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IFCI bailed out by the government

Feb 23, 2000

Industrial Finance Corporation of India (IFCI) has been bailed out by the government by pumping in funds into the institution through a Rs 1.9 bn grant and a Rs 4 bn subscription to a 20 year preference share issue. IFCI, India's third largest financial institution is a specialised project finance institution promoted by the Government of India in 1948. While initially it was providing long term finance to corporates, it is currently providing even short and medium term loans. It also runs a financial services division which offers merchant banking, loan syndication and advisory services.

IDBI which holds a 28.8% stake in IFCI subscribed to the rights issue of IFCI at Rs 10 per share. However as the rights issue mopped up only 80% of the total targeted amount (Rs 3.5 bn), the remaining was met by the preference issue which was subscribed by the government to help IFCI increase its capital adequacy ratio to 9%.

IFCI has been bogged down by changes in management, high NPA's especially in the steel and textile sectors and low transparency levels. Inspite of these issues the government continues to pump in funds into IFCI. Despite the market reforms undertaken by the government it continues to also follow its socialist policies of supporting loss making and inefficient institutions and banks by using taxpayers money.

IFCI's NPAs stood at 21.5% as of March'99. Its highest NPAs are in the steel and textile segments. As the economy is improving these sectors could improve in the future, however an area of a concern for IFCI would be its lax lending policies and its not so serious attitude in recovering loans.

IFCI needs to be restructured to get it going to meet the increasing competition. Its asset quality needs to be improved as well as future lending policies need to be reviewed. On the restructuring front IDBI wants to undertake an independent study for restructuring the country's oldest institution IFCI. The restructuring would include all aspects of the revival of IFCI.

In a related news article the chairman of IDBI did not rule out the possibility of a merger between IFCI and IDBI. However IFCI does not seem very keen on this, despite the fact that IDBI has pumped in funds into the rights issue inspite of its high NPA's and low capital adequacy ratio. This being mainly because of the different market segments they target, IDBI focuses on large corporates and IFCI on small and medium scale companies. However there is no concrete basis for this merger yet.

Market View:
IFCI has been on the 'SELL' list of many analysts due to its high NPA's and the fact that there are better quality institutions in this sector.

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