ICICI bashing by RBI

The Reserve Bank of India in its inspection report for FY99, has pulled up ICICI Ltd for understating its non-performing assets, overstating its capital adequacy ratio, and also for reporting a higher net profit for FY99. There is a contention on other issues as well. ICICI is India's second largest financial institution, with a major presence in almost all areas of financial services. The company has an asset base of Rs 585 bn.

The main areas which RBI has pointed are:

• Gross and Net NPA figures were reported as 11.98% and 7.82% by ICICI in their FY99 results as against the RBI calculation of 15.79% and 11.65%.
• There were drawbacks in pre-sanction credit appraisals.
• Capital adequacy ratio (CAR) reported by ICICI in FY99 is 12.46%, however the calculation by RBI reveals a CAR of only 11.14%.
• Net profit and surplus carried to the balance sheet were higher by Rs 160 m and Rs 710 m in ICICI's FY99 results.
• There is a negative gap of 45% between assets and liabilities in the short term band of 3 to 6 months.

However ICICI countered these arguments by stating that for NPAs no additional provisions were required, the difference is due to long term nature of investments. Regarding the credit appraisal policies, ICICI stated that the differences were noticed and they have taken steps to improve on these. On CAR, ICICI's stance was that there is a difference due to interpretation of tax rates on income from government securities. On asset-liability mismatch ICICI claims that their assets mature faster than there liabilities hence these are in a comfortable position.

Besides the above issues some other things pointed out by RBI to ICICI are: important reviews of NPAs, status of sick/BIFR cases were not put up to the board, periodicity for conducting internal audit of zonal offices and various business units was not maintained in FY99, limits were sanctioned without ensuring whether promoters had tied up for finance requirements by other methods. There have also been instances where amounts disbursed by ICICI to group companies were utilised for paying off other outstanding liabilities of the group.

As per a letter send by RBI to ICICI pinpointing these differences, it has asked ICICI to discuss these issues at the board level. They have also recommended to take corrective action and has asked ICICI to rectify these errors by 31st March'2000.

This tough stance of RBI is required in the finance and banking sectors in India, especially as the public sector banks and institutions turn to be lax resulting in a deterioration in asset quality, indiscipline in credit appraisal policies and taking advantage of loop holes existing in the system. This will also set an example in future for others who do not follow the RBI rules correctly and result in a more prudent and efficient banking and finance system.

The government's recent decision of setting up of a credit information bureau is a step in the right direction as this would result in transparency in the sector and prevent such inefficiencies in the system as information on borrowers and lenders would be freely available.

Market View:
ICICI has been rated a 'BUY' by many analysts due to its restructuring, its high spends on technology and manpower which has helped it retain quality manpower and its aggressive retail expansion. However the reason that ICIICI has not been a favourite stock of fund managers is that they have always been concerned about ICICI's hidden NPAs.