India - Eleventh and Twelfth Industrial Credit and Investment Corporation Projects

Doc_amet of The World Bank FOR OFFICIAL USE ONLY Repot NW. 6052 PROJECT COMPLETION REPORT INDIA: INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LOAN 1097-IN AND LOAN 1475-IN January 31, 1986 Industrial Development and Finance Division South Asia Projects Department Thi d _emet bm a res&Iru d__UltIo md may be =_ by reciets dly In he pefommee of _hei oficad du*& It bcnents an ad gwwue be d ld wih Wrd Dmk aus_r_mtle.  Currency Equivalent (as of June 21, 1985) US$1.00 = Rs 12.51 December 1983 US$1.00 = Rs 10.49 December 1982 US$1.00 - Rs 9.63 December 1981 US$1.00 = Rs 9.10 June 1977 US$1.00 = Rs 8.80 June 1975 US$1.00 = Rs 7.81 Acronyms ASPID - Industrial Development and Finance Division, South Asia Projects Department, World Bank DFC - Development Finance Company DM - Deutsche Mark CDP - Gross Domestic Product COI - Government of India ICICI - Industrial Credit and Investment Corporation of India IND - Industry Department, World Bank JY - Japanese Yen KfW - Kredit fur Wiederaufbau SF - Swiss Franc US$ - United States Dollars Fiscal Year ICICI - January 1 to December 31  MO OMCJAL USE ONLY THE WORLD SANK Washington .C. 20433 U.S. OhIc* a ietecoa opwat' EvAjtui January 31, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report: India - Industrial Credit and Investment Corporation of India (Loans 1097-IN and 1475-IN) Attached, for information, is a copy of a report entitled "Project Completion Report: India - Industrial Credit and Investment Corporation of India (Loans 1097-IN and 1475-IN) prepared by the South Asia Regional Office. Under the modified system fox project performance auditing, further evaluation of this project by the Operations Evaluation Department has not been made. Attachment L ( This document has a restricted distribution and may be used by ecipients only in the performance of their offcial duties. Its contents may not otherwise be diclsed without World Bank authoriadon.  FOR OMCIL USE ONLY PROJECT COMPLETION REPORT INDIA: INDUSTRIAL CIAEDIT AND INVESTMENT CORPORATION OF INDIA LOANS 1097-IN AND 1475-IN TABLE OF CONTENTS PAGE NO. PREFACE .................................................. BASIC DATA SHEET ............. e ii DISBURSEMENTS ....................... iv HIGHLIGHTS .......................................... v Io BACKGROUND 1....*.... 1 II. ENVIRONMENT 2...**....a**........*e 2 III. PERFORMANCE OF ICICI ..................................... 4 IV. LOAN UTILIZATION/PROJECTS FINANCED ..... .................. 9 V. CONCLUSIONS .................... .......................... 12 LIST OF ANNEXES 1. Organization Chart 13 2. Comparative Summary of Operations 14 3. Income Statements, 1978-1984 15 4. Balance Sheets, 1978-1984 16 5. Trends in Arrears 17 6. Analysis of Arrears 18 7. Loan 1097-IN and Loan 1475-IN by Size of Loan 19 8. Loan 1097-IN: Assistance by Industrial Subsector 20 9. Loan 1475-IN: Assistance by Industrial Subsector 21 10. Loan 1097-IN: Time and Cost Overrun by Type of Project 22 11. Loan 1475-IN: Time and Cost Overrun by Type of Project 23 12. Comments Received from ICICI 24 Ths docment has a restcted distbution and may be used by recpients only in the peformance of theikroi duties. Its ontents may not otherwis be discloekd without Word Bank authoization.  -i- PROJECT COMPLETION REPORT INDIA: INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (ICICI) LOAN 1097-IN AND LOAN 1475-IN PREFACE This report reviews the achievements under the Eleventh and Twelfth Loans to the Industrial Credit and Investment Corporation of India (ICICI). It covers ICICI's progress and its relationship with the Bank Group during 1978-1983. The 1971-1977 period was covered in the Completion Performance Audit Report No. 3428 on Loans 789-IN and 902-IN, and earlier periods in similar earlier reports. Loan 1097-IN was approved on April 1, 1975, declared effective on July 1, 1975, and disbursed until June 3, 1981. Losn 1475-IN was approved on July 5, 1977, declared effective on October 4, 1977, and disbursed until September 30, 1983. The undisbursed amounts of US$6.2 million, under LoanlO97-IN, and US$4.0 million, under Loan 1475-IN were cancelled. This Project Completion Report was prepared by the Industrial Development and Finance Division of the Projects Department, South Asia Regional Office, based on draft PCRs prepared by ICICI and file review. Comments received from the borrower have been reflected in the report and are reproduced as Annex 12. This project has not been audited by the Operations Evaluation Department.  -ii- PROJECT COXPLETION REPORT INDIA - INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OP INDIA LOAN 1097-IN AND LOAN 1475-IN BASIC DATA SHErT KEY PROJECT DATA Item Loan 1097-IN Loan 1475-IN Loan Amount US$ million 100.0 80.0 Disbursed n 93.8 76.0 Cancelled 6.2 4.0 Repaid to IBRD " 73.8 42.4 Outstanding to IBRD US$ million 20.0 33.6 Economic Rate of Return Varied Varied Financial Performance Varied Varied Institutional Performance As expected As expected oTHER PROJECT DATA Item Loan 1097-I Loan 1475-IN First Mention in Files 5/31/74 12/18/75 Negotiations 2/26/75 4/27/77 Board Approval 4/01/75 7/05/77 Loan Agreement Date 4/02/75 7/22/77 Effectiveness Date 7/01/75 10/04/77 Original Closing Date 12/31/80 3/31/83 Actual Closing Date 6/03/81 9/30/83 Borrower ICICI ICICI Executing Agency ICICI ICICI Fiscal Year of Borrower 12/31 12/31 Follow-on Project Name ICICI XII ICICI XIII. Loan Number 1475-IN 1483-IN Amount 80.0 100.0 Loan Agreement Date 7/22/77 5/16/80  -lii- MISSION DATA Item Month Year Staffweeks Report Date Appraisal (Loan 1097-IN) March 1974 6 03/14/15 Supervision October 1975 1 12/18/75 Appraisal (Loan 1475-IN) November 1976 6 06/22/77 Supervision December 1976 9 02/18/77 Supervision September 1977 3 10/14/77 Supervision December 1978 4 02/06/79 ppraisal (Loan 1843-IN) December 1979 4 04/18/80 Appraisal (Loan 2057-IN) April 1981 4 09/08/81 Supervision June 1982 2 07/26/82 Supervision April 1983 2 04/28/83 Supervision September 1984 2 10/24184  -iv- PROJECT COMPLETION REPORT INDIA: INDUSTRIAL CRED'IT AND INVESTMENT CORPORATION OF INDIA LOAN 1097-IN AND LOAN 1475-IN SCHEDULE OF ESTIMATED AND ACTUAL DISBURSEMENTS (Us$ million) Loan 1097-IN Loan 1475-IN Actual as Z Actual as Z Estimated Actual of Estimated Estimated Actual of Estimated FY75 5.4 - - FY76 29.7 8.1 27.3% - - FY77 60.0 45.9 76.5% - - - FY78 82.4 78.1 94.8% 9.0 2.5 27.8% FY79 95.8 89e4 93.3% 32.0 26.9 84.1% FY80 100.0 92.3 92.3% 60.05 53.5 88.4% PY81 100.0 93.8 93.8% 78.0 69.6 89.2% FY82 - - - 80.0 74.4 93.0% FY83 - - - 80.0 75.7 94.6% FY84 - - - 80.0 76.0 95.0% Total 100.0 93.8 93.8% 80.1 76.0 95.0%  PROJECT COMPI.ETION REPORT INDIA: THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED LOAN 1097-IN AND LOAN 1475-IN HIGHLIGHTS The two loans subject of this review were the eleventh for US$100 million and twelfth for US$80 million of a series of fourteen loans, totaling US$765 million, made to date to the Industrial Credit and Investment Corporation of India Ltd. (ICICI). The Bank's association with ICICI dates back to the Corporation's establishment in 1955. The Bank's objectives under these two loans were to continue to tutilize ICICI as an efficient channel for financing high priority industrial projects and to undertake studies of specific industrial development problems and support its promotional efforts (para. 5). Both loans were disbursed in a timely fashion to finance projects which have had a positive impact on industrial development in India (para. 23). Compared to previous Bank loans, the eleventh and twelfth loans were utilized for more projects located in backward areas in line with agreed objectives (para. 25), the projects were implemented more efficiently and are operating satisfactorily (para. 27). Also, ICICI has successfully developed new operations to assist industry, primarily in the areas of merchant banking and leasing (para. 11). It also is involved in promoting industrial research and improving labor and management skills through assistance to various technical institutions in India (para. 18). With Bank support and assistance, ICICI has also initiated more policy-oriented sector work, which has served as basis and has led to the formulation of the Bank's proposed Industrial Export Development Project and Cement Project (para. 29). Other important developments at ICICI have been the sizeable amount of foreign currency resources mobilized in the international markets (para. 21), the reorganization of its operational structure along subsec- toral lines (para. 11), the strengthening of its regional offices, and the con- tinuity and ability of its management (paras. 10 and 29). However, ICICI will need to be more actively involved in the appraisal, implementation and supervi- sion of projects financed with bank consortia, and to take steps to improve loan collections (para. 22). Overall, ICICI is successful in adapting its operations to changes and constraints in the financial and industrial environment and thereby promote efficient and profitable operstions (para. 29). These two loans were helpful in contributing to institutional improvements in ICICI, reinforcing ICICI's development objectives and increasing ICICI's role in making recommenda- tions on industrial policy reform.  PROJECT COMPLETION REPORT INDIA: THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED LOAN 1097-IN AND LOAN 1475-IN 1. Loan 1097-IN for US$100.0 million was the eleventh loan extended to ICICI under a Loan Agreement signed on April 2, 1975. The Loan carries an 8.5% rate of interest repayable in accordance with a composite of amortization schedules of subloans with a maximum maturity of 15 years including grace period of up to 5 years. The Loan became effective on July 1, 1975. 2. Loan 1475-IN for US$80.0 million was the twelfth loan to ICICI, which became effective on October 4, 197i, under a Loan Agreement signed on July 22, 1977. Loan 1475-IN carries an 8.2% p.a. rate of interest repayable in accordance with a composite of amortization schedules of subloans with a maximum maturity of 15 years including a grace period of up to 5 years. I. BACKGROUND 3. ICICI was established in 1955 with an initial capital issue of Rs 50 million to provide financial assistance to industry and to promote the develop- ment of Indian capital markets. The Bank Group was actively involved in ICICI's establishment, as it assisted in setting-up a steering committee and organizing a strong group of private shareholders. After a slow start in the first three or four years, ICICI operations grew steadily through the sixties and seventies and contributed significantly to industrial development in India. Throughout the 30 years of its existence ICICI has been the prime source of foreign currency financing to private industry. As of December 31, 1984, its paid-up capital and reserves stood at Rs 1,327.2 million and its cumulative assistance to industry since 1955 totaled Rs 24,250.0 million. Since ICICI's establishment, the World Bank has extended 14 loans for a total amount of US$765 million, of which the two loans covered in this report are the Eleventh and TweLfth, respectively. This long association with ICICI has been satisfactory, as Bank funds have been allo- cated efficiently and judiciously while ICICI developee into a mature, well- managed and diversified financial institution. 4. Previous PCRs. The last PPAR (PCR included) was issued on April 24, 1981, covering the Ninth (Loan 789-IN) and Tenth (Loan 902-IN) Loans to ICICI. The report's main conclusion was that ICICI continued to be a viable, profitable, well-managed, and mature financial institution. It suggested that ICICI should capitalize on its stature and maturity to develop into a more "dynamic and pace- setting institution" in development efforts, i.e. expand clientele and the geographic coverage of its operations. The report also suggested a "target approach" to achieve specific development objectives. As a strategy, ICICI opted to intensify projec: promotion to complement efforts of other GOI agencies in developing new entrepreneurs and backward areas. With Bank assistance under the proposed First Industrial Export Project, ICICI is adopting a "target epproach" by sector and activity with important and substantial support to oOI's policy measures to promote increased competitiveness and exports of manufactured products, especially engineering products.  -2- 5. Objectives. The basic objective of both loans under review was to con- tinue to utilize ICICI as an efficient channel for financing high priority industrial projects, encourage ICICI to undertake studies of specific industrial development problems, and support its promotionel efforts. Appraisal and sub- sequent negotiations on both loans dealt with adjustments in ICI'Is organization, procedures, and strategies to achieve more effective operations. The recommended and agreed adjustments within ICICI centered on the diversifica- tion of both local and foreign currency resources, the strengthening of regional offices, the building-up of sector information to g'ide lending strategy, and the revision of lending rates to reflect the cost of funds and allow adequate opera- tional margins. During the implementation of these loans, close contact was maintained between ICICI and the Bank and these adjustments were largely carried out, making ICICI's assistance to industry more effective. II. ENVIRONMENT 6. The period covered in this report, from effectiveness of the Eleventh Loan in July 1975 to the closing of the Twelfth Loan in September 1983, witnessed many changes in the environment affecting industrial development and the finan- cial institutions. The period opened under the full effects of world price increases and stagflation that followed the first world oil crisis, and closed with the equally adverse effects of the second major oil price increase. Indit, however, came through tCis difficult period without major economic disruptions. This was possible mainly because of the relatively minor importance of the country's external economy, although other factors also facilitated the adjustment. Principal among these were: (a) high foreign exchange reserves built up during the late sixties and early seventies; (b) channelling of product surpluses to exports as world prices rose in the mid-seventies; (c) demand for labor and services in the Middle East, resulting in remittance flows from Indian laborers and businesses migrating to that area. This period, however, was also characterized by low levels of economic activity, with GDP growth averaging 3.8% p.a. The situation in the industrial sector was a reflection of the macro picture. During the period, industrial value added expanded by an average rite of 4.2% p.a., as compared to 5.6% p.a. during the 1961-1970 period. Industrial development was hindered by: the slow rise in disposable incomes, particularly in the rural areas; raw material shortages resulting from complex import regulations; poor weather conditions in some years; serious infrastructural deficiencies in energy and transport; and a restrictive environment resulting from government regulatory policies in the sector. With a favorable balance of payments position and some relaxation in industrial and trade regulations, industrial growth has picked up. Expectations are that this trend will continue, but more steps still need to be taken to liberalize further restrictions on investments and imports. A favorable development during the period was the expansion of manufactured exports, led by engineering products. This was facilitated by rising world prices which attracted exports. Although these exports were mostly production not absorbed by the internal market, it had a demonstration effect that may prove to be longer lasting if supported by appropriate policy adjustments which provide stronger incentives and support for exports.  -3- 7. During the period 1975-1983, gross domestic capital formation in industry was characterized by the substantial expansion of public sector investment. Private industrial investment, which accounted for 31.3X of total industrial investment in 1916, was reduced to 15.5! by 1979 and recovered partially Lo 26.1S by 1983, as the general performance of the economy improved. During most of the period, however, private industrial activity suffered from policy, infrastructure and power supply constraints; all of which, together with labor disturbances, affected adversely its performance and financial results. Declining profitability at the firm level in turn affected the pattern of industrial financing, tending toward greater dependence on external finance. In the area of short term finance, private industry relied more heavily on non-institutional sources of finance, 1/ particularly as commercial banks had to yield resources to the demands of agricultural production, public sector enterprises, and other priority allocations. In the area of term financing, private industry increased the pressure on the development finance institutions to expand their operations to make up for the reduction in reinvestable profits. More recently, since 1981, with GOI taking some liberalizing steps in financial instruments, some of this pressure was reduced as public offerings of bonds and debentures have gained increasing acceptance in the market. Still, the contribution of the financial institutions' assistance for term lending, as a percentage of private industrial investment, increased from 15.7X in 1976 to 50.4X in 1983. 8. In this context, ICICI continued to be the principal source of foreign exchange funds, accounting for over 80Z of foreign exchange loans extended by the financial inst{tutions to the private industrial sector. However, the require- ments for rupee financing have been much more significant. Consequently, although expanding rapidly over the past years, ICICI's assistance in relation to total private industrial investment has been decreasing and was only 7.1! at the end of 1984. Furthermore, its activities, as those of other financial institutions, fall under a guideline limiting the maximum size of loan that a finencial institution can commit (presently around Rs. 30 million) to a single enterprise. To arrange financing in excess of the guideline amount, the All-India financial institutions operate on a consortium basis. The consortium appoints a "lead" institution to appraise proposals which exceed the limit. The institutions then subscribe to participation certificates on the basis of this appraisal. Participation by all institutions in one proportion or another is normally expected, with ICICI providing most of the foreign currency requirements. In 1983, consortium financing accounted for 59X of ICICI's total lending operations, down slightly from levels exceeding 60! in previous years. ICICI has been successful in undertaking competent appraisal of projects, par- ticularly on economic evaluation. However, ICICI should continue to guard against the potential pressures to finance doubtful projects led by other members of a consortium, particularly since ICICI is often the primary source of foreign exchange financing in such consortia, while the critical stages of implementation and supervision remain the responsibility of the lead institution. I/ Company deposits, intercorporate borrowing, supplier credit and others.  -4- III. PERFORMANCE OF ICICI Institutional Aspects 9. Ownership. About 79% of ICICI's share ^apital is held by public institu- tions as a result of the nationalization of banks and insurance companies. Foreign commercial banks hold 14% and the balance of 7% is held by about 4,000 private Indian investors. Under the Companies Act ICICI is classified as a government company, as the public sector holds more than 5OX of its shares. However, this classification does not affect ICICI's operational autonomy, except in respect of the procedures for appointing auditors. Relations between GOI and the Corporation are good and, because of its close relations with the business community, ICICI continues to be an important link between the private sector and the Government. 10. Management. ICICI is well-managed and operates effectively under the guidance of an experienced Board and competent staff. During the period covered by the loans, Mr. S.S. Mehta was Managing Director until 1979 and then Chairman until early 1984, when Mr. S.S. Nadkarni, Managing Director (1979-1984), assumed the Chairman's post. The Board consists of 14 members in addition to the Chairman. Two represent GOI, one the financial institutions, two the foreign shareholders, one is ICICI's Deputy Managing Director and eight are businessmen and professionals. The Board meets regularly, sets ICICI's overall financial and operational policies and decides on individual loan proposals involving an exposure above Rs 10 million. During the period under review, the Board provided the direction, guidance and support to management necessary to expand and diver- sify ICICI's activities. 11. Organization. ICICI's Organization Chart is attached as Annex 1. Major organizational changes and more decentralized decision-making and authority were made in 1982 and 1983 to respond to a more dynamic industrial inveat.ment environment. Non-traditional activities, such as merchant banking, leasing, management services, investment counselling to overseas residents, and resource planning, were given more importance. The reorganization aimed at: (a) strengthening the appraisal and supervision functions by developing expertise along subsector lines; (b) recognizing the contributions of experienced staff; and (c) providing openings for promotion of younger professionals. Under the new structure, the management team consists of the Chairman and the Deputy Managing Director, Mr. S.V. Shah. Five groups: operations; development and planning; finarce; merchant banking and rehabilitation; and regional offices make up ICICI's core organizational structure. 12. The Operations Group, headed by the General Manager, is the largest in professional staff and volume of business. The group is responsible for apprais- ing new loans and monitoring the portfolio; in the past, the supervision function was carried out by a separate department. The new arrangement is useful for more immediate feedback and could produce closer and more effective supervision  -5- arising from established contact and knowledge of the project/company and more identifiable accountability. Most legal staff, who were previously in a separate Legal Department, were brought into the Operations Group. The objective is to reduce the period between appraisal and loan signing. However, some legal matters, which by their nature take time, and also legal issues not directly related to the loan documents will continue to be handled by the Legal Department, which reports to the General Manager and Legal Adviser. The Finance and Resource Planning Group is headed by a Deputy General Manager, and is divided into two subgroups, foreign exchange and accounts, and resources and management information. With the increased importance of borrowings from foreign commercial sources, the resource mobilization function has been given a more prominent role in ICICI's structure. The merchant banking and rehabilitation functions are presently supervised by a Deputy Ceneral Manager assisted by an Assistant General Manager. The functions are divided into two departments, Merchant Banking and Rehabilitation. The Rehabilitation Department is responsible for the problem projects, which are transferred from the operating divisions when more in-depth analysis and substantial rehabilitation measures are needed for their restructuring. This Department carries out intensive monitoring of hard-core cases and is looked after by experienced and senior staff. The Development and Planning Group has three functions: market and economic research; administration; and cons.ltancy services to other DFIs and other developmental activities. Regional offices report directly to the Deputy Managing-Director. ICICI now has three regional offices in New Delhi, Madras, and Calcutta staffed with 52 professionals who carry out a good portion of the promotional, appraisal and supervision functions for projects in those areas. The New Delhi office is responsible for liaison with the Government in addition to its lending functions. ICICI started its leasing operation in early 1983, and this business has grown rapidly. The Leasing Division is headed by a competent middle-level manager in ICICI. A corporate office with a senior person as Executive Assistant was created to ensure that performance is evaluated through a comprehensive manage- ment information system. 13. Policy/Strategy. During the first 20 years of activity ICICI had no formal policy statement, but relied on its Memorandum of Association, together with government guidelines and the periodic resolutions of its Board, to provide a satisfactory operating policy framework. However, in 19f7 at the Bank's prompting, the Corporation's Board adopted a Statement of Financing Strategy, which set out, in general terms, its intentions for lending. In this statement, six broad areas were specified for priority attention: (a) export oriented industries; (b) power and transport projects; (c) manufacturers of agricultural inputs and processors of agricultural outputs; (d) mass consumption goods; (e) capital equipment and tool manufacturers; and (f) balancing and modernization projects. The statement also noted ICICI's commitment to promote projects in backward areas and new entrepreneurs. This policy statement was reaffirmed on the occasion of the Thirteenth and Fourteenth loans to the Corporation. 14. ICICI's appraisal procedures and standards continued to be satisfactory during the period under review. Similarly, project implementation and supervi- sion have received continuous and systematic attention by competent staff. Quarterly progress reports are required during implementation, in addition to periodic visits by staff. Problem projects are handled by a separate unit and,  -6- in serious cases, ICICI has appointed a Director to the enterprise's Board (as it is empowered to do by the terms of its Loan Agreements). These Directors provide additional monitoring and, together with the Rehabilitation Unit, have often been instrumental in bringing about solutions to a company's problems. Recent Performance 15. ICICI had another year of good performance in 1984. Disbursements during the year totaled Rs 3,881 million, an increase of 162 over the Rs 3,348 million disbursed in 1983. The 312 projects financed are expected to generate 600,000 new jobs, and contribute added value equal to Rs 10,400 million. Of the assis- tance sanctioned, 57 was for projects in the backward areas and 50X was for new projects. Leasing operations aggregated Rs 223 million against Rs 121 million in 1983. The Merchant Banking Division was successful in raising Rs 5,050 million for its clients. ICICI also underwrote issues of shares and debentures totaling Rs 157 million and subscribed directly to shares and debentures valued at Rs 50 million. These operations and other services to the industrial sector and finan- cial institutions resulted in a profit after ta.; of Rs 221 million, or a return on equity of 25X, which compares favorably with the results in previous years. This return is high, since ICICI increased its equity capital by 50% during the year. At the end of 1984, its authorized capital was Rs 500 million of which Rs 405 million were issued and fully paid. Collections of amounts due in 1984 amounted to Rs 1,964 million, representing a collection rate of 73%. Net of Rs 350 million in rescheduling, total arrears as of year end stood at Rs 366 million, or 1.8% of outstanding loan portfolio. ICICI's liquidity position and debt service capability remained satisfactory. During the year ICICI's efforts at resource diversification continued; ICICI obtained two syndicated loans for US$40 million, Stg 10 million, ECU 30 million, private placement of bonds worth JY 5,000 million and credit line of DM 25 million from KfW (equivalent to US$114 million in 1984 compared to US$54 million in 1983). For the first time, ICICI also raised additional local currency funds of Rs 155 million from long term deposits and loans from the Army Group Insurance Fund, the Unit Trust of India, and the Life Insurance Corporation. The financial condition of ICICI remains sound with totaL assets of Rs 16.5 billion, of which Rs 14.9 billion were loans to industry; equity was Rs 1.3 billion, or 62 of total assets. Operational Performance 16. A comparative summary of ICICI's operational performance for 1978-1983, is shown in Annex 2. 1/ As of December 31, 1983, ICICI had approved financing totaling Rs 26.4 billion (US$2.4 billion) for 3,764 projects, committed Rs 22.8 billion, and disbursed Rs 19.7 billion. During the 1978-1983 period, ICICI increased its lending operations at a compounded annual rate of about 26%. By 1983, foreign currency loans were 5 times the amount in 1978, while rupee loans 1/ The Completion Report on Loans 789-IN and 902-IN covered the period, 1911-1977.  were twice the amount in 1978. The growth of ICICI's operations compare favorably with the rate of growth in private industrial investment, which was about 16% p.a. for the corresponding period. ICICI's actual performance was generally higher than projected; during 1978-1983 period, actual cumulative approvals and total disbursements were 44% and 29% higher than projected amounts respectively. Additionally, during this period ICICI's operations expanded in new areas, with merchant banking and leasing operations becoming important in its overall assistance to industry. Because of the substantial increase in non- lending operations and more demand for locally manufactured equipment, the share of foreign currency lending as a percentage of ICICI's total operations was declining from a high of 37% in 1981 to 31% 1983. 17. In addition to its direct lending, investment operations and merchant banking activities, ICICI undertakes a broad range of complementary activities and services aimed at enhancing its overall developmental impact. In this respect, ICICI undertakes industrial subsector and policy studies, identifies and promotes new projects, participates in backward area development programs, promotes industrial research, and offers training and support services to other domestic and foreign financial institutions. Most of these activities were initiated following the joint Bank ICICI study of the Corporation's developmental impact in 1973. Since then, the Bank has been actively involved in planning some of these activities, particularly the industrial studies. In accordance with agreements reached between ICICI and the Banks the focus of these activities involve addressing major industrial bottlenecks, encouraging improvements in industrial efficiency and improving the export performance of the manufacturing sector. ICICI's program of industrial subsector and policy studies was, in fact, initiated under Loan 1097-IN, with a study on manufactured exports. Loan 1475-IN also involved a study of the automotive sector. In addition to these major studies, ICICI completed a number of shorter papers on subjects such as price and distribution controls in the sugar and cement industries, the impact of industrial licensing regulations, and the economics of small cement, steel, and paper plants. Under the Thirteenth and Fourteenth loans, three other studies were completed: one on energy utilization and conservation in industry, another on the electrical equipment manufacturing subsector, and the last on a survey of exporters of manufactured goods. In addition, ICICI participated in the Bank's study of the cement subsector. These studies and papers have received wide circulation in India and have been used by various government committees in their review of different aspects of industrial policy. 18. ICICI's other development activities involved assistance in training for other financial institutions. ICICI also participated actively in the estab- lishment of a Foreman Training Institute, and a Financial Management and Research Institute. In collaboration with the other financial institutions, ICICI has set up several state technical consultancy institutions to assist new entrepreneurs. In addition, apart from its regular activity in training staff from other Indian and foreign development banks, ICICI has seconded staff to DFCs in other countries and has been involved in consultancy assignments in support of Bank lending in Sri Lanka, Ghana, Jamaica, and Nepal. ICICI has also made financial  -8- contributions to industrial research to develop new indigenous industrial technologies. Financial Results and Condition 19. ICICIVs income statements for the period 1978-1984 are summarized in Annex 3. During this period, ICICI has performed exceptionally well; from 1980-1984, return on equity was maintained at about 25% compared with about 15% from 1978-1980. The improvement in profit was due to higher volume of operations, wider operating margins, and lower effective tax rates. Interest rate gross spread increased from 2.8% in 1980 to 3.8% in 1983, as the interest charges to borrowers were revised upward. Administrative expenses measured as percentage of average total assets declined from 0.6% in 1978 to 0.5% in 1984. Fee based income from ICICI's non-lending operations increased from Rs 4 million in 1978 to Rs 24 million in 1984. Compared to projected figures, its actual gross income was higher on the average by 21% per year, and net profit by A3%. 20. Annex 4 shows ICICI's balance sheets for 1978-1984. ICICI's total assets reached the US$1.0 billion (Rs 10.0 billion) mark for the first time in 1982 and increased further to Rs 17.6 billion in 1984. These assets were financed by rupee borrowings (58%), foreign currency borrowings (29%), other liabilities (5X), and net worth (8%). The rapid growth in assets since 1981 was due to the improvement in the investment climate, as a result of initial liberalization steps by GOP in the industrial sector and the recovery of the world economy and internal demand. ICICI efforts to diversify and promote business was also relevant, as witnessed by the start of leasing operations and the diversification of both foreign and rupee resources. 21. In 1984, IBRD loans outstanding accounted for 53% of foreign currency loans, down from 85% at the end of 1978. In fact, since 1980 ICICI has been quite active in raising foreign currency resources from the international capital markets, partly at the prompting of the Bank. Up until 1983, ICICI had obtained four Eurocurrency loans from banking consortia and one direct loan from a European bank, aggregating US$62 million, DM 95 million, SF 40 million and JY 3,000 million (para. 15). In addition, since 1981 KfW has granted loans to ICICI totaling DM 90 million. Rupee borrowings by way of debentures and bonds have also increased substantially. In the period 1979-1983, bonds and debentures issued totaled Rs 3,720 million. These large borrowings, however, have not affected adversely the Corporation's debt equity ratio, which was actually reduced from a high of 10.5 to 1 in 1981 to 9.8 to 1 in 1984, because of ICICI's earning capability, its policy of substantial reinvestment of profits, and increase in share capital in 1984. The Corporation's liquidity position and its debt service capability have also remained satisfactory. 22. Arrears Position. Annex 5 shows the trend in ICICI's arrears from 1978-1984. Annex 6 shows an analysis of arrears as of December 31, 1984. Total arrears increased from Rs 129 million in 1978 to Rs 366 million in 1984. However, as a percent of its total portfolio, its total arrears declined to 2.4% in 1984 from a high of 3.8% in 1980; likewise, the principal outstanding of  -9- companies in arrears as a percent of total portfolio was down to 11.7% in 1984 from a high of 20.1% in 1980. The number of companies in arrears increased from 156 in 1978 to 241 in 1984 although this was maintained at 11% of total client companies. ICICI has been able to contain its arrears through reasonably high collections (73% of total dues in 1984) and regular supervision and rescheduling. ICICI has also managed to achieve an adequate debt service coverage (average about 1.3 times). ICICI's portfolio remains basically sound; ICICI has also built an adequate equity base and accumulated reserves which amounted to almost 4 times its arrears at end of 1984. There are, however, some aspects which would need greater attention by ICICI. At the end of 1984, there were 99 companies facing severe difficulties, These hard-core cases accounted for 61% of total arrears. In 1984, ICICI rescheduled Rs 350 million, or 13% of the total amounts due. However, there were still 92 companies with loans rescheduled (Rs 597 million) which were still in arrears; these had outstanding loans of Rs 858 million or 6% of total portfolio. Part of the arrears problem has been due to projects financed under consortium financing in which ICICI is not the lead institution. While recovery of difficult cases is coordinated by all members of a consortium and joint periodic reviews are made of common arrears, ICICI has less flexibility and more limited control on the speed with which recovery deci- sions are taken in consortium projects. Some arrangement may have to be made to speed up recovery including ICICI taking a lead role in problem project analysis and/or restructuring. Another aspect is the adequacy of experienced staff to handle a growing number of problem projects. One option is to utilize outside consultants as the need arises; ICICI has on occasion engaged these services for this purpose. IV. LOAN UTILIZATION/PROJECTS FINANCED 23. Actual Utilization and Disbursements. Both loans were committed and disbursed very much as anticipated. Loan 1097-IN was fully committed by December 1977 and disbursements completed by 1981. Similarly, Loan 1475-IN was fully committed by December 1980 and fully disbursed by 1983. Final amounts disbursed were US$93.8 million and US$79.0 million, respectively. The subloans under both loans are broken down as followsS Number of Subloans Amount Disbursed (US$ 'million- Above Free Limit: Loan 1097-IN 2 8.971 Loan 1475-IN 2 9.830 Below Free Limit: Loan 1097-IN 233 84.836 Loan 1475-IN 159 66.181 Total 396 169.818 Annex 7 shows a detailed breakdown by size of loan. The average loan size was about US$429,000. Above free-limit ioans were 11% of the total disbursements and about one-third was for loans between US$1.0 - US$2.0 million. However, 213  -10- subloans (54%) were less than US$250,000, though the amount of such loans was only 10% of the total. Due to cancellations, about 95% was disbursed which is considered normal, but slightly higher than the two previous Bank Loans (92%). The Bank loans (Rs 1.936 million) accounted for about 78% of total ICICI assis- tance with rupee loans (Rs 400 million) and underwriting/direct subscriptions (Rs 129 million) representing 16% and 6% respectively. 24. Subsector Distribution. Under both Loans, about one-third (Rs 554 million) of the subloans went to chemical and petroleum products (Annexes 8 and 9). The textile sector was a major recipient accounting for 15% (Rs 291 million) of subloans in each Bank loan. Two subsectors, basic metal and fabricated metal products/machinery manufacturing, accounted for 12% (Rs 238 million) and 10% (Rs 210 million) of the subloans, respectively. Of the total subloans (Re 1,936 million) 67% went to the above four subsectors. Under the Eleventh Loan, ship- ping was provided Rs 22 million or 5%. Other subsectors financed included elec- trical machinery (8%), automotive ancillaries (6%), rubber/rubber products (5%) and mining (4%). 25. Location and Type of Projects. Of the total 396 projects, 84 projects (21%) were located in backward areas; these received Rs 586 million, or 30% of the total disbursements under the Eleventh and Twelfth Loan. The performance in this regard compares favorably with the experience under the two previous Bank Loans (Loans 789 and 902), where 16% of the projects were in backward areas and accounted for 20% of total disbursements. Thus, ICICI achieved its objective of promoting more projects in the backward areas. By the type of projects, the experience was as follows: Tne Number Amount (Rs Million) Loan 1097 Loan 1475 Total Loan 1097 Loan 1475 Total New 30 23 53 156 138 294 Diversification 24 20 44 166 227 393 Expansion 62 45 107 444 296 740 Modernization 31 19 50 157 135 292 Balancing/ Replacement 88 54 142 112 105 217 Total 235 161 396 1,035 901 1,936 In line with ICICI's priorities (para. 13), modernization and balancing/replacement projects (192) accounted for 48% of total projects. However, new projects accounted for 13% by number and 15% by amount compared to 15% by number (60) and 25% by amount (Rs 359 million) under the two previous Bank Loans. By amount, expansion and diversification projects continued to have a substantial share of 58% of total loans. 26. Time and Cost Overrun. Based on data for 350 projects, 189 projects (54%) were implemented on schedule which is a substantial improvement over tho v in the previous Loans, i.e. 92 projects (27%) out of 333 projects. Projects with delays of over 12 months were fewer, i.e. 55 projects (15%) compared to 90 projects (27%) in previous Loans. Only 102 projects (29X) experienced cost  -11- overruns versus 150 projects (48%) in previous loaas. The aggregate overrun of actual over estimated cost for 350 projects was 10.8%. However, for the projects with cost overrun, the overrun was 23.8% of estimated costs; there were only 29 projects with overrun over 20% of estimated costs compared to 56 projects in previous loans. Overall, project implementation under Loans 1097 and 1475 has been satisfactory and much better than the two previous Bank Loans. The major delays were in arranging project finances including equity contribution, delivery of equipment, government licenses, shortage of power, and modification of design/location during implementation. In addition to delays in implementation, cost overrun were due mainly to increases in excise and customs 4uties, price increase of steel and cement, and changes in project location and scope/design. 27. Financial Performance. Based on available data for 81 companies, only eight companies showed net losses and 41 companies (51%) showed profits higher than estimated. Average return on investment was 18% which is adequate. Actual capacity utilization (45 projects) averaged 75% ranging from 21% to 160%. Three companies with losses had capacity utilization of less than 35%. Repayment experience of Bank financed projects has been satisfactory and better than ICICI's overall portfolio. Out of the 396 projects, 164 subloans have been fully repaid and repayrments of 52 cases were rescheduled. As of September 30, 1984, the outstanding loan balances were US$37.3 million, or 40% of Loan 1097-IN and US$49.1 million, or 65% of total disbursements for Loan 1475-IN. Total arrears from 13 companies (5%) amounted to Rs 8.3 million or 0.1% of outstanding amount. The arrears were due to poor performance arising mainly from inadequate management, power shortages, technical problems leading to low capacity utiliza- tion and labor problems. In many cases, ICICI has arranged the merger or pur- chase by larger, more efficient companies to rehabilitate these projects. 28. Economic Indicators. The actual average economic rate of return (ERR) for a sample of 16 subprojects was 25%, which is satisfactory, ranging from 7% to 50%; four projects showed ERRs of below 7-8% compared to expected ERRs of 11% and above. Six out of ten subprojects had actual ERRs higher than expected. A sample of 15 projects showed exports averaging 9% of sales with one company exporting as high as 34% of sales. Results of an ICICI study lt of export per- formance of ICICI-financed projects indicated the following: [a) exports as percent of sales declined to 9% in 1981 from 12% in 1979 due to the larger growth in domestic sales; (b) companies with more than 10% exports decreased from 32 in 1979 to 20 in 1981; (c) in general, profitability of domestic sales remained t higher than exports; (d) there was an increasing number where exports had become profitable, although in the majority of the sample, export profitability remained negative despite the export incentives; and (e) in general, exports were not competitive in price due mainly to prices of local raw materials and less liberal credit facilities. To help address the disappointing export performance, ICICI would be implementing the Bank's proposed Industrial Export Development Project. Data on actuai employment in 28 companies was estimated at 12,900 workers at a cost per job of about Rs 400,000 or US$32,000 which is still reasonably low given the type of projects and size of enterprises financed (para. 25). 1/ Sample of 90 companies of which 81 were exporting; share of the sample to India's total exports was about 32% (1978-1981)  -12- V. CONCLUSIONS 29. Since the two projects under review were first appraised, ICICI has developed well. It has expanded and diversified its operations. It has made important resource mobilization efforts, both domestically and in international markets. Its present activities go beyond the simple transfer of funds to industry and encompass support in developing skilled labor, carrying out industrial research, promoting project development, and several other development activities. This has been achieved by continuity and dynamism in management, and dedication and capacity on the part of staff. The profits attained by the Corporation have been consistently satisfactory and its financial condition is sound. It is not surprising, then, that ICICI was able to execute the two projects with good results and the achievement of positive developmental impact. ICICI is successful in adapting its operations to changes and constraints in the financial and industrial environment and thereby promote efficient and profitable operations. At the same time, ICICI with Bank support and assistance, is developing new initiatives particularly in policy oriented sector work. For example, ICICI's sector work served as basis and has led to the formulation of the Bank's Industrial Export Development Project and the proposed Cement Project, which are expected to be present to the Executive Directors in FY86. 30. However, an area that is of some concern to the Bank relates to an incipient rise in the overall level of arrears, particularly in respect of loans under consortium arrangements. ICICI's management is fully conscious of the potential problems in this area and is acting to minimize them by expanding its independent operations, subjecting consortia operations to harder scrutiny at appraisal, and maintaining close contact with the consortium leader during implementation, supervision and collection for early detection of problems in these projects. It is important to address these arrears, particularly in com- panies whose loans have been rescheduled but remain in arrears with ICICI which indicate more serious problems. ICICI needs to be cautious in reschedulings since these adversely affect its debt service capacity and could represent an under assessment of collection problems.  - ii - AE| l ~~~~Ft ~I : _Ii Rj _i! I R I i l  INDIA INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA Comearative Sumary of Operationo 1/ (Re Million) 1978 ___1979 1980 1981 , 1982 19_83 Net Approvals Projected Actual Proiected Atu_al Proiected Actual Proiected Actgal Proiected Actual Proiected Actual Foreign Currency Loans 575 242 635 707 700 766 715 1.065 796 973 861 1.390 Rupee Currency Loans 430 1.029 480 1.031 530 1..078 1,422 1.55 1.569 1,47 _ L737 1.955 Sub-total i,005 1,271 1,115 1,738 1,230 1,844 2,137 2,520 2,365 2,820 2,598 3,345 Guarantees 20 3 20 - 20 11 10 7 10 141 10 260 Investments: 21 Shares 85 96 86 125 93 84 120 156 129 165 132 244 Debentures 40 13 44 38 52 23 33 86 36 70 40 79 Suppliers Credit N.A. - N.A. 136 N.A. 341 N.A. 78 N.A. 298 N.A. 370 Leasing N ALL N.A. - N.A. - N.A. - _. A. - N.A,. N 122 Total 1.150 1.383 1.265 2.037 1.395 2.303 2.300 2.847 2.540 3,94 2.80 4.420 Disbursents Foreign Currency Loans 460 381 568 345 645 550 520 862 595 1,045 680 1,097 Rupee Currency Loans 404 612 432 808 4_8 1.129 1.250 1.319 1.445 1.696 1,660 L1794 Sub-total 864 993 1,000 1,153 1,133 1,679 1,770 2,181 2,040 2,741 2,340 2,891 Guarantees - 2 - - - - - - - - - - lnvestments: Sbares 55 56 60 27 70 28 60 26 68 45 75 76 Debentures 34 13 40 63 47 20 20 20 22 60 25 75 Suppliers Credit N.A. - N.A. - N.A. - N.A. - N.A. 102 N.A. 293 Leasing N.A. - N.A. A.A. NA. 32 Total 953 1.064 1.00 1.243 1.250 1.727 1.850 2.227 2.3 2.J48 2.49 3.367 Source: ICICI and Bank's Appraisal Reports. / Comparative figures 1971-1977 are contained in the PCR for Loans 789-IN and 902-1N. Projected figures for 1978-1980 are based on 8AR for Loan 1475-IN and for 1981-1983 on SAR for Loan 1843-IN. Vi Actuals are gross approvals (Annual Reports)  INDIA INDVSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA Income Statements, 1978-91284 (Rs Million) INCOME 1978 1979 1980 1981 1982 1983 1984 Interest of Temporary Investments and Deposits 12.30 15.80 24.02 28.17 87.81 56.56 41.57 Interest of Rupee Loans and Debentures 140.70 206.90 307.02 433.94 619.58 780.99 946.51 Interest on Foreign Currency Loans 225.50 240.50 241.57 297.18 409.28 464.53 551.70 Dividends 11.70 12.30 15.67 21.29 20.01 23.03 24.21 Capital Gains - - 4.20 38.75 8.82 5.41 7.34 Underwriting Commission & Brokerage 1.30 1.00 0.74 2.78 2.73 3.26 2.82 Guarantee Comission 0.50 0.50 0.47 0.49 0.58 2.35 2.78 Comission of Letters of Credit 1.50 2.20 4.01 4.13 3.81 4.32 4.95 Merchant Banking Fees 1.00 2.00 2.63 5.22 6.82 10.82 13.63 Lease Manageent Fees and Rentals - - 2.33 17.63 Other Income Q1.30 -100 _1_24 5.87 9.90 5.04 4.73 Total Income (Actual) 395.80 482.20 601.57 837.82 1,169.34 1.35