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

On Thursday, CNBC-TV18 had reported that the government plans to exit IFCI. Sources say the government will appoint a consultant to decide the future shape of IFCI. The consultant will help with suggest what the government's role in IFCI will be. The government has left all options open including exiting IFCI. It may merge IFCI with another institution.

So, why should the government act fast? Ashvin Parekh of Ernst & Young says most development institutions have been converted into banks, so a delay in deciding IFCI's fate will only complicate matters.

Seconding Parekh, BD Narang, Former Chairman, Oreintal Bank of Commerce, says IFCI needs access to cheaper funds to survive. "Getting funds at competitive rates is key for IFCI. A merger with a bank seems to be the best option for IFCI as it needs access to CASA funds."

But why is IFCI in the doldrums? According to Narang, IFCI suffered as it borrowed short and lent long. "IFCI needs to substantially cut liability costs." However, he was quick to add that the financial institution's core strength lies in project evaluation.

Here is a verbatim transcript of the exclusive interview with Ashvin Parekh and BD Narang on CNBC-TV18. Also watch the accompanying video.

Q: You were engaged in the process last time around and now the government is saying that it has options open of even merging IFCI with another institution and exiting its shareholding completely. What do you make of the first few statements, which have come in?

Parekh: First and the foremost, I suppose the objective with which I see the divestment into last time or opening up the shareholding, I would say, some of the areas particularly the areas of management and management participation and the rights to management, the CEO position and other areas was still little open within the government itself. In the sense the government wasn’t very clear in terms of how much or how far it would go in that area. Now after having worked for about a year after that, after that scenario there seems to be some clarity -- otherwise once again going into that kind of an exercise once again without that clarity certainly wouldn’t really get them or get any one good result. So I suppose this clarity was even essentially, I mean around that time we made an attempt this clarity was essential and I am glad that there will be some more clarity on this subject. So how prepared the government is in regards governance, management rights, if there are anything on the affirmative votes if those conditions, if there is a clarity on that then I suppose the programme could be conducted once again.

Q: You have studied the value of the business in detail, which has probably improved if anything since the last time this entire process started. What to your mind is the more elegant way of doing this - to open it up and get a strategic investor and promise them majority stake or to look at merging this financial institution with another bank?

Parekh: That’s the larger issue; I think you are touching upon something which is very core to what the ministry of finance will eventually decide, not just in case of IFCI but I suppose equally important for some of the seven public sector bank, I mean out of the 19 public sector banks who almost nearing that 51% mark now. So I am not trying to put two together but I am saying that there is a larger question – is the divestment is the route for the government to bring in capital into these institutions or is the consolidation, the way out. If the consolidation is the way out then of course there would be institutions that have the government equity of much more than 51%, so there is a comfort available with those institutions, they are large enough to absorb, let’s organizations such as the ones who are ready for that kind of capital requirement who need capital. So either its divestment or consolidation, the government has to make up its mind in terms of saying what route it should adopt. We are seeing that practically every three months, the view keeps on changing; I mean we are talking about profit making entities, public sector enterprises who could go to the markets now on one side but at the same time, we believe that 51% is a holy cow and we don’t want to touch instead of anything less than that. So that clarity is really essential I should say.

Q: It’s not an apple-to-apple comparison but you are at the helm of affairs when Oriental Bank of Commerce had to digest the merger with Global Trust Bank (GTB). Is it a good idea usually for two large institutions to merge like this and does it work to the benefit of both?

Narang: You should examine it from another perspective – what is best for IFCI. IFCI has suffered primarily because they borrowed short and lent long that means their cost of funds was always very high. If IFCI has to recover on a sustainable basis their liability cost has to come down at a very competitive level. There could be only three options available for that – (1) they themselves get a banking license (2) they are merged with a bank (3) they takeover a bank –there could be any other way where such an organization could be made sustainable for all types to come.

IFCI has played a very pioneering role in funding of the mid corporate all over the country. That means they have their core sense; their core sense are basically appraisals. So they can definitely concentrate on a fee based income models and if they are unable to cut down the cost of their liabilities they can become very viable organization. So government should do what is best for IFCI. If you keep the IFCI at the core then the best options could be to merge it with a big bank where cost of funds is very low or current account savings account (CASA) is very high.
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