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: How would you rate IFCI as it stands now as a business? They have been disbursing loans, they have a fairly steady margin performance of 2%, and their NPA are down to almost zero. How does IFCI rate as a business right now?

Narang: Let's understand that they have declared dividend, notional one of course but that means they are in profit for the last four years - that's one. That means they have cleaned up their balance sheet significantly not exactly what ought to be but significantly than it use to be - second. They are conscious of the fact that now they have to stay on the course of profitability, that means they have to improve revenue stream as well and apparently they are focusing on the fee based income, so to that extent I find a considerable improvement in their working - third, they are beginning to realise that you cannot afford to carry a very long book - that means they are now focusing on short-term advances, which are higher in yield and short-term advances and they have also tried to put their act. But the core issue again comes is where are they going to get funds at a competitive rates, they cannot afford to raise from the market at a cost which is affordable. So at the end of the day the long-term solution will only come if they have assess to the rates at which competitive organisation like ICICI Bank or IDBI is able to obsess, converting them into a bank or merging them into a bank, I do not see any other solution which will make it stand for all types of come, it could be merged with a public sector bank or it could be merged with a private sector bank that's a different issue. But at the end of the day they are doing very well but if they have to do still better then they have to have an access on cheaper parts.    

Q: If the whole debate is about whether it should merge with a public sector undertaking (PSU) bank or not why is the government doing this exercise, is it so that IFCI in the future does not become a sick or ailing institution again or is it because it wants to divest its equity in IFCI and pretty much treated as a divestment or a capital raising exercise?

Parekh: This time around on account to the fact that there has been a profit track record, the entire premise over which this exercise would be carried out would be very different or little different from the kind of exercise that was carried out earlier. So to that extent, I do agree that at the profit record and the performance record is significantly different from what it was leaving aside the very fundamental issues of the long-term liability or even the short-term liability at lower cost. That remains for any investors to be - so I suppose unless they answer that question, going into this exercise and keeping that part open to the new investor and suggesting that once a new investor has acquired the equity then thereafter that new investor can go to the government, approach the regulator, sick some license on commercial banking or ability to raise deposits at the retail level, these are some of the open questions. How far will the mandate or the government go is going to be a critical part of this exercise.

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