Finance ministry officials openly admit that while on the one hand the dfis are plagued with mounting bad loans or non-performing assets (npas), on the other the capital adequacy levels have plummeted. Bad loans make an FI bleed—that's common knowledge, but when there is growth in terms of higher disbursals, the npa ulcers often tend to get suppressed. Says a senior industry official: "It is when growth stops that the bad investments loom large."
Last week, the top brass of the cash-strapped ifci had a closed-door meeting with the FM and his bureaucratic motley. ifci desperately needs about Rs 1,500 crore to tackle both repayments and redemption pressure. At the meeting, officials were forced to confess that they had a strong asset-liability mismatch—they had borrowed short-term and lent long-term. The pressure for funds is now so intense that ifci is keen to sell debentures to lic, idbi and ask bondholders to reinvest at slashed interest rates.
Industry sources admit the repayment crisis, though brewing for some time, was sparked after ifci called back privately placed bonds worth Rs 420 crore to reduce the 17 per cent interest rate burden. This, in turn, precipitated other redemptions and repayments that now stand at a staggering Rs 710 crore. Add to that the almost-certain downgrading by credit rating agencies icra and Moody's, which will add to the panic and heighten redemption pressure.
Any analysis of ifci's financials soon begins to sound like an autopsy. In the year 2000-2001, it ran up losses of Rs 265.93 crore. Between 1996-97 and 2000-01, it had a net cash inflow of only Rs 532.33 crore after providing dividends on its equity and preference shares. And of the total npas, the top 100 cases by size account for Rs 2,504 crore—13 per cent of net assets and 61 per cent of total npas.
IFCI has some government-guaranteed bonds, besides the unguaranteed ones. It has also borrowed from domestic and international markets. In any event, inability to service these loans or "re-negotiation" can precipitate a macro crisis.
With in-built structural and systemic flaws, legal loopholes, official languor which made readjusting to the fast-changing business realities impossible and overt and covert political pressure, the crash was inevitable. "The contamination of the portfolio and with it the increasing vulnerability are direct consequences of all top brass being political appointees. The boards of directors in all these institutions are inter-related just like a clique," confesses an ifci insider. Such direct string-pulling have, in effect, made them organs of directed lending by government, and, consequently by political authorities.
Even IDBI acting chairman, S.K. Chakrabarti (the government is yet to make up its mind on who to appoint as chairman) admits that the dfi is suffering from a serious identity crisis. Recently, the rbi cautioned idbi after it was reported that its gross npas at Rs 10,875 crore (in 2001) had wiped out its entire net worth of Rs 9,126 crore. The dfi has written off Rs 500 crore as lost assets, and other assets aggregating Rs 6,285 crore have been restructured and rescheduled. But, says a former idbi director, this is only another attempt at beating about the bush."These are assets where the chances of recovery are extremely low and yet, no provisions have been made against them," he says.
Describing IDBI as a classic case of wealth destruction, the director, who spoke on conditions of anonymity, says that idbi's fee-based income, an indicator of its knowledge resources, was less than 3 per cent of its net profit. Besides, return on average assets were less than one per cent and net profit per employee was a meagre Rs 23 lakh. As a result, return on net worth of idbi dwindled to a lowly 7.3 per cent in 2000-1 from 20 per cent in 1997-98. Worse, to earn a net profit of Rs 156 crore (excluding capital gains of Rs 535 crore), idbi required a large contingent of nine executive directors, more than 24 general managers and a staff strength of 3,200 employees (out of which, almost 55 per cent are Class III and IV staff) in 50 offices across the country.
What is even more shocking is that the dfi—in the last five years—has appointed no less than five reputed management consultants to draw up restructuring plans. As for the investors who paid Rs 130 per share in idbi's ipo in June 1995, they have never seen the stock quoting at that price. For the last two years, the scrip has stagnated at around Rs 25—80 per cent below the issue price.
Although apprehensions over the future of ifci and idbi abound, experts feel the former has been a case of deliberate mismanagement. Few argue against the fact that a substantial portion of the loans sanctioned and disbursed from ifci has been to further personal interests of its senior officials. Indeed, a former ifci chairman was referred to inside the organisation as Mr 3 per cent for his penchant for kickbacks.
IDBI, that way, has been a tad lucky and it appears its real problems may surface a little later. Says a senior industry source: "Its bane is a lack of leadership, low growth and morale among officials." Consequently, its portfolio has not been handled well and there has been little effort at damage-control.
"Look at the huge investments in steel companies (idbi's current exposure is over Rs 12,000 crore), sugar and textile cooperatives, chemicals (cumulative idbi exposure stands at over Rs 600 crore). How can you continue investing in companies like Flex Industries, MS Shoes, svc Superchem, Malavika Steel, Padmini Polymers or Mesco Group? And frankly, in how many cases did the production even begin?" the former idbi director told Outlook.
Crooked entrepreneurs have also colluded with officials to take full advantage of weak bankruptcy laws. According to the finance ministry, the number of companies in the portfolios of idbi and ifci, and even icici, that were referred to bifr, stood at a whopping 430 at the beginning of 1996-97. Then, 77 more companies fell sick with loans outstanding of Rs 2,500 crore the same year. The figure now stands at a whopping Rs 7,000 crore, with 520 companies under the bifr umbrella.
What should the government do now? "I agree idbi and ifci are in a mess but with each crisis, you cannot dismantle the board and sack the chairman," says Jaimini Bhagwati, deputy secretary (capital markets), ministry of finance and the North Block nominee on the uti board. But what if ifci defaults on its payments, as is very likely? How many FIs can the government keep bailing out? And why should taxpayers pay for the crises brought on by corruption and incompetence? The only long-term solution can be to drastically downsize their operations, sell off their real estate (the only thing idbi and ifci have excelled in is building plush offices and residences for its executives at prime locations all over India), and finally privatise them.
Yashwant Sinha's headaches simply refuse to go away.
And Arijit Barman with Vatsala Kamath in Chennai
