Why is it imperative for the govt to act on IFCI?

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Why is it imperative for the govt to act on IFCI?

In an interview with CNBC-TV18, Ashvin Parekh, Partner, National Leader-Global Financial Services at Ernst & Young and BD Narang, Former Chairman of Oriental Bank of Commerce spoke about the contours of the stake sale and what it means for the shareholders.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See latest News about IFCI See previous management interviews See what other Experts & Brokerages are saying about IFCI IFCI BSE | NSE 10/02/12 Are Mutual Funds betting on IFCI?

Q: You think that will be the preferred option that a large public sector bank merges with IFCI?

Narang: If we decide what is best for this then this appears to be the best option. You got to understand that they have historically been lending at a very high rates of interests. When accounts started becoming sick they arranged foreign exchange exposure for these people. The cost of average borrowers went still high and all their accounts became empty. At the core of the heart, if this business has to become viable; their cost of funding has to become competitive. That means the cost of liabilities of IFCI has to come down dramatically and the only way it could be that they have excess to CASA funds rather than a borrowing route for all types to come. 

Q: Where do you stand on this? The government owns a majority stake in IFCI; the government owns majority stakes in many public sector banks. Is this simply going to be one directive to public sector bank to merge with IFCI and be done with it or do you think in this round the government will explore something, which is slightly bolder than this by saying I am exiting from IFCI, let a strategic investor run with it?

Parekh: That's a very important decision that the government has to make. Mr. Narang has touched upon very interesting and I do agree with. The underlying reason why - let's say IFCI now in the longer run will have huge challenges; its the question of borrowing short and lending long quite clearly. What has happened to the other comparable institutions such as IFCI who have already gone through this in the past whether it was IDBI or other - they have already done their normal correction of raising CASA funds through either the merger of small or large private sector banks or in some cases they have also absorbed some public sector banks as well. But that story almost is over; it was a ten year old story and most of the development institutions have come out of that by converting themselves by adoption universal banking approach - that story is over. IFCI is at a point where if they were to do that and take another four-five years to absorb bank and go retail on their deposits and then thereafter improve their liability or their fund raising capability, it's going to be a long-term story.

On the other hand the ability to a public sector bank; midsize or largesize to absorb an organisation like IFCI, not just on its balance sheet but also on its geography, on its people, employees and other things is going to be a bit of a challenge that organisation almost like the OBC that we saw. OBC did suffer a bit of a blink when GTB had to be acquired and thereafter it got back to its financial performance. What could happen to a large size public sector banking company, which were to acquire IFCI; it would certainly have a larger challenge for the next five-six years on its financial performance to come back to the original state or whatever. So it's that kind of an issue on one side - one of the factors, I am not suggesting that that's the only important factor to be considered. But one of the factors which weigh on the government's mind and longer way take the more difficult view of making this particular entity to survive in some form or the other either it gets a banking license, absorbs a bank, gets absorbed into a bank knowing fully well that its going to create a certain amount of impact on that particular organisation or alternatively the route that they adopted over a year-year and a half ago of getting a stakeholder and then converting it into some kind of - let's say a private sector organisation, and expanding its business activities.                

Q: The last time you were involved in this process, it was Sterlite Morgan Stanley at the end of it and the price or the bid that they put in was Rs 107 a share. We understand that this time its E&Y maybe one of the consultants considered. What would you advice them to do differently and what kind of price would you set. Is there anything much different to say this time than you had to say the last time?

Parekh: Without getting too much into what could have happen then and what's happening now. I suppose the core question still continues. What was contributing the value or what could even now contribute the value are some of the critical decisions associated with this particular initiative, at that point in time if you recall, we had the situation of about the government debt which was sitting in the books and it was a concessional debt and there was question about how to treat that debt as far as the new entity was concerned. Once again that kind of question will arise. There was question about the shape of this organisation - is the government willing to give certain indication to the proposed shareholder or proposed investor that it will allow this organisation to take a certain shape. It will allow this organisation to perhaps become a commercial bank for instance as Mr. Narang suggested or it will allow this institution because the hardcore reality is that in its normal course any investor who gets into acquiring IFCI equity is going to find it difficult to run it the way it is at this point in time. The inherent question of short liability, long asset is a very predominant one. So till that is taken, the value contribution, it could be traded at any value, the financial performance can improve in a year or two years marginally but the underlying fundamental question still remains - they need to be answered by the government I thought.         

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