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Monday, Jul 19, 2004

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IDBI's generosity

Dinesh Narayanan

INDUSTRIAL Development Bank of India is a lucky lender. The development financial institution, which just redefined itself as a commercial bank, quietly wangled a budgetary support of Rs 9,575 crore — Rs 9,000 crore to neutralise the mounting non-performing assets (NPAs) and Rs 575 crore to bear some of its interest burden — for this fiscal year.

The cash-neutral support will virtually free the institution of its legacy of bad loans and perhaps give the borrowers a really long rope. A statistic in the latest Budget may help put the issue in perspective: The Government earned Rs 11,240 crore last year as dividends or surplus profits from the Reserve Bank of India, public sector banks and financial institutions put together.

This fiscal the Government expects to get only Rs 5,896 crore from them. It will spend more than 85 per cent of its last year's share of profits from all its financial companies to fund the bad loans of just one bank. Since the bulk of the money was borrowed by some of the biggest corporates in the country, the plan would effectively `defer' their liability to an as yet unspecified period.

The scheme would work something like this. A special purpose vehicle called the Stressed Assets Stabilisation Fund (SASF) will get Rs 9,000 crore which would be invested in non-interest bearing bonds to be issued by the Centre. The SASF will then take over IDBI's NPAs worth Rs 9,000 crore in exchange for the bonds, which would also qualify to be included in the bank's SLR holdings. The Budget document does not mention who would manage the SASF.

IDBI's current NPA level has not yet been made public as it has extended its financial year by six months to end in September. It has no obligation to declare it before that. On March 31, the net NPAs were Rs 7,330 crore, which means the higher allocation suggests an increase of about 23 per cent in the NPA level. A banking source said the institution has classified its exposure to Dabhol Power Company as an NPA after that date.

A foreign broking firm has, in an IDBI stock analysis this week, estimated that the bank's net NPA level would fall to 1.2 per cent after the SASF absorbs the stressed assets. The plan would likely create a pseudo asset reconstruction company without the obligation or mandate an ARC would ordinarily have.

Also, it is likely to buy the distressed assets at book value, something an ARC would never do. In short, the repayment of the loans would be postponed, in all likelihood, to a period equivalent to the maturity of the bonds that the Government would issue.

The largest NPAs were loans taken by iron and steel companies followed by cotton textile and foodstuffs sectors, according to a presentation of May 2003 put up on the bank's Web Site. Loans to iron and steel companies continue to lead the bad assets' list in spite of the industry making a stunning turnaround in the past year.

Whether this has changed the situation for IDBI is not known though the DPC loan would now perhaps qualify as its biggest NPA.

It is difficult to recover bad loans or even restructure them. In 2002, the Government let IDBI keep Rs 2,150 crore of long-term funds that were due for repayment for another 20 years. The largesse helped IDBI make an accelerated provision bringing down its net NPAs to 11.7 per cent of total assets. It also vowed to bring the NPA level down to below 5 per cent "over the next couple of years" by aggressively pursuing recoveries.

A team led by an executive director was asked to pursue errant borrowers. In November 2003, the bank and its co-lenders restructured loans worth about Rs 20,000 crore taken by three big steel companies on terms that some say were highly favourable to the latter. Despite all these efforts the net NPA level rose to 14.2 per cent of total assets by end March 2004. Some of IDBI's other large loans such as those given to Mukand and Essar Oil areunder revamp in the Corporate Debt Restructuring mechanism for the past year and half. Lenders and borrowers are yet to agree on a package.

IDBI is a promoter-shareholder in two ARCs — the Asset Reconstruction Company (India) Ltd floated with ICICI Bank and SBI, and Asset Care Enterprise with IFCI. It does not make sense why the bank cannot sell its NPAs to any of these companies specifically created to recover or restructure them. The two companies are also looking for partners, preferably foreign distressed asset specialists.

If IDBI transfers all its sticky assets even at a 50 per cent discount, the budget support required would have been only half and recovery presumably better.

Besides, an amendment to the Debt Recovery Act promised by the Finance Minister in his Budget speech is expected to help lenders recover loans quickly from defaulters.

Given the scenario, the huge package for IDBI appears a generous gift from a benign owner.

More Stories on : Financial Institutions | Non-Performing Assets | Insight

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