FOR OFFICIAL USE ONLY A2 z9 z ,/A - The World Bank OFFICIAL USE ONLY A2 z9 z ,/A ... A. Industrial Development Bank of India ... Terms s The proposed loans would be made at the Bank's

Document of

The World Bank

FOR OFFICIAL USE ONLY

A2 z9 z ,/AReport No. 7058-IN

STAFF APPRAISAL REPORT

INDIA

INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT

March 7, 1988

Industry and Finance DivisionCountry Department IVAsia Region

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

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CURRENCY EQUIVALENTS

Rs 1 = US$0.077Rs 13.00 = US$1.00

FISCAL YEARS

Government of India: April 1 - March 31IDBI : July 1 - June 30ICICI : January 1 - December 31SAIL : April 1 - March 31

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BIFR - Board for Industrial and Financial ReconstructionBMR - Balancing, Modernizatior. or Replacement ProjectsDAF - Development Assistanc, FundDFI - Development Finance InstitutionGIC - General Insurance Corporation of IndiaGOI - Government of IndiaICICI - Industrial Credit and Investment Corporation of IndiaIDBI - Industrial Development Bank of IndiaIFCI - Industrial Finance CorporaUion of IndiaLIC - I.ife Insurance Corporation of IndiaMRTP - Monopolies and Restrictive Trade Practices ActRBI - Reserve Bank of IndiaSAIL - Steel Authoritv of India LimitedSCICI - Shipping Credit Investment Corporation of IndiaSFC - State Financial CorporationSIDC - State Industrial Development CorporationSSI - Small-Scale IndustriesTA - Technical AssistanceUTI - Unit Trust of India

FOR OMCAL Use ONLY

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INDIA


TABLE OF CONTENTS

Page Nn.

LOAN AND PROJECT SUMMARY ................... v

I . INTRODUCTION .................... * ... 1eoo..

II. POLICY ENVIRONMENT AND PROJECT RATIONALE .................. 2

A. The Industrial Sector . 2B. The Financial Sector ... 4*......... .......... .... 4C. Past Bank Lending to Industry ......................... 7D. The Bank's Future Lending Strategy .................... 8

III. THE PROJECT .* ........................................... 10

A. Objectives and Components ............................. 10B. Project Cost .......................................... 11C. Financing Plan ......... .. 12

IV. THE DEVELOPMENI FINANCE INSTITUTIONS .................... 14

A. Industrial Development Bank of India (IDBl) ........... 14B. Industrial Credit and Investment Corporation of

India Ltd. (ICICI) ............................................ 26

V. TECHNICAL ASSISTANCE TO THE STEEL AUTHORITY OFINDIA LTD. (SAIL) .....................see 36

A. The Steel Sector ..................................... 36B. The Steel Authority of India Ltd. ..................... 37C. The Technical Assistance Project ...................... 38

VI. THE PROPOSED LOANS .......................o........ 44

A. Terms and Conditions *e....................... .......... 44B. Administrative Procedures ...... ....................... 46C. Project Benefits and Risks ............................ 49

VII. AGREEMENTS REACHED AND RECOMMENDATION ..................... 51

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

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ANNEXES

1. IDBI. Organization and Operational Data2. ICICI. Organization and Operational Data3. DPI. Technical Assistance Cost Summary4. The Steel Sector5. SAIL. Institutional Review6. SAIL. Technical Assistance Project Details7. Contents of Project File

This report was prepared by G. Vivado, S. Thomas, K. Arichandran, A. Edun(AS4IF); J. Pernia (AEMlID); E. Mangan (LATIF); S. Mott (AS4CO), andV. Barrios (Consultant), following an appraisal mission to India inOctober 1987.

INDIA


LOAN AND PROJECT SUMMARY

Borrowers : a) The loan to India: India, acting by its President.b) The Technical Assistance loan: Steel Authority of India

Limited (SAIL)Guarantor ofthe TechnicalAssistance Loanti SAIL : India, acting by its President

Beneficiaries : Industrial Development Bank of India (IDBI),Industrial Credit and Investment Corporation of India (ICICI),and Steel Authority of India Limited (SAIL).

Amount : US$360 million comprising:

a) The loan to India: US$310 millionb) The loan to SAIL: US$50 million

Terms s The proposed loans would be made at the Bank's standardvariable interest rate and would have a term of 20 yearsincluding 5 years of grace.

Re-lending Terms: The GOI Loan of US$310 million would be relent in luialcurrency to IDBI and ICICI at 11 p.a. The lending rateto the final sub-borrowers would be 14Z p.a. initially.These rates would be reviewed periodically to ensure thatthe rate to fiaal borrowers remains positive in realterms, reflective of market conditions and provide areasonable spread to the development finance institutions(DFIs). The proposed lending rate of 14X p.a. is thecurrent non-concessional rupee term lending rate for DFIsin India, and is positive in real terms given current andprojected rates of inflation and consistent with theoverall structure of interest rates in India. TheGovernment would bear the foreign exchange and interestrate risks on its loans to the DFIs.

Project The proposed project would support the Government's strategyDescription : for expanding and modernizing industries and assist in the

adjustment process both in the financial system and theindustrial sector. The proposed project would provide:

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a) financial and technical assistance support to the two

largest DFIs, IDBI and ICICI, to help them meet their

requirements for long term foreign exchange resources and to

strengthen their capacity to appraise projects effectively in

a less regulated environment, cope with the more difficult

portfolio management problems stemming from the adjustment

process and mobilize resources through new financial

instruments in more competitive financial markets; and

(b) technical assistance to the major Government steel

company, SAIL, to enable it to complement the physical

restructuring efforts on which it has embarked, by improving

organizational systems, technical skills, distributionarrangements, pollution control measures, and devisingplans to reduce costs and improve quality.

Benefits and In addition to strengthening key institutions in the financial

Risks : and industrial sector, the credit component of the projectwould help finance 80 subprojects, resulting in total

investments of about US$750 million and the creation of

28,000 jobs at an average cost per job of US$26,785. The

Technical Assistance to SAIL would contribute to improve the

productivity of the major steel plants, thus resulting in the

production of higher quality, lower cust steel to users

throughout the domestic economy. The Project would also have

positive effects on the environment as the DFIs have

incorporated strong environmental objectives in their strategy

statements and the technical assistance to SAIL would help it

comply with the Government's environmental standards.

The Government's recent pclicy reforms have resulted in

more domestic competition, which could create adjustment

difficulties for some enterprises accustomed to operatingin a more regulated and protected environment. These

circumstances, together with the fact that enterprises that

have borrowed abroad are exposed to foreign exchange risks,

could result in loan collection problems for the DFIs. The

technical assistance programs and the portfolio improvement

and collection strategies provided for under the project

would reduce this risk by ensuring detailed reviews of

existing portfolios, establishment of better portfolioinformation systems for early warning of possible problemprojects, better portfolio management through closer

subproject supervision and intensive collection and recovery

efforts. Careful attention will be given during project

supervision to these activities and realization of agreed

collection objectives.

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Estimated Costs:

---------(US Million)--Local Foreign Total

Credit Component 450 300 750

Technical Assistance for DPIs 7 10 17

Technical Assistance for SAIL 46 55 101

TOTAL 503 365 868

Financing Plan:

Bank -- 360 360

IDBI 55 -- 55

ICICI 27 -- 27

Subproject Sponsors 225 -- 225

Other Credit & Capital Market Sources 150 -- 150

SAIL 46 5 51

TOTAL 503 365 868

EstimatedDisbursements:

Bank FY 88 89 90 91 92 93 94

----------------…(US Mill ion)-----…-

Annual 0.2 31.8 81.0 102.0 110.0 20.0 15.0

Cumulative 0.2 32.0 113.0 215.0 325.0 345.0 360.0

Economic Rate of Return: Subprojects financed by ICICI and IDBI would have a

minimum economic rate of return of 12%.

Map: IBRD 20713

INDIA

STAFF APPRAISAL REPORT


I. INTRODUCTION

1.01 Recognizing the need to improve the industrial performance of the1970., the Government has in the 1980s revised its industrial developmentstrategy to place greater reliance on price signals and market forces. Sincethe early eighties, the Government has been moving towards a supporting andguiding role through provision of incentives, infrastructure andinstitutional services. The policy reforms, described in more detail inChapter II, represent a marked change in substance and direction from pastpolicies, and are especially significant in view of the strong political andsocial impediments to change in India. These policy reforms have fostered amore competitive environment and more collaboration with foreign investors,and the rate of growth of both manufacturing production and exports has risenperceptibly in the last two years.

1.02 The reform process has also stimulated private investment and createda need for industries to adjust to greater competition through modernizationof plant and equipment and more efficient management. Liberalization hasalso affected the development finance institutions (DFIs), which need torespond by diversifing their financial sources and services, improving theircapacity to select and appraise economically and financially competitiveprojects and strengthening the management of their loan portfolios during theadjustment process.

1.03 The proposed project would provide support to the Government indealing with two major issues emanating from the reform process. The firstrelates to strengthening the capacity of the DFIs to appraise projects in aless regulated environment, to cope with more difficult portfolio managementproblems and to mobilize resources through new financial instruments in morecompetitive financial markets. The second relates to the need forrestructuring in the industrial sector, particularly in industries whichprovide important inputs to the rest of the economy and have importanteffects on the overall cost structure.

II. POLICY ENVIRONMENT AND THE BANK'S ROLE IN THE INDUSTRIAL SECTOR

2.01 The Government of India (GOI) has recognized that achievement andfuture maintenance of the economic growth targets of the Seventh Five-YearPlan (FY86-90) require a commitment to modernization an4 increasedefficiency, particularly in the industrial sector. During the Sixth Plan

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(FY81-85), industrial and trade performance were disappointing. Though GDPgrowth in real terms averaged about 5% p.a., industrial output grew at anaverage annual rate of 4.9%, and total exports only 4.5%. Manufacturinggross value added growth averaged 4.3% p.a. and manufactured exports grewonly 2.8% p.a. To support average annual GDP growth of 5.0%, the SeventhPlan sets goals of 8.5% and 8.0% growth in real terms, respectively, forgross industrial and manufacturing output, and 6.8% and 5.6%, respectively,for industrial and manufacturing value added. The Plan emphasizes costreduction and productivity improvements, as well as domestic andinternational competitiveness. It also calls for a greater role for theprivate sector and the financial system, and more reliance on price signalsand market forces, with Government providing the necessary incentives,infrastructure and institutional services.

A. The Industrial Sector

2.02 Many of the recent industrial regulatory, fiscal and export policyinitiatives represent marked departures from past practice in India. Therehas been significant progress in industrial delicensing, easing regulationson expansion by large firms, opening areas previously reserved forsmall-scale industry (SSI), introduction of new procedures for therehabilitation or closure of "sick" firms, and deregulation of foreigntechnology and investment collaborations. Fiscal incentives have beenimproved and a modified value-added tax (MODVAT) has reduced some of theadverse effects of the fiscal system on resource allocation and exportcompetitiveness. Exporters have been provided easier access to inputs atinternational prices and 100% exporters have been exempted from capacitylicensing. However, there has been little change in overall import policy;Indian industry remains protected with high and uneven tariffs, as well amnon-tariff barriers.

2.03 Regulatory Policy. Delicensing, broadbanding and other policy moveshave reduced Government approval requirements for establishment or expansionof manufacturing units or changes in their product mix. In March 1985, forexample, 25 broad categories of manufactured products were exempted fromlicensing requirements for the establishment of new units. Thirty-sevenproduct groups were "broadbanded" in 1986; firms manufacturing them no longerneed official approval to shift to making another product within the samegroup as their original line of business. The number of products that maybe manufactured by large firms (those with asset size over Rs 1 billion, orotherwise under the purview of the Monopolies and Restrictive Trade PracticesAcc (MRTP)) has been increased, and fast-track clearance has been introducedfor 23 additional product groups where a project is being set up by an MRTPfirm in designated "backward areas". While a few new items were added to thelist of goods reserved for SSI production, the definitions of some werenarrowed and more than 20 others were deleted. In addition to these andother regulatory changes, improved administrative procedures have made

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investment approval decisions faster and their basis clearer. This trend isexpected to continue.

2.04 Until recently, financial institutions and state governments havebeen constrained to maintain "sick" industrial enterprises functioningthrough different schemes thus burdening their portfolios. To deal moreeffectively with obstacles to closure, restructuring and rehabilitation offirms, the Sick Industrial Companies (Special Provisions) Act, 1985,established procedures for identifying and resolving the worst cases offinancial difficulties. The Act established the Board for Industrial andFinancial Reconstruction (BIFR), with quasi-judicial Dowers to order andspeed closures, mergers, and other changes, including the power to overridesome other industrial legislation, including MRTP. The current obligation ofa company with completely eroded net worth to report to the BIFR, and of thesubsequently appointed operating agency to coordinate all involved partiesand rapidly recommend a rehabilitation or closure scheme, should rationalizeand quicken the decision-making process on the rehabilitation or closure ofsick units. While the creation of the BIFR is a major step forward, itsability to act efficiently is likely to be constrained by the fact that itsactivities are confined to firms where networth is already fully eroded.Consideration may eventually need to be given to allowing BIFR to becomeinvolved earlier before a firm's financial plight has become so difficult.

2.05 Export Promotion. The Government has also taken steps to encouragethe growth of an export sector t:hat can meet international standards ofprice, quality and reliability. Among the measures taken are the expansionand administrative simplification of the schemes for duty-free imports byexporters (including duty exemption arrangements and duty drawbacks),increased cash compensation for taxes and duties paid, widened eligibilityfor advance import licenses, streamlined administrative procedures for exportprocessing zones, reduction of export taxes and improvements in foreignexchange forward cover fac;,ities. Credit programs are being reviewed toensure that exporters have adequate access to preshipment financing. Priceand exchange rate policies have been managed to improve significantly theprofitability of exports.

2.06 Import Policy. Changes have also been made in trade policy, but theyhave been less sweeping than those in the regulatory and export promotionareas. In 1985, the Long-term Fiscal Policy stressed the reorientation oftrade policy away from direct controls to a more tariff-based system. Thethree year Import-Export Policy covering 1985-88 was intended to make tradepolicies more stable compared to the previous system of annual determinationof import licensing norms. In general, the implementation of non-tariffbarriers has been improved; for example the "indigenous angle clearance"requirement (that a capital goods importer demonstrate that a domesticequivalent cannot be obtained within a reasonable time or near the landedprice plus duty of the import) has been simplified and decisions are madefaster. While progress is being made, there is still a need to reduce

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quantitative restrictions further and to gradually rationalize and lowertariff protection.

2.07 Results. Overall, the policy changes of the past three years havequickened decision making and fostered increased domestic competition. Theinvestment policy initiatives have promoted the realization of economies ofscale and technology upgradation; for example, the average size of industrialprojects has increased over the past two years in automotive products,electronics, petrochemicals and cement and this is contributing to loverproduction costs. Manufacturing output growth accelerated to an average of8.9% p.a. in the last three years from less than 5% over the previous threeyear period. Manufacturing export growth, after averaging 3-3% p.a. incurrent U.S. dollars from FY81 to FY85, reached 9.3% in FY86 and 11.8% inFY87. At least part of this improvement can be attributed to the reforms ofthe last few years.

2.08 The severe drought during 1987 is expected to reduce the real growthof GDP at factor cost to between zero and 2Z in FY88, and industrial growthis likely to be no more than 7% to 7.5%; the negative impact on the balanceof payments is expected to exceed $1.5 billion over the next 18 months.Nevertheless, barring any further unforeseen events, industrial growth shouldresume its recent pace over the next several years. The growth ofmanufactured exports is expected to continue, since some of the excesscapacity resulting from weak domestic demand this year will be used toproduce for export. Despite its current revenue and balance of paymentsconcerns, the Government has stated that it remains committed to the economicreform process.

2.09 Remaining Issues. The important areas for further policy reform toencourage efficient industrial production are import policy (both removingdistortions and lowering levels of effective protection), continuedadministrative streamlining of export promotion measures, including wideningtheir applicability to indirect exporters and new exporters, and improvingthe ineans available to firms to take remedial action quickly when financialdifficulties emerge. This latter area is only partially addressed by thesick industry policies recently introduced, since many of their provisionsonly come into effect when a firm's net worth is completely eroded.Necessary restructuring in response to the newly competitive industrialmarkets will need to be ~mplemented quickly if the portfolios of thefinancial institutions are to remain sound. Progress in these policy areaswill be monitored and encouraged through the Bank's sector dialogue with theGovernment, and the financial institutions involved in the proposed project.

B. The Financial Sector

2.10 India's monetary and financial policies reflect a strong commitmentto macroeconomic stability which has contributed to high savings rates and

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financial deepening. Savings rate are comparable to those of middle incomecountries, averaging 22.61 of GDP during 1980-1985. The Reserve Bank ofIndia (RBI) acts as the central bank and the regulatory agency for thefinancial system. Holdings of its currency issues account for 17X offinancial assets. The commercial banks, primarily government-owned, accountfor 401 of total financial assets, and lend to the agricultural, industrialand commercial sectors on both short and medium terms. Government andprivately-sponsored retirement schemes account for 23X of financial assetswhile 10 correspond to government-owned life and general insurancecompanies. The equity, debenture and short term money markets have grownrapidjy in recent years and now account for 10% of the assets of thefinancial system. The DFIs are not significant direct mobilizers offinancial savings, obtaining their funds from the central and stategovernments, the RBI, the commercial banks, and the life insurance companiesthroug} loans and bond issues. They are, however, important term lenders toindustry. The DFIs include four All-India institutions, the IndustrialDevelopment Bank of India (IDBI), the Industrial Credit and InvestmentCorporation of India Ltd. (ICICI), the Industrial Finance Corporation ofIndia (IFCI) and the Industrial Reconstruction Development Bank (IRDB) plus44 state level institutions.

2.11 Financial policies have been closely linked to the Government'sstrategy of directed economic development and are principally reflected inthe flow of resources within the system. During the period 1981-1985 onaverage, 401 of bank deposits, 75% of life insurance and practically 1001 cfretirement fund savings have been transferred to the Government andgovernmental institutions (including the DFIs) through high reserverequirements on bank deposits and stipulations that financial institutionsinvest in government and other public sector securities. The Government alsouses interest rate ceilings and sectoral allocation of credit in order topromote investment and growth in preferred activities. Ceilings on depositrates have tended to be moderately positive in real terms, while, most of thetime real lending rates have been positive. However, because of the interestrates ceilings, there are large differences between formal and informalmarket rates with differentials as high as 10 on the deposit side and 18% onthe lending side. The fragmentation of the financial system caused byallocation and interest rate policies is further exacerbated by thecomplexity and wide range of preferential lending rates. The implementationof this strategy has produced mixed results. The financial system hasallocated large amounts of resources to rural areas and "priority" activitieswhile continuing to meet the demands of industrial finance, largely becauseoi the rapid expansion of the system. However, the overall allocation ofresources may not have been as economic as would have been desirable and anumber of recent Government reports have recommended that market forces playa greater role in resource allocation.

2.12 Since about 1980, there has been a noticeable shift in the pattern ofcorporate financing away from commercial banks and the financial institutionsto direct savings mobilization through the capital and money markets. In

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1980, equity and debenture issues combined were less than Rs 1 billion but

1985 equity issues alone totalled Rs 4 billion and debentures another

Rs 12 billion. During this period, the contribution of commercial banks to

industrial finance fell from 14% to 7%, while that of capital market

instruments increased from 2% to almost 12%. Loans to industry by the DFIs

remain important, and their contribution to industrial finance has remained

at around 14% of the total since 1980. However, DFI lending has been

expanding in absolute values and has accounted for the bulk of project

lending. The DFIs have played a major role in fostering the emergence of new

industrial sectors such as engineering, electronics and chemicals.

2.13 Policy Changes. Conscious of segmentation and inefficiency problems

in the sector, the Government has constituted, in the past three years, a

number of committees to review financial sector practices and policies and to

make recommendations for reforms. The Chakravarty Committee lo,oked into

aspects of monetary policy and the development of financial markets and

instruments. The Patel Committee reviewed the operations of the stock

exchanges, while the Vaghul Committee examined the money markets. More

recently, the Hussain Committee is looking more broadly into the capital

markets. Other working groups have studied rather specific aspects such as

brokerage practices, automation of bank procedures, and special credit

schemes.

2.14 The recommendations of these committees provide a sound basis for

financial sector reform, and they are being implemented selectively and

gradually. The Government has taken measures to make Government financial

operations more transparent and more closely related to overall financial

market conditions. RBI sets out annual monetary targets within which RBI's

financing of the fiscal deficit is clearly identifiable. In addition, the

rate of interest for new issues of Government securities has been raised from

101 to 11% and their maturities reduced from 30 to 20 years. DFI bond issues

also now carry yields of 11.5% and shorter maturities. Complementing these

measures, initial steps toward rationalizing interest rates have been taken

by reducing bank lending rates over 15% by 1%, and increasing bank deposit

rates by 0.5% or 1%, depending on the maturity of deposits. The effects of

these measures, and the higher yields on GOI's securities and treasury bills,

have been a desired narrowing of the wide dispersal of interest rates, less

expensive working capital financing, and greater incentives to financial

savings. However, the very great diversity of concessional rates of interest

and the cross of short and long term lending rates remsin.

2.15 In the area of capital market reform, a number of recommendations of

the Patel Committee have been accepted to expand market participation,

prevent speculative trading, professionalize broker activity and safeguard

investor interests, principally by tightening procedures at the stock

exchanges. Implementation of other recommendations require changes in the

Companies Act or other legal instruments, as well as the establishment of new

institutions. For example, a stock holding corporation has been established,

sponsored by IDBI and other institutions, to facilitate stock transfers.

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Similarly, a credit rating agency has been set up and an information servicescompany is coming into existence to assist investors with better marketinformation and professional advice. The recommendations of the VaghulCommittee are also being implemented, with the establishment of a discounthouse and concrete steps have been taken to promote greater acceptance ofshort term market instruments. Treasury bills with 6 months maturities arenow issued on a monthly auction basis with flexible discount rates and issueprices, that fluctuate as holders of treasury bills manage their liquiditypisition. The use of commercial bills and related discount facilities by thebanks are also being promoted through refinance facilities at 10% p.a. andlower user interest rates, at 15.5%, than those applicable to other shortterm borrowings.

2.16 As the indicated measures take full effect and other recommendationsfor financial sector reform are implemented, new challenges and opportunitieswill emerge for diversification and expansion of financial products andservices. As the reform in the structure of interest rates narrows theoperating spreads of financial agents, sharper risk analysis and greaterefficiency in their operations will be induced. Of particular relevance tothe development finance institutions and the commercial banks will be therelative growing scarcity and absolute higher cost of resources. At the sametime, the opening up of the financial markets should enable theseinstitutions to develop new areas of assistance and new lending an.d resourcemobilization instruments.

C. Past Bank Lending to Industry

2.17 The Bank has made 18 loans and credits totalling US$1.1 billion toDFIs and commercial banks in India for onlending to private industrial firms.Fourteen operations have been to ICICT and three (Credit 356-IN, andLoans 1511-IN and 1260-IN) were channelled through IDBI to State FinancialCorporations (SFCs) and State Industrial Development Corporations (SIDCs) forrelending. The Bank's experience with IDBI and ICICI in implementing pastprojects has been discussed in recent Project Completion Reports (PCRs) andthe conclusions have been taken into account in project preparation. In thecase of IDBI, the PCR on the IDBI Public/Joint Sector Project (Loan 1511-IN)concluded that, in view of recent shifts in Indian industrial policy tofoster greater internal and external competition and the likelihood of a morecompetitive future economic environment, it was important for IDBI to assessthe efficiency of proposed subprojects i.L relation to world standards. ThePCR on the Second IDBI/SFCs Project (Loan 1260-IN) concluded that IDBI hadsubstantially enhanced its interaction with the SFCs and actively assistedthem in implementing their institutional upgrading program. However, thereport drew attention to the persistence of the serious problem of SFCs'collections and arrears and recommended that IDBI's continued support to SFCsshould be linked to their collection performance. In the case of ICICI, themost recent PCRs covered ICICI Projects Eleven and Twelve (Loans 1097-IN and

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1475-IN). They concluded that implementation had been satisfactory and that

ICICI was a mature, well managed and profitable corporation. However, it was

recommended that ICICI improve loan collections.

2.18 The most recent development finance loan, Industrial Export

(Engineering Products) Project, (Loans No. 2629-2930-IN), approved in

September 1985, was designed to support the growth of exports of engineering

products through provision of term finance through ICICI and commercial banks

and the creation of productivity and marketing funds for exporters. As of

September 30, 1987, US$11.3 million, about 4.5% of the total loan amount of

US$250 million, had been disbursed. The slow performance is due primarily

to the reluctance of sub-borrowers to bear the currency pool foreign exchange

risk at relatively high interest rates. The fact that exports of engineering

exports have expanded much less rapidly than projected at appraisal is also

contributing to slow disbursements. Finally, the commercial banks, which are

borrowing from the Bank for the first time, have been slow in initiating

lending under the project. The Government has requested the Bank to allow

GOI to bear the foreign exchange risk, permit financing of locally purchased

equipment and broaden the categories of export industries able to participate

in the project. These changes are expected to result in a sharp acceleration

of loan commitments and disbursements.

2.19 The Bank Group has also provided US$3.2 billion for projects in the

fertilizer, cement, and petrochemicals subsectors where opportunities existed

for the Bank to support policy reforms at the subsectoral level and to

finance economic investment. Implementation of these projects has been

generally satisfactory with all projects currently under implementation

expected to have satisfactory rates of economic return and, despite some

initial delays, to be fully disbursed by the respective closing dates.

D. The Bank's Future Lending Strategy

2.20 The Bank has had an active industrial sector work program and

prepared a number of sector reports on such subjects as industrial

regulation, technology policy, export promotion and credit and capital

markets and a number of subsector reports including electronics, automotive

products, steel and fertilizer. The 1987 CEM, "India: An Industrializing

Economy in Transition" also focused on the development of the industrial

sector. Many of the issues in these reports will continue to be discussed

with the Government in the context of future operations.

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2.21 The future lending program for industry will include:

i) industrial finance projects which will serve as a focal point forevaluating and discussing with Government overall progress onindustrial and financial policy reform as well as addressingissues in the financial institutions;

ii) export and technology projects which will support some ofthe key issues in the industrial reform process andimprove the policy, financial and institutional supportfor exporters and facilitate the acquisition oftechnology; and

iii) subsector projects which will provide policy, technical andfinancial support for economic investments in areas whereimproved efficiency will have implications for the growth of thewhole industrial sector (e.g. petrochemicals, cement and capitalgoods).

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III. THE PROPOSED PROJECT

A. Objectives and Components

3.01 The proposed project would support industrial development n India

at a time when significant reforms in the regulatory environment are taking

place. These reforms and others anticipated to follow in the future will

affect the direction of industrial invescment, the operating results of

industrial enterprises and the way industrial investments and operarions will

be financed. First, as the Government becomes less involved in determining

industrial capacity for the Indian market through the licensing system, the

responsibility for selecting industrial projects would fall more and more on

the financial system, especially the DFIs. This would require improved

appraisal capacity and sharper risk assessment by the financial institutions.

Second, as both the Government and the private sector are increasingLy

interested in having industry achieve economies through investments of

appropriate scale, projects are becoming larger and the financial

institutions are reaching exposure limits which has implications for risk

management. Third, increased competition is causing a shake-out of less

efficient firms. While this is on the whole a desirable result, it has

short-term adverse implications for the portfolios of financial institutions.

In these circumstances, the DFIs need to improve project supervision and

portfolio management. Finally, it has become increasingly evident that

industries in some key subsectors provide major inputs to the economy at high

costs and variable quality and are in need of restructuring in order to bring

their industrial production costs and product quality closer to international

standards.

3.02 The proposed project would assist the Government in dealing with the

adjustment process in both the financial system and the industrial sector.

It would provide a) financial and technical assistance support to the two

largest DFIs to help them meet their requirements for long term resources and

to strengthen their institutional capacity to appraise projects effectively

in a less regulated environment, cope with the more difficult porrfolio

management problems stemming from the adjustment process and mobilize

resources through new financial instruments in more competitive financial

markets; and b) technical assistance to the major Government steel company,

the steel authority of India (SAIL), to enable it to implement the

restructuring effort to which it is committed, through improvements in

organizational systems, technical skills, distribution arrangements,

pollution control measures, and devising plans to reduce costs and improve

product quality.

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3.03 To meet the above objectives, the proposed project would have thefollowing components:

a) a credit line of US$200 million to IDBI and US$100 million toICICI for direct lending to medium and large industrialenterprises to finance economically sound and financially viableprojects;

b) provision of technical assistance amounting to US$10 million($5 million each to IDBI and ICICI) for staff training in projectappraisal, portfolio management and mobilization of resources throughnew financial instruments; computerization to facilitate betterplanning, management information and monitoring of the existingportfolio; and consulting services to improve the quality ofmanagement and technical advice provided to DFI clients; and

c) technical assistance of US$50 million to SAIL to finance consultancyassignments, training activities, productivity studies and technicalassistance related equipment to help SAIL enterprises improveoperational efficiency.

B. Project Cost

3.04 Total project cost is estimated at $868 million (Rs 11.3 billion)of which $365 million (42%) is estimated to be in foreign exchange. Physicalcontingencies (10%) have been added to the base costs of the technicalassistance component to allow for possible increases in the scope ofconsultants or other support work. The expected price contingencies for theTA components have been based on projections of annual inflation rates asfollows: for local costs -- 8.0% for 1988 and 1989, 7% for 1990 and 6.0% for1991 and 1992; and for foreign costs -- 1.0% for 1988 through 1990 and 3.5%for 1991 and 1992. Cost estimates are summarized in Table 3.1. Detailedcosts of the DFIs' technical assistance component are in Annex 3, while thoseof the SAIL technical assistance details are in Table 5.2.

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Table 3.1: Project Cost Summary(in current prices)

Local Foreign Total Local Foreign Total XForeign

---- Rs million---- ---US $ million--- Exchange

Credit Component

IDBI 3900 2600 6500 300 200 500 40ICICI 1950 1300 3250 150 100 250 40

Subtotal 5850 3900 9750 450 300 750 40

Technical Assistance

DFIs 93 130 223 7 10 17 59SAIL 600 710 1310 46 55 101 54

Subtotal 693 840 1533 53 65 118 55

Total Project Cost 6543 4740 11283 503 365 868 42

C. Financing Plan

3.05 The proposed Bank loan of US$360 million would finance the entireforeign exchange cost of the project except for $5 million of the steelcomponent for which the possibility is being explored of obtaining 450million yen (US$3.3 million equivalent) from the Japanese Cofinancing GrantFacility with the Bank. In any event, SAIL would meet unfinanced foreignexchange requirements from its own resources. Table 3.2 shows the financingplan.

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Table 3.2: Project Financing Plan(in current prices)

Bank DFI Sector Others SAIL TOTAL-- --------(US$ million)-------------

Credit Component

IDBI 200 50 150 100 - 500ICICI 100 25 75 50 - 250

Subtotal 300 75 225 150 - 750

Technical Assistance

IDBI 5 5 - - - 10ICICI 5 2 - - - 7SAIL 50 - - - 51 101

Subtotal 60 7 - - 51 118

TOTAL 360 82 225 150 51 868

3.06 Under the credit component, the Bank would finance 40% of subprojectcosts representing the average foreign cost of industrial subprojects inIndia. The DFIs would finance about 10Z of subproject costs from their ownRupee resources. Based on financing patterns for medium and large industrialprojects in India, other capital and credit market sources are expected toprovide another 20% while subproject sponsors and other equity subscribers(the sector) would provide equity financing for the balance 30%. Under thetechnical assistance component, the DFIs and SAIL would finance the entirelocal costs in addition to SAIL's partial financing of the foreign exchangerequirement.

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IV. DEVELOPMENT FINANCE INSTITUTIONS

4.01 With the advent of more competitive conditions in both the financial

and industrial sectors, the role of the development finance institutions in

industrial finance has acquired renewed importance. In spite of the rapid

growth of the capital markets in India and the access to them by a large

number of established industrial firms, the DFIs are still the single most

important source of project finance. Their assistence to industry extends

beyond the simple provision of funds and both the Government and the private

sector have come to rely on them for in-depth knowledge of financial and

industrial developments in the Indian economy. IDBI and the ICICI are the

two largest DFIs in India, together accounting for over 50% of total term

investment financing to industry by the financial institutions. In the

context of project appraisal, the DFIs have developed longer term policy,

strategy and loan collection statements as well as supporting technical

assistance programs, which are directed toward improving their capacity to

adapt to the changing policy regime and to play an active and constructive

role in the adjustment process.

A. Industrial Development Bank of India (IDBI)

4.02 IDBI, which was established in 1964 as a wholly owned subsidiary of

RBI, is now fully owned by GOI. It is India's "principal financial

institution for coordinating, in conformity with national priorities, the

working of institutions engaged in financing, promoting or developing

industry, for assisting the development of such institutions, and for

providing credit or other facilities for the development of industry and for

matters connected therewith." 1/ As the lead institution for industrial

investment finance, IDBI operates as a direct lender and as an apex refinance

institution for the state financial institutions and the commercial banks in

their investment lending operations. It also acts as the central

coordinating agency for the operations of the other All-India DFIs (ICICI and

IFCI) and the term lending activities of the Life Insurance Corporation (LIC)

the General Insurance Corporation (GIC), and the Unit Trust of India (UTI).

Its importance as a direct lender is demonstrated by the fact that it

accounted for 44% of total industrial investment lending by the All-India and

state level financial institutions during the period 1982-87. Its

promotional role covers a wide range of activities at the national level and,

through specialized institutions, on the local level. These activities aim

at the development of both sound industrial investments and financial

practices, and include industrial potential surveys, entrepreneurship

development programs, consultancy and advisory services, and expanded

1/ IDE- Act, October 1976.

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development banking training programs. IDBI was also instrumental in settingup specialized financial institutions. Inevitably, then, IDBI is thespokesman for financial institutions on matters of industrial and financialpolicies, and its influence on Government decisions in these areas issignificant.

4.03 IDBI is a creditworthy institution cArrying out successfully theleadership role in industrial finance in India. While IDBI is facing someproblems, primarily in the area of loan collections, it is taking steps toaddress them through improvements in organization, staff training, appraisaltechniques, portfolio management and project supervision procedures, andmanagement information. To continue to fulfill its role adequately, it hasdeveloped a medium term strategy that continues to address these areas andothers emerging out of the more competitive industrial and financialenvironments where there are increased risks, larger exposures, and costlierand scarcer financial resources. The proposed project incorporates atechnical assistance program which has been prepared ts support IDBI'sstrategic initiatives.

4.04 IDBI's 21 member Board, appointed by Government, represents a crosssection of GOI officials, industrialists and commercial and development bankexecutives, allowing for a wide array of expertise and diversity of viewpoints at Board meetings. These are held at least six times a year to f:amerecommendations to Government on industrial and financial policies, formulateinternal policies, review IDBI's overall operations and its interaction withthe public and private industrial sectors. Full powers are delegated to an11-person Executive Committee, which meets monthly on project proposals andoperational matters. Management is entrusted to a group of experiencedcareer executives, headed by Mr. S. S. Nadkarni as Chairman and ManagingDirector. An experienced and internationally-recognized development banker,Mr. Nadkarni enjoys the confidence of public officials and leadingbusinessmen. Since October 1985, when he assumed his position, he has soughtto make IDBI a more commercially oriented institution by streamliningprocedures, delegating decision-making responsibilities, improving physicalfacilities and building up greater rapport with the private sector.

4.05 IDBI's organizational structure comprises six administrative units,each headed by an executive director. The Direct Finance Operations groupis responsible for appraisal, disbursement, supervision, billing, collection,and recovery of all direct lending operations. It also conducts productmarket research to support appraisal assumptions. The Development FinanceOperations group is in charge of refinance and bill rediscount operations forthe state financial and commercial bank institutions, and the supervision ofthese activities. It is also responsible for Personnel and Administrationand supervises IDBI's regional offices. The Small Industries DevelopmentFund is a specialized activity for the promotion and funding of small scaleenterprises at the national and state levels. The Corporate Finance Grouphandles the secretariat, accounting, and planning functions. In addition, itreviews, develops, and implements methods and organizational changes

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throughout IDBI. It also conducts the internal audit function andcoordinates the work of the external auditors. The Technical Department hasinternal functions assisting appraisal with technical reviews of projectproposal and external functions carrying out studies to provide advise toindustrial enterprises. It includes a new venture capital operation directedat specialized technology projects. The Legal Department acts in an advisorycapacity to the Board and management and in an operational capacity indealing with internal legal matters.

4.06 This organizational structure was adopted in 1982 and while it isgenerally satisfactory, important changes and improvements will be made thiscoming year. An immediate step will be the reassignment of the InternalAudit function to report to an Executive Director not dealing with accounts.Another important change will be the placing of asset/liability managementfunctions under the direction of a Committee of Executive Directors. Asthese activities grow and staff expertise in them is built up, thought may begiven to constitute them as a separate organizational group. Similarly, thePersonnel and Administration functions in as large an institution as IDBIshould have a separate identity. This change, recognized by IDBI's Chairman,may come about as executive responsibilities are reassigned in the wake of anExecutive Director's retirement in late 1987.

4.07 IDBI's staff, numbering 993, is professionaily well qualified, sinceIDBI is able to recruit top university graduates because its salaries arecompetitive with other private and public institutions and career prospectswithin the institution are attractive. Turnover of staff is minimal, andmuch of the staff have spent their entire careers within IDBI. In spite ofintensive in-house training programs, there would be clear benefits inenhancing staff exposure to other foreign financial institutions with strongbusiness orientation and to the issues facing modern industrial enterprisesin more competitive environments. A more focused training program has beendeveloped that will meet this need (para. 4.30).

4.08 Operations. IDBI's financial assistance to the industrial sector iseffected through three basic areas of operations: a) Direct finance,available to projects costing at least Rs 50 million (approximatelyUS$3.8 million), accounts for about 34% of IDBI's portfolio. Direct financetakes the form of loans, underwritings, direct capital subscriptions orguarantees. Directly-financed projects are generally cofinanced with otherall India term lending institutions; b) Refinanced loans account for 40% ofportfolio. These are originated as loans to small- and medium-sizedbusinesses by state-level institutions and banks which bear the risk on theseoperations; c) Rediscounted bills, constituting 24% of portfolio, cover thesale of machinery, financed by banks on a deferred payment basi' and bearcorresponding bank guarantees. In addition to these operations. projectsconsidered strategic to the development of the economy and viable infinancial terms, but that cannot be completely financed by commercialresources because of their large size or long gestation period, are financedby the Development Assistance Fund (DAF), separately managed by IDBI for the

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central Government. The DAF's total assets (at Rs 3.5 billion in FY87)constitute less than 21 of IDBI's assets. The Fund obtains close to 902 ofits resources from Government loans and issues of Government guaranteed bondsand debentures. IDBI applies the same appraisal standards and criteria toDAP financed projects as it does to the rest of its operations. Only 13public and joint sector companies have received DAF funds for a total ofRs 4.4 billion since its establishment in 1965. The Fund operates profitablywith a 2.5X average return on assets over the last five years.

4.09 Resources and Onlending Terms. To carry out its operations IDBI hasto mobilize large amounts of resources. These include equity contributionsby the Government, RBI borrowings, bond issues, internal generstion throughcollections and earnings and foreign currency borrowings. Rupee bonds anddebentures constitute the largest source of funds, for 50Z of all externalresources. These instruments with 10 to 15-year maturities, had been issuedat lower-than-market rates, but received ready acceptance due to theireligibility for liquidity reserves of commercial banks and as approvedinvestments for other Government-controlled corporations. As explained in anearlier chapter of this report, the rate on these bonds has been graduallyraised from 71 in the late seventies to 11, which is now closer to a marketrate. RBI loans, the other important source of funds, at 301 of totalresources mobilized, are presently available at 81 p.a. compared to 71 p.a.in earlier years. The weighted average cost of domestic funds for IDBI hasconsequently increased from 6.81 p.a. in 1983 to 7.71 p.a. in 1987. Foreignborrowings constitute only 5.51 of IDBI's total resources, although they havebeen growing rapidly in recent years.

4.10 Interest rates on domestic currency loans range from 11.51 to 141depending on the type of loan. Loans to new projects in designated backwardareas and loans for modernization receive concessions on the standard rate,while a 11 p.a. surcharge on interest is levied on companies whose sharesare not listed on a stock exchange. IDBI's standard terms provide formaximum loan maturities of up to 15 years, including up to 3 years grace.Inasmuch as the basic lending rate for industrial term financing has ramainedunchanged during this period at 14%, IDBI's basic gross operational spreadhas been reduced from 7.2% to 6.3% in 1987. 1/ The full effect of the squeezeon operating margins, through higher cost funds and rather stable lendingterms, has yet to show in the profit statements inasmuch as the greaterportion of IDBI's portfolio is still supported by earlier bond issues and RBIborrowings, some at rates as low as 7% p.a.

1/ This basic spread does not apply to all of its portfolio, inasmuch asmany loans are booked at concessional rates, on which a lower spread isobtained. About 21% of direct finance operations are at concessionalrates of interest.

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4.11 Policies. IDBI's activities have been governed by internal

gu-delines flowing from its charter and partly arising out of the structured

pattern of its funding and lending operations. As this framework is not

sufficient for a large and diversified institution, IDBI is adopting a

general Policy Statement which outlines its institutional objectives, the

areas of its activity, and the operations in which it engages. It also

provides guidelines on risk management such as enterprise and exposure

limits. Project implementation guidelines place particular emphasis on

procurement procedures, which conform to World Bank guidelines. The Policy

Statement mentions the stimulation of desired investment, the geographical

dispersal of industry, the promotion of small-scale industries, the promotion

of new financial activities and the development of entrepreneurs, as the key

areas of IDBI's activity. It also emphasizes the soundness of its financial

condition as a main policy objective to be achieved through high portfolio

quality, adequate operating spreads, sound provisions for operating losses,

tight expenditure control, continued reinvestment of profits and build up of

equity. The preservation of the environment and ecological balances receive

adequate treatment in the Statement, which clearly states that IDBI will not

finance projects that may adversely affect the environment and will actively

encourage existing industries to adopt pollution-free processes and carry out

investments in environment-protection equipment.

4.12 Procedures and Standards. The quality of appraisal reports is

generally satisfactory, and there is adequate staffing to handle projectappraisal work. Economic indicators such as internal economic rates of

return and financial rates of return are standard features of appraisal

reports. Sensitivity analysis is done on the effects of subprojectimplementation delays, reduction in output prices, increase in input prices,

drop in capacity utilization rates, and changes in project-specificparameters. Certain deficiencies in appraisal and follow-up procedures have

been identified during appraisal and IDBI plans to upgrade its appraisal

techniques. Planned improvements include greater uniformity in appraisal

presentations, the application of an inflation factor in the estimation of

investment costs and operational revenue and expenditure streams, higher

contingencies for exchange fluctuations, more stringent sensitivity analysis

in relation to increased market competition, and the credit rating of

clients, to be undertaken in cooperation with ICICI. In accordance with the

priority of the Covernment's industrial reform policies, IDBI has

increasingly given attention to appropriate economic scale of investments,

adoption of competitive technology and investments which create production

that approach world price and quality standards. As a result of Bank

encouragement, there are plans in FY88 to regularly prepare project

completion r2ports and ex post indicators, together with the introduction of

improvementa in subproject audit practices.

4.13 Recent Performance. IDBI has successfully achieved its mandated

aims, measured in terms of the volume and growth of its operations,institutional and financial support of other DFIs and the assistance to

priority activities, i.e. new types of projects, new entrepreneurs, the small

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business sector, and projects in backward areas. Total commitments grew at a

high rate of 25% p.a. during FY82-FY87, attaining a level of Rs 48.7 billionin FY87. Cumulative disbursements since 1964 total Rs 177 billion. In itsdirect finance operations, even though IDBI is a government-ownedinstitution, it lends principally to the private sector. Of total IDBIdirect operations, 74% were to private industrial enterprises, 23% to publicsector corporations and 3% to cooperative ventures. About 64% of itsassistance is to medium and large enterprises and about 32% is for loans tosmall scale enterprises channelled through the commercial banks andstate-level institutions and 4% is accounted by investments in shares andbonds of other financial institutions. Sectorwise, its operations are fairlyevenly distributed, with the services sector accounting for 18%, textiles13%, chemicals and power generation each 10% and cement and food processing5% each. New projects account for 68% of all IDBI financing, modernizationand rehabilitation operations 17% and expansion and diversification projects15%.

4.14 Loan collections and arrears. IDBI's overall collection performanceis satisfactory. Principal and interest collected on total dues 1/ haveaveraged 93% during the last five years and accounts in arrears areequivalent to 4% of total portfolio as of FY87. However, under these globalfigures there are signs of emerging collection and arrears problems whichmerit close attention.

4.15 The collection performance of refinanced loans and discounted billspayable has been 100% as state financial institutions and commercial bankshave always met their guarantee liability on these operations. However, theaverage collection ratio of the state-level institutions themselves was cnly35% in FY87, requiring important capital infusions by the state governmentsto enable many of these entities to service their debt obligations. Tocorrect this situation, IDBI is reinforcing its program for assistance to thestate-level financial institutions to improve loan recoveries andprofitability. A program has been adopted that places emphasis onconsolidation of these lending operations and providing technical assistanceto the SFCs in improving collection performance (para. 4.28). The AsianDevelopment Bank is selectively supporting IDBI in this effort through aproposed project that will provide funds to industry through some statefinancial corporations.

4.16 The collection performance in IDBI's direct lending presents moreconcrete difficulties and needs to be improved. In FY87 collections ondirect finance loans were 67% before rescheduling and 80% afterreschedulings. Portfolio infection stood at 31% before rescheduling and 20%after rescheduling. Of the principal in arrears of Rs 1.56 billion, 59% hadremained unpaid for over a year, including 47% unpaid over 18 months. Five

1/ Amounts due during the year and amounts past due.

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major industries (textile, sugar, paper, cement, and miscellaneous chemicals)comprise 601 of total arrears. About 66Z of these arrears were in privatesector enterprises, 14X in public sector companies and 20X in joint sectorventures. There are a number of factors which account for these arrears,including the fact that many earlier investments took place under a policyregime which was not conducive to creation of efficient and modernfacilities, which would be viable in today's increasingly competitiveenvironment. Under a highly protected environment and because of pressuresfrom the labor sector, it has been difficult for IDBI and other DFIs to takeconcerted corrective action opportunely and or to press creditor claimssuccessfully. Consequently, a hard core of problem projects has developedfor the DFIs, and while for IDRI this constitutes less than 1Z of its loanportfolio, it needs to be re6cLvtr'. The Government has recognized thisproblem and, as explained in ;ara. 2.04, has created a new organization,BIFR, to assist the DFIs in cur. ig through regulatory restrictionsconstraining the DFIs ability cv either restructure still viable companies orto foreclose on enterprises which cannot be salvaged.

4.17 To improve collections on direct finance loans, and recognizinglegitimate difficulties that industrial enterprises face, IDBI, like otherDFIs, uses rescheduling of repayment obligations as a means of assistingenterprises in such difficulties. The extent of reschedulings over the pastfive years represented, on average, 22X of amounts due and resulted in lowlevels of arrears. Experience with rescheduled payments has generaly beengood, with only 15Z of amounts rescheduled requiring further concessions.Additionally, IDBI has stepped up its collection efforts and introduced moresystematic procedures for managing its portfolio, which have led to improvedcollections during the last five years. Collections on principal haveincreased from 47% in 1983 to 551 in 1987 and collections of interest haveincreased from 66X to 76% during the same period. Finally, IDBI hasconsistently made adequate provisions for both uncollected interest andpossible losses on principal of loans in arrears. Accounts which fall behindpayments for two installments (quarterly or half/yearly) do not accrueinterest and provision for losses on principal, done on a case by casereview, have generally exceeded the recommendation of IDBI's auditors in thisrespect. Provisions for losses presently total Rs 1.3 billion, or about1.5 times the amounts overdue for more than a year. Conscious thatcollections may again be aggravated because of more competitive pressures inthe industrial sector, IDBI's Strategy and Collection Statements set out adetailed action program for improving collections (see paras. 4.25-4.28).

4.18 Financial Results and Condition. As a result of the rapid growth ofits operations and the high overall collection performance, IDBI has had ahistory of satisfactory profit performance and its overall financialcondition is sound, with a consistent high level of liquidity and debtservicing capacity. The rapid build-up of assets, which more than doubledover the las. five years to Rs 111.3 billion as of FY87, has been reinforcedby a rise in the net operating margin from 2.53% in 1982 to 2.94% in FY87.Revenue has consequently grown at an average :ate of 201 to Rs 9.9 billion

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in FY87. Total income over the five-year period ending FY87 grew at anaverage rate of 281 per annum. The growth of income has been accompanied bycontrol over general and administrative expense, kept at a commendably low0.31 of total average assets in FY87. The net final result of operationsin FY87 was a 17Z return on average net worth, up from 15Z in FY86 and 131 inFY85. The profit performance ±nabled IDBI to transfer Rs 441 million co GOIas dividends in FY87, while keeping a high retained earnings ratio of 74Z ofprofit.

4.19 The debt to equity ratio (including contingent liabilities) was 10.0in FY83, 8.8 in FY84, and rose temporarily to 10.5 in FY87. The debt servicecoverage ratios have been strong, averaging 2.7 over the past five years.This is explained by the fairly long maturities of debt, most of whichinvolve global payments at maturity, and the absence of sinking fundprovisions. IDBI is able to cope with this debt retirement pattern withcomfortable margin due to the continuous growth in operations and a quickerturnover of assets than liabilities. However, even if a straight linesinking fund were computed for debt issues, the debt service cover ratios forthe past five years would still exceed 1.5, a situation which is clearlysatisfactory.

4.20 IDBI has always maintained a high level of liquidity, with thecurrent ratio averaging 3.0 over the past five years. Current assetsrepresented almost one-fourth of total resources at the end of FY87,indicative of its liquidity level. Included under current assets aregovernment securities which, by special arrangement with RBI, may beconverted quickly into cash should emergency liquidity requirements arise.IDBI's potential liquidity is also higher than indicated by the current andliquid asset ratios since it has access to preferential term debt issues,which can be mobilized at short notice, and a rediscount facility with RBIfor short term bills. Beyond the one-year horizon of the current ratio, IDBIhas the enviable position where the weighted maturities of its assets (3.6years) are shorter than the weighted maturities of its liabilities (9.2years). While this general situation is likely to continue to provide for aliquidity cushion, it will be gradually modified in the future, since bondsand debentures are being issued for shorter maturities and lending terms havealready been extended to a maximum of 15 years.

4.21 Future Role and Strategy. IDBI defines its future role as thecontinuation of its functions as the lead institution for industrialinvestment finance in India. It will continue to expand its operationsthough at a slower rate than in the past with a growing emphasis on directlending. It will become increasingly commercial in its operation seeking outprojects with strong financial and economic returns and intensify its effortsto upgrade the quality of its existing portfolio. It will also play a rolein financial innovation through promotion of capital and commercial papermarkets; promote high-technology ventures; and support the development offinancially-sound leasing companies. It also intends to give growing

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attention to environmental concerns in its appraisals and promotion of new

projects.

4.22 To attain these objectives, IDBI has the full support of Governme

and the RBI. IDBI's financial position is sound, and the capabilities a..

morale of its professional and support staff are high. Under the direction

of experienced managers, a more commercial orientation of their work is

already evident. However, there are both internal and external difficulties

that will have to be overcome to carry out its objectives effectively.Internally, IDBI will have to become more flexible to adapt rapidly to

changing conditions, something that may be difficult simply because of its

large size and the weight of traditional molds built into its activities.

Secondly, because of its lead role in industrial finance, it may be more

vulnerable to exposure risks from new undertakings and large-scale projects,

which sometimes involve large loan amounts, new technology, new entrepreneurs

and long gestation periods. Potential vulnerability in this respect is

highlighted by the lumpiness of current exposure to a few borrowers. As of

June 30, 1987, the eight largest borrowers accounted for an aggregate

exposure of Rs 6.8 billion, or 8% of the outstanding portfolio of loans. All

of the eight borrowers are operating profitably, but two of them are in

arrears. While these borrowers account for 8% of the portfolio, they

constitute 70% of IDBI's equity, with the largest loan representing 14% of

capital. To minimize potential risks in this respect, IDBI's Policy

Statement restricts exposure to a single enterprise to 25% of IDBI's net

worth, presently Rs 9.8 billion.

4.23 In addition, there also exist increasing external pressure that will

make IDBI's development finance efforts more difficult in the future. While

a less restricted domestic environment presents opportunities for rational

industrial expansion, it will also result in higher risks in both industrial

and financial activities. Increased risks will be present in new lending

operations, but even the existing portfolio will be under the pressure of

greater uncertainty and competition in the industrial sector. IDBI itself

will face increased competition in the financial scene. Already the more

established and profitable firms have permanent access to investment funds

through the capital markets at lower costs and with simpler procedures. On

the liability side of the balance sheet, domestic resources are becoming

scarcer and costlier. IDBI's bond issues, bearing GOI's guarantee, are

limited by GOI to a 10% rate of annual growth, and their cost has been rising

since the late seventies, from 7% to 1979 to 11% p.a. currently. At the

same time, non-concessional lending rates for industrial investment exhibit

little flexibility and have remained at 14% since the late seventies, while

the range of industrial activities eligible for financing at concessional

interest rates has expanded.

4.24 To deal with the difficulties arising out of economic, policy, and

environmental change as well as to make the necessary internal adjustments to

fulfill its role, IDBI has adopted a medium term strategy, the main thrust of

which aims at improvements in risk management and portfolio quality to enable

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IDBI to face increased uncertainty and competition in the industrial sector.

This business blueprint embraces three other main objectives: continued

growth in its operations and promotional activities to maintain its lead role

in industrial development assistance; internal adjustments on organization

and procedures to improve its intermediating role and cope with reduced

operating margins; and diversification of resources to face increased

competition in the financial sector and to develop the financial markets.

To diversify and expand its resource base, IDBI plans to lay greacer emphasis

on developing low cost borrowing instruments to access household and

corporate savings directly.' Already beginning steps in this direction have

been taken by the introduction in 1986 of an Investment Deposit Account

Scheme paying 10% p.a. and in 1987 of 3 year Capital Bonds, issued with

9% p.a. yields. These instruments have gained public acceptance and IDBI

plans to continue to develop direct resource mobilization schemes. To

improve its internal organization, it plans to continue to streamline its

systems and procedures, improve its information systems and intensify staff

training in areas relevant to the above three elements of its strategy.

Growth in accord with its lead role in industrial finance is interpreted as

expanding prudently the volume of its operations and their range and purpose,

while maintaining operating spreads that will guarantee its financial

soundness. Specific emphasis will be placed on flexibility in developing new

forms of assistance to its clients, transferring modern financial and

information techniques to the state-level institutions, upgrading the

technical level of Indian industry, and promoting other financial activities

such as leasing and the capital and money markets. As projected its

operating margins will be no less than 2.5% and close to 3% in the coming

years.

4.25 Risk management and Collection Strategy. The central thrust of the

IDBI's strategy aims at protecting the quality of its portfolio, both through

improved risk assessment on new operations and higher collection ratios on

past loans. Improved portfolio quality is expected to be achieved through

more focused appraisal of project proposals, more careful sensitivity

analysis of the underlying assumptions, and stricter use of economic and

financial indicators with minimum financial and economic rate of return

thresholds of 15% and 12% respectively. IDBI also plans to place greater

emphasis on implementation and follow-up of projects financed, collecting

financial performance data and carrying out subproject completion reviews. A

collection strategy that spells out targets for collections and ceilings for

portfolio arrears has also been developed and is contained in a Collection

Strategy Statement. The objectives are to raise the pre-reschedulingcollection ratio for direct loans from 67% at present to 70% by FY90, or a

one percentage point rise each vear. While this may appear a modest

objective, it is realistic given the hard core of old accounts with

collection difficulties and the emergence of a more competitive economy in

India and the pressure this is likely to create on DFI portfolios. The

maximum portfolio arrears ratio after reschedulings is projected to average

around 3%, which is also acceptable.

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4.26 The collection targets are supported by a specific action programwhich includes: review and classification nf portfolio in arrears; thecreation of a special IDBI unit to handle cases within the purview of theBoard for Industrial and Financial Reconstruction (BIFR); the establishmentof a single point collection system for consortium loans via the leadinstitution; the gathering of updated information on collection effortsthrough improved management information systems; the ippointment of auditorsin debtor enterprises; opportune decisions on merger, consolidations, andmanagement change, as required; and the holding of bi-monthly regionalexecutive meetings to coordinate collection efforts and take quick decisionson foreclosure.

4.27 Additionally, it is anticipated that the active participation ofother financial institutions and principally the BIFR in the expeditiousresolution of rehabilitation measures for sick units should contributesignificantly to an improved portfolio. In this respect, IDBI's managementis prepared to take the necessary decisions to restructure viable projects orto foreclose on unviable ventures.

4.28 An important corollary program for protecting the quality of theportfolio is IDBI's active involvement to help improve the loan recoveriesand profitability of SFCs. Some of the SFCs are financially sound andprofitable, but others are distressed. The key ingredients of this programinclude: emphasis on consolidation of the portfolios of the SFCs, ratherthan enlarging them; intensive portfolio review; performance review of keyoperations; efforts to tap commercial bank financing for clients of the SFCs;the formation of a Default Review Committee for each SFC by March 1988;periodic evaluation of every SFC; staff training; and adoption of policies oncollection targets and provisions for loan losses.

4.29 Technical Assistance Program. In addition to agreements on lendingand financial policies contained in IDBI's Policy Statement and thepreparation of Strategy and Collection Statements, a technical assistanceprogram was developed during appraisal to support IDBI's strategicinitiatives. This program concentrates on three activities: human resourcedevelopment through training, both locally and abroad; development ofmanagement and other information systems through automation; and expansion ofits non-credit supportive services to industry. The total cost of thisprogram is estimated at Rs 130.2 million, of which 50%, or aboutUS$5.0 million, is the foreign exchange component (Annex 3).

4.30 In the area of human resource development, the technical assistanceprogram to be supported by the prGpc'sed project would provide on-goingtraining at a new IDBI training institute in Hyderabad principally for theofficers of the DFIs and other banks, in line with IDBI's role as the leadterm finance institution in the country. For its own senior officers,training would aim at improving the quality of project promotion andappraisal, portfolio management and resource mobilization. With respect toproject appraisal, senior managers would attend training sessions at

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financial institutions abroad which would focus on such subjects as scale andtechnical standards for modern industries in various subsectors, riskanalysis and more sophisticated economic and financial analysis. Withrespect to portfolio analysis, training would focus on loan classificationprocedures, the handling of problem projects and the use of rehabilitation,merger, or transfer measures. With respect to resource mobilization,training would focus on use of new financial instruments to mobilize bothshort and longer term resources. IDBI would submit annual training programsand a list of candidates for foreign training to the Bank for comment atleast three months before the beginning of its fiscal year. It is expectedthat annually about 10 staff members would benefit from foreign training inspecialized areas while about 30 staff would be trained locally in computeruse and applications, in addition to IDBI's regular training courses.

4.31 In the area of management and other information systems, the proposedtechnical assistance program would support IDBI's plan for computerization,with a mainframe computer at headquarters and networking with its fiveregional offices. In addition to reducing manual workloads and increasingthe processing capacity for IDBI's daily operations, this system would beable to generate accounting and administrative information for improvedmanagement monitoring of IDBI's operations. It would also processindustrial, product market, industrial capacity, production and othersectoral information needed to develop an early warning system for portfoliomanagement and for project appraisal purposes. IDBI's proposals for purchaseof equipment and software for specific applications would be discussed withthe Bank.

4.32 The third area of technical assistance would be in the expansion ofIDBI's non-credit support services to its clients and associated financialinstitutions, which are an important part of its mandate, and enables it tointeract closely with the industrial sector in areas such as labour,technology transfer, entrepreneurial development, infrastructural constraintsand others on which it can also advise the Government. The proposed programwould include the provision of management and technical consultancyassistance in technology transfer and procurement of equipment, training ofentrepreneurs and managers, and risk and portfolio management techniques.

4.33 Projected Operations and Financial Results. In accord with itsstrategy, IDBI projects that its operations will grow at a rate of 14% p.a.over the next five years, a more moderate rate compared to past rates ofgrowth which have exceeded 20Z p.a.

4.34 The growth in operations will demand increased resources that overthe five year period total Rs 364 billion, 61Z of which will come frominternal generation, through loan recovery and earnings. AboutRs 140 billion will come from borrowings and Rs 2 billion will be freshequity contributions by the Government. The proposed project wouldcontribute less than 1Z of total resources and about 7% of foreign exchangeresources required by IDBI's projected levels of operation.

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4.35 IDBI's direct finance project pipeline continues to be strong, with

236 projects amounting to Rs 49.0 billion under consideration as of

August 31, 1987. Of the total financial assistance required by these

projects, 78% is expected to be rupee-based and 22% foreign currency-based.

The private sector accounts for 55% of total financial assistance sought, the

joint sector 38%, and the public and cooperative sectors 7%. Of total

financial assistance applications on hand, 82% are for new projects, 8% for

expansion projects and 10% for balancing modernization or replacement. The

strength of the pipeline is confirmed by the observations of industrialists

who report high business confidence as a result of policy liberalization and

strengthening of demand for term finance.

4.36 The high level of disbursements over the medium-term is expected to

produce a strong revenue stream. Income from direct finance, assuming a

moderate improvement in collection performance, is projected to rise by 28%

p.a. during the coming five year period, while the growth of refinance income

is expected to rise from Rs 3.0 billion to Rs 7.0 billion. As expected,

income from bills rediscounting will grow by a lower rate of 14% from

Rs 2 billion to Rs 3.9 billion. Differential growth rates will influence

the relative composition of revenues such that income from direct finance

will rise from 38% to 52% of the total between FY87 and FY92, while refinance

income will slip from 30% to 28%, and bills income will likewise decline from

20% to 15%. Income from non-fund based financial services will increase from

12% to 15%.

4.37 The attainment of the projected net income levels will result in

rising profitability, with the rate of return on average equity rising from

17% in FY87 to a 18-20% range over the next five years. Consequently, IDBI

will be able to maintain a consistent dividend policy that calls for a cash

dividend rate of 9.5% of paid-up equity, a rate that will result in an

average pay-out ratio of 17% and income retention ratio of 83%, for important

reinvestment of profits.

4.38 It is anticipated that IDBI will be able to maintain its high

liquidity position, with the current ratio consistently exceeding 2.0 times

during the projected period, because of improved collections and continued

mobilization of debt with long maturities, blended with new equity

contributions by GOI. The debt servicing capacity will thus remain strong.

For the five-year period ending FY92, the debt service ratio is estimated to

be at least 2.2 times, providing ample leeway for payment of IDBI debt

obligations.

B. Industrial Credit And Investment Corporation of India (ICICI)

4.39 The Industrial Credit and Investment Corporation of India

Limited (ICICI) was established in 1955. It has grown to assume a major role

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in India's financial system, accounting for 451 of institutional foreignexchange financing for industry. During the thirty-two years of theCorporation's existence, the Bank has made fourteen loans totallingUS$765 million to ICICI. ICICI is also the principal intermediaryinstitution for the Bank's Industrial (Engineering Industries) ExportProject. Over the last few years, ICICI has diversified its activities, andnow provides a broad range of financial services including working capitalfinance, mergers and acquisitions, export finance, supplier credits,underwriting, guarantees and leasing. ICICI also is playing a much moreactive role in assisting the government in formulating industrial policies,especially those related to the private sector. ICICI also has diversifiedits resource base and is now an established borrower in internationalfinancial markets. From 1981 through 1987, ICICI raised the equivalent ofabout US$700 million from the international financial markets. ICICI isnow a mature institution and an effective vehicle for reaching specifictarget groups and/or charting new strategies in development assistance.

4.40 Ownership. Ownership of ICICI is dominated by public sectorcorporations, including the Life Insurance Corporation, the Unit Trust ofIndia and a number of nationalized commercial banks. Of ICICI's issued sharecapital of Rs 800.5 million, public institutions hold 80.8Z, foreignshareholders (mainly commercial banks) hold 9.3% and the remaining 9.9% isheld by more than 7,000 private Indian investors. As the public sector holdsmore than 50% of its shares, ICICI is classified as a Government companyunder the Companies Act for certain purposes such as the appointment of itsauditors. However, ICICI lends principally to the private sector.

4.41 Organization. ICICI is well-managed and operates effectively undera competent and experienced Board. The fifteen members of the Boardrepresent GOI (2 members), public financial institutions (1), foreignshareholders (2), the professions and business (8), and include threefull-time executives of ICICI: the Chairman and two Deputy ManagingDirectors. The Board meets regularly to set out ICICI's overall financialand operational policies and decide on individual project proposals resultingin single enterprise exposure over Rs 35 million. Mr. N. Vaghul, anexperienced banker, became Chairman in September 1985. Under him theCorporation continues to benefit from the able leadership that hascharacterized it for many years. Mr. Vaghul's efforts have been directedmainly at decentralizing decision-making in the corporation by transferringauthority down the executive ladder and out to the branch offices; wideningand making more stable the resource base of the corporation by innovativemobilization schemes; and adopting new strategies and instruments ofassistance for industry through such means as venture capital financing, andtechnology development financing.

4.42 Organizationally, ICICI is divided into five major groups:(i) operations; (ii) corporate planning; (iii) finance, (i~r) specialoperations, and (v) administration. The Operations group, headed by a DeputyManaging Director is the largest in professional staff and volume of

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business. The group is responsible for appraising new projects andmonitoring the loan portfolio, including collections and legal recovery. Italso coordinates and supervises the activities of the regional offices inDelhi, Calcutta and Madras. The Planning group is headed by a Deputy GeneralManager and is responsible for corporate planning and policies. It is alsoresponsible for resource mobilization, which has been given a more prominentrole in ICICI's structure, given the increased importance of directborrowings from both foreign and local commercial sources. The Financegroup, supervised by a General Manager, handles all accounting and billingfunctions, foreign exchange operations, and is responsible for theCorporation's investment portfolio. The Special Operations Group, under aDeputy Managing Director includes merchant banking, leasing, venture capitaland industrial rehabilitation operations. It also handles the exportdevelopment functions and is responsible for market and economic researchactivities. The Administration group is currently under the responsibilityof the Chief General Manager. The Personnel Administration functions are theresponsibility of an Assistant General Manager, but are organizationallyunder the supervision of the Deputy Managing Director. The Legal Advisor andthe Internal Auditor report directly to the Deputy Managing Director.

4.43 Operating Policies and Procedures. Prior to 1977, ICICI had noformal policy statement, but relied on its Memorandum of Association,together with Government guidelines and the periodic resolutions of itsBoard, to provide a satisfactory operating policy framework. That year,ICICI's Board adopted a Statement of Financial and Operational Strategy inwhich six broad areas were specified for priority attention: exportindustries; power and transport; agricultural related enterprises; industriesbasic to industrial growth; mass consumption goods; and balancing andmodernization projects. With the Fourteenth Loan, ICICI updated thisStatement principally to reflect ICICI's intention to diversify its foreignexchange resources. Under the Industrial Export Project, ICICI placedexpanded emphasis on export-oriented projects, with a particular focus onengineering products. ICICI's current Corporate Policy Statement, updated atappraisal, continues ICICI's earlier basic lending policies, but gives newimportance to supporting sunrise industries, fostering technology developmentand protecting the environment. It also places added emphasis oncontributing to the modernization of existing industries. Internally, thebuild-up of capital reserves, the adequacy of provisions for doubtfulaccounts, and minimization of the foreign exchange risk on its operations areall more clearly defined.

4.44 Appraisal and Supervision Standards: ICICI's appraisals continue tobe of a high standard and incorporate a thorough treatment of technical,financial, market and economic aspects. Follow-up procedures and projectsupervision standards also are satisfactory. Clients submit detailedquarterly progress reports to ICICI for review and follow-up. Projects arevisited at least once a year and a satisfactory system of reporting andmanagement review exists. ICICI also reserves the right to appoint a

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director on its clients' board and has done so selectively to intensify thesupervision of certain projects.

4.45 Onlending Terms. Similarly to IDBI, ICICI's standard rare ofinterest for subloans from euro-currency sources bear a spread of 1.5% overthe borrowing cost. Interest rates on domestic currency loans also rangefrom 11.5% to 14% with a 1% p.a. surcharge on interest levied on companieswhose shares are not listed on a stock exchange. ICICI charges a 1% p.a.commitment fee on foreign currency loans, and a commitment fee rangingbetween 0.25% and 1Z p.a. on domestic currency loans. ICICI's st-ndard termsprovide for maximum loan maturities of up to 15 years, including p to3 years grace, which conform to those offered by the other all Indiaterm-lending institutions. In the past, ICICI's sub-borrowers bo.'e theexchange risk on foreign currency loans, but for the proposed oper.ction andthe ongoing Industrial Export (Engineering Industries) and Cemcx projects,the Government has decided to assume this risk.

4.46 Recent Performance. A summary of ICICI's operational perf,;rmancefor the last five years (1982-1986) is shown in Annex 2.Table 2. Ai ofDecember 31, 1986, ICICI had approved cumulative financing since its foundingtotalling Rs 55 billion for some 4,100 projects. For the year ending on thatdate, disbursements were Rs 6.0 billion, reflecting a 25% average annualgrowth over the level of disbursements in 1982. The sub-sectoraldistribution of assistance reflects ICICI's concentration on non-trasitionaland technologically more advanced industries. The engineering sector,including metal products, mechanical and electrical machinery and transporteouipment, accounted for about 25% of the total, followed by the chemical andpetrochemical industries (22%). Other more traditional subsectors receivinga significant proportion of ICICI financing were: textiles (13%); basicmetal (9%); cement (9x); and pulp and paper (6%). ICICI's clients arepredominantly medium to large-sized private enterprises. In 1986, ICICI'saverage assistance per project was about Rs 13.9 million (US$ 1.1 million).However, only 45% of the firms financed had net fixed assets of less thanRs 100 million (US$7.8 million).

4.47 ICICI has emphasized the modernisation and upgrading of clients'plant and equipment to improve overall industrial efficiency and improvecompetitiveness. These efforts involve advising clients at the appraisalstage on technology choice. ICICI also provides technical assistance,through its merchant banking and rehabilitation divisions, to industrieswhich need financial restructuring. The geographical distribution ofassisted projects is somewhat skewed toward the more industrialized states inWestern India; however, ICICI has made progress in diversifying its portfoliogeographically, and its assistance now matches more closely that of otherlenders and investors in states with the infrastructure necessary to attractmedium and large private industrial projects.

4.48 ICICI carries out an annual review of the financial performance of417 companies in its portfolio. Of this sample analyzed for the year 1986,

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the average return on equity after tax was 15.3%, and return on capital

employed was aLout 15.7% which is an improvement over the return of 14.9%

obtained in 1985. Most companies financed by ICICI have a sound capital base

with an average debt:equity ratio of 0.68. The economic impact of ICICIfinanced projects has also been satisfactory. The average ex-ante economic

rate of return for 80 projects approved in 1986 was 36%. These investmentsare expected to create about 38,000 new jobs at an average investment cost

per job of about US$19,400; this is reasonable in view of the concentrationon balancing and modernization. Furthermore, a significant proportion of

ICICI's clients export at least part of their output, contributing 20% to

India's manufactured exports.

4.49 Other Developmental Activities. ICICI undertakes a broad range of

complementary activities and services aimed at enhancing its overalldevelopmental impact. These activities include: industrial subsector and

policy studies; identification and promotion of new projects; and training

and advisory support for other domestic and foreign financial institutions.Most of these activities were initiated following the joint Bank/ICICI study

of ICICI's development impact in 1973. Currently, a Technology Development

Corporation is also being established as a subsidiary to assist existingindustry in adopting advanced technologies in their fields and to encourage

investments in new high technology ventures. Venture capital operations have

started in 1986. A credit rating agency is being promoted, as well as an

information services agency, in collaboration with a leading internationallyrecognized firm in this field.

4.50 Financial Results and Position. ICICI's financial results for the

1982-1986 period are summarized in Annex 2 Tables 3 and 4. ICICI hasperformed exceptionally well, especially since 1984. ICICI's total assets

passed the Rs 20.0 billion mark for the first time in 1985 and increasedfurther to Rs 28.0 billion at the end of 1986. Assets were financed by rupee

borrowings (54%), foreign currency borrowings (33%), other liabilities (4%)

and networth (9%). The rapid growth in assets correspond to the surge in

ICICI's business since 1981. This was due to an improved investment climate

and ICICI's concerted efforts to diversify and promote new business. Net

profits after tax as a percentage of average net worth during the 1982-1986period averaged 20% compared with 16% in 1980. The improvement in net profit

was due to higher volume of operations and lower effective tax rate on

profits. The interest rate spread increased from 2.5% in 1980 to 3.5% in

1983 and declined to 2.8% in 1986 due to the rapid increase in ICICI's

borrowing from commercial markets at higher costs to reduce reliance on

GOI-guaranteed bond issues. Administrative expenses measured as percentage

of average total assets declined from 0.6% in 1981 to 0.5% in 1984. Due to

the increase in profit, ICICI's debt: equity ratio as defined in the latest

Bank loan agreement, declined from 10.5:1 in 1981 to 9.8:1 by the end of

1984, and to 9.5 by the end of 1986. The debt service coverage ratio also

remained favorable at 1.7.

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4.51 These results have been supported by the general high quality of

ICICI's portfolio. Principal in arrears at the end of 1986, atRs 391 million, was less than 2% of total loans outstanding. However, theappraisal mission and ICICI's management have identified an emergingunfavorable trend in collection performance. The arrears ratio indicatedabove has actually climbed steadily in recent years from a low point of 1.4%in 1983, and for the first half of 1987 it was slightly above 2.1%. Thecollection ratio before reschedulings has dropped from 75% in 1983 to 73% in1985 and further to 72% in 1986. Industries in the cotton and synthetictextiles, cement, paper, chemicals and sugar subsectors account for 64% ofportfolio in arrears. ICICI identifies adverse market developments,prolonged labor trouble, inadequacies in management and low capacityutilization as the principal causes of companies falling back in theirpayments. Rapid corrective measures to prevent further deterioration in

these companies has not always been possible because of difficulties inagreeing with other creditors and the enterprises' management on actionsnecessary. As of the end of 1986, 24% of accounts in arrears were behindpayments for more than 12 months and an additional 28% were behind for morethan 24 months. These figures represent, as in the case of IDBI, a hard coreof difficult accounts which will require intensive attention. ICICI'smanagement has recognized these trends as indicative of potential portfolioproblems, particularly in view of more difficult competitive conditions forIndian industrial enterprises and will take steps to prevent portfoliodeterioration. Actions proposed by ICICI's management to address thisproblem are discussed in the following paragraphs, under ICICI's future

strategic initiatives.

4.52 Future Role and Strategy. ICICI perceives its role in the near term

future as a continuation o. its past contribution to industrial developmentin India, with increased emphasis on the financing of efficient,internationally competitive modern technology industries. Its management is

conscious that to play this role effectively under different economic and

policy conditions it will have to adopt strategies different from those that

characterized past operations. Similar to IDBI, it will be encounteringdifferent risks as larger projects are required because of the need foreconomies of scale and as first time ventures in new industrial activitiesare proposed. To meet these demands and to make established industries more

competitive, upgradation and development of modern industrial processes isnecessary. To permit market forces to rati inalize industrial production,more decisive attitudes will have to prevail on closure of unviableenterprises, while at the same time, rehabilitation of problem, but viable,projects will have to be undertaken more vigorously.

4.53 ICICI is well positioned to assume this changing role. As a resultof its long and fruitful association with industry and the financial sector,

it is a well established and highly regarded institution, both in India andinternationally. It has an enviable record of profitable performance andenjoys a sound financial position. Its management is capable and proven,enjoying the full confidence and support of ICICI stockholders. It is

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endowed with in experienced and multidisciplinary staff and has the abilityto attract ant: reLain young professional talent. It has a diversified andstable portfolio base with a large core of prime-risk clients, and hasdeveloped a relatively wide resource base in both foreign and localcurrencies.

4.54 However, the external pressures bearing on IDBI as the result ofindustrial and financial sector changes also apply to ICICI. In addition toincreased risks in industrial activity and greater competition from capitalmarket sources for the business of the better rated companies, ICICI willface competition in foreign currency finance. The same group of primeclients that can access the domestic capital markets also prefer theinternational markets for foreign currency borrowings at relatively lowinterest costs. On the liability side of the balance sheet and the spreadson interest income, ICICI is facing problems similar to IDBI's for basicallythe same reasons: domestic resources are becoming scarcer and costlier.

4.55 To deal with the difficult scenario described above while achievingits stated objectives, ICICI has adopted a four-pronged strategy to beimplemented during the next five years. This strategy, to be formallyadopted by ICICI's Board before loan effectiveness, aims at: ensuring highportfolio quality; maintaining adequate levels of profitability; diversifyingits resource base; and preserving a sound financial structure. These fourobjectives are necessarily overlapping and complementary.

4.56 To ensure high portfolio quality ICICI intends to apply stricterappraisal criteria to new projects. Minimum economic and financial ratesof return, generally no lower than 12% and 15%, respectively, will berequired. Closer monitoring of subprojects should result in early warning ofdifficulties in project execution and/or sub-loan repayment. It additionallyintends to tighten collection procedures, partly by classifying accounts byrisk categories and by decentralizing collection receipt procedures. :t willenforce expeditious rehabilitation and restructuring measures by opportunelyapproaching other creditors and/or the BIFR to avoid further sub-loandeterioration. It will enforce stricter legal recovery of unviable projectsby using the legal means at its disposal. These and the measures outlinedabove have been incorporated into a separate Collection Strategy Statementthat ICICI's Board has approved in December 1987.

4.57 To maintain current levels of profitability, ICICI will aim atex '-_ng operations in product lines that clearly have higher margins suchas leasing and local equipment financing (lines of credit). These productlines are also those on which collection experience is more favorable. Localequipment financing is practically risk free as it is done through deferredbills of exchange guaranteed by the purchaser's commercial bank anddiscounted for the equipment supplier. Leasing is by its nature a highmargin operation and collection experience in leasing operations has beennear 100% because of the selected ciientele to which this product can bemarketed. Additionally, to reduce the stress on profitability from reduced

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margins on borrowed funds, ICtCI plans to expand substantially activitiessuch as issue management, merger and acquisition counseling, letter of crediLbusiness and portfolio managemert, so that non-fund based income willcontribute proportionately more to profits. This part of ICICI's strategywill be complemented by efforts at controlling administrative costs. Theautomation of systems and procedures and more focused and intensive trainingshould contribute to controlling administrative costs as operations expandand diversify.

4.58 To diversify its resource base, ICICI plans to continue an activeborrowing role in the international capital markets, availing ofopportunities to reduce costs and minimize foreign exchange risks for itsclients by making full use of futures, options, swaps and optimal mix offloating and fixed rate loans. ICICI has already acquired significantexpertise in this area and has successfully raised large volumes ofcommercial foreign exchange resources at low costs and hedged risks. Withrespect to rupee resources, ICICI plans to diversity both the sources offumds and the instruments used to raise them. The idea is to progress fromdrawing first on corporate sector liquidity, then to attract general publicfunds for investment, and finally to begin to tap rural savings. Thisprogression will have to be achieved through innovative financialinstruments, of which securitization of debt and the issuance of debenturesare initial steps which ICICI is planning for FY88.

4.59 To preserve a sound financial position, in addition to the emphasison high portfolio quality, adequate operational margins and diversifiedborrowings, ICICI is adopting stricter policies on provisions for loanlosses, and will aim for continued reinvestment of earnings and programmingof periodic equity issues. Provisions for loan losses call for write-off ofinterest earned on accounts which have more than two payments in arrears, andwrite-off of the principal amount of loans classified for legal recovery. Atpresent, provisions on both principal and interest in arrears total Rs 449.5,or more than 50% of arrears of Rs 756 million. Considering that seriousproblem loans account for Rs 532 million of the total portfolio in arrears,the provisions cover more than 80% of these subloans, exclusive of the valueof fixed asset guarantees. With respect to net worth, ICICI has beenreinvesting profits in large percentages and will continue to do so whilemaintaining very satisfactory dividends and yields per share. Consequently,recent equity issues have had acceptance with institutional shareholders andwith the general public. Further issues of stock are programmed in thefuture for a total of Rs 430 million.

4.60 Technical Assistance Program. ICICI's medium term strategy alsocalls for technical assistance support. A program has been prepared duringappraisal covering two important areas of ICICI's institution buildingprograms: computerization and training. This program, at a total cost ofRs 93.0 million, will be partially funded by the Project's TA component, withICICI covering the balance of expenditures (Annex 3).

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4.61 ICICI is at present implementing a major computerization program.An on-line database that would improve the quality of credit decisions and

the monitoring of problem projects, together with an automation plan toimprove office productivity, form the core of this program. The planenvisages interconnection of hardware, software, and data resources amongindividual departments at Headquarters and the regional offices. These localnetworks would later be connected to each other over telecommunicationschannels. To carry out the initial part of the program at the regionallevel, investments in software and data communication equipment are alsonecessary. Fuller computerization of its operations and more effective dataprocessing would enable ICICI to improve its collection performance further

by an early warning system for potential portfolio problems and by moreeffective and decentralized billing.

4.62 ICICI has routinely carried out training of its staff, both in-house

and externally. Current plans, however, are for intensified training inthree important areas relevant to its strategic objectives. In the firstplace, as its computerization program is implemented, training in advancedconcepts of information technology would be necessary. Second, to accomplishits resource mobilization and more focused assistance objectives, ICICI'sstaff will have to acquire expertise in new financial services, innovativeresource mobilization instruments, changing international market practicesand contemporary liability management techniques. Finally, there iscontinuing need for training in ICICI's traditional operations term lendingoperations, with emphasis on streamlining procedures, designing systems, andadopting review and adjustment methods. Training in these three areas willinvolve attending high level seminars and courses abroad, on the job trainingand observation at institutions abroad, and the hiring of consultants/trainers to conduct in-house seminars. ICICI would submit annual trainingprograms and a list of candidates for foreign training to the Bank for

comment three months before the beginning of each financial year. It isestimated that annual programs, exclusive of ICICI's regular training of itsstaff, will involve about 160 staff weeks of training in computer use and

applications, DFI operations, and state-of-the art financial practices.

4.63 Projected Operations and Financial Results. ICICI's five yearprojections through 1991 call for a 15% annual rate of growth in itsoperations. This is a conservative estimate considering that recent yearshave witnessed a 25% of growth in operations. Loan commitments during thenext five years are expected to total Rs 83.2 billion, while disbursementsprojected total Rs 41.8 billion of which the equival .nt of US$600 millionwill be in foreign currencies for 35% of total disbursements. This patternof disbursements reflects ICICI's policy to reduce foreign exchange riskexposure in its portfolio.

4.64 Projections are also conservative with respect to portfolio arrears.Even though it is expected that measures to improve portfolio quality willpay off substantially, projections are deliberately set low to reflect onlyminor improvements in collections before rescheduling. These projections are

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modest because of the "hard core" quality of some of the existing arrears,and considering that the portfolio will be under heavy pressure in the co ingyears due to growing competition in the economy.

4.65 Profitability is also projected under conservative assumptions.While the strategy calls for significant expansion of high margin operationsand non fund based income, projections for these activities are reasonablyconservative. Annual after tax profits for the period are expected toaverage 1.5% of assets, and 18Z of net worth compared to 1.8Z and 24%,respectively, in the previous five year period. While projected returns onnet worth and total assets will be lower than in the past, they will still be

satisfactory, given the vastly different environment in which ICICI willconduct its operations in the projected period. It is expected that actualresults will be even more satisfactory as ICICI's performance has generallyexceeded projected results.

4.66 Even with the conservative assumptions for projections, the financialcondition of ICICI will continue satisfactory with a debt:equity ratio of10:1 and a debt service coverage ratio of 1:7. The liquidity position willremain comfortable at 20% of assets. The generation of resources throughcollections, external mobilization of funds and operating surpluses, will beadequate to maintain the projected levels of operations.

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V. TECHNICAL ASSISTANCE TO SAIL

5.01 As the Government continues with the reform process, the need for therestructuring of industries in various subsectors becomes more and moreurgent, as enterprises need to adjust to an increasingly competitiveindustrial environment. This need is co&firmed by sector studies and projectwork that the Bank has undertaken in recent years, most notably in steel,capital goods, electronics, fertilizer, automotive, textiles and cement.While such restructuring typically would involve investment in themodernization and upgradation of physical plant as a prime component, suchinvestment must also be complemented with efforts to improve technical andmanagerial skills. The Bank has already financed restructuring of the cementindustry in India (Ln. 2660-IN and 2661-TN), and is studying the possibilityof similar financing in other sectors.

5.02 The Bank undertook a study of the steel industry in March 1986 andproduced a Steel Sector Strategy Report in January 1987, which wassubsequently discussed with the Government. The Government has sincerequested the Bank to provide US$50 million to the Steel Authority of India,

Ltd. (SAIL) under the proposed project to support technical assistance for

the restructuring of the steel industry. The request is based on (i) thewell-defined needs of SAIL; (ii) SAIL's importance as a supplier of rawmaterials to most other industrial subsectors, as well as the transport andconstruction sectors of the economy; and (iii) the fact that an extensiverestructuring of this corporation is already underway and significantprogress in this respect has already ueen achieved. Bank involvement in the

preparation and implementation of the technical assistance work is expected

to help ensure the future success of the restructuring of the steel industry.

A. The Steel Sector

5.03 The steel sector report examined the role of the steel sector in the

economy, analyzed the major problems confronting the sector, and suggestedthe outline of a strategy for addressing these problems. The steel sectorplays a critical role in the Indian economy. In 1985/86, steel productionamounted to nine million tonnes, or Rs 34 billion (US$2.6 billion),equivalent to 1X of GDP. Imports have held steady in recent years at therate of 1-2 million tonnes per year with a value of US$300-600 million, and

are expected to remain at about this level or increase in the future. The

costs of production of domestically produced steel are on average 23Z higher

than prevailing international export prices 1/, while domestic prices,

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reflecting the structure of levies, taxes, and tariffs over domesticproduction costs, are typically 50Z to 100% higher than international exportprices. While India has a potential comp&vrative advantage in steelproduction, based on market size, industrial skills and availability of ironore, coal and limestone, the following constraints have developed leading todeteriorating performance: poor condition of plant and equipment, lack ofmanagement autonomy, overmanning, constraints in the transport anddistribution networks, inability to meet increasingly stringent pollutioncontrol standards and limited investment funds.

5.04 Faced with falling steel costs and prices worldwide, the domesticindustry must restructure so as to be able to improve productivity and toreduce costs. In addition to hardware-oriented technological upgradation,equipment modernization, and debottlenecking measures, the industry will needto adopt software-oriented improvements, for which TA, and related equipment,are required. Annex 4 gives a brief description of the Indian steel sector,along with a development strategy.

B. The Steel Authority of India, Ltd. (SAIL)

5.05 With assets of Rs 84 billion and a workforce of 250,000 people, SAILis the largest industrial undertaking in India. SAIL accounts for 63% ofcrude steel production in India. Its primary assets include five integratedsteel plants, two alloy steel plants, 25 mining operations, 46 sales andmarketing offices, and 60 stockyards throughout the country. It is a limitedcompany wholly owned by the Government of India. In the recent past, SAIL'sautonomy in relation to the Government has been quite constrained. Thistended to lessen the accountability of management, with the result thatperformance was less than satisfactory. More recently, Government hasgranted increased autonomy to SAIL in operational and investmentdecision-making. Through the instrument of a yearly Memorandum ofUnderstanding (MOU), instituted for the first time for the fiscal year1987/88, GOI grants SAIL more autonomy, while at the same time elaboratingclear parameters of accountability. Under new management, and withincreasing autonomy and accountability, SAIL's performance has improved overthe last three years, and it has embarked on an ambitious restructuringprogram. This is expected to cost Rs 67 billion (US$5.2 billion equivalent)over the period 1988/89 to 1994/95, which SAIL expects to finance largelyfrom internal cash generation and direct foreign borrowing, without recourseto support from the central Government budget. SAIL values the involvementof the World Bank, not only for the financial assistance which it is able toprovide, but also for the analysis it can contribute on steel sector

1/ Based on 1985 data. Recent movements in international export pricesshow an increasing trend.

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development issues. Following discussion of the Steel Sector Strategy Study,

SAIL requested the Bank to finance and help supervise a large technicalassistance program needed to complement other steel sector restructuring

efforts. Annez 5 provides a fuller discussion of SAIL's dimensions, its

organization and management, its finances, its restructuring program, and the

need for a program of technical assistance to complement in particularphysical restructuring efforts.

C. The Technical Assistance Program

5.06 The proposed technical assistance program was prepared by SAIL and

reviewed by a Bank mission in September 1987. The technical assistance

component would include:

(a) a study on productivity improvement and planning at SAIL;

(b) a study on environmental management and pollution control in SAIL

plants;

(c) training - a study and a training program;

(d) studies on marketing and distribution; and

(e) a study on technology upgradation at the Alloy Steel PlU.nt.

5.07 Each of these project components is summarized here in turn. Further

detail is available in a project report prepared by SAIL which is held on theProject File. 1/

5.08 Productivity Improvement and Planning. The purpose of this study is

to set in place the systems and procedures that would enable SAIL'smanagement to meet, on a continuing basis the productivity norms and targets

which will from time to time be set and agreed with the Government in Annual

Performance Plans which form part of the MOU's signed becween SAIL and the

Government MOU's (Annex 5, para. 6). The objectives of the study would be

to:

(a) increase organizational effectiveness through improvedorganizational structures and accountability/responsibilityrelationships;

1/ SAIL. Project Appraisal Eeport on SAIL Projects being considered forWorld Bank Technical Assistance. October, 1987.

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(b) develop and/or improve management systems and procedures, toenable better day-to-day management and control of physical,financial and human resources, thereby improving productivity and thequality of operational processes; and

(c) design and implement systems for improving strategic andoperational planning at SAIL to meet corporate objectives,particularly with respect to (i) internal resource generation throughimprovements in operational processes and work practices, and (ii)improved customer service through improvements in quality service anddelivery.

5.09 The study would be carried out at three levels, viz. (i) thecorporate head office, (ii) the individual plant, of which one (Bokaro) wouldbe selected for initial attention, and (iii) the Central MarketingOrganization (CMO). Interlinkages (information flows, androle/responsibility relationships) among these three levels would be examinedalso. A counterpart team comprising SAIL personnel would be formed to workwith the consultants, who would be expected to transfer necessarymethodological skills and approaches for later extension to all of the plantsby SAIL staff, and for future continual review and adjustments to meetchanging needs and requirements.

5.10 Since this study goes to the heart of SAIL's corporate mission, itwill be the nodal study with which the others must be in harmony. SAILtherefore would like to get this study off the ground as a matter of urgency,and possibly even before the proposed Bank loan is approved. For that reasonsome retroactive financing of up to US$250,000 would be needed. The Bank hasgiven its approval in principle to such an arrangement, on the understandingthat the Bank's Guidelines for the Uses of Consultants would be followed.SAIL has agreed to this, and the Bank has cleared the terms of reference andthe shortlist of consultants proposed by SAIL, as well as the Request forProposals. It is anticipated that this study should begin by April, 1988 andbe completed by October 1989 (Annex 6).

5.11 A total of US$2.5 million has been budgeted to meet the foreignexchange costs of this study, based on an estimated requirement of 150man-months of consultancy input. It is estimated that a team of ten expertswould be required to conduct the study. It is anticipated that aninternationally recruited management consulting firm with appropriatetechnical credentials would lead the study, assisted most likely by localconsultants. In addition, SAIL will set up task forces comprising its ownpersonnel, 18 in all, to work closely with the consultants and under theirdirection, in carrying out the study, and to absorb the methodological skillsinvolved, for later transference to all .he plants of SAIL. A SteeringCommittee headed by the Chairman of SAIL is also to be constituted tosupervise the work of the consultant/SAIL team, to give guidance wherenecessary, and to head off and/or resolve problems that may arise from timeto time.

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5.12 Environmental tfanagement. The environmental and pollution control

study is being undertaken in the wake of stringent new pollution control

legislation (1986) recently adopted by the Government. SAIL has already

taken steps to monitor air and water pollution caused by its plants, but

because of inadequate expertise available within SAIL and in India, not

enough has been done.

5.13 This study will be conducted in three phases spread over three years.

The first phase will involve a survey of SAIL's plants to assess the

equipment requirements for monitoring and measuring the levels of air, water,

thermal and noise pollution. In the second phase, the consultants would

analyse the data collected and assess the current level of pollution, and

suggest a comprehensive system of environmental management and pollution

control, which would then be implemented in a third phase. The timing of the

various phases is shown in Annex 6.

5.14 An amount of US$27.4 million has been budgeted for the foreign

exchange requirements of this activity. This includes: (i) US$4.1 million

for internationally recruited consultancy services, to provide for 270

man-months of services from a team of 10 experts; (ii) estimated pollution

monitoring equipment requirements of US$3 million per plant (i.e. a total of

US$15 million) and US$3.5 million for mines and the central R&D institute

combined -- these are needed to assess systematically the extent of pollution

being caused, and to identify future investment requirements; and

(iii) US$1.0 million for training.

5.15 An important feature of this assignment would be the transfer of

skills to SAIL personnel in techniques of environmental pollution control;

the provision for training, over and above that discussed below (para. 5.16),

seeks to ensure that this objective is achieved. Internationally recruited

experts will be engaged for this assignment.

5.16 Training. A major part of SAIL's restructuring effort must involve

the training and retraining of workers, engineers and staff to meet the

demands of new technologies being introduced, and to achieve the productivity

gains being sought. Accordingly, SAIL has articulated its TA needs in this

area, and has identified the following:

(a) the need (i) to upgrade and revamp its existing training facilities,

particularly to make greater use of video and computer technologies in

training, and (ii) to change the content of its ongoing training

programs at different levels to meet changed and changing requirements

induced by recent and projected technological change in plant and

managerial processes;

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(b) the need to plan and implement a massive plant-specific retrainingeffort occasioned first by the Durgapur modernization, and then to besucceeded by similar modernizations at Rourkela and IISCO; and

(c) the need to expose approximately 200 of its young engineers tointernational best-practice in identified areas of steel planttechnologies, including blast furnace operations, coke ovens,sintering, basic oxygen furnace operations, continuous casting, androlling mill operations.

5.17 SAIL intends to hire internationally recruited consultants to assistin the efforts required for (a) and (b) above, for which US$675,000 has beenbudgeted, based on an estimated 45 man-month requirement for (a) and (b).Training equipment requirements for the effort at (a) are estimated at US$6million, and includes provision for blast furnace (US$2 million) and powerplant (US$3 million) process simulators. The cost of training 200 engineersabroad at c) above is estimated at US$4.1 million. The firms invited to bidon this component would be operating steel companies of international repute,not consulting firms per se.

5.18 Marketing and Distribution. SAIL has identified the need for athorough-going study of marketing and distribution arrangements, which is anare (Annex 5, para. 15) in need of improvements. The study would be dividedinto four parts:

(a) Distribution channels: This part of the study would look first atthe present system of allocational and distributional controls andmake recommendations for their improv4-ment, in particular reassessingthe role of Government as established in the Iron and Steel ControlOrder (1956). The extent to which greater use could be made oftraders in the distribution of steel would be examined, among otheralternatives.

(b) Movement: This part of the study would focus on ways of minimizingthe cost of moving steel from the plants to the consumers, taking intoaccount constraints imposed by Indian Rail with regard to minimum sizeof rake loads, and the present infrastructure at plants and stockyardsin respect of loading/unloading equipment and storage facilities. Thestudy would examine alternative routes, e.g roads and waterways.

c) Infrastructure: The study will examine the present materialhandling infrastructure at plants, stock yards, and service centers,and make recommendations on how this should be changed/extended toaccommodate growing requirements and to support the strategies adoptedunder (a) and (b) above.

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(d) Packing: The study will specify appropriate standards for packing,

and make recommendations for required packing infrastructure at plants

and stockyards.

5.19 A total of US$2.0 million has been budgeted for the consultancy costs

of this study, to cover a team of nine experts, whose work would spread over

12 months. In addition, it will be necessary to evaluate on an experimental

basis alternative pieces of equipment for packing, and material handling. A

total of US$8.2 million has been budgeted for this purpose. Both local and

foreign consulting firms, separately or in combination, will be asked to bid

on this assignment. While local firms may be competent to handle items

mentioned in sub-paras. 5.18(a) and (b), it is anticipated that foreign firms

will be needed to address items mentioned in sub-paras. 5.18(c) and (d).

5.20 Alloy Steel Plant Survey. The Alloy Steel Plant (ASP) at Durgapur

has remained technologically stagnant since it was set up durir,g the 1960's,

and as a result, its cost and quality competitiveness has gradually eroded.

There is need, therefore, to survey the plant, and to determine what steps

would be necessary to take to restore its competitiveness. The study would

be divided into four phases:

(a) in the first phase, the consultant will study the existing facilities

and performance of ASP in relation to the market and prepare a general

investigative report on the areas for improvement including cost-

benefit analyses for the schemes proposed;

(b) in the second phase, a detailed project report would be prepared;

(c) in the third phase, detailed engineering would be undertaken for the

schemes selected in phase two; and

(d) in the fourth phase, the consultant would assist in smooth

implementation of the scbemes selected.

5.21 The total estimated involvement of the consultants over all four

phases is 92 man-months, costing US$1.4 million in foreign exchange.

However, a decision point will come at the end of each phase, at which time

the parameters of involvement for the succeeding phase would be re-examined

and decided. Internationally recruited consultants will be needed to carry

out this study, specifically consultants with operational experience in

running specialty steel plants.

5.22 Project Implementation. The project will be implemented over a

period of five years as diagrammed in Table 1, Annex 6. The Corporate

Planning Directorate of SAIL will bear overall responsibility for the

management and coordination of the project components. The individual

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projects will be managed by senior level Project Managers who have alreadybeen selected for each project, and have primarily been responsible fordrafting the respective study terms of reference, the implementationschedules, and cost estimates. SAIL would carry out its technical assistancecomponent in accordance with an Implementation Program, agreed with the Bank,that would spell out the administrative arrangements, schedules for carryingout the five technical assistance studies and submission of the individualstudies to the Bank for comment. Details of the foreign training programwould be sent to the Bank for approval prior to its implementation.

5.23 ?roject Cost. A summary project cost table is shown in Table 5.2.

Table 5.2: SUMMARY PROJECT COST

Project Llement Local Foreign Total Local Foreign Total

(Rs Million) (US$ Million)

Productivity Study 13 33 46 1.0 2.5 3.5Environmental Study 244 294 538 18.8 23.6 42.4Training 109 140 250 8.4 10.8 19.2Distribution Study 95 133 228 7.3 10.2 17.5ASP Plant Survey 4 18 22 0.3 1.4 1.7

Base Cost 465 618 1,083 35.8 48.5 84.3

Physical Contingencies 47 62 109 3.6 4.9 8.5Price Contingencies 88 16 104 6.8 1.2 8.0

Project Cost 600 710 1,310 46.2 54.6 100.8

Note: (US$1 = Rs 13.0)Source: SAIL, and staff estimates.

This shows a total base cost estimate of US$84.3 million, of whichUS$48.5 million is in foreign exchange. Of the local currency cost ofUS$35.8 million (Rs 465 million) duties and taxes amount to US$30.4 million(Rs 396 million). The bases of the calculations of physical and pricecontingencies are set out in para. 3.04. Consultancy fees have beenestimated at US$15,000 per man-month, inclusive of fees and expenses, basedon recent consultancies in this field with which the Bank h..s been involved.Including contingencies, the total foreign exchange requirement amounts toUS$53.0 million, and the total project cost to US$95.0 million. Interestcharges during implementation are expected to amount to about US$3.2 million.

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The allocation of the loan, by project element and by disbursement category,is shown in Annex 6, Table 2. The financing plan is shown in Table 3.2.

VI. PROPOSED LOANS

A. Terms and Conditions

6.01 The loan of US$310 million for industrial credit would be made toIndia at the Bank's standard variable interest rate with a repayment periodof 20 years, including five years of grace, and would be onlent to the DFIsunder the terms of subsidiary loan agreements between GOI and each DFI.Draft subsidiary loan agreements were discussed and agreed duringnegotiations and their signature would be a condition of loan effectiveness.The US$50 million technical assistance loan for industrial sectorrestructuring would be made directly to SAIL with the guarantee of theGovernment of India, also at the Bank's standard variable interest rate witha repayment period of 20 years including five years of grace.

6.02 Relending Terms and Conditions. The US$310 million loan would beonlent by OI to the DFIs in local currency at an interest rate of ll%, whichin turn would relend the proceeds to final borrowers at 14%, the prescribedrate for non-concessional lending by the DFIs. This would leave a spread forthe DFIs of 3%, which is conrwidered appropriate for this Loan in view oftheir projected administrative costs and repayment risks. The rupee lendingrate to subborrowers of 14Z p.a. is highly positive in real terms in view ofthe current and projected inflation rate of 6% and is consistent with theoverall structure of interest rates in India. The Government willperiodically review the relending rates of DFIs 1/, in relation to changes ininflation and other market conditions and adjust the relending rates asnecessary to ensure that rates on new subloans remain positive in real terms,are reflective of market conditions and provide a reasonable spread to theDFIs. GOI would bear both the foreign exchange and interest rate risks forthis loan.

6.03 Subproject Eligibility Criteria. An eligible enterprise is definedas an industrial enterprise in the private, joint and cooperative sectors,which is engaged or intends to engage in manufacturing or processing. Aneligible subproject would involve the establishment, expansion and/orbalancing, modernization and replacement proposal of an eligible enterprisewhich meets minimum economic and financial viability criteria. For these

1/ Including those for the Industrial Export (Engineering Products)Project Part B of the Cement Industry Project and this Project,

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purposes, all appraisals would include detailed subproject analysis showingthe economic and financial rates of return of subproject proposals, which tobe acceptable to the Bank would generally have a minimum economic rate ofreturn of 12% and a financial rate of return of 15Z. An enterprise shouldhave an acceptable capital structure such that with the new subloan thedebt:equity ratio of the enterprise would not exceed 70:30. These financialand economic parameters for investment enterprises and subprojects arecontained in the Agreed Minutes of Negotiations.

6.04 Subloan Terms and Conditions. The relending terms and conditionsreflect the policies of the DFIs and agreements reached with the Bank asfollows:

(a) all subloans would be denominated in rupees;

(b) the final lending rate would be 14% p.a. or the applicable rate setafter the periodic interest rate review under the proposed project;

(c) the amount of the Bank loan allocated to a single enterprise wouldnot exceed US$20 million, either singly or jointly financed by IDBIand ICICI;

(d) subloan maturities would be at least three years and up to amaximum of fifteen, including a grace period of up tothree years; and

(e) Both DFIs would be.ve a free limit of US$6.0 million. Since thisis the first Bank loan to finance IDBI's direct lending operations,the Bank would review the first ten subproject proposals regardlessof size. It is anticipated that under these procedures, the Bankwould review 14% of the number and 45% of the amount of subloans byIDBI. Similarly, for ICICI, above free-limit loans to be reviewed bythe Bank would constitute 12% of the number and 35% of the amount.

6.05 Policy, Strategy, and Collection Statements. Each DFI has adoptedpolicy, strategy and collection statements. These documents, which aredescribed more fully in Chapter IV, will serve as internal guidelines forthe conduct of DFI operations and as reference documents for Projectsupervision and monitoring of agreed courses of action between the DFIs andthe Bank. These statements cover a wide variety of issues includinginstitutional objectives, financial projections, adjustments inorganizational structure, improvement in appraisal standards and procedureswith minimum financial and economic returns on projects financed and measuresto improve project supervision and collection with a view to achievingspecific collection targets. Drafts of these three statements had beendiscussed at appraisal and were agreed during negotiations. Any substantialchange in these documents would be discussed with the Bank.

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6.06 Financial Covenants. In accordance with their current policies andfuture strategies, the DFIs would have to maintain appropriate capitaladequacy and liquidity ratios. The DFIs are committed to maintain:

(a) a maximau debt:equity ratio of 12:1; and

(b) a minimum debt service cover ratio of 1.2:1.

B. Administrative Procedures

6.07 Procurement. Under the credit component, for conatracts exceeding$8 million equivalent, the DFIs would irqist that sub-borrowers followinternational competitive bidding proce.Ares in accordance with BankGuidelines. For other contracts, procurement would be done in accordancewith the DFIs' internal procedures which are acceptable to the Bank.Presently, the DPIs require their borrowers to submit three competitive andresponsive quotations for all procurement. For each withdrawal application,the concerned DFI would have to certify that the agreed procurementprocedures have been followed. The DFIs would maintain records of the method

of procurement, summarizing offers and awards for each subproject. The Bankwould periodically review these records on a sample basis in the course ofregular project supervision.

6.08 For the SAIL and DPI technical assistance components, tendering forall Bank financed contracts for goods expected to exceed US$500,000 in valuewill be on the basis of international competitive bidding in accordance withWorld Bank Guidelines. Such packages would be subject to prior Bank reviewand approval of related tender documents, bid evaluations, and contractawards. A preference of 15%, or the level of custom duties, whichever isless, would apply for domestic bidders under international competitivebidding for goods contracts. Contracts of less than US$500,000 each would be

procured by inviting price quotations from at least three suppliers. However

in respect of SAIL, the aggregate of such contracts would not exceedUS$8 million. Limited International Bidding (LIB) or direct purchase would

be permitted when the equipment or goods to be procured involve proprietarytechnology, subject to prior Bank review and approval. Table 6.1 shows a

breakdown of procurement method, by category.

6.09 Employment of consultants by the DFIs and SAIL would be in accordancewith the Bank's "Guidelines for the Use of Consultants by World BankBorrowers and by the World Bank as Executing Agency". Appointment of all

consultants and their terms of reference would be subject to the priorapproval of the Bank.

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INDIA


PROCUREMENT METHODS(US $ Million)

Table 6.01: PROCUREMENT METHODS(US$ Million)

Procurement MethodProject Element ICB/LIB IS CON Total

Credit Component 45.0 705.0 750.0

-Bank (35.0) (265.0) (300.0)

IDBI TechnicalAssistance 2.0 5.0 3.0 10.0-Bank (1.0) (2.0) (2.0) (5.0)

ICICI TechnicalAssistance 1.5 2.5 3.0 7.0-Bank (1.0) (2.0) (2.0) (5.0)

Productivity Study 4.2 4.2-Bank (2.5) (2.5)

Environmental 43.2 7.5 50.7-Bank (20.0) (4.5) (24.5)

Training 13.3 9.7 23.0-Bank (6.1) (4.9) (11.0)

Distribution 18.2 2.7 20.9-Bank (8.4) (2.1) (10.5)

ASP Surv4y (2.0) 2.0-Bank (1.5) (1.5)

Total 123.2 712.5 32.1 867.8

-Bank (71.5) (269.0) (19.5) (360.0)

Notes:ICB means International Competitive Bidding.IS means International Shopping.LIB means Limited International Bidding.CON means in accordance with consultancy selection guidelines.

Source: Staff estimates

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6.10 Disbursements. Under the credit component, the Bank loan wouldfinance 80Z of the amount of DFI loans to eligible enterprises, or 100% ofthe foreign cost of imported equipment financed by the sub-loans. Thisprocedure has been adopted to allow the DFIs to be reimbursed for estimatedaverage foreign exchange costs of subprojects, which in most cases is around40Z of project cost. However, there are a number of cases where the DFIsfinance only equipment imports, particularly where they are minority partnersunder consortium arrangements and in the case of simple balancing ormodernization projects. In these cases, 100% financing of CIF imports wouldbe appropriate. For the DFI and SAIL technical assistance component, theproposed loan would finance 100l of the foreign exchange cost of importedequipment and foreign consultants and training and 100% of the ex-factorycost of domestically procured equipment under ICB procedures. It would alsofinance up to 100% of the fees of local consultants and trainers and 601 ofexpenditures in locally purchased equipment procured under other than ICBprocedures.

6.11 In accordance with the Bank's current disbursement profiles for DFIprojects and the Bank's experience in similar technical assistance projects,it is expected that the US$310 million loan will be committed in two yearsand disbursed over six years, while the SAIL loan is expected to be committedin two years and disbursed over f.ve years. However, from the strength ofthe DFIs' pipeline of eligible projects and the overall volume of theiroperations it is very likely that disbursements of the credit component couldbe completed in three years.

6.12 Since disbursements by the DFIs to industrial enterprises would be inlocal currency, disbursements by the Bank would be made on a reimbursementbasis through a Special Account, which would be established for the projectin RBI, with an authorized allocation of US$40.0 million, or about fourmonths disbursements over a three year disbursement period (para. 6.11).After Loan effectiveness, the Bank would deposit into the Special Account thestated amount, through the submission of the usual Withdrawal Application,which would serve as the revolving fund. The Bank would replenish theSpecial Account on the basis of requests for reimbursements on a quarterlybasis or whenever the amount in each Special Account reaches 50% of theinitial deposit. Reimbursement to the DFIs would be made against Statementof Expenditures (SOE) for projects which are below their free limits.Supporting documentation under SOEs would be retained by the DFIs and wouldbe subject to review by Bank supervision missions, and to annual audit byauditors acceptable to the Bank, such audit is to be submitted within fourmonths after the close of each financial year. For all sub-loans in excessof free limits having prior Bank approval, the DFIs would fully documentWithdrawal Applications when requesting replenishments to the SpecialAccount.

6.13 For the steel component, a Special Account would be opened withSAIL's bank, the State Bank of India, with an initial deposit ofUS$3.0 million. For the Special Account, SAIL will maintain a Statement of

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Expenditure (SOE) for disbursements made from this account. SOE's would besubmitted to the Bank on a quarterly basis, and would be subject to review byBank supervision missions, and to annual audit by auditors acceptable to theBank, such audit to be submitted within four months after the close of eachfinancial year.

6.14 Retroactive financing up to US$250,000 may be required for theCorporate Planning and Productivity Study of the SAIL TA in respect of whichproposals have been invited with the clearance of the Bank (para. 5.10).

6.15 Reporting and Audits. Each DFI would submit to the Bank semi-annualprogress reports on commitments, disbursements, collections and arrears underthe project and for the institution as a whole. Financial statements wouldalso be submitted by the DFIs in conformity with the Bank's standardreporting requirements, including the submission of audited financialstatements, prepared by independent auditors acceptable to the Bank, withinfour months of the close of each financial year. Audit of SOEs (para. 6.14)would be submitted four months after the close of each financial year. Afterfull disbursement of a subloan, the DFI would prepare a subproject completionreport, comparing actual vs. projected costs and benefits of the subproject.After closing of the Project the two DFIs would prepare and submit an overalloperational audit report of the Project's experiences and results within sixmonths of the closing date.

6.16 As a public sector enterprise, SAIL is already subject to stringentaudit requirements, and has made available to the Bank its annual auditedreports of accounts for the past three years. SAIL would continue to submita copy of its audited accounts, including audited SOEs, within seven monthsof the end of its fiscal year, as long as the loan remains outstanding. Theauditors would be acceptable to the Bank. SAIL will carry out an operationalaudit of each of the TA components financed under the Project within fourmonths of submission of the consultants' final report. The audit reportswould cover all aspects of implementation pertinent to the achievement of theobjectives defined in the TOR, and take into account considerations oftimeliness, cost-effectiveness, and efficiency. SAIL will prepare and submitan overall Project Completion Report within six months of the Project ClosingDate.

C. Project Benefits and Risks

6.17 Benefits. The proposed project would support the on-going processof industrial policy reform in India and would provide a basis for continueddialogue on its future course. It would support GOI's strategy for expandingand modernizing industry and assist in the adjustment process as it affectsboth the DFIs and the real sector. The technical assistance programs and thepolicy, strategy and loan collection statements that were prepared in the

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context of aprraisal of the Project would support the DFIs in imp:oving thequality of appraisals and the management of risk and portfolio accounts andmobilization of resources in the more difficult environment which is emergingas part of the liberalization process. The loan would provide needed termfinancing to the DFIs and finance about 80 subprojects, resulting ininvestments of about US$750 million. The subprojects financed are expectedto generate about 28,000 new full-time work places at an average cost per jobof US$26,785.

6.18 The Steel TA component would assist SAIL in its restructuringeffo;ts, aimed ultimately at improving the competitiveness of the domesticindustry, reducing costs, and lowering steel prices in real terms. Thiswould be to the benefit of downstream users of steel, a group which includesvirtually all major segments of the economy. This TA component provides anecessary complement to the physical investments in plant modernization anddebottlenecking, which must also take place if international competitivenessis to be restored. The improvements in both hardware and software wouldbring about efficiency improvements which would facilitate longer-term tradeand other liberalization measures.

6.19 Both the DFI and SAIL components would also contribute to greaterconsciousness and actual measures to protect the environment by industrialentrepreneurs and managers. The DFIs have adopted clear environmentalguidelines in their Policy statements to promote investments required forcleaner processes in existing industries and to abstain from financing newprojects that do not meet GOI's guidelines on the matter. In the case ofSAIL, one of the key components of the technical assistance program aims atdetermining the extent of pollution in steel production, the measuresrequired to reduce it and the investments necessary to carry these measuresout.

6.20 Risks. With the changing industrial policy environment consequentupon policy reforms, individual enterprises, established under a moreprotected and regulated environment, could experience difficulties. Tnequality of the portfolio of the DFIs could deteriorate further as a result ofthe more competitive environment and the effect of possible future exchangerate adjustments on the repayment capacity of enterprises which have borrowedabroad. The technical assistance programs and collection strategies providedfor under the Project would reduce this risk by ensuring a detailed review ofexisting portfolio, establishment of better portfolio information for earlywarning of possible problem subprojects, stricter appraisal standards, betterportfolio management through close subproject supervision and intensivecollection and recovery efforts. Careful attention would be given duringsupervision to these activities and the realization of agreed collectiontargets.

6.21 The risks on the steel technical assistance component are minimal asSAIL is committed to the technical assistance program, is expected to havesufficient internal cash generation to finance its share of the technical

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assistance program and has made adequate arrangements for the management andstaffing of the various studies. There is, however, a small risk that thechosen consultants would not perform as expected. However, this risk wouldbe mitigated by the fact that the terms of reference have been carefullydrafted and approved by the Bank, the selection of consultants would be inaccordance with Bank guidelines and subject to the prior approval of the Bankand careful arrangements have been made to ensure that counterpart SAIL staffwork closely with the consultants in all cases.

VII. AGREEMENTS REACHED AND RECOMMENDATION

A. Agreements and/or Understandir.gs Reached during Negotiations

7.01 Interest Rate Reviews. GOI confirmed in a separate letter itsintention to periodically review the relending rates of the DFIs, includingthose for this Project, the Industrial Export (Engineering Products) Projectand Part B of the Cement Project (para. 6.02)

7.02 Policy Strategy and Collection Strategy Statements. The DFIs'respective Boards approved, in December 1987, policy, strategy and collectionstrategy statements. These -were reviewed by the Bank and found substantiallyin accord with understandings reached in these respects at appraisal. TheBank would be kept informed of important changes in these statements by theDFIs (para. 6.05).

7.03 Eligibility Criteria and Subloan Terms and Conditions. Theeligibility criteria and subloan terms and conditions for the creditcomponent of the Project were agreed upon by COI/DFIs and the Bank duringnegotiations as outlined in paras. 6.03 and 6.04.

7.04 Procurement and Disbursements. During negotiations it was agreedthat the DFIs/SAIL would observe procurement procedures consistent with WorldBank guidelines except that for contracts under US$8 million and US$500,000,respectively, for the credit and technical assistance components, theinstitutions can follow their internal procurement procedures (paras.6.07-6.39). These exceptions are detailed in the IDBI and ICICI ProjectAgreements and in the SAIL Loan Agreement.

7.05 During negotiations GOI and the Bank agreed on disbursementprocedures and on the establishment of a Special Account at RBI for the Loanto COI for the DFIs and a Special Account at the State Bank of India (SBI)for the Loan to SAIL (paras. 6.10 - 6.14).

7.06 Financicl Covenants, Audits and Reporting Requirements. Duringnegotiations it was agreed that both IDBI and ICICI would maintain

-52-

appropriate capital and liquidity positions. For this purpose a mximumdebt:equity ratio of 12:1 and a minimum debt service coverage ratio of 1.2:1were agreed upon (para. 6.06).

7.07 Audit and reporting requirements for the IDBI, ICICI, SAIL, theproject components, and the Special Accounts were discussed and agreed uponas indicated in paras. 6.12-6.13 and 6.15-6.16.

7.07 Condition of Effectiveness. Final drafts of proposed subsidiary loanagreements between GOI and the DFIs were agreed upon, reflecting the agreedrelending terms and conditions, subproject eligibility criteria and sub-loanterms and conditions (paras. 6.03 and 6.04). Signing of the subsidiary loanagreements between GOI and IDBI and between GOI and ICICI, both satisfactoryto the Bank would be a condition of effectiveness of the Loan to theGovernment. No special condition of effectiveness applies to the SAIL loan.

B. Recommendation

7.08 The proposed project constitutes a suitable basis for a Bank Loan ofUS$310 million to the'Government of India, and a Bank Loan of US$50 millionto the Steel Authority of India Limited with the guarantee of India, both atthe Bank's standard variable interest rate and under conditions outlined inChapter VI.

INDIAINDUSTRbIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT

INDWSTRIAL DEVELOPMENT BANK OF INDIAOrganization and Operational Data

II. a . _Upibi . _ P. _ C.. _ am

MP imgmi of WC.MlSC * nm adk Bud 9 Pd pmadmda aedva,ai he, aped.. allmn S i m

NW". _._maad some of pm

1 1 ~ ~~~~ U"SU Q ingn na

.m. hU __1 _r. _ , _*:w~S__. I1 g1 " 11 a I iI~~~~&I

Mdbw . Poo af.

I s" 011 I I I I1I*- mii mu in~ aim swl.___ ~~~ I- -:= 1 1--- I____

* ~~~~~~ 60 admi umme i.

* ~~~u ~~. 0u smi aut ma..

*- - I paduI pmd

em adi q- '1.* _W IO

1 _* Iat a.uauimmbd..

ANNEX 1Page 2 of 8Table 1

INDIA

IWDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT

INDUSTRIAL DEVEmWPKENT BANK OF INDIA

Resource Position as of September 30, 1987

--- -- ---(Rs.Billions) - _--__---__

(Rupees)

Share Capital 4.75Reserves 6.39Loans 90.26Deposits 7.3Curr.Liabs & provs 14.01

Total Resources 116.13

Loan Portfolio& Investments 109.66

Other Assets 5.42

115.08

Resources Avail.For Disbursnent i.05

Undisbursed Comitntst 51.8

N.C9

*includes US$ 228 sillion in foreign currency loans

Rs.100-US 7.79

INDIAINDUSTI.AL FINANCE AND TECHNICAL ASSISTANCE PROJECT

Actual and Projected S actios cnd Disbuirsmtet(as. million)

Finc I Veer Endimg June 1983 1984 1955 1986 1987 19U 1969 1990 1991 1992

SAUTICT S

Direct Assictaoce 4,742.70 7,584.20 12,104.90 15,021.20 17,629.00 20,273.35 23,314.35 26,811.51 10,533.23 35,4 8.22

lefinmace 8,453.40 5,926.50 13,320.80 15,543.60 18,830.00 21,654.50 24,902.68 28,638.08 32,933.79 37,673.26

Sills IediscouatinS 5,140.90 7,401.80 6,556.10 9,298.60 10,386.00 11,424.60 12,567.06 13,623.77 1S,206.14 16,126.76

Otber. 526.30 621.00 1,269.50 1,096.00 1,846.00 1,370.00 1,507.00 1,657.70 1,823.47 2,005.S2

Total 19,063.30 24,533.50 33,251.30 40,961.40 48,691.00 54,722.45 62,291.09 70,931.05 60,796.63 92,064.65

DISSU IIEiZMTS

Direct Assistnace 4,629.00 5,478.00 6,029.00 7,766.00 9,913.50 16,416.53 19,168.21 22,096.63 25,411.12 29,222.79

Refiaaiice 6,501.00 8,024.00 9,614.00 10,924.00 13,023.60 16,240.86 18,677.01 21,475.56 24,100.34 28,40S.39

bills llediecousting 3,1t28.00 5,594.00 4,946.00 6,970.00 7,766,30 5,568.45 9,425.30 10,367.62 11,404.61 12.545.07

Others 466.00 490.00 1,079.00 1,012.00 1,58.00 1,100.00 1,210.00 1,331.00 1, 46.10 1,610.51

Total 15,1124.00 19,556.00 21,663.00 26,672.00 32,285.40 42,325.65 45,430.51 55,274.01 62,960.17 71.73.76

La

I

T0

ANNE 1Page 4 of 8Table 3

INDIA

nDUSTRIAL FINA.NCE AND TECHNICAL ASSISTANCE PROJECT

INDUSTRIA, DEVELOPMENT BANK OF INDIA

Actual and Projected Income Statements

…- Rs. billions)--------------…----

FYE JUNE 30TH 1983 1984 1985 19B6 1997 1998 1989 1990 1991 1992

----------------(Actual)---------------- ---------------(Projected)--------------

Incose

Total Income 3.84 4.90 6.48 8.14 9.90 12.67 15.36 16.37 21.70 25.54

Expenses

Interest 2.65 3.40 4.43 5.53 6.83 9.22 10.61 13.33 16.01 19.56Financial Charges 0.03 0.04 0.04 0.06 0.09 0.09 0.09 0.10 0.11 0.12

Provisions 0.49 0.69 1.04 1.20 1.33 1.86 1.93 2.06 2.30 2.59Admin. 0.11 0.13 0.16 0.20 0.22 0.26 0.30 0.34 0.39 0.45

Total Expenses 3.29 4.25 5.67 6.99 8.46 10.43 12.93 15.93 18.81 21.72

Net Incose 0.56 0.65 0.91 1.15 i.44 2.24 2.43 2.54 2.89 3.62

Dividends 0.15 0.22 0.3k 0.00 0.44 0.45 0.50 0.53 0.59 0.62

Reserves 0.41 0.43 0.49 1.15 1.00 1.79 1.93 2.01 2.30 3.20

RATIOS

ROE 14.0% 12.1% 12.3% 14.91 15.9l 20.1% 17.9% 15.5% 14.9% 16.9%

on N1.2X 1.1% 1.21 1.4% 1.4% 1.8Z 1.6% 1.4% 1.4% 1.6%

Source: IDOR.

MW 1Page 5 of 8.Table 4

INDIA

INDUSTtIAL FINANCE AND TECHNICAL ASSISTANE PROJECT

INDUSUIAL DOVEO OF INDIA

.tual and Projected Balance Shoots.e-as. Billious-. - ------------

EvE JCNE oS 1 4 ;5 Q84 1?95 1986 1987 1;38 199W 1990 1991 !-92

-------- tActual …----------------- ---------------…--cjected --------------

ASSETS

Cash ana Bank Balances 0.;2 1.97 3.02 4.91 5.46 5.33 4.93 4.33 4.33 4.33Other assets and Advances 11.03 12.47 15.96 17.97 21.91 25.39 29.38 3'.74 39.57 43.95

Current Assets :1.35 14.44 19.99 22.79 27.27 30.71 34.21 38.07 42.90 48.29

Loans * Investeents 31.31 32.53 45.57 54.86 66.23 96.54 105.89 127.64 152.11 179.77Bills Rediscounted 7.15 10.33 11.60 14.41 17.08 19.36 21.79 24.29 26.92 29.74Other Assets 0.08 0.10 0.22 0.35 0.45 0.50 0.55 0.60 0.66 0.73

TGTAL ASSETS 49.99 63.40 76.37 92.40 111.03 137.11 162.43 190.60 222.59 258.52

LIAIILITIES AND NETLORTH

Payables 2.70 3.97 4.73 5.62 7.65 9.26 10.36 11.17 11.95 13.08CPLTO 0.22 1.07 1.76 2.56 2.64 3.02 5.50 1.84 2.79 3.30

Current Liabilities 2.92 4.94 6.49 .19 10.29 12. - 15. h 13.01 i4.73 16.0O

Long Tere Cebt 42.49 52.25 62.89 75.79 90.96 112.29 131.74 159.72 196.99 218.02

Share :aaital 2.56 3.95 4.15 4.45 4.75 5.25 5.56 6.25 6.55 6.95

Reserves 1.93 2.36 2.85 3.99 5.03 7.30 9.27 11.62 14.33 17.57

Total Equity 4.49 6.21 7.00 8.44 9.79 12.55 14.93 17.97 20.88 24.42

TOTAL LIABILITlIES 49.89 63.40 76.37 92.40 111.03 137.11 162.43 190.60 222.59 259.52AND NETNOR-H -- …----------------------------- - - - ----------

Contingent Liabi:ities 0.30 0.38 1.49 3.00 3.50 3.90 4.40 4.90 5.50 6.20

RATIOS:

M£hT.rMMl7 y StIMV aa C OA A^t nh th !66 @ 0 10407 10O 0.9

Sr .. 109_... - . - - - - - -. -. -. - - -. -_ - -. -,

Source: 1081.

ANEX 1Page 6 of 8Table 4

INDIA


INDUSTRTAL DEVELOPMENT BANK OF INDIA

Actual and Projected Caeh Flow Stateanwut…._________-----…Re. Billions ----------------------

FYE 3UNE 3.TH 1993 !?B4 1995 1986 1987 1989 1969 1990 1991 199

----------------(Actual)----------------- ------ --- (Projected)--------------

Sources

Opening Cash 0.55 0.32 1.99 3.43 4.96 5.83 5.33 4.83 4.33 4.33

Operations(Int.& Other Inc) 3.55 4.34 6.36 9.00 9.12 12.32 14.97 17.92 21.19 24.97

Share Capital 0.55 1.30 0.30 0.30 0.30 0.50 0.30 0.70 0.30 0.30

Loan Drawdouns 8.93 11.81 12.93 14.70 17.36 21.95 24.95 29.91 30.04 34.04

Repayeents 5.99 B.23 9.69 12.75 15.54 19.26 21.78 25.57 29.72 34.32

Dispcsal of Investments 0.02 0.03 0.06 0.14 0.10 0.10 0.10 0.10 0.10 0.10… - - _ __ _ -- - - -----

Total 19.59 26.03 31.32 39.32 47.39 59.96 67.43 78.93 85.69 98.06

USES:

Disbursements 15.82 19.59 21.67 26.67 32.29 42.33 48.48 55.27 62.98 71.78

Repayments 0.51 0.90 1.62 1.75 2.70 2.64 3.06 5.50 1.84 2.79

Dividend 0.11 0.15 0.22 0.32 0.00 0.44 0.45 0.50 0.53 0.59

Others(Interest) 2.90 3.40 4.40 5.61 6.57 9.22 10.61 13.33 16.01 18.56

Closing Cash 0.34 1.99 3.41 4.97 5.82 5.33 4.93 4.33 4.32 4.35___ _ _ _ _ _ __ _ __ ____ _ ___ _____ _ _- _ __ - _ -_

Total 19.59 26.03 31.32 39.32 47.38 58.96 67.43 78.93 85.68 98.06

DSCR: 1.59 1.61 1.65 1.90 1.91 1.93 1.77 1.75 1.79 1.93

Source: IDBI.


INDIA


INDUSTRIAL DEVELPEN SAK OF INDIA

Direct Lending Operations

Collection Performance Before Rescheduling…I ----.------------------- s. Billions-----------------------

YEAR 1983 1984 1095 1986 1997

Amount OverdueAt Beginning Of Year 1.68 0.98 0.92 1.15 1.29

Aeount Falling DueDuring Year 2.46 4.17 4.98 5.93 7.62

Asount CollectedDuring Year 2.37 2.83 3.47 4.46 5.98

COLLECTION RATIO: 57.22 55.02 59.82 63.02 67.12

Collection Performance After Rescheduling

----------- (Rs.billions) -------------

YEAR 1993 1994 1995 1986 1987

Amount OverdueAt Beginning Of Year 1.68 0.98 0.92 1. 15 1.29

Amount Falling DueDuring Year 2.46 4.17 4.98 5.93 7.62

Amount CollectedDuring Year 2.37 2.83 3.47 4.46 5.99

Amount RescheduledDuring Year 0.79 1.40 1.29 1.29 1.41

COUL.ETIQN RAT1ln 70.77 75.51 75.1t 77.02 79.7n

_ _- _ - _ _ - _ _ - _ _ - _ _ _ - _ , -_-_… - .-- - - - - - …

Source: 1D09.

ANN 1Page 8 of a

INDIA Table 7


INDUSTRIAL DEVELOdMENT BANK OF INDIA

Direct Lending Operations

Arrears of Principal Before Rescheduling

… R_ _ R. Billions -- _-___-_-___-_-__-_-_-

YEAR 1983 1984 1985 1986 1987

Aeount RescheduledDuring Year 0.36 0.75 1.09 0.68 0.8

Arrears At Year End 0.67 0.76 0.84 0.94 0.94

Loans Outstanding 19.11 23.12 27.60 33.83 42.13

ARREARS RATIO: 5.42 6.51 7.0% 4.81 4.12

Arrears Of Principal After Rescheduling

------------(Rs.billions)--------------

YEAR 1983 1984 1985 1996 1987



ARREARS RATIO: 3.5% 3.32 3.02 2.82 2.22

Source: IDBI.

INDIA


1HE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED

Organizational and Functional Chart

DIRECTO

I I .D* I 1PR 1FIIIANCE PLANNING GenINISTR^tlON OPERAltONS SffCt^L OI"IiYTuIONA SGeneral manager Deputy General Manager Deun irco nra narr

1 Ac:unts 1. Corporate Planning 1. Development Program 1. Appraisal l. Merchant Banking 1. Secretariat2. Inestments 2. Corporate Policy 2. Administrative Services 2 Supervision 2. toeoing 2. Shares Ragiatt3. Foleign Ex- 3. Resource Mobilization 3. Estotes 3. Collection 3. Venture Capital

cRange 4. Legal Recovery 4. Industrial RehabilitetionA. billing 5. Operations S. Export Devolepient!'. Cooiputerization Coordination 6. Export Developmente. Vus S. Operations Systems 7. Ecenomicw

7. Regional Offictes S. Pub. of Public RelationsS. Personnel

*Alao oak after Administrativ Services and Eat :e. lbr

0

GoI

AM= IPage 2 of 8Tabl.l 1

INDIA

NDUSTRI FINANCE AND TECHNICAL ASSISTANCE PROJECT

THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED

Resource Position as of October 8,1987--------------------------------------

…-------(billions)---------------

(Rupees) (US$)

Share Capital 0.80Reserves 2.14Loans 16.10 1.25Deposits & Other 2.25 2.24

Total Resources 21.29 1.25

Loan Portfolio 16.56 0.77

Investments 1.21Advance Paymentsto for.creditors 0.70

Other Assets 1.96

20.43 0.77

Resources Avail.For Disbursement 0.86 0.48

Undisbursed Commitments.* Rs.5.12

N.B

*includes US$ 141 million in foreign currency loans

Rs.100=US$ 7.79

INDIA

INDUSTRIRIL FINANCE TECHNICAL ASSIST ANCE PROJECT

INDUSTRIAL CREDIT AND IHVESTMENT CORPORATION OF INDIA (ICICI)

SUMMARY OF OPERATIONS 1982-1991

Actual Projected

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Fiscal Year Ending Sanctions

Loans Rupee 1816 1903 2381 2971 3920 5060 5820 6690 7700 83SO

- Lines -f credit 296 337 550 871 1360 1650 1900 2180 2510 2690

- Forei1n currency 915 1254 1447 1700 3570 3440 3960 4550 5230 6020

Equity Investments 40 92 63 82 470 550 630 730 840 960

Bond/deb. Investments 188 220 370 63 240 240 280 320 370 420

Leasing - 121 196 281 1040 1100 1350 1550 1750 2000

Guarantees 166 260 236 183 230 250 290 330 380 440

Total 3421 4187 5243 6151 10830 12290 14220 16350 18770 21570

Disbursements

Loans - Rupee 1697 1775 2117 2218 2840 3530 4060 4670 5370 6170

- Linoe of credit 102 293 315 544 810 1000 1150 1320 1520 1750

- Foroign currency 1018 1096 1204 1345 1790 2170 2500 2870 3300 3801

Equity Investments 60 80 51 77 70 100 120 130 150 170

Bond/dab. Investmonts 45 72 45 38 140 180 210 240 270 310

Leasing - 32 119 159 370 600 700 900 1100 1300

Guarantees - 3 5 10 20 20 30 30 30

Total 2922 3348 3854 4386 6030 7600 8750 10160 11750 13540

w0


INDIA


THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LTD.

Actual and Projected Balance Sheets-------------------------- Rs. Billions---------------------

FVE DEC 31ST 1982 1983 1984 1985 1986 1987 1988 19B9 1990 1991

----------------(Actual)----- - ---------…- -…-Pro

Incose

Interest on Loans & Debs. 1.12 1.30 1.54 1.96 2.51 2.88 3.43 4.05 4.77 5.62Fees and Commission 0.04 0.05 0.07 0.14 0.27 0.25 0.40 0.61 0.85 1.14Other income 0.01 0.01 0.01 0.01 0.15 0.22 0.23 0.25 0.26 0.29

Total Incose 1.17 1.36 1.62 2.11 2.93 3.35 4.06 4.91 5.89 7.05

Expenses

Interest 0.80 0.90 1.16 1.44 1.92 2.19 2.74 3.40 4.16 5.05Provisions./lrite offs* 0.01 0.03 0.00 0.00 0.15 0.13 0.15 0.17 0.20 0.23Salaries & Personnel 0.02 0.03 0.03 0.04 0.05 0.07 0.09 0.10 0.12 0.14Depreciation 0.01 0.02 0.02 0.02 0.11 0.14 0.24 0.36 0.50 0.66Other 0.02 0.04 0.05 0.07 0.07 0.10 Q.13 0.14 0.15 0.17

Total Expenses 0.86 1.02 1.26 1.57 2.20 2.63 3.34 4.17 5.13 6.25

Profit Before Tax 0.31 0.34 0.36 0.54 0.73 0.72 0.72 0.74 0.75 0.80Tax 0.12 0.13 0.15 0.16 0.12 0.12 0.11 0.11 0.11 0.12

Profit After Tax** 0.19 0.21 0.29 0.38 0.61 0.60 0.61 0.63 0.64 0.69

Dividends 0.04 0.04 0.06 0.08 0.09 0.13 0.14 0.15 0.17 0.19Reserves 0.15 0.17 0.22 0.30 0.52 0.47 0.47 0.48 0.47 0.49

* interest incoae for 1984,1985 is net of provisions and write-offs##1984 figure includes write back of Rs.70 million froD doubtful debt reserve

RATIOS!

ROE 22.5Z 21.3? 23.2? 24.7? 29.9? 21.7? 18.6? 16.7? 14.89 13.9?ROA 1.9? 1.6? 1.89 1.9? 2.4? 1.9Z 1.7? 1.5Z 1.3? 1.2Z

Source: ICICI.

AUIU 2Page 5 o£f Table 4

INDIA

IUDUsTITIAL FINUACE AND TECNICAL ASSISTANCE PRJCT

TU INUThIAL CEDIT AID IWVEThET CORPOATION OF INbIA LTD.

Actual and Proiected Balance Sbeets

FYE DEC u tS7 1 . 4 1983 1994 1985 1916 1987 1989 1999 1990 1991

---------------- iA:tual! ----------------- -------------- (Projected) -------- -----

ASSETS

Cash and Bank Balances 0.99 0.40 0.42 1.47 1.51 1.50 1.50 1.50 1.50 1.50Other assets and Advances 0.92 0.90 1.05 1.27 1.53 1.90 2.30 2.90 3.40 4.00

Current Assets 1.91 1.20 1.47 2.74 3.04 3.40 3.80 4.30 4.90 5.50

Loans(rupees) 5.79 7.70 9.40 11.40 14.12 17.10 20.40 23.80 29.01 33.00Loans(4x) 3.70 4.60 5.50 6.83 9.27 10.50 11.70 13.10 14.71 16.46Investments 0.75 0.90 1.00 1.20 1.29 1.50 1.58 1.92 2.00 2.30Net Fixed Assets 0.04 0.05 0.20 0.24 0.41 1.00 1.49 .2.10 2.10 3.40

TOTAL ASSETS 12.09 14.35 17.57 22.41 28.13 33.50 38.97 45.12 52.32 60.66

LIABILITIES AND NETMORTH

Payables 0.60 0.76 0.97 1.09 1.23 1.23 1.25 1.25 1.24 1.26CPLTD 0.54 0.41 0.67 o.9 1.22 1.39 2.34 2.15 2.68 2.21

Current Liabilities 1.14 1.17 1.64 2.08 2.45 2.62 3.59 3.40 3.92 3.47-- --------_ ----- ---- - - ---- - - - --- ___------ _ - -

Rupee Debt 6.90 9.40 10.00 12.70 14.96 18.69 22.09 26.90 31.79 38.03Foreign Currency ebbt 3.15 3.70 4.60 5.89 8.25 9.12 9.79 10.87 12.00 14.00

Net Long Term Debt 10.05 12.10 14.60 18.51 23.21 27.91 31.88 37.67 43.79 52.03

Share Capital 0.27 0.27 0.41 0.50 0.67 0.80 0.80 0.11 1.00 1.10Reserves 0.62 0.91 0.92 1.25 1.90 2.27 2.70 3.17 3.61 4.06

Total Equity 0.99 1.08 1.33 1.75 2.47 3.07 3.50 4.05 4.61 5.16

TOTAL lIABILITIES 12.09 14.35 17.57 22.41 29.13 33.50 38.97 45.12 52.32 60.66AND NETNORT- ----------------------- --------------------

RATIOS:

DEMt:EGQUITYMt!ES) 9.60 10.30 9.80 10.40 9.50 9.21 9.1q 9.42 9.62 10.17

Source: IClII.

hUm 2?w a of a

USUL FINAUc AND TUUCAL ASSISTAC PUc?

TIE IlTDUStRIAL C&. IT Ai ISTIErT CO 6ATIN F INIA LINITES

Atial ad Projected Csh Flow Statuuuts

------ - (Rs-I.btllionsl ------

PIE MC 31ST m2 19 19 19 1 1 19 m 19" 19I

0 ~~ ~~ ~~~~- - te- ---- -- -- -Po*i - -

Sbwcn

Operatimus 0.32 0.38 0.53 0.53 0." 0.73 0.O5 o.9 1.15 1.35

hwmc Capital 0.00 0.00 0.07 0.09 0.11 0.13 0.00 0.01 0.11 0.11

Loun DraWiods 2.43 2.23 3.13 4.59 4.C4 .00 4.52 5.03 3.0 10.55

Rupayuts 0.70 0.63 1.10 1.56 2.06 2.40 3.30 3.9S 4.40 4.92

Dispasl of Investments 0.04 0.03 0.04 0.04 0.21 0.0 0.04 0.07 0.07 0.00

Total 3.49 3.47 4.07 L.O5 8.09 9.31 10.73 13.12 14.43 17.01

Fixed huts 0.01 0.03 0.12 0.13 0.26 0.12 0.0 0.65 0.05 0.02

Disuhousnts 2.64 3.0 3.47 4.18 5.7 4.70 7.71 1.34 10.19 11.72

Investnits 0.12 0.14 0.14 0.24 0.31 0.90 1.0 1.29 I.5 1.61

Ruiaymts 0.54 0.41 0.6 o.9 1.15 1.22 1.50 2.42 2.24 2.79

Dividdis 0.04 0.04 0.04 0.06 O.09 0.13 0.14 0.11 0.17 0.19

Othrr 0.21 0.27 0.14 0.14 0.45 0.00 0.06 0.00 0.00 0.00

Chnge in Cash -0.09 -0.53 0.04 1.06 0.04 0.24 0.26 0.35 0.41 0.46I uters invetamts

Total 3.N9 3.4i 4.37 4.5 6.09 9.31 10.73 13.12 14.13 17.01

NCII 1.30 1.40 1.50 1.50 1.70 1.40 1.40 1.50 1.50 1.50

Surce ICICI.


INrtIA



Collection Performance Before Rescheduling-…-_ -__--___-_ _ _------_ Rs. Billions ------------------------

YEAR !982 1983 1984 1965 '986

Aount OverdueAt Betinning Of Year 0.27 0.27 0. 31 0.37 0.56

Amount Falling DueDuring Year !.53 1.72 2. 36 3.00 3.73

Asount CollectedDuring Year 1.32 1.49 L.96 2.46 3.10

COLLECTION RATIO: 73.31 74.91 73.4l 73.0Z 72.3Z

Collection Performance After Rescheduling---…(Rs. billions)--------------

YEAR 1982 1983 1984 1985 1986

Amount OverdueAt Beginning Of Year 0.27 0.27 0.31 0.37 0.56

Amount Falling DueDuring Year 1.53 1.72 2.36 3.00 3. 73

Amount CollectedDuring Year 1.32 1.49 1.96 2.46 3.10

Aaount RescheduledDuring Year 0.20 0.19 0.35 0.35 0.35

COLLECTION RATIO: 82.51 82.81 84.5 81.5l 73.7Z

Source: ICICI.


INDIA



Arrears of Principal Before Rescheduling

-------------------------Rs. Billions-------------------------

YEAR 1982 1983 :984 19e5 1986

Amount RescheduledDurirg Year 0.10 0.09 0.17 0.17 0.19



ARREARS RATIO: 2.42 2.0% 2.4% 2.6% 2.6%

Arrears Of Principal After Rescheduling

------------ (Rs.billions)--------------

YEAR 1982 1983 1984 1985 1986



ARREARS RATIO: 1.41 1.3% 1.31 1.7% 1.8%

Source: ICICI.

INDIA


TECHNICAL ASSISTANCE TO DFI

(Rs Million)

1988/89 1989/90 1990/91 TOTALID0I Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total

Management Info. Systems 6.9 8.6 15.5 11.0 12.6 23.6 11.0 13.0 24.0 28.9 34.2 63.1Support Services 3.0 3.2 6.2 5.8 8.0 13.8 5.2 5.0 10.2 14.0 16.2 30.2Human Resources Development 2.4 2.0 4.4 4.0 3.0 7.0 4.0 3.0 7.0 10.4 8.0 18.4

Subtotal Base Costs 12.3 13.8 26.1 20.8 23.6 44.4 20.2 21.0 41.2 53.3 58.4 111.7Physical Contingencies 1.2 1.3 2.5 2.1 2.4 4.5 2.0 2.1 4.1 5.3 5.8 11.1Price Contingencies 0.5 _ 0.5 2.4 0.4 2.8 3.5 0.6 4.1 6.4 1.0 7.4

Total IDI 14.0 15.1 29.1 25.3 26.4 51.7 25.7 23.7 49.4 65.0 65.2 130.2

ICICI

Information Technology 5.3 12.3 17.6 12.0 29.8 41.8 - - - 17.3 42.1 59.4

Overseas Training - 2.7 2.7 - 6.3 6.3 - - - - 9.0 9.0In house Training Center 1.4 2.4 3.8 4.4 4.8 9.2 - - - 5.8 7.2 13.0

6.7 17.4 24.1 16.4 40.9 57.3 - - - 23.1 58.3 81.4

Physical Contingencies 0.7 1.7 2.4 1.6 4.1 5.7 - - - 2.3 5.8 8.1Price Contingencies 0.4 0.1 0.5 2.2 0.8 3.0 - - - 2.6 0.9 3.5

Total ICICI 7.8 19.2 27.0 20.2 45.8 66.0 - - - 28.0 65.0 93.0

Grand Total 13.8 38.6 52.4 35.3 91.4 126.7 - - 93.0 130.2 223.2

Iw

ANNEX 4Page 1 of 6

INDIA


THE STEEL SECTOR

I. Role

1. The steel sector plays a critical role in the Indian economy. In1985/86, production of saleable steel amounted to 9.0 million tonnes, a valueat international prices of Rs 34 billion, and 1% of CDP. Imports in the sameyear amounted to 2.0 million tonnes, with a corresponding value of Rs 8billion. Though imports are small relative to domestic production, theimport bill which they represent is significant, ranking fifth afterpetroleum, machinery, gems, and edible oil. The steel industry ranks high inthe value of its assets, which now total about Rs 70 billion, close to thatof Indian Railways, which, with assets of Rs 75 billion, is the largestundertaking in India. Steel also ranks high in the planning of publicexpenditures. It accounted for 36X of Sixth Plan industrial sectorexpenditures, and is targeted for 37S of Seventh Plan industrial sectoroutlays - about Rs 64 billion -- which represents three times that for the

next subsector, chemicals and fertilizers.

II. Structure and Market

2. Indian steel production is dominated by six integrated steel plants,five of which are in the public sector under the control of SAIL, with thesixth being the Tata Iron and Steel Co. (TISCO), in the private sector. Thesix integrated plants account for 100% of the production of iron, and 77Z ofthe crude steel production. In addition to the integrated plants, there are160 mini-plants, based largely on scrap, with an average capascity of 25,000tonnes per year (tpy) of crude steel, with the largest at 130,000 tpy and thesmallest at less than 10,000 tpy, which altogether account for the remaining23S of crude steel capacity. In addition, there are private rerolling mills,some attached to mini-plants, others independent, which contribute tofinished steel production. India's iron and steel balance for 1984/85 isshown in Chart 1.

3. India consumed in 1984/85 10.7 million tonnes of steel, or at therate of roughly 17 kg. per capita. The rate of consumption is about 30 timesgreater in the U.K, and about 50 times greater in the U.S., roughly in linewith the differences in GDP per capita. The consumption pattern has remainedin the proportion of 631 non-flat products to 37Z flat products over the last15 years or so.

ANNEX 4Page 2 of 6

4. Recent steel demand forecasts suggest that steel demand will grow ata slightly faster pace than GDP -- if the latter is projected to grow at 4%p.a, steel demand is expected to grow at about 5% p.a. On this basis, steeldemand is projected to increase from the level of 10.7 mtpy of 1985/86 to18.7 mtpy by 1995/96 and to 23.6 mtpy by 2000/01, with little change in thestructure of demand. On this basis, and taking into account new capacitythat will be coming onstream, a supply shortfall will develop in themid-1990's expanding to about 6.0 mtpy by 2000. However this shortfall ismet, whether through imports, or through domestic production, and whetherthrough the integrated route of production or through scrap-based mini-plantroute, it will be very costly, and it is important to make the right choices.Most important, emphasis must be placed in the first instance in maximizingthe utilization of existing capacity through increased operationalefficiencies.

III. Costs and Prices

5. Steel prices in India are very high compared to international prices.Duties (basic and auxiliary) on mild steel products range from 65Z to 952,and go up to 325X on some specialty steels. These high duties are not,however, reflective of the extent of protection required by the domesticindustry. A weighted average of the cost of saleable steel produced by theintegrated plants in 1984/85 amounted to Rs 4,561 per tonne, which is 231higher than international cif prices (Rs 3,700 per tonne) for a product mixappropriate to India. That is, the average required level of protection is23X. The average level of protection actually enjoyed, that is to say, unitincome retained by the steel producers (net sales realization), compared tointernational prices, is 261. In the best case, that is for TISCO, therequired level of protection is just 132, and this in an international marketsituation characterized by variable cost pricing on export markets. Over andabove retention prices, the price of domestic products is increased byvarious levies and taxes, specifically the Freight Equalization Fund (FEF),the Steel Development Fund (SDF), and the Engineering Goods Export AssistanceFund (EGEAF), along with excise duty. With these add-ons, the free-on-rail(FOR) price of domestically produced steel therefore is roughly comparablewith the landed- duty-paid price of imported steel, with some higher, otherslower, but mostly the domestic steel would be priced more favorably,particularly when inland freight is added on to the price of the importedsteel. In any event, imports are controlled, not just through prices andfiscal means, but through physical control over import licenses.

IV. Comparative Advantage

6. India's presumed comparative advantage in steel production stems fromthe following:

(a) India has the required raw materials of iron ore, coal andlimestone needed for steel production, and the qualities aregenerally adequate;

ANNEX 4Page 3 oE 6

(b) India has a huge potential domestic market, both for steel and fordownstream capital and engineering goods industries, and so couldsecure the economies of scale necessary for modern steelproduction; and

(c) India has built up a large pool of technical manpower with thenecessary technical and other skills needed for efficientindustrial production.

V. Constraints

7. India enjoyed a period during the sixties when its cost of steel

production was among the lowest in the world. Since that time, however,

India's cost advantage has steadily eroded. The present constraints on

performance include the following: (a) deterioration in raw material quality,

principally of coking coal and iron ore; (b) limited availability of power

supply; (c) constraints in the transport infrastructure; (d) poor condition

of plant and equipment; (e) outdated and obsolete plant facilities; (f)

inability to meet increasingly stringent environmental pollution control

standards of the country; (g) surplus labor, coupled with weaknesses in work

culture; (h) inadequacies in the distributiou system; and (i)limited availability of investment funds.

VI. Policy Environment

8. These constraints have arisen in a policy environment characterized

by the following major features:

(a) insulation of the industry from import competition through high

tariffs as well as quantity controls on imports;

(b) limited domestic competition due to a system of administeredpricing; this has also limited resource generation;

(c) public sector reservation for integrated steel mills, TISCO --whose establishment predated independence -- being the soleexception;

(d) regulation of private sector mini-mills and rerollers through a

system of capacity licensing;

(e) regulation of the distribution system, with about 60Z of steel

production earmarked for designated priority sectors (Defence,Railways, etc.), sales restricted to end-users, except for small

quantities permitted to be sold to traders;

(f) limited autonomy for SAIL, and day-to-day supervision of SAIL

operations and decision-making by the central Ministry; formal

control by the Central Government over investment decisions in

ANNEX 4Page 4 of 6

excess of Rs 10 crores, as well as of decisions regardingproduct-mix, employment policy, and prices;

(g) surcharge on the producer price to finance the Steel DevelopmentFund (SDF), administered by the Central Ministry, which could beconstrued either as a tax on consumers or a device by which theCentral ministry asserts control over the disposition of what wouldotherwise be retained earnings of the producers;

(h) equalization of freight rates to all destinations throughout Indiathrought the mechanism of a Freight Equalization Fund (FEF);

(ij) excise tax on finished goods which GOI uses as a device for raisingrevenue; and

(k) rebates to engineering goods exporters through the mechanism of anEngineerirg Goods Export Assistance Fund (EGEAF), made necessarybecause of the relatively high retail price of steel including theabove charges.

VII. Diagnosis

9. Given the foregoing major features of the policy environment, thebroad diagnosis which suggests itself is that there has been too muchpre-emption of market forces by Government intervention. If one considers thelist of constraints previously cited (para. 7), one finds that these couldlargely have been avoided if, at least in hindsight, the right performanceincentives had been in place. The effects of declining raw material qualitycould have been mitigated through appropriate investments in preparationfacilities. Power supply limitations c.. Id also have been overcome throughinvestment. Indeed captive power planti are a feature of most integratedsteel mills around the world. Poor condition of plant and equipment also isa reflection of inadequate maintenance having cumulative effects over theyears. Obsolescent facilities suggest that the incentives, or the funds,necessary to undertake investment in plant having more modern technology havebeen absent. The existence of high levels of surplus labor similarly raisesthe more fundamental question how and why this condition was allowed todevelop, with a strong presumption that public sector modes of operationmight have had something to do with it. Likewise for inadequacies in thetransport infrastructure and distribution system. Finally, lack of adequateinvestment funds to correct at least the problems which are amenable tosolution through appropriate investment activity is not only the cause ofpresent difficulties, but also the result of policies which have ensured thatretained earnings in the industry have not been enough zo keep plant properlymaintained, to invest in newer technology, to acquire facilities that wouldmitigate the effect of declining raw material quality, to invest in captivepower plants that would ensure adequacy of power supply, etc.

10. Thus, in retrospect, Government control over prices, and the settingof prices at levels too low to cover reinvestment requirements, probably

ANNEX 4Page 5 of 6

account for most of the difficulty now faced by the industry. This basic

problem was exacerbated by excessive interference by Government in even

routine AMR (additions, modifications, and replacement) investments, leading

to inordinate delays, and deteriorating condition of plant and equipment. The

third factor was the absence of either domestic competition, or competition

through imports, which meant there were few pressures to halt the slow but

sure slide into the present unsatisfactory state of affairs.

VIII. Strategic Response

11. The Bank's steel sector report advocated the following strategic

response:

(a) The individual enterprises, particularly SAIL, which accounts for 632

of crude steel production, must move:

(i) as a first step to improve work culture and discipline, and at

the same time, to improve operational and maintenance

practices; these are relatively painless steps that could

yield significant results in plant productivity: variable

costs could be reduced, and capacity utilization increased

through such measures;

(ii) as a second step, efforts must be made to reduce the levels of

overmanning; SAIL has developed a plan intended to achieve

this goal, relying mostly on attrition, but involving also

innovative schemes for voluntary retirement; and

(iii) third, costly investments must be undertaken to restore the

condition of plant, modernize where it is cost-effective to do

so, and to improve raw material preparation facilities to

address the problems of deteriorating and fluctuating raw

material quality.

(b) Assuming that international cost-competitiveness could be restored,

it remains essential that policy reform should be instituted to

ensure that pressures are in place to maintain competitiveness. This

requires

(i) increasing the level of autonomy for SAIL, as the single most

important steel producer; SAIL should be allowed to function

as a commercial enterprise; if it is not allowed to do so,

then its accountability for results achieved is compromised,

and to that extent, it cannot be expected to remain

competitive; this point has been accepted by the Government,

which has entered into a Memorandum of Understanding (MOU)

with SAIL which delegates more autonomy in both operational

and investment decision-making to SAIL;

ANNEX 4Page 6 of 6

(ii) heightening the level of competition, which must be achievedultimately through relaxation of import controls, and movingfrom physical instruments of control, to .iscal instruments(i.e tariffs); as the health of the industry is restored,tariffs could be reduced; domestic competition could beheightened through relaxation of capacity licensingrestrictions for new entrants, and through abolition of thesystem of administered pricing and distribution controls. TheGovernment is, however, reluctant to dismantle its system ofpricing and distribution controls without further study,arguing that both steel and foreign exchange are in shortsupply, necessitating some form of Government control andrationing; and

(iii) ensuring incentives parity between minimills and integratedplants, through abolition of FEF, SDF and EGEAF schemes; asthings now stand, the minimills are protected relative to theintegrated plants, which pay into the foregoing schemes whilethe minimills do not; as a result there is a concern thatinefficient minimills will be set up in an environment wherethe prices of electricity and scrap -- the main inputs of theminimill producers - are prohibitive by world standards.

ANNEX 5Page 1 of 9

INDIA


THE STEEL AUTHORITY OF INDIA, LTD.

I. Basic Dimensions

1. SAIL is the largest industrial undertaking in India. It owns andoperates a vast array of facilities, consisting of five integrated steelplants. 1/ two alloy steel plants, a centralized Research and Developmentfacility, 25 mining operations that produce coal, iron ore, limestone,dolomite, quartzite, and fire clay, all of which are located in the easternpart of the country. Its head office is in Delhi, and it has 46 sales andmarketing offices and 60 stockyards throughout the country. The integratedsteel plants have a combined capacity of hot metal of 10.3 million tonnes peryear (mtpy); 8.8 mtpy crude steel; and 6.6 mtpy of saleable steel.

2. SAIL and IISCO together employ 250,000 people, a number which hasrisen oniy slightly from 241,000 people since 1981. Most are employed at theplants, with only about 7,000 people being employed in marketing, research,training, and the corporate offices awa> from the plants. Of SAIL's 206,000people, 125,000 work in steel-making operations, with the remainder employedin projects, mining, R&D, marketing and administration, which includestownships, security and plant administration. The vast majority of theemployees are between 25 and 50 years old, only 17% being older or younger.Skilled, semi-skilled and unskilled workers make up about two-thirds of theworkforce.

II. Organization and Management

3. Relations between SAIL and the Government are governed by theMemorandum and Articles of Association of SAIL, which was incorporated underthe provisions of the Companies Act (1956) on January 24, 1973. The sharecapital of the Company was set at Rs 40 billion divided into forty millionshares of Rs 1,000 each. The initial subscribers were three, viz. thePresident of India acting through the Secretary of the Department of Steel,

1/ Among which is the wholly-owned subsidiary, the Indian Iron and SteelCo. (IISCO) at Burnpur. Formerly in the private sector, this companywas nationalized in 1978 after running into financial difficulty, andhas been managed by SAIL on the Government's behalf. It remains aseparate juridical entity with separate books of account.

ANNEX 5Page 2 of 9

Ministry of Steel and Mines, and two officers of the Department of Steel, ofthe ranks respectively of Joint Secretary and Director. The Company was setup as a "private company" under the Companies Act (1956), which meant thatshares were not to be issued to the general public. Shares issued andsubscribed stood at Rs 35.8 billion on March 31, 1985, all of which are heldby Government officials in their official capacity; no shares have yet beenissued to the general public.

4. The management of the Ce" -%ny is entrusted to a Board of Directorsheaded by a Chairman who is appoi.ed by the President under terms andconditions determined by the latter. Full-time functional directors areappointed by the President in consultation with the Chairman. Directorsrepresenting the Government are appointed by the President without suchconsultation. There are now 15 directors, five of which represent theGovernment.

5. The Company's Articles of Association contain provisions whicheffectively determine the relations between SAIL as a Company and theGovernment as its owner, and which have, in the past, severely restricted theautonomy of the Company's management. Matters explicitly reserved for thedecision of the President include, inter alia:

(a) any program of capital expenditure in excess of Rs 200 million;

(b) agreements involving foreign collaboration;

(c) the five-year and annual plans of development and the Company'scapital budget; and

(d) appointment of any person aged 58 years or older where the rate of payproposed for such person would exceed Rs 2,500 per month.

In addition, specific provision is made allowing the President to issue suchdirectives or instructions as may be considered necessary in regard toconduct of the business and affairs of the Company. Hence, ultimate authorityover SAIL as a company is wielded, not by its Board of Directors, or evenGovernment acting through the Board, but by Government as Government.

6. Notwithstanding these powers of Government, the Government hasrecently accepted the wisdom of granting increased autonomy to SAIL onoperational and even investment decision-making. Through the instrument of aMemorandum of Understanding (MOU), it grants to SAIL more autonomy, on theone hand, while at the a--me time elaborating clear parameters ofaccountability. This is expected to lead to improved performance by SAIL.The MOU for 1987/88 is held on the Project File.

7. SAIL's internal organization is headed by -:he Chairman who is theChief Executive of the Company. The Chairman is assisted by full-time

ANNEX 5Page 3 of 9

functional directors in the technical, financial, commercial, personnel,R & D, planning and projects areas. An organization chart for SAIL is shownas Chart 1. SAIL's five integrated steel plants are each headed by aManaging Director (MD), and are separate profit centers. The MD's aredelegated full authority on all matters relating to their respective plantssubject to authority ceilings in defined areas. The MD's areadministratively under the control of the Chairman, although theirappointment, including terms and conditions, tenure and removal aredetermined by the Government within the frame of the Articles of Association(para. 4).

III. Financial Performance

8. SAIL's balance sheets for the last four years are shown in Table 1.These show a fundamentally sound financial condition. The current ratio in1985/86 is 1.7:1, while the long-term debt to equity ratio is 44:56. Totalassets amounted to Rs 84.4 billion in FY86, with net worth amounting toRs 38.1 billion. As of 1986/87, this fundamentally sound position has beenmaintained with a debt:equity ratio of 47:53, and current ratio unchangedat 1.7:1.

9. The Company's profitability over the last four years is displayed inTable 2. This shows a steadily improving performance over the last fouryears, coinciding with the appointment of a new Chairman and with a concertedeffort on the part of new management to boost morale, to minimize Governmentinterference, and to ensure accountability at all levels of management.

ANN 5Paso 4 of 9

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ANNEX 5Page 5 of 9

Table 1: SAIL - BALANCE SHEETS, FISCAL YEARS ENDING MARCH, 1984 TO 1986

(Rs Billion)

1986/87 1985/86 1984/85 1983/84

AssetsInventories 17.7 15.7 14.9 15.5Other Current Assets 11.9 12.8 10.3 8.8

Total Current Assets 29.6 28.5 25.2 24.3

Gross Fixed Assets 60.0 56.0 47.1 36.5Less: Depreciation 24.4 22.3 19.0 16.6

Net Fixed Assets 35.6 33.6 28.1 19.8

Cap. Work in Progress 22.2 21.3 24.6 29.0Other Assets 2.8 1.0 1.0 1.0

Total Assets 90.2 84.4 78.9 74.1

LiabilitiesCurrent Liabilities 17.7 16.8 17.1 15.3Loan Funds 33.7 29.5 27.6 27.3

Equity 40.2 40.0 37.9 35.1Reserves/(Losses) (1.4) (1.9) (3.6) (3.5)

Net Worth 38.7 38.1 34.3 31.6

Total Liabilities 90.2 84.4 78.9 74.1

Note: Totals may not add due to rounding of individual line items.Source: SAIL Annual Reports.

All performance indicators show improvement: an FY84 loss of Rs 2.1 billionhas been turned around to an FY86 profit of Rs 1.6 billion; sales haveincreased from Rs 31 billion in FY84 to Rs 45 billion in FY86; production ofsaleable steel increased from 4.3 m.tonnes to 5.5 m.tonnes; andprofitability, expressed as the ratio of gross margin to capital employed,increased from 2.1Z to 15.3%, the best SAIL has ever done. A creditableperformance was maintained in 1986/87, with productions showing continuedincrease; the value of sales did however, decline, owing to canalized sale ofimported steel being taken over by the Minerals and Metals Trading

ANNEX 5Page 6 of 9

Corporation. Profitability declined slightly as an effort was made to holdthe line on price increases even in the face of mounting pressure on costs.

10. Despite improving performance, SAIL must improve even further if itis to match the performance either of TISCO, in the private sector, or ofinternational competitors. The broad strategy necessary to achieve suchimprovements has been described earlier (Annex 5.1, para. 11(a)).

Table 2: SAIL - PROFITABILITY STATEMENT, FY84 - FY86

(Rs Billion)

1986/87 1985/86 1984/85 1983/84

IncomeSales 42.8 44.7 37.2 31.1Other Revenues/Adjustments 4.1 1.8 0.8 (1.2)

Total 46.9 46.5 38.0 29.9

ExpensesMaterials 14.5 15.2 13.7 11.1Employees' Remuneration 6.1 5.4 4.9 4.5Operating Expenses 12.6 11.4 9.1 7.8Freight Outwards 2.7 2.6 2.3 2.1Excise Duty 2.8 2.6 2.3 2.1Levies 2.4 2.4 2.2 2.2Interest 2.1 2.1 1.3 1.4Depreciation 3.2 3.2 2.2 1.3

Total 46.4 44.9 38.0 32.0

Profit/(Loss) 0.5 1.6 .04 (2.1)

Memo Items:Saleable Steel Production (m.tonnes) 5.8 5.5 4.9 4.3Pig Iron for Sale (m.tonnes) 1.1 1.1 1.1 1.3Gross Margin as Z Capital Employed 12.2 15.3 10.0 2.1

Source: SAIL Annual Reports

ANNEX 5Page 7 of 9

IV. SAIL's Restructuring Program

11. SAIL's restructuring effort is already underway. This effort invol-ves hardware as well as software elements, very much along the lines earliermentioned (Annex 5.1, para. 11(a)).

12. On the hardware side, the Company has developed short-term andmedium-term programs. The short-term programs include "additions,modifications, and replacement" (AMR) projects which amount in large degreeto overdue maintenance undertakings. These AMR projects appear to be welljustified, require little capital, and should provide immediate benefits.

13. The medium-term plans involve modernization and technical upgradingof both facilities and skills. The investment plans for each plant aresummarized in Table 3. The total investment planned for the period 1988/89 toFY1994/95 is Rs 67 billion, or approximately US$5.2 billion. The investmentprogram includes a total of Rs 13.5 billion earmarked for AM&

Table 3: SAIL - INVESTMENT PROGRAM, 1987

Cost percapacity Capacity- Tonne of

Total Related AdditionalPlant Before After Investment Investment Capacity

(Million Tonnes) (Rs Million) (Rs Million) (Rs)

Bhilai 3.6 4.0 4,463 3,164 7,910Bokaro 3.6 4.0 3,314 3,171 7,928Durgapur 1.0 1.6 13,573 7,923 13,205Rourkela 1.0 1.9 15,998 14,593 16,214IISCO 0.5 2.2 29,280 23,040 13,964

Total/Avg. 9.7 13.7 66,628 53,197 13,468

Source: SAIL

projects intended to maintain existing capacity of the five plants, and formining, infrastructure and environmental projects that will not directly addto steel-making capacity. The balance of Rs 53.2 billion is to be spent ontechnological modernization and upgradation investments, typically includingreplacement of obsolete open-hearth furnaces by basic oxygen furnaces, theintroduction of continuous casting technology, improved raw material handlingand preparation systems, the modernization of rolling mills, and complemen-tary balancing investments in sinter plants, blast furnaces, coke ovenbatteries, etc. These will have the effect of debottlenecking plants,

ANNEX 5Page 8 of 9

increasing effective capacity through increased yields, raising qualitystandards to meet increasingly stringent customer requirements, and loweringoperational unit costs, both variable and fixed.

14. These investment plans are at varying stages of progress. Detailedfeasibility needs to be established for the IISCO proposal, and the Rourkelaproposal has not yet been approved by the Cabinet. The Durgapur proposal hasrecently been approved and is going forward, while the Bhilai and Bokaroprojects are still under preparation.

15. In addition to the plant-based investment programs, SAIL needs toimprove the marketing and distribution systems. SAIL's stockyards are cur-rently a bottleneck, hampered by lack of rail facilities, and of properunloading and handling equipment. This means that SAIL's customers are nowpoorly served by the distribution system, which does not physically deliverto the customer what he wants, when he wants it; moreover, poor handling intransit not infrequently causes damage to the goods. In addition to beingpoorly served by the physical distribution system, the Government's alloca-tion policy means that customers who need the steel and are willing to payfor it at the asking or even higher price, must often go without, while"priority" users do not always lift their allotment. In both allocationaland physical terms, therefore, the system of marketing and distribution needsto be revamped.

16. To complement its hardware investments, SAIL plans also to makeinvestments in comunnications and automation technology to improve systems of

planning, information, and control. The marketing network will improve itsperformance with the availability of a satellite co-munication network,SAILNET, which would allow all of SAIL's stockyards to be linked.Comp'iterized systems of sales order entry could be linked also to productionplanning in the plants, and in turn to the systems for the despatch offinished product. It is planned also to introduce systems of automatedprocess control within plants, as a means of improving operational efficiencyprimarily in the coke oven batteries and blast furnaces. With the assistanceof UNDP, SAIL is also introducing a computerized maintenance managementsystem, starting with the Rourkela plant (1989), and later extending it tothe other plants (1995).

17. SAIL intends to carry out its investment program without budgetarysupport from the Government, relying instead on internal resource generation,and independent borrowings from domestic and external sources. Internal cashgeneration is now of the order of Rs 5-6 billion per annum, meaning that ifSAIL's investment program were to be completely internally financed, and ifcurrent performance is maintained or improved, it would require in the orderof 6-8 years, which is roughly the implementation period contemplated.

18. On the human resource side, the prime concern is to improve workculture, discipline, and operational and maintenance practices. Based on

ANlEX SPage 9 of 9

operational performance over the past two to three years, some success inthis effort is already apparent (para. 9). Labor productivity has remainedmore or less stagnant at 50 tonnes of crude steel per man year. The newtechnologies which will be inducted as part of the investment in hardware,along with increased levels cf automation, will require reduced levels ofmanpower. The skill level and the technological discipline of the work forcewill have to be improved to match the increased level and quality ofoperations. SAIL has developed a manp3wer plan which uses natural attrition,a voluntary retirement scheme, and a program of training/retraining andredeployment to attain the required level, age and skill mix.

SAIL TA COMPONENT DETAILS

Toble 1: IMPLEMENTATION SCHEDULE

1 1988 l 1989 1 1990 1 1991 l 1992Component IJFMAMJJASONDIJFMAMJJASOND JFMAMJJASOND IJFMAMJJASOND IJFMAMJJASONDI

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Operational Phase

Note: Consultancy activity continues in general into tho Equipmentphases.

Source: SAIL and staff estimates.

7

SAIL TA COMPONENT DETAILS

Toble 2s ALLOCATION OF THE IBRD LOAN AND JAPAN GRANT COMBINED,DY CATEGORY AND COMPONENT

(USS Million)

Project Component

Catogory 1 2 4 4 5 U Total Share

TA Cons. Expensos 2.6 4.3 0.7 2.1 1.5 11.1 22TA Training Expenses 4.1 4.1 8TA Related Equipmnt 19.5 6.0 8.2 33.7 68Unallocated 1.1 1.1 2

Total 2.6 23.8 10.6 10.3 1.5 1.1 50.0 100ShareC ) 5 48 22 20 3 2 100

KeY:

No. Component1 Corporate Planning and Productivity Study2 Environmental Management Study3 Training4 Market and Distribution StudiesS Tochnology Upgrodat ion *t ASPU Unallocated

Sources SAIL. and staff estimates

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0o, | 4 '

'-*-J-- l RailroodsCochin

rJLOMETER0S 10r 200 300 400 SW KERALA/ 0 Towns and Cities

I E)| i \ 9 / - (3 State and Union Territory Capitals

miles ll 21~ 3~0 Trivondrum@ nSR National Capital

SRI Sfoe/ Sote ond Union Territory Bourndories

LANKA - I- Internotional Boundaries

,_ _'. I V orOJ.g7 b.,c.. g' _0'' - .o a.V. oe - to_bW OUn Wo wale consilerartos som arers cold ,-otc~w~ao. no w ~--wt *-a'_ 00.. c a. 'a~ -_ he ibncluded iicldni. the mop: tw Jo ony anfoinfm ox

ihat mly opply to ech w5os.0 W' d a a.,a.c. a, .. f.OO-.so..Ot0bt

70' 0 9_

FEBRUARY 1988

Documents

FOR OFFICIAL USE ONLY A2 z9 z ,/A - The World Bank OFFICIAL USE ONLY A2 z9 z ,/A ... A. Industrial Development Bank of India ... Terms s The proposed loans would be made at the Bank's