DFI and evolution of ICICI from a DFI

Presented ByManoj B Bharadwaj

Harsh AgarwalSrivathsa N Chakravarthy

1

WHAT ARE DFI’s ?

ØDevelopment Financial Institutions who hadaccess to cheap funds (Subsidized funds) andwere an important source of medium and longterm funds for industries / firms.

ØTheir primary role was to reduce the financialconstraints faced by firms who found itdifficult to access funds from banks.

2

Domestic Financial Institutions• Historically, different kinds of financial intermediaries

have existed in the Indian financial system. Banksfinanced only working capital requirements ofcorporates. As the capital market wasunderdeveloped, a number of Development FinanceInstitutions (DFIs) were set up at the all-India and theInstitutions (DFIs) were set up at the all-India and theState levels to meet the long-term requirement offunds.

• DFI’s were initially setup by government to cater tothe sectoral needs by providing finance to the longgestation projects in infrastructure, construction,roads etc.

3

Role of DFI’s

• They were the principal source of medium andlong term finance for industries

• Constituted an island of expertise in projectappraisal and credit assessment

• In an economy where the price mechanism• In an economy where the price mechanismwas not sufficiently developed to signaldemand – supply gaps and need for capacitycreation, DFI’s level of lending activity todifferent industries provided a proxy signal forthe same.

4

Emergence of DFI’s

• More than 300 DFI’s were established aroundthe world in 25 years after the World War II.However there was less than a dozen DFI’s atthe beginning of that period.

• In India, IFCI, ICICI and IDBI were the 3• In India, IFCI, ICICI and IDBI were the 3National DFI’s and were established 1948,1955 and 1964 respectively.

5

Why have DFI’s when you have Banks?

• Post World War II, Underdeveloped /Developing economies that had repressedfinancial markets.

• In other words, financial systems were highly• In other words, financial systems were highlyregulated.

Countries started to have fixed exchangerates

Interest rates were administered andpegged at unrealistically low levels

6

Why have DFI’s when you have Banks?

As a result the interest rates were kept outof the purview of the market forces and thefinancial markets were unable to perform itscore function, which is “ efficient allocation ofresources to the most productive sectors ofresources to the most productive sectors ofthe economy.”

This task eventually fell upon the DFI’s toperform

7

How did the DFI’s get the funds?

• DFI’s primarily had two sources:• Central banks provided long term operation (LTO)

funds at cheap rates (Subsidized rates)• DFI’s were allowed to issue government• DFI’s were allowed to issue government

guaranteed bonds that were eligible for SLR

8

Post Liberalization of Financial Markets• When economies reformed, financial

repression was eliminated (i.e.) interest rateswere determined by market forces.

• As a result, the efficient resource allocationfunction fell back on financial marketsfunction fell back on financial markets

• This deprived the DFI’s to access cheap funds(Subsidized funds) and were forced to raiseresources at markets rates

9

STRUCTURE OF INTEREST RATES

YEAR CALL MONEY RATES

1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

SBI ADVANCE RATE

CEILING RATE GENERAL

MINIMUM RATE GENERAL

MINIMUM RATE SELECTIVE CREDIT CONTROL

1970-71 6.38 6.00 7.00 7.25 7.00 - - -

1971-72 5.16 6.00 6.5 7.25 8.5 - - 12.0

DEPOSIT RATES LENDING RATES

1972-73 4.15 6.00 6.5 7.25 8.5 - - 12.0

1973-74 7.83 6.00 7.0 7.25 8.5 - 10.0 12.0

1974-75 12.82 6.75 7.75 8.0 9.0 - 11.0 14.0

1975-76 10.55 8.0 9.0 10.0 14.0 16.5 12.5 14.0

1976-77 10.84 8.0 9.0 10.0 14.0 16.5 12.5 14.0

1977-78 9.28 6.0 8.0 9.0 13.0 15.0 12.5 14.0

YEAR Short term (1-5yrs)

Medium term(5-15 yrs)

Long term(15yrs and above)

IDBI IFCI ICICI

1970-71 3.85-4.28 4.32-4.84 4.77-5.53 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 (7.50- 9.5 9

LENDING RATESYIELD OF GOVT. OF INDIA SECURITIES

1973-74 4.47-5.05 4.74-5.34 5.00-5.74 9.0 (7.50-10.50)

9.5 9

1974-75 5.00-5.65 5.18-5.99 5.93-6.39 10.2 (8.00-10.50)

11.3 10.3

1975-76 5.20-6.04 5.47-6.02 6.08-6.48 11.0 (8.00-11.00)

12.0 11.0

1976-77 5.18-5.59 5.43-5.97 6.02-6.47 11.0 (8.00-11.00)

11.0 11.0

1977-78 5.06-5.59 5.42-5.98 6.03-6.46 11.0 (8.00-11.00)

11.0 11.0

1978-79 5.12-5.48 5.47-6.25 6.12-6.73 11.0 (8.00-11.00)

11.0 11.0


1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

SBI ADVANCE RATE




1978-79 7.57 6.0 7.5 9.0 13.0 15.0 12.5 14.0

1979-80 8.47 7.0 8.5 10.0 16.5 18.0 12.5 15.5

1980-81 7.12 7.5 10.0 10.0 16.5 19.4 13.5 16.7

1981-82 8.96 8.0 10.0 10.0 16.5 19.5 - 17.5

1982-83 8.78 8.0 10.0 11.0 16.5 19.5 - 17.5

1983-84 8.63 8.0 10.0 11.0 16.5 18.0 - 16.5

1984-85 9.95 8.0 10.0 11.0 16.5 18.0 - 16.5

1985-86 10.0 8.5 10.0 11.0 16.5 17.5 - 16.5

YEAR Short term(1-5yrs)



IDBI IFCI ICICI

1979-80 4.70-5.74 5.70-6.30 6.20-6.98 11.0 (8.00-11.00)

11.0 11.0

1980-81 4.74-6.01 5.80-6.75 6.44-7.49 14.0 (12.00-14.50)

14.0 14.0

1981-82 5.32-6.43 5.81-7.02 6.45-8.00 14.0 (12.50-14.00)

14.0 14.0

1982-83 4.98-8.46 6.25-7.77 6.46-9.00 14.0 (12.50-14.50)

14.0 14.0

1983-84 4.50-7.08 6.67-9.04 6.47-10.00 14.0 (11.50-16.50)

14.0 14.0

1984-85 4.20-8.31 6.47-9.04 7.93-10.50 14.0 (12.50-18.50)

14.0 14.0

1985-86 5.42-9.84 6.49-9.50 8.38-11.50 14.0 (11.50-16.50)

14.0 14.0


1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

SBI ADVANCE RATE




1986-87 9.9 8.5 10 11.0 16.5 17.5 - 16.5

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 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 11.0 19.0 - 17.0 17.0




IDBI IFCI ICICI

1986-87 5.09-11.60 6.50-10.86 8.88-11.50 14.0 (11.50-16.50)

14.0 14.0

1987-88 6.86-15.78 6.51-11.73 9.17-11.50 14.0 (11.50-16.50

14.0 14.0

1988-89 7.03-23.88 6.76-13.77 9.36-11.73 14.0 (11.50-16.50

14.0 14.0

1989-90 7.56-18.36 7.69-15.06 10.05-11.80 14.0 (11.50-16.50

14.0 14.016.50

1990-91 7.04-21.70 9.44-12.70 10.86-12.04 14.00-15.00 14.00-15.00 14.00-15.00

1991-92 8.37-26.26 9.50-13.42 9.91-12.38 18.00-20.00 18.00-20.00 18.00-20.00

1992-93 9.08-23.77 9.50-14.78 8.82-12.47 17.00-19.00 17.00-19.00 17.00-19.00

1993-94 11.86-12.86 12.70-13.30 12.85-13.43 14.50-17.50 14.50-17.50 14.50-17.50

1994-95 9.75-11.76 11.30-13.86 11.77-13.47 15.00 14.50-18.50 14.00-17.50


1 TO 3 YEARS

3 TO 5 YEARS

ABOVE 5 YEARS

SBI ADVANCE RATE




1993-94 6.99 10.0 10.0 10.0 19.0 - 14.0 15.0

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

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 - 12.0 Free




IDBI IFCI ICICI

1995-96 6.00-14.28 5.75-14.07 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 9.79-13.11 13.60-17.10 13.50-17.00 12.50

Impact of Deregulation

• Improved asset-liability management andadvanced hedging technique enabled thebanks to lend on a longer term

• DFI’s appraisal methods became out oftune with the ground realities of thetune with the ground realities of theliberalized economy

• Signaling role of DFI was almostcompletely lost

19

Curse of DFI’s in India• There was no competition between the 3

DFI’s as several mechanisms werecreated to co-ordinate the activities ofthe 3 DFI’s.

• Virtually all important decisions weretaken at inter institutional meetingsdesigned to ensure a common approachto all issues.

20

Transitional roles for DFI’s

• DFI’s could use their strategic stakes in manycompanies as instruments for improvingcorporate governance.

• Could provide unbiased policy formulations tothe governmentthe government

• Folding into the state• Transformation into ordinary financial institution• Transformation into free market DFI

• Insolvency / Liquidation

21

Narasimham Committee on DFIs

Submitted report in 1991has both appreciation and criticism:

Appreciation:

• Successful in meeting their primary objective of providingfunds for industrial investment.

• Successful in channalizing assistance industrially less• Successful in channalizing assistance industrially lessdeveloped 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 playeda major role in M&A

Weaknesses

• Licensing Policy: DFIs induced to finance unviable projectsby entrepreneurs without proven competence, and unwantedrelaxation in the appraisal standards.

• Govt. Policy: DFIs forced to provide financial support tosick units against their better commercial judgments

• State level DFI working as wings of State Governments• State level DFI working as wings of State Governmentsrather than as autonomous financial institutions

• No Competition: Total Absence of Competition to DFIs

• Consortium Finance: DFIs have been operating almost likea cartel – since different FIs join together and offerconsortium finance

Recommendations

• Ownership pattern of DFI should be broad based, like that ofICICI

• Government should workout an action plan to beimplemented in the next 3 years which would usher in ameasure of autonomy of the DFIs in matters of internalconsiderationconsideration

• Appointment of Chief Executives of DFIs (banks) should bemen of proven professional competence and should beselected on the recommendations of a panel of eminentpersons.

• The Boards of DFIs should include representatives from theindustrial sector.

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) –• National Bank For Agriculture & Rural Development (NABARD) –

1982• Industrial Investment Bank of India Ltd. (IIBI) – 1985• Power Finance Corporation 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• India Infrastructure Finance Company Ltd. (IIFCL) - 2006 25

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 andrepresentatives of Indian industry, with the objective of creating adevelopment financial institution for providing medium-term and long-termproject financing to Indian businesses•Funded by World Bank to provide Foreign currency loans to IndustrialProjects & promote Industries in Private Sector.

1969:1969:• Banks were nationalized & ICICI became a Quasi-Public organization

1972:•Second entity to start merchant banking services

1977:•ICICI sponsored the formation of Housing Development FinanceCorporation. Managed its first equity public issue

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

26

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 Shipping Credit and Investment Company of India

Limited. (SCICI)1987:

• The Corporation made a public issue of Swiss Franc 75 million in • The Corporation made 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 Technology Development Industry Corporation of India -

India’s First venture capital company.1994:

• ICICI Securities and Finance Company Limited in joint venture with J. P. Morgan set up

27


• ICICI Asset Management Company set up.• ICICI Bank set up.• ICICI Ltd became the first company in the Indian financial sector to raise GDR.

1997:• SCICI merged with ICICI Ltd.

2000:• ICICI launched retail finance - car loans, house loans and loans for consumer • ICICI launched retail finance - car loans, house loans and loans for consumer

durables.• ICICI becomes the first Indian Company to list on the NYSE through an issue of

American Depositary Shares.

2001:• ICICI Bank announces merger with Bank of Madura• ICICI Bank launched India's first 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 ICICI Bank. ICICI

Ltd merged with ICICI Bank Ltd to create India's second largest bank in terms of assets. 28


• ICICI Bank introduced partnership model wherein ICICI Bank would forge analliance with existing micro finance institutions (MFIs). The MFI wouldundertake the promotional role of identifying, training and promoting themicro-finance clients and ICICI Bank would finance the clients directly on therecommendation of the MFI.

• ICICI Bank introduced the concept of floating rate for home loans in India.• ICICI Bank became the largest bank in India in terms of its market• 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 pool of

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. It isalso the largest deal in Asia (ex-Japan) in 2008 till date and the second largestdeal in Asia (ex-Japan & Australia) since the beginning of 2007.

29

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

Merger

30

Strong complementary organizations

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

ICICI Bank•Largest private sector bank•Strong retail franchise •Technology leader among banks

31

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

•Well established corporate relationships

ICICI Bank’s strategy to capture retail potential

Strong corporate relationships

Brand

Achieving leadership in retail financial services

32

Technology

Operational excellence

retail financial services

… the core of this strategy isrelentless focus on thecustomer and cross-selling ofproducts

Capitalising through cross-selling

Internet Banking Call Centers 1520 Branches 4816 ATMs

Customized cross-selling

33

Bonds Life insurance Health insuranceFixed deposits

Consumer loans Auto & home loans Credit & debit cardsPower Pay

Customized cross-selling by leveraging relationships, brand and

technology

Benefits of Mergerl “Forward leap” in the hierarchy of Indian banks

l A discontinuous jump in size and scalel Achieve size and scale of operations

l Leverage ICICI’s capital and client base to increase fee incomel Higher profitability by leveraging on technology and low cost structure

l Offer a complete product suite with immense cross-selling opportunitiesl ICICI’s presence in retail finance, insurance, investment banking and venture

capitalcapitall Access to the ICICI group’s talent pooll Improved ability to further diversify asset portfolio and business revenuesl Lower funding costs

l Ability to accept/ offer checking accountsl Availability of float money due to active participation in the payments systeml Diversified fund raising due to access to retail funds

l Increased fee income opportunitiesl Ability to offer all banking products

34

Competitive Advantages of the Merged Entities

Large capital baseTechnology

-enableddistributionarchitecture

Vasttalentpool

Extensivecustomer

relationships & strong brand franchise

Completeproduct

suite

architecture

Low operatingcosts

35

Whole & The Parts

36

Organizational Structure• To control enterprise wide risk, few of them like ICICI Bank and

State Bank of India have decided to introduce a structure of forminga “Holding company”.

• As per this plan ICICI Bank has decided to transfer its holding in foursubsidiaries• ICICI Prudential Life Insurance,• ICICI Lombard General Insurance,• ICICI Prudential Asset Management Co.,• ICICI Prudential Trust• 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 byregulators, ICICI Bank intends to transfer these investments to IFS atbook value in the books of ICICI Bank.

• Formation of holding company would reduce burden of financingmassive capital expenditure of these subsidiaries which arewitnessing impressive growth in their respective businesses.

37

Organizational Structure

38

Market Capitalization

8%

2%

SBI ICICI Bank IDBI IFCI

3%

2%

SBI ICICI Bank IDBI Bank IFCI

39

65%

25%

54%41%

September 2002 October 2009

Types of NPAThere are three major types of NPA:•• SubSub--standardstandard NPA’sNPA’s : The account holder comes in this

category when they don’t pay three installmentcontinuously after 90 days and upto 1year. for thiscategory bank has made 10% provision of funds fromtheir profit to meet the losses generated from NPA.

•• DoubtfulDoubtful NPA’sNPA’s : Under Doubtful NPA there are three sub•• DoubtfulDoubtful NPA’sNPA’s : Under Doubtful NPA there are three subcategories :• D1 i.e. up to 1 year : 20% provision is made by the banks• D2 i.e. up to 2 year: 30% provision is made by the bank• D3 i.e. up to 3 year : 100% provision is made by the bank.

•• LossLoss AssetsAssets : under this 100% provision is made. Whenaccount holder comes in this category their account can bewritten off by the banks.

40

IFCI & Its Profile• Was set up in 1948 and was the first DFI in

India• It was initially set up as a Statutory

Corporation to provide institutional credit tomedium and large scale industries.medium and large scale industries.

• It was converted into a public limited companyon 1st July 1993

41

IFCI & It’s Operations

The company’s financing operations principally included

• Project Financing • Financial Services• Financial Services• Comprehensive Corporate Advisory

Services.The main objective of DFI was to fundgreen-field projects.

42

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• The fall in the growth rate was mainly on

account of the deceleration in industrialproduction.

• The problem of Non-performing Assets (NPAs)was cropping up hastily and IFCI was the worstaffected with them.

43

PAT of IFCI after a steep fall in industrial production

Year PAT

March 1997 Rs. 218.56 crore

March 1998 Rs. 83.5 crore

March 1999 - Rs. 267.70 croreMarch 1999 - Rs. 267.70 crore

March 2000 - Rs. 191.81 crore



44

IFCI: Asset classification of PortfoliosAsset classification ofPortfolio

2001-02 (Rs. Millions) 2000-01 (Rs. Millions)

Standard Assets 136501.59 (77.79%) 148178.78 (79.01%)

Sub-standard Assets 8952.37 (5.10%) 9739.64 (5.19%)

45

Doubtful Assets 30024.07 (17.11%) 29630.96(15.80%)

Total 175478.03 (100%) 187549.38(100%)

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

46

192 4838( 12.41%) 5-7 yrs

671 7265 (18.64%) More than 7 yrs

Total =1145

NET NON PERFORMING ASSETS

YEARS SBI PNB ICICI UTI1996 7.31 10.21 3.69 5.331997 7.30 10.38 3.22 3.661998 6.07 9.57 1.14 5.631999 7.33 8.96 2.88 6.321999 7.33 8.96 2.88 6.322000 6.65 8.52 1.53 4.712001 5.33 6.69 3.36 2.392002 5.63 5.32 5.48 3.462003 4.5 3.86 5.21 2.392004 3.48 0.98 2.21 1.292005 2.65 0.2 1.65 1.392006 1.87 0.29 0.72 0.982007 1.32 0.28 0.78 0.72 47

Key reason for IFCI’s crisis

• Unlike other financial institutions, IFCI rakesrevenue from just one activity, which isProject Finance.

• It accounts more than 90% of its business• It accounts more than 90% of its businessassets

• As a result, the impact of NPAs arising fromdelayed completion of projects has been moreevident in the case of IFCI than in the case ofother institutions.

48

ICICI’s De-Risking of Portfoliol Diversified portfolio

March 2001- Proforma merged March 2002- Merged

12%

33% Project finance

Corporate finance

Retail finance

Reserves & cash

23%7%5%

49

Rs. 931.50 billion Rs. 1,041.10 billion

3%12%

4%

12%

36%

Reserves & cash

Investments

Other assets 23%

8%

34%

… the asset composition change on account of statutoryrequirements and increase in retail assets is contributing to de-risking the portfolio

50

DFI and evolution of ICICI from a DFI

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