ICICI's debt obligations

Suresh Krishnamurthy

ICICI is a frequent visitor to the capital markets and several Indian investors have made investments in the debt and fixed deposit programmes of ICICI.

In this backdrop, the merger between ICICI and ICICI Bank has important implications for the credit risk involved in their investments.

At first glance, the implications appear to be positive. In the case of investors in safety bonds, the credit risk involved in the investment is likely to decline. This is because the asset quality of ICICI Bank is much better than the asset quality of ICICI.

One of the measures of credit risk -- net non-performing assets to advances ratio -- was 5.25 per cent for ICICI at the end of September 2001 compared to the ratio of 1.41 per cent for ICICI Bank.

Since the merger would reduce the net non-performing assets ratio from 5.25 per cent, the implications are positive for the ICICI shareholders, for example, those investing in the bonds offered by the institution. However, the secondary market price of ICICI Bonds is not likely to register any significant increase since the valuations before the announcement of the merger did not factor in any significant degree of default risk.

On the other hand, many mutual funds that have invested large sums in ICICI certainly have reasons to rejoice. They will be relieved that something definitive is being done to chip away at the problem of non-performing assets of ICICI.

In the case of investors in the fixed deposits of ICICI, the benefit could be even more. Investments in the fixed deposits of banks have the benefit of deposit insurance upto Rs 1 lakh, if the concerned bank pays the insurance premium. When the fixed deposits of ICICI become the fixed deposits of the Universal Bank, it is highly probable that the deposit insurance premium will be paid even on the fixed deposits of ICICI. However, the interest rates paid earlier will not be reduced. Therefore, investors in the fixed deposits of ICICI may gain more than the investors in safety bonds of ICICI.

As far as investors in the fixed deposits of ICICI Bank are concerned, a decline in credit quality is a cause for concern. There will be substantial jump in the net non-performing assets to advances ratio of the Bank. However, because of the effect of deposit insurance, investments of up to Rs 1 lakh need not worry. Besides, the net non-performing assets ratio will still be much below that of most state-run banks.

Interestingly, it is not clear as to what would happen to future offers of safety bonds from the merged entity. ICICI will now have access to low-cost deposits. As such, they may not be interested in raising capital through the high-cost public issue route. It is likely to compound the problem of lack of choice although the concerns regarding the credit quality may have scared away several investors in recent times.

The lack of choice is likely to be seriously felt in the case of tax saving bonds. Only ICICI's safety bonds provide the additional tax rebate that is available for investments in infrastructure bonds. If ICICI were to stay away from the market, investors will necessarily have to restrict their investments in tax-saving instruments to Rs 60,000. The situation will be compounded if the tax incentives on NSC and NSS are also withdrawn next year.