IFCI, had reported a drop of 43% in its nine months earnings of FY01. Its financial health has taken a turn for the worse with rising non performing assets. On a revenue base of over Rs 21 bn, net margins of just 1.8% are very discouraging.
IFCI's operating margins continue to slide from over 24% in FY98 to just 10% now. This is largely due to high cost of funds and low growth in advances. The institution's sanctions and disbursements for the period April '00-Jan '01 fell by 38% and 42% respectively. On the other hand during the same period, sanctions and disbursements of the industry grew by over 10%.
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The level of NPAs at 21% of advances is the highest in IFCI compared to its peers in the industry. The major reason of climbing bad loans is the higher proportion of lending to co-operatives (20% of total loans). Till FY95, these co-operatives did not pay any interest but only principal. Also, it has high concentration in industries such as textile and sugar. Project finance to basic commodity sectors has marred the performance of the institution since the last few years. Steel and textiles sectors had experienced massive cost overruns and commodity prices were severely affected by international factors. IFCI failed to increase the proportion of non-project financing which is considered non-risky, although the margins are also low.
IFCI has recently appointed an expert committee to restructure its financial health and to resolve the problems of bad loans. The committee has projected a nearly ten fold increase in the financial institution's net profits to Rs 5.3 bn by the end of FY07 (from Rs 0.6 bn in FY00). The projections of the committee are however based on the assumptions that the government would lend to the institution an amount of Rs 4 bn to shore up its weak capital adequacy ratio (8.8% in FY00).
However, whether the projections of the committee would be met depends on IFCI's success in dealing with large amount of NPAs, raising low cost of funds and generating newer income streams. Looking at the current scenario it is likely to take over 3 years for the institution to strengthen its financial health.
At the current market price of Rs 5 IFCI is trading at a P/E of 6 times its 9 months annualised earnings. Its price to book value ratio of 0.2 times suggests the deteriorating health of the institution.
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