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Untapped potential for growth... - Views on News from Equitymaster
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  • Jun 5, 2000

    Untapped potential for growth...

    The robust growth in national income witnessed over the last several years has dramatically lifted the prospects of the financial sector in India. The domestic financial institutions (FIs) have leaped onto the 'Universal Banking' bandwagon to capitalise on the boom that lies ahead.

    With the government initiating measures to liberalize the economy, the FIs have been facing more intensive competition. As a result of these measures the business environment has witnessed a significant change over these last several years. On the demand side, there has been a drying up of assured sources of long term funds from the Reserve Bank of India among others. On the other hand the competition for supply of funds has also increased with banks entering the domain of long term financing and FIs making a foray into disbursing short-term loans. This has resulted in the narrowing of spreads over the years.

    Another worrying factor for FIs is the increasing level of non-performing assets (NPAs). Among the FIs, ICICI has the best quality of assets as can be viewed from the table below. In the last few years, ICICI has been successful in reducing its NPAs as a proportion to its total loan portfolio by curtailing its loan exposures to the manufacturing sector. The performance of the other FIs in recent years has been marred by high operating cost of funds and low margins due to the considerable reduction in interest spreads.

    Net NPAs as % of loan portfolio
    Particulars 95-96 96-97 97-98 98-99
    ICICI 6.7 6.8 7.6 7.8
    IDBI 9.4 10.3 10.1 12
    IFCI - 14.9 14.4 21.4

    In the past one year, activity in the financial sector has perked up due to the economic and industrial recovery. In FY00, India's industrial growth (April - February) has been put at 7.9% as against 3.9% in the corresponding period in FY99. Also the increased disbursals by housing finance companies and the pick up in activity in the core sector has contributed to the furthering the growth.

    Loans sanctioned by All India Financial Institutions (including specialised FIs) during FY99 increased by 19.2% to Rs 90 bn and disbursement reflected a growth of 7.6% to Rs 55.8 bn YoY. On the other hand ICICI, a leading FI, witnessed a mind-boggling growth of 38% in its sanctions to Rs 34.2 bn and 21.6% growth in its disbursement to Rs 19.2 bn during the above period.

    Sanctions & Disbursements FY1999 (Rs in bn)
      Sanctions Disbursements
    Particulars Amount % share Amount % share
    ICICI 342.2 50.0% 192.2 50.0%
    IDBI 255.5 37.0% 144 38.0%
    IFCI 86.4 13.0% 47.4 12.0%
    Total 684.1   383.6  

    However the key concern is the increasing level of NPAs (in absolute terms) due to excessive exposure to sectors like steel, textiles and chemical. On the other hand increasing their loan exposure to sectors like telecommunication, agrochem and information technology will help FIs in reducing the level of NPAs. Thus FIs are likely to play a critical in the present financial set up from the viewpoint of financial and real sector development.

    The valuations clearly reflect the sharp divergence in business prospects of the FIs under study. ICICI enjoys the premium valuations among the FIs due to its unique brand, excellent YoY financial performance and transformation to Universal Banking concept. Also comparatively lower NPA levels, high capital adequacy ratio and higher interest spread gives it an edge over IDBI and IFCI.

    Comparative Valuations of Select FIs
    Particulars ICICI IDBI IFCI
    Market Price (Rs) 133.4 35.4 7.9
    Market Cap/Sales (x) 1.2 0.3 0.1
    P/E (x) 8.7 2.5 3.1



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