Corporate: Battered, But On The Mend

A mountain of bad loans and shrinking profits have put IFCI in a tight spot . To survive, it needs to restructure ownership-fast.

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At the Industrial Finance Corporation of India's (IFCI) headquarters in Delhi, the story goes that none of its chairmen has ever seen the inside of ICRA-a credit rating agency in which IFCI holds 26 per cent equity. Apparently, the Chinese Wall ensures the independent functioning of ICRA.

But now times are such that IFCI's current Chairman and Managing Director, P.V. Narasimham, 58, may be forgiven if he gives in to the temptation of breaking the age-honoured rule. The provocation? ICRA has just downgraded IFCI's long-and medium-term ratings from LAA+ and MAA+ to LAA- and MAA-, respectively. That makes it the second downgrade in the last 13 months. Earlier, IFCI's bonds were downgraded from AAA to AA+. Says P.K. Choudhury, 53, Managing Director, ICRA: ''There is great pressure on the yields of IFCI due to competitive reasons.''

Choudhury's is an understatement. Things are downright alarming at the 52-year-old, one-time financial powerhouse, the oldest development financial institution, and till date the only one in North India. Its non-performing assets (NPAs) are mounting, burning a hole in its bottomline, and forcing it to make higher provision for bad debt. There has been a drop in interest spreads due to low yields and historically high cost of funds. As a result, IFCI's reserves are drying up. It has a capital adequacy ratio (CAR) of 8.8 per cent, making it the first public financial institution to report a car below the Reserve Bank of India's stipulated 9 per cent. So, the big question is whether IFCI can survive in its present form.

Sitting in his tennis court-sized 18th-floor office in New Delhi's glistening IFCI Towers, Narasimham gives the impression of a man on the move. Deeply religious, he seems keen to clean up the dirt that was swept under the carpet all these years. IFCI's critics say that it is teetering on the edge. But Narasimham-who was brought in two years ago for the no-nonsense reputation he acquired during his stint with the Industrial Development Bank of India (IDBI)-says it is far from true. He asserts: ''As I see it, things will only get better and better.''

At the moment, it sounds more like a matter of faith than fact. IFCI's balance-sheet paints a grim picture. At 20.8 per cent of Rs 20,000 -crore assets for the last fiscal, IFCI's NPA-levels are alarmingly high. Sure, the current figure is a marginal improvement over 1998-99's 21.4 per cent. But it is still higher than IDBI's 13.5 per cent and ICICI's 11.5 per cent. ''They need to improve the quality of their clients,'' says an executive of a rival financial institution.

Part of IFCI's NPA problem is historical. In the early 1990s, the institution raised funds at relatively high rates of interest. Within a few years of doing so, a benign monetary policy pushed interest rates down by as much as 200 basis points. While IFCI had to lend at the lower market rates, its cost of funds had already been fixed at the higher end.

What made matters worse was the fact that IFCI lent primarily to capital-intensive projects, and particularly to those in cement, steel, textiles, and chemical industries. The quasi-recession of the late 90s sent most of its projects into a spiral of cost- and time-overruns. Those that managed to go on-stream were plagued with problems of low capacity utilisation. In fact, the power sector-where IFCI had some of its biggest borrowers-is still struggling to sort out regulatory issues.

Says Mukul Gupta, 36, a financial services expert with Andersen Consulting: ''IFCI needs to tap the retail market to hedge risks and source funds cheaper.''

Besides, it needs to move towards universal banking by getting into areas like insurance and asset-management to diversify its sources of income, stabilise its earning, and improve corporate image. Here it could take a leaf out of ICICI's book. The FI has been focusing on automobile loans, home loans, and consumer loans.

Narasimham is cracking the whip on NPAs. Last year, IFCI made a one-time settlement in as many as 160 cases, raking in Rs 432 crore. The year before it had netted Rs 600 crore. By the end of this financial year, he intends to lower the NPA-level to 15 per cent-about Rs 3,000 crore at current levels. Simultaneously, he is restructuring the debt of borrowers to help them repay. In the last two fiscals, debt worth Rs 668 crore has been reorganised by adjusting their repayment schedules.

Where the incumbent management of borrower firms proves inept, IFCI is seeking the ouster of senior managers. And those units beyond help could be put on the block, with the proceeds helping other ailing units of the borrower.

IFCI is restructuring some of its own debt too. In 1999-2000, it retired Rs 800 crore high-cost debt and borrowed Rs 3,170 crore at an average cost of 12.3 per cent. It also issued new preference shares worth Rs 20 crore for a tenure of two years, bearing an interest rate of 10.5 per cent. Besides, it has drawn up a comprehensive list of don'ts (See IFCI's 7 New commandments).

Narasimham's list of challenges doesn't end there, though. He has to perform the more arduous task of transforming IFCI from a bureaucratic and uninspired set-up into an aggressive, on-the-ball institution. No doubt, a large part of IFCI's malaise stems from the government's majority ownership of 51 per cent.

Narasimham admits that the government has a say in policy-making at the institution. But adds that it is in no way a disadvantage.

ICRA's Chaudhury, however, is unequivocal that for IFCI to turn around, the government must lower its stake to 26 per cent, as in the case of ICICI. But, with a little over a year to go before Narasimham retires, a turnaround of IFCI is probably not on the horizon he gets to see from his 18th-floor office.