Indian companies, especially loss making ones, seem to think that expensive advice from McKinsey & Co is the solution to their myriad, self-created problems. The global consulting leader, of course, has often conjured up solutions that are impossible to implement. The beleaguered Industrial Finance Corporation of India is the latest recipient of McKinsey’s quick fix that IFCI should merge with Industrial Development Bank of India, which holds 30 per cent of its equity.
Since it is accepted wisdom that Development Finance Institutions have outlived their utility, merging two financially weak DFIs will only create a larger ship which will sink that much more rapidly. McKinsey’s boys surely knew that IDBI chairman P P Vora has a clear game plan for his institution and is well on course to implementing it. But the consulting giant probably decided that IDBI’s opinions are irrelevant, since it can always be arm-twisted by the government to change course to bail out IFCI.
IDBI, however, swiftly rejected McKinsey’s suggestion without even waiting to read its report. Corporatisation, an amendment to the IDBI Act and merger with a large nationalised bank are part of IDBI’s declared future plan. These are in line with the advice that it received from another global firm, the Boston Consulting Group.
Chairman P P Vora expects the corporatisation proposal and amendment to the IDBI Act to be cleared in the monsoon session of Parliament and the merger to be finalised in the next few months. He also categorically rules out a merger with IDBI Bank, although IDBI holds a 57 per cent stake in it. Mr Vora’s ambition is to make IDBI the second largest financial entity in the country after State Bank of India — ahead of the recently merged ICICI. Naturally, he benchmarks his performance to these two organisations as well as the Bank of India and Bank of Baroda.
IDBI is talking to a bank with assets of around Rs 55,000 crore, which when merged with IDBI’s own assets of over Rs 66,000 crore, would catapult it to the coveted No 2 position. Mr Vora says that talks are at an advanced stage and the merger should be completed by June 2003. IDBI is rumoured to be considering a merger with one of the two unlisted banks — Union Bank of India or Punjab National Bank; however, Mr Vora is naming no names at present.
Of course, IDBI’s restructuring effort has been kick-started with generous help from the government. Over Rs 2,000 crore of loans from the government and the Reserve Bank of India are being rescheduled or restructured into 20-year convertible bonds. This has helped it strengthen its tier-I capital and increase provisioning for non-performing assets, and it hopes to improve its capital adequacy ratio to over 17 per cent.
After a Rs 2,500 crore accelerated write-off during 2001-02, the total provisioning for bad loans during the last three years will be around Rs 5,700 crore. Vora plans to bring down net NPAs to 5.5 per cent next year. He also says that 90 per cent of smaller NPAs have been written off entirely. However, legal action for recovery will continue and the money recovered will add to the bottomline. Mr Vora is conscious that a mere merger of assets to form the second largest financial entity is meaningless without an attractive bottomline and that is a far more difficult task.
IDBI has three major problems. First, it could be saddled with the role of sponsor of Unit Trust of India and asked to bail it out. Second, it is already stuck with the largest chunk of Rs 1,500 crore in the Rs 6,000-odd crore lent to Enron’s Dabhol Power Company and third, that it has a huge exposure to the steel sector which has long been in dangerous territory.
The good news is that things are looking less bleak on all three fronts. The government continues to blow hot and cold with regard to UTI’s bailout redemption demands through the Development Reserve Fund. There isn’t enough money in the DRF to fulfill its liabilities. Knowledgeable sources say that the government may ultimately have to find a way to help UTI by providing funds to its so-called sponsors in order to meet at least a part of its redemption liability. This means that IDBI may not be asked to cough up any money to cover the hole in UTI’s schemes.
For Enron’s DPC, IDBI has stopped chasing the share sale route. It wants to revive the project and salvage its own loans, albeit with a substantial cut in interest and an extended repayment period. Enron and its other shareholders (GE, Bechtel and MSEB), who have a $1 billion equity investment out of the project cost of nearly $3 bn, are likely to get nothing. Meanwhile, IDBI and other lenders are on the verge of mandating the global investment banking firm N M Rothschild & Sons to negotiate the asset sale and revive the project.
Mr Vora insists that interest in acquiring DPC assets is still high and two more bidders including British Petroleum have recent entered the race. The problem is the cost of DPC’s power. IDBI hopes that the sale of the regassification plan will substantially reduce tariff and the Maharashtra government would be in a position to buy the 740 MW Phase I power. It hopes to persuade other states to buy the remaining 1,400 MW of Phase II. Only time will tell if IDBI’s gameplan is feasible and if it can find buyers for over 1,400 MW of Phase II power.
On the steel front, IDBI’s sticky assets are looking less sticky. International steel prices have firmed up in recent months, but it will be a very long time before steel companies are truly out of the woods and able to repay principal. So far, IDBI only hopes to recover interest dues. Even here, the two steel projects that have captive power projects are in a better position than Ispat Industries or Lloyds steel who have to buy expensive power from government utilities. The bigger problem is dead investments like Malvika Steel, MESCO and Rajinder Steel where there is still no hope of finding any buyers or the plants are not functioning.
But all said and done, IDBI is certainly better off pursuing its own revival plans, rather than be saddled with IFCI’s problems which seem far tougher to resolve. -- Sucheta Dalal