The revised ratings, however, indicate high safety.

ICRA had first downgraded IFCI in June 1999, one notch down from AAA plus to AA plus. IFCI is the single largest shareholder in ICRA Ltd. The downgrade in the long-term and medium-term ratings factor in the continued high level of NPAs resulting in income loss and increased provisioning, consistent decline in interest spreads following fall in gross yields, decretion in reserves and lower capital adequacy ratio (CAR) at 8.80 per cent times as on March 31, 2000.

"The revised ratings, however, take into account IFCI's substantial indirect sovereign ownership through IDBI, UTI etc and its role and position in the Indian economy", a top official of ICRA said. The IFCI management is trying to reduce and recover some NPAs and has made substantial provisioning for the same. But IFCI's net NPA levels continue to be high at 20.8 per cent as on March 31, 2000, although it has declined marginally from 21.4 per cent as on March 31, 1999. High NPAs have resulted in income loss leading to a decline in gross yields and has increased the provisioning and write-off requirements over the years.

IFCI's business growth has been declining in the last two years due to capital adequacy constraints. IFCI's capital adequacy as on March 2000 was 8.8 per cent, which is lower than the stipulated norm of 9 per cent prescribed by Reserve Bank of India.

The capital adequacy is higher as on March 31, 2000 as compared to 8.37 per cent as on March 31, 1999, despite a decline in the reserves following the rights issue of equity shares by IFCI in 1999-2000 and revaluation reserve created on revaluation of assets in the previous fiscal. Low capital adequacy will constrain the asset growth of IFCI in future years, the statement adds. "IFCI has got involved in projects where viability is in question and where further disbursals are required for those to get moving" the official added.

There is also a pressure on the cost of funds with IFCI's profitability also being adversely affected. The release says that IFCI's ability to control further slippage in asset quality, recover from existing NPAs, ability to recapitalise to increase capital adequacy and control on borrowing are critical for its future growth and profitability.

New ratings not to affect interest rates : IFCI CMD

New Delhi, July 6: Industrial Finance Corporation of India (IFCI) chairman and managing director PV Narasimhan on Thursday said that the downgrading of its ratings by Icra will not put pressure on the interest rates of its outstanding bonds.

"Icra's downgrade is for our outstanding debt issues. It is not going to affect interest rates on our existing long term and medium term bonds issue," Narasimhan told PTI.Earlier in the day, credit rating firm, Icra downgraded long term and medium term ratings of IFCI saying the FI'S high level of non-performing assets (NPAs), resulted in decline in spreads, drop in reserves and lower capital adequacy ratio at 8.80 per cent.Narasimhan said that there was nothing new in the rating downgrade as Icra had downgraded the ratings of IFCI last year. "Icra's rating is similar to the ratings of other credit rating agencies," he said.

Further, he said it will not force IFCI to hike interest rates on the new bonds issues."We are finding it difficult to maintain a good spread on interest rates. But, this is a general trend which all financial institutions face," he pointed out. Icra had stated that IFCI'S marginal and average cost of borrowing had declined in 1999-00 following decline in interest rates in the economy.