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McKinsey moots Rs 88 billion capital shot for IFCI

Sidhartha in New Delhi

As part of restructuring the beleaguered financial institution IFCI Ltd, global consulting firm McKinsey & Co has recommended a capital infusion of up to Rs 88 billion by the government and stakeholders.

According to the revamp plan, while bailing out IFCI would call for support in the range of Rs 26 billion to Rs 88 billion depending on the liability restructuring that the institution is able to undertake, the cost of liquidation has been put between Rs 88-122 billion. The Centre alone would take a hit of Rs 30 billion on its investments.

The McKinsey recommendations which also lay out a future business plan for IFCI assume significance as a group of ministers is expected to discuss the issue of a bail-out for IFCI.

Quoting the Pricewaterhouse-Coopers report on asset classification, McKinsey has also pointed out that IFCI had bad assets of over Rs 120 billion, a large number of which had not been provided for. PwC had mooted that IFCI double its provisioning for bad and doubtful assets from Rs 22 billion in 2000-01 to Rs 45 billion.

The institution, however, decided to reject the report and had asked McKinsey to prepare a business plan. Executives told Business Standard that PwC's recommendations were not accepted as IFCI would have had a negative tier-I capital of -Rs 14 billion and its capital adequacy ratio would have come down to -7 per cent.

They added that based on the FI's ability to restructure its liabilities, McKinsey, in its report cleared by the IFCI board last month, has drawn up four different scenarios for infusion of capital.

In the worst case scenario where none of the lenders agree to reduce the interest rate on their loans to 9 per cent, as suggested by McKinsey, the stakeholders would be required to chip in with Rs 88 billion capital infusion.

Even if all the liability restructuring measures like conversion of KfW line of credit into tier-I capital and reduction in interest rate are achieved then the institution would require a fund infusion of Rs 26 billion. The retail depositors have, however, been kept out of the ambit.

Executives said that liability restructuring was crucial as there was a liquidity gap of Rs 71 billion over a period of three financial years beginning 2001-02 and ending in 2003-04.

IFCI has already initiated the process of restructuring of liabilities and is in parleys with the investors for reduction of interest rate on deposits and bonds.

The consultancy firm is of the opinion that restructuring of liabilities is a crucial element of IFCI's restructuring plan which also looks at splitting India's largest development financial institution into a good bank and a bad bank. While the bad bank would be an asset reconstruction company with all the bad and doubtful assets on IFCI's books, the remaining part would be IFCI which would look at a different business.

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