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ICICI: Betting on the finance revolution - Views on News from Equitymaster
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  • May 19, 2001

    ICICI: Betting on the finance revolution

    Founded in 1955 by the World Bank, government of India and representatives of private industry, ICICI, today, is one of India's largest premier financial institutions. Starting from medium-term and long term project financing for the manufacturing sector, the institution has diversified into the more profitable areas of short-term corporate finance, infrastructure finance and consumer finance.

    The liberalisation of the Indian economy in the 1990s offered an opportunity to ICICI to provide a wider range of financial services. It has set up specialised subsidiaries in the areas of commercial banking, investment banking, non-banking finance, broking, venture capital financing and state-level infrastructure financing.

    ICICI's loan portfolio was tilted in favour of manufacturing (project) finance for a long period of time. Over the years the institution carried out a major shift in its portfolio composition with corporate finance (most of them is for working capital) and retail accounting for 43% of the total outstanding loans in FY01 (compared to just 27% in the previous year). Consequently, the share of manufacturing finance dropped to 36% from 41% in the previous year. Not only this. But 89% of its total disbursements are now 'A' rated, indicating an improvement in the quality of asset portfolio. It is the first domestic financial institution to get a financial strength rating by Moody's.

    ICICI's net interest margins (2.2%) are however under pressure with a shift in focus from project funding to higher quality corporate lending business. Project finance, which was earlier the forte of the institution has generally long duration period (5 to 7 years) and carries a relatively high degree of risk and high returns. However, in the last three years, an increasing proportion of lending was directed towards medium-term corporate finance. The implication of this is that the risks are lower, but so also are the returns.

    But the mission of ICICI was not over by increasing the proportion of corporate financing. The institution is persisting towards achieving universal banking, to have a presence in every dimension of financial service. Given the disappearing boundaries in the financial sector today, universal banking offers good long-term growth opportunity to ICICI. Its recent entry into retail loans, asset management, housing finance, personal finance and life insurance only confirms its aim to become a 'Universal Bank'.

    During the year ICICI consolidated its position in the growing retail market. The share of retail disbursement increased to 11% in FY01 (from 3% last year) and contributed 16% in total loan growth. It has gained market share in auto loans and home loans, expanding its customer base and asset portfolio. ICICI now provides auto loans in 70 cities and home loans in 51 cities. (Auto loans account for 72% of total retail loan portfolio.) Its newly launched insurance business also received encouraging response. ICICI has sold over 6,000 policies till March '01 and hopes to sell over 0.1 million policies by end of the current fiscal year. With access to a customer base of over 7.4 million (including 3 million customer accounts of ICICI Bank) and wide product portfolio, these new growth avenues has the great potential of expanding the revenue base in the coming years.

    Nevertheless, 2001 was a challenging year for ICICI. The highlight of the year was the manner and quantum of provision for non-performing assets (NPAs) provided by it. During the year, ICICI reported a drop of 56% in profits as a result of increased reserve coverage on non-performing assets (Rs 8.1 billion additional provision). ICICI's clean up effort has paid off in reducing the net non-performing loans to 5.2% from 7.6% in the previous financial year. Interestingly gross NPAs of the institution declined by 0.5% in the year, the first time in the last five years. The declining trend, to an extent suggests that the worst seems to be over for its bad loans problem.

    Incremental NPAs slowing down
    (Rs billion) FY97 FY98 FY99 FY00 FY01
    Gross NPLs 28.2 42.1 54.9 60.2 59.9
    % increase 48.0% 49.3% 30.3% 9.6% -0.5%
    Net NPLs 19.5 28.1 37.3 39.6 29.8
    % increase 63.0% 43.9% 32.8% 6.1% -24.7%

    Over the past few years' investor confidence has been shaken due to the high NPAs of the institution. As a result, ICICI has proposed to accelerate provisions against NPAs to 50.2% in next 3 years, a time frame that is quicker than the RBI's guidelines of five and a half-years. With the reduction in the level of NPAs and consolidation of subsidiaries, ICICI will now be able to venture into non-life insurance business, which presents an immense growth potential.

    Although the company is seeking to chart a safe path by steadily improving its operating performance and enhancing loan-loss coverage its past continues to haunt it. Textiles, man made fibres, steel and chemical industries top the list of non-performing loans (accounting for 45% of total NPAs). More discouraging is the fact that in value terms these loans amount to Rs 13.3 billion forming about 16% of its networth. In the current year ICICI's business has shown signs of improvement in the risk profile. But with economic and industrial activity weakening and corporates likely to be under pressure, risk associated with ICICI's loans is still high.

    Financial revolution in India is in the initial stages. ICICI is virtually taking the right steps to become a one stop financial shop to ride on the boom that lies ahead. A gradual reduction in the NPA level clearly indicates ICICI's determination to achieve global standards. It will also help the institution in improving its image and enhance shareholder value.



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