Life after IFCI

It speaks volumes for the independence of banks in the country that the board of the Punjab National Bank (PNB) should approve a merger with the ailing IFCI without knowing what the swap ratio of the shares between the two institutions is going to be "" the fact that PNB's share prices have fallen after announcement of the merger, of course, shows the markets feel the valuation is not going to be in PNB's interests.

While that pricing is critical to determine whether or not the merger is going to harm PNB, it's worth keeping in mind that the deal is not without its merits.

For one, a package is being worked out with IFCI's major lenders to restructure its liability, both in terms of lowering interest rates as well as increasing the tenure of the loans.

Second, if you go by IFCI's analysis, it has around Rs 7,000 crore of good assets and a similar amount of sub-standard assets "" NPAs of another Rs 6,000 crore are to be transferred to an asset reconstruction company.

Since the good assets, even after some restructuring, will command interest rates of 10-11 per cent, that's not something to be sneezed at, especially if all IFCI's lenders (like the LIC and the EPFO) agree to restructure their loans at 6-7 per cent, as is currently being envisaged.

And, with commodity prices on an upswing, presumably this is as good a time as ever to get some value out of the Rs 7,000 crore of sub-standard assets.

But since there is clearly considerable doubt about how genuine IFCI's claims about even Rs 7,000 crore of assets being of standard quality, the final swap ratios will have to take all this into account. One hopes PNB's board will show some guts and ensure the valuation is fair to its shareholders.

There are other causes of concern as well. With ICICI converting itself into a purveyor of primarily consumer loans, IDBI in the process of converting itself into a bank, and IFCI effectively shutting down, what happens to the country's need for long-term loans? Few banks, it is obvious, can provide loans for tenures longer than 3-4 years, since that is roughly the tenure of their deposits.

The bond market is the obvious solution, yet there are problems with this approach. For one, there just isn't enough appetite for private sector bonds as yet, especially for infrastructure projects which tend to be more prone to delay and therefore more risky.

Besides, if bonds have to be raised by new firms, how do they get rated, and if they don't get rated, it's not going to be possible for them to raise debt.

While the spread of insurance companies will fix things to the extent insurance companies look for projects of longer gestation to invest in, an immediate shortage of long-term debt is certain, especially now that India Inc. looks ready to invest big money again.

While IDBI's mandate still requires it to lend to projects of the type it currently lends to for a few more years, even after it converts to a bank, it is unlikely IDBI will be able to raise the kind of funds it needs unless its balance sheet is cleaned up substantially. The government's job, it would appear, hasn't quite finished with just merging IFCI with PNB.