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IDBI: Debt restructuring to benefit? - Views on News from Equitymaster
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  • Aug 21, 2001

    IDBI: Debt restructuring to benefit?

    IDBI, which is the largest development financial institution, had reported better than expected first quarter performance. The institutionís interest income grew by over 8% while profits before tax witnessed an astounding growth of 82%.

    For the first time in the past two years, IDBI's operating margins were above 20%. This could be attributed to the repayment of high cost debt and raising fresh funds at substantially lower interest rates. In FY01, IDBI repaid high cost debt amounting to Rs 39 bn and aims to repay further Rs 30 bn loans in the current year. With a retirement of high cost funds, IDBIís cost of rupee borrowing declined by over 93 basis points to 11.2% in FY01 from 12.4% in FY00. The primary reason for higher cost of funds is declining share of low cost deposits (4.8% in FY01 and 5.2% in FY00) and non-access to public deposits. The average maturity of loans at 3.9 years is also satisfactory considering the short tenure of the funds advanced by it.

    As part of this ongoing debt restructuring, IDBI is planning to exercise the call option on its deep discount Flexibonds 1992 issue (interest rate of about 16.2%). The bond was originally issued for 25 years tenure, with a put and call option after every five years. The decision of the institution has come in the wake of softer interest rate scenario. IDBI could now raise fresh funds by about 500 basis points lower than the earlier 16% debt. This is also supported by its lower lending rates at 12.5%.

    The strategies of the institution seem to be going on the right track.

    On the loan disbursement part, IDBI is following cautious policies. In FY01, IDBIís total disbursements at Rs 175 bn grew marginally by 2.6%. This was largely due to a drop of 18% in project finance loans. The institution is now concentrating on short term lending, which will help it improve asset liability management (ALM). As seen from the table, a remarkable 22% growth in non-project finance was supported by over 100% growth in investments of the institution. It is also lending aggressively for working capital requirements of the corporates.

    Break-up of disbursements
    (Rs bn) FY00 FY01 Change
    Project finance 68 55 -18.0%
    Non-project finance 87 106 22.6%
    Working capital loans 38 44 16.2%
    Investments 15 32 119.5%

    Nevertheless, top 5 credit exposures of IDBI accounts for over 43% of its total loan portfolio. Out of this, excluding refineries and oil exploration segment, almost all the manufacturing industries have failed to show good performance. This would only lead to acceleration in non-performing assets (NPAs). Already the contribution to NPAs from cotton textiles and steel industry together is about 23%. IDBIís gross NPA ratio of 18.5% (Rs 109 bn in value terms) is a factor of concern not ignoring the fact of the current restructuring happening in the institution. Its net NPA ratio of 14.2% is also the highest amongst the financial institutions and banks. This is due to the fact that IDBIís provision coverage at 23% is much lower compared to 50% of ICICI and over 50% for most public sector banks. IDBI has also not made any provision for assets restructured amounting to Rs 63 bn. Inability of the institution to recover its loans and clean up the accounts has weakened its financials in the last two years. IDBI has however, initiated steps by making provision of Rs 2.6 bn towards NPAs in the first quarter results.

    Credit exposure to top 5 sectors
    Credit exposure IIP growth rates
    Industries as a % to total loans 1QFY02 FY01
    Steel 13.3% -0.8% 7.5%
    Electricity generation 10.8% 2.8% 4.0%
    Cotton textiles 9.4% 0.4% 4.4%
    Fertilisers 5.2% 4.3% 3.3%
    Refineries and oil exp. 4.8% 9.6% 6.2%
    Total 43.5%

    Also focusing on fee-based income could help it to minimize the losses from lending to fund based loans. IDBI has, therefore, initiated measures in this direction and set up M&A department to generate income by providing consultancy for both buyers and sellers of industrial units.

    At the current market price of Rs 17 IDBI is trading at a P/E of 6x its 1QFY02 annualised earnings. Its Price/Book value ratio of 0.2x is indicative of its deteriorating financial health. Also, the institution's investment (direct or through loans) in K-10 companies has affected its image and consequently valuations.



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