The bombshell news is out and one, which the investors in IFCI should take note and get their ears glued to the above, said FI.

The news is that as a result of the redemption and repayment pressures being faced by IFCI, one of the credit rating agencies, ICRA has decided to put all IFCI debt issues on the "rating watch with negative implication". IFCI has come under repayment pressures for the fiscal mainly due to its decision to exercise a call option on a bond issue to the tune of Rs 420 crore and this coupled with the normal repayments have put a repayment pressure of around Rs 1,300 crore on the financial institution.

And this is something which is a shocker since the the change in rating outlook comes even after IFCI chairman P V Narasimham’s assurance yesterday that the default in payment to bondholders due to some "technical reason" and it was confident in repaying to the tune of Rs 100 crore within three days.

The ICRA statement says > the rating action takes into account the liquidity pressure being faced by IFCI due to bunching of repayments, IFCI’s liquidity strain got exacerbated after it exercised a call option for early repayment in July 2001. IFCI has been affected due to deterioration in asset quality, significant asset liability mismatch and weak capitalization.

IFCI would need to rollover or raise fresh borrowings to meet the shortfall. And in view of IFCI’s weak financial position, ICRA has stated, government support would be critical and recapitalisation of IFCI would mitigate some pressures and IFCI has already requested the government for infusing Rs 400 crore fresh capital. ICRA said that it would review IFCI’s ability to manage its cash flows, besides assessing the likelihood, timeliness and adequacy of government support.

IFCI is up against repayments and redemption pressure to the tune of over Rs 1,300 crore in the current fiscal. Repayment problems have cropped up due to shortage of liquidity. While the borrowings of the institutions are of shorter period, the FI has landed out for a longer period and hence is facing an asset-liability mismatch. The FI is likely to request the other institutions to allow them to delay the repayments apart from asking them to convert the IFCI loans into debentures and the total amount of loans, which can be converted into debentures, is to the tune of Rs 20 billion.

The repayment crisis has been aggravated by the call option, which IFCI decided to exercise on a private placement of bonds to the tune of Rs 420 crore. The call option was exercised in an effort to reduce the interest rate burden, which was to the tune of 16 per cent to 17 per cent. This has added up to the routine redemption and repayment, which are to the tune of Rs 710 crore.

Earlier, P V Narasimham, chairman and manging director of IFCI stated that there has been an asset liability mismatch for the institution for the last few years and the asset liability mismatch is mainly due to the fact that we had borrowed for a period of 5 years while our lending has been for a period of 10 years.

Now Moody’s puts IFCI rating under watch

Rating agency Moody’s Investor Services have put financial institution IFCI Ltd on the watch list for a possible downgrade in view of the liquidity crunch faced by the institution which has resulted in a delay in its repayment obligations and this comes in the wake of IDBI’s rating being downgraded last week. In a statement issued on 25/7/2001, Moody’s said that the rating was put on review on concerns that a liquidity squeeze, which has led to a delay in payment of local currency obligations may spill over and lead to delays in the servicing of the institution’s foreign currency obligations.

Further the statement says that the availability of support (from the government) has been a major factor pulling up IFCI’s issuer rating to the Ba2 country ceiling for foreign currency debt in India and expressed hope that the Indian government would respond positively to IFCI’s recapitalisation request and also disclosed that IFCI's ability to manage its cash flow besides assessing the likelihood and timeliness of government support during review would be kept under close watch.

How scams are flaking out the savings surplus

KETAN PARIKH the very mention of the name is being greeted with a lot of disdain and contempt for the shame and ruin he has brought upon millions of innocent investors both small and big, it has already rendered the U T I and GTB as two unfit institutions and who are now just a blot on the country’s fair name. The man should not be let go easily, he should be dealt with a hard and firm hand and meted out life imprisonment if be for the hurt he has caused to investors.

Added to this is the fact the tumbling share markets have wiped out prospects of capital gains in the foreseeable future and the fall in distribution by mutual funds (including UTI) has cut deep into current incomes, reinforced by the squeeze on interest on postal savings and commercial bank term deposits.

This may adversely impact financial savings, which, as a proportion of GDP, has fluctuated between 11.9 per cent (1994-95) and 8.9 per cent (1995-96) and there is no estimate of the (income and wealth) loss suffered by financial savers this year. The reckoning is the loss is large. Investments in mutual funds dedicated to infotech, for example, are a dead asset.

At a rough guess, 6 per cent of the country’s population is above age 60. At least this proportion of savers has been adversely affected. But those younger also save from their current income; their income and wealth losses will be far from small.

At the margin, all this could slow down private final consumption expenditure; its growth, as a proportion of GDP, has fluctuated between 7.9 per cent (1996-97) and 1.7 per cent (1997-98). The economy depends on middle class households, a large section of which been wounded by the financial markets. Current expectations are that a likely monsoon-fed kharif bumper will revive demand.

But the goods that will be in demand from agricultural income earners are different from those in demand from urban middle class households. The revival of domestic consumption-led growth is unlikely to be a smooth affair. This is ominous in a year of certain slowdown in exports (which contribute 8-10 per cent to GDP).

The policy-maker views individuals as captive savers: if savings are not diversified into financial markets, they are bound to flow into the banks. This is true of incremental savings. And currently bank deposits are burgeoning. However, this does not mean business as usual-for three reasons.

First, there are no takers for bank credit. Second, with the decline in industrial growth, banks fear a rise in their non-performing assets. This will require larger provisioning from profits; consequently, banks will not be in a hurry to lower their average lending interest rate. Without improved credit offtake and investment, accumulation of deposits will go in vain.

And finally, through 1999-2000, there has been a surge in private placements of bonds and shares. Bond finance substitutes for working capital; and banks have no control over their end-use. There is no knowing how bond finance has been spent in the present milieu of financial scams.

As regards private placements of shares, the current allegations against UTI investments in them are worrisome: it was in cahoots with market operators who inflated prices (by a mind-boggling dimension). No tab has been kept on private MFs in this regard. The financial bubble is likely to have attracted a wide array of players.

Less than hundred percent of financial flows has gone in support of the real economy (where income growth is consequently slated to slow down). This perhaps reflects a savings surplus in a situation of declining investment. The logic of scams now requires financial savings to decline to match the low level of investment.