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. Excerpts:
Have you heard from the government on conversion of bonds worth Rs 530 crore?
We have not received any information on what the government wants to do with the investment.
What is the road map for the revival of IFCI since the government investment was one of the issues raised by prospective strategic investors?
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.
For almost a decade, you were absent from lending.
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.
What is your 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.
But won’t the cost of funds limit your ability to grow?
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.
But is this a sustainable model?
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.
Can that be your long-term strategy?
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.
Won’t these sectors be riskier as well?
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.
What is the status of your investment in Tata Motors’ differential voting right shares and Hindalco shares?
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 government has once again started talks of consolidation of public sector banks. Is it also the time to revisit the issue of IFCI’s merger with a bank?
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.
There were certain issues about your investment in MCX-SX.
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.
So, what happens to your investment in the National Stock Exchange?
In line with the regulatory requirement, we have reduced our holding to above 4 per cent. Now, it is a function of treasury.
It seems Atul Kumar Rai changes his position like a chameleon changes colour. He is not a professional banker but a retired bureaucrat, who is running IFCI like a dictator. He does not exactly prefers project financing. He prefers speculation with public money. As a result, he lost a lot of cash in Tata Motors and HINDALCO shares. It will be worth examining what kind of assets he is so called adding every year to the balance sheet. Because rumour is rife how loan proposals are cleared in IFCI. One case in point is GMR to whom Rs.50 cr. was doled out within 24 hours of application. Most of directors on the Board are his cronies like Shobhit Mahajan - a close friend, Laschar - an ex-IES, to name a few. Actually, Atul Kumar Rai was so keen in declaring a dividend that he went overboard. Now at every forum, he is beating the drums that IFCI has declared a dividend and its CAR is very very healthy.
Posted by: aryan
December 09 , 2009, 12:37 IST
I guess, u r right. First, Atul Rai was keen to have some strategic partner. Then a few days back his interview on "Moneycontrol" was as if he was speaking on behalf of the Government, which included even merger with some Bank. Now he is saying the institution is revived and merger is not on his mind. Is he again speaking on behalf the Government ? I believe he is enjoying full authority so why should he want a merger. Speaks too much.
Content Guide
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. Excerpts:
