Tamal Bandyopadhyay: Dying, but not quite dead

Jiten Agarwal (name changed), 41, goes to his office every day. His daily routine includes reading newspapers, having his lunch, drinking tea and occasionally pushing a few files during the day before he comes back home in the evening. He works for IFCI, the country's oldest development finance institution, born in 1948.

The experience of Agarwal and his few hundred colleagues is quite unique in the Indian financial sector. They have no tomorrow to look forward to. The organisation has stopped growing and nobody, including the government, has a clear idea about its future even as the stock market is busy punting on the scrip.

The IFCI share price is now ruling at over Rs 16. This has indeed brought cheers to the investors. However, the employees of the 57-year old organisation are just counting the days before it closes down or merges with some other entity.

IFCI has stopped sanctioning and disbursing funds. Last year, no fresh assistance was sanctioned and only Rs 91 crore was disbursed. That too on account of devolvement of guarantees issued earlier. In 2003-04, IFCI technically sanctioned Rs 1,391 crore and disbursed

Rs 278 crore. But these were all restructured assets. Its loan asset base that was over Rs 17,500 crore in March 2002, has shrunk to Rs 9,598 crore in March 2005. The quantum of non-performing assets (NPAs) has marginally reduced to 28 per cent but the accumulated loss has swelled to Rs 4,698 crore.

With no fresh resources being raised (the outstanding public deposit on its book in March 2005 was Rs 83 lakh) and no new money in the kitty to be lent, the focus has been only on recovery of bad assets.

Till March this year, IFCI had filed 810 recovery applications with Debt Recovery Tribunals across the country for Rs 11,845 crore. In other words, in its present avatar, IFCI does not need bankers any more. A legal cell can do the job.

IFCI was corporatised in July 1993 to achieve greater operational flexibility and access to the capital market. Ironically, the seeds of its impending death were sown in its corporatisation. Immediately after this, IFCI embarked on rapid expansion, taking up large exposures in greenfield projects.

Most of the financing was done through short-term loans and when the projects suffered from cost and time over-runs. IFCI had a huge maturity mismatch. It had no choice but to refinance its borrowings at a higher interest cost.

At the second stage, in the late 1990s, IFCI opened its cupboard to bare the skeletons of NPAs and made huge provisions to clean its balance sheet.

But the move back-fired as alarmed rating agencies downgraded IFCI and it could not raise fresh resources. Its cash flow dried up and there was a liquidity crisis. Since 2001-02, it has been living on borrowed time by restructuring liabilities and assets.

There has been no dearth of solutions provided by the experts. The Dipankar Basu panel proposed an immediate infusion of Rs 400 crore by the government and repositioning of IFCI by shifting from project finance to short-term financing and fee-based services. It also recommended setting up of an asset reconstruction fund (ARF) to recover the bad assets.

In fact, in June 2002, along with Punjab National Bank (PNB), Life Insurance Corporation (LIC) and a few other entities, Assets Care Enterprises was set up for this purpose. But before recovering a penny, the ARF itself died.

The next set of solutions came from consultancy firm McKinsey that proposed dividing IFCI into two companies "" one with good assets and the other with bad assets. That too remained an academic exercise.

Finally, a merger with a healthy financial intermediary emerged as the best possible way of salvaging the situation. The IFCI board even passed a resolution in 2003-04 for a possible merger with PNB. SBI Capital Markets was appointed to carry out a due diligence exercise.

However, PNB refused to play the role of a white knight. After all, why should a listed entity take a hit of Rs 3,500 crore (that's the hole the IFCI balance sheet has today) to save IFCI?

Last week, the government extended a life support system to another Delhi-based financial intermediary, Punjab and Sind Bank, in the form of a Rs 500-crore recapitalisation bond. For IFCI, time is fast running out.

The government has no choice but to cough up Rs 3,500 crore, no matter how it wants to save IFCI "" through merger with a bank or winding up. Any delay will only increase the cost. Both of revival, and death.