• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

According to the D. Basu Committee, the change in the external environment for commodity companies, a depressed capital market in the mid-1990s, and a change in the operating environment for DFIs combined to undermine IFCI.

THE developments of the last five years have affected ICICI, IDBI and IFCI in different ways, and their responses to the crisis have varied. However, the underlying reasons for the trouble development financial institutions have found themselves in are common.

This extract is taken from the report of the D. Basu Expert Committee, which was appointed by IFCI's governing board to suggest a restructuring plan for IFCI. A section of the Basu Committee report deals with the genesis of IFCI's problems, and the reasons cited there hold good for the three DFIs.

Edited extracts:

a) Immediately following its corporatisation and initial public offering in 1993, IFCI embarked upon a programme of rapid expansion of business. This was at a time when the traditional consortium mode of lending, in which all major financial institutions participated as per a set pattern of sharing, was breaking down in a milieu of financial sector liberalisation, thereby introducing a competitive relationship among financial institutions. This resulted in IFCI taking relatively large exposures in several greenfield projects (notably in steel and oil sectors) which suffered from cost- and time-overruns. Such exposures were often not commensurate with IFCI's net-owned funds.

b) In many cases, the financing plan for the projects included raising equity from the capital market or from internal generation of group companies. However, due to prolonged, depressed conditions in the capital market and the industrial recession in the aftermath of the South-East Asian crisis of 1997, the promoters were unable to raise such resources as planned, which led to time- and cost-overruns and a number of projects remaining incomplete, resulting in loans becoming non-performing.

c) IFCI's loan portfolio was heavily weighted towards traditional commodity sectors such as iron and steel, textiles, synthetic fibres, cement, sugar, basic chemicals, synthetic resins, plastics, etc. These traditional sectors were significantly more exposed to demand recession and price fluctuations that affected viability. Some of these sectors were particularly affected by the abolition of import controls and the gradual reduction of tariffs.

(d) Unlike other financial institutions, IFCI has not diversified into other types of businesses. Project finance still accounts for 94 per cent of IFCI's business assets. As a result, the impact of NPAs arising from delayed completion of projects has been more pronounced in the case of IFCI than in the case of other institutions.

(e) The sharp rise of IFCI's gross NPA level in 1998-99 (Rs 5,783.56 crore as against Rs 4,159.84 crore in the previous year) was partly the result of falling in line with the mandatory Reserve Bank of India guidelines for classifying non-performing assets. As a result, certain loans, particularly those relating to projects under implementation, which had been treated as performing assets in earlier years, had to be classified as non-performing.

(f) In the years immediately following corporatisation, when IFCI was rapidly scaling up the volume of business, it increasingly raised resources from the debt markets. This was at a time when interest rates were relatively high. In order to cover the high cost borrowings, the institution also went in for high yielding loan assets. As interest rates eased over time, such high cost borrowings frequently proved unviable for the concerned customers and this again contributed to the relatively high level of NPAs for IFCI.

The Committee has noted that despite a Board-level decision in 1996 initiating a drive to attract prime quality borrowers as recommended by consultants, Arthur Andersen & Associates could be brought to the books of IFCI.

(g) As credit rating agencies started taking note of IFCI's deteriorating loan book quality, they lowered credit ratings. This in turn affected IFCI's standing in the debt market, making resource-raising increasingly difficult.

(h) Constraints in raising resources in turn led to cutbacks in disbursements and new business with an inevitable impact on earnings, thus completing the cycle of downward spiral.

(i) In this context, the Committee would like to observe that some of the factors referred to above such as impact of trade policy liberalisation and tariff reduction, recessionary conditions in the late 1990s, depressed conditions in the capital market, etc, affected other DFIs and banks as well. However, the impact was particularly pronounced in the case of IFCI, as the concentration of risk relative to net worth was much higher. Also, as already stated, other DFIs had started diversifying into non-project related lending and business.

The Committee has noted that despite the worsening of the business environment for IDBI, ICICI and State Bank of India, these institutions continue to retain the AAA rating for their long-term bonds.

Send this article to Friends by E-Mail

Stories in this Section
Kadri Mills: Accept

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line