

and now the state governments use the joint sector as a promotional tool toattract private sector investment. As illustrated by Annex 2, states are nowutilizing the joint sector to fill investment gaps which are often focussed atthe improved utilization of natural resources in these states. GOI has mean-while designated IDBI as the central financial institution which is to playthe principal role in the development of this sector.

2.03 Advantages of the Concept and Main Issues. The joint ventures withprivate entrepreneurs have the following advantages for the state governments:(i) the SIDCs/SIICs can spread their scarce funds over a larger number of proj-ects than is possible with wholly state owned projects by mobilizing privateresources for investment in industry in their state; and (ii) the private part-ner provides the management, thus relieving the public sector from administra-tion of those projects. The joint sector concept also has advantages for theprivate partner: (i) the association with the state government is likely tohelp the project managers surmount administrative hurdles and assure someassistance for continued availability of infrastructure facilities and rawmaterials; (ii) the SIDCs/SIICs can assist the private entrepreneur in over-coming pre-operational formalities, such as capital goods clearance, foreigncollaboration approval, and at times even assist in obtaining finance for theproject from other sources; (iii) the financial risk of the entrepreneur isreduced, although the entrepreneur is still managing the unit; and (iv) theproblem of insufficient equity capital of the entrepreneur is overcome bythe SIDCs/SIICs' equity contribution. These advantages are of particularimportance for investments in the less developed states which need to attractentrepreneurs from other states.

2.04 However, there are also a number of potential problems as the statesneed to strengthen their capacity to identify, prepare, appraise and imple-ment industrial projects. IDBI can play a useful role in developing and im-plementing institutional upgrading programs for the SIDCs/SIICs (para 3.10)which are aimed at solving these problems. However, in the meantime, IDBIwill be responsible for selecting, appraising, and supervising subprojects tobe financed by the proposed loan. IDBI will also, by comparing and reviewingthe pipeline of projects of all states, assure coordination of individualstate plans at an early stage. 1/

2.05 As a first step to strengthen the project identification and prep-aration capanlilty of the states, IDBI is preparing sector work programsfor individual states. These programs would list priority studies coveringsectoral issues identified for each state, particularly in relation to therole of the joint sector. These studies would address issues such as a surveyof industrial resources in some states, where still required, 2/ to identifyunexploited investment opportunities and reviews of state industrial policy

1/ In the past, many similar projects were promoted by different statesat the same time, i.e., mini steel plants, motor scooter plants,automobile parts, etc; leading to the possibility of excess capacity.

2/ IDBI has completed industrial potential surveys for a number of states,although some need updating.

Page 14: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 4 -

objectives, procedures and effects and the efficiency of the joint sectorconcept. They could also include the preparation of technical feasibilitystudies on specific projects and studies of areas of critical importancesuch as marketing prospects of particular products, optimal plant size,and analysis of the efficiency, appropriateness and competitiveness of theindustry incentives offered by these states.

2.06 To assist in the execution of the sectoral work program, $500,000of the proposed loan would be allocated to a Technical Assistance Fund whichwould enable IDBI to engage consultants to assist state government agenciesin preparation of projects and studies. 1/ Priority would be given to theless developed states which are short of the technical manpower to developprojects. Annex 3 gives the details of the Technical Assistance Fund pro-posal, which has been agreed with IDBI.

2.07 Number and Characteristics of State Joint/Public Sector Units. Asshown in Annex 4, IDBI started financing state joint/public sector projectsin 1970 and has financed up to June 1977, 47 state public sector projectswith an average project cost of Rs 77 million (US$9 million) and 73 statejoint sector projects with an average project cost of Rs 106 million (US$15million). 2/ The total foreign exchange requirement for these 120 projectsconstituted 25% of the total project cost. The cost of individual statejoint and public sector projects financed by IDBI ranged generally fromRs 10 million to Rs 200 million. The highest IDBI assistance was for fer-tilizer projects while machinery and basic metal industries accounted forthe largest number of projects. Geographically, the number of projects werewell diversified, with 15 states covered.

2.08 Performance of State Joint/Public Sector Industrial Projects. Moststate public/joint sector projects are either under construction or just start-ing up so it is difficult to evaluate their performance. Nevertheless, ananalysis was made of projects in 3 states which are in different stages ofindustrial development (Gujarat, Andhra Pradesh and Madhya Pradesh). Annex 5shows that, in 1976, there were 12 operating state joint/public sector projects(2 in Gujarat, 2 in Madhya Pradesh, and 8 in Andhra Pradesh), the performanceof which was mixed. Five companies were operating profitably and four hadstarted operations only in 1975 or thereafter. Three were making losses mainly

1/ IDBI will, where appropriate, capitalize expenditures in these studiesin the project cost and use the reimbursement of such expenditures tofinance further technical assistance.

2/ Data on state joint sector companies, other than those financed by IDBI,

are difficult to obtain partly because (i) in general these are not shownseparately as the joint sector but normally classified as part of theprivate sector, and (ii) many companies are not yet operating or havedone so for only a limited period due to the recent origin of the jointsector concept. However, the state joint and public sector projectsfinanced by IDBI provide background on their characteristics.

Page 15: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 5 -

due to market problems. 1/ With diversification schemes under considerationand demand anticipated to improve, all 3 companies are expected to make profitsin the long run. In the case of the bottling company which is IDBI financed,IDBI lent its experience and knowledge in management and marketing to improvethe company's financial performance. Wihile the sample is small, this recordappears satisfactory given that most of the firms had recently started opera-tions. Moreover, a comparison of 10 state government sponsored projectsfrom different states with 8 private sector projects in the same industrieswhich had been in existence for comparable periods of time shows that generallythe performance of these projects has been similar and that, where involved,IDBI played a useful role in project formulation and follow up.

2.09 Pipeline. The states have presented a pipeline of 218 statejoint/public sector investment proposals of medium size (para 7.05) costingRs 12 billion equivalent, with foreign exchange requirements of Rs 2.2 bil-lion ($250 million) or 19%. 2/ However, many of these projects are not readyfor financing and several may not be economically efficient. It would beIDBI's function to screen this pipeline and select high priority projects(approximately 15 to 20) requiring foreign exchange amounting to or exceeding$25 million over the next two years. IDBI's appraisal capability and thesectoral studies to be undertaken in conjunction with the proposed loan (para2.05) would ensure that resources are allocated efficiently.

2.10 The list indicates a heavy emphasis in chemicals (35%) which is con-cerned with downstream development of existing Central Government/State ownedpetrochemical and chemical facilities or projects largely based on locallyavailable raw materials (paper, gas, coal, salt, clay, etc). The remainderof the industries show a wide diversity of activities many of which involveexploitation of local natural resources. The majority of these industriesrequire capital intensive technology with fixed cost per job roughly estimatedat about $30,000. However, while in many cases, the issue of market potentialand economies of scale in production has to be studied thoroughly (confirmingthe need for IDBI's involvement also to coordinate and avoid investment dup-lication), there are possibilities for efficient import substitution and in

1/ One bottling company in Anhdra Pradesh was making losses, as was theindustry generally, because the declaration of prohibition in TamilNadu reduced its market. A cable manufacturer, which made profitsin 1974, was making losses in 1976 because of reduced demand fromits main customers, the electricity boards. The third company,which was initially started by a private promoter, made losses in2 out of the last 3 years because of reduced demand for its ferriterods from the T.V. and radio manufacturers.

2/ Refer to Annex 21.

Page 16: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 6 -

selected cases, export orientation. 1/ Further, the effect of such invest-ments is to stimulate a variety of other industries to utilize the intermediategoods being produced by these large units as well as to develop ancillary andservice functions. Thus, the employment effect should be substantial. Thegeographical distribution shows that about 70% of the proposals came from the14 less developed industrial states. Although actual resource allocation neednot follow this pattern in the short-run, a marked shift in favor of the lessindustrialized states is envisaged, and these will be the major beneficiaries ofthe institution building program, resulting in increased investment subsequently.

ITT. STATE INDUSTRIAL DEVELOPMENT/INVESTMENT CORPORATIONS (SIDCs/SIICs)

3.01 General. The role of SIDCs/SIICs is to promote industrial develop-ment through provision of equity capital and by identifying, preparing, andimplementing high priority projects which constitute the target group for theproposed loan. 2/ They fill an important gap in the financial system at thestate level. The first SIDC was set up in Bihar in November 1960. Over theyears, all states have established SIDCs/SIICs intended to serve as catalystsin the industrialization process and at present there are 21 throughout thecountry. Although some are reasonably well organized and managed (e.g., inIiaharashtra, Gujarat, Andhra Pradesh), most need substantial institutionalupgrading. IDBI, which has experience in upgrading the State FinancialCorporations (SFCs), is fully qualified to execute the upgrading programs forSIDCs/SIICs (para 3.10).

3.02 Functions. All SIDCs/SIICs are wholly owned by the state govern-ments, and have been incorporated under the Companies Act, as public orprivate limited companies. Their Articles of Association or their Statutesauthorize SIICs/SIDCs to undertake a wide range of activities, which aregenerally appropriate in view of the objective to promote industry. Themain activities are: granting of financial assistance (equity and loans);identification, promotion and management of industrial projects; setting upof industrial estates; selection and training of entrepreneurs; and provisionof technical assistance. There is, and should be, considerable diversity ofoperations from state to state, as well as differences in emphasis, arisingv>. v; L-c Cigree 0± industrialization achieved, the available institutionalnetwork and particular local needs.

1/ A more detailed screening of the pipelines by 3 states (Annex 2) indi-cates that there are a number of attractive investment opportunitiesin these 3 states which implies that out of a total pipeline (for allstates) of about 220 projects, IDBI should be capable of finding 15-20suitable ones, particularly when also taking into account the sectoralwork to be carried out under the proposed loan.

2/ In most states, these functions are carried out by the SIDCs, but insome, such as Maharashtra and Gujarat, SIIC's are responsible for theseactivities.

Page 17: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

3.03 Industrial investment priorities vary widely from state to stateand the SIDCs/SIICs generally cope with the different needs. Thus, in

Maharashtra the SIIC tends to emphasize geographical dispersion of industry

away from the major urban centers. In states like Andhra Pradesh, Kerala andPunjab, SIDCs concentrate on entrepreneurial promotion through initiating and

implementing arrangements for setting up new industries such as preparation of

detailed feasibility studies, securing licenses, and negotiation of collabora-tion agreements with entrepreneurs. The Gujarat SIIC also undertakes the above

functions but is now focussing mainly on developing projects to utilize the

by-products of the refinery at Baroda through downstream development. The

Madhya Pradesh IDC concentrates on project identification as the state is

highly undeveloped, despite relatively large resources. However, some SIDCs

are also financing small scale industry, where this is better done by SFCs.

Thus, the adequacy of the functions of individual SIDCs are being evaluated

in the context of the requirements of the particular state, and any proposed

changes are being incorporated in the upgrading programs.

3.04 Management. In all SIDCs/SIICs, the principal decision makingauthority is vested in the Board of Directors which is nominated by the state

governments. Day-to-day operations are handled by a full-time managing direc-tor, who is the chief executive and who, in some cases, has limited sanction-

ing power. The managing director is a nominee of the state government. Heis usually from the Indian Administrative Service and on average serves from

2 to 3 years. In many instances, the key management staff of SIDCs/SIICs are

deputed from state government service. In some SIDCs/SIICs the staff, par-

ticularly at the middle management level, could be upgraded and the turnoverfor the managing director should be reduced.

3.05 Resources. Taken as a group, the bulk of the resources available

to the SIDCs comes from state governments; about 40% is in the form of equity

and about 20% in the form of loans. The balance comes from bonds on the openmarket (40%). The Reserve Bank of India fixes a quota of open market borrow-

ings each year for each state and consequently, SIDCs have difficulties rais-

ing as much capital as they need to expand their operations. Also, SIDCs havestatutory restrictions as to the level of deposits they can accept in relationto their net worth and their inability to offer attractive interest rates inrelation to their lending rates as well as the competition from commercialbanks make their problem even more acute. In general, very few, of the SIDCsappear to have effective financial resource planning as a basis for their pro-

jected operations. Most of them rely on annual budgetary allocations from

the states for their resources, which are in certain instances augmented by

commercial borrowings from banks. Recently, IDBI has made available itsrefinance facilities to the SIDCs/SIICs which should help alleviate theresource problem (para 3.10).

3.06 Size and Nature of Operations. Compared to the size of operations

of SFCs and the all-India financial institutions (Annex 1, paras 13 to 27),

the volume of finance provided by SIDCs is relatively small as shown below:

Page 18: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 8 -

Disbursements from Term Lending Institutions, 1976/77

Equity CapitalLoans Subscriptions------ (Rs million) ------

IDBI 2,720 68IFCI 529 19ICICI 606 65SFCs 1,050 3SIDCs 207 91

3.07 In recent years, SIDCs have disbursed about one-quarter of theamount disbursed by the other important category of state sponsored develop-ment institutions, the State Financial Corporations (SFCs). The SFCs essen-tially deal with the smaller size category of enterprises, almost all of whichare privately owned, and SFCs are able to enhance their resources with re-finance from IDBI, which the SIDCs have only recently been allowed to do.However, SFCs are not general:Ly permitted to subscribe to shares 1/ althoughthey may underwrite. On the other hand, SIDCs can underwrite and subscribefor shares and as shown in the Table above, their level of share subscriptionsindicates the importance of SIDCs in providing venture capital. One of theobjectives of SIDCs is to rotate funds through sales from their investmentportfolio. The performance OII this score has been relatively poor so far,either because the continued i nvolvement of the SIDCs in the management of theenterprise was deemed necessary or the profitability of the undertakings wasinsufficient to attract buyers. This situation should change as the portfoliobecomes more mature with time and as the SIDCs become more experienced.

3.08 Operating Results. The operating results of the SIDCs show consid-erable variation but in general, and as might be expected, the SIDCs in theindustrialized states have greater resources at their disposal and earn higherprofits than most of the other SIDCs, as shown in the sample below.

1/ However, in 1972 the SFC act was amended to allow SFCs to raise specialcapital from the state governments and IDBI for investment in new indus-trial units. This scheme has not been very successful partly due toinsufficient demand. In any event, this scheme does not overlap withthe SIDCs' activities because (i) it is limited to rather small unitswith paid up capital not exceeding Rs 500,000 and (ii) it is limited toprivate companies since the SFC capital contribution must not exceedthe promoter's contribution or 20% of the paid up capital of thecompany whichever is lower.

Page 19: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 9 -

SIDCs' Loans and Equity Investments as of March 31, 1977

Ratio of Profit beforeOutstanding Loans Tax as % of

State SIDC to Equity Investment Total Assets Equity

Maharashtra SICOM 11 : 1 Rs 815 million 4.1Gujarat GIIC 4.1 : 1 Rs 318 million 13.5Rajasthan RSIMDC 3.6 : 1 Rs 137 million -2.0Assam AIDC 1.9 : 1 Rs 109 million - 1.1

Under the upgrading programs, the finances of each SIDC have been analyzedin detail and measures are proposed, where appropriate, to improve theirfinancial position.

3.09 Organization and Procedures. Some SIDCs need to streamline theirorganization, to implement efficient and timely financial reporting systems,institute a planning system which matches the SIDC's institutional capacityto handle projects with its project pipeline, the absorptive capacity of theindustrial sector and the SIDC's and private investor's financial resources,and to improve their appraisal standards.

3.10 Upgrading Programs. In general most of the SIDCs/SIICs are not yetfully equipped to provide a second tier of intermediation for IBRD funds andit is essential that IDBI appraise and supervise the subprojects directly.The upgrading of SIDCs/SIICs which are responsible for promotion of projectsin the target group is a key aspect of the proposed project. In July 1976IDBI decided to provide assistance and finance for upgrading the SIDC/SIICsgiven their potential to play an important role in future state sponsoredindustrial development and to make them eligible for IDBI's refinance facil-ities subject to certain conditions such as maximum loan size of Rs 6 millionand agreement with the concerned SFC where assistance could also be providedby the SFC (Annex 6). In addition IDBI also decided to subscribe to SIDCshare capital and supervise their activities. IDBI would be represented onthe SIDC/SIIC boards and would routinely inspect their operations and accounts.In connection with the proposed project, IDBI has been preparing upgradingprograms for SIDCs/SIICs activities, which generally include a review andappropriate recommendations concerning management, staffing, procedures andstandards, operating policies, resources, operations, financial aspects andprospects, which would improve SIDCs/SIICs' capability to identify and selectsuitable projects and suitable private sector partners for joint sectorenterprises. GOI, IDBI and IBRD agreed that IDBI could declare ineligibleany project sponsored by any SIDC/ SIIC which is failing to make a reasonableeffort to fulfill its upgrading program.

IV. IDBI - INSTITUTIONAL ASPECTS

General

4.01 IDBI's function under the proposed loan would be to (i) select andappraise high priority projects from the pipeline of state joint/public secto)r

Page 20: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 10 -

projects, (ii) supervise implementation of the institutional upgrading pro-grams for SIDCs (para 3.10) and (iii) supervise execution of sector workprograms for each state (para 2.05). IDBI is qualified to perform thesefur.tiL,ns. AlthCugh the major emphasis of this operation would be to bringabout improvements in the joint sector, and although the proposed loan wouldaccount for only about 2% of IDBI's approvals during 1978 and 1979, thedialogue concerning measures to strengthen I1BI as an institution wouldcontinue - as pointed out below.

4.02 IDBI was established in 1964 as a wholly owned subsidiary of RBI,but is now owned by GOl. It is the apex institution for industrial financein India. Its objectives are to: (i) coordinate the activities of, and ex-tend finance to, other industrial termn financing institutions; (ii) providedirect and indirect assistance to industrial units; (iii) supplement theirresources to plan and promote industries of key significance in the industrialsector structure; and (iv) adopt and enforce a system of priorities in promot-ing future industrial growth. To achieve these objectives, IDBI is empoweredto: (i make direct loans; underwrite and subscribe to shares and debentures;and make guarantees; (ii) refinance industrial term loans and export credits;(iii) accept, discount or rediscount bills of exchange and promissory notes,and (iv) carry out researci. and surveys on marketing or investments, and pro-vide technical and administrative assistance. The IDBI Act was amended inDecember 1972, when IDBI was empowered to assist a wider range of industriesand to provide longer maturities on its loans. In addition, the Public Finan-cial Institution Laws (Amendment) Act has come into force in February 1976.This Act includes a series of amendments to the IDBI Act as well as to thestatutes of RBI, IFCI, SFCs, LIC and UTI. 1/ Annex 7 summarizes the moreimportant amendments affecting IDBI. These brought about a fundamental changein IDBI's character, structure and its role vis-a-vis other financial institu-tions. First, the organizational relationship between IDBI and RBI was severedand IDBI's ownership was transferred to GOI. Second, IDBI's role as an apexinstitltion for industrial financing was strengthened. Moreover, in 1976 GOIappointed IDBI to administer industrial modernization programs 2/ and IDBI hastaken up the refinance scheme of SIDCs/SIICs (para 3.10). 3/ In view of this

1/ Reserve Bank of Lndia, Industrial Finance Corporation of India, StateFinancial Corporation, Life Insurance Company of India, Unit Trust ofIndia.

2/ The modernization program, which GOI announced in 1976 for the textiles,cement, jute, sugar and engineering industries consists mainly in pro-vision of cheaper funds (7-1/2% interest p.a.) than normal (11% p.a.)but does not specify how the basic structural problems of these in-dustries are to be tackled.

i/ IDBI has taken up four other new "schemes" since 1976: (i) assistanceunder the Technical Development Fund Scheme; (ii) scheme for provisionof seed capital assistance to new entrepreneurs; (iii) extension of con-cessional refinance assistance to single truck operators, and (iv) specialconcessions for bills rediscounting scheme in the Nortlh Eastern Region,consisting rnaLnly of softer financing terms.

Page 21: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 11 -

increased work load, IDBI is taking adequate steps to ensure continued opera-

tional efficiency (para 4.05), adequate staffing (paras 4.06 to 4.08) and

viable finances (para 6.06). IDBI intends to be cautious in taking up any

new responsibilities beyond those already mentioned since they may create an

undue burden on IDBI.

Ownership and Organization

4.03 Share Capital. IDBI's original paid up capital was Rs 100 million.

Increases took place in FY67, FY71, FY72 and FY74, each of Rs 100 million,

to reach the then authorized level of Rs 500 million. As a result of the

most recent amendments to its Act, IDBI's authorized capital has increased to

Rs 1 billion with GOI having the power to increase it further to Rs 2 billion.

The Rs 500 million issued capital was transferred from RBI to GOI in February

1976 and any further share capital increases would be paid from budgetary

allocations by GOI.

4.04 Board of Directors. Before February 1976, IDBI's Board of Directors

was the same as RBI's. In November 1976, IDBI acquired a new Board which has

16 members, 5 short of the provisions of the 21 provided in its Act (Annex 8).

This shortage has been discussed with GOI and IDBI and they expect to fill

these positions by mid-1978. IDBI's present board members are competent and

experienced. IDBI's Board meets about every two months with an attendance

record of over 90%, and concentrates on general policy matters. An Executive

Committee (comprising 5 members as of December 1977) meets once a month and

concentrates on ordinary business, such as loan and investment approvals,

etc.

4.05 Organization. After the transfer of its ownership, IDBI has under-

gone a major reorganization, the major features of which (Chart I) are:

(a) Decentralization. Regional offices are upgraded and given

much greater powers to approve refinance and direct finance

cases. After a trial period, the authorization limits

have been increased recently again. Two additional regional

offices were set up in Ahmedabad and Gauhati;

(b) Delegation of powers. The powers of the executive directors

and department heads have been increased;

(c) Upgrading of the former Export Department into the "Interna-

tional Finance Wing";

(d) Creation of a new "Soft Loan Division" responsible for the

administration of GOI's modernization program (see para 10

of Annex 1);

(e) Creation of three new units (Regional and Backward Area

Development Department, State Financial Corporations and

other State Level Agencies Department, and Inter-institutional

Coordination Department) enables IDBI to set industrial finance

Page 22: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 12 -

policies effectively and supervise their implementation.These are attached to the Domestic Finance Wing, whichdeals mainly with direct loans, rediscounting and refinance.

IDBI's operational efficiency and promotional and policy setting capabilityhas improved as a result of this reorganization.

4.06 Management and Staff. IDBI's top management is well qualified.The Chairman and Managing Director is assisted by three Executive Directors,responsible for the Project Finance Division, the International FinanceWing, and the Soft Loan Division respectively. The position of one Execu-tive Director is vacant since August 1977 but is expected to be filled shortly.Annex 9 shows that IDBI's staff increased during the past year by about 50%from 914 in June 1976 to 1338 in October 1977 of whom 494 were professionals(including management, and staff officers in regional offices). In additionto staff growth due to increased operations, IDBI had to increase its stafffor implementing the modernization program and the refinance scheme for SIDCs/SIICs. IDBI has special training programs for newly recruited staff at theBankers' Training College in Bombay and in-house.

4.07 The departments within IDBI that will play a key role in the pro-posed project are the State Financial Corporations and other State LevelAgencies Department (SFC/SIDCs Dept.) and the five Loans Departments. 1/The former will administer the institutional upgrading programs and the latterwill appraise the subprojects (Annex 10). IDBI recognizes that the additionalworkload on the SFC/SIDCs Department resulting from IDBI's recent involvementwith SIDCs should not affect its work on upgrading and monitoring the perform-ance of SFCs. Therefore, IDBI has budgeted for about 50% more staff to under-take the institution building program for the SIDCs, in addition to somestrengthening -of staff for SFC work and confirmed that it will hire thisstaff before mid-1978, IDBI should be able to obtain experienced staff forthe SFC/SIDC Department partly througn transfers from its Imports Loan Depart-ment and perhaps from RBI. To monitor the sector work program (para 2.05),IDBI is recruiting at least one senior economist for each of the five regionaloffices, which is satisfactory.

4.08 IDBI has also budgeted for a 50% staff increase in its LoanDepartments (including the Soft Loans Division which was created in 1976 toimplement GOIs modernization program (para 4.05 d) to cope with the increasedworkload. The actual staff strength is 25% below the budgeted level and IDBIconfirmed that it will fill the vacancies by mid-1978, which is satisfactory.

Procedures and Standards

4.09 Appraisal. IDBI's appraisal procedures and standards are satis-factory. Its refinance and rediscount facilities are granted to financial

1/ One of the Loan Departments works exclusively on problem projects whilethe other four undertake appraisal and follow-up work with responsi-bilities divided on a sectoral basis. These Departments are under thecontrol of the Project Finance Division.

Page 23: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 13 -

institutions and banks who in turn finance specific projects. Appraisal ofdirectly financed projects are carried out by IDBI's staff but for screeningof complex projects, prior to Board approval, IDBI calls on the advice of ad-hoc committees composed of technical and financial experts, or consultantsin particular fields. IDBI's evaluation of the projects' economic contribu-tion includes the calculation of an Internal Economic Rate of Return, althoughthe methodology needs improvement mainly by utilization of border rather thanmarket prices and exclusion of taxes. IDBI has indicated that it will infuture apply the rate of return methodology prepared by the Bank Group forDFCs and confirmed that it will continue to put more emphasis on marketaspects, optimal plant size and management strength in its appraisals.

4.10 Follow-up. During the past year IDBI has improved its follow-upwork. It has created a department for monitoring of its problem projects(about 14% of its projects) which prepares periodically comprehensive reports.IDBI defines problem projects as those industrial concerns which defaultedin payment of interest and/or principal for 2 consecutive half-years or more.For its regular follow-up work on the other projects (about 300 in FY76), IDBIrelies on regular progress and annual reports from its clients, and on itsinspections. It is implementing a policy whereby the progress reports willbe quarterly while the projects are under implementation, and half-yearlythereafter. In addition, IDBI keeps representatives on the Boards of 148companies (end June 1976); this is obligatory where the assistance is aboveRs 5 million and where no other all-India financial institution has a nomineedirector on the Board. IDBI has confirmed that it intends to strengthen itsfollow-up by visiting all projects under implementation at least every sixmonths and problem projects more frequently, and by reviewing regularly andpromptly all information received from clients, so as to decrease substan-tially its arrears. IDBI would continue its program for rescheduling ofloans, where appropriate and foreclosing in selected cases.

4.11 Procurement and Disbursement. IDBI ensures that all capital expend-itures for projects it finances are technically and economically justified.It scrutinizes the equipment required for a comparative asseasment of pricesand quality. IDBI disburses usually in installments according to the progressof the projects and would request disbursements accordingly from IBRD. Theutilization of disbursements is verified through auditors' certificates, pro-gress reports, or in some cases through inspections by IDBI's staff. IDBI'sprocurement and disbursement procedures are adequate.

Operating Policies and Results

4.12 General. While IDBI has no formal policy statement, the IDBI Actand the "IDBI Amendment Act" (para 4.02), complemented by Board resolutionsadopted from time to time, and Government guidelines, provide guidelines forIDBI's activities, which are, in general, satisfactory. Moreover, IDBI'sPerformance Strategy 1/ sets a 10:1 risk assets (direct financial assistance)to equity ratio as a guiding norm, which is satisfactory. IDBI has no specific

1/ Annex 26.

Page 24: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 14 -

guidelines to determine its maximum exposure in a single enterprise or pro-

ject, but its maximum exposure is 18%, which is satisfactory. 1/

4.13 Lending Terms. IDBI's interest rate structure is shown in Annex 11.Its rates were last increased in December 1975. For direct rupee assistance(other than for export) the lending rate is 9.5% for units in backward areas;

11.0% in other cases. 2/ With long run inflation estimated at about 8% p.a.which is a reasonable assumption given GOI policies, IDBI should be lending

at positive real rates of interest of 1.5% to 3%.

4.15 Operating Results. Over the three years 1974 to 1977, IDBI's totalapprovals more than tripled from Rs 2.2 billion to Rs 7.9 billion. In 1977,IDBI's direct assistance to industrial units accounted for 35% of the total,

refinance and share and bond subscription for SFCs for 33%, rediscounting of

bills for 21%, and export finance, 11%. In the past, IDBI has financed highpriority projects and had no difficulties to raise resources (Annex 12).

V. IDBI's FINANCIAL POSITION

Quality of Portfolio

5.01 Loans. IDBI's arrears position (Annexes 13 and 14) shows that thetotal principal outstanding on loans affected by arrears has improved from50% as of December 31, 1974 of direct loans outstanding to 40% as of June 30,1977, although the amount of arrears has increased. IDBI's collection ratioof 85% to 90% is still satisfactory. Annex 14 shows the characteristics ofIDBI's arrears as of June'30, 1977. Four sectors, chemicals-(21%),--fer-tilizers(20%), iron and steel (14%), and textiles (10%) account for 65% of the totalarrears. IDDBI's aiLears reflect the special pro-blems faced by Indian industrysince 1972; power cuts in 1973; credit restrictions in 1974; business reces-sion in 1975; insufficient demand in 1976 and the first six months of 1977,and the effects of industrial strife following the repeal of the emergencyand further power cuts. However, the upward trend in arrears has slowed andIDBIs' improved follow up (para 4.10) should help to further reduce arrears.

5.02 Investments. Annex 15 shows that as of June 30, 1976, IDBI's equityportfolio was Rs 226 million (at cost). Some 24% of the equity portfolio was

1/ If IDBI and Development Assistance Fund (para 6.05, footnote) financ-ing is taken together the maximum exposure would be 30%. Up untilSeptember 30, 1976 the largest DAF loan was Rs 265 million representinga 23% exposure.

2/ The lending rates under IDBI's other schemes vary from 6.5% to 10.0%.Presently IDBI lends the foreign exchange under the fertilizer project(para 1.02) at 11%. In comparison, ICICI's lending rates for foreignexchange are 10% and 11% for projects located in backward and non-backward areas respectively, and those for local currency are identicalto IDBI's lending rates.

Page 25: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 15 -

in companies operating profitably, 54% in companies under construction orin a pre-operating stage but not in technical or financial difficulty, and22% in companies operating at a loss or in difficulties. Such distributionof the investment portfolio is not unusual for a development finance company,which is assisting mainly new projects. The estimated market value of theportfolio was Rs 170.7 million. The current rate of return on the portfoliois 4% which is somewhat low but still acceptable.

5.03 Provisions. Although IDBI has no specific provisions for bad anddoubtful debts it has appropriated profits for this purpose and has built upcontingency and general reserves of Rs 67 million 1/ or 1.8% of direct loansand equitv investments (0.7% of total loans, refinance, equity, and bills dis-counted) as of June 30, 1977. In absence of an auditor's opinion it is dif-ficult to assess the adequacy of the provisions (para 5.04). IDBI is satisfiedthat its loans are presently well secured, but it intends, by FY80 to increasethe level of reserves for bad and doubtful debts to 2.5% of direct loans andequity investments. 2/

Audit

5.04 In the past, IDBI's statutory audit has been carried out in accord-ance with local law and IDBI's accounts have been presented without qualifi-cation. For FY76, IDBI has submitted - in compliance with a requirement underthe IDBI/SFC II loan - a long form audit, although the position of the audit-ors with regards to the level of provisions for doubtful accounts was notmade clear. The FY77 long form audit is expected in January 1978 and wouldincorporate the auditor's assessment of the adequacy of provisions.

Financial Performance

5.05 General. Annexes 16 to 19 show IDBI's financial statementsand operational ratios for FY73 to FY77. The statements consolidate the

1/ This consists of an investment reserve of Rs 37 million, provisions ofRs 21 million and underwriting commission not taken as income of Rs 9million. In addition there is an interest in suspense account (nottaken into reserves) of about Rs 110 million.

2/ To achieve this coverage, provisions should be increased from Rs 54million to Rs 160 million. Since the risk of loss on refinancing, re-discounting and export financing is very low (the financial institutions/banks, and not the ultimate recipient, are liable to IDBI) IDBI considersexplicit provisions for these assets unnecessary.

Page 26: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 16 -

activities of ID)BI's General Fund and the Development Assistance Fund(DAF). 1/

5.06 Profitability. IDBI's income statements for the period FY73 toFY77 (Annex 16) show that net profits after provisions increased from Rs 51million in FY73, to Rs 77 million in FY77. This increase was due to thegrowth in disbursements and to an increase in the interest rate structurein December 1975. The percentage return on net average assets ranged from1.4% to 0.8% which is low but still adequate. During this time, the overalllending spread decreased slightly from 1.1% in FY74 to 1.0% in FY77 due to adecline in the return from refinancing because of increased lending to smallscale industry and projects in backward areas, where IDBI applies lower in-t~rest rates. The average gross return on direct loans was 6.5% in FY74 -FY77, while that on rediscounting was 6.9%. With an average spread of 2.7%,rediscounting is IDBI's most profitable activity particularly in view of thesmall administrative expense it entails. During FY76 and FY77, IDBI trans-ferred Rs 19 million each year to the GOI in payment of a 3.75% dividend onshare capital, as in the past to RBI (pay out.ratio of 15.5%). The otherRs 163 million of profit in FY77 were appropriated to reserves, interestsuspense and contingencies. Administrative expenses have been kept to 0.4%of average total assets which is satisfactory.

5.07 Liquidity. Annex 17 shows IDBI's cash flow statements for FY73 toFY77. During this time, IDBI's debt service coverage ratio was fully satis-factory varying from 2 to 3 mainly as a result of large repayments of generalpurpose borrowings from RBI.

5.08 Capital Structure. Total assets reached Rs 11 billion as ofJune 30, 1977 after an annual growth of 30% over the previous four years(Annex 18) which resulted from the rapid increase in IDBI's general opera-tions (para 4.15). Direct financial assistance accounted for 28% of totalassets, rediscounting for 28%, refinancing for 32% and export credits for 7%.Total long term borrowings were Rs 8.9 billion, of which 72% was due to GOIand RBI. As at June 30, 1977, 'LDBI's long term debt/equity (Annex 19) was10.6:1. Considering that 60% oi- IDBI's assets are in low risk rediscountingand refinancing, this ratio is satisfactory. IDBI's ratio of direct financialassistance to equity was 4.1:1 as of that date which is satisfactory.

1/ IDBI administers the DAF and with the prior approval of GOI, which bearsthe financial risk, makes loans, investments or guarantees to acceptableprojects. The DAF, which is maintained separately from IDBI's GeneralFund, was established in March 1965 to provide supplementary financingfor projects where the financial institutions want to limit their ex-posure due to the high risk: factor, the magnitude of capital require-ments, low profitability oI- long gestation period of such projects. Asof September 30, 1976, DAF's assets represented 3% of IDBI's total assets,and about 7% of its direct assistance outstanding. Since the inceptionof the fund to September 30, 1976, DAF has financed six projects for atotal amount of Rs 560 million.

Page 27: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 17 -

VI. IDBI's BUSINESS PROSPECTS

Business Forecasts

6.01 Annex 20 shows the forecast of IDBI's total approvals, commitmentsand disbursements for FY78-FY81. These do not include activities relating toGOI's modernization program the disbursements under which are still uncertain.Total approvals are expected to increase from Rs 5.3 billion in FY77 to Rs 7.7billion in FY81 or by compound rate of 10% per annum. Direct lending wouldaccount for about 26% of total approvals; equity investments in industrialcompanies for another 2%; rediscounting for 23%, refinance 37%, export credits10% and investments in shares and debentures of other financial institutions2%. Total disbursements are expected to be Rs 4.5 billion in FY78 and to growthereafter by about 12% per annum. The proposed loan would account for about8% of IDBI's direct loan approvals during FY78-FY79.

Resource Requirements

6.02 Foreign Currency. IDBI's program of financing imports of capitalequipment comprises: (i) loans for the medium and small-scale industrialsector through the SFCs; (ii) loans for fertilizers; and (iii) loans for theproposed target group. Annex 21 shows the pipeline of joint/public sectorprojects costing from Rs 10 million to Rs 200 million as consolidated fromthe investment plans of state governments and SIDCs (para 2.09).

6.03 Domestic Currency. The local currency requirements (see Annex 21,para 5) for the proposed loan would be about Rs 860 million ($100 millionequivalent). The bulk of the local currency finance (62%) would come fromthe financial institutions (including all-India institutions, commercial banksand SIDCs), the public at large (19%), share subscription by SIDCs (10%), andfrom private entrepreneurs (9%). IDBI's total rupee resource requirementsduring FY78-FY81 are expected to be Rs 27 billion, of which its rupee loandisbursements are estimated to be Rs 20 billion. IDBI anticipates that thesedirect disbursements and its other rupee requirements will be financed asfollows:

IDBI Resource Requirements - FY78-FY81(Rs billion)

Requirements Amount % Sources of Finance Amount %

Rupee Disbursements 21.54 79 Cash Generation 3.17 12Debt Servicing -Principal 1.39 5 Share Capital Increases .80 3

Debt Servicing -Interest 3.89 14 GOI Borrowing 0.47 2

Dividends 0.14 1 Tax Deposits 2.25 8Cash Increases 0.15 1 RBI Borrowing 6.77 25

Bond Issues 2.25 8Sale of Investments 0.19 1Collections 11.21 41

27.11 100 27.11 1W

Page 28: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 18 -

As a source of funds, collections - particularly from its refinance and re-discounting assistance where the IDBI has no arrears) - assume a significantimportance because the average maturity of IDBI's borrowings is longer thanthat of its lendings and because its bond issues, as well as much of itsborrowings from RBI, are repayable in lump sums. The projected share capitalincreases of Rs 0.8 billion though relatively small compared to total sourcesof funds, would keep IDBI's debt/equity ratio at about 10:1, provided nomodernization funds are being disbursed.

Financial Projections

6.04 Annexes 22 to 25 show [DBI's projected income statements, balancesheets, cash flow, and comparative operational ratios from FY78 to FY81. Netprofit after provisions is expeclted to increase from Rs 72 million in FY78 toRs 218 million in FY81 as a resu:Lt of the growth in direct loan disbursementsand the increase in lending rates in December 1975. Under the assumption ofan increase in the share of lend:ing to small scale industry, backward areasand exports which is made with a lower interest spread than the other opera-tions, net profits after provisions as a percentage of average total assetswould range from 0.5% to 1.0% during FY78 to FY81 which is adequate. Theaverage interest spread on all its operations is expected to remain also ataround 1.0% during the same period. Administrative expenses are forecast togrow by 33% per annum 1/, increasing as a percentage of average total assetsfrom 0.43% in FY78 to 0.46% in FY81, which is reasonable.

6.05 Total assets are expected to almost double from Rs 13.8 billionin FY78 to Rs 23.6 billion in FY81. Compared to the distribution of assetsin FY77 (para 5.08) direct financial assistance and refinance is projectedto increase to 34% and 35% respectively of total assets in FY81, rediscount-ing to decrease to 23%, and export credits remain at 7%. Provisions and networth should represent 9% of IDBI's total loan and equity portfolio by FY81.

6.06 IDBI's particular asset structure is different from most otherDevelopment Finance Companies to the extent thiat only about one-third ofIDBI's assets is in direct loans and investments for industrial enterprises.The other two-thirds of IDBI's assets consist of rediscounting for commercialbanks and refinance of commercial banks and of SFGs (para 5.08); these arebasically central banking operations focussed on the industrial sector.Therefore, IDBI has set in its strategy statement a 10:1 risk assets (directfinancial assistance) to equity norm (para 4.12), which would be about equalto a 25:1 debt/equity ratio ceiling taking into account IDBI's overall assetsunder the present structure. However, IDBI's actual debt/equity ratio isprojected to stay around 10:1 over the next four years due to annual equityinfusions of Rs 200 million. 2/ GOI has already budgeted the FY78 share

1/ This high level of increase reflects the expected increases in staff.

2/ Assuming that, in addition, IDBI disburse Rs 600 million annually,under GOIs modernization program, the ratio would remain below 12:1.

Page 29: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 19 -

capital increase. IDBI and G01 confirmed that these projections reflected,as far as possible, the basis of GOI's and IDBI's plans and objectives forIDBI's business expansion and the timing and level of equity infusions, andthat they would initiate consultations with IBRD if and when these forecastswould change to a significant degree.

6.07 Annex 24 shows IDBI's projected cash flows for the period FY78-81.During this period, IDBI's liquidity position remains satisfactory assuminga gradual reduction of arrears. IDBI's debt service coverage ratio wouldremain above 2.0:1 which is fully satisfactory (Annex 25). This ratio doesnot take into account lump sum repayment of bond issues and certain RBI bor-rowings which do not start maturing until 1984. If sinking fund provisionswere assumed, the level of servicing would still be adequate at 1.2:1 in FY78and 1.8:1 in FY81.

VII. FEATURES OF THE PROPOSED LOAN

7.01 The Proposed Loan. As in the two previous operations with IDBI(Credit 356-IN and Loan 1260-IN) the proceeds of the proposed $25 millionloan to be allocated to subprojects ($24.5 million) would be lent to GOI atthe current IBRD lending rate of 7.45% 0 GOI would relend to IDBI 1/ whichwould on-lend these funds to industrial units sponsored by state govern-ments to meet the foreign cost of capital goods and services. As with otherloans to development finance companies, eligible enterprises would be broadlydefined to include manufacturing, agro-industries and mining enterprises.Service and utility corporations would be excluded. As IDA has provided aseparate credit (also through IDBI) for the fertilizer industry, this typeof projects would be also excluded from the proposed credit. The $500,000 ofthe loan allocated for the Technical Assistance Fund (para 2.06) would begiven by GOI to IDBI as a grant and disbursed by IDBI against 100% of localand foreign expenditures. IDBI's strategy statement as discussed and con-firmed during negotiations (Annex 26) outlines IDBI's approach for financingthe target group from the proposed loan for the next 2 to 3 years.

7.02 Onlending Terms and Foreign Exchange Risk. GOI would onlend theloan proceeds to IDBI on the terms and conditions of the IBRD loan to GOI,including interest rate, commitment charge, and repayment schedule, exceptfor the $500,000 allocated for the Technical Assistance Fund, which GOI wouldpass on to IDBI on grant basis. IDBI would onlend to subborrowers at 9-1/2%and 11% for backward and non-backward areas respectively, in line with itsrupee lending rates. It would charge 1% commitment fee. Since it is likelythat about two-thirds of the loan would go to backward areas, IDBI's averagespread would be over 2% which is satisfactory. As in the previous two opera-tions with IDBI, GOI would carry the foreign exchange risk. This would make

1/ During negotiations GOI and IDBI confirmed that IDBI will send with-drawal applications and similar correspondence directly to IBRD ratherthan through GOI.

Page 30: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

- 20 -

the proposed operation virtually identical to IDBI's rupee lending, whichis desirable since entrepreneurs are able to borrow rupees to buy foreignexchange which is presently readily available.

7.03 Amortization. The maximum maturity on subloans would be 15 years.Allowing for a two year commitment period of the loan, a 17-year maturityincluding 3 years of grace is proposed. The amortization schedule is subjectto change to conform substantially to the aggregate of the amortizationschedules of subprojects.

7.04 Approval of Projects and Free Limit. In order to provide the Bankwith an early assessment of project preparation and appraisal work, the firstproject, not being a free limit project, from each of the first six statesshould be sent to IBRD for approval. In addition all subsequent projects forwhich IDBI would make loans of more than US$3 million from the proposed loanwould require the IBRD's approval. With this arrangement, about 50% by number,and 70% by amount of the projects financed under the loan would be reviewedfor prior approval.

7.05 Lending Limits. In order to ensure that the proposed $25 millionloan is channelled to a sufficiently large number of firms, an upper limitof $4 million is proposed on the amount of assistance in foreign exchange thatIDBI can provide for any single project. In addition, to ensure that funds arerestricted to medium-sized enterprises, and that overlaps with SFCs are mini-mized, only projects with fixed assets (excluding land) of between Rs 10 mil-lion to Rs 200 million would be eligible. Virtually all state joint/publicsector enterprises fall within this size range. In special cases, on IDBI'srecommendations, the Bank would consider somewhat larger projects where thereis a clear priority for investment. 1/

7.06 Annex 27 shows the estimated disbursement schedule for the proposedloan.

1/ Projects for expansion would also be eligible within these criteria,provided that the corporation concerned does not have fixed assets,excluding land, of more than Rs 200 million prior to the proposedexpansion.

Page 31: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Industrial Sector and Industrial Finance

Industrial Sector - Structure and Past Performance

1. India's industrial output has grown on average by only about 3.5%per annum since 1965 and manufacturing presently accounts for 16% of NDP,as opposed to 14% in 1960/61. 1/ Within the manufacturing sector, therehave been gradual changes in structure which reflect the Government's prior-ities. Consumer goods industries now contribute less to value added thanformerly. For example, the food processing and textile industries' combinedshare has fallen from 43% in 1960/61 to 28% in 1974/75. Over the same period,the share of "basic" industries, (defined to include basic metals industries,chemicals and fertilizers), together with the engineering industry, increasedfrom roughly 40% of value added in manufacturing to somewhat more than 50%.

2. About two-thirds of manufactured output is estimated to come fromregistered plants, which are predominantly medium- and large-scale. The morelabor-intensive small scale sector, whic-h accounts for the balance of indus-trial output, employs two-thirds of the industrial labor force. The Govern-ment sector dominates mining and power generation and, to an increasing extent,the "basic" industries within the manufacturing sector. Nonetheless, accord-ing to the 1970 Annual Survey of Industry, almost 80% of value added in indus-try and mining originated in the private sector. While in 1974/75, the lastyear for which statistics were available, public sector enterprises accountedfor about 15% of manufacturing value-added (22% of value added from the larger,registered sector) in certain sectors such as steel, petrochemicals and heavyelectrical equipment all or almost all the enterprises in the sector aregovernment owned. Within the private sector, textiles, chemicals and engi-neering goods continue to be dominant with food processing, paper and tobaccomaking important contributions to manufacturing value-added.

The Environment for Industry

3. Over the last fifteen years, both supply and demand factors havehindered industrial growth. Supply constraints have perhaps been more per-sistent. Through much of this period lack of foreign exchange constrainedthe availability of essential intermediate inputs not manufactured in India,and affected the supply of inputs, such as steel, at times when domestic pro-duction was unable to match demand. Equally the unpredictable effect of themonsoon on the supply of agricultural raw materials, such as cotton, has con-strained industrial growth. Moreover, agricultural supply bottlenecks have

1/ If industry is more broadly defined to include the remainder of thesecondary sector - utilities and construction - then value added inindustry constitutes about 23% of NDP.

Page 32: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Page 2

tended to coincide with power shortages, since hydro supply is also dependenton the monsoon.

4. However, when these supply constraints have not been binding, de-mand has not kept pace with increased output. The principal opportunities forsimple import substitution were largely exhausted by the mid-1960s. Exportshave recently contributed to growth, but they still constitute a very smallpart of total production. The relatively slow growth trend of agriculture oflittle more than 2% since 1967/68 has restricted demand for consumer goods.Finally, both public and private real investment has been stagnant, althoughpublic sector investment is now increasing and may provide a much needed boostto demand.

Industrial Policies

5. The Government has placed central emphasis on rapid industrializa-tion and national self-sufficiency as the keys to development. At the sametime, the Government has sought to curb the concentration of economic powerthrough expanded public ownership, restrictions on the growth of "largehouses" and "dominant undertakings"; reservation of many products to thesmall-scale sector as well as special assistance to it; and finally supportfor development in backward regions. The aim of self-sufficiency has largelymanifested itself in the pursuit of import substitution as well as curbs onforeign-owned firms and other forms of foreign involvement in industry.

6. The main instruments of industrial policy have been central licen-sing of investment and imports, physical allocation of scarce domesticallyproduced raw materials and controls on industrial prices. This system hasitself tended to conflict with other aims, especially that of curbing econo-mic concentration, since large firms are much better able to bear the over-head costs of dealing with a centralized bureaucracy. Controls have alsorestricted the ability of firms to respond to changed opportunities, especiallyin overseas markets, and thus hampered exports. Price controls appear to havehad an adverse effect on investment and modernization in such critical indus-tries as cotton textiles, sugar, and cement.

7. In the last two years, there have been a number of important devel-opments in industrial policy. In the face of poor industrial performance thegovernment recognized that existing capacity must be utilized more efficientlyand took steps to require public sector enterprises to meet more commerciallyoriented criteria for output, price and profitability. Increased emphasis wasplaced on exporting and a number of measures were taken to boost industrialgrowth, including liberalization of licensing procedures, relaxation of importand other controls, fiscal incentives and more emphasis on industrialmodernization.

8. Liberalization of Licensing Procedures. The process of simplifyingprocedures for the issue of industrial and other licenses started in 1973

Page 33: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

KNNEX IPage 3

when a time limit on the disposal of licensing applications was established. 1/

Subsequent changes towards liberalization of licensing have taken four majorforms. Firstly, diversification of production has been allowed in indus-

trial machinery, machine tools, electrical equipment, steel castings, and

steel forging industries within the overall licensed capacity of a particular

undertaking, in order to facilitate fuller utilization of installed capacity.

Secondly, 15 export-oriented engineering industries are now allowed to growautomatically in a five-year period by 25% over their licensed capacity.

Thirdly, 21 selected industries in the medium-scale sector have been exempted

from licensing and "Large Houses" and foreign companies (as defined in the

Foreign Exchange Regulation Act, FERA, 1974 2/) have been permitted to expand

in 30 other industries subject to certain conditions. Finally, 29 selected

industries have been allowed to utilize their installed capacity fully. In

general, the obstacles posed by licensing procedures have been virtually

eliminated for all except the Large Houses and FERA companies, for which the

obstacles have been reduced, (but so far with little effect on investment).

However, a recent policy statement by GOI indicates that the further expansion

of the "large" houses will be restricted.

9. Relaxation of Controls and Fiscal Incentives. Import controls

have been significantly liberalized and the procedures for obtaining export

incentives and necessary raw materials have been streamlined. Export dutieshave been abolished on a number of commodities. Excise duties also have been

reduced for 45 industries and the rate of income tax has been lowered. 3/Further, price controls have been lifted for many finished manufactures and

price increases permitted for cement, coal and coke, commercial vehicles and

aluminum. Distribution controls on industrial materials have been lifted for

almost all items. The Dividend Ordinance of 1974 was allowed to lapse in July

1976 thus removing the restriction on payment of dividends.

10. Modernization. In 1976 GOI has announced a modernization program

for the textiles, cement, jute, sugar and engineering industries. The scheme

will be monitored by IDBI, which would be responsible for textiles and cement,

ICICI for the engineering industry and IFCI for sugar and jute. GOI and thethree financial institutions involved have meanwhile clarified the criteria

1/ The procedural changes then effected have had a marked impact in

clearing the backlog of cases and accelerating the process of issuingindustrial licenses/letters of intent and approvals of applications for

capital goods clearances and foreign collaboration.

2/ FERA was also amended during 1976 to make the maximum foreign owner-ship allowed more flexible if the company was exporting at certain

levels.

3/ The FY77 budget provided for a reduction in the marginal rate of income

tax from 77% to 66%. The basic exemption level was also raised. Tostimulate investment, the FY77 budget permitted companies an invest-

ment allowance of 25% on the value of plant and machinery.

Page 34: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Page 4

and terms of assistance under the modernization scheme. The likelihood thatmodernization will result in substantial improvement of the financial situa-tion of the enterprise concerned within a reasonably short period of time hasto be established, and competent management is a major criterion. The effec-tive rate of interest to the borrower will depend on the blending betweenthe soft loan component (at 7.5%) and the balance on normal terms (at 11%),the blending depending on the dividend paying capability of the firm. Origin-ally, GOI's disbursement targets for ICICI, IDBI and IFCI under this schemewere Rs 2,000 million per year for a period of three years. As of July 31,1977, the institutions had received 379 applications for a total of Rs 7.3billion, of which 132 (Rs 2.55 billion) were rejected or withdrawn (mainlydue to ineligibility). Of the remaining, 183 applications for Rs 3.84 bil-lion are pending, and 64 for Rs 790 million have been approved. Assumingthat 70% of the pending applications are approved, total disbursements wouldbe about Rs 1,160 million per year for three years, which is almost half ofthe original target of Rs 2,000 million. No disbursements under the schemehad been made by IDBI (nor by ICICI or IFCI) as of August 1977. In November1977 GOI decided that IDBI would take up all the funds required, from thecapital market at about 6% with GOI providing a subsidy so as to allow a 2%interest spread, and that the loans would carry no conversion option intoequity, as do other rupee loans in India.

Recent Performance and Prospects

11. With the recent change in government, however, strategy for theindustrial sector is again under review. It is clear that policies relatingto, for example, larger private sector undertakings and foreign investmentin Indian industry are being actively debated within the Government. One ofthe elements of strategy that has now emerged is the emphasis to be placedon small scale enterprises, and on the development of industry in rural areas.The industrial priorities of the new Government are expected to crystalizein the process of the preparation of a rolling five year plan. The new planis to be initiated in March 1978.

12. India's foreign exchange situation has turned around in the lastseveral years, and lack of foreign exchange is no longer a constraint toindustrial growth. Industria:L production increased by about 10% in FY77,compared with 5.5% in FY76, 2.5% in FY75, and 1% in FY74. Industrial exportperformance has also improved. However, growth is highly uneven, and thereare a number of important areas, such as production of electrical motors,jeeps, railway wagons, and diesel engines, as well as cotton textiles, wheredemand continues to be sluggish. In the longer run, overall growth willdepend on a continued rise in the final demand both for investment and forconsumption, which will in turn depend on the buoyancy of investment. Thereis considerable opportunity for investment at the state level, particularlyin the less developed states, in economically efficient state-sponsoredprojects in the joint/public sector.

Page 35: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX IPage 5

Industrial Finance

13. Financial Institutions. Industrial financing institutions can beclassified into those working at the all-India levels, and those at Statelevel. At the all-India level, IDBI, ICICI, IFCI, LIC and UTI 1/ are the mainsources of long-term finance. At the State level, the primary institutionsare the SIDCs/SIICs, the SFCs, the SSICs, and the SSIDCs 2/. Also workingat the all-India level, but playing a more restricted role (para 2) are IRCIand NSIC 3/. IDBI, as the apex institution for industrial financing in thecountry, is responsible for coordinating the activities of these institu-tions. It also provides finance to some, particularly, to SFCs, and morerecently, SIDCs, mainly through IDBI's refinance facilities (commercial banksalso avail of IDBI's refinance facilities). Appendix 1 shows the financialassistance provided by these institutions over the period FY72-FY76. 4/

14. Briefly, term lending for all-India is the main responsibility ofIDBI, ICICI, and IFCI, although they also make equity investments and under-write public issues. Their total financial assistance approved up to March31, 1976 was Rs 26 billion. Securities and capital market activities are theresponsibility of LIC and UTI. However, LIC has also become an importantprovider of rupee loans. Total approvals by LIC and UTI up to March 31, 1976were Rs 4.4 billion. IRCI was established to provide financial and managerialassistance to "sick-industries" in West Bengal but has started diversifyingits operations geographically. Up to March 31, 1976 its total approvals wereRs 327.3 million. The only all-India financial institution not catering tothe medium-and large-scale sector is NSIC, whose financial assistance consistsof hire purchase financing amounting to Rs 862 million (in terms of valueof machinery) as of March 31, 1976.

15. At the state level, medium- and large-scale industries are the re-sponsibility of SIDCs, which apart from promotional activities make loans andequity investments (Rs 2.1 billion of approvals up to March 31, 1976). Asubstantial proportion went to the joint and public sectors. SFCs, which re-cently received a second line of credit from the Bank Group (Report No.1158-IN of May 6, 1976), are mainly involved in financing the small1-scale,and also the medium-scale sector (Rs 7.5 billion of approvals for both up

1/ Industrial Development Bank of India (IDBI), Industrial Credit and In-vestment Corporation of India (ICICI), Industrial Finance Corporationof India (IFCI), Life Insurance Corporation of India (LIC), Unit Trustof India (UTI).

2/ State Industrial Development/Investment Corporations (SIDCs/SIICs),State Financial Corporations (SFCs), State Small Industries Corporations(SSICs), and State Small Industries Development Corporations (SSIDCs).

3/ Industrial Reconstruction of India (IRCI), and National Small Indus-tries Corporation (NSIC).

4/ Excluding NSIC, SSICs and SSIDCs whose financial assistance is modest,involving hire purchase finance.

Page 36: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Page 6

to March 31, 1976). While their role varies somewhat from state, SSICs are

usually responsible for the distribution and allocation of raw materials to

small industries, although some are also involved in modest amounts of hired

purchase financing as are the SSIDCs, although the main activity of the latteris the promotion and management of industrial estates.

16. Attachment 1 indicates that during FY76, approvals by financialinstitutions were Rs 6.6 billion and disbursements, Rs 4.3 billion. Of the

total approvals, IDBI accounted for 39% (excluding its refinance of SFCs to

avoid double counting) followed by the SFCs (23%), and ICICI (12%). ICICI

provided about 72% of foreign exchange approvals, followed by the SFCs (20%),

and IFCI (8%). It is difficult to estimate accurately the contributions of

these institutions in relation to total industrial investment in India as

capital formation data are not reliable. On the basis of capital formationestimates for 1975, their disbursements accounted for about 13% of fixed

capital formation in industry.

17. Commercial Banks. Apart from providing short-term working capital

to the economy, commercial banks also provide term financing estimated at

10%-15% of their total outstandings 1/. Outstanding industrial term loansby scheduled commercial banks were as of March 28, 1976, Rs 2.2 billion to

small-industries and Rs 3.2 billion (rough estimate) to medium and largeindustries. Since the nationalization of 14 commercial banks in 1969, credit

to the small-scale sector has substantially increased. There is an extensivenetwork of bank branches in India totalling 21,200 in 1976 (8,300 in 1969),or one branch for every 26,000 people.

18. Consultancy Organizations. At the initiative of IDBI, a numberof institutions have been created 2/, mainly to identify project ideas,

prepare project profiles and feasibility reports, as well as to look for

and assist entrepreneurs in implementing these projects. While not involvedin financing, these organizations are worth mentioning because of the contri-bution they can make to assist f-inancial institutions in project appraisal andimplementation. It is still too early to judge their promotional effective-

ness. However, they have alreadly made an impact in assisting SFCs and commer-

cial banks to complete techno-economic evaluations of a number of their pro-posed projects. In addition, these organizations are expected to build apool of technical expertise which is so badly needed in the areas they serve.

1/ Commercial banks in India comprise the State Bank of India, 14 na-

tionalized banks, 450 other scheduled banks in India and 14 foreign

banks. Deposits by scheduled commercial banks were Rs 140 billionas of March 28, 1976.

2/ The Kerala Industrial and Technical Consultancy Organization (KITCO),The North-Eastern Technical Consultancy Organization (NEITCO), and

the Bihar Industrial and Technical Consultancy Organization (BITCO)were created between 1972-74. New technical consultancy agencies havebeen set up by IDBI in Andhra Pradesh, Uttar Pradesh and Orissa during1976. IFCI is setting up similar institutions in Himachal Pradesh and

Rajasthan.

Page 37: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Page 7

19. Coordination. There is a substantial amount of joint financing,particularly amongst the all-India term lending institutions. About half ofICICI's financing (by amount) during 1974 and 1975 was jointly financed withIDBI, IFCI or both 1/. The institutions started joint financing to avoid un-due exposure in large or risky projects or when underwriting arrangementswere required so as to avoid underwriting relatively large portions of acertain issue. All-India financial institutions have their own Inter-institutional (IIM) meetings in order to coordinate their activities.

20. IDBI initiated the IIII in 1965. The Chief Executive of IDBI isthe Chairman of this group which also includes the Chief Executives of ICICI,the Industrial Finance Corporation of India (IFCI), the Life Insurance Cor-poration of India (LIC), the Union Trust of India (UTI) and, since April1976, the General Insurance Corporation of India (GIC). The meetings of theIIM discuss and decide on: (a) policy matters including allocation of in-stitutional finance between various industrial sectors keeping in view na-tional priorities; (b) the contribution by each of the institutions tofinancing relatively large projects (generally those requiring financialassistance of more than Rs 5 million; many of these projects are financedby at least two of the above listed all-India financial institutions to re-duce their individual exposure particularly in underwriting); (c) waiver ofexercise of the conversion option 2/; (d) the promoters' contribution tothe project cost; (e) business plans for the participating institutions onthe basis of a review of loan applications pending and in the pipeline.

21. Senior Executive Meetings (SEMs) take place twice a month in betweenthe IIM meetings. In the first monthly meeting, senior executives of theorganizations discuss more detailed matters such as the: (a) stipulation ofconversion terms; (b) nomination of directors in the borrower's boards (c)decision on the institution which would take the lead in appraisal and follow-up; and (d) exercise of conversion options. The second SEM each month isdevoted to review project supervision, particularly problem projects.

22. A lead bank system was established, by which one institution wouldtake the "lead" in appraisal and follow-up, although each reserves the rightto submit to its own Board a recommendation by its staff for each project.The arrangement has been streamlined gradually and by now application forms,reporting reauirements, legal documentation for disbursements, etc., havebeen standardized to avoid duplication of efforts and an additional burdenon the clients. The "lead" bank arrangement is working reasonably well.

23. Apart from the establishment of the lead bank system which helpscoordination among all-India institutions, better coordination at the statelevel is being attempted through cross representation on Board of Directorsand through Inter-Institutional Group (IIG) meetings. IIG meetings comprise

1/ LIC and/or UTI also participated in most of these cases.

2/ Each All-India financial institution has the option to convert 20%of its rupee loans into share capital of the borrower.

Page 38: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Page 8

representatives of all State level and all-India financial institutions, in-c1uding commercial banks. Where the states are small, one group covers sev-eral contiguous states. These groups meet periodically and cover a range ofsubjects including participation of the different institutions in projectfinancing; new project proposals and their relation to the state industrialpolicy; the state investment program and the need for financial resourcesand the availability of private entrepreneurs to participate in state pro-moted projects.

24. Evaluation. In terms of availability of services, the financialsystem in India is adequate. There is a tendency at the state level to createnew institutions as the need arises, rather than utilize the expertise alreadyavailable. However, this can be justified to a certain extent when takinginto account the diversified culture of the country and efforts are being madeto improve coordination (para 29). Many of the above institutions have beensuffering from resource constraints due to GOI's strict monetary policy, butthis was necessary, and should improve the lending environment in the longrun. A problem has been the lack of equity capital by medium and small entre-preneurs to start industries. In the case of medium and large industries,this has been partly tackled through the institution of the joint sector,whiere a private firm joins with the state government to implement a project,and which constitutes the target group for the proposed project. In addi-tion, IDBI and IFCI are experimenting with interest-free loans to medium-scaleentrepreneurs towards their contribution to the equity of projects, althoughthe amounts are modest. For smal:L-scale industries, SFCs are also establish-ing a "special capital" mechanism to solve this problem (refer to the ap-praisal report for the second IDB1/SFCs project No. 1168-IN, para 4.03).Overal1, while most of the state-level institutions need strengthening,the financing system is adequate.

25. Interest Rates. The Central Bank rate was raised from 6% to 7% inJune 1973 and again to 9% in July 1974. The resources available to banksfor lending were curtailed and the cost to banks of its borrowings and de-posits, as well as the cost to borrowers of bank funds, was raised. Further,ceilings on credit expansion were imposed and commercial banks' liquidityratios made more stringent. Also, in July 1974, a tax of 7% on commercialbank interest income was imposed, and is passed on to final borrowers. Asshown in Attachment 2 the rate of interest on fixed deposits is now 8% (1-3years), and the maximum rate (for deposits of over 5 years) is 10%. Long-term lending rates by financial institutions range from 9.5%-12%. The com-mercial banks' prime lending rate is now 15%, though most banks charge more(up to 16.5% including about 1% tax). IDBI's lending rates are in line withthe country's rate structure (para 4.14).

26. Capital Market. The capital market has been weak during the pastfew years. Total capital 1/ raised fell from Rs 902 million in FY73 to Rs 703million in FY74, and to Rs 613 million in FY75 although it increased to Rs 939

1/ Including bonds but excluding bonus issues.

Page 39: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

AINNEX IPage 9

million in FY76. The decline was mainly in the issue of debentures due tothe weak secondary markets; the capital raised as ordinary and preferenceshares (inclusive of rights issues) actually increased from Rs 569 millionin FY73 to Rs 687 million in FY74, although it declined to Rs 423 million inFY75 and again increased to Rs 812 million in FY76. RBI's price index forordinary shares increased from 103.1 at the end of FY73 to 125.5 at the endof FY74, but declined to 99.4 at the end of FY75 as a result of legislativerestrictions on the distribution of dividends. The index rose to 102.4 atthe end of FY76 and to 106.8 by August 1976 after the dividend restrictionswere lifted (para 2.14). However, the lapsing of the Dividend RestrictionsOrdinance did not have a substantial impact on the market because the highinterest rates make deposits with commercial banks quite attractive. Dataon capital issues for the first half of FY77 also reflect the slump in thestock market. The total capital raised between April to September 1976 wasRs 516 million compared with Rs 650 million in the corresponding period in1975.

27. The limited available data on underwriting reveals that in FY75, 90%of the total amount of equity issued to the public was underwritten; in FY74the corresponding figure was 97%. In FY75, underwriters, as part of theirobligation, had to take up equity shares for Rs 31 million compared with Rs 39million in FY74. During the early 1970s, brokers were active underwriters.Subsequently, with the slackening of activity in the capital market, brokerslost interest in this activity and the bulk of the underwriting is now beingdone by the financial institutions. The stock market should improve gradu-ally as the impact of the recent incentives by GOI (para 7) begins to befelt.

Page 40: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

op RAlcl OF jLjaEAL FiN 5rIrJrNsITrurioNis - 197e ro L977

( Ra. adll)Lo:

Uiderwriti ne .ndjjrim Gu!C jfa~ - Suoee L4o..ns - - Direct Sub,eriDt1on Tot.1

1971- 1972.- 197S- 1974- 197,- 1976- 1971- 197.- 1973- 1974- 1975- 1976- 1971- 197Z- 1973- 1974- 1975- 1 137- 1972 1973-- 1974- 1 1 1VI76

72 Z 7__. A_4 7 _ .73 74 75 76 77 72 75 74 75 76 77 72 75 74 75 76 _ .

IDBI - - - - -0 1,2861] 67 0 ,65 2,148-/ 2,382V/ 4,Wall/ 133 55 82 90 73 237 1,419 925 1,720 2,238 2,4Z5 :. CSd

IFCI 28 43 43 35 46 46 237 373 345 2aa 432 663 22 41 31 35 .3S 62 2S7 457 419 292 513 "1

ICICI 225 290 347 415 452 338 120 134 196 160 204 518 52 70 G7 56 129 87 397 494 611 629 786 344

I RC - - - - - - 66 51 72 76 53 l1o) - - - - - - 66 61 72 76 53 ID.

SFCg - - 44 86 132 111 634 778 977 1,326 1,491 1,570 7 9 3 6 6 2 641 787 1,031 1,418 1,629 1,665

510DG - - - - - - 164 181 230 213 257 354 72 54 48 122111 119 236 235 279 535 367 474

Sub-Tot-l 253 333 434 534 650 495 2507 2.397 460 4.14 4819 88006 86 229 7 3w 3 5.8029.MO

071 _ _ _ _ _ _ _ _ _ _ _ _ 130 99 77 70 71 95 151 99 W7 70 71 95

} Li G- - - - - - 141 116 171 212 292 5a0 90 85 88 26 318 71 I -! 4AM 5c1 571

Toti 253 3553 434 534 630 495 3x flk *Oka tT a___ _ _ _ _84 2,513 3,631 4,357 5.111 8.5C7 526 413 402 605 Ws 675 5,427 3,259 4.468 5,496 6.463 9._

IDBI - - - - - - 774 624 1,134 1,639 1,695 2,720 14 43 48 27 55 68 76 667 1,18E 1,666 1,750 2,788

IFCI 34 41 30 55 26 34 161 215 273 325 302 495 8 24 15 10 20 19 2O5 280 319 569 S46 549

ICI C I 206 280 23 Z 91 399 389 80 79 138 137 163 217 18 38 35 26 49 65 303 397 435 44 611 670

IRCI - - - - - - 11 35 52 81 46 lOB - - - - - - 11 35 52 81 46 108

SFCs - - - 20 46 54 390 441 541 774 947 996 6 6 5 2 6 3 396 447 546 796 1,CM 1,C53

SIDC1 - - - - 107 127 381 198 200 207 S6 59 45 69 70 91 1 166 206 267 Z71 298

Sub-Tot .1 239 S21 295 546 472 477 1,525 1,521 2,298 3,154 3,352 4,742 82 150 148 134 200 247 1,845 1,992 2,739 3,635 4,0235s,458

UT}i - - - - - - - - - - - - 16 56 78 76 52 t0 16 56 77 76 52 61

L1C - - - - - - 9 42 107 438 228 274 44 98 93 105 47 115 53 140 20 541 27 389

Tot.1 239 321 293 346 472 477 1,532 1,563 2,405 3,592 3,580 5,016 142 304 319 313 299 422 1,914 2,188 3,016 4,250 4,552 5,916

&I Comprising direct lo.ne, refin.nce to bnkgs -nd redismunts;refin.nce to SFCs is excluded

gI

Page 41: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 1Attachment 2

IEDUSTRIAL DEVELOPI$T BANK OF INDIA

Selected Borrowing and Lending Rates in India FY73 toJuly 31, 1977

As of As of As of1972-73 19 73-74 1974-75 September August July

___1_ _ - 1976 1972

Bank Rate 1/ 6 7 9 - 9 9

Deposit Rates

Post Office Savings 4 4 5 5 5 5Fixed Deposits for oneyear or less than TwoYears with Large Banks/ 6 6 8 8 8 6

Rate on Bank Advances

Rate of Scheduled Banks 3 '/ 9-12 10-12 12.5-15 12-18 14-16.5 12.5

Long-Term Lending Rates-Runee Loans

IDBI 8.5 9.0 10.25 10.25 11.00 11.00IFCI 9.0 9.5 11.25 11.25 12.00 12.00ICICI 8.5 9.0 10.25 10.25 11.00 11.00

(9.5% for (10.5 for (for both (for bothforeign foreign foreign foreigncurrency currency & rupee & rupeeloans) loans) currency currency

loans) loans)

Central Government Se-curities

: 1986 or later i/ 5.00 5.00 5.00 5.00 5.00 5.004% 1980 6/ 4.98 4.91 5.37 5.54 5.28 5.544% 1979i 4*34 4.89 5.30 5.45 5.22 5.45

% 19829 5.03 5.00 5-45 5.62 5.50 5.625-1/2 1999 5.62 5.63 5.17 6.31 6.22 6.315-3/4% 2003 W - 5.74 6.39 6.44 6.37 6.44

Bazaar Bill Rate BombaY1'15.00 17.00 21.00 21.00 21.00 21.00

Private Securities

1. Debentures :Redemption Yield 9.40 8.86 9.48 10-53 13.14 11.91Running Yield 7.46 7.98 8.07 8.31 8.44 885

2. Preference Shares 10.36 10.34 10.81 11.50 12.13 12.693. Variable Dividend -

Industrial Securi-ties 6 ' 5.59 504.87 6.06 6.48

J1 Bank Rate raised to 7,S in June 1973 to 9% in July 19742/ The highest rate for deposits over five years is now 10.00%. Between

A,Dril 1, 1974 and July 22, it w's 8% -rior to April 1, 1974, it was7.25%. The rate of 6% reduced from 6% refers to deposits for 1-3 years.

3/ The rates are those most comrronly charged. A ceiling of 12.5%< was imposedon the lending rates of commercial banks during this period.

4/ Normal lending rate. In case of default, a penalty rate of 0.5% normallyapplies.

F/ Flat yieldRedemption Yield.

J Rates at which bills of small traders are discounted by shroffs -these are unofficial quotations.

a/ The figure above the line is the average for nine months (April-toDecember 1972) and the below figure is the average for three months(January to March 1973)

2/ Due to insignificant trading on account of 'Companies (TemporaryRestriction Dividend) Ordinance, 1974, the yields on ordinary sharesfor the month of July 1974 were not compiled. The figure above the lineis the average for threemonths (April to June 1974) and thebelow figure is the aversge for eight months (August 1974 toMarch 1975).

Source: Reserve Bank of India - Report on Currency and Finance,1975-76 and RBI Bulletin - July 1977

December 22, 1977

Page 42: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 2Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Role of the State Joint and Public Sector inMadhya Pradesh, Gui-arat and Andhra Pradesh

1. General. In order to evaluate the role of the state joint andpublic sector in India, three states (Gujarat, Andhra Pradesh and MadhyaPradesh) representing advanced, medium and backwork development states,were selected for a detailed ana:Lysis below. Moreover, para 5 describes theselection mechanism of the management of the state joint sector company.

2. Gujarat is one of the most industrialized states in India noted forits entrepreneurship which has been fundamental in its development process.The State Government plans to resort to the state joint sector for relativelylarge projects which the private sector is not undertaking due to heavy invest-ment requirements or because of Monopolies and Restrictive Trade Practicing(MRTP) Act constraints. There is a pipeline of 13 projects (Attachment 2) mostof which are based on Gujarat's resources, particularly on by-products of thepetrochemical complex at Baroda (the methyl/polymethyl methacrylate andsynthetic cresols look promising although an appraisal is still necessary)and/or local demand. 1/ The Gujarat SIIC has already arranged foreign colla-boration and identified its private sector partner (sometimes a Large House)for many of these projects. GIIC is also commissioning market studies forsome of the products. Apart from market questions, the main issue regardingthe pipeline, which would have to be reviewed at the time of appraisal, iseconomic size.

3. The Andhra Pradesh IDC (APIDC) has been one of the most activein promoting industry. Andhra Pradesh is a state with potential to developminerals (coal, limestone, barytes, silica), agro, forest, and marine basedindustries. Its economic growth was severely affected by political insta-bility during the 1960's. Origirally the state joint sector was seen as theonly vehicle to induce investment in view of the lack of confidence andentrepreneurship in the state. F[owever, as time elapsed many local entre-preneurs still want to develop projects in the state joint sector in view ofthe advantages of being involved with the state government and because oftheir close contact with APIDC which offers a selection of projects for whichfeasibility studies have been carried out. APIDC has identified some 38projects likely to be sponsored in the public or joint sector, of which aboutthree-fourths (by amount of investment) are based on local resources. Attach-ment 3 shows a sample of this pipeline and corroborates concerns about thelack of coordination in state industrial investment (for example, mini-paper

1/ Except for a tyre project (see remarks in Appendix 2).

Page 43: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

A4NEX 2Page 2

mills) and the need to improve project selection (for example, questionabledemand for particle board). On the other hand, some projects such as refrac-

tories, based on locally available clay, seem feasible (a further project can

be developed based on the state's high quality asbestos).

4. In Madhya Pradesh the state government expects the state jointsector to play a key role in filling entrepreneurial gaps. MIadhya Pradesh is

one of the most industrially backward states in India but with considerable

natural resources in the form of various agricultural products, forests,minerals, and coal (which would support related industries) together with

plentiful availability of land, labor, and water. The lack of sufficient

infrastructural facilities in some of the areas where natural resources are

concentrated (forests) is one of the factors that constrains investment, and

the main thrust of the state's industrial policy is towards provision of thesefacilities. However, investment also has been limited by lack of entrepreneur-

ship. As the state government itself has limited manpower resources to operateindustrial enterprises, it wants to attract professional management (including

from other states) to operate the units it wants to promote. Madhya Pradesh

has identified 18 projects which would be promoted in the state joint sector(Attachment 1). Some of these projects seem inappropriate, such as the PVC

plant since this product can be manufactured more economically from a petro-

leum base rather than from a coal base (apart from possible market problems).Others, such as the carbonization project and paper and pulp, are based on

abundant natural resources in the state and in view of the comparative advan-

tage, should be pursued by commissioning feasibility studies. 1/

5. Selection of Management. State joint sector projects are managedby a Board of Directors, where the SIDCs/SIICs and the private sector partner

generally have equal representation. The SIDC/SIICs normally nominate the

chairman. The private sector partner normally nominates the managing direc-

tor (in charge of the day-to-day management of the unit). There have beena few variations to this practice and in some states the SIDCs/SIICs have

their representatives on special committees dealing with some of the impor-tant decisions. The practice in the choice of partners varies among the

SIDCs/SIICs. Some advertise in the local, as well as national, newspapersfor entrepreneurs, while others seek partners through direct contacts. Most

SIDCs/SIICs prefer to choose partners from local entrepreneurs, except when

no suitable candidate is available locally for the larger projects. Some

SICDs/SIICs prefer partners that are already operating in a particular fieldor with adequate experience in managing an industry, while others preferpartners with technical expertise even if they do not have adequate entre-

preneurial experience in industry.

1/ To answer questions such as market, economic size, economic and finan-

cial viability, etc.

Page 44: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

MADHYA PRADESH INDUSTRIAL DEVELOPMENT CORPORATION

Joint and State Majority Sector Pipelineas at September 30, 1976

(Rs million)

1/ Estimated F/EProject Product Capacity Cost Component Remarks

MP Glychem Industries Fatty Acids - N.A. 20.0 Based on locally availabliSolvent Extracts sal seeds.

MP Gas Ltd. Oxygen and Acetylene Gases N.A. 10.0 This Is an ancillary unit toserve the heavy electrical andmechanical engineering complexestablished in the state.

MP Electrical Machinery Electrical Motor/ N.A. 11.0 This is an ancillary unit toTransformer serve the established heavy

electrical plants.

Carbonization Project Semi Coke Gases N.A. 174.0 Based upon extensive "softcoking" coal depoeits inKorba/Surguja regions.

Pelletization Project Iron Ore Pellets 1-2 million 250.0 52.0 Based upon Bailadilla iron oretons p.a. reserves where there is

adequate infrastructure.

Particle Board Project Particle Board/Textile 20,000 tons p.a. 42.9 Based upon similar resourcesFibre of Bastan region.

Paper Project Paper and Pulp 45,000 tons p.a. 300.0 Based upon similar resourcesof Bastan/Netanegar regions.

Polyvinyl Chlorium PVC Product N.A. 120.0 Based upon coal resources ofProject Korba/Surguja regions.

Industrial Explosives Industrial Explosives 18,000 tons p.a. 40.5 By-product of the coalProject carbonization project.

1/ Apart from the 9 projects listed, MPSIDC is also interested in promoting a 27,000 tons p.a. Caustic Soda plant together with3 related projects. MPSIDC also has letters of intent for a Rayon fibre project, synthetic detergents and a steering gearproject, but these are likely to lapse and seem inappropriate investments for this State. >

Page 45: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 2Attachrment 2

(l C AbOT

ast if lit-rohe 1070

(Re siinkonl Forolgo Exshasge CotpoyP-ntof tho proiect ccI'

Ieclceical Capistatecoede Goods

tr< lect Product Annual CePaclty slnerd Co-s Enei.e.. Veo- _R-roke

Caj..ral Tyrca Ltd. Tyn./T.etbe 400,000 lbh. 277.15 4.1 61.5 lnny s1to-. are in -erecind -n s iytrcnsnthel type or yruec. Technical col ahoc:obtained Irot 8r GoodrIch (USA). CIICjostlE (em project bsed on droan.d althuo,hlc.iiitle dindlste retol,ly In tecuble no

qurot.tonObte it 1eind at on country bast.L

"I ymNts Corporation M4ethyl Methetacrylte 1 12.2 T-hloloal c,lriab-eanton <btained orneof CGtjreL Ltd. PF.Iyncthyl Matha-oylato rugibtWhe Lt.yo ho -, joInt sctOr t.1

-tonoter 5,000 tense. Drug H u-- Ltd il bt th. j.i- --5100 Sheets 2 000 xt partn-. Project based on -ooan 1p,lon .' VS1A Pellet .ISOO tonn.* fel,, the PiLrocicbnttL conpictPl ear h- t2dra

There -re Iorge ntonho of F.2,A sheetsnanulocturint units both In 'ho State asnel l *s country ebchlo se tmnporclnt Y'suncotr. Sneers end pot lets also eeqoitocby saI l-scale et-croft and othortoduettls.

bejorat Stats achIn Machine To1. Lathes 2.000 units 9D Nil 15 Gujarat hbo large n-nbor Po snal lndctttrlesTool Corp. Ltd. Radist I)Tilig iraItne. 100 units sating s-aIl lnchin_o, orn rt, ct

Coleter Drillintg chinoe 200 uts neodod by le idnecros. Projec cc-net>Kydocopying Attatlm-nts 200 units bha-d n' dc--d (coin clint r.ot ca.o:. l

Gc%. Appratoal voald h Iec to loto anarket situation carefully

CuJsrst Caromn Ltd. Carbeo slack 10.000 tcnnes 50 Isgi 3 For-rlrn Collal, ra thin i0'rer le), -

Pr,ir-ru 1(0K. Prijrct o,iclp t..till-e -nsilabln carbon blacit f-dst-.frc o leilna Pr-iects of irdi-n Pctro-chotiole Coroostnlo. btr L a arid catcrochet of -fotry. Subse-titcl p.ru t -_pot -'nld bl foe the tyrt pe%.-_t (Se.t 1L

Gajes&t Arcttius Ltd. Synthetics Creaols 3,000 tcuors 90 8 13.8 Foe-JAn colloretiro by Mt.l Jo t-nd otir- In Japn. At present -otiterryquioenoto of cre.onl frn inports.P00(00tnv uld cor05000 toltoortanotlsOh:leone tho retiterry neat Fanoola 'can dxci'.

-or coeccin is tn Cu;oat urd Ul.tn I- -

G.Jara-t ylons Ltd. Nylo_- PlO-t VYarn 2.100 nongs bO 10.0 400 Proj.ct doi-od because ai nt 4i ot - -fila...t y-n n - -- e-d In CuJara- by r -rlo in osol -u esco- GI It ar go thatpeoucnbt t Wt shc-tag coil innprIcor. Proboble proble if c patityneil (etc on in 01.K <fmislt lo hIcon'

Spons Irot Ponjert Spo-Se leo. 180.QO. tunnes 240 11.7 40.0 ((,cg n ps Ictni-d jroro hCi n F'i <reduceio of le-coe r/t- uochas patosiga Rt. Te1onlcl featlbillt.bengi stadied. As ptoin of surep Ir. Odelcached this sill afflts sponge iron. t*vor- cci 'rohlos and _1 4t ondretaike pt l.-

e-ablitlhad on bass of reinott u-I-touoctsael tndcseey. Unikely Inplnseenatlonr

Cyanide salts Penj. Cyosids felte. 1,500 i -oess 45 2.5 5.0 OydrooyaaLl anid sp-ilable eIt ledisopenrocherclols Coepooolion noar icizrdatotte esqueenosots I yatVile sotl Colby isyots. CIIC plans In und1reahck -rtetsneney. loubrology rot cc. Iluhc inonootoy *n f orenln I.llaboost l menolscac"l.If toyie-ennted otlI stl i -Ako sooti l.

Tit Poojelt TDI 5,000 b30 18.0 i0.0 GIIC plans lt undetukie ' ,are surv-y.burbber of cuorpoent i.e bete Lu uetsicoospehoten Inlceert of >nlcc3 Clh2 a-co.hecActerss Furt lOe (i,llat rcatloet v.1Ibo nqul -ed. ntote ciqolic-ni ci t1e e

di-iconyOnate I'ieioeld tm 0-ireqt'ul''of sant,acluorersof poem elat*e fool-.Tolv.'nr haste roe o.atoerba aesllahinl os refinery at LLoda

Me¢thanol Pooject Metbeoato 2tD0 bOtosses 120 P.S 20.0 PsoJest prisetted to 55 litre natuiral p.scoollohie Isonoun. t;u1 aran StatFeortliems vooad ho the cartntte.Dotale of proltbeltip oneicod cout.

Phenol PraJoot Phenol tGOSO O tOSSO 00 17T *.5 20.0 Ttheea is neoroi ebt8ttX tietar of r piecal dt

oIttuene see C 121. tIll pnithehin tisb*o''e Linen to onach sencederelson stae.

Itnloastes sf tIslesce Tolsess 14.000 teanses ' hO To be decided To br decided - uhensteatl quenchtoew ..f enloeset corlonfoca C7 Jsnocast froot oletine proiree of Indiec Pt-rcuthnnislw

Coep,ieanion. If ice bItt-ce d es notdeetlde enon earle blts I-inr-n GIt 1 vodd

coeider lnirlenaenllt ptuect.

Page 46: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANDIIRA PRAI)JLSfl

APIDC Target: Group Project Pipeline

as of September 30, 1976

(Rs Million)

1/ Annual Estimated F/E

Project Product CaDacity Cost Component Remarks

Novapan India Ltd. Particle board 20,000 Tons 54.0 10.3 A wood plantation is available. The

product would be used as a substitute for

raw wood which is becoming scarce. Never-theless, information available on themarket shows that there was over-capacityin 1972/73.

Delta Paper Mills Paper 10,000 Tons 40.8 3.6 This paper mill will use as its raw

material locally-available agro wastes.It is doubtful if it is an economic size.

A.P. Carbides Ltd. Calcium Carbide 33,000 Tons 66.0 8.0 High grade limestone is available locally.

At present there are few unitsmanufacturing this product. The outputof the plant will be used in the chemicaland engineering industries.

A.P. Refractories Ltd. Refractories 36,500 Tons 150.0 25.0 This project will make use of locally-

available clays and sell part of itsoutput to local steel plants.

N.A. Brake liners and 350 Tons 10.0 3.0 This plant will make use of locally-

clutch facings available high grade Asbestos.

Southern Transformers Power transformers 1,000 MVA- 30.0 7.0 The output of this plant will be used in

ILtd. 132 KVA the Andhra Pradesh power development

program.

1/ Some other projects (out of a pipeline of 38) that APIDC is considering that will require foreign exchange are: (1) A sponge iron m A

project that could sell its output to local steel mills; (2) A Caustic Soda plant that could use salt produced by another APlDC n

project. T'his plant would supply Chlorine to a planned P.V.C. plant; (3) A Nylon Filament Yarn plant; (4) A second mini paper D

mill; (5) A Rayon Grade Pulp plant and (6) A Fibre Glass plant.

Page 47: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 3Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Technical Assistance Fund

1. $500,000 of the loan would be allocated to the Technical AssistanceFunds. GOI would make the funds available to IDBI on grant basis.GOI would repay the $500,000 on or before January 1, 1995.

2. The fund will be managed by IDBI.

3. The fund will be used to pay for the services of local and foreignconsultants for the following purposes:

(a) to finalize projects to bankability stage,(b) project preparation work, and(c) development of export potential in eligible undertakings

whether existing or proposed.

Priority will be given to the needs of those states which areshort of the necessary in-house technical manpower to developprojects and identify export possibilities.

4. Each request for the reimbursement of expenditure will be accom-panied by a short statement not exceeding two pages, for the in-formation of the Bank, indicating:

(a) the reasons for the study,(b) selection process for the consultant, and(c) proposed follow-up action by IDBI.

The Terms of Reference issued by IDBI for the study should beattached to this statement.

5. Consultants will be chosen by IDBI in accordance with Bank guide-lines.

6. IDBI will, where appropriate, capitalize expenditures on thesestudies in the project cost. IDBI will use the reimbursement ofsuch expenditures to be credited to the Fund to finance furthertechnical assistance.

7. In the usual quarterly reporting to the Bank, IDBI will include astatement of the accounts for the Technical Assistance Fund.

Page 48: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 3Page 2

8. After full disbursement for the Technical Assitance Fund from the

credit, IDBI will send IBRD a report describing in summary form:

(a) the technical assistance features of the various studies

undertaken,(b) the achievements of these studies,(c) the problems encountered, and(d) the likely needs for the immediate future.

Page 49: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 4Page 1 of 2

INDUSTR(LCF DWSLOPMT BAK OF INDIA

Direct Pro-1act Assistance by 1001 (Rs. in million)

Yer No, Project Maaa of Tiniincn 86 Foign - - et by(July-June) of oost Equity+ Loas Others Exchange ICICI IFG; Others

ply- Pr fe- Require-

. . _ t rence me.nti

A. 1f1 Industries

197C-71 16 1935.49 526.97 1363.68 102.84 414.34 83.bs 2a.40 304.03

(25.48) (317.71) (25.64)

1171-7 2b 4C14..33 7G1.O, 2C06.37 1545.54 856.6S 3G6.8 9.i3 731.67

(137.5o) (o93.77) (10.00)

17.-76 46 o ..- 4G.*;1 1367.13 307.01 174.17 03.4S 11.10 z J. 5,

(53.cG) (416. 43) (10.50)

1373-74 57 2297.02 734.10 1487.00 75.92 37C.8S 66.953 4. do .iL.L4

(76.3se) (405.51) (-)

lJ74-75 4i3 451e.86 333.03 44S.w 11'5.77 7ol.46 S0.75 3.57 2o0.06)

(72.G6) t5J,..55) (36.00) (s5.5s - IF5- +

1975-7b 94 %46e.57 1l76.06 3171.eb ou .55 14. .31 156.67 63.66 49Ž.56

(b7-6e) i.J60.,4)

147-77 63 943.96 el21.57 540o.64 ',6 .05 r4.5O 6lo.2u 77u.6. 4dl&.'4

(Z6*&62) (15b J. 57 i

ic3 26150.10 6860.86 17535.63 473b.66 3300.96 1G6.74. 31G.0u 7550.25Tot els (74-.53j (S15.78) (76,34)

B. Publio Sector

137c)7-71 . 102.54 24.50 72.95 5.09 17.39 - 17.39

(-) (30.0u) (-)

1971-74 1 150.53 31.50 113.00 6.03 21.63 - - 21.63

(_j (46.50) (-)

147k:-73 4 1 14.7U 67. u 115.41 1l.29 i - - 27.95

(11.15) (30.50) (-)

1975-74 a 144.Z0 55.00 67.60 u.6L 35.57 - _ 5.57

(5.Uo) (12'.6) (-)

Ia7 75 5 755.e0 lb2.50 491.20 b1.50 - - - -

(7.00) (2S.505 (-)

1975-76 1 377.56 300.69 431.02^ 125.65 li,.20 10.03 7.90 11'..7

(A4.60) (148.67)

1J76-77 lb 161'/.bO 333.S0 002.77 83.b - 7.50 167.Z0 53M.9q

(10-40 ) (46'i. 3a)

47 364Z.53 1121.89 2203.95 314.44 435.ok 37.53 175.10 611.31

Total 'd, (6d.15) (973.69)

C. Joint Sector

1970-71 1 3.60 Z.00 - 1.60 - - - -

(0.90) ( -) ( -)

1371-72 7 2116.56 493.50 1551.66 71.40 558.74 3.z6 3.12 552.36

(Lo4.47) (454.19) (-)

1s7a-73 8 769.62 127.60 635.56 5.46 70.C3 15.57 i.52 49.94

(20.87) (200.60) (-)

1973-74 10 766.5? 255.50 506.70 4.32 99.11 10.60 4.10 84.21

(27.07) (160.56) (-)

1974-75 10 131b.9& 377.90 885.81 50.a7 47i.97 5.00 5.00 430.47

(40.47) (136.45) (-) (35.50 - IFCI + ICTCI)

1975-76 19 133.91 405.72 837.41 60.78 136.82 5.78 8.19 122.65

(26.26) (301.34)

1976-77 18 3278.08 741.57 z526.55 252.66 50.65 19.90 20.55 196.89

(148.52) (7?±3.34)

Total ic 73 9571.2? 2403.79 6343.69 466.49 30.76 60.31 45.48 1436.72

(370.56) (1954.48)

Tot el b & CPublic & 120 13d53.G0 55sa.6& Y147.b4 7D0.93 62b.10 276.96 22U.5b 4020.01

Joint (426.71) (e934.17) (3x.50)

Total B & Cas %of

Total a(Pablic & 331 46.94 51.x4 5e.17 16.50 9.68 26.21 24.08 54.63

Joint Seo-to re as %of all In-dustries)

(I'iguire in ouracketr represeait IDI assistaoce)

Page 50: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 4Page 2

INDUSTRIA]. DEVELOPMENT BANK OF INDIA

Industry-wise Direct Financial Assistance to Publicand Joint Sector Projects (July 1964 to June 1976)

(Amount in Rs Million)

Industry No. of Project AssistanceProjects Cost Sanctioned

1. Fertilizers 4 2,144.2 559.4

2. Basic Metal Industries 13 1,475.1 270.7

3. Rubber 3 915.9 165.0

4. Basic Industrial Chemicalsother than Fertilizers 9 837.0 225.8

5. Cement 2 818.0 259.0

6. Paper 5 887.6 323.5

7. Machinery 13 588.1 147.5

8. Sugar 6 286.5 64.6

9. Transport Equipment 4 236.7 50.9

10. Textiles (including jute) 8 288.2 83.6

11. Other Chemicals & Chemical Products 4 182.3 62.4

12. Others 13 306.5 74.6

Total 84 8,966.1 2,286.9

Page 51: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 5

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Target Group's Past Performance

1. It is difficult to evaluate the performance of state government

sponsored projects since most are either under construction or have been

in operation for less than three years. In Gujarat, only two state government

sponsored projects are in operation. 1/ One, Gujarat State Fertilizers Com-

pany, Ltd., which started production in 1967 and is well known to IBRD, has

shown very good performance. The other, Gujarat Alkalies and Chemicals

Ltd. (producing caustic soda/chlorine), only started operations in October,

1976. It was completed with a 45% cost overrun and 6 month delay which is

in line with the outcome of a similar private sector company now under im-

plementation (Gujarat Alkalies was appraised in 1973 before the oil crisis,

etc.). By December 1976, it was operating at 60% capacity utilization which

is good considering that production had just started. The market for caustic

soda is poor at present but ICICI and IDBI expect profits to be fair.

2. Madhya Pradesh has two state joint sector projects in operation.One, M .P Electri^c' Fl .T zna -lled wires) started operations in 1975. It

is still experiencing some start-up difficulties because the company has yet

to stabilize production and the market is depressed. However, poor market

conditions also affected similar companies in the private sector. The other

company, M.P. Lamps started operations only six months ago. Its production

and operational performance are reportedly in line with budget forecasts.

3. Andhra Pradesh has eight joint/public sector projects in opera-

tion 2/. Of the eight, four are operating profitably (one of these four

companies had been a private sector company that failed and was subsequently

acquired by APIDC). Another three are having temporary market problems due

to initial market entry difficulties, recession, etc. The other company,

Associated Glass Ltd., producing bottles has suffered from the impact of

prohibition and recycling of bottles on demand and is now trying to diversify

its nrodrict lin' (?wq,' fr-om ct f1 es! ood t^ expor! its zrystal glass which is

of reasonable quality.

4. As most existing projects in the target group (particularly joint

sector) started operations only recently, an attempt was made to evaluate

their performance by comparing a sample of them with private sector projects

in the same industries which had been in existence for comparable periods

of time. While the evidence in Attachment I does not contain sufficient in-

formation for a solid conclusion, it suggests that, in general, the per-

formance of these projects has been similar to that of comparable private

sector units.

1/ Both are wholly state govcrnment owned and not state joint sector.

2/ Excluding a miaing company and a sugar company set up before India'sindependence and now owned by the state.

Page 52: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

Co-n.rison of Perfor,-cce by Entotirn Public/Joint SectorProjocts with Private Sector ?rolccts in the em-a Industries

which have bcen Ln E.iot-cCe for C-parable Tite

…-- ------- …---P--- ----- ----------- 7ublic/.boint Sector------------------------P-i--t- S-t-_o…___ ------------------------------------ …----…Pri…at Sector--------------------------_______ -__1/ Cost Deloy in Profitability 6 1/ Co.t DOI&y in Profitability &Produ.t Copoanv Name Tie Overrun Co.pletion (montha) Capacity Cotil. M;,naoc Co-pany Name i*"- Overrun Completion (fonthse Capacity Util. maogsmet

2/Fertili.-rf GCJarat State Fertilizers 1967 Nil Nil Cood G.d 2-ar Agro Chemidcls 1973 2% 6 Fair GoodFertilioer- Southern Petrochbpicals 1975 41% 12 Poor Fair Indian Farmers &Fertlftrers Mangalore Chemicals A Fertilizers Cooperative

3/ Fertilizers 1976 31% 15 Fair Cood Ltd. 1975 7% 13 Fair PairDrv Cet1is To.biba Anand Batteries 1973 I;I Nil Fair Good Lakhnpal National 1973 11 5 Fair FairLao, Toshiba Anand Lanps 1968 627. NA. Poor Cood Sylvani & La-n Ltd. 1973 397. N.A. Poor FairPhth.lic iMysore Potroche.icals 1976 16% 9 Faic/Good F.ir Thir.malai Chroicals 1976 107 4 FaLr/cood FairAr,hydride

Ca.. ic soda/ Gujarot AIKalies A 1976 457. 6 Fair Coed Kothari Ltd. isp. Jao. 78 Overruns in cost And tim aapeted to be si-ilar tO GACLchl-I n. Che,icalsSteel- Gogte Steels Ltd. 1976 20% 13 Poor Fair Usha Alloys A St*el. 1975 26% 11 Poor GoodSteel 6 Steel Corplex Ltd. 1975 157 24 Poor GoodCl^as co -raloe/ Eocl Cl.seo Ltd. 1972 177 14 Poor Poor ivciers.l Class 1976 277. 24 Poor Fair

1/ Ti wh=Ien prod-ction started.

2/ Tht peftability of a11 fertili.er plota set up before 1974 both in the privace *nd pblic sectors is snbst.ntially better than tho..Ot' .:cd s.5soquonti 0; has appoioted Aco -ittee to study the p-vitabiliLy of fe-til- nit and r- vend anions

Ic: loc= fertilizer plants.zru s^ e-/ Y .-e: cob ^- Trhb b: :nd B- ttcrN r dy --- t l -r-.T Ine tt y culi uni - in t.e

private secor.4/ Both ocepanie were Affected due to Attempt to enpand and diversify too quickly. Toshiba Aetd Ita-P

055 01.0 Affected by labor/political problems is Kerala. The fioaocial insicutions hove rescheduledtheir loans to this pro,ect fuer company took action to strengthen v-rio-s Aspecta of its activities.Sitoatios itprovig.

5/ The *to.; industry in general, and aslil steel plants in particular Are severely affected by market conditions.Ml arket proble,a hae boons ag&ravat&d by imsposition of prohibition (14upr) in some staces.

rC3

ft(D:3

He

Page 53: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 6Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Highlights of Scheme for IDBI Refinance Assistance to SIDCs/SIICs

On July 9, 1976 IDBI's Board approved a scheme for refinance ofSIDCs/SIICs, of which the salient features are summarized below:

Eligibility: IDBI shall refinance loans made by 21 listed SIDCs/SIICs toindustrial concerns for acquisition of fixed assets and margin money forworking capital.

Coordination with SFCs: In all cases where units are eligible for assistancefrom an SFC (i.e. having paid up capital and reserves less than Rs 10 million)refinance assistance shall be given to SIDCs/SIICs, if financing of such proj-ect by SIDC/SIIC is agreed to by the concerned SFC.

Overall limits for refinancing of individual SIDC/SIIC; IDBI shall determineon an annual basis ceilings of refinance to individual SIDCs/SIICs.

Limits for refinanced loans: Normally refinance would be available for loansranging from Rs 0.5 million to Rs 3 million, for projects costing at leastRs 5 million. For smaller-projects agreement of the concerned SFC is neces-sary. In exceptional cases refinance would be available for loans up to Rs 6million, with an overall ceiling of IDBI refinance per unit through differentintermediaries of Rs 9 million.

Extent of refinance: 100% of loans for projects in specified backward areasand 80% of loans for projects in all other areas.

Rate of interest: Interest on refinance will be charged at the rate prevalentat the time of disbursal of refinance in full or instalments. The presentstructure of rates of interest for refinance is as below:

Ceiling on rate ofinterest to be charged

IDBI Rate by SIDCs/SIIC

(a) Normal rate 9% 12-1/2%

(b) Special rate onrefinance to proj-ects in specifiedbackward areas 6% 9-1/2%

Page 54: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 6Page 2

Period for repayment: Normally, loans granted for a period up to 10 yearsshall be considered eligible for refinance, but in special cases, a longerperiod for repayment can be considered. The period for repayment should beso fixed that it gives a debt service coverage ratio of 2:1.

Repayment of refinance: The schedule for repayment of refinance should syn-chronize with the schedule for repayment of the corresponding loan.

Security for loans. The SIDCs/'SIICs shall assume full credit risk in respectof the loans sanctioned by them.

Upgrading of SIDCs/SIICs: To ensure proper utilization of refinance assistanceextended by IDBI and to streamline the working of SIDCs/SIICs, the latter willbe subjected to the same discipline as has been done in the case of SFCs. Forthis purpose, IDBI contemplates to conduct regular and periodic inspections,nominate its representative on the Board of Directors and Executive Committeesof SIDCs/SIICs, call for regular returns and issue guidelines on importantpolicy matters.

Guidelines relating to norms about promoters' contribution, debt-equity ratio, debt-service coverage ratio and other related subjects will beissued from time to time by IDBI and these have to be adhered to by the Corpo-rations to be eligible for refinance.

Amount of business: IDBI estimates that refinance of SIDCs/SIICs might notexceed Rs 100 million in the first year. This is a small amount compared toRs 1,807 million (for 8,244 cases) of refinance which IDBI granted to SFCs inFY75/76.

Page 55: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 7Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Public Financial Institutions Law (Amendment) Act

1. Policy. The Act now states explicitly that IDBI shall function asthe principal financial institution for co-ordinating the working of otherinstitutions engaged in financing, promoting or developing industry. IDBIshall deploy its resources in conformity with national priorities. GOI willhave the power to give directions to IDBI in matters of policy involving thepublic interest.

2. Ownership. IDBI's authorized capital will be increased from Rs 500million to Rs I billion, with GOI having the power to increase it further toRs 2 billion. The issued capital will be transferred from RBI to GOI, andany further share issues will be wholly subscribed by GOI.

3. Board of Directors. IDBI will have an independent Board with amaximum membership of 23, consisting of a Chairman, a Managing Director, anRBI Deputy Governor, two Government officials up to five representativesof other all-India term-lending institutions, 1/ up to six representativesof the State Bank, the nationalized banks and the SFCs, and at least fivepersons who have special knowledge or professional experience which, in GOI'sopinion, would be useful to IDBI. There will also be two directors chosenfrom the employees of IDBI and the term-lending institutions, one from amongthe officers and one from the workmen employees. Except for the DeputyGovernor of RBI, all Directors will be appointed by GOI. IDBI's ExecutiveCommittee will consist of 11 members inclusive of the Chairman and the Man-aging Director. They will hold office for terms not exceeding five years,and they will be eligible for reappointment.

4. Staff. Those staff members currently assigned to IDBI, or whosefunctions are being transferred to IDBI from RBI, will have 18 months inwhich to decide whether to return to RBI or to remain in IDBI; the actualtransfer to staff will take place within 30 months.

5. Audit. IDBI's accounts will continue to be audited by auditorsduly qualified under the Companies Act, but they will now be appointed byGOI instead of by RBI. IDBI's accounts and the auditors' report have beenpublished in the official gazette; they will now first be placed beforeParliament.

6. Amendments to SFC Act. The amendments to the SFC Act will transferto IDBI most of the powers hitherto held by RBI:

(a) RBI's holdings of shares in SFCs will be transferredto IDBI.

I/ Inclusive of UTI.

Page 56: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 7Page 2

(b) IDBI's representation on an SFC's Board will increase

from one to two.

(c) IDBI will take over the responsibility of inspectingSFCs. 1/

(d) IDBI will take over from RBI (or join with it in per-

forming) the supervisory functions regarding SFCs' re-source mobilization. RBI will still be consulted re-

garding the issuing of bonds and debentures, the rateof interest on such bonds, borrowings from the StateGovernment, and the acceptance of deposits.

1/ The Industrial Finance Department of RBI has been transferred to IDBI.

January 18, 1977

Page 57: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 8

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Board of Directors and Executive Directorsas of December 30, 1977

Name Primary Occupation

*1. Shri J. N. Saxena Chairman & Managing Director

*2. Shri Maumahan Singh Secretary to the Government of India,Department of Economic Affairs

3. Shri H.T. Parekh Chairman, ICICI

4. Shri Baldev Pasricha Chairman, IFCI

5. Shri R.B. Pradhan Chairman, Life Insurance Corporation ofIndia

6. Shri G.S. Patel Chairman, Unit Trust of India

*7. Shri A. Niyogi Chairman, Industrial ReconstructionCorporation of India Ltd.

8. Shri Mukul Chand Barua Managing Director, Assam FinancialCorporation

9. Shri B.P.R. Vithal Secretary, Finance & Planning Department,Government of Andhra Pradesh

10. Shri K.S. Krishnaswamy Deputy Governor, Reserve Bank of India

11. Shri S.S. Marathe Secretary, Ministry of IndustrialDevelopment

12. Shri O.P. Gupta Private Sector Industrialist

13. Shri P.P. Khanna Private Sector Industrialist

14. Shri N.M. Waghle Private Sector Industrialist

15. Shri Freddi Mehta Private Sector Industrialist

16. Shri P.C.D. Nambiar Chairman, State Bank of India

* Executive Committee Members.

Page 58: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Staffing Situation

New Recruits Terminations- Staff on HandJuly 1973- July 1974- July 1975- July 1976- Nov. 1976- July 1973- July 1974- July 1975- July 1976- Nov. 1976- June June June June Oct 31stJune 1974 June 1975 June 1976 Oct. 1976 Oct. 1977 June 1974 June 1975 June 1976 Oct. 1976 Oct. 1977 1973 1974 1975 1976 1976 Oct. 1977

Management - - 3 - 5 - - -2 2 2 3 6 9

Professional Staff- 22 13 30 3 190 12 8 8 3 6 273 283 288 310 310 494

EconoMists 1 3 - 1 8 1 1 1 - 2 24 24 26 25 26 32

Engineers - 3 9 1 - 3 1 1 - 3 29 26 28 36 37 34

Financial Analysts 21 5 19* - 170 6 5 4 2 1 162 177 177 192 190 359

Others 0 2 2* 1 12 2 1 2 1 - 58 56 57 57 57 69

Other Staff 59 29 36* 19 226 - - - 3 5 474 533 562 59R 61b S35

Total 81 40 69 22 421 12 8 8 6 13 749 818 852 913 930 1338

l/ Mainly deputations.2/ Excluding staff officers from regional offices (62 in October 1976).

Representing personnel drawn from Industrial Finance Department of RBI.

D

Decembet 22. 1977

Page 59: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

IDBI - Staffing of SFCs Department and Other Loan Departments(Additional Requirements as of December 1977)

SFCs & OSLAs Dept. Soft Loans Division Special Loans Div. Project Finance Div.SS WS Vac AS AR SS WS Vac AS AR SS WS Vac SS WS Vac

G.M. (Fin.) 1 1 - - - 1 1 - - - 1 1 - 1 1 -G.M. (Tech.) - - - - - - - - - 1 1 -

Dy.G.M. (F) 1 1 - - - 3 3 - - - 1 1 - 2 2 -Dy.G.M.(T) - - - - - 1 1 - - - 1 - 1 1 2 -1Manager (F) 3 4 -1 2 1 7 7 - 2 2 2 3 -1 13 13 -

Manager (T) - - - - - 2 2 - 4 4 2 3 -1 8 7 1Dy. Mgr. (F) 7 2 5 3 8 10 - 10 12 22 2 - 2 17 4 13Dy. Mgr. (T) 2 - 2 - 2 6 - 6 6 12 2 - 2 10 5 5I.F.O. (F) 11 9 2 3 5 - _ - 14 14 4 4 - 20 22 -2I.F.O. (T) 2 - 2 - 2 - - - 12 12 2 - 2 12 1 11S.O.Gr. II 17 13 4 3 7 22 17 5 6 11 4 4 - 26 24 2

44 30 14 11 25 52 31 21 56 77 21 16 5 111 92 29

I.F.A./C1.Gr.I 17 15 2 - 2 16 9 7 - 7 2 2 - 25 27 -2

Clerk Gr. II 11 3 8 - 8 20 9 11 12 23 2 2 - 18 8 10

SS - Sanctioned strengthWS - Working strengthVac - VacanciesAS - Additional sanctions required as per the Dept.AR - Total additional requirements as per AS has been advertised

C0

Page 60: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 11

11DU3TRTAL DEVEDLOPFET B9ANK OF TIYDIA

DBIt's Structure of Interest Rates l/(Percent Per Annum)

IDBI Ceiling on PrimaryRate Lenders' Rate

1. DXrect Assistance to Industrial

Concerns (other than for exports)

xa) 'Nornall rate 11.00

(b) Concessioraal rate to units inspecified backward districts 9.50

2. ReNfnance of Industrial Loans

'a) Normal rate 9.00 12.50

~b) Special rate for small-scaleindustrial units covered underthe Credit Guarantee Schemeand Technician-entrepreneurschemes 7.50 11.00

c` .-nder IDA line of credit(Foreign currency component)

(i) To small-scale industriescovered under Credit GuaranteeScheme, Technician-entrepreneurschemes and units in specifiedbackward districts 8.50 11.00

(ii) Other cases 9.00 11.50

'. Export Credit

(a) Refinance against medium-termexport credits 6.50 c.OO

(b) Participation export finance scheme The rate on IDBI's portion of thecredit is such that after taking into

(c') Buyer's credit scheme account the participating bank's rate,I the average rate to the exporter onI the entire credit will generally be1 7.50 percent.

L. Bi''s "hediscounting Scheme2/

T'nexpired issuance of bills/promissory notes

(a) 6 to 36 months 10.00 11.75

(b) Over 36 months and upto 8L months 9.50 11.25

I/ These are IDBIts current lending rates. The latest increase was implementedon December 1975.

2/ SDecial rediscount rate to State Road Transport Corporation situated in theqtpt's of wortl, 1astprr Region (Assar, Mvphalava, mar,alarl, Maripoor andTripura) and the Union Territories (Arunachal Pradesh and Mizoram) are3-1/2 percent less than the current rediscount rate of IDBI/Bank with effectfrom 9th October, 1976.

Penaity rate is 0.57 on the amount of principal outstanding. Thus, the effec-tive penalty rate will in most cases be quite high. There is no commitmentcharge up to 12 months. After 12 months, the commitment charge is 1/2% andafter 19 months 1%.

Page 61: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 12Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

IDBI's Role in the Economy

Resource Allocation

1. Overall Operations. From its inception in July 1964 to June 30,1977, IDBI's net approvals of financial assistance totalled Rs 24.5 billion.Direct loans 1/ accounted for Rs 6.4 billion (or 26%) underwriting and directsubscriptions to shares and debentures of industrial companies for Rs 1.0billion (4X), and guarantees Rs 0.7 billion (1%). IDBI's direct financialassistance to develop industry therefore accounted for 32% of the total.The balance consisted of rediscounting of bills (29%), refinance (26%), ex-port finance (9.0%) and subscription to shares and bonds of financial insti-tutions (4%).

2. There has been a substantial growth in IDBI's operations in thelast five years. Net approvals grew from Rs 1.3 billion in FY73 to Rs 7.7billion in FY77 and disbursements from Rs 1.0 billion to Rs 3.9 billion res-pectively. Most of this growth took place in the refinance and rediscountingoperations. The former has increased six fold in the last five years whilethe latter has more than trebled in the same period. This increase was dueto the tight resource position of commercial banks and SFCs and their in-creased reliance on IDBI as a source of funds. Also, the Liberalized RefinanceScheme (LRS) which was introduced in 1971 was extended to the commercial banksJnt February 1975 and their share of the refinance operations has increasedf--- 16.2% in FY74 to 40% in FY77.

3. Net approvals of export finance grew substantially from Rs 195million in FY74 to Rs 442 million in FY75, increasing to Rs 829 milliorn inFY77.

4. IDBI's net approval of direct loans (otlher than for export finance)increased from Rs 492 million in FY74 to Rs 671 million in FY75 to Rs 1,035'illion in FY76 and to Rs 2,449 million in FY77. The large increase that tookplace in FY76 and FY77 is explained by the improvement in the economic climateand the introduction of new procedures for faster processing of the backlog ofloan applications. On the other hand, disbursements were Rs 468 million inFY74, Rs 403 million in FY,75 Rs 487 million in FY76 and Rs 810 million inFY77. The decline in d-'sbursements in FY75 is consistent with the relativelypoor economic conditions at that time.

1/ Not counting direct loans for export, which consist of loans to financepre-shipment and post-shipment requirements of exporters, when offeringdeferred credit terms to importers abroad.

Page 62: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 12Page 2

Economic Impact

5. Since inception and up to March 1977, IDBI accounted for 41%(including its refinancing of SFC's) of all the assistance sanctioned byindustrial term-lending institutions. The latest data which was availablefor 1973/74 shows that IDBI's total assistance during that year represented27% of the investment in fixed assets of the private corporate sector. Itis the apex industrial lending institution in the country, which assists inthe formulation and implementation of GOI's industrial policies and coor-dinates the activities of other financial institutions, with which it worksclosely. It finances the small and medium scale sector through its refinanc-ing of SFCs and finances the large-scale sector directly. It is involved inthe private, public and joint sectors, and is also a lender of last resort.IDBI-assisted companies provide a major proportion of installed capacityin many important industrial fields such as 95% in introgeneous fertilizersand 65% in PVC and aluminum. Some 45 out of the 458 projects to which IDBIhas approved direct financial assistance up to June 1967 have introduced newtechnologies into the country 1/, 149 involved foreign collaboration and 48were sponsored by new technician entrepreneurs. It has also contributedthrough its promotional activities to the development of backward areas.Further, it has become the focal point for export finance in India.

6. Between FY71 and FY77 the number of companies financed by IDBI andin operation increased from 88 to 171, their direct employment from 133,000to 281,000. The average investment/direct employment ratio of these companieswas $9,500 indicating reasonable capital intensity of IDBI's projects. Theproduction of these 171 companies represents 23% of the output, 14% of thenet value added and 4% of the exports 2/ of the private corporate sector inIndia during FY75. The data on the 88 companies that have been in operationsince 1971 indicates that between 1971 and 1975 their output grew by an aver-age of 17% per year, their net value added by 15.6%, their capital employedby 12% and their gross earnings by 14.5% which is satisfactory. IDBI esti-mates that through its direct assistance in FY77 it catalyzed investments ofthe order of Rs 5.5 billion; these projects are expected to produce a netvalue added of Rs 1.8 billion and provide employment for 42,000 persons.

7. Ex-ante internal economic rates of return and DRC (domestic resourcecost per unit of foreign exchange earned/saved) calculations were prepared for181 projects. Of these projects, 43 had DRC's of more than Rs 10. However,of the 43, only 10 had IERR 3/ of less than 15%.

1/ Mainly in metal products and chemicals.

2/ The total impact of these companies on the foreign exchange positionof the country would be larger if their import savings are taken intoaccount.

3/ However, the methodology IDBI uses to calculate IERR is questionable.Of the 181 projects, 10 had IERR of less than 15%, 104 had IERR between15% and 30% and 67 had IERR above 30%.

Page 63: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 12

Page 3

Resource Mobilization

8. Of total resources of Rs 10,374 million borrowings from RBI

accounted for 51%, bond issues 24%, borrowings from GOI, 11% 1/, shareholders

funds (i.e. share capital and reserves) 9% and others 5%. Since FY70 (when

GOI stopped budgetary lending to IDBI) IDBI's resources have been provided

mainly by bond issues and RBI advances. Bond issues generate little actual

mobilization of primary savings, as they are taken up by commercial banks

and insurance companies. This is mainly due to (i) the controls exerted

by RBI upon the maturities and rates of interest that can be offered, (ii)

traditional investment habits, and (iii) lack of secondary markets. At the

project level, IDBI plays an important role in mobilizing direct financial

assistance -- each rupee of IDBI investment, generates Rs 4 of additional

investment by the project sponsors or other financial institutions.

9. Taking into account all disbursements and undisbursed commitments,

IDBI had a negative long-term resource position of Rs 297 million which IDBI,

consistent with its normal practice, has covered with a facility to borrow

against lodgement of commercial bills under its overall short-term borrowing

facility with RBI.

1/ The borrowings from GOI include Rs 145 million (or 2% of total resources)

on account of the Development Assistance Fund (DAF) (footnote to para

6.05).

Page 64: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 12Attachment 1

INDUSTRIAL DEfE PVIT BAK C' INDIA

SUMKARY C' OtPEIIONS(Ph.million )

Year ended Direct assistance to indubtri±l Refinaoe Redie- Export Invest- Sub-Total TotalJune 30, oto of indue- counting Aemie- ments in

on Egt-yr Bond OuwW SubTotal trial taned/ Financialinvest- ir=vet- antee loans Institu-mert. ment _ tions

Gross sanctions

1971 431.7 40.4 16.9 26.1 515.1 261.3 284.8 265.2 81,0 892.3 1407o4(26) (11) (3) (2) (1552) (36) (6)

1972 560,5 148.9 17.5 - 726.9 322.0 452.9 226.8 32.1 1033.8 1760.6(35) (20) (1) (2194) (22) (4)

1973 585.5 65.0 17.5 3.1 671.1 3i2.6 498.4 26.4 27.7 907.1 1578.2(57) (36) ti*() (1) (2517) (6) (5)

1974 591.7 68.6 - 0.4 660.7 461.6 763.0 231.6 102,0 1558.2 2219.0(46) (22) (1) (2975) (10) (5)

1975 696.3 81.5 30.0 - 807.8 1078.6 1143.9 472.4 65.9 2760.8 3568.8(51) (38) (1) (6453) (42) (10)

1976 1049.2 81.8 41.3 - 1172.3 1807.1 1207.7 467.4 167.8 3650.0 4822.3(97) (51) (2) (9255) (39) (21)

1977 2512.8 292,6 50.00 - 2815.4 2601.9 1513.1 844.1 105.8 5064.9 78a0.4(193) (76) (1) (14818) (39) (23)

Net Sanctions2/

1971 296.4 26.4 6.9 21.3 351.0 235.5 284.8 236.3 81.0 837.6 1188.e(23) (9) (2) (1366) (33; (6)

1972 502.8 131.3 10.0 - 644.1 255.5 452.9 162 8 32,1 902.3 1546.4(33) (19) (1) (1646) (21) (4)

1973 392.0 56.2 10.5 3.1 461.8 269.1 498.4 27.9 27.7 823.0 1284.9(48) (32) (1) (1) (2035) (6) (5)

1974 487.0 66.3 - (.4 553.7 397.2 763.0 194.6 102.0 1456.8 2010.5

(43) (20) (.) (2474) (9) (5)1975 670.3 81.5 30.0 - 781.8 917.1 1143.9 443.8 65.9 2570.7 3352.6

(51) (38) (1) (5342) (39) (10)1976 1034.8 79.8 41.3 - 1155.9 1631.9 1207.7 444.0 167.8 3451.4 4607.4

(96) (50) (2) (8132) (38) (21)2449 2 252.6 32.5 - 2734.3 2516.5 1513.1 829.1 105.8 4964.5 7698.9(193) (76) (1) (14214) (38) (23)

Commitments

1971 61.3 - - 61.3 235.5 243.4 168.7 81.0 728.6 789.9(13) (1366) (44) (6)

1972 125.7 - - 125.7 255.5 383.0 178.5 32.1 849.1 974.8(17) (1646) (34) (4)

1973 569.0 - - 569.0 269.1 424.7 105.7 27.7 827.1 1396.1(23) (2035) (20) (5)

1974 218(2 - - 218.2 397.2 637.5 311.3 102.0 1448.0 1666.2(36) (2474) (17) (5)

1975 323.7 - - - 323.7 917.1 916.9 190.3 65.9 2090.2 2413.9

(38) (5342) (17) (10)1976 437.8 - - _ 437.8 1631.9 916.6 273.9 167.8 2990.2 3428.0

(45) (8132) (31) (21.)1977 540.0 - - - 540.0 2516.5 1132.5 278.9 105.8 4033.5 4573.5

(62) (14214) (25) (23)

Diabuirsements1971 48.8 37.9 - - 86.7 212.3 243.4 218.7 36.5 710.9 797.51972 95.9 14.5 4.3 - 114.7 239.9 383.0 149.9 51.6 824.4 939.11973 252.4 41.2 7.7 - 301.3 249.9 424.7 61.1 27.7 7b3.4 1064.81974 468.4 36.9 9.9 - 515.2 277.1 637.5 77.5 114.5 1106.6 1621,91975 403,1 20.8 2.4 - 426.3 524.5 916.9 175.6 73.4 1690.4 2116.71976- 486.8 58.4 10.0 - 555.2 1024.7 916.6 278.1 141.5 2360.9 2916.11977 883.1 35.8 45.0 - 963.9 1414.1 1132.5 288.0 127.7 2962.2 3926.2

it 97?1 ents 69.3 3.1 0.3 - 72.7 150.9 125.4 24.0 - 300.3 373.01972 85.9 - 0.3 - 86.2 163.7 184.9 76.0 8.0 432.6 518,8

1973 92.3 1,9 0.3 - 94,5 179.7 264.3 88.4 8,0 540.4 634,91974 108.8 5.7 0.1 - 114.6 210.1 356.9 72.8 10.5 650.3 764.91975 106.7 1.0 0.4 - 108.1 216.6 580.0 75.3 12.3 884.2 992.3

1976 3.8 1.3 - 105.3 310.0 721.9 83,8 25.2 1140.9 1246.2

1977 134. 4.8 0.3 - 139.6 506.5 890.5 87.5 35.3 1519.8 1654.ichtgtanM

1971 757.1 160.5 7.9 - 925.5 662.8 588.0 260.2 225.5 1736.5 2662.0

1972 767.1 173.7 11.9 - 952.7 738.9 855.9 334,0 330.9 2259.7 3212.4

1973 926.9 205.4 19.1 - 1151.4 809.2 1090.1 306.6 340.6 2546.5 3697.9

1974 1284.9 238.9 19.0 - 1542.8 876.2 1496.2 311.4 450.9 3134.7 4677.5

1975 1583.7 257.4 28.9 - 1870.0 1184.1 2060.1 411.7 508.2 4164.1 6034.1

1976 1989.6 320.8 27.1 - 2337.5 1898.8 2546.0 605.0 617.7 5667.5 8005.0

1977 2793.0 363.0 26.8 - 3182.8 2806.7 316e.6 806.9 705.5 7487.7 10670.5

I/ Comprising loans, Refinance, foreign line of credit, overseas buyers' creditand guarantee assistance.

2/ Net of reductions, oancellations and take-ups by other institutioni.

() Refers to number of applications approved.

Page 65: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 13

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Aging of Arrears 1/(Rs '000)

Total Amount of Amount of (3) as % of (4) as % of (4) + (5) as %

Age of No. of Principal Principal Interest Total Loans Total Loans of Total Loans

Arrears Projects Outstanding in Arrears in Arrears Outstanding Outstanding Outstanding

1 2 3 4 5 6 7 8

As of June 30, 1977

Total 126 1,359,725 149,163 198,991 39.81 4.37 10.19

As of September 30, 1976

0-3 months -

3-8 months 24 290,782 3,108 10,918 13.09 0.14 0.63

6-12 months 18 240,363 3,318 18,237 10.82 0.15 0.97

12-24 months 16 203,848 6,170 30,449 9.18 0.28 1.65

Over 24 months 21 206,639 59,162 53,656 9.30 2.66 5.08

Total 79 941,632 71,778 113,260 42.39 3.23 8.33

As of December 31, 1975

0-3 months 31 328,104 4,400 11,601 19.48 0.26 0.69

3-6 months 1 10,000 1,000 - 0.59 0.06 -

6-12 months 10 36,302 3,945 2,076 2.15 0.23 0.12

12-24 months 12 175,735 5,340 19,797 10.43 0.32 1.18Over 24 months 21 322,451 51,913 61,638 19.14 3.08 3.66

Total 75 872,592 66,598 95,112 51.79 3.95 5.65

As of December 31, 1974

0-3 months 22 270,204 10,845 10,195 21.92 0.88 1.70

3-6 months 1 13,500 1,750 - 1.08 0.14 0.14

6-12 months 5 15,400 1,750 663 1.24 0.14 0.20

12-24 months 7 217,219 16,375 15,856 17.62 1.33 2.61

Over 24 months 16 99,040 29,179 28,583 8.03 2.37 4.69

Total 51 615,363 59,899 55,297 49.89 4.86 9.34

As of December 31, 1973

0-3 months 3 27,650 1,950 705 2.83 0.20 0.27

3-6 months 1 300 100 - 0.03 0.01 0.01

6-12 months 4 58,663 4,525 4,422 6.00 0.46 0.92

12-24 months 10 92,322 13,336 11,357 9.45 1.36 2.53

Over 24 months 12 67,180 11,435 19,904 6.87 1.17 3.21

sv Lo, j _ .246,115 31,346 36,388 25.18 3.20 6.94

i/ Direct loans to industrial concerns other than for export.

December 22, 1977

Page 66: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDUSTRIAL DEVELO ST LUX 0S OJNDLA ANNEX 14

Characteristica of lDB7'a Arrean t of June 30. 1977 (D±rct Loanat xc1udini bxo1t Financ)

mo1unt Of_rinolka1 and interest in arrears(Rs thousanda)

----------- - o-,- cf ±ota riRotp; ri7otp2L- neeit - - - otal A1OunA of outet;n&inproueota oompaniea outatanding ao heoted by arreare

- - -- - - -- - --- - - -- - - -- - - - - -- - - -- - -o--e- - hree tre ontntsGeographioal lbreakdown

Andhre Prauesh 12 12 73017 9840 11886 21726 44020As am8t 2 2 l1^2840zi V. 3 %00 21110 214 1.0

P. are IM ii-0.0 1 0 ~~~~~~~~1 00hery&al 4 4 31995 64 964 900Ijimichal 9ri vl. 1 1 2000 - 85 85 -

mlmntel:sk 16 16 261175 33075 41459 74534 232275.eresla 7 7 109939 5635 12348 17983 66459;IAdUya i'rndcsh 3 3 15157 1140 1486 2626 10954,eaLn.rsvbLwrr. 19 19 175370 11278 19750 31008 100856

;.: I A1FII d 1 1 4850 200 - 200 -risset 2 2 10460 910 1933 2843 10460

A'nJab 2 2 13000 2550 771 3321 3500i.nJa5t':Su. 4 4 21487 2500 2840 5340 16487i.n1il i.du 14 14 256634 43864 52648 96512 216555"Plvr crvnosh 14 14 8498f4 6720 5420 12140 41215

.,.st scr,:al 14 14 61500 21651 11967 33bl8 47450

.,hoin Territoris s 2 2 5500 600. 592 11392 2500

Totel: 126 126 rn159725 T491 -3 -i '48154 102(4W

4*.e of Ciielt (owitrahiD)

li-iblic 11 11 144350 22700 16208 3t908 107200Joirt 23 23 570370 51345 112658 164203 527145zrjv:to 79 79 541115 74218 66486 140704 3683580;-.cr t1tive 13 13 1C3890 900 3439 4339 17790

't 1: 126 12b I;s9725 149163 198991 34B154 1020493

0 I Client .b, v C

.L uni 86 86 403540 55531 49413 104944 273302L r, e 40 40 156185 93632 149578 243210 747191

Tot; 1: 1-2b 126 1359725 149163 198991 348154 1020493

Industrial Breakdown

Textiles 10 10 70487 23085 13163 36248 55240Sugar 16 16 145675 4100 5647 9749 39425Paper and Paper Products 6 6 123120 1930 20678 22608 111145Chemicals (other than 10 10 161251 47483 33827 81310 129525fertilizers and Petro chemical)

Petrochebical 2 2 22500 800 2850 3650 22500Fertilizers 4 4 258781 19810 55040 74850 258781Cement 1 1 7506 5434 1954 7388 7506

Basic Metal Induatries

i) Iron & Steel 32 32 274054 18913 33206 52119 229814ii) Non-ferrous Metals 4 4 18945 5275 901 6176 13995

Manufacture of Machisaw except 9 9 50420 1760 7150 S910 47420electrical machinery

Manufacture of Electrical 4 4 18833 1355 4743 6098 16333Machinery

Transport Equipment 7 7 53264 2798 4548 7346 16750Other Industries 21 21 154889 16420 15284 31704 72059

Total 126 126 1359725 149163 198991 348154 1020493

Page 67: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Summary of Equity Investments held as of September 30, 1976(Rs million)

Amount held 1/ Dividend receivedName of the Company Face Value Book Value % Estimated Market Value Amount

Companies operating profitably 56.0 53.2 24 113.3 6.8

Companies under construction orin pre-operating stage not intechnical/financial difficulties 134.3 122.5 54 51.0

Companies operating at loss orin technical/financial difficulties 50.7 49.5 22 6.4

Companies in liquidation 1.5 0.7 - -

Total 242.5 225.9 100% 170.7 6.8

1/ As all the shares are not quoted in the market, the estimated value has been shown.

December 22. 1977

t>

Page 68: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

.ANNEX 16

INEUSTRIA. DEVELOPMENT BANK OF INDIA 11Income Statement for Years Ending June 30, 1973-77-

(Rs Million)

Audited1973 1974 1975 1976 1977

Income

Interest(a) Direct loans to industrial 63.99 86.15 118.68 146.29 217.88

concerns (other than forexports)

(b) Direct loans - Exports 10.08 10.92 12.09 20.35 29.70(c) Refinance 43.18 44.59 55.68 94.77 169.32(d) Ppfinance - Export Credit 4.06 2.93 3.93 9.21 9.54

Discount (Earned on billsrediscounted) 53.61 73.04 118.09 168.66 240.54Income from Investments

(a) Dividend on shares of Joint 8.54 4.60 7.40 7.11 18.22Stock Companies

(b) Dividend on shares of financial 3.48 1.65 3.00 3.03 3.00institutions

(c) Interest on debentures of Joint 1.48 1.54 2.31 2.26 2.24Stock Companies

(d) Interest on debentures of 13.28 14.99 20.99 22.95 24.22financial institutions

(e) Interest on Governmentsecurities 13.95 7.32 5.58 7.43 8.63

(f) Interest on short term depositswith commercial banks - - - - 0.41

Other Income(a) Guarantee Commission 4.66 3.11 1.66 1.37 0.56(b) Prnfit- n -'le ^ - _r__e.ent 5.82 19.56 3.94 11.43 12.55

in shares of joint stockcompanies

(c) Others 1.30 3.53 3.66 8.64 9.65227.43 273.93 357.01 503.50 736.46

Expenditures

Payment of Interest(a) Reserve Bank of India 53.62 86.17 156.87 239.05 332.77(b) Government of India 79.72 74.87 68.45 61.76 54.99(c) IDA - - 0.17 1.49 4.21(d) Market borrowings bonds & 15.01 16.84 27.36 48.90 94.68

debentures(e) Stamp duty and brokerage on 1.06 0.97 0.99 4.40 13.20

bonds(f) Deposits from companies - - - - 11.96

Other Expenditures(a) Establishment expenses 10.19 14.60 16.51 19.90 24.35(b) Law charges 0.18 0.53 0^26 0.27 3.03(c) Others 3.05 3.30 4.05 6.72 18.00

162.83 197.28 274.66 382.49 554.19Profits 64.60 76.65 82.35 121.01 182.27

Profits after provisions (c) & (d) 50.66 61.19 46.35 59.65 77.19Appropriation

(a) Transfer to Reserves 35.86 44.81 27.60 40.90 58.44(b) Transfer to Reserve Bank of 15.00 16.38 18.75 18.75 18.75

India (by way of dividend) 2/(c) Interest on loans and advances - 11.74 12.46 30.00 51.36 90.08

(Suspense Account)(d) Contingencies & provisions 2.00 3.00 6.00 10.00 15.00

l/ Includes Development Assistance Fund

2/ In FY76 payment to GOI.

December 22, 1977

Page 69: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 17

INDUSTRIAL DEVELOPNENT BANK OF INDIA

Cash-flow Statements, Years Ending June 30, 1973-77

(Rs Million)

Audited1973 1974 1975 1 _ 1977

SOURCES

Cash generation 194 176 181 240 290

Increase in share capital - 100 - -

IDA/GOI borrowings - - 12 41 47

Other GOI borrowings - - - - 50

Reserve Bank of India borrowings 363 696 1,287 1,779 1580

Bond issue 160 152 165 550 1320

Deposits from companies - - - - 499

Rupee loan collections 625 748 978 1,207 1619

Sale of investments/redemption of 10 17 13 31 52

debentures ____352 _1__88__ ____6_6 _____84 _ 5457Total 1,352 1,889 2,636 3 5457

USES

Disbursement of loans 988 1,459 2,032 2,707 3717

Disbursement of investments 78 163 97 209 209

Repayment of loans -Rupee Loans (Governmefrt of India) 89 119 124 129 135

IDA/GOI borrowings - - - *

Reserve Bank of India borrowings - - 200 428 744Payment of interest 148 178 253 356 507

Dividend payments 15 16 19 19 19

Total 1,318 1,935 2,725 3,848 5331

Cash surplus (shortage) 34 (46) (89) - 126

Opening cash balance (including 150 184 138 49 49

Government of India Securities)Closing cash balance (including 184 138 49 49 175

Government of India Securities)

1/ Includes Development Assistance Fund.

December 22, 1977

Page 70: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 18

INIDUSTRIAL DEVELOPMENT BANK OF INDIA

Balance Sheets, June 30, 1973-77l/(Rs Million)

Audited1973 1974 1975 1976 1977

Assets

Cash, bank balances and invest- 183.81 137.78 48.69 49.48 174.64ment in Government securitiesInvestment in stocks, shares,bonds and debentures(i) Financial Institutions

(a) Shares 108.41 129.73 166.55 253.67 326.54(b) Bonds 232.21 321.11 341.66 364.08 378.94

(ii) Industrial Concerns(a) Shares 195.43 238.94 257.88 320.77 362.73(b) Bonds 19.10 18.96 28.39 27.12 26.81

Loans and Advances(1) Scheduled banks, State

Cooperative Banks andother financialinstitutions(a) Refinance 809.19 876.23 1184.14 1898.76 2806.70(b) Export credit 80.14 60.27 134.22 188.27 186.19

(ii) Industrial concerns(a) Direct loans 926.93 1284.87 1583.74 1999.57 2792.99(b) Export credit 226.55 251.10 289.79 417.95 621.58

Bills of exchange or promissory 1090.09 1498.24 2060.14 2545.98 3168.64notes discounted or redis-countedOther Assets less interest 71.85 67.09 75.75 110.05 212.91suspense

3943.71 4882.40 6168.93 8164.70 11058.67Liabilities and CapitalPaid-up capital 400.00 500.00 500.00 500.00 500.00Reserves and Reserve Fund 249.67 294.47 322.08 362.98 421.42Borrowings(a) Government of India 1576.27 1457.61 1333.84 1204.68 1119.86(b) Reserve Bank of India 1290.94 1786.98 2646.45 3881.76 5262.05(c) Temporary borrowings

against bills - 200.00 427.94 543.95 -(d) Market borrowings by way 286.90 439.93 603.93 1153.93 2473.93

of bonds and debentures(e) IDA (SFC Credit) -- - 11.69 52.81 99.00(f) Deposits from companies - - - - 499.25

Current liabilities & provisions 139.93 204.45 323.00 464.59 683.16

3943.71 4882.40 6168.93 8164.70 11058.67

Guarantee Outstanding 579.23 340.70 251.30 150.12 -

l/ Includes Development Assistance Fund

Page 71: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDUSTRIAL DEVELOPMENT BANK OF INDIAComparative Operational Ratios, FY73-FY71

FY73 FY74 FY75 FY76 FY77

Ratios of Profitabilityl.Profit before tax and provisions as % of the average total assets 1.75 1.75 1.49 1.69 1.902.Profit after tax and provisions as % of average total assets 1/ 1.38 1.40 0.8i 0.83 0.803.Profit after tax as x of year-end share capital 1/ 16.15 15.33 16.47 24.20 36.45

Ratios of Structure4.Non-current conventional Debt-Equity 2/ 5.04 4.75 5.70 7.36 10.565.Debt Service Coverage 3.53 3.11 2.20 1.84 2.92

Average rate of Growth6.Average Annual Rate of Growth of Total Assets (%) 14.30 23.80 26.35 32.35 35.44

Financial Earnings and Margins7.Income from term loans as % of average term loan portfolio 6.00 6.14 6.70 7.00 7.578.Cost of term debt as % of average term debt 5.04 5.08 5.70 6.00 6.289.Equity income (including net

(a) Shares of capital gains before Tax) as %Joint Stock Companies of average equity portfolio 7.69 11.12 4.57 6.41 9.00

(b) Shares pf Financial institutions 3.49 1.39 1.80 1.44 1.03

CostslO.Financial costs as % of average total assets 4.04 4.03 4.59 4.96 5.18ll.Administrative costs as % of average total assets 0.36 0.42 0.36 0.38 0.44

Reserves12.Reserves (including retained earnings) plus provisions as % of

year-end lending portfolio (Direct loans, refinance, rediscounting,and export credits) 7.97 7.42 6.32 4.91 4.40

13.Reserves for bad debts as % of year-end portfolio - - - 0.67 0.94

Share Capital14.Book value as % of par value 162.42 158.89 171.32 172.60 184.28

Dividend

15 .Dividend as % of par value of share capital 3.75 3.75 3.75 3.75 3.75

1 ,.Dividend as % of net earnings (pay-out ratio) 23.22 21.37 22.77 15.50 10.29

1/ IDBI pays no tax

2/ Excluding temporary borrowings, guarantees of GOI, and portion of guarantees which are liabilities agreed to beborne by other financial institutions.

December 22, 1977

Page 72: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 20

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Forecasts of approvals, commitments and disbursalsFY77-FY81

(Rs Million)

1974 1975 1976 1977 1978 1979 ]980 1981------Actuals ----- ------Projected-------

I. APPROVALS -

1. Direct Loans (other than for exports) 492 671 1035 2734 1595 1760 1935 21252/

2. Export Loans 167 281 375 769 495 545 600 660

3. Refinance of Industrial loans 402 939 1715 2516 2120 2360 2650 2865

4. Refinance or export credits 27 159 53 60 100 120 140 160

5. Rediscounting of Bills 763 1144 1205 1513 1410 1510 1610 1710

6. Investment in shares, bonds & debent:ures 102 66 164 106 120 140 160 180of Financial institutions - - -

TOTAL 2020 3372 4669 7698 5840 6435 7095 7700

II. COMMITMENTS

1. Direct loans (other than for exports) 218 324 438 540 1425 1560 1725 1895

2. Export loans 2/ 33 112 201 240 330 490 535 590

3. Refinance of industrial loans 402 939 1715 2516 2120 2360 2645 2865

4. Refinance of export credits 28 132 44 39 100 120 140 160

5. Rediscounting of bills 637 917 917 1132 1045 1120 1195 1270

6 . Investment in shares, bonds & debentures 115 73 142 106 120 140 160 180of Financial institutions

III. DISBURSALS TOTAL 1480 2520 3525 4573 5040 5790 6400 6960

1. Direct Loans (other than for exports) 468 403 487 944 1154 1516 1813 2010

2. Export loans 2/ 67 76 192 188 300 350 400 450

3. Refinance of Industrial loans 277 524 1025 1414 1725 2150 2350 2525

4. Refinance of export credit 10 99 86 100 110 120 130 140

5. Rediscounting of bills -/ 638 917 917 1152 1045 L120 1195 1270

6. Investment in shares, bonds & debentures 115 73 142 128 120 140 160 180of Financial institutions

TOTAL 1622 2115 2917 3926 4454 5396 6048 6575

1/ Sanctions effective as of September 1.9762/ Including lines of credit to Bangladesh and Overseas buyer's credit.3/ Face value of bills minus rediscount retained.

Page 73: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 21Page 1

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Investment Program for the Target Group

1. From basic data provided by state governments and SIDCs/SIICs, atentative program of projects within the target group definition has beenprepared. This program anticipates a total investment of Rs 12 billion instate joint and public sector projects over the next 3 years with about 90%of the investment being for state joint sector projects. The geographicaldistribution of these projects is shown in Appendix 1, while the sectoraldistribution is shown below:

Table 1: Sectoral Distribution of Proposed Projects

Sector Investment Foreign Exchange__% Amount Requirement

(Rs Million) (Rs Million)

Chemicals 36.4 4384 771Consumer Goods 3.5 422 195Electrical Goods 2.1 253 73Electronics 3.8 458 139Goods and Beverage 2.4 289 69Glass and Glass 9.6 1156 142Products

Iron and Steel 9.4 1132 175Jute 1.8 217 11Leather - Leather 0.9 108 14

ProductsLight Engineering 5.2 626 145Mechanical Equipment 2.4 289 91Metal Products 5.0 602 148Pulp - Paper Products 5.7 687 57Rubber - Rubber Goods 1.3 157 44Transport Equipment 2.9 349 38Textiles 5.4 650 112Wood - Wood Products 0.2 24 14Miscellaneous 2.0 242

100.0 12045 2238

US$ Millions 1401 260Equivalent

Average Cost perProject:Rs Million 55 10US$ Million 6 1

Page 74: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 21Page 2

2. So far as the financing of Bank financed projects is concerned,about 20% of total project costs (as has been IDBI's experience to date forjoint sector projects) is expected to be required in foreign exchange andabout Rs 1.1 billion (US$125 million) for total project investment. Underthe proposed loan, these needs would be financed as follows:

Table 2: Financing of Subprojects

% of TotalProject Cost US$ Million Rs. Million

Equity Capital

SIDCs/SIICs 26%) 8 10 88Private Entrepreneurs 252) 7 9 79Public at Large 49%) 15 19 167

Sub-Total: Equity Capital 30 38 334

Loans

Foreign Exchange (Bank loan) 20 25 220Local currency loans (National

Institutions, SIDCs/SIlCs andcommercial banks) 50 62 546Sub-Total: Loans 70 87 766

Total 100 125 1100

3. The SIDCs/SIICs would need to invest about Rs 88 million (US$10million) in equity over the next two to three years. These funds would haveto come mainly from state governments to the SIDCs/SIICs, and from SIDCs/SIICs'internal funds (sale of investments and cash generation). The internalfunding would co-qtitutc approAiwaLely 5/o of SIDCs/SIICs' present resourcesand is expected to be raised by them without too much difficulty. IDBI wouldfinance the foreign exchange cost of the proposed projects from the Bank loan.IDBI, together with the nat:ional institutions, SIDCs/SIICs and the commercialbanks, would have to provide another Rs 546 million (US$62 million) in localcurrency loans over the next 2-3 years which represents about 4% of thefinancing extended by the various institutions over the past three years.

Private Sector Financing

4. Private sector contributions to project financing will be vital intwo respects. In financial terms, the participation of private sector part-ners should enable more extensive state level investment to take place thanwould have been the case without them. As far as projects likely to befinanced under the proposed. loan are concerned, the private sector partnerswill be expected to put up around Rs 80 million over the next 2-3 years; this

Page 75: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 21Page 3

amount is negligible in terms of overall private sector investment. The se-cond aspect is that these contributions will demonstrate the willingness ofthe private sector to enter into partnership with government. At the pre-sent, there is considerable enthusiasm for this approach because it permitsthe private entrepreneur to reap the benefits of the state government'ssuperior leverage in matters affecting licensing, location and infrastruc-ture, and importing of raw materials. The intention of the state govern-ments is to leave management responsibilities with the private partnerand so long as this continues, as it appears to have done so far, thenthe private sector should be prepared to continue with its strong support.

5. The contribution from the public at large will be in respect ofthe public offering of 49% of the equity of state joint sector companies.In financial terms, the amount is not large in relation to annual capitalissues in India. Joint sector companies will require about Rs 170 millionover 2-3 years, while recently the annual level of capital raises throughcapital issues alone has been around Rs 2 billion p.a. However, the market-ing of shares in virtually unknown companies in a limited capital marketcould pose a problem. At the moment, IDBI is confident that underwritingat the projected level should be well within the capability of the princi-pal national financial institutions which are presently underwriting and sub-scribing at the rate of Rs 600 million p.a. However, in the future, if thejoint sector develops as anticipated, underwriting is likely to become aproblem unless the SIDCs/SIICs have been sufficiently upgraded and givenadequate funds to play an effective role in developing capital markets at thestate level.

Page 76: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 21Appendix 1Page 1

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Geographical Distribution of Projects inthe Target Group Proposed by State Governments Ia

ForeignNumber of Cost of Exchange /bProjects Projects Required

-------Rs Million------

Andhra Pradesh /c 25 1,772.4 300.3Assam /d 9 677.5 190.0Bihar Te 13 321.7 27.9Gujarat If 11 940.0 166.5Haryana /g 20 938.9 145.4Hichamal Pradesh /h 1 37.5 7.2Jammu and Kashmir 7Ii 7 470.0 14.0Karnataka X 13 860.8 241.1Kerala /k 13 675.5 138.2Madhya Pradesh /1 10 556.3 142.0Maharashtra /m 24 1,075.9 348.1Orissa /n 14 861.5 128.1Punjab /o 10 502.5 N.A.Rajasthan jP 7 274.0 37.8Tamil Nadu /a 14 853.7 235.2Uttar Pradesh /r 15 639.0 116.4West Bengal /s 12 588.2 N.A.

TOTAL 218 12,045.4 2,238.2

/a It includes projects with the estimated investment of below Rs 200mil1ion and above Rs 10 million.

/b Foreign exchange requirements are not given for every project. Thefigures in this column, therefore, have partial coverage.

/C Source: A.P.S.I.D.C. 4 projects with investment requirement over Rs 200million are not included. Total investment for these 4 projects esti-mated to be Rs 1,470 million with foreign exchange requirement of Rs 125.5million.

/d Source: Secretary of Industries, Assam. Requirements for expansion ofexisting units and for proposed sugar mills are not included.

/e Source: Industrial Development Commissioner, Government of Bihar. Twentyadditional investment ideas with total cost estimated to be Rs 12 millionare not included so are projects of Bihar State Agro-Industrial Develop-ment Corporation.

Page 77: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

AJNEX 21Appendix I

Page 2

/f Source: Gujarat Ind. Inv. Corp. Ltd., Projects over Rs 200 millionexcluded, it includes G.U.D.C. projects as well.

jg Source: I.D.B.I.

/h Source: I.D.B.I.

/i Source: Annual ReDorts and Accounts - 31st Ma-ch, 1975, J & K, SIDC,IDBI.

/j Source: Government of Karnataka, Department of Industries and Commerce.

/k Source: Kerala SIDC, Expansions and projects with a capital outlay overPs 200 million excluded.

/1 Source: Madhya Pradesh Andyogik Visak Nigam Ltd.

/pi Source: SICOtI, It is not clear that all projects would be realizedthrough public or joint sector.

/n Source: Industrial Promotion & Investment Corporation of Orissa Ltd.(IPICOL).

/o Source: Pun,ab SIDC.

/p Source: IDBI.

/q Source: TIIC.

/r Source: IDBI, Projects with an investment over Rs 200 million andbelow Rs 10 million are not included.

/s Source: A review of Industrial Growth in West: Bengal, Commerce andIndustry Department, Governnent of West Bengal, March 1976. Projectsover Rs 200 million excluded.

Page 78: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEY 29FNDUSTRIAL DEVELOPMENT BANK OF INDIA

Projected Income Statement, FY78-FY81

(Rs Million)

INCOME 1974 1975 1976 1977 1978 1979 1980 1981---- Audited Actuals ------------ ------------Projected-------------

1. Interest

a) Direct loans (other than for exports) 86.15 118.68 146.29 217.88 259.96 364.73 500.00 657.35b) Direct loans - exports 10.92 12.09 20.35 29.70 40.42 53.75 68.47 84.07c) Refinance - industrial loans 44.59 55.68 94.77 169.32 203.54 293.20 396.43 501.88

d) Refinance - Export credits 2.93 3.93 9.21 9.54 16.17 20.54 24.72 28.82

2. Discount (earned on bills rediscounted) 73.04 118.09 168.66 240.54 248.28 272.36 315.49 372.61

3. Income from investmentsa) Dividend on shares of Joint Sector

Companies 4.60 7.40 7.11 18.22 13.75 16.75 20.12 23.95b) Dividend on shares of financial

institution 1.65 3.00 3.03 3.00 3.00 3.00 3.00 3.00c) Interest on debentures of Joint Sector

Companies 1.54 2.31 2.26 2.24 2.58 2.74 2.90 2.90d) Interest on bonds of financial

institution 14.99 20.99 22.95 24.22 26.59 28.38 29.84 31.34e) Interest on Government securities 7.32 5.58 7.43 8.63 4.00 4.00 4.00 4.00f) Interest on short term deposits with 0.41

4. Other Income commercial banksa) Guarantee commission 3.11 1.66 1.37 0.56 1.37 1.37 1.37 1.37b) Profit on sale of investment in shares

of Joint Sector Companies 19.56 3.94 11.43 12.55 20.00 20.00 20.00 20.00c) Others 3.53 3.66 8.64 9.65 9.00 9.00 9.00 9.00

Total 273.93 357.01 503.50 736.46 848.66 1089.82 1395.34 1740.29E.XPENDITURE

1. Payment of interesta) Reserve Bank of India 86.17 156.87 239.05 332.77 425.14 549.15 670.20 785.328,) Govornnent of India 74.87 68.45 61.76 54.99 47.46 39.83 31.87 23.87c) IDA

i) Refinance - 0.17 1.49 4.21 11.10 17.68 25.92 36.85ii) Foreign exchange - Fertilizer - - - - 4.08 11.05 21.25 33.40iii) Foreign exchange - others - - - - 2.72 10.20 20.91 33.49

d) Market borrowings - bonds and

debentures 16.84 27.36 48.90 94.68 125.94 162.48 200.17 237.84e) Deposits from companies - - - 11.96 39.00 70.50 105.00 141.00f) Stamp duty and brokerage on bonds 0.97 0.99 4.40 13.20 2.U Z.au L.JU 2.U

2. other expenditurea) Establishment expenses * 14.60 16.51 19.90 24.35 40.43 53.74 67.59 80.69b) Law charges 0.53 0.26 0.27 0.03 0.36 0.45 0.53 0.61c) Others 3.30 4.05 6.72 18.00 11.89 14.93 17.76 20.17

3. Net profit 76.65 82.35 121.01 554.19 138.04 157.31 231.64 344.55Total 273.93 357.01 503.50 182.27 848.66 1089.82 1395.34 1740.29

Net profit after provisions (c) and (d) 61.19 46.35 59.65 77.19 72.05 71.89 123.99 217.78

a) Transfer to reserve 44.81 27.60 40.90 58.44 49.45 41.89 86.49 172.66b) Transfer to RBI/Government by way of

dividend 15.38 18.75 18.75 18.75 22.50 30.00 37.50 45.12c) Interest on loans and advances - Suspense

Account 12.46 30.00 51.36 \ 90.08d) Contingencies and provisions 5.00 6.00 10.00 ) 15. 00 65.99 °5.42 107.65 126.77

Page 79: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 23INDUSTRIAL DEVELOPMENT BANK OF INDIA

Projected Balance Sheets FY7 -FY81(Rs Million)

1974 1975 1976 1977 1978 l3,9 1980 1981-----------------Audited…---- - -----projected------------------------

ASSETS

1. Cash and bank balances 1.75 0.21 0.79 0.97 0.79 0.79 0.79 0.792. Government securities 136.03 48.48 47.69 173.85 173.69 1iG.' 107.69 188.693. Investment in shares, bonds and

debenturesa) Financial institutions

i) Shares 129.78 166.53 253.67 326.54 386,54 •61,,4 551.54 556.5''ii) Bonds 321.11 341.66 364.08 378.94 438.94 503.94 573.94 6o8.99

b) Industrial concernsi) Shares 238.94 257.88 320.77 362.73 467.73 582.73 712.73 857.73ii) Debentures 18.96 28.39 27.12 26.81 26.81 26.81 26.81 26.81

4. Loans and advancesa) Scheduled banks, State

Cooperative Banks and otherfinancial institutionsi) Refinance 876.26 1184.14 1898.76 2806.70 3841.70 5043.00 6146.00 7100.00ii) Export credits 60.27 134.22 188.27 186.19 244.00 293.00 331.00 356.00

b) Industrial concernsi) Direct loans 1284.87 1583.74 1989.57 2792.99 3621.00 4711.00 5967.00 7250.00ii) Export credits 251.10 289.79 417.95 621.58 789.00 961.00 1130.00 1288.00

5. Bills of exchange or promissorynote discounted or rediscounted 1496.24 2060.14 2545.98 3168.64 3768.64 4255.00 4723.00 5352.00

6. Other assets 67.09 73.75 110.05 212.91 211.82 164.05 214.54 155.27TOTAL 4882.40 6168.93 8164.70 11058.67 13970.66 17164.55 20485.04 23880.77

LIABILITIES

1. Paid up capital 500.00 500.00 500.00 500.00 700.00 900.00 1100.00 1300.002. Reserve and Reserve fund 294.47 322.08 362.98 421.42 470.87 512.76 599.25 771.913. Borrowings

a) Government of India 1457.61 1333.84 1204.69 1119.86 977.86 818.86 653.86 481.56b) Reserve Bank of India 1786.96 2646.45 3881.76 5262.05 6427.00 8027.00 9627.00 11227.00c) Temporary borrowings against 200.00 427.94 543.95 - 185,00 185.00 - -

billsd) Market borrowings by way of

bonds and debentures 438.93 603.93 1153.93 2473.93 3073.93 3623.93 4223.93 4723.93e) Deposits from companies - - - 499.25 999.00 1549.00 2149.00 2749.00f) IDA/World Bank

i) Refinance - 11.69 52.81 99.00 212.00 289.00 404.00 533.00ii) Fertilizer - - - 60.00 164.00 299.00 442.00

iii) Public & Joint Sector - - - - 64.00 175.00 318.00 473.004. Current liabilities and provisions 204.43 323.39 464.59 683.16 801.00 920.00 1111.00 1180.00

TOTAL 4882.40 6168.92 8164.70 11058.67 13970.66 17164.55 20485.04 23880.77

December 22, 1977

Page 80: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

INDUSTRIAL DEVELOPMENT BANK OF INDIA ANNEX 24

Projected Cash-Flow Statements, FY76-FY81(Rs million)

SOURCES 1974 1975 1976 1977 1978 1979 1980 1981------------- Audited Actual------- --------------- Projected -------… --

1. Cash generation 176 1l9l 240 290 482 663 884 1143

2. Increase in share capital 10( - - - 200 200 200 200

3. IDA/GOI borrowingsi) Refinance - 12 41 47 114 81 126 150

ii) Foreign exchange - Fertilizer - - - - 60 104 136 150

iii) Foreign exchange - others - - - 50 64 111 143 160

4.4. Deposits from companies - - - 499 500 550 600 600

5. Reserve Bank of India borrowings 696 1287 1779 1580 1785 1785 1600 1600(of which short-tern) (-) (-) (-) (185) (185) (-) ()

6. Bond issues 152 165 550 1320 600 550 600 500

7. Collection

i) Rupee loans 748 978 1207 1619 1904 2531 3130 3641ii) Foreign exchange - Fertilizers - - - - - - -

iii) Foreign exchange - others - - - - - - - -

Sale of investments/redemption of 52debenture 17 13 31 40 50 50 50

Total 1889 - 2636 3848 5457 5749 6625 7469 8194LBSES

1. Disbursement of loansi) Rupee 1459 2032 2707 3717 4105 4926 5479 5940

ii) Fertilizer-Foreign exchange - - - - 60 104 136 150iii) Others-Foreign exchange - - - - 64 ill 143 160

z. Disbursement of investments 163 97 209 209 225 255 290 325

3. Repayment of loansi) Ruipee loans (COI) 119 124 129 135 142 159 165 172

ii) Refinance - - - 1 4 11 21iii) FertiliZers - - - - - 1 7iv) Others - - - - - - 5

4. Reserve Bank of India Borrowings - 200 428 744 435 185 185 -

,. Payment of interest 178 253 356 507 658 863 1075 1288

6. Dividend Payment 16 19 19 19 23 30 38 45

Total 1935 2725 3848 5331 5713 6637 7523 8113

Cash surolujs (shorta2e) (46) (89) 126 36 (12) (54) 81

Opening Cash balance (including 49

GOI securities) 18' 138 49 133 17' 162 109

Cissing Cash balance (including

GODI securities 133 49 49 175 174 162 1].9 1S9

J:nuiry 3, 1?77

Page 81: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ATMN 25

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Projected Comparative Operational Ratios, FY76-FY81

FY76 FY77 FY78 FY79 FY80 FY81

Ratios of Profitability ----- actual…----- ---------- projected -------------

1. Profit before tax and provisions as % of the

average total assets 1.69 1.33 1.10 1.01 1.23 1.55

2. Profit after tax and provisions as % of averagetotal assets 1/ 0.83 0.75 0.58 0.47 C.66 0.99

3. Profit after tax as % of year-end share capital 1/ 24.20 25.32 19.72 17.45 21.05 26.50

Ratios of Structure 2/

4. Non-current conventional Debt - Equity 7.36:1 9.62:1 10.10:1 10.37:1 10.04:1 9.96:1

5. Debt Service Coverage 1.84 1.82 2.18 2.94 3.11 3.62

Average rate of Growth

6. Average Annual Rate of Growth of Total Assets(%) 32.35 33.00 26.00 22.87 19.35 16.58

Financial Earnings and Margins

7. Income from term loans as % of average term loanportfolio 7.00 5.62 6.16 6.67 7.28 7.93

8. Cost of term debt as % of average term debt 6.00 4.90 6.26 5.54 6.74 6.87

9. Equity income ( including net(a) Shares of capital gains before tax) ss %

Joint Stock Companies of average equity 6.41 8.47 7.36 6.58 5.98 5.51

portfolio(b) Shares of Financial institutions 1.44 1.09 0.91 0.76 0.63 0.52

10. Financial cost as % of average total assets 4.96 4.13 5.32 5.60 5.79 5.90

11. Administrative costs as % of average total assets 0.38 0.41 0.43 0.48 0.46 0.46

aeserves

12. Reserves (including retained earnings) plus provi-

sions as % of year-end lending portfolio (Direct

loans, refinance, rediscounting, and export credits) 4.91 4.93 4.33 3.85 3.77 4.06

13. Reserves for bad debts as % of year-end portfolio 0.67 1.02 0.39 0.83 0.d0 0.77

Share Capital

14. Book value as % of par value 172.60 183.20 167,27 156.97 154.48 159.84

Dividend

15. Dividend as % of par value of share capital 3.75 3.75 3.21 3.33 3.41 3.47

16. Dividend as % of net earnings (pay-out ratio) 15.50 14.81 16.30 19.07 16.19 13.10

I/ IDBI pays no tax.2/ Excluding temporary borrowings, guarantees of GOI, and portion of guarantees which are liabilities agreed to be borne by

.ther f.inancial institutions.

December 22, 1977

Page 82: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 26INDIA Page 1 of 4

INDU- &RIAL DEVELOPMENT BANK OF INDIA

Strategy Statement

The main objective of establishing IDBI was to bring into existencean apex term lending institution for coordinating the activities of otherfinancial institutions (includ:ing commercial banks), providing term financeto industries and to plan, promote and develop industries to fill up gaps inthe industrial structure of the country. With effect from February 16, 1976,IDBI was restructured with the objective of enlarging its role as the principalfinancial institution for finarcing industries and for more effective coordina-tion of the working of the other all-India as well as state-level financialinstitutions engaged in the financing or promotion or development of industry.The commercial banks, which participate with the Development Bank and otherterm lending institutions in financing industry, were also brought within thepurview of coordination by the Development Bank.

The objectives have necessarily to be achieved within the broadframework of national economic policy as enunciated in the Five-Year Plansand the guidelines issued by Government from time to time.

IDBI's basic sphere of work is industry and institutions working inthe field of industry. IDBI is one of several institutions in the countrywhich deal with industrial progress and whose main objectives and efforts haveto be directed towards achievement of national economic objectives in the fieldof industrv. The basic objectives of the IDBI, therefore, are to help stepup industrial employment and industrial growth in the socially desirablesectors by augmenting the supply of essential goods as well as the supply ofthose basic and intermediate goods that go in producing essential goods. Carehas always to be taken to give priority to projects coming up in rural andbackward areas, projects in the tiny and small sectors, and to projects sponsoredby technician entrepreneurs, new entrepreneurs and small entrepreneurs. Whileensuring fulfillment of social objectives and priorities, the main guidingprinciple in its appraisal of projects has always been the socio-economicbenefits that the nation would derive from the project in the internationalsetting, apart from the technical feasibility and economic viability aspects.

Unlike many financial institutions in most of other countries, inaddition to its direct industrial assistance to projects, IDBI operates otherschemes of indirect assistance, namely, the refinance assistance scheme, theBills Rediscounting Scheme. The assistance to small-scale and tiny sector islargely through refinance to SFCs, SIDCs and commercial banks. In addition,IDBI promotes export of capital goods on deferred payment basis, through itsfinancial services and assistance.

Direct assistance sanctioned to industrial projects has been aroundone-third of the total assistance in the last three years. Under its indirectschemes of assistance, the risk of lending is borne by the primary lendinginstitution and hence, from IDBI's point of view, this assistance happens tobe risk-free. IDBI's cover for debt service charges as reflected in its debt/service coverage ratio, therefore, has been exceptionally good -- the ratiobeing more than three in recent years.

Page 83: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 26Page 2 of 4

The resources of IDBI comprise apart from the internal generation offunds -

(1) market borrowings against bonds guaranteed by the Governmentof India - these bonds have 12-year maturity and thematurities are well spread;

(2) borrowings from the Reserve Bank of India out of its NationalIndustrial Credit (Long Term Operations) Fund;

(3) borrowings from Government against the World Bank credit;and

(4) company deposits.

Insofar as (4) is concerned, this source of company deposits was availableonly during 1976-77 and the deposits so received will mature for payment onlyin 1982-83. And, in the case of other outside liabilities aforementioned,there is none which can all of a sudden be required to be repaid. Further,all "refinance assistance" and "bills rediscounted" carry the obligations offirst class banks or financial institutions. In the case of IDBI, therefore,the adequacy of equity (viz., capital and surplus) needs to be viewed as abuffer or shock absorber only for that part of its credit portfolio whichcovers direct lending plus the guarantee obligations. For its operations,accordingly, IDBI is guided by the ratio of its risk assets to equity, apartfrom the debt/service coverage ratio. And, as all the risk assets cannotsimultaneously go bad, they being well spread in different industries andover different units in the same industry, a ceiling of 10:1 for its "riskassets to equity" ratio is considered as a good guiding norm.

IDBI since 1976 has been extending refinance to one more state-levelinstitution, viz. State Industrial Development Corporation. With the introduc-tion of this measure IDBI is now covering practically all major financialinstitutions - both at central and state level - in the country by its schemesof assistance. It was also simultaneously proposed to streamline the workingof SIDCs/SIICs, and to ensure proper utilization of refinance assistanceextended by IDBI through regular and periodic inspections, nomination of IDBIrepresentative on Board and Executive Committees of SIDCs/SIICs, issuance ofguidelines on policy matters, etc. IDBI's missions have already visited theSIDCs and an upgradation program is being prepared for each SIDC/SIIC.

IDBI is keenly aware that the existing capacity needs to be utilizedfully and effectively before assisting creation of new capacity. At the sametime, IDBI has to keep in view demands from priority industries and prioritysectors. There is also the question of modernization of plants and machineryin certain key industries. Keeping in view these considerations, IDBI, inconsultation with the Government of India, has introduced a scheme for softloan assistance to selected industries. The scheme envisages grant of conces-sional finance to cement, sugar, certain engineering industries and to cottonand jute textiles for modernization of their plant and machinery, includingtechnological upgradation, to improve their performance and competiti'qe capa-bility. The soft loan assistance is given to units in the eligible industrieswhich are not in a position to service loans on normal lending terms but have

Page 84: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 26Page 3 of 4

fair prospects of attaining viability in a relatively short period. Theseloans carrv the concessional rate of 7.5% p.a. and are repayable over 12 to14 years with initial moratorium of 3 to 5 years.

In order to assist those entrepreneurs who have skills but lackfinance to put up the minimum promoters' contribution normally required, IDBIhas initiated two seed capital assistance schemes. Under the first scheme,meant primarily for the small scale industry, IDBI has issued guidelines toSFCs for granting such assistance from a special class of share capital whichis contributed equally by IDBI and the state governments. This assistance isby way of equity or soft loan towards meeting the gap between the normalexpected level of promoters' contribution as envisaged by the SFC and theactual amount that the promoter could bring on his own, subject to a ceilingof 20% of the project cost of Rs. 2 lakhs, whichever is lower. Under the secondscheme, which is operated through the agency of the State Industrial Corpora-tions, seed capital assistance is provided in respect of bigger projects withcost upto Rs. 1 crore. These seed capital loans carry a service charge of1% p.a. and moratorium is permitted in regard to interest and repayment of theprincipal of the loan upto five years. We expect the Schemes to gather momentumin the coming years.

As in the past, and consistent with the national objectives, IDBIwill continue to consider favorablv proiects coming up in the backward areas,in the small scale sector and projects promoted by technician entrepreneurs.IDBI is already having schemes of concessional assistance for projects inbackward regions, in the small sector and projects promoted by technicianentrepreneurs. In the context of emphasis on tiny industrial sector in anemployment-oriented strategy, IDBI is contemplating some measures to see thata larger quantum of its indirect assistance goes to this smaller of the smallscale sector.

In its procedure for allocation of resources IDBI is guided by thefollowing principles:

(i) Projects which have been sanctioned assistance wheresome progress in implementation has already been madeand which face cost over-runs for reasons beyond theircontrol are given first priority;

(ii) Projects which are employment-intensive and in thepriority sector are given preference;

(iii) Projects to be located in the backward and rural regionsare also given preference;

(iv) Given all other factors, projects promoted by technicianentrepreneurs, projects in the joint sector and co-operative sector are given additional weightage.

When the financial resources are in short supply, a larger contri-bution from promoters, particularly in the case of established entrepreneurs,greater use of internal accruals in expansion projects, lowering of debt/equityratio, shorter repayment periods in case of profitable projects have to beemphasized. These norms will form a subject of careful study in the comingyears.

Page 85: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 26Page 4 of 4

Strategy Regarding the Target Group

IDBI has agreed to refinance loans given by SIDCs/SIICs. One of themain intentions of strengthening the activities of SIDCs during refinancefacility of IDBI is to accelerate industrial development by so encouragingthe activities of these organizations that the resources constraint fromwhich they are at present suffering is removed to some extent. At present,most of the joint sector projects are promoted mainly by SIDCs. SIDCs alsotake considerable interest in promoting local entrepreneurs and also technicallyqualified entrepreneurs who are not able to go ahead with their projects onaccount of lack of adequate resources and the necessary support which an or-ganization like SIDC could provide. The role of SIDCs cannot be adequatelyover-emphasized in the context of promoting industrial development, especiallyin the relatively industrial backward areas of the state.

A number of joint sector projects do have foreign exchange componentin their investment costs. While extending financial support to such projectsif IDBI is also in a position to meet the foreign exchange investment componentof the joint sector projects, their implementation could not only be facilitatedbut also expedited. The availability of foreign exchange to the joint sectorprojects through the agency of IDBI would help considerably in furthering IDBI'sefforts at improving the organizational set-up as well as the overall func-tioning of SIDCs.

As noted above, the IDBI has also initiated steps in nominating itsofficers on the Board of-SIDCs as well as conducting inspections and issuingsuitable guidelines in regard to policy matters, etc. And, IDBI has takenup in earnest the upgradation program of SIDCs as is being done in the case ofSFCs. The experience of IDBI in the upgradation program of SFCs has been quitesatisfactory during the recent past. It is hoped that the same would be thecase with regard to the upgradation program of SIDCs.

Page 86: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ANNEX 27

INDIA

INDUSTRIAL DEVELOPMENT BANK OF INDIA

Estimated Disbursement Schedule for the Proposed Loan

Per Quarter Cumulative(US$ thousand)

FY79 July-September 1,000 1,000October-December 1,000 2,000January-March 1,500 3,500April-June 2,000 5,500

Sub-total 5,500

FY80 July-September 2,000 7,500October-December 2,000 9,500January-March 2,500 12,000April-June 3,000 15,000

Sub-total 9,500

FY81 July-September 3,000 18,000October-December 3,000 21,000January-March 1,000 22,000April-June 1,000 23,000

Sub-total 10,000

FY82 July-September 1,000 24,000October-December 1,000 25,000

Total 25,000

Page 87: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

ORGANIZATION CHNAT(as of November 30,1976)

INDUSTRIAL DEVELOPMENT BANK OF INDIA

EXECUTIVE COMMITTEE CHAIRMAN ~~~~~~~~~AND MANAGING DIRECTO REGIONAL COMMITTEES

E.ECUTIVE UIRKTOR CH~~~~~~~~~~~~~~~~~~~~~AFIRATARIAS SOEIIA

'w", vE D.. CI." 11~~~~~~~~~~~~~~~~~~~~~~~~~~~~L.lIIDING SECLIIII

5 U'VIIIO" 10 P D".,~ ~ ~~~~~~~~~~~~~~IA W.

LU AU LOAN ALLAIIIRLNL II NA MW. RPORI LOANS AEIIAAMENI DL GM Ss~ cr~. LEGAKPARLALOERS ISAPAAIl,,NINTLSGDA.IAL II A. ALO*SANC AAIMEXPU FIEF61

LISIMA A NANACREITANEA, CME

ADAAIIRLDIRATLL13 II12 I0.5&NLL

AANLNIA.I ORl DLISANGA .. A R, ICOASELLINCI SEAV'CEL APLLL S.-AI

RELATICORS ALPAJITMANT lAIR

I DA.AAlUN A ONAPLUN LA EAIEII

[I ACIL ANEIA t AINEA FINALS2 CASUINOS FOAGIAAS RAID I t AL CAlLAHSOAPS LAIIA NI 61AWRE RILI I I Lo O6OI,,LDLLL

IHARLAL ILLCANDAAPA,LL N PLASIICS I MANSCOOTANCIAN-A OMACINULERY ES~

ollAACNILA 'F)LL Is LI GAS CERAMIC PRDCSICILILSAFR .IA hAl004I AADRGSI I'-RAILACELAIIASR A L"aIOSIRA ACLLLAIREs AD'R G. AIGIRMMM.I EDI .. AM MNAI A AALCAIC ANUAL C.HEMICALS I INSIFIADRLNDS N bOLL 1211 (S._______ LA IANN~~~~IAN LADLILA A l"I"A,IOAIESL

ILALAN MINI LA ~~~lkAIIILR PhOOLCI .NIALNS P,AwMESN[ClI Il S lAlS MaIDLA ILK IA MAL RNAA(,SIIARES1INIGNLNIL AAILS I IISAA N I AAE S .T 5f*GOSAI0OFFICE

YALDIA DIA DI ALICILAL C IR511l11,,,A 6321

A UNNILLALILLAL IL LILLIALLAL LOAN LIEFAAIILENIAN IL 11* CACLyLIANS SACADIARILLI RIItEC COANSIStREYARIM L CO. SIAOf SENIORSII'AAIMLLI WILL lOLL CARL ILL ~~~~~~~~~~~OFFICERS ANTI WILL BE WALL C001ALDSIAII *11H lA FUMI -- 11. TLvS10LC LINCSWANAANI NLAAl IARC. OFlLN n-LADE OPEFLNTI6T D-IAIS3S AND WILL MOIRIOR1,11 LALIALLS OPERATIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~AS WELL AS ILLALADLANAV PADIIS FOR TML WTI1

lIlt MANA,,GErEN SERACA b,IFSIONI WAR BE RESPCRASRL ikLOLI -ILA CAL S - o PESO PACELANINPO FOr 6,D I A$IR.AIFCOPADNCTAIG AL

LIIIL,LLILISAC IIAIlES OF lIl IDOL ANSI ARCh, STAIIST!CS .INLoAMTI

7CTA"LL _ P7 "III " 'OCI W.0Bank - 18096

1/ Replaced by Mr. J. N. Saxena in June 1977.

Page 88: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial
Page 89: India: Appraisal of a Loan to Finance State Joint/Public ...documents.worldbank.org/curated/pt/757481468268799746/pdf/multi... · SFCs -State Financial Corporations SIDCs -State Industrial

IBRD 3873R7L 5vr5v.rE' rsoQ t| ta V A G AN Ttr 7 J\~~~~~~~~~~~~~~~~~~~~~~~~~~~~NUARY 19751

4-.- \ r 7;GDsH o' 4- 4 - 4- !ET

t ~ ~ ~ ~ 0 44sM &44.,{aP i s

M 4MU & K0,51iMP

C H I N A, g -, \. | /~~~~~~~~~~~~~~~~~~~~~ N r t C P A N '.4

PRADES

.4(4 > '4ANGAL / '

PIJ'JA0 ( T I 8 E T)*5 .4' 5 0 g /' ~)_ > / 30

q t't kt<->k ;ELHI Af t- pIs'1 - \ f L N ~ ~ c-

.1 *-~~~ '4 ~ ~ .~EKI5jJ ~BHUTAN IJTTAR P5gDFSH >'< .'4 £ 5 J; .

> JAIPUR A h -. _ .,ENAMRUP 1JAIPUR ~ IELGORAKIS' -.. j.-.~ 1 M ~

l .A .'iS T H A N < ILGRK; x ' e\ r 4

DCM . .. - -*

-, r g .BA NGLADESHsIJRNrIUR

r - z 3 , g - < ~~~~~~~~44.-4) SINDRIv

.A A ID H y A PRADESH JAMSHEPr WESr , .. t . .

. .' UJARAT ', E.DHi NqAE5 LOR >CTTt{b 4 IX, - ,U ASF C ROA> l - 0S C

40 ELA

SHILA I HIRAKUD

rOOR I 5 S A

jr TROMBAY , , ' 3

"Ot A Y I F LT R,>OPOONA

< _ AUM ANDHRA PRADESh IN DI AV ' z~~~~ELGAUM r'..

- ' X -J. t'LOCATION OF MAJOR INDUSTRIAL CENTERS

EHADRAVATI c- !nd,sSr4oI Centlss

K.ARNsArAKA r. A S-eiei 2 Piontsr

4 i SANGALORE MF :0AAOiA40 .- 1 S2- Stoae or Union Territory B45umd6a rJ

- ,l> NEYVELI; ~'- [nrlernotioncl BourdqriesNT YV IAE

.... SALEM

FACT IS45L\tO AdWA'' NSrDU

-7D14441 4H7t -, MILES

- I 4-- SRI LANKA I° 505 300 400 Soo

I 4- 0 ,00 A SS S00 0oo) - RLO~~~~~~~~~~~~~~~1CMETERS