CHAPTER - VIII
CONCLUSION
India could not achieve much on the front of industrial
development in the pre-Independence period. Among other factors,
one of the most important factor which hampered the development of
industries under the British rule was the lack of financial intermediaries,
particularly lack of specialized financial institutions in the country, to
meet the financial requirements of the industrial sector, especially the
requirements of medium and long term finances. Immediately after
Independence, the absence of an organised and developed capital
market was keenly felt. Government of India, consistent with its policy
of playing an active role in the industrial development of the country
took appropriate steps towards creating a network of financial
institutions in the country to fill the gaps in the supply of long term
finance to industry. Beginning with the setting-up of IFCI in 1948, the
structure of financial institutions in India has so greatly diversified and
strengthened that at present a battery of such institutions has come
into being with the ability to supply finance to a variety of enterprises in
diverse forms.
The Industrial Finance Corporation of India was established as a
statutory corporation in July 1948. After 45 years of its long and
successful performance it was converted into a public limited company
on July 1, 1993. It was established as a statutory corporation with an
expecta tion that it would provide a solution to the long-standing
com pla in t of inadequate long term financing facilities for both medium
as well as small enterprises. Besides, it was expected to underwrite
new issues, promote and encourage new enterprises and while doing
so. adopt a rational attitude rather than to continue with the traditional
and conservative practices for the advance of loans. But the
C orpora tion could not do so due to:
0 their constitutional bindings
ii) lack of viable financial structure
iii) excessive degree of government control and interference,
and
iv) lack of competent and technical staff.
These and a few other reasons led to the emergence of the
Corporation in the new role as a public limited company. In view of its
progressive widening role and scope of operations, it has emerged as
one of the principal development financial institutions/banks in the
Indian industrial financial system. Its role in industrial financing is fairly
pervasive and widespread, indicative of which is the fact that it has
financed industrial projects, either independently or in consortium with
other financial institutions, and has thereby assisted in the process of
development of the industrial sector in India.
TESTING OF HYPOTHESIS
In the introductory chapter certain hypothesis have been
formulated on the basis of various opinions and criticisms voiced from
time to time. Now that an in depth study of the working and
achievements of the Industrial Finance Corporation of India Ltd, has
been made, it becomes imperative to test the hypothesis as to their
accuracy and correctness. In assessing the working of the Corporation
opinions sharply differ. Looking at its growth in the field of capital,
financial assistance sanctioned and disbursed , its performance
appears to quite impressive. However, on going deep into its
functioning some such facts are revealed which invite criticisms from
different quarters.
1 The Mahalanobis Committee had, long ago, pointed that
contrary to national policy the IFCI’s lending operations
had encouraged concentration of wealth and capital. The
IFCI has mostly assisted large and medium large
projects. By itself, a development of this type brings about
rapid industrialisation. Nevertheless, large scale industry
means a huge mobilization of own resources which can
only be generated by the existing large industrial houses.
Thus, these institutions have unconsciously promoted
concentration of economic power and therefore the first
hypothesis that the IFCI's lending operations has
encouraged concentration of wealth and capital , is proved
correct.
2. It is alleged that the Corporation pursues a discriminatory
policy to the disadvantage of medium and small sized
industrial unit and this has led to the formulation of the
second hypothesis. A detailed study of the facts relating
to the sanctioning of assistance by the Corporation to the
projects, size wise, has clearly indicated that our
hypothesis is true. It is shown in the table 6.11 and from
the accompanying discussions that, whereas on the one
hand there has been a consistent decrease in the
provision of assistance by the Corporation to small and
medium sized projects, on the other hand, there has been
a consistent increased in the assistance provided to large
and very large projects. The contribution to large sized
projects has been maximum at 24.3% in 2000-01 while
the assistance provided to projects belonging to small and
medium sizes have been less than 8.6% in 2000-01 of the
total financial assistance of the Corporation .
3. The third hypothesis states that the Corporation has done
little to remove regional disparities. As can be seen from
table 6.7 and table 6.8, it is evident that the assistance
from the Corporation is not evenly distributed. It is also
difficult to justify that industrial concerns in Maharashtra
got as much assistance as the ones located in the five
backward states namely; Assam, Orissa, Kerala,
Rajasthan and Madhya Pradesh. By concentrating a large
chunk of their resources by way of assistance to the
already developed regions and states, the Corporation has
defeated one of the principal aims of its establishment, viz;
reduction of regional inequalities and thereby establishes
the correctness of the hypothesis.
4. The main purpose behind the establishment of IFCI had
been to provide financial assistance to the projects which
were critical to the economic growth of the country in
accordance to the national priorities. For this, the
Government, through various plan document, has put
forward various schemes for the development of backward
and underdeveloped areas which would lead to all round
economic development of the country. In the formulating
the fourth hypothesis it was assumed that it sanctioning
assistance the IFCI has not always upheld the national
priorities as stated in various plan document. But the study
made in the preceeding chapters has proved it to be
incorrect. The Corporation's role has not only been
quantitative in nature but it has a more significant
qualitative dimensions in terms of improving the
allocational efficiency of available scarce resources by
blending its investment policies with the priorities and
needs of planned economic development. The financing
policies and practices of the Corporation, in a large
measure, seems to have helped in promoting balanced
regional development as nearly 52.03% of the financial
assistance of the Corporation is being deployed in projects
belonging to backward regions.
5. It is very difficult to say if the bulk of the Corporations
assistance has gone to companies which otherwise would
have found it extremely difficult to raise funds. It has often
offered financial assistance to undertakings, which could
easily raise resources from the capital market and thus is
established the correctness of fifth hypothesis. The
Corporation does not appear to be insisting that borrowers
must come to the Corporation only after exhausting
possibilities of borrowing elsewhere, though from the point
of view of the Corporation’s own interests one can
understand its desire to seek a fair share of ‘good’
borrowers.
6. A closer look at sectoral exposure suggests that IFCI has
not been a prudent lender either. The hypothesis that the
Corporation has not been able to promote sufficient
industrial areas is proved correct from the discussions
accompanying table 6.5 and table 6.6. Fully 40% of IFCI's
advances have been to three sectors- cotton textiles, iron
and steel and electricity generation. None of these sectors
have been strong performers. Small wonder, then, the
three sectors account for almost a third of IFCI’s NPAs.
Thus the Corporation has not been able to develop a
variety of industries in the country and its assistance is
concentrated only to a few selected industries. IFCI
clearly has the maximum vulnerability to the slowdown
and its problems have already precipitated.
7. The Corporation has assisted new projects and
entrepreneurs and has always laid emphasis on such
projects. Though it is an encouragement to the fresh-blood
with greater zeal and talent but the point to be considered
is that though the projects should be new, the
management and the promoters of the projects should
have proven results in similar fields. Significant
contribution also seems to have been made by IFCI to the
emergence and growth of broad-based entrepreneurship
by extending bulk of its financial assistance to projects
from relatively young and new companies, IFCI's
investments is greater for new companies and those
industrial projects which are of basic, critical, high national
priority and strategic significance. Thus, the seventh
hypothesis is partially correct as the Corporation has
provided package assistance to new enterprises which
formed a major part of the total assistance sanctioned by
the Corporation till a few years back after which the trend
has began to change. In the recent years as is seen in
table 6.3 and table 6.4 the emphasis has shifted to other
schemes including overrun, corporate loans, working
capital loans etc.
8. The Corporation through its assistance has failed to
prevent the sickness amongst its assisted units. As is
shown in table 6.3 and table 6.4, the Corporation's
assistance towards rehabilitation of sick assisted units has
shown constant decline during the period of study. It stood
at about 0.27% as at end March 2001, thereby indicating
the correctness of the hypothesis.
9. The IFCI has failed to exercise necessary control over the
defaulting borrowers. The borrowing concerns in some
cases have not used the loans for the purposes for which
they were sanctioned and yet the Corporation has not
initiated any action against them. So what all this means is
that IFCI has to pay utmost attention to proper end-use of
credit and for a good follow-up organisation, to recover
interest and principal promptly. Otherwise, the
development bank will become ‘default’ bank.
Thus, most of the hypothesis formulated has been proved correct from
the study and discussions made in the preceeding chapters.
IFCI, in association with other development banks, has initiated a
large number of promotional measures apart from direct financial
assistance. These measure aim at providing counseling and
knowledge inputs for the preparation of industrial projects, execution of
projects, identification of entrepreneurs and improving their skills
through entrepreneurship development programmes (EDPs), making
available consultancy services through the machinery of TCOs, etc.
Professionalisation of corporate management and toning up the quality
of industrial projects are added advantages of Corporation’s
participation. The efforts are likely to have generated impulses for
accelerating the pace of economic growth in our country. In view of the
above, it can reasonably be asserted that IFCI has co-coordinated, to a
marked extent, its investment objectives, as an instrument of economic
development, with the achievement of certain goals of the country’s
developmental plans.
In keeping with the current trend it can be reasonably
contended that IFCI, as a forerunner amongst the DFIs is required to
be the mainstay of the industrial enterprises in so far as their
requirement of industrial capital is concerned. In order to meet the
challenges of catering to the growing industrial capital needs in the
coming years, it is very much imperative on the part of the Corporation
that its own operations should be financially viable. No financial
institution can survive only by concentrating its efforts on
developmental functions. Financial viability and profitability are the
major yardsticks of the success and performance of a development
bank. IFCI, being a forerunner in the field of development banking in
India, acquires added significance in view of the re-emphasis of the
Government on the role of public sector as a means of generating
resources to finance planned investment.
The brief account of the achievements of the Corporation
presented in the preceding chapter indicates that the sanctions and
disbursements of financial assistance by it has broadly registered a
continuous increase. But this fact alone should, however, not lead us to
conclude that the Corporation has justified its working during its long
existence of 53 years. In fact what we need to look into are its
achievements particularly in restructuring the existing institutional set
up of development banking characterised as it is by overlapping
functions of different financial institutions and by lack of co-ordination
among these institutions.
The foremost financial indicator to test economic efficiency of
IFCI’s investment and lending operations is its profitability record.
Viewed from this perspective of financial management its operating
returns seem to be very low. As is clear from the Table 8.1, the profit
after tax to average net worth of the Corporation has continuously
declined since 1996-97 when it was about 25.1% so much so that it
reached a low of 3.7% in 1999-2000. The situation worsened in the
year 2000-01 as the profit after tax to average net worth has turned
negative with -31.5%. Similar story was repeated in the case of profit
after tax to average assets, which has also shown a declining trend
from 2.6% in 1994-95 to 0.3% in 1999-2000 and turned into a negative
ratio of -1.15% in the year 2000-01. The Corporations profitability has
been reduced to such a poor condition that it has been unable to pay
dividends to the equity shareholders during 1999-2000 and 2000-01
due to inadequacy of profits. As a result of this, clear indications of
Corporation’s declining profitability can be seen from the continuously
falling earnings per share from Rs 10.70 in 1996-97 to Re 0.10 in
1999-2000 from where it has turned to a negative value of Rs -4.20 per
share in 2000-01 (as in Table 8.1). This apart, the Corporation has also
failed to keep pace with rise in its cost of borrowings, for instance, its
average cost of funds has increased from 9.5% in 1994-95 to 11.50%
in 1997-98 and 12.6% in 2000-01; the corresponding rise noted in
average return on funds lent by IFCI was much higher at 17.7% in
1995-96 from where it declined to 13.9% in 1999-2000 with a marginal
increase in the following year to 14.2% by 2000-01.
On this basis, one may even go to the extent of observing that
the Corporation might be adjusting its sanctions and disbursements in
accordance with the availability of funds to finance its lending
operations. If this is true one cannot approve of the Corporations lapse
in not strengthening its portfolio of owned resources. It would also be
correct to remark that this constraint has not allowed the Corporation to
expand its lending to the desired extent.
Besides indicating a negative real growth in its income, this
analysis also bears out the fact that its operating expenses appear to
be on the higher side, considering its business operations. This can
be further interpreted to mean two things; one, there appears to be
over-staffing in the IFCI’s office and second, its Oand M Department
has perhaps failed to evolve proper checks and controls to assess the
efficiency of its employees. In its evolution as a development bank, it
has passed through many stages, though it has not been easy to shed
its old skins from time to time. It began as a very conservative lending
agency and a most reluctant underwriter of issues of securities. This
situation has more or less continued up to this day. Its preference was
to finance traditional industries like cotton textiles and sugar, in
particular sugar co-operatives, against the guarantee of the
Central/State Government. It also inherited a staff from Government
which was, by and large, accounts oriented rather than development
oriented. Thus, in point of profitability the performance shown by the
Corporation cannot be considered satisfactory.
A plausible explanation for low returns can be seen in the
philosophy governing IFCI’s investment operations. Being a
promotional body, IFCI is not expected to be guided exclusively by the
commercial feasibility of a project. The Corporations social obligations
and developmental functions explain its low returns. The Corporation
has always been required to carry out operations in conformity with the
national plans and objectives of rapid economic growth, promotion of
projects set up by new entrepreneurs, financing relatively new projects
and for achieving the socio-economic objectives of balanced regional
development, promote industrial projects in backward areas. A major
portion of the assistance provided by the Corporation for the above
stated purposes are at concessional rates on the one hand and is
prone to higher risk on the other. This financing pattern of the
Corporation is also responsible for the low recoveries of loans on due
dates and more overdues and reschedulements. The observation
made by the ex-chairman of IFCI, Mr. B.B. Singh 1 can be quoted
here:-
“ IFCI has also been rescheduling/postponing the overdue
amounts on an increasing scale especially during the last few
years, in order to align the debt servicing burden of such projects
with their cash earnings............ The above mentioned relief were
extended on an increasing scale in projects promoted by new
entrepreneurs, projects located in less developed areas.......”
Thus, IFCI in its challenge of striking a balance between its
developmental functions and its economic activities is required to
strengthen the efforts of recovering the over dues through more
rigorous follow-up of the existing measures and continued search for
more effective ways.
In the course of our study it was found that the application form
for obtaining loan from the Corporation, which is required to be filled by
the borrowers, is lengthy to an undesirable extent. It contains certain
queries, which, in our view, are not very meaningful. For instance, the
form requires detailed information regarding schemes of land
utilization, buildings, water supply and supply of steam, power and fuel
and transport arrangements. It is wondered whether the Corporation
has the requisite technical staff to scrutinize such details furnished by
the borrowers. There is no harm if such columns are deleted from the
application form and the personnel of the Corporation can visit the site
for understanding such schemes better rather than appreciating them
on paper.
S m g h B . B. ' I nd us t r i a l F i n a n c e C o r p o r a t i o n o f Ind i a ' . Jou rn a l o f D e v e l o p m e n t F i n a n c e ( Ph i l i p p i ne s )V i . 6 pp. I 22
The application form also requires information about the
location of the plant and installed capacity of each of the existing as
well as of new licensees in the particular industry. Not only this, the
borrowing concern is also required to furnish information of the present
position regarding implementation of the project of the new licensees. It
is wondered and at the same time surprising as to how the Corporation
can expect that every applicant would be aware of all such information.
It is desirable that the Corporation, with its expert survey team, should
gather all such information about the various industrial concerns rather
than ask the applicant to supply the same. The application form should
be made simple, yet informative as those adopted by foreign financial
institutions. The application form of the Japan Development Bank 2 is
presented here in Statement-B and it is suggested that the Corporation
should follow similar lines. If accepted, the procedure followed would
be much simplified and would help expedite disposal of cases.
STATEMENT-B
APPLICATION FORM OF THE JAPAN DEVELOPMENT BANK
(ENGLISH TRANSLATION)
TO,
THE JAPAN DEVELOPMENT BANKGOVERNOR Dated...................
Applicant:N am e: .............................Address:..........................Name ofrepresentatives..............
I lie J a p a n D e v e l o p m e n t B a n k , B r o c h u r e o n Ac t iv i t i es a n d Fu n c t i on s o t t he Ba nk . 1959. p p . 6
(Items to be filled up by the applicant)
Amount of loan requested ................................Purpose for applying loan ....................................Repayment period ....................................Method of repayment .....................................Security ....................................Guarantor ....................................Date or which theloan is desired ....................................Others ...................................
The reasons for the decline in IFCI’s operations and
performance are exposure to large projects where promoters were
unable to raise matching equity funds, slowdown in the economy and
key industries in earlier years, adverse price movements in key
commodities in the international markets, large NPAs necessitating
commensurate provisions, decline in the availability of low cost funds
and slow recovery in respect of BIFR and suit filed cases. An Expert
Committee under the Chairmanship of Shri. D. Basu, ex-Chairman and
Managing Director of SBI, was set up to advise on the restructuring
plan and future strategy of IFCI. The Committee, in its report,
submitted in December 2000, had made the following major
recommendations:3
• Reduction of NPAs by at least Rs 5000 million per year
over the next three years.
• Endeavor to reduce the proportion of project finance to
around 50% to 60% of the total business assets
compared with the current level of 94%
• Diversify into short-term products and fee-based
services.
I I - CT s C h a i r m a n ’s S t a t e m e n t 2000-01
• Build up a portfolio of selected highly rated corporate
bonds with appropriate maturities.
• Activate treasury operations as an important profit
centers.
• Revamp HR policies and strengthen internal
capabilities.
IFCI is in a severe cash crunch and requires substantial fund
infusion. The loss of the Corporation stood at Rs 266 crores and the
capital adequacy ratio dipped to 6.22% (table 8.1) far below the 9%
level stipulated by the Central Bank. It has NPAs of 21% and total
stress assets of Rs.8183.2 crores of total assets (Rs 17547 crores).
ICRA, the credit rating agency, has downgraded the rating of IFCI to
non-investment grade, making it the first public financial institution to
slip into that low a rating.
Another negative impact is the high interest rate structure. With
inflation running around 5%, there is no reason why interest rates on
borrowings should be above 8% or 9%. However, the Corporation
charges 10 ,4%4, because of the large portfolio of bad debt that it has.
It is obvious, that the corporate and retail buyers are paying for this.
IFCI has advanced huge sums of money with adequate
collateral. But in the prevailing milieu, the defaulters have no qualms,
the law is slow to catch up with them; in the meanwhile IFCI’s books
take a serious hit. To make matters worse, IFCI is still in long-term
financing while its deposits have a shorter maturity. Moreover, a large
share of its funds is blocked in projects under implementation. Thus, it
is susceptible to asset-liability mismatch to the tune of Rs. 129.6 crores
for a one year period in its latest annual report for 2000-01. That is, it
A n n u a l Re p o r t . RB I
Table 8.1 Financial Ratios of IFCI Ltd.
Sr. No. Particulars 94-95 95-96 96-97 97-98 98-99 99-00 00-01
1. Profit after tax to
average net worth
(%)
20.9 25.6 25.1 23.8 1.5 3.7 -31.5
2. Profit after tax to
average assets (%)
2.6 2.9 2.4 1.9 0.1 0.3 -1.15
3. Earning per
Share (Rs.)
7.8 10.1 10.7 10.3 0.7 0.1 -4.2
4. Book Value (Rs.) 37.2 41.5 43.7 41.3 32.9 18.7 ' 13.0
5. Average cost of
funds (%)
9.5 10.8 12.9 11.5 11.7 11,8 12.6 :
6. Average return on
funds (%)
15.7 17.7 18.7 15.9 14.1 13,9 14.2
7. Margin (%) 6.2 6.9 5.7 4.4 2.4 2.1 1.6
8. Debt-equity ratio 6.8 7.7 9.5 11.2 11.9 11.5 15.6
9. Capital adequacy
ratio (%)
14.4 12.4 10.1 11.6 8.4 8.8 6.2
Source: IDBI's Report on Development Bank in India, various issues
needs to repay its liabilities for an amount more than what it recovers
from the planned repayment of its assets. Then there is the issue of
sticky loans and funds blocked in several cases falling under the
purview of Board of Industrial and Financial Reconstruction and debt
recovery tribunals, amounting to Rs 6000 crores and Rs1500 crores 5
respectively. Even the loans given under state government guarantees
to the extent of Rs 500 crores could not be recovered as they simply
refuse to honour their guarantees. Pressure on cash flows and inability
to meet redemption and interest obligations has become inevitable,
which currently stands at Rs 220 crore 6
If IFCI is earnest about chalking a path to financial health, it must
overcome formidable problems. Even if it tackles only the issue of non
performing assets, IFCI would have taken a giant leap towards
financial viability. But its track record in this respect is rather bad.
Among the FIs, IFCI is the one, which requires capital the most and at
the same time it is worst placed to raise it. IFCJ’s capital adequacy ratio
(CAR) is already below the stipulated limit of 9 percent. This limits the
institutions ability to expand business.
The deteriorating health of IFCI, resulting from mindless
exposures and government interference, has made the organisation
virtually untouchable. Although suspected to be in bad shape for
several years, the skeleton started coming out of the closet after the
chairman P.V. Narasimhan took charge. In the face of this all-round
deterioration in the working of IFCI the following four options can be
deliberated: -
I oi t i me India . Vol . xix 2 0 . " F i n a n c i a l Cr i s i s a n d I FCI Ba i l ou t - T i m e for s o m e t o u g h talk " . A u gu s t
; ! ■ 2 0 0 I . p p . 6
A n n u a l R e po r t . IFCI . 2 00 0- 01
1) Capitalisation by the Government of India by infusing Rs 400
crores by way of convertible debentures and the balance of Rs
600 crores by institutional investors on a pro-rata basis (as in
table 8.2). This discussion is erroneous as it centres on meeting
a minimum capital adequacy and unless its portfolio is cleaned,
these demands on the Government of India will be recurrent.
Moreover, in a bid to save IFCI from the dire predicament it finds
itself in, the Center runs the risk of endangering the entire
financial sector.
Table 8.2
Cost of IFCI Bail - Out on Its Institutional Shareholders
(RS. CRORES).
Item Stake in IFCI Bail-OutAmount
IDBI 202 302LIC, GIC and Subsidiaries 112 167Nationalised Banks 46 69SBI, associates 13 19UTI 29 43Note:- Figures only indicative
2) A merger with another financial institution, IDBI. But this will
put IDBI in the same position as IFCI instantly, by weakening the
balance sheet of the combined entity. In fact, the combined entity
will face, on a larger scale, the same problem that brought IFCI
into serious troubles in the first place.
3) An approach to the capital market; but this is unlikely to find
many takers.
4) Closing down IFCI; this will require Government of India to
pay off its liabilities. The closure of IFCI will be costly: Mckinsey
places the one-time cost of closure at Rs 11,200 cro re7, which
will ultimately have to be paid by the exchequer. Apart from the
huge economic cost of closing down IFCI, a closure would also
bury all traces of sins committed by vested interests. Instead, we
need a thorough probe to unmask financial irregularities and
book the culprits. The directors’ neglect of the institution’s
problem is incredible. They have been holding IFCI’s assets in
trust, in a fiduciary capacity; therefore they should be held liable
for financial misdemeanors. Even greater is the liability of the
auditors.
With most options falling through and no one willing to bail it out,
the Finance Ministry had suggested that the beleaguered IFCI Ltd. be
converted into an Asset Reconstruction Company (ARC). This would
entail all institutions transferring their bad assets to the proposed ARC,
which in turn will draw its liquidity support to run the establishment
through the sale of standard assets to other financial services
providers. But the proposal faced a stiff resistance from the IFCI
management.
With its capital adequacy ratio perilously close to ‘unsatisfactory’
the reality is that IFCI needs a massive infusion of funds to stay afloat.
Although the government is keen on deriving the FI it has declined to
provide any financial support to the FI, which makes it difficult to give a
new life to the institution. The Government however, found a way out of
the IFCI impasse by approving a Rs, 1,000 crore bailout package for
the crisis-ridden IFCI Ltd. on August 2,2001.
The Government, however, failed to design its bailout packages
with the checks and balances needed to guard against such instances
being repeated. As a result the government bailout of Rs 1000 crore
I lie ILconoinic T i m e s . 2 0 I:' S e p t e m b e r 2 0 0 2 . pp I 7
came to nought. According to the analysts the problem lies in poor
loan appraisals, poorer loan recovery, political patronage and
interference, excess exposure to certain sectors, inadequate
managerial capabilities and even corruption; which has made IFCI a
‘dead-duck’.
A further demand for Rs 900 crores assistance from the
Government has been put forward by the IFCI Ltd. But a sector of
analysts are of the view that there should be absolutely no case for
further huge IFCI bailout as this will give IFCI the headroom to create
the same mistakes all over again. In their view, such bailouts bequeath
scarce taxpayer’s resources, which could have been used for health,
education or infrastructure. So the poor are paying for bad loans.
Hence the suggest closure of the IFCI Ltd. and no large-scale bailout.
But a rational view suggests that arguments for IFCI’s closure
are based on its perceived failure. However, before agreeing to such a
step of bravado it would be rationale and logical to assess, how critical
is IFCI Ltd. to our economy.
IFCI was set up to provide medium and long-term development
finance to Indian industry. If we want to close it down, it must be
because IFCI has failed to fund industry or if industry does not need
funding- arguments nobody will make in his right senses. Moreover,
nearly 80 percent of IFCI loans were given jointly with IDBI, ICICI, SBI
and LIC. If these are recalled due to closure, the others have to recast
these loans and make massive provisions, possibly dragging everyone
under. Can our financial sector withstand this impact?
Recently, the German Exim Bank extended it a guarantee; BHF
of Germany has also sanctioned unsecured loans, which indicate that
no international lender or global institution that acts on IFCI guarantees
has pressed the panic button. Therefore, the first priority of the
Corporation must be to restore investor confidence and the
government should unequivocally guarantee IFCI’s commitments.
Under the circumstances, the prime aim of the management of IFCI
Ltd. is to keep a close watch and send early warning signals to eschew
similar crisis in the future.
IFCI’s troubles are so deep that it is evident that only a bailout
could save it. But the following precautions are recommended which
the Corporation must consider to avoid slipping into similar situation in
which it presently is: -
1) A proper and in depth study of the projects before sanctioning
of assistance is required, because the huge NPAs are a result
of bad credit appraisal of the projects by the institution. Most
loans, which have gone bad, started as projects appraised by
teams of experts of the Corporation. So, the Corporation made
terrible decisions.
2) What is immediately required is, action on the part of
Corporation to recover the dues. For this, the Debt Recovery
Tribunal (DRT) should be strengthened. It is great in theory but
has just not worked. It needs infrastructure since most courts
are ill-equipped to deal with such a big issue. We need a
mechanism where decrees can be implemented. The Indian
Legal System is slow and borrowers take advantage of it.
3) Insistence on adherence to strict transparency norms could
make a difference. It would be desirable to bring about
uniformity in disclosure practices adopted by the FIs with a
view to improve the degree of transparency in their affairs. The
Financial Institutions should be required to disclose credit
exposure as percentage to capital funds and as percentage to
total assets, as also credit exposure to the five largest industrial
sectors as percentage to total loan assets. FIs should also be
required to divulge the percentage of net NPAs to net loans
and advances as also the amount and percent of net NPAs
under the asset classification categories.
4) Corporation also needs to ensure that no further credit is given
to groups who have bad debts. It has been found that very
often, promoters quietly dump their bad projects and move on
to start something in Infotech, the media or telecom. This
should not be encouraged. Funds should be provided only if
they reduce the existing bad loans.
5) Last, but not the least, some element of social pressure needs
to be created on errant borrowers. A system where they would
feel the ridicule of society should be in place. It is ironic that
even when large units are sold, the lending Corporation is
prohibited from giving out the owner's names. Such an
approach towards persons who have taken public money and
not returned it, cannot continue.
Together with the stated recommendations, IFCI’s ability to
restructure its liabilities, control further slippage in asset quality,
improve its recoveries from existing non-performing assets, and
continued support from the government and other shareholders would
be critical for IFCI Ltd.
IFCI never had the privilege of access to cheap funds nor tax
breaks that other DFIs had. But it paid dividends of Rs 700 crores and
tax of Rs. 200 crores over the years; funded about 5000 companies
and was the cornerstone for finance for textile, steel and jute
industries. Its closure will send shock waves through north and east
India, where many firms depend on it. Finally, the so-called ‘bailout’ of
Rs 900 crores is not a grant but an interest-bearing loan to provide
temporary liquidity. Hence it would not be a burden on the exchequer
but on the other hand, it would give the Corporation a huge support to
regain its lost position.
In sum, it can be said that the future performance of IFCI will
depend to a marked extent on its ability to mobilise additional funds at
reasonable costs, augment its financial returns, exercise control over
default and sticky accounts and above all, strike a balance between its
banking and developmental functions.
IFCI, the pioneer amongst the Development Financing
Institutions, which has a long history of successful performance and
which has been incident to the rapid industrialisation and development
of backward areas in the country should be given a chance to revive its
operations and try to achieve the same height of performance as it
enjoyed a few years back. The study of its problems and the
recommendations suggested also point to the fact that there still lies a
hope and therefore, a radical restructuring of the Corporation with a
strategic global partner that keeps IFCI’s DFI character is favoured, so
that the country can continue to flourish industrially through the
Corporation’s sincere services.