The Industrial Finance Corporation of India (IFCI) has decided to set up a banking arm to provide working capital loans to corporates. Announcing the decision, IFCI chairman, K.D. Agrawal, however, clarified that this did not mean that the corporation was entering retail banking.
IFCI would remain as a refinance institution, and the new area it is entering is the extension of its operation to lending short-term loans to corporates, Agrawal said.
He added that the financial institution was already providing short-term loans but now it proposed to set up a separate banking arm as the Industrial Development Bank of India (IDBI) had done for funding working capital. IFCI has sought clearance from the Reserve Bank of India for this purpose. The aim of setting up a separate banking arm is to take deposits which could be transferred to the parent organisation, Agrawal said.
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Project financing, accounting for 75 per cent of its lending, would continue to be the main function of IFCI, he added. Under the proposed banking arm, he said, "we would lend to corporates, who are already our borrowers, short-term loans for funding working capital and other requirements we agree to."
Currently, such short-term requirements of corporates are funded by commercial banks. IFCI proposes to give the corporates direct loans for this purpose as well, he added.
IFCI's market share in respect of sanctions and disbursements increased to 20.5 and 20.2 per cent respectively in 1996-97 against 15.2 and 14.8 per cent in 1993-94.
Agrawal said IFCI's disbursements were provisionally estimated at Rs 5159 crore for 1996-97 recording a growth of 13.1 per cent. IFCI recorded average annual growth of 40.9 per cent in disbursements over the three-year period from fiscal 1994
Taking the cue from IDBI, IFCI, too, has decided to reduce the prime lending rate (PLR) from 16 per cent to 15 per cent from May 1. The rate band would be 15 per cent to 18.5 per cent.
Stating that the slack season credit policy announced by the RBI last month has increased the liquidity further, Agrawal felt that additional liquidity could be of the order of Rs 20,000 crore.
He felt that in the wake of the PLR reduction by IFCI, the disbursement could be Rs 6000 to Rs 7000 crore in the next fiscal recording a growth of 35 per cent.
Agrawal clarified the overall lending rate could not be less than 18 per cent as it is governed by the prime lending rate and the cost of borrowing. As the PLR has been fixed at 15 per cent, the barest minimum cost of borrowing work-ed out to be around 3%.
The cost of borrowing comprised overheads which worked out to be 0.5 per cent, dividend on share capital 0.75 per cent, tax on profit 0.75 per cent and provision for NPAs, one per cent, he said.
With the increase in volume, the spread would be higher, he said, extending his ''positive view'' in this regard particularly after the announcement of the slack season credit policy.