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IFCI: Dodo or Phoenix?

Manas Chakravarty and Tamal Bandyopadhyay

These days, the IFCI (formerly Industrial Finance Corporation of India) offices around the country have started handing out snazzy new brochures on corporate advisory services.

The bright little booklet invites companies to avail of IFCI's expertise in project advisory services, credit syndication, placement of debt and equity. It also offers advice to regulatory agencies and even legal advisory services. Clearly, IFCI is desperately seeking to re-invent itself.

For good reason. The institution's financial performance for 2001-02 says it all. During the year, while income from operations was Rs 17.12 billion, the cost of borrowing amounted to Rs 18.16 billion.

That implies IFCI will have to borrow to meet its interest expenses - hardly a solution considering its non-investment grade rating.

High borrowing expenses are one reason for the institution's operating loss, the other reason, of course, being the huge burden of its non-performing assets.

Chairman V P Singh says that IFCI owes banks and financial institutions around Rs 70 billion, raised at rates of interest ranging between 12.5 and 17.5 per cent.

While some of the high interest loans have call options, IFCI doesn't have the money to repay them. That's why the IFCI chairman is seeking a restructuring of its debt, just like many of his institution's own distressed borrowers.

"If corporates can avail of debt restructuring, why can't IFCI?" says Singh, unmindful of the irony that he, a term lender, is now sitting, cap in hand, on the other side of the table. Singh wants banks and financial institutions to help by prolonging the maturity profile of their loans, by reducing interest rates and converting part of the debt into equity."

"Why should IFCI pay 17 per cent, when banks can earn only 9 per cent on their loans at present, or even less if they park the funds in government securities?" asks Singh.

Talks are on for restructuring the debt. In the interim, IFCI has been frantically searching for resources, and has been selling off its assets. It sold Rs 6.25 billion worth of assets last year, and Singh wants to sell another Rs 20 billion this year. He also wants banks and financial institutions to take over Rs 50 billion worth of loans disbursed by IFCI in consortium lending.

Last year, IFCI managed to repay Rs 50 billion worth of liabilities, aided by fresh borrowings. But meeting this year's liabilities of about Rs 45 billion poses a challenge.

Singh's immediate headache is to redeem $100 million worth of floating rate notes due to mature in August. IFCI has started negotiating with a string of banks to sell its forex assets to generate liquidity and redeem the FRN.

But asset sales and recoveries of non-performing loans are not going to be enough. The once-proud financial institution's net non-performing assets are a staggering 22 per cent, while stress assets are estimated to account for another 20 per cent of its portfolio.

Its capital adequacy ratio, as at end-March 2001, was a meagre 6.2 per cent against the stipulated 9 per cent, thereby inhibiting lending. It doesn't have the resources for more lending, nor the ability to raise resources at competitive rates. Long-term solutions need to be found, and quickly.

But how did IFCI get into this mess? The D Basu expert committee pointed out that, immediately following its corporatisation and initial public offering in 1993, IFCI embarked on a programme of rapid expansion, taking up large exposures in greenfield projects.

Former IFCI Chairman K D Agarwal led the show. Their financing was often done on the basis of short-term loans. When the projects suffered from cost and time overruns, a maturity mismatch developed, and IFCI had no option but to refinance its borrowings at higher interest costs.

At the same time, the Reserve Bank of India introduced stricter norms for classifying NPAs, and many of these advances became bad loans. As these problems developed, the then IFCI chairman P V Narasimham decided to bare all, making huge provisions to meet the NPA problem.

That led to a further decline in resources. Rating agencies became alarmed, downgrading the institution and constraining its ability to raise fresh resources.

Starved of funds, it couldn't make new loans. Its cash flow dried up, and a liquidity crisis hit the institution. And as any financial analyst will tell you, a liquidity crisis for a financial company is the kiss of death. Insolvency is merely a step away.

But the adverse conditions affected the other development finance institutions as well, especially since many of IFCI's adventurous loans had been given together with a consortium of other banks and financial institutions. Why, then, was IFCI so badly affected?

"Our balance sheet size is much smaller than the other institutions," points out Singh. "Also, our portfolio is heavily weighted towards traditional sectors such as textiles, sugar and chemicals. These suffered the most after the economy was opened up."

Moreover, unlike other institutions, IFCI hadn't diversified into short-term loans and other businesses.

Thankfully, there has been no dearth of solutions. The Basu committee proposed an immediate infusion of Rs 4 billion by the government, through convertible 20-year bonds. That would count as Tier-1 capital.

It also recommended fundamental restructuring of IFCI, moving away from project finance into other areas, such as short-term financing, fee-based services and corporate advisory services. It recommended the setting up of a dedicated recovery unit at IFCI and an Asset Reconstruction Corporation.

More recently, McKinsey proposed that IFCI should be divided into two companies: one with good assets and the other with bad assets. The company with the good assets would focus on financing mid-size companies and IPO management, syndication, project finance, receivable financing, mergers and acquisitions, and other fee-based activities.

The asset reconstruction company (already set up with a capital of Rs 200 million), will take care of the bad assets. Singh has already initiated discussions with private players, including foreign companies, who are interested in taking up stakes in the ARC, or in floating a separate special purpose vehicle for taking over distressed assets. "We have had a positive reaction to our proposals," says Singh.

But the big question - one that editorial-writers have never tired of asking - is a simple one: is it necessary to restructure IFCI? Why not wind it up instead? V P Singh takes that question squarely on the chin.

"The question of winding up IFCI doesn't arise," he says firmly, "The government will, sooner or later, have to pump in the resources." That's because even if the government decides to let IFCI die a natural death, it has no alternative to picking up the tab for some of its liabilities.

"These include a statutory liquidity ratio liability of Rs 30 billion and Rs 55 billion worth of funds parked by provident funds in IFCI. Furthermore, it has no alternative to meeting repayments of IFCI's foreign borrowings, because that is treated by lenders as quasi-sovereign debt. The repercussions of default will be felt by the entire country. So another Rs 8 billion worth of loans from multilateral agencies will also have to be met."

Even if the government decides that it has no obligation towards IFCI's large number of retail bondholders, it will have no alternative to shelling out at least Rs 90 billion towards meeting liabilities.

"We'll need much less for recapitalisation," points out Singh. Rating agency Moody's Investor Services has retained IFCI's foreign currency debt rating at the sovereign ceiling of Ba2, pointing out that it reflects "a high likelihood that government support will prevent investor losses on the institution's foreign currency obligations". Ominously, it says that, "The same cannot be said of its rupee obligations."

If winding up is ruled out, what is the way out? Both the Basu committee and McKinsey's recommendations imply a recapitalisation. Singh is mum on the extent of the hole in IFCI's books, merely saying that that would depend on how much is recoverable.

If IFCI is to survive, it will have to be bailed out - either by the government or by its stakeholders. But when V P Singh was asked whether he had any regrets in taking up the hot seat at IFCI, he had only one comment: "I expected more cooperation from our stakeholders."

The crux of the problem, however, is the government. IFCI's so-called privatisation is a sham - government-owned institutions hold the majority of its shares. The government is in the driver's seat.

Yet when it comes to taking a decision to pump in resources, or to advise its lenders to restructure its debts, the government has been strangely non-committal. For example, while the Asian Development Bank has indicated a willingness to pick up a stake in IFCI, one of its conditions is true privatisation of the institution.

To date, however, the government has failed to respond either positively or negatively to the proposal. McKinsey and Singh had done the rounds of IDBI, LIC and SBI in an effort to ask them to take over the beleaguered IFCI, but were, understandably, met with a marked lack of enthusiasm.

"Given the state of IFCI's finances, nobody is going to stick his neck out to help the institution. What is required is a clear policy statement by the government, followed by a large infusion of capital. Only then will other institutions have the courage to act," says a senior term lender. In other words, the government needs to act - and act fast. With every passing day that the government dithers, IFCI's problems become more intractable.

Will IFCI survive its present ordeal? Singh points to the example of China Development Bank, an indispensable part of the Chinese government's programme for rapid development of infrastructure. More importantly, the IFCI scrip has shot up from Rs 2.65 in September last year to Rs 7.40 now. The stock market certainly seems to believe in IFCI's viability.

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