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Tamal Bandyopadhyay
Mumbai, Aug 9: In a major policy shift, the Industrial Development Bank of India (IDBI) has decided to finance takeovers of domestic corporates by foreign companies.
This is part of the institution's three-pronged strategy to boost asset growth. The other aspects of the strategy are aggressive lending of short-term corporate loans and treasury products, and lending long with an interest rate reset clause every year.
Confirming the development, sources in the premier term-lending institution --which is caught in a pincer of too much cash and too few avenues for profitable deployment--said: "We are drawing up a plan to go all out on pushing the asset growth. We are taking a close look at the legal and tax implications of the proposed new products. The new lending strategy will be put in place over the next fortnight."
The institution's sanctions fell by 15.8 per cent in the April-June quarter of fiscal 2000 to Rs 4,806 crore, from Rs 5,708 crore in the first quarter of 1998-99, while disbursements droppedby 30.6 per cent to Rs 1,749 crore, from Rs 2,521 crore.
In the first quarter of the current fiscal, IDBI posted a 19.39 per cent drop in its net profit to Rs 291 crore, from Rs 361 crore in the year-ago period. In fiscal 1999, IDBI's net profit had dropped sharply to Rs 1,259 crore.
The decision to finance foreign companies' takeovers of domestic entities marks a major policy shift for the term-lending institution. "All takeovers are subject to Foreign Investment Promotion Board (FIPB) approval. We will decide on financing these proposals on a case-to-case basis and strictly on merit," an IBDI insider said. Rival financial institution ICICI is in the processs of financing similar takeover deals.
In tune with the new-found aggression, IDBI is also developing an array of treasury products. Besides, the plan is to fund short-term (between six months and one year) corporate loans. "So far, primarily, we have been borrowing long. With an active treasury, we will borrow short and lend short and, hence, therewill not be any asset-liability mismatches," sources said. It has disbursed about Rs 1,500 crore of the targeted Rs 4,000 crore corporate loans in the current fiscal.
In a radical shift in strategy, IDBI has also decided to lend long, with a clause to reset the interest rate every year. "We never used the reset clause effectively. The plan is to extend long-term loans with a reset clause every year, which will enable the institution to borrow one-year money to create three to five year assets," the sources said.
As part of a strategy to boost its loan growth, IDBI will also lift the cap on financing non-banking finance companies (NBFCs) and cut the interest rate on bill discounting.
The move to push advances aggressively was triggered by the fact that the institution is sitting on large cash balances, on which it is earning negative returns. With the marginal cost of funds pegged at nearly 13 per cent, the beleagured term-lending institution is earning a 5 per cent negative spread on this corpus, as theaverage yield on the overnight call market and short-term treasury bills is around 8 per cent.
INSIGHT: Quality of assets will improve
So far, IDBI has not been able to fulfil its commitment towards rapid asset growth. The reason has been a shortfall in demand for term finance. To that end, the move towards funding purchases of domestic assets by overseas companies will have a beneficial impact. The funding of Lafarge's purchase of Tisco's slag cement plant or PowerGen' purchase of Torrent Power by a financial institution is welcome, as the quality of assets will improve.
--Aaron Chaze
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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