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Presented By Manoj B Bharadwaj Harsh Agarwal Srivathsa N Chakravarthy 1

WHAT ARE DFI’s ?


Development Financial Institutions who had access to cheap funds (Subsidized fun
ds) 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 firms
who found it difficult to access funds from banks.
2
Domestic Financial Institutions
• Historically, different kinds of financial intermediaries have existed in the
Indian financial system. Banks financed only working capital requirements of cor
porates. As the capital market was underdeveloped, a number of Development Finan
ce Institutions (DFIs) were set up at the all-India and the State levels to meet
the long-term requirement of funds. • DFI’s were initially setup by government
to cater to the sectoral needs by providing finance to the long gestation projec
ts in infrastructure, construction, roads etc.
3
Role of DFI’s
• 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 sign
al demand – supply gaps and need for capacity creation, DFI’s level of lending a
ctivity to different industries provided a proxy signal for the same.
4
Emergence of DFI’s
• More than 300 DFI’s were established around the world in 25 years after the Wo
rld War II. However there was less than a dozen DFI’s at the beginning of that p
eriod. • In India, IFCI, ICICI and IDBI were the 3 National DFI’s and were estab
lished 1948, 1955 and 1964 respectively.
5
Why have DFI’s when you have Banks?
• Post World War II, Underdeveloped / Developing economies that had repressed fi
nancial markets. • In other words, financial systems were highly regulated. Coun
tries started to have fixed exchange rates Interest rates were administered and
pegged at unrealistically low levels
6
Why have DFI’s when you have Banks?
As a result the interest rates were kept out of the purview of the market forces
and 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 DFI’s to perform
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 (Subsi
dized rates) DFI’s were allowed to issue government guaranteed bonds that were e
ligible for SLR
8
Post Liberalization of Financial Markets
• When economies reformed, financial repression was eliminated (i.e.) interest r
ates were determined by market forces. • As a result, the efficient resource all
ocation function fell back on financial markets • This deprived the DFI’s to acc
ess cheap funds (Subsidized funds) and were forced to raise resources at markets
rates
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STRUCTURE OF INTEREST RATES
DEPOSIT RATES
YEAR CALL MONEY RATES 1 TO 3 YEARS 3 TO 5 YEARS ABOVE 5 YEARS SBI ADVANCE RATE C
EILING RATE GENERAL
LENDING RATES
MINIMUM RATE GENERAL MINIMUM RATE SELECTIVE CREDIT CONTROL 12.0 12.0 12.0 14.0 1
4.0 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
YIELD OF GOVT. OF INDIA SECURITIES
YEAR Short term (15yrs)
3.85-4.28
LENDING RATES
IDBI 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)
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
11.0
11.0
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 1
5.5 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
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
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
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 RAT
E 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
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
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 9.5
0-13.42 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 18.00-20.0
0 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
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
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
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
9.79-13.11
13.60-17.10 13.50-17.00 12.50
Impact of Deregulation
• Improved asset-liability management and advanced hedging technique enabled the
banks to lend on a longer term • DFI’s appraisal methods became out of tune wit
h the ground realities of the liberalized economy • Signaling role of DFI was al
most completely lost
19
Curse of DFI’s in India
• There was no competition between the 3 DFI’s as several mechanisms were create
d to co-ordinate the activities of the 3 DFI’s. • Virtually all important decisi
ons were taken at inter institutional meetings designed to ensure a common appro
ach to all issues.
20
Transitional roles for DFI’s
• DFI’s could use their strategic stakes in many companies as instruments for im
proving corporate governance. • Could provide unbiased policy formulations to th
e government • Folding into the state • Transformation into ordinary financial i
nstitution • Transformation into free market DFI • Insolvency / Liquidation
21
Narasimham Committee on DFIs
Submitted report in 1991has both appreciation and criticism: Appreciation: • Suc
cessful in meeting their primary objective of providing funds for industrial inv
estment. • Successful in channalizing assistance industrially less developed sta
tes and backward areas. • Build image (extent corporate sector relay on DFI) • I
ncreasing their share in equity of the Pvt. Sector • Represented in the Boards o
f mgt. of companies and played a major role in M&A
Weaknesses • Licensing Policy: DFIs induced to finance unviable projects by entr
epreneurs without proven competence, and unwanted relaxation in the appraisal st
andards. • Govt. Policy: DFIs forced to provide financial support to sick units
against their better commercial judgments • State level DFI working as wings of
State Governments rather than as autonomous financial institutions • No Competit
ion: Total Absence of Competition to DFIs • Consortium Finance: DFIs have been o
perating almost like a cartel – since different FIs join together and offer cons
ortium finance
Recommendations • Ownership pattern of DFI should be broad based, like that of I
CICI • Government should workout an action plan to be implemented in the next 3
years which would usher in a measure of autonomy of the DFIs in matters of inter
nal consideration • Appointment of Chief Executives of DFIs (banks) should be me
n of proven professional competence and should be selected on the recommendation
s of a panel of eminent persons. • The Boards of DFIs should include representat
ives from the industrial sector.
Development Financial Institutions
• • • • • • • • • • • • • • Industrial Finance Corporation of India Ltd. (IFCI)
– 1948 Industrial Credit & Investment Corporation of India (ICICI) – 1955 Life I
nsurance Corporation of India - 1956 Industrial Development Bank of India (IDBI)
– 1964 General Insurance Corporation of India (GIC) – 1972 Export Import Bank o
f 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 Co
rporation if India Ltd. (TFCI) – 1989 Small Industrial Development Bank of India
(SIDBI) - 1990 Infrastructure Development Financial Corporation Ltd. (IDFC) - 1
997 25 India Infrastructure Finance Company Ltd. (IIFCL) - 2006
History Of ICICI
1955: •The Industrial Credit and Investment Corporation of India Limited (ICICI)
incorporated at the initiative of the World Bank, the Government of India and r
epresentatives of Indian industry, with the objective of creating a development
financial institution for providing medium-term and long-term project financing
to Indian businesses •Funded by World Bank to provide Foreign currency loans to
Industrial Projects & promote Industries in Private Sector. 1969: • Banks were n
ationalized & ICICI became a Quasi-Public organization 1972: •Second entity to s
tart merchant banking services 1977: •ICICI sponsored the formation of Housing D
evelopment Finance Corporation. Managed its first equity public issue
1982:
• ICICI became the first ever Indian borrower to raise European Currency
Units
26
History of ICICI
1986: • ICICI became the first Indian institution to receive ADB Loans • ICICI,
along with UTI, set up Credit Rating Information Services of India Limited, Indi
a 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 Switzerland, the first public i
ssue by any Indian entity in the Swiss Capital Market. 1993: • Promoted Technolo
gy Development Industry Corporation of India India’s First venture capital compa
ny. 1994: • ICICI Securities and Finance Company Limited in joint venture with J
. P. Morgan set up
27
History of ICICI
1996: • • • 1997: • ICICI Asset Management Company set up. ICICI Bank set up. IC
ICI Ltd became the first company in the Indian financial sector to raise GDR. SC
ICI merged with ICICI Ltd.
2000: • ICICI launched retail finance - car loans, house loans and loans for con
sumer 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 s
first CDO (Collateralised Debt Obligation) Fund named Indian Corporate Collatera
lised 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 ban
k in terms of assets. 28
History of ICICI
2005:
• ICICI Bank introduced partnership model wherein ICICI Bank would forge an alli
ance with existing micro finance institutions (MFIs). The MFI would undertake th
e promotional role of identifying, training and promoting the micro-finance clie
nts and ICICI Bank would finance the clients directly on the recommendation of t
he 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 capit
alisation.
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 1.21
billion) in a multi-tranche issue backed by four different asset categories. It
is also the largest deal in Asia (ex-Japan) in 2008 till date and the second lar
gest deal in Asia (ex-Japan & Australia) since the beginning of 2007.
29
Merger of ICICI Ltd. With ICICI Bank & Benefits of Merger
30
Strong complementary organizations
ICICI Bank ICICI
•Large capital base •Diversified and de-risked assets •Strong brand •Well establ
ished corporate relationships
•Largest private sector bank •Strong retail franchise •Technology leader among b
anks
… having similar operating architecture, people and processes. This merged entit
y is consequently well-positioned to harness synergistic advantages and thereby
provide benefits to both ICICI and ICICI Bank
31
ICICI Bank’s strategy to capture retail potential
Strong 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-sellin
g of products
32
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
33
Benefits of Merger
“Forward leap” in the hierarchy of Indian banks A discontinuous jump in size and
scale Achieve size and scale of operations Leverage ICICI’s capital and client
base to increase fee income Higher profitability by leveraging on technology and
low cost structure Offer a complete product suite with immense cross-selling op
portunities ICICI’s presence in retail finance, insurance, investment banking an
d venture capital Access to the ICICI group’s talent pool Improved ability to fu
rther diversify asset portfolio and business revenues Lower funding costs Abilit
y to accept/ offer checking accounts Availability of float money due to active p
articipation in the payments system Diversified fund raising due to access to re
tail funds Increased fee income opportunities Ability to offer all banking produ
cts
34
Competitive Advantages of the Merged Entities
Vast talent pool Large capital base Technology -enabled distribution architectur
e
Complete product suite
Extensive customer relationships & strong brand franchise
Low operating costs
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 forming a “Holding company”. • A
s per this plan ICICI Bank has decided to transfer its holding in four subsidiar
ies
• • • • ICICI Prudential Life Insurance, ICICI Lombard General Insurance, ICICI
Prudential 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. Onc
e approved by regulators, ICICI Bank intends to transfer these investments to IF
S at book value in the books of ICICI Bank. • Formation of holding company would
reduce burden of financing massive capital expenditure of these subsidiaries wh
ich are witnessing impressive growth in their respective businesses.
37
Organizational Structure
38
Market Capitalization
SBI ICICI Bank IDBI IFCI SBI ICICI Bank IDBI Bank IFCI
2% 8% 25% 41% 3%
2%
54% 65%
September 2002
October 2009
39
Types of NPA
There are three major types of NPA: • Sub-standard NPA’s : The account holder co
mes in this Subcategory when they don’t pay three installment continuously after
90 days and upto 1year. for this category bank has made 10% provision of funds
from their profit to meet the losses generated from NPA. • Doubtful NPA’s : Unde
r 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 is
made by the bank.
• Loss Assets : under this 100% provision is made. When account holder comes in
this category their account can be written 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 to medium and large sca
le industries. • It was converted into a public limited company on 1st July 1993
41
IFCI & It’s Operations
The company’s financing operations principally included • Project Financing • Fi
nancial Services • Comprehensive Corporate Advisory Services. The main objective
of DFI was to fund green-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 19
95-96. • 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 decelerati
on in industrial production. • The problem of Non-performing Assets (NPAs) was c
ropping up hastily and IFCI was the worst affected with them.
43
PAT of IFCI after a steep fall in industrial production
Year March 1997 March 1998 March 1999 March 2000 March 2001 March 2002 PAT Rs. 2
18.56 crore Rs. 83.5 crore - Rs. 267.70 crore - Rs. 191.81 crore - Rs. 265.93 cr
ore - Rs. 884.70 crore
44
IFCI: Asset classification of Portfolios
Asset 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%)
45
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
46
NET NON PERFORMING ASSETS
YEARS 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 SBI 7.31 7.30
6.07 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 8.52
6.69 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 5.21
2.21 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
47
Key reason for IFCI’s 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 has
been more evident in the case of IFCI than in the case of other institutions.
48
ICICI’s De-Risking of Portfolio
Diversified portfolio
March 2001- Proforma merged
33% Pro ject finance Co rp o rate finance Retail finance 12% 4% 12% 3% 36% Reser
ves & cash Investments Other assets
34% 8% 23%
March 2002- Merged
5% 7% 23%
Rs. 931.50 billion
Rs. 1,041.10 billion
… the asset composition change on account of statutory requirements and increase
in retail assets is contributing to derisking the portfolio
49
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