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IFCI bailout: Vicious chain - Views on News from Equitymaster
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  • Aug 9, 2001

    IFCI bailout: Vicious chain

    To save the sinking financial institution, IFCI, the government has already cleared a bailout package of Rs 10 bn. Out of this, the government will put in Rs 4 bn. IDBI is one of the institutions, which has been asked to infuse the proportionate amount of the balance Rs 6 bn. This will solve the liquidity problem for IFCI by improvement in the capital adequacy ratio (CAR).

    The exact proportion that each institutional shareholder of IFCI will be required to infuse is yet to be finalised. However, IDBI’s shareholders are not convinced about such large infusion of funds into IFCI. This is due to the fact that returns from such investments will be on the lower side considering that IFCI is likely to take over 3-4 years before it starts making profits. IDBI has already expressed its inability to spare the large amount that it would be required to shell out. Earlier also, the institution had come to the rescue of IFCI by subscribing its rights issue worth Rs 1 bn.

    IDBI’s financial health is also deteriorating. Its capital adequacy ratio stood at 15.8% as on March ’01. The institution’s net non-performing assets at Rs 83 bn, is however mounting up every year (net NPA ratio at 14.8%). The figure of net NPAs is over 90% of networth. If we consider the gross NPA of Rs 109 bn, it will wipe out the entire networth.

    IDBI has already discussed the possibility of a future requirement of long-term funds from the government with the MoF. This is to augment its CAR (if it were to increase the provisioning coverage). The rating agency Crisil has already downgraded IDBI’s rating due to mounting NPAs, which will affect its CAR. International rating agency Moody’s has also changed the foreign currency debt ratings of IDBI to stable from positive. The recent change in ratings by both domestic and international rating agencies is likely to create a tough environment for IDBI to raise funds at lower cost.

    As a result, the government is planning to involve SBI to fill in the shortfall that would be created on lower contribution by IDBI. If this happens, then it will be SBI’s second bailout package in recent times (remember UTI bailout). IDBI is the principal shareholder in IFCI with an equity holding of Rs 2 bn for a 31.7% stake. Among the others, UTI and SBI hold 4.5% and 2.1% respectively. Insurance companies are the other major stakeholders in IFCI.

    Thus to revive two institutions: one is India’s largest mutual fund and the other is one of the largest financial institutions, the government is creating a vicious chain. Involvement of India’s largest public sector bank (PSB), SBI, is the addition to this chain. The financial health of other PSBs could come under trouble if the chain is extended further. With the industrial activity in the country slowing down, asset quality of these institutions and banks are likely to come under pressure. The non-performing assets are going only up, as recovery of dues from the textile, steel and chemical (largest contributors to total NPAs) seem difficult considering the slowing economy.

    Agreed that the bailout of IFCI is crucial for the Indian financial system. But the government should make sure that such bailouts do not become a regular feature. If bailouts happen time and again then it will ultimately pressurize government’s financial health, which is anyway suffering from lethargy. A proper credit appraisal and reporting system between the apex bank and lending institutions could be one of the options. Is Delhi listening?



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