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 9 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 50