25136828 DFI and Evolution of ICICI From a DFI

8/9/2019 25136828 DFI and Evolution of ICICI From a DFI

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WHAT ARE DFIs ?Development Financial Institutions who had access to cheap funds (Subsidized funds) and were an important source of medium and long term funds for industries /firms. Their primary role was to reduce the financial constraints faced by firmswho found it difficult to access funds from banks.

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Domestic Financial Institutions Historically, different kinds of financial intermediaries have existed in theIndian financial system. Banks financed only working capital requirements of corporates. As the capital market was underdeveloped, a number of Development Finance Institutions (DFIs) were set up at the all-India and the State levels to meetthe long-term requirement of funds. DFIs were initially setup by governmentto cater to the sectoral needs by providing finance to the long gestation projec

ts in infrastructure, construction, roads etc.3


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Role of DFIs They were the principal source of medium and long term finance for industries Constituted an island of expertise in project appraisal and credit assessment In an economy where the price mechanism was not sufficiently developed to signal demand supply gaps and need for capacity creation, DFIs level of lending activity to different industries provided a proxy signal for the same.4


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Emergence of DFIs More than 300 DFIs were established around the world in 25 years after the World War II. However there was less than a dozen DFIs at the beginning of that period. In India, IFCI, ICICI and IDBI were the 3 National DFIs and were established 1948, 1955 and 1964 respectively.

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Why have DFIs when you have Banks? Post World War II, Underdeveloped / Developing economies that had repressed financial markets. In other words, financial systems were highly regulated. Countries started to have fixed exchange rates Interest rates were administered andpegged at unrealistically low levels6


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Why have DFIs when you have Banks?As a result the interest rates were kept out of the purview of the market forcesand the financial markets were unable to perform its core function, which is efficient allocation of resources to the most productive sectors of the economy. This task eventually fell upon the DFIs to perform

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How did the DFIs get the funds? DFIs primarily had two sources: Central banks provided long term operation (LTO) funds at cheap rates (Subsidized rates) DFIs were allowed to issue government guaranteed bonds that were eligible for SLR

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Post Liberalization of Financial Markets When economies reformed, financial repression was eliminated (i.e.) interest rates were determined by market forces. As a result, the efficient resource allocation function fell back on financial markets This deprived the DFIs to access cheap funds (Subsidized funds) and were forced to raise resources at marketsrates

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STRUCTURE OF INTEREST RATES


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DEPOSIT RATESYEAR CALL MONEY RATES 1 TO 3 YEARS 3 TO 5 YEARS ABOVE 5 YEARS SBI ADVANCE RATE CEILING RATE GENERAL

LENDING RATESMINIMUM RATE GENERAL MINIMUM RATE SELECTIVE CREDIT CONTROL 12.0 12.0 12.0 14.0 14.0 14.0 14.0

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78

6.38 5.16 4.15 7.83 12.82 10.55 10.84 9.28

6.00 6.00 6.00 6.00 6.75 8.0 8.0 6.0

7.00 6.5 6.5 7.0 7.75 9.0 9.0 8.0

7.25 7.25 7.25 7.25 8.0 10.0 10.0 9.0

7.00 8.5 8.5 8.5 9.0 14.0 14.0 13.0

16.5 16.5 15.0

10.0 11.0 12.5 12.5 12.5


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YIELD OF GOVT. OF INDIA SECURITIESYEAR Short term (15yrs)3.85-4.28

LENDING RATESIDBI IFCI ICICI

Medium term(5-15 yrs)4.32-4.84

Long term(15yrs and above)4.77-5.53

1970-71

8.5 (7.00-8.50)

9.0

8.5

1971-72

4.21-4.17

4.53-5.25

5.00-5.74

8.5 (7.50-8.00)

9.0

8.5

1972-73

4.46-4.98

4.08-5.28

5.00-5.74

8.5 (7.50-9.75)

9.0

8.5

1973-74

4.47-5.05

4.74-5.34

5.00-5.74

9.0 (7.5010.50) 10.2 (8.0010.50) 11.0 (8.0011.00) 11.0 (8.0011.00) 11.0 (8.0011.00) 11.0 (8.0011.00)


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9.5

9

1974-75

5.00-5.65

5.18-5.99

5.93-6.39

11.3

10.3

1975-76

5.20-6.04

5.47-6.02

6.08-6.48

12.0

11.0

1976-77

5.18-5.59

5.43-5.97

6.02-6.47

11.0

11.0

1977-78

5.06-5.59

5.42-5.98

6.03-6.46

11.0

11.0

1978-79

5.12-5.48

5.47-6.25

6.12-6.73


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11.0

11.0


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YEAR

CALL MONEY RATES

1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

CEILING SBI ADVANCE RATE GENERAL RATE

MINIMUM MINIMUM RATE RATE GENERAL SELECTIVE CREDIT CONTROL 12.5 12.5 13.5 14.0 15.5 16.7 17.5 17.5 16.5 16.5 16.5

1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86

7.57 8.47 7.12 8.96 8.78 8.63 9.95 10.0

6.0 7.0 7.5 8.0 8.0 8.0 8.0 8.5

7.5 8.5 10.0 10.0 10.0 10.0 10.0 10.0

9.0 10.0 10.0 10.0 11.0 11.0 11.0 11.0

13.0 16.5 16.5 16.5 16.5 16.5 16.5 16.5

15.0 18.0 19.4 19.5 19.5 18.0 18.0 17.5


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YEAR

Short term (1-5yrs) 4.70-5.74

Medium term(5-15 yrs) 5.70-6.30

Long term(15yrs and above) 6.20-6.98

IDBI

IFCI

ICICI

1979-80

11.0 (8.0011.00) 14.0 (12.0014.50)

11.0

11.0

1980-81

4.74-6.01

5.80-6.75

6.44-7.49

14.0

14.0

1981-82

5.32-6.43

5.81-7.02

6.45-8.00

14.0 (12.50- 14.0 14.00) 14.0 (12.50- 14.0 14.50) 14.0 (11.50- 14.0 16.50) 14.0(12.50- 14.0 18.50) 14.0 (11.50- 14.0 16.50)

14.0

1982-83

4.98-8.46

6.25-7.77

6.46-9.00

14.0

1983-84

4.50-7.08


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6.67-9.04

6.47-10.00

14.0

1984-85

4.20-8.31

6.47-9.04

7.93-10.50

14.0

1985-86

5.42-9.84

6.49-9.50

8.38-11.50

14.0


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YEAR

CALL MONEY RATES

1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

MINIMUM MINIMUM CEILING SBI RATE RATE ADVANCE RATE SELECTIVE GENERAL GENERAL RATE CREDIT CONTROL 16.5 17.5 16.5

1986-87

9.9

8.5

10

11.0

1987-88

9.88

9.0

10.0

10.0

16.5

16.5

-

16.5

1988-89

9.77

9.0

10.0

10.0

16.5

-

16.0

16.0

1989-90


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11.49

9.0

10.0

10.0

16.5

-

16.0

16.0

1990-91

15.85

9.0

11.0

11.0

16.5

-

16.0

16.0

1991-92

19.57

12.0

13.0

13.0

16.5

-

19.0

19.0

1992-93

14.42

11.0

11.0


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11.0

19.0

-

17.0

17.0


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YEAR

Short term (1-5yrs) 5.09-11.60 6.86-15.78 7.03-23.88 7.56-18.36 7.04-21.70 8.37-26.26 9.08-23.77

Medium term(5-15 yrs) 6.50-10.86 6.51-11.73 6.76-13.77 7.69-15.06 9.44-12.70 9.50-13.42 9.50-14.78

Long term(15yrs and above) 8.88-11.50 9.17-11.50 9.36-11.73

IDBI

IFCI

ICICI

1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93

14.0 (11.50- 14.0 16.50) 14.0 (11.50- 14.0 16.50 14.0 (11.50- 14.0 16.50

14.0 14.0 14.0 14.0

10.05-11.80 14.0 (11.50- 14.0 16.50

10.86-12.04 14.00-15.00 14.00-15.00 14.00-15.00 9.91-12.38 8.82-12.47 18.00-20.00 18.00-20.00 18.00-20.00 17.00-19.00 17.00-19.00 17.00-19.00

1993-94 1994-95

11.86-12.86 12.70-13.30 12.85-13.43 14.50-17.50 14.50-17.50 14.50-17.50 9.75-11.76 11.30-13.86 11.77-13.47 15.00 14.50-18.50 14.00-17.50


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YEAR

CALL MONEY RATES

1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

MINIMUM CEILING SBI RATE ADVANCE RATE GENERAL GENERAL RATE

MINIMUM RATE SELECTIVE CREDIT CONTROL 15.0

1993-94 6.99

10.0

10.0

10.0

19.0

-

14.0

1994-95 9.40

11.0

11.0

11.0

15.0

-

15.0

Free

1995-96 17.73

12.0

13.0

13.0

16.5

-

16.5

Free


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1996-97 7.84

11.0

12.0

12.5

14.5

-

14.5

Free

1997-98 8.69

10.5

11.5

11.5

14.0

-

14.0

Free

1998-99 7.83

9.0

10.5

10.5

12.0

-

12.0

Free

1999-00 8.87

8.5

10.5

10.0

12.0

-


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12.0

Free


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YEAR

Short term (1-5yrs)

Medium term(5-15 yrs) 5.75-14.07

Long term(15yrs and above)

IDBI

IFCI

ICICI

1995-96

6.00-14.28

11.84-13.02 16.00-19.00 16.00-20.00 14.00

1996-97

5.21-16.21

5.75-14.44

9.00-14.20

16.20

15.00-19.50 16.50

1997-98

5.50-17.69

5.20-14.00

9.00-13.17

13.30

14.50-18.00 14.00-14.50

1998-99

4.45-17.73

5.75-13.74

10.00-13.46 13.50

13.50-17.00 13.00

1999-00

3.18-14.30

6.50-13.84


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9.79-13.11

13.60-17.10 13.50-17.00 12.50


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Impact of Deregulation Improved asset-liability management and advanced hedging technique enabled thebanks to lend on a longer term DFIs appraisal methods became out of tune with the ground realities of the liberalized economy Signaling role of DFI was almost completely lost19


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Curse of DFIs in India There was no competition between the 3 DFIs as several mechanisms were created to co-ordinate the activities of the 3 DFIs. Virtually all important decisions were taken at inter institutional meetings designed to ensure a common approach to all issues.20


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Transitional roles for DFIs DFIs could use their strategic stakes in many companies as instruments for improving corporate governance. Could provide unbiased policy formulations to the government Folding into the state Transformation into ordinary financial institution Transformation into free market DFI Insolvency / Liquidation21


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Narasimham Committee on DFIsSubmitted report in 1991has both appreciation and criticism: Appreciation: Successful in meeting their primary objective of providing funds for industrial investment. Successful in channalizing assistance industrially less developed states and backward areas. Build image (extent corporate sector relay on DFI) Increasing their share in equity of the Pvt. Sector Represented in the Boards of mgt. of companies and played a major role in M&A


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Weaknesses Licensing Policy: DFIs induced to finance unviable projects by entrepreneurs without proven competence, and unwanted relaxation in the appraisal standards. Govt. Policy: DFIs forced to provide financial support to sick unitsagainst their better commercial judgments State level DFI working as wings ofState Governments rather than as autonomous financial institutions No Competition: Total Absence of Competition to DFIs Consortium Finance: DFIs have been operating almost like a cartel since different FIs join together and offer cons

ortium finance


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Recommendations Ownership pattern of DFI should be broad based, like that of ICICI Government should workout an action plan to be implemented in the next 3years which would usher in a measure of autonomy of the DFIs in matters of internal consideration Appointment of Chief Executives of DFIs (banks) should be men of proven professional competence and should be selected on the recommendations of a panel of eminent persons. The Boards of DFIs should include representatives from the industrial sector.


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Development Financial Institutions Industrial Finance Corporation of India Ltd. (IFCI) 1948 Industrial Credit & Investment Corporation of India (ICICI) 1955 Life Insurance Corporation of India - 1956 Industrial Development Bank of India (IDBI) 1964 General Insurance Corporation of India (GIC) 1972 Export Import Bank of India (EXIM) - 1982 National Bank For Agriculture & Rural Development (NABARD) 1982 Industrial Investment Bank of India Ltd. (IIBI) 1985 Power Finance Cor

poration Ltd. (PFC) 1986 National Housing Bank (NHB) - 1988 Tourism Finance Corporation if India Ltd. (TFCI) 1989 Small Industrial Development Bank of India(SIDBI) - 1990 Infrastructure Development Financial Corporation Ltd. (IDFC) - 1997 25 India Infrastructure Finance Company Ltd. (IIFCL) - 2006


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History Of ICICI1955: The Industrial Credit and Investment Corporation of India Limited (ICICI)incorporated at the initiative of the World Bank, the Government of India and representatives of Indian industry, with the objective of creating a developmentfinancial institution for providing medium-term and long-term project financingto Indian businesses Funded by World Bank to provide Foreign currency loans toIndustrial Projects & promote Industries in Private Sector. 1969: Banks were n

ationalized & ICICI became a Quasi-Public organization 1972: Second entity to start merchant banking services 1977: ICICI sponsored the formation of Housing Development Finance Corporation. Managed its first equity public issue

1982: ICICI became the first ever Indian borrower to raise European Currency

Units26


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History of ICICI1986: ICICI became the first Indian institution to receive ADB Loans ICICI,along with UTI, set up Credit Rating Information Services of India Limited, India

s first professional credit rating agency. (CRISIL) ICICI promotes ShippingCredit and Investment Company of India Limited. (SCICI) 1987: The Corporationmade a public issue of Swiss Franc 75 million in Switzerland, the first public issue by any Indian entity in the Swiss Capital Market. 1993: Promoted Technolo

gy Development Industry Corporation of India Indias First venture capital company. 1994: ICICI Securities and Finance Company Limited in joint venture with J. P. Morgan set up27


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History of ICICI1996: 1997: ICICI Asset Management Company set up. ICICI Bank set up. ICICI Ltd became the first company in the Indian financial sector to raise GDR. SCICI merged with ICICI Ltd.

2000: ICICI launched retail finance - car loans, house loans and loans for consumer durables. ICICI becomes the first Indian Company to list on the NYSE thr

ough an issue of American Depositary Shares.

2001: ICICI Bank announces merger with Bank of Madura ICICI Bank launched India

sfirst CDO (Collateralised Debt Obligation) Fund named Indian Corporate Collateralised Debt Obligation Fund (ICCDO Fund).

2002: The Boards of ICICI Ltd and ICICI Bank approved the merger of ICICI with ICICIBank. ICICI Ltd merged with ICICI Bank Ltd to create India

s second largest bank in terms of assets. 28


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History of ICICI2005: ICICI Bank introduced partnership model wherein ICICI Bank would forge an alliance with existing micro finance institutions (MFIs). The MFI would undertake the promotional role of identifying, training and promoting the micro-finance clients and ICICI Bank would finance the clients directly on the recommendation of the MFI. ICICI Bank introduced the concept of floating rate for home loans in I

ndia. ICICI Bank became the largest bank in India in terms of its market capitalisation.

2008: ICICI Bank concluded India

s largest ever securitisation transaction of a poolof retail loan assets aggregating to Rs. 48.96 billion (equivalent of USD 1.21billion) in a multi-tranche issue backed by four different asset categories. Itis also the largest deal in Asia (ex-Japan) in 2008 till date and the second largest deal in Asia (ex-Japan & Australia) since the beginning of 2007.

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Merger of ICICI Ltd. With ICICI Bank & Benefits of Merger

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Strong complementary organizationsICICI Bank ICICI

Large capital base Diversified and de-risked assets Strong brand Well established corporate relationships

Largest private sector bank Strong retail franchise Technology leader among b

anks

having similar operating architecture, people and processes. This merged entity is consequently well-positioned to harness synergistic advantages and therebyprovide benefits to both ICICI and ICICI Bank

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ICICI Banks strategy to capture retail potentialStrong corporate relationships

Brand Achieving leadership in retail financial services Technology

Operational excellence

the core of this strategy is relentless focus on the customer and cross-selling of products

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Capitalising through cross-selling

Internet Banking

Call Centers

1520 Branches

4816 ATMs

Customized cross-selling by leveraging relationships, brand and technology

Fixed deposits Power Pay

Bonds Consumer loans

Life insurance Auto & home loans

Health insurance Credit & debit cards

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Benefits of MergerForward leap in the hierarchy of Indian banks A discontinuous jump in size andscale Achieve size and scale of operations Leverage ICICIs capital and clientbase to increase fee income Higher profitability by leveraging on technology andlow cost structure Offer a complete product suite with immense cross-selling opportunities ICICIs presence in retail finance, insurance, investment banking and venture capital Access to the ICICI groups talent pool Improved ability to fu

rther diversify asset portfolio and business revenues Lower funding costs Ability to accept/ offer checking accounts Availability of float money due to active participation in the payments system Diversified fund raising due to access to retail funds Increased fee income opportunities Ability to offer all banking products34


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Competitive Advantages of the Merged EntitiesVast talent pool Large capital base Technology -enabled distribution architecture

Complete product suite

Extensive customer relationships & strong brand franchise

Low operating costs

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Whole & The Parts

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Organizational Structure To control enterprise wide risk, few of them like ICICI Bank and State Bank ofIndia have decided to introduce a structure of forming a Holding company. As per this plan ICICI Bank has decided to transfer its holding in four subsidiaries ICICI Prudential Life Insurance, ICICI Lombard General Insurance, ICICIPrudential Asset Management Co., ICICI Prudential Trust

to Holding Company ICICI Financial Services (IFS). The bank currently holds 74% each of two insurance companies and 51% each of ICICI AMC and ICICI Trust. Once approved by regulators, ICICI Bank intends to transfer these investments to IFS at book value in the books of ICICI Bank. Formation of holding company wouldreduce burden of financing massive capital expenditure of these subsidiaries which are witnessing impressive growth in their respective businesses.37


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Organizational Structure

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Market CapitalizationSBI ICICI Bank IDBI IFCI SBI ICICI Bank IDBI Bank IFCI

2% 8% 25% 41% 3%

2%

54% 65%

September 2002

October 200939


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Types of NPAThere are three major types of NPA: Sub-standard NPAs : The account holder comes in this Subcategory when they dont pay three installment continuously after90 days and upto 1year. for this category bank has made 10% provision of fundsfrom their profit to meet the losses generated from NPA. Doubtful NPAs : Under Doubtful NPA there are three sub categories : D1 i.e. up to 1 year : 20% provision is made by the banks D2 i.e. up to 2 ye

ar: 30% provision is made by the bank D3 i.e. up to 3 year : 100% provision ismade by the bank.

Loss Assets : under this 100% provision is made. When account holder comes inthis category their account can be written off by the banks.40


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IFCI & Its Profile Was set up in 1948 and was the first DFI in India It was initially set up asa Statutory Corporation to provide institutional credit to medium and large scale industries. It was converted into a public limited company on 1st July 1993

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IFCI & Its OperationsThe companys financing operations principally included Project Financing Financial Services Comprehensive Corporate Advisory Services. The main objectiveof DFI was to fund green-field projects.42


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First Sign of Crisis The economy recorded a GDP growth of 6.8% in 1996-97 as compared to 7.1% in 1995-96. The growth of the capital goods sector fell from 17.9% in 95-96 to 8.4%in 96-97. The fall in the growth rate was mainly on account of the deceleration in industrial production. The problem of Non-performing Assets (NPAs) was cropping up hastily and IFCI was the worst affected with them.43


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PAT of IFCI after a steep fall in industrial productionYear March 1997 March 1998 March 1999 March 2000 March 2001 March 2002 PAT Rs. 218.56 crore Rs. 83.5 crore - Rs. 267.70 crore - Rs. 191.81 crore - Rs. 265.93 crore - Rs. 884.70 crore

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IFCI: Asset classification of PortfoliosAsset classification of Portfolio Standard Assets 2001-02 (Rs. Millions) 2000-01(Rs. Millions)

136501.59 (77.79%)

148178.78 (79.01%)

Sub-standard Assets

8952.37 (5.10%)

9739.64 (5.19%)

Doubtful Assets

30024.07 (17.11%)

29630.96(15.80%)

Total

175478.03 (100%)

187549.38(100%)

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Break-up of NPAs:No. of cases of NPAs Amount Blocked No of years

130

12589(32.30%)

Less than 3 years

152

14284(36.95%)

3-5 yrs

192

4838( 12.41%)

5-7 yrs

671

7265 (18.64%)

More than 7 yrs

Total =1145

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NET NON PERFORMING ASSETSYEARS 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 SBI 7.31 7.306.07 7.33 6.65 5.33 5.63 4.5 3.48 2.65 1.87 1.32 PNB 10.21 10.38 9.57 8.96 8.526.69 5.32 3.86 0.98 0.2 0.29 0.28 ICICI 3.69 3.22 1.14 2.88 1.53 3.36 5.48 5.212.21 1.65 0.72 0.78 UTI 5.33 3.66 5.63 6.32 4.71 2.39 3.46 2.39 1.29 1.39 0.98 0.72

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Key reason for IFCIs crisis Unlike other financial institutions, IFCI rakes revenue from just one activity, which is Project Finance. It accounts more than 90% of its business assets As a result, the impact of NPAs arising from delayed completion of projects hasbeen more evident in the case of IFCI than in the case of other institutions.48


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ICICIs De-Risking of PortfolioDiversified portfolioMarch 2001- Proforma merged33% Pro ject finance Co rp o rate finance Retail finance 12% 4% 12% 3% 36% Reserves & cash Investments Other assets34% 8% 23%

March 2002- Merged5% 7% 23%

Rs. 931.50 billion

Rs. 1,041.10 billion

the asset composition change on account of statutory requirements and increasein retail assets is contributing to derisking the portfolio49


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25136828 DFI and Evolution of ICICI From a DFI

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