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IFCI: Bleak outlook

Aug 30, 2001

IFCI, India's third largest financial institution is financially weak due to its over-exposure to the green-field project finance. The segment contributes over 90% of the total loans disbursed by it. As per the table below, steel and textile segment accounted for 25% of the institution’s loan disbursements in FY01. The net outstanding from these two sector stands at 37%. Being commodity sectors, their performance is highly related to the economic and industrial activity. During the period April-July ’01, the industrial growth was a mere 2.7% as against 4.3% recorded in the same period last year.

Top 5 disbursements
Industries FY01
Power generation 27%
Steel 15%
Textiles 10%
Petroleum refining 7%
Basic chemicals 4%
Total 63%

If the weakness in the economy continues, it would be reflected in the financial performance of the commodity companies. This would in turn further impact the asset quality of IFCI, resulting in an increase in non-performing assets (NPAs). The institution’s loan portfolio is already weak with exposure to 387 sick units registered with BIFR (total outstanding credit of Rs 15 bn).

IFCI’s net NPA to advance ratio at 21% is the highest among the financial entities. This is primarily due to low NPA coverage ratio of 4%, which is much below the norms set by the RBI (FIs are required to achieve the NPA coverage ratio of 35% in the next three years). IFCI’s disclosure level is also not good, as its balance sheet does not provide the break-up of NPAs sector wise.

The institution has violated the risk management norms set by the RBI. It has lent to a company exceeding the maximum individual borrowing norm of Rs 1 bn. As per the RBI norms, lending to individual borrower and a group as percentage of capital funds should not exceed 15% and 30% respectively. IFCI has already exceeded this limit, as these ratios stands at 126% and 201% respectively as on March ‘01.

IFCI has appointed the expert committee to prepare future business plans in order to minimize the risk from high exposure to project finance and bring down the level of NPAs. It has decided to sanction 50% of the total loan amount for short-term projects having duration of 3-5 years. It would implement the aggressive NPA recovery plan by disposal of unproductive assets and restructuring debts & doubtful debts. This exercise is expected to reduce its NPAs ratio to around 15.2% in the next year.

But before the institution follows this road map, it requires enough capital to support the business plans. IFCI’s capital adequacy ratio has come down to 6.2% as on March ‘01, which is lower than minimum 9% norm set by the RBI. To shore up this ratio, the government has decided to infuse additional capital to the tune of Rs 10 bn in the institution. With this support, IFCI would be able to meet its repayment obligations and can continue its business activity.

IFCI’s stock at Rs 3 is trading at its 3 year low (52 week high / low: Rs 9.7 / Rs 2.9). In order to clean up the balance sheet IFCI needs to increase the NPA coverage ratio, which is expected to depress its bottomline for the next few years. The stock price would also reflect similar movements.

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