Icra has, in effect, downgraded the term-lending institution by one notch, from higest safety to higher safety. "Deterioration in business conditions consequent to economic slowdown has adversely affected the asset quality of IFCI," an Icra release said.

Icra has, however, reaffirmed IFCI's short term rating at `A1+', indicating highest safety.

An unfazed IFCI chairman-cum-managing director PV Narasimham told The Financial Express: "This downgrade is a one-time phenomenon, precipitated by the provisioning made by the institution towards its non-performing assets (NPAs)."

The IFCI chief, however, admitted that as a fallout of the downgrade, the institution's cost of borrowing will go up although marginally. "IFCI intends to raise around Rs4,000 crore in this fiscal. We do not expect this downgrade to have any significant impact on our cost of funds. It may go up by a maximum of 10 basis points. Most of our borrowing will be from institutions who are still upbeat about IFCI's capabilities," Narasimham said.

Other rating agencies, Crisil and Care, do not have any outstanding credit ratings for IFCI.

"The financial institution will continue to derive advantages of lower expense levels and a favourable asset-liability matching," the Icra release said, adding that a large proportion of long maturity SLR bonds in IFCI's borrowings are also likely to provide the institution with significant cushion with respect to debt repayments.

The Icra release said the decline in IFCI's asset quality has resulted in significant decline in its net spreads during 1998-99 and this, coupled with higher provisions required on NPAs, have adversely affected IFCI's profitability and reserves.

According to Narasimham, IFCI has shown significant improvement in itsoperating profits for 1998-99, but this got watered down on account of NPA provisioning. "The current fiscal will see a still better performance and we are targeting a net profit of Rs 125 crore for the first half of 1999-2000," Narasimham said.

IFCI has reported a 93 per cent fall in its net profits to Rs 23.50 crore for 1998-99, consequent to a provisioning for Rs 2000 crore of its NPAs.

"IFCI has initated steps to control future build up of NPAs by taking a selective approach towards fresh disbursements and reduction of past problem accounts through re-schedulement or legal measures," IFCI chairman said.

IFCI's ability to control further slippage in light of continuing economic slowdown and the competition faced by banks in term-lending would be key to its future profitability, senior analysts pointed out.