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Tuesday, December 8, 2009

'We stand revived, merger not on our mind'

IFCI, the country’s oldest development financial institution, seems to have turned the corner as it has paid dividends after a decade. While tough times, including defaults, are a thing of the past, the institution is still trying to find a new business model. In an interview, IFCI Chief Executive Officer and Managing Director Atul Kumar Rai talks about his strategy and says he will try to keep the financial institution afloat without merging with another entity.We have not received any information on what the government wants to do with the investment.

From our perspective, IFCI stands revived. There is no longer any deficiency in the institution. We have a very healthy capital adequacy ratio and, this year, we have paid dividend after 10 years. There is an issue as to which lines of business we should pursue. From the management side, we need to act depending on the situation. The stakeholders will have a point of view on the role to be adopted by the institution.

We have been lending for the last three years and we have created fresh assets of around Rs 3,000 crore each year. We have been lending at a reasonable margin that covers our cost of funds.Our long-term cost of funds is around 9 per cent. This is very good for an entity which neither has sovereign backing nor is a bank.

For us, the crucial business aspect is that we have begun to grow our balance sheet, which was shrinking for several years. We are avoiding ambitious growth. Given the past experience, we have taken a conscious decision to keep our maximum exposure at Rs 150 crore, while the minimum, which was Rs 50 crore, is being enhanced to Rs 100 crore. We may increase the upper limit to Rs 200 crore.

Given the scarce human resources, we do not want to lend aggressively. Maybe we are not represented in the biggest projects, but that’s a call that we need to take because we cannot have the cost of funds of a bank. For instance, during times of market volatility, you can use the shyness of other people to your advantage, earn good returns, and then exit. Given our experience in dealing with various sectors and mid-corporates, we can tap the potential in this.Straight-forward banking is something we cannot do since we raise funds from the secondary market. We can look at sectors where banks have an issue.

That is one way to look at it. We have a higher cost of funds and that needs to be recognised. So, we have to define the risk profile that we want to go for. You have to earn 2.5-3 per cent margin. But at times the margin can be 4-5 per cent, as is the case now. Banks may not be willing to enter at every stage. So, we can enter at, say, the stage before a power project achieves financial closure and exit a year after the financial closure is achieved. This way, the returns will be higher. IFCI cannot manage risks across sectors, but given its expertise in roads and power, it can use this to our advantage. Here, you can do part-equity, part-debt and go for mezzanine or take-out finance. Basically, you can use a lot of gaps to leverage returns.

We are sitting on some decent profits. We have sold some of the Tata shares and we will make some more profit on the shares that we are left with.The option is always there since we have a public sector character. But this has been tried before. Several suitors were approached, but it was not possible to merge then. Valuations and other issues, that can make the merger a success or failure, would need to be factored in before taking a decision.From the management’s perspective, we want to do a good job so that IFCI can stand firm on its own feet.
We have invested 5 per cent on the basis of an approval from our board. It is a long-term investment where you cannot expect to earn a return overnight.In line with the regulatory requirement, we have reduced our holding to above 4 per cent. Now, it is a function of treasury.

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