India - Industrial Finance and Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY A2 z9 z ,/A Report No. 7058-IN STAFF APPRAISAL REPORT INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT March 7, 1988 Industry and Finance Division Country Department IV Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Rs 1 = US$0.077 Rs 13.00 = US$1.00 FISCAL YEARS Government of India: April 1 - March 31 IDBI : July 1 - June 30 ICICI : January 1 - December 31 SAIL : April 1 - March 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BIFR - Board for Industrial and Financial Reconstruction BMR - Balancing, Modernizatior. or Replacement Projects DAF - Development Assistanc, Fund DFI - Development Finance Institution GIC - General Insurance Corporation of India GOI - Government of India ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India IFCI - Industrial Finance CorporaUion of India LIC - I.ife Insurance Corporation of India MRTP - Monopolies and Restrictive Trade Practices Act RBI - Reserve Bank of India SAIL - Steel Authoritv of India Limited SCICI - Shipping Credit Investment Corporation of India SFC - State Financial Corporation SIDC - State Industrial Development Corporation SSI - Small-Scale Industries TA - Technical Assistance UTI - Unit Trust of India  FOR OMCAL Use ONLY -ill- INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT TABLE OF CONTENTS Page Nn. LOAN AND PROJECT SUMMARY ................... v I . INTRODUCTION .................... * ...1eoo.. II. POLICY ENVIRONMENT AND PROJECT RATIONALE .................. 2 A. The Industrial Sector . 2 B. The Financial Sector ...4*......... .......... .... 4 C. Past Bank Lending to Industry ......................... 7 D. The Bank's Future Lending Strategy .................... 8 III. THE PROJECT .* ........................................... 10 A. Objectives and Components ............................. 10 B. Project Cost .......................................... 11 C. Financing Plan ......... .. 12 IV. THE DEVELOPMENI FINANCE INSTITUTIONS .................... 14 A. Industrial Development Bank of India (IDBl) ........... 14 B. Industrial Credit and Investment Corporation of India Ltd. (ICICI) ............................................ 26 V. TECHNICAL ASSISTANCE TO THE STEEL AUTHORITY OF INDIA LTD. (SAIL) .....................see 36 A. The Steel Sector ..................................... 36 B. The Steel Authority of India Ltd. ..................... 37 C. The Technical Assistance Project ...................... 38 VI. THE PROPOSED LOANS .......................o........ 44 A. Terms and Conditions *e....................... .......... 44 B. Administrative Procedures ...... ....................... 46 C. Project Benefits and Risks ............................ 49 VII. AGREEMENTS REACHED AND RECOMMENDATION ..................... 51 This document has a restricted distribution and may be used by recipients only in the peirforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  t ~-iv- ANNEXES 1. IDBI. Organization and Operational Data 2. ICICI. Organization and Operational Data 3. DPI. Technical Assistance Cost Summary 4. The Steel Sector 5. SAIL. Institutional Review 6. SAIL. Technical Assistance Project Details 7. Contents of Project File This report was prepared by G. Vivado, S. Thomas, K. Arichandran, A. Edun (AS4IF); J. Pernia (AEMlID); E. Mangan (LATIF); S. Mott (AS4CO), and V. Barrios (Consultant), following an appraisal mission to India in October 1987.  INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT LOAN AND PROJECT SUMMARY Borrowers : a) The loan to India: India, acting by its President. b) The Technical Assistance loan: Steel Authority of India Limited (SAIL) Guarantor of the Technical Assistance Loan ti SAIL : India, acting by its President Beneficiaries : Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), and Steel Authority of India Limited (SAIL). Amount : US$360 million comprising: a) The loan to India: US$310 million b) The loan to SAIL: US$50 million Terms s The proposed loans would be made at the Bank's standard variable interest rate and would have a term of 20 years including 5 years of grace. Re-lending Terms: The GOI Loan of US$310 million would be relent in luial currency to IDBI and ICICI at 11 p.a. The lending rate to the final sub-borrowers would be 14Z p.a. initially. These rates would be reviewed periodically to ensure that the rate to fiaal borrowers remains positive in real terms, reflective of market conditions and provide a reasonable spread to the development finance institutions (DFIs). The proposed lending rate of 14X p.a. is the current non-concessional rupee term lending rate for DFIs in India, and is positive in real terms given current and projected rates of inflation and consistent with the overall structure of interest rates in India. The Government would bear the foreign exchange and interest rate risks on its loans to the DFIs. Project The proposed project would support the Government's strategy Description : for expanding and modernizing industries and assist in the adjustment process both in the financial system and the industrial sector. The proposed project would provide:  -vi- a) financial and technical assistance support to the two largest DFIs, IDBI and ICICI, to help them meet their requirements for long term foreign exchange resources and to strengthen their capacity to appraise projects effectively in a less regulated environment, cope with the more difficult portfolio management problems stemming from the adjustment process and mobilize resources through new financial instruments in more competitive financial markets; and (b) technical assistance to the major Government steel company, SAIL, to enable it to complement the physical restructuring efforts on which it has embarked, by improving organizational systems, technical skills, distribution arrangements, pollution control measures, and devising plans to reduce costs and improve quality. Benefits and In addition to strengthening key institutions in the financial Risks : and industrial sector, the credit component of the project would help finance 80 subprojects, resulting in total investments of about US$750 million and the creation of 28,000 jobs at an average cost per job of US$26,785. The Technical Assistance to SAIL would contribute to improve the productivity of the major steel plants, thus resulting in the production of higher quality, lower cust steel to users throughout the domestic economy. The Project would also have positive effects on the environment as the DFIs have incorporated strong environmental objectives in their strategy statements and the technical assistance to SAIL would help it comply with the Government's environmental standards. The Government's recent pclicy reforms have resulted in more domestic competition, which could create adjustment difficulties for some enterprises accustomed to operating in a more regulated and protected environment. These circumstances, together with the fact that enterprises that have borrowed abroad are exposed to foreign exchange risks, could result in loan collection problems for the DFIs. The technical assistance programs and the portfolio improvement and collection strategies provided for under the project would reduce this risk by ensuring detailed reviews of existing portfolios, establishment of better portfolio information systems for early warning of possible problem projects, better portfolio management through closer subproject supervision and intensive collection and recovery efforts. Careful attention will be given during project supervision to these activities and realization of agreed collection objectives.  -vi i- Estimated Costs: ---------(US Million)-- Local Foreign Total Credit Component 450 300 750 Technical Assistance for DPIs 7 10 17 Technical Assistance for SAIL 46 55 101 TOTAL 503 365 868 Financing Plan: Bank -- 360 360 IDBI 55 -- 55 ICICI 27 -- 27 Subproject Sponsors 225 -- 225 Other Credit & Capital Market Sources 150 -- 150 SAIL 46 5 51 TOTAL 503 365 868 Estimated Disbursements: Bank FY 88 89 90 91 92 93 94 ----------------