IDBI, one of the largest financial institutions in India, reported a 27% drop in earnings in FY01. The institution’s financial health is deteriorating and the business is facing strong competition.
Sighting the dwindling financials of IDBI, Crisil has recently downgraded its bonds and certificate of deposits programme to ‘AA’ (high safety) from ‘AAA’ (highest safety). Deterioration in the asset quality, continuous decline in profitability and contraction in spreads is reflected in its downward rating. Although, IDBI has initiated steps to improve asset quality by emphasizing on restructuring to arrest further slippage in asset quality, it still has not come out of the trouble.
Since its formation in 1964, IDBI has focused on long term project lending. IDBI's developmental activities have included a range of promotional services to build an institutional structure for entrepreneurship development, credit delivery and capital market development. Steel, electricity generation and textile industry formed major part of its advances. With a downturn in the industrial cycle IDBI failed to recover its dues from these industries resulting in a substantial rise in non-performing assets. As on March 2000, IDBI had Rs 9.7 bn of NPAs from the cotton textile sector alone. Considering the current scenario of decline in industrial output, it seems unlikely that IDBI would recover this amount in the short term.
Sliding asset quality
Top 5 NPAs as on March '00
% to total
IDBI’s current ‘AA’ rating is based on its strong market position in the wholesale lending segment and comfortable liquidity position. IDBI was on one of the first institutions to come out with Deep Discount Bonds in 1992 for the retail market. IDBI came out with its first flexi bonds in FY96 with different maturity periods ranging from 4 years to 35 years. Its latest (10th) bond issue was in FY01. Total funds raised by IDBI stood at Rs 572 bn as on March ’00. Change in rating would negatively impact its deposit programme in the current year, indicating difficult time for the institution to raise money either from domestic or overseas markets.
A downgrade in rating by Crisil will further shake the confidence of small investors who are already suffering from the US-64 fiasco.
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