According to newspaper reports, the Industrial and Finance Corporation of India Ltd. (IFCI) has decided to limit group exposure limit to 30% (currently at 50%) and cap exposure to individual companies at 15% (currently at 25%). It has also decided to repay Rs 9 bn of high cost debt. The entire exercise is aimed at restructuring its asset liability portfolio.
IFCI is the third largest domestic financial institution offering services related to project finance. It also runs a financial services division which offers merchant banking, loan syndication and advisory services.
IFCI has already exceeded the RBI limit of 50% on group exposure in the case of Essar, Ispat and Usha Group, all of which are in vulnerable financial situations. If these groups were unable to recover from their existing plight, IFCI could face serious problems.
The decision to limit exposure at levels well below the limits specified by the Reserve Bank of India is a step in the right direction. This will prevent the financial institution from being exposed to large risks because of investments in a particular company/group, thus providing it with a hedge. Moreover, the decision to retire high cost debt will enable IFCI to earn larger spreads and at the same time offer loans at rates which are competitive with those offered by its peers.
The main concern facing IFCI is pertaining to the burgeoning level of non-performing assets (NPAs) in its books. The financial institution has however, initiated measures to clean its books and prevent a build up of NPAs in the future.
With signs of an economic recovery already evident, it is likely that a portion of the NPAs will get repaid, as companies start to generate profits. However, IFCI must take concrete measures to establish itself in a market, which is likely to become more competitive as time passes by.
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