Stakeholders of IFCI will have to dilute their shareholding or else exit from the development financial institution (DFI). This will allow IFCI to team up with another institution on a 50:50 basis as it re-focuses on a totally new business model for its survival.
The McKinsey report on the restructuring of the financial institution proposes IFCI to re-focus its operations and come out with a fresh perspective for a "good" bank.
McKinsey in its report has proposed that the good assets of IFCI be segregated from the bad assets and the latter be spun off to the asset reconstruction company (ARC) -- Asset Care Enterprise Ltd. IFCI is already in talks with a number of international investment banks and private equity firms to help in the recovery process and to take a stake in the ailing institution. "There are interested parties, but pricing is the key issue," stated senior officials at McKinsey.
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Tying up with a partner for a "good" bank will help IFCI find a new focus as the DFI model is no longer sustainable, stated McKinsey. Much, however, depends on getting the right level of support from the existing stakeholders -- Industrial Development Bank of India (31.71 per cent), General Insurance Corporation of India and state-owned general insurance subsidiaries (9.48 per cent), Life Insurance Corporation of India (8 per cent), nationalised banks (7.14 per cent), Unit Trust of India (4.47 per cent), corporate bodies (7.16 per cent) and State Bank of India and subsidiaries (2.1 per cent).
The financial institution is in dire need of funding well in excess of Rs 3,000 crore. The McKinsey report once approved by the board of directors of IFCI, will be submitted to the Centre.
Legally speaking, as IFCI is not a government institution it is not obliged to bail out the institution. Recapitalising the financial institution has seen roadblocks on all fronts. The central government had in April rejected a fresh bailout for the DFI after the Rs 1,000 crore bailout package cleared last August. Banks and LIC have also reportedly denied further funding to the beleaguered institution.
McKinsey in its report has identified three key priority areas for IFCI's survival. Foremost will be the emphasis on restructuring the institution's balance sheet to attend to the short-term liquidity problem. This would require the creation of an internal group to look into the non-performing assets, value them, and then decide on a strategy. The institution will, then through the ARC and help from external parties, focus on the recovery of bad loans. Ultimately, it will have to restructure its business model, which as IFCI stated "is more in consonance with the current and expected future trends in the financial industry".
It has already initiated talks with outside recovery specialists and is looking at taking help from ICICI Bank, which has made headway in its own recovery process.