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 30/05/12 Are Mutual Funds betting on IFCI?

Q: On the points both of you have been making, let me ask you two basic questions, one is that it cannot run but as a bank but we have many successful non-banking companies for example IDFC, which are running very well without being a bank, you have other non-banking companies which are doing very well, why cannot IFCI become the IDFC of the SME space with a strong private sector management? Secondly, while you are saying it makes sense for IFCI to merge with a bank, what sense does it make for a PSU bank to acquire IFCI?

Parekh: Organisations like IDFC or IFCI have been created with a specific purpose of leading capital into infrastructure projects and there also once again the very core issue of borrowing short and lending long is now being addressed, we are now going to have instruments like take-out finance, so in this budget we did get very clear indication from the FM that in order to make organisations like IFCI or IDFC viable over a longer period. This aspect of long liability will have to be addressed. IFCI can view as one more organization in that list in that case but then the nature of its book will have to change then once again you are not looking at the kind of shift that IFCI has made in the last four-five years, which is once again getting into the shorter tenure, asset building kind of then once again you are knowing the entire organization into a different shape altogether. So perhaps if I have to answer your question, IDFC or IFCI are different kind of organizations. IFCI which was a development bank at one point in time is now making its effort to get more into the shorter end of the asset building and therefore once again to push it back into something else could become a challenge in itself.

So that could be one of the major considerations. A fundamental question about if you are really going to have short assets, medium assets and long assets in your book then the ability to raise matching liability will keep on staring in the face of the IFCI leadership in any case.

Q: Based on the synergies that you have pointed out between IFCI and a bank, potentially what looks like the best fit from the public sector banks?

Narang: You should understand IFCI does not need the divestment for its own sake. Their capital adequacy ratio is around 20%. Issue is making it sustainable whether it is in the hands of the private organisation or it is in the hands of a public organisation. IDFC could raise money because it was rated as AAA and right from the beginning, they have structured themselves in a manner that their whole working world has became a very flexible kind of a thing but IFCI was molded in the typical IDBI mode and just plain simple vanilla lending.

Their non-interest income was pretty low, which only recently they have switched over and trying to make efforts. I did examine this balance sheet at that point of time.

Unfortunately both of us being from North India, we had exposure at the same client base and to be able to help out a client, we were not in a position to take extra exposure in that, similar client base so exposure limit coming to the full, we were not able to take advantage of the situation. Situation comes that should it become a bank in the hands of a private sector organisation acquirer or it should first become a bank and then be sold. This is the moot issue now.

Even if the private investor is going to buy it, he would like the government to grant him a license to become a bank, so why not to make it a bank first and then sell it. That means today it fulfills all the qualifications, entry barriers which RBI has stipulated. If the private sector takes it over and then ask for a bank license to make it a viable then why not to give it a license, allow to become viable and then be sold that is what I would like to say.

We have a beautiful organisation, it went into a problem, it has come out of a problem, now the ratios are becoming to look much more attractive than they used to become attractive, to add value or to increase value give it a banking license like anybody else is getting, allow it to become a bank and then be sold, you will get a proper valuation for that.