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.