India - Industrial Development Bank of India Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5163 PROJECT PERF(RMANCE AUDIT REEORT INDIA - FIRST IDBI/SFC PROJECT (CREDIT 356-IN) June 27, 1984 Operations Evaluation Department This document has a restricted distribution and may be used by recipients enly in the performance of their offcial duties. Its contents may not otherwise be discloed without Worl Bank authorization. ACRONYMS APSFC - Andhra Pradesh State Financial Corporation AFC - Assam Financial Corporation BBSFC - Bihar State Financial Corporation BPRF - Business Plan and Resources Forecast CGAC - Capital Goods Adhoc Committee CGS - Credit Guarantee Scheme DFC - Delhi Financial Corporation DSCR - Debt Service Coverage Ratio GOI - Government of India GDCF - Gross Domestic Capital Formation GIC - General Insurance Corporation of India GSFC - Gujarat State Financial Corporation HFC - Haryana Financial Corporation HPFC - Himachal Pradesh Financial Corporation ICICI - Industrial Credit and Investment Corporation of India, Ltd. IDBI - Industrial Development Bank of India IFCI - Industrial Finance Corporation of India IRCI - Industrial Reconstruction Corporation of India, Ltd. JfKSFC - Jammu & Kashmir State Financial Corporation KFC - Kerala Financial Corporation KSFC - Karnataka State Financial Coroporation LIC - Life Insurance Corporation of India XD - Managing Director MPFC - Madhya Pradesh Financial Corporation MSFC - Maharashtra State Financial Corporation NSIC - National Small Industries Corporation OED - Operations Evaluation Department OSFC - Orissa State Financial Corporation OSLA - Other State Level Organizations PFC - Punjab Financial Corporation PCR - Project Completion Report PPAMA - Project Performance Audit Memorandum PPAR - Project Performance Audit Report RBI - Reserve Bank of India RFC - Rajasthan Financial Corporation SDI - State Directorate of Industries SFC - State Financial Corporation SIDA - Swedish International Development Agency SIDC - State Industrial Development Corporation SIDO - Small Industries Development Organization SIIC - State Industrial Investment Corporation SISI - Small Industries Service Institute SSI - Small Scale Industries SSICs - Small Scale Industrial Corporation SSIDC - State Small Industries Development Corporation TIIC - Tamil Nadu Industrial Investment Corporation TCO - Technical Consultancy Organization UPFC - Uttar Pradesh Financial Corporation UTI - Unit Trust of India WBFC - West Bengal Financial Corporation FOR OFFICIAL USE ONLY PROJECT PERF0REANCE AUDIT REPORT INDIA - FIRST IDBIISFC PROJECT (CREDIT 356-IN) TABLE OF CONTENTS Page No. Preface ...........................................................i Basic Data Sheet ................................................. Highlights ........................ iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT RATIONALE AND OBJECTIVES ............ ........ 1 II. PROJECT DESIGN ............................... 4 III. IDBI's PERFORMANCE AS AN APEX INSTITUTION ....... 7 IV. PERFORMANCE OF SFCs.. ......................... 11 A. Institutional Accomplishments .................... 11 B. SFC Operations ................................. 12 V. UTILIZATION OF IDA FUNDS -.. ...... ..........15 VI. IMPACT OF IDA's ASSOCIATION WITH IDBI ................ 17 VII. CONCLUSIONS ....... ........................ 17 Appendix A: Comments Received from the Borrower ....... 22 PROJECT COMPLETION REPORT I. Background ............................................. 52 II. The Project ...... ... ...-o ..... ... .......... 56 III. Performance of the Implementing Agencies ............. 60 IV. Subproject Performance ......................... .. 70 V. Role of IDA and Lessons Learned . . ........ 75 VI. Conclusions .............................. .... 78 is document has a restricted distribution and may be used by rpients only in the performane of their official duties. Its contents may not otherwise be disclosed without World Bank authorizaton. Table of Contents (Cont.d) List of Annexes and Attachments Attachment 1. Problems and Actions of Selected SFCs 2. Summary of IDA's Assessment of IDBI's Evaluation Reports on the SFCs Annexes A. SFCs' Aggregate Data 1. SFC's Gross Sanctions and Disbursements, FY75-80 2. Summary of SFCs' Operations, FY77-81 3. SFCs' Net Sanctions and Disbursements: Distribution by Sector 4. SFCs' Loan Assistance to Small Industries, FY75-80 5. SFCs' Loan Assistance to Backward and Other Areas, FY75-80 6. SFCs' Assistance by Type of Units, FY77-80 7. Trend in Arrears of SFCs, FY74-81 8. Collection Performance of SFCs, FY78-81 9. Debt Service Coverage Ratio of SFCs, FY74-81 10. Summary Financial Statistics of SFCs, FY78-81 11. Consolidated Balance Sheet of SFCs, FY72-81 B. Credit 356 Data 12. SFCs' Sanctions and Disbursements under Credit 356 13. Distribution by size of "A* and "B" Subprojects and Subloans 14. Financing of Subprojects; SFCs and IDBI Contributions 15. Type of Units Financed, SFC Breakdown 16. Subsector Distribution of Subprojects Financed 17. Subproject Implementation Performance 18. Financial Performance of Subprojects Financed 19. Economic Performance of Subprojects Financed 20. Actual Investment Costs per Job by Subsector 21. Domestic Resources Costs of Selected Subprojects 22. Projected and Actual Disbursements under Credit 356 PROJECT PERFORMANCE AUDIT REPORT INDIA - FIRST IDBI/SFC PROJECT (CREDIT 356-IN) PREFACE This is a performance audit on the First Industrial Development Bank of India (IDBI)/State Finance Corporation (SFC) Project, involving a credit in the amount of US$25 million to the Government of India, with the objective of supporting small and medium scale industry through the regional SFCs and assisting the SFCs themselves to formulate and implement institution upgrading programs through IDBI which operated as an apex institution. The credit was approved in January 1973 and disbursed in March 1980, some 33 months behind schedule. About one-third (US$8.4 million) of the loan was cancelled. A second IDBI/SFC project (Loan 1260-IN) in the amount of US$40 million was approved in June 1976. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) prepared by the South Asia Regional Office of the Bank. The PPAM is based on the attached PCR, the Staff Appraisal and the President's Reports, sector and economic reports, the loan documents, the transcript of the Board discussion, study of the project files and dis- cussions with Bank staff. An OED mission visited India in October 1982 and discussed the effectiveness of the Bank's assistance with IDBI, the manage- ment and staff of SFCs in Maharashtra, Delhi, Gujarat, Karnataka and West Bengal (accounting for roughly two-thirds in number and 55% in amount of IDA lending), Central and State Government officials, technical assistance deli- very agencies, and a sample of recipients of IDA's funds. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR very ably describes the project experience and the results achieved by the SFCs in the areas of institution building, operations and financial performance, dwells on the utilization of the Bank's funds and dis- cusses IDBI's performance. The PPAM examines the design of the project, elaborates on particular aspects of the institutional development and opera- tional performance of the SFCs, assesses in some depth IDBI's accomplishments as an apex institution, comments on the justification for Bank support of the SFCs, and draws the lessons from the project experience. Comments received from the Borrower have been taken into account in finalizing the report and are reproduced as Appendix A. - ii - PROJECT PERFORMANCE AUDIT REPORT BASIC DATA SHEET INDIA - FIRST IDBI/SFC PROJECT (CREDIT 356-IN) KEY PROJECT DATA (Amounts in US$M) LOAN STATUS As of 03/31/84 Original Disbursed Cancelled Repaid Outstanding Credit 356-IND 25.0 16.6 8.4 .2 16.4 CUMULATIVE CREDIT DISBURSEMENT FY75 FY76 FY77 FY78 FY79 FY80 (i) Planned 4.0 15.6 25.0 25.0 25.0 25.0 (ii) Actual 1.5 6.7 12.9 15.0 16.2 16.6 (iii) (ii) as % of (i) 37.5 42.9 51.6 60.0 64.9 66.4 OTHER PROJECT DATA Original Actual or Credit Dates Re-estimated Board Approval 01/09/73 Credit Agreement 02/09/73 Effectiveness - 05/09/73 Credit Closing 06/30/77 03/31/80 Borrower Government of India (GOI) Executing Agency IDBI MISSION DATA /a No. of No. of Date of Month, Year Weeks Persons Manweeks Report Appraisal 10-11/71 4 3 12 12/19/72 Supervision I 02-03/74 4 3 12 05/31/74 Supervision II 05-06/75 2 4 8 11/18/75 /b Supervision III 11-12/76 3 5 15 03/24/77 Supervision IV 01/78 3 4 12 03/23/78 Supervision V 02/79 2 3 6 04/04/79 Supervision VI 02/80 2 2 4 04/14/80 Supervision VII 01/81 2 3 6 04/07/81 Supervision VIII 05/82 3 3 9 07/16/82 Completion 05/82 2 1 2 10/82 /a Credit 356 Supervision combined with Loan 1260 supervision missions beginning in 1975. /b Combined with Yellow Cover Staff Appraisal Report for Loan 1260-IN. - iii - EXCHANGE RATES Name of Currency (Abbreviation) Indian Rupee (Rs) Year: Appraisal Year Average US$1 = 7.444 (1971/72) Intervening Years Average US$1 = 8.41 (1972-80) Completion Year US$1 = 8.076 (1980) Since January 1980 US$1 = 7.893 (1981) US$1 = 9.25 (May 1982) FISCAL YEARS GOI, SFCs: April - March 31 RBI, IDBI: July 1 - June 30 FOLLOW-ON PROJECT Second IDBI/SFC Project (Loan 1260-IN) approved on June 10, 1976, in the amount of US$40 million. - iv - PROJECT PERFORMANCE AUDIT REPORT INDIA - FIRST IDBI/SFC PROJECT (CREDIT 356-IND) HIGHLIGHTS The project under review aimed at upgrading 18 SFCs and thereby improving India's credit delivery system to SMI. In the face of the large number of SFCs involved, their deep-seated problems and the extensive assis- tance requirements, the scope of the project was overly ambitious. The progress achieved so far has been modest, in part due to systemic reasons. The majority of SFCs have not made sufficient progress in improving their organizational structures, the quality of their appraisals continues to be deficient in important aspects, and supervision and collection procedures have not been very effective. Management information systems remain inade- quate. IDBI initiated action programs and put in place monitoring devices. However, actual compliance by SFCs depends more on persuasion by IDBI and willingness of state governments to cooperate than on self generated professional managerial initiative prompted by assertiveness on the part of IDBI or by financial penalties in case of substandard performances. Lack of support by state governments for SFC institution building reflects different perceptions, priorities and expediencies regarding the role of the SFCs. On the other hand, progress was made in strengthening IDBI's refinance organizational set-up and procedures, although there is room for further improvement. IDBI's SFC monitoring and review procedures and instruments could also be further strengthened (paras. 4, 7, 13, 28). The lending operations of the SFCs grew rapidly over the years, with a significant part allocated for establishments located in less developed areas. But at the same time, arrears have kept mounting and have reached unacceptable levels. The profitability of the SFCs has been on the whole low in nominal terms and negative in real terms, suggesting a degree of erosion in the SFCs equity base (paras. 17-22). The sectoral and size dis- tribution of the subprojects supported by IDA funds has been satisfactory, but their implementation was marred by time and cost overruns, their operating performance in key variables has been below projected levels, and their financial results mixed (paras. 23-25). Despite inadequacies and the need for remedial action to improve the serviceability of the technical assistance delivery system, the project did not press for remedial action and coordination between the delivery of credit and the delivery of technical assistance to SMI. Similarly, no attempt was made to help establish a firm link and effective coordination between term lending by SFCs and working capital availability from the com- mercial banks. In both instances, the subborrowers were largely left to fend for themselves. Efforts to date to improve coordination between SFCs and commercial banks in this, as well as related matters (e.g. security sharing, - v - recovery of overdues), have not been successful, suggesting lack of common- ality of interest and the need for intervention by central authorities to rectify the situation (paras. 6-11). Virtually all problems that were afflicting the SFCs at appraisal persist in most SFCs, although to a varying degree. To ensure unimpeded development and to improve their financial viability, SFCs would have to focus with greater determination on institution building in its various facets; IDBI would have to take a more assertive stance in the discharge of its functions as a shareholder, creditor and overseer; and the states would have to become more cooperative, supportive and respectful of the SFCs' managerial autonomy. The SFC Act may have to be amended to limit the role of the states to providing only the general policy framework within which SFCs should operate, to strengthen IDBI's authority and to enhance the SFCs' managerial independence. Improving the credit delivery system at the state level and advancing the cause of SMI would further require concerted efforts on the part of the central and state governrents, RBI, IDBI and the SFCs, to better the performance of the technical assistance delivery system, to make it more responsive to the needs of the SMI and to link it with the credit delivery system. Finally, addressing the array of other sectoral issues affecting SMI would also help improve SMI performance (paras. 27, 32). Even though the objective of institution building has met with limited success, IDA's decision to support the SFCs was conceptually cor- rect. To be sure, there is room for improvement, which can be speeded up through greater receptivity and a higher degree of commitment by the SFCs and state authorities. An indigenous institutional capacity for term financing is developing as a result of the project, albeit very slowly, catering to the needs of the SMI, especially in the more backward areas. IDA's association, although not as fruitful as originally expected, helped identify deficiencies in the SFC's organizational and institutional set-up and operations, led to the development of realistic upgrading programs, and supported IDBI's efforts to help SFCs introduce institutional reforms. The project experience has been instructive in many respects. It suggests that: (a) there is need for full understanding and appreciation of the institutional arrangements, political realities, attitudes and, more generally, of the way business is conducted in a particular country, prior to introducing organizational and institutional reforms; (b) a gradual approach, in the sense of focusing on a smaller number of institutions and fewer tasks instead of following an all-embracing approach, could make the institution- building and supervision effort more.direct and manageable and could avoid dissipation of effort; (c) commitment by financial intermediaries and unswerving support by state governments to institutional development is extremely important if set objectives are to be achieved; (d) the quality of top management is a powerful driving force behind the development and growth of an institution and frequent changes, resulting in instability and lack of leadership and direction, tend to undermine the effectiveness of organiza- tions; (e) the attainment of corporate objectives can be vitiated in the absence of managerial autonomy and appropriate managerial incentives; (f) - vi - access to working capital and establishing a link between financial and tech- nical assistance at all stages of the project cycle are essential for the viability of smaller undertakings; (g) staff compensation remains a vexing issue in state-owned financial intermediaries; (h) although time and cost overruns can be ascribed to a degree to factors beyond the control of a lending institution, there is need for greater effort during subproject appraisals to review more carefully technical designs, to assess more realistically project costs, to allow for adequate price escalations and physical contingencies, and to develop more realistic financing plans and implementation schedules; and (i) studies of industries with high rates of defaults can help diagnose the nature of the problems they face, ascertain the composition of defaulters and fashion appropriate measures to deal with such issues. Finally, in apex type lending, the extent of responsibility assigned for institutional and operational upgrading to the participating fina2cial intermediaries should be commensurate with the apex institution's delivery capability, realistically assessed. - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA - FIRST IDBI/SFC PROJECT (CREDIT 356-IND) I. PROJECT RATIONALE AND OBJECTIVES 1. In the early 1970s, for economic, social and political reasons, India was making special efforts, both at the federal and the state level, to develop small and medium scale industries (SMI), in view of this sector's actual and potential contribution to output, employment and income distribu- tion. The development of small, labor-intensive industries was considered as an especially convenient vehicle for the promotion of economic growth in the less developed areas and the expansion of exports. In 1972, about 50% of value added and 80% of employment in the entire manufacturing sector was con- tributed by small industries. An array of incentives had been instituted to stimulate the development of SSI: credit at concessionary terms, hire-pur- chase schemes, special deductions on income taxes for priority industries, export incentives, reservation of a large number of products for SSI manufac- turing through an elaborate industrial licensing scheme, government procure- ment of certain manufactured goods exclusively from small units, or grant of up to 15% price preference to SSI if goods could be procured by both large and small enterprises. To promote the regional dispersion of SSI, state governments provided additional incentives in the form of concessionary finance and tax relief (e.g., preferential treatment with respect to state sales taxes and the octroi tax).1/ National and state institutions were established to provide technical assistance and infrastructural facilities to 1/ IBRD, Small Scale Industry in India, 2 Vols., Report No. SA-33a, May 22, 1972, Vol. I, paras. 24, 33, 34, 55-58, 61-65, 72-73, 78-90; Appraisal of a Line of Credit to the Industrial Development Bank of India for the State Financial Corporations, Report No. DB-95a, December 19,1972, paras. 2.19-2.15; PCR, paras. 1.02, 1.03. - 2 - small industries.2/ Commercial banks and State Financial Corporations (SFCs), the latter being specialized institutions providing term finance to small and medium size enterprises, have been the principal sources of SMI finance. The Industrial Development Bank of India (IDBI), an apex term-lending institution, has played a major indirect role in financing SMI projects through the refinancing of SFC loans.3/ 2. Despite their growth,4/ small enterprises faced many nagging prob- lems: persistent underutilization of capacity, largely due to the irregular supply of imported and indigenous raw materials and the deficient system for their distribution; power shortages; transportation bottlenecks; marketing difficulties; delays in import license clearance; limited access to working capital; and inadequate access to the latest technology, resulting in sub- standard quality production which constrained the ability of this segment of industry to export.5/ The quality of non-financial services also left much 2/ The Small Industries Development Organization (SIDO) of the Ministry of Industrial Development is responsible for the formulation of national policies for the development of SSI, performs a liaison function between central and state ministries, establishes and operates industrial estates, and its Small Industries Service Institutes (SISIs) and many extension service centers in the states provide technical assistance to individual firms, including common workshop facilities, process designs, testing facilities, skill upgrading, economic information, marketing assistance, management consultancy services and training for entrepre- neurs. The National Small Industries Corporation (NSIC) supplies machinery on hire-purchase basis, extends marketing services and runs production and training centers for SSI. At the state level, the State Directorates of Industry (SDI), through the State Industrial Development Corporations (SIDCs) they have set up, distribute raw materials in short supply, do promotional work, extend marketing assistance, process all applications for capital goods import licenses, and extend term loans and equity capital to SSI in modest amounts. For details see IBRD, Small Scale Industry in India, Vol. I, paras. 150-153, 164-186. Since 1972, IDBI, ICICI and IFCI began to set up Technical Consultancy Organizations (TCOs) in most states, providing a variety of advisory services to pro- moters, particularly those coming from the small scale sector, in the preparation of feasibility reports, choice of products and technology, etc. They also undertake studies for the rehabilitation of sick indus- tries. IDBI has been organizing entrepreneurial development programs (EDPs) and recently established a national training and research center (Entrepreneurship Development Institute of India). 3/ The institutional and policy framework as they relate to SMI are detailed in SAR, paras. 1.01-2.42 and PCR, pdras. 1.04-1.10. 4/ There were an estimated 428,000 registered small scale units in 1981 in India; there may be as many unregistered units. 5/ IBRD, Small Scale Industry in India, Vol. II, paras. xii-xxix. -3- to be desired.6/ The situation eased up somewhat in the late 1970s with the removal of certain infrastructural bottlenecks and the increased supply of intermediate inputs (PCR, para. 1.08). 3. The SFCs also faced many problems at the time of appraisal, which gravely affected their institutional development and operational performance: (a) frequent turnover of managing directors as well as appointment to the position of unqualified and inexperienced persons; (b) insufficient and of uneven quality staff, in part due to the SFCs inability to attract and retain competent professionals because of uncompetitive pay-scales; (c) inadequate training; (d) serious inadequacies in project appraisal, particularly in engineering, marketing and economic aspects; (e) extremely weak follow-up; (f) protracted and cumbersome approval and disbursement procedures; (g) high level of arrears and inadequate loan collection procedures and effort; (h) low profitability; and (i) in some cases, weak capital structures. IDA felt that these deep-seated problems, which afflicted all 18 SFCs, could have been addressed by divising a comprehensive action program and by actively in- volving a local institution intimately familiar with the structure, institu- tional arrangements, policies, operations, capital requirements and potential of each SFC. IDBI was an institution that met to a large extentthese condi- tions and, with some assistance and strengtening of its organizational structure and professional staff, could be entrusted with the implementation of an all-encompassing institution building program that could help upgrade the standards of the SFCs and thereby improve their effectiveness as finarr- cial intermediaries.7/ In point of fact, it was thought that IDBI was in a rather unique position to deal with the problems of SFCs in view of its ownership and board membership relationship, policy influence through inspections, grant of technical assistance and provision of capital through its refinancing activities (SAR, para. 1.04). 4. The objectives of the project therefore were: (a) to upgrade the 18 SFCs as financial institutions and thereby improve India's credit delivery system at the state level; (b) to support the establishment of new SHI units as well as the expansion, diversification and modernization of existing units, by financing the import requirements for machinery, equipment and per- manent working capital of SFC-supported small and medium size industries on the basis of prescribed eligibility criteria;8/ and (c) to strengthen IDBI's SFC review and refinance organizational set-up and procedures (SAR, paras. 1.04, 4.23, 6.01, 6.04, 6.05; PCR, para. 2.02). 61 Ibid, Vol. I, paras. ii, xx, 106, 132, 150-153. 7/ Institutional aspects, policies and procedures of SFCs, including problem areas, are detailed in SAR, paras. 3.01-3.36. 8/ Small scale industry has been defined as units with investment of less than Rs 750,000 (1972), later increased to Rs 1 million (1975) and Rs 2.5 million (1980), or US$250,000 equivalent, whereas medium scale industry as units with net equity of up to Rs 10 million (1980), or US$1 million equivalent. 5. To upgrade the SFCs, and to ensure the effective use of the pro- posed credit, a set of corrective measures addressing the problems outlined in para. 3, as well as guidelines for each SFC, was agreed between IDA and IDBI. In turn, each SFC was required, as a condition of eligibility under the IDA line of credit, to agree to these measures and guidelines and to undertake to implement them. In addition, for the SFCs as a group, guide- lines were prepared concerning criteria for financial and economic evaluation of projects, procurement and disbursement procedures, and resource management (SAR, paras. 3.52, 3.53; PCR, paras. 2.06, 3.15). To enable IDBI to imple- ment more effectively the upgrading program for the SPCs, IDBI and IDA agreed on special organizational and staffing arrangements deemed necessary to administer the IDA credit and to supervise the SFCs. Specifically, IDA was satisfied that: (a) a systematic reporting system was developed between the SFCs and IDBI, covering SFC operations, resource position, financial perfor- mance, arrears, etc; (b) biennial comprehensive field inspections, bi-annual follow-np visits and evaluation of each SPC were undertaken by IDBI, covering the foregoing; (c) the upgrading program referred to previously would be carefully monitored; and (d) SFC projects presented for refinancing to IDBI would be scrutinized by qualified staff(SAR, paras. 4.23, 4.50, 7.09-7.11). II. PROJECT DESIGN 6. The project involved a DFC credit to IDBI, an apex institution, for on-lending to SHI through 18 SFCs which covered the entire country. The project did not include promotion or technical assistance components, because these were deemed to be already available to the target group and because IDA felt that it could have much greater impact by focusing on strengthening the credit delivery system (PCR, para. 2.02). In view of the problems already alluded to (para. 3) and the heavy technical assistance requirements for SFC upgrading, even with the interposition of IDBI, the task was arduous and the scope of the project overly ambitious. 7. The argument has been advanced that somehow IDA had to include all 18 SFCs because it could not determine which ones would be in a position to present "bankable projects- without IDA's greater involvement with all of them. Also, inclusion of selected SFCs would run against IDBI's all-India mandate (PCR, para. 5.03). These judgments do not seem convincing, since the bulk of SMI financing activity was carried out by a half dozen or so SFCs, while the SFCs' participation was optional. Preselection and concentration on a limited number of SFCs, at least initially, could have made possible their direct appraisal at a greater depth, could have led to a greater appreciation of their problems and of the magnitude of the task at hand, and could have made the exercise more manageable. The fact that IDA was relying basically on IDBI as an apex institution for the processing of the IDA funds and the supervision of the SFCs appears to be a more plausible explanation for the inclusion of such a large number of SFCs in the project. 8. At appraisal, India was indeed replete with technical assistance agencies which obstensibly could cater to the needs of the SMI. Nonetheless, - 5- as conceived and designed, the project did not attempt to link and coordinate the delivery of SFC credit with the delivery of technical assistance at all stages of the project cycle, and subborrowers in effect were left to fend for themselves. Such an approach could have been justified if the technical assistance delivery system in the country was efficient and the sponsors of subprojects sophisticated enough to appreciate the value of technical assis- tance. But this was not the case. The quality of service, delivery capa- bility, coordination and effectiveness of the nultitude of technical assistance agencies was very uneven. The Bank's 1972 SSI study commented: "... there is particular need for providing technical aid to SSI if it is to play a significant role in export expansion and at the same time raise the generally poor quality of domestic supplies. An adequate service system to promote the development of small scale units requires both provision of technnical assistance and a working division of labor and responsibility among Central, State and Local authorities. The organizations serving SSI provide-at least on paper-for most needs. In fact, India has been a pioneer in this field. The problems are mainly the low and indifferent quality of service, and this goes back to the capacity and remuneration of those rendering it. The quality differences between the institutions in the States is unacceptably high. Units in several regions, among them some of the most backward areas, have to make do with technical and economic services below the national standards-. The SSI study also pointed out that, -NSIC must consider very seriously the general dissatisfaction with its services and streamline its bureaucracy to give the sector better service", and that almost all SISIs badly needed new or supplemental equipment.j/ These obser- vations clearly highlighted the prevailing inadequacies and ineffectiveness of the various technical assistance schemes and extension services and under- scored the need for devising comprehensive action plans by the central and state governments to improve the technical assistance delivery system for SSI. IDA could have flagged the need for remedial action and could have 9/ IBRD, Small Scale Industry in India, Vol. I, paras. xix, xx, 106. See also SAR, para. 2.38). -6- tried to obtain assurances that steps would be taken to rectify the situa- tion, thereby complementing and reinforcing its effort to strengthen the credit delivery system.10/ 9. In the same vein, in designing the project IDA did not appreciate fully the need for developing suitable arrangements to ensure that sub-bor- rowers, along with term credit from the SFCs, would also have access to working capital facilities from the commercial banks when their units became operational, despite the fact that the Bank's SSI study (Vol. I, para. xvi) emphatically indicated that "many small industrialists claim that they have difficulty raising working capital from commercial banks when they had term financing from the SFCs. There is obvious need for coordination between SFCs and the commercial banks". Apparently, IDA acquiesced in RBI's credit allocation system which set targets for commercial bank lending to SSI and refrained from assessing its effectiveness. This situation has persisted to date. In most instances, SFCs approve term loans without regard to the availability of working capital, which basically remains the sponsor's responsibility. At the time of approval of the SFC subloans, arrangements for the provision of working capital either are not made or requirements are not secured by commercial bank commitments so that, when subprojects have been implemented, the subborrowers can not secure working capital with inimical effects on their operations. 10. At IDBI' s initiative, a working group was set up to review the arrangements for coordination between SFCs and commercial banks and to suggest measures and procedures to improve such coordination.11/ Areas of possible coordination included joint appraisal/pooling of information, terms and conditions for granting financial assistance, sharing of security, 10/ Even to-date, technical assistance to SSI is in short supply and of uneven quality, despite the efforts of the delivery agencies (SISIs, TCOs, SIDCs, etc.). The various agencies operate under low budgets, have limited facilities and range of skills, use technologically out- of-date equipment, and are understaffed because they cannot attract and retain specialists due to low pay-scales. NSIC has been incurring losses. As a result, technical assistance delivery agencies cannot provide services of the requisite quality and on time, and cannot reach the target groups. Also, the emphasis appears to be more on the pre- operational stage of projects rather than the operational. In particu- lar, technical assistance is still not geared to cater to the needs of the sick units . The frequency of referrals by SFCs to technical assis- tance delivery agencies apparently has not been high, in part because the supervision function has broken down and in part because referrals were thought of as reflecting on the SFCs' own technical assistance capability. Questions regarding the quality of the service of these agencies may have also contributed to limited referrals. For IDBI's role, see para. 1, footnote 2 above, and Appendix A, page 45. Il/ RBI also had issued directives to commercial banks emphasizing the need for cooperation with the SFCs. - 7 - disbursement of loans, loan supervision, recovery of overdues.12/ The coordination arrangements, including training schemes, were left to be worked out by the individual SFCs and commercial banks-but very little progress has been made to date. In particular, there have been virtually no concerted efforts to ensure the availability of working capital to SFCs' term subborrowers. 11. The lack of coordination between SFCs and commercial banks has been attributed to several reasons. Commercial banks are not inclined to partici- pate in a joint appraisal because the need for working capital financing comes up at a later stage when the unit becomes operational; because of the uncertainty as to whether or not commercial banks would have available funds at a future date, they are reluctant to undertake a commitment. Joint appraisals are difficult because small borrowers keep changing their bankers.13/ Commercial banks are reluctant to support SFC-financed SMI because they are security-oriented and consider them as high risks. Or, com- mercial banks have been able to package loavs and to provide funds more expeditiously and, thus, are in a position to attract SMIs with higher credit standing, particularly expanding units which have proven themselves. Apparently, there is little commonality of interest between SFCs and commer- cial banks.14/ If this is so, the issue cannot be reasonably expected to be resolved by RBI's and IDBI's admonitions to the parties concerned to improve coordination. As the timely provision of working capital to SMI is a pressing issue that cuts across states, the matter deserves RBI's full atten- tion, study and intervention. RBI could ensure that adequate funds are made available to commercial banks to cater to the working capital needs of SKI (e.g., by exempting short-term SMI lending from credit ceilings, increasing allocations for SMI, extending discount facilities). An alternative worth considering might be to allow SFCs to extend working capital. III. IDBI'S PERFORMANCE AS AN APEX INSTITUTION 12. As already mentioned (paras. 3 and 5), IDBI was expected to play a key role in the implementation of the SFC upgrading program. However, by 1975, or two years after the project had been under implementation, IDA came to appreciate that the institution building programs formulated by RBI/IDBI 12/ IDBI, Report of the Working Group on Coordination Between State Financial Cooperations and Banks, 1977. 13/ For IDBI's viewpoint, see Appendix A, page 47. 14/ IDBI acknowledges that there are "administrative and technical difficul- ties" in achieving effective coordination between SFCs and commercial banks, but efforts are continued in this regard (Appendix A, page 47). - 8 - in 1972, and which it had endorsed, were ineffectual for the intended pur- poses as they were insufficiently detailed and not broad enough in scope.15/ RBI/IDBI were then advised to develop more detailed programs to improve the SFCs' organizational structure, loan processing capability, and appraisal, supervision and collection procedures, which IDA sanctioned. Nevertheless, compliance was still impeded by the absence of specific and time-bound action programs detailing the requisite changes to be introduced by the SFCs, including the steps and dates by when such actions would be completed, as well as by IDBI's own weak monitoring system. 16 Changes in IDBI's own management and staff have also hampered IDBI's effectiveness in supervising the SFCs. As the PCR points out (para. 3.16) the "SFCs and IDBI had diffi- culty in adopting these measures... for many SFCs, the programs were only on paper; actual systems and procedures were not changed". The problem was compounded by the large number of SFCs involved, which made the supervision of the SFCs very difficult.17/ 13. At this juncture, an additional factor that greatly affected IDBI's effectiveness deserves to be mentioned. The power of the state governments over the SFCsl8/ and the deeply embedded institutional arrangements and political expediencies at the state level were not fully appreciated by IDA at appraisal (and perhaps by IDBI itself) and, as a result, IDBI's potential influence and impact were overestimated.19/ By the same token, IDBI's pre- sumed leverage on SFCs, based on the fact that it was a major shareholder and 15/ Appraisal of a Second Line of Credit to IDBI for the SFCs, Report No. 1158-IN, May 6, 1976, para. vi; PCR, para. 3.14. 16/ IDBI set up a special cell at headquarters to process SFC refinance applications under Bank financing and decentralized most of the SFC evaluation and inspection functions to its four regional offices to speed up the review process. However, staffing these regional posts with high caliber staff from headquarters has been difficult, and this has affected IDBI's ability to discharge these functions effectively. Nonetheless, IDBI believes that, with decentralization, its supervision and monitoring of SFCs have become more effective (Appendix A, page 30). 17/ IDBI maintains that changes in IDBI's top management and staff, as well as the large number of SFCs involved, have not hampered IDBI's effec- tiveness in supervising the SFCs. The problems that arise relate mainly to external factors (Appendix A, pages 48-49). 18/ The powers that the SFC Act accords state governments are extensive and encompass: general direction in policy matters; fixing the amount of authorized and issued capital; nomination of directors, including the chairman; appointment of the managing director. 19/ The assertion that "IDBI is in a position to influence other term- lending institutions in their policies and procedures", SAR, para. 4.42, is indicative of the thinking at the time. - 9 - creditor, was effectively neutralized because it simply could not be meaning- fully exercised in the surrounding circumstances. In the face of a board composed mostly of government officials with unequivocal loyalty and a management system taking decisions on a consensus basis, IDBI's (and RBI's) Directors sitting on SFC boards have not been able to sway the decision- making process in directions conducive to implementing institutional reforms. Constant interference in SFC matters by state governments (e.g., appointment of managing directors and their premature transfer, emphasis on new loan approvals rather than on strengthening existing firms, lax collec- tion efforts, restrictions on staff recruitment to fill vacancies), reflecting different perceptions, priorities and expediencies regarding the role of the SFCs, severely undermined IDBI's ability to fulfil its func- tions. On occasion, IDBI took a strong position against deliquent SFCs and suspended refinancing. "However, these suspensions were lifted after short intervals, partly as a result of influence from the state governments, who wielded considerable power in protecting their SFCs from IDBI's remedial actions" (PCR, para. 5.01).20/ Thus, despite determined efforts, for reasons largely beyond its control IDBI has not been effective in implement- ing vigorously the upgrading programs worked out and in improving the perfor- mance of the SFCs (PCR, paras. 3.20, 5.02 (i)).21/ Low receptivity levels by most SFCs and lack of support from the state governments compounded further the problems of implementation of the upgrading programs. For instance, IDBI has very seldom been consulted by state governments on the appointment or transfer of chief executives, in disregard of Section 10(f) of the SFC Act. 14. IDBI had been statutorily preparing inspection reports on all SFCs, which aimed basically at ascertaining their compliance with the provisions of the SFC Act. In addition, since 1977 IDBI has been preparing annual evalua- tion reports which focus on the performance of the SFCs, highlighting important issues and suggesting remedial action (PCR, para. 3.18). Although prepared for ostensibly different purposes, both the inspection and evalua- tion reports typically dwell on institutional aspects and the operational performance of the SFCs (e.g. organizational structure and management, staffing, management information systems, quality of appraisal and supervi- sion work, arrears situation and collection effort, resource management, resource mobilization and allocation, financial performance), make recom- mendations for improvement, and follow up on the implementation of recom- mendations made in earlier evaluation reports. In view of the considerable overlap between the two reports, the time and manpower cost to the SFCs for 20/ This judgement, which is correct, runs counter to assertions in the SAR that "IDBI has been free from potential influences in its decision- making process" (para. 4.42); or that "the SFCs are largely free from Government influence" (para. 3.14). 21/ IDBI points out that IDBI Directors, along with RBI Directors, on boards of SFCs have been playing a useful role and have influenced to a large extent expeditious implementation of measures improving the working of SFCs (Appendix A, page 49). - 10 - two similar exercises, and the potential manpower savings to IDBI, the latter might wish to consider refocussing its inspection work22/ and combining the two reports. 15. IDBI's evaluation reports are factual and fairly comprehensive but descriptive, and provide little analysis or explanation about the causes of the particular problems facing the SFCs. Nonetheless, IDBI's evaluation reports, despite their inadequacies, do raise important issues, provide prac- tical recommendations, and afford an opportunity for a dialogue between IDBI and the top management of the SFCs. But, apparently, the effectiveness of such discussions remain limited.23/ Board discussions of key issues also appear to be rather inconsequential, even when IDBI's evaluation reports reach directors without undue delay. The fundamental problem remains the reluctance of many SFCs to respond to and implement IDBI's recommendations. As it were, the reports are used basically to meet IDA's reporting require- ments--which is unfortunate. There is clearly a need for improving the quality of IDBI's evaluation reports, if they are to serve as a purposeful guiding and monitoring device; but, more importantly, there is need for greater receptivity, compliance and action on the part of the SFCs. 16. Since 1980, at the Bank's recommendation, SFCs prepare annual Business Plans and Resources Forecasts (BPRFs) which cover approvals, dis- bursements, collections, resource availability, income and expenses, etc., for the upcoming fiscal year. The BPRFs, which are now part of IDBI's evalu- ation process, are discussed between IDBI and the individual SFCs and a consensus is reached as to projections and targets, including related insti- tutional arrangements (e.g. organization, appraisals/supervision, management information systems). There is a mid-year review during which the BPRF may be revised. The BPRF could become a useful vehicle for improving the planning process, financial management and discipline of the SFCs, for imparting direction and motivation, and for concentration of effort to achieve set goals and targets. However, in spite of its supervisory role and its presence on the boards of the SFCs, IDBI has yet to use the BPRFs as an instrument to help the SFCs set and enforce realistic operational objectives and targets or to influence key operational variables in the desired direc- tion, in particular to curb the dramatic annual growth of approvals. Consistently, approvals by SFCs have exceeded agreed upon targets. A typical IDBI remark in the BPRF document as recently as 1982 has been that "despite 22/ In addition to IDBI's inspection, SFCs are statutorily subjected to annual audits by the Comptroller and the Auditor General (CAG) and by chartered accounting firms. 23/ IDBI has been frequently holding conferences for chief executives of the SFCs to discuss a variety of important issues, but again with modestre- sults. Also, certain SFCs have engaged management consultancy firms and institutes to perform management and institutional audits, which IDBI has reviewed and discussed with the SFCs concerned (PCR, para. 3.18). In some instances, e.g., in the case of Gujarat, Karnataka, recommenda- tions have been or are being implemented. - 11 - our exhortations from time to time, SFCs, by and large, continue to indulge in sanction sprees, apparently without regard to the BPRF targets and organi- zational capabilities to service their vast clientele". Yet, in the very same document IDBI endorses substantial increases in approvals and provides (together with RBI) the bulk of the requisite funding. Such admonitory statements as "the Corporation may consider slowing down the pace of sanc- tions", or the SFC needs to "consolidate its position by stabilizing the level of sanctions" are commonplace in the BPRFs, with the result that the preparation of the BPRF has evolved into an annual routine. 24 Ideally, BPRFs should be extended to cover a period of three years, should include specific and time-bound action plans, and should develop appropriate strate- gies to achieve set targets and priorities (operational, institutional, etc). Introduction of conditionality on access to IDBI funding may also be an expedient device to ensure SFC adherence to the BPRFs. The question of course remains whether IDBI can assume a more assertive posture. IV. PERFORMANCE OF SFCs A. Institutional Accomplishments 25/ 17. Some SFCs (e.g. Gujarat, Haryana, Andhra Pradesh, Himachal Pradesh, Madhya Pradesh, Karnataka) have improved, or are in the process of improving, their organizational structures; but the vast majority have not accomplished very much in this area. With perhaps few exceptions, the high turnover of the state-appointed managing directors has continued unabated. Their tenure has been averaging just over one year, which allows them hardly enough time to even familiarizethemselves with the SFCs' operations and problems, let alone to have an impact on the institution and its performance. This is the consequence of a myopic rotation policy as applied at the state level for cadres in the Indian Administrative Service from which they are drawn and the fact that state governments have not been receptive to IDBI's pleas that they be assigned for at least three years.76/ The high turnover of experienced staff in other management positions has also frustrated efforts to develop an efficient middle level management. Thus, the management of SFCs, with a few notable exceptions (e.g., Gujarat, Karnataka), is not strong. Although the 24/ IDBI maintains that the earlier focus on sanctions by top management in SFCs has changed with the introduction of the BPRFs in FY80 (Appendix A, page 26). 25/ Details in PCR, paras. 3.08-3.13. 26/ IDBI indicates that it has been "firm" in dealing with cases of prema- ture reassignments of managing directors. At present, in 13 SFCs their tenure of office has increased to two years or more (Appendix A, page 27). - 12 - professional staff for all SFCs more than quadrupled in size in the last decade or so, many SFCs are still understaffed.27/ Positions remain vacant for long periods, as SFCs cannot attract and retain high caliber staff because of their perceived lower prestige vis-a-vis other institutions and uncompetitive pay-scales. Appraisals continue to be deficient in important aspects and generally of uneven quality, while supervision28/ and collection procedures remain weak,29/ as the emphasis has been on "sanctions" and most SFCs have failed to fully implement the agreed upon upgrading action programs and the recommendations of the Bank and IDBI that would have brought about badly needed institutional reforms. Management information in general remains weak. Although IDBI has repeatedly emphasized the importance of information systems, most of the SFCs still lack basic data on performance and overdues, and appear to regard the information that is collected as fulfilling externally imposed reporting requirements and as of no particular utility for internal purposes.30/ B. SFC Operations 31/ 18. Net approvals (in amount) for all SFCs almost quadrupled between FY74 and FY81, rising from Rs 1.1 billion to Rs 3.8 billion, or about 20% per 271 On the other hand, SFCs seem to be overstaffed at the non-professional level. For details, see Appendix A, pages 27-28. 28/ The supervision/collection function as such is viewed by SFC staff as much less prestigious than other activities, an impression which could possibly be corrected through internal staff rotation. 29/ In supervision, the emphasis has been on collection and not on diagnosis of problems and their causes that could have led to suggestions for remedial action. As a result, SFCs cannot even tackle the simpler prob- lems, referring more complex ones to outside technical specialists. Also, staff was reassigned and committees were formed in certain SFCs to tackle the arrears issue; but, apparently, in most instances without a strategy and a systematic approach for disaggregating the mass of de- faulters in meaningful categories and focusing on the more important cases, in order to render the task of collection more manageable. 30/ In this regard, the findings of IDBI's recent annual evaluation reports, typical for most SFCs, are revealing. They show serious weaknesses in organization, loan processing, appraisals, and supervision and monitoring procedures. 31/ Details in PCR, paras. 3.01-3.07. - 13 - annum.32/ Of these approvals, 60% were for new units, 65% for SMI and 55% for units located in backward areas. The average size of SFC loans declined from Rs 210,000 in FY77 to Rs 180,000 in FY83, suggesting that SFCs are reaching smaller enterprises. Six SFCs accounted for some 60% of the total. The loan portfolio of the SFCs is sectorally well-diversified. Such performance is prima facie creditable. However, disbursements have persis- tently lagged behind, suggesting a high level of premature commitments. More importantly, SFCs have placed undue emphasis on loan approvals to new units without rigorous appraisal and supervision procedures, with the result that arrears have kept mounting despite the rapid growth in the volume of lending and extensive reschedulings. The rise in the number of "sick" units in the SSI sector has been "alarming",33/accounting for over 10% of overdues and requiring the development of rehabilitation schemes. Throughout, and with the exception of a few SFCs in recent years, insufficient attention has been given to collection and reduction of arrears which have now reached propor- tions that threaten the financial viability and creditworthiness of many SFCs.34/ Administrative expenses are well within acceptable limits, but provisions for bad debts have not been adequate (about 1% of total portfolio instead of the normal 3-5%). Yet, profitability has been declining as heavy borrowing has raised interest expenses (PCR, Annex 10). Return on equity for the SFCs as a group amounted to around 6% in FY83, which is modest in nominal terms and negative in real terms. 19. To be sure, creation of new employment opportunities has been a major goal of both the central and state governments. However, achievement of this objective could not have meant to imply the indiscriminate creation of new units based on substandard appraisal and supervision procedures, the absence of a concerted effort to link short with long term funding, and the lack of coordination between financial and technical assistance to ensure the viability of the units supported. Furthermore, employment generation can be equally achieved through support for expansion of existing--most likely more robust and tested-units, with higher probability of success. Also, atten- tion and effort could have been beneficially directed toward increasing the efficiency and improving the performance of existing units by up-grading their technical and managerial skills. Finally, it has to be appreciated that good technicians, a group targeted by SFCs, do not necessarily make suc- cessful businessmen. However, the emphasis on approvals would also have to be rationalized by the buili-in incentive that the growth in the volume of 32/ Approvals reached RS 5.96 billion in FY83, growing at the accelerated pace of 25% per annum between FY81 and FY83 (Appendix A, page 25). 33/ Proceedings of the 21st Conference of the Chief Executives of State Financial Corporations, Bombay, February 1982, para. 4. 34/ IDBI maintains that "while the results may have not been fully positive and uniform", efforts are being made by the SFCs to improve appraisal standards and procedures. Also, collection performance has shown some improvement in the past two or three years (Appendix A, pages 34, 51). - 14 - lending provides, being a quantifiable performance indicator and particularly convenient when the tenure of the incumbent and aspiring managing directors is so short. This incentive is reinforced when the chances for recognition for the less tangible supervision effort and the thankless task of improving collections and catering to the needs of problem-ridden units are slim. 20. At the end of FY83, arrears were about 26% of the SFCs combined portfolios while the aggregate portfolio affected by arrears stood at 45%-- both figures being extremely high. While the growth of arrears appears to have been contained in recent years, in part because of the rapid growth of the portfolio, a disquieting feature is their chronic nature, with a good part overdue for two years or more. More perhaps disturbing is the existence of a high percentage of wilful defaulters, arising from the large deferential between the SFCs' term lending rates and the commercial bank's short-term rates, leading to diversion of term finance for working capital purposes; their eagerness to maintain a good standing with the commercial banks; the soft attitude taken by the SFCs in handling their cases; the impunity for being delinquent; and the weak recovery machinery of the SFCs, including insufficient information on individual subborrowers. The causes of the defaults are not fully known because there have been no systematic analyses of the large number of units affected. Some of the most frequently advanced reasons for the mounting arrears include: push for creation of new units in backward areas with high rates of failures and problems; weak appraisals; inadequate follow-up; deficient capital structure, in particular inadequate working capital; unrealistic implementation schedules35/; inefficient management; delays in commissioning production facilities, in part due to shortage of building materials; insufficient power and raw materials; deficient production engineering and management; decline in demand; marketing problems; strained labor relations; unavailability of the necesssary infrastructure and technical skills, particularly in backward areas; and political pressures affecting the collection effort of the SFCs. 21. Some SFCs have recently taken steps to reduce arrears, including strengthening of project supervision and loan recovery activities; reduction of the interest rate differential between short and long term rates through a system of rebates for prompt and regular repayments and penal rates for delayed payments; resort to action under Section 29 of the SFCs Act for quick take-over of delinquent units; and recourse to revenue recovery proceedings. Also, Default Review Committees have been set up in certain SFCs to monitor overdues, apparently with some success. But even though some SFCs have managed to improve their collections, the overall collection performance of the SFCs remains unsatisfactory. SFCs have been slow in settling claims under the Credit Guarantee Scheme and in adopting a more discriminatory strategy and course of action against defaulters, e.g., by analyzing the composition of defaulters and focusing their efforts on the large defaulters, thereby making the task more manageable and enhancing the chances of 35/ Reportedly, subborrowers have had to commence repaying their loans before they had even started commercial production. - 15 - achieving better results. No studies of industries with high rates of de- faults have been undertaken in order to diagnose the nature of the problems they face and thus be in a better position to prescribe appropriate remedial action and to provide feedback to the appraisal staff. Review of accounts in default by the boards of the SFCs has not been up to the required frequency to keep the issue in the forefront. It should be noted in this connection that persistent high levels of arrears has tied up a large amount of resources and has increased the dependence of the SFCs on external sources to finance their new loan approvals as well as to meet their debt service obli- gations. Also, infusions of share capital had to be made in a number of SFCs to strengthen their lop-sided capital structure and to maintain debt/equity ratios within acceptable limits. IDBI's refinance and bond issues have become the major sources of such external funding, increasing the SFCs' interest burden and reducing their profitability. 22. In order to motivate SFCs to intensify their efforts and to evolve new strategies to improve their recovery performance, since April 1, 1982, IDBI has linked refinance availability to SFCs' recovery performance. How- ever, IDBI's unilateral share capital contributions, over and above the normal matching contributions to those of state governments, expand the base upon which present refinance limits are determined, thereby enabling SFCs to avoid facing squarely their arrears problems. Greater discrimination in such unilaterial initiatives by IDBI could induce SFCs to introduce financial dis- cipline, to improve collections and to bring about long overdue institutional changes. V. UTILIZATION OF IDA FUNDS 36, 23. The closing date of the Credit was extended by 33 months, while US$8.4 million was cancelled. IDA authorized 442 subprojects; but about one-third (115) were subsequently withdrawn because of widespread cancella- tions by subborowers, stemming from lost of interest in implementing the project, switch to less expensive domestically produced equipment, availa- bility of free foreign exchange, exchange rate realignments, administrative hurdles (licensing, certification, etc.), and the disparity in lending rates.37/ Competition from the commercial banks, premature approvals reflecting inadequate project appraisal, and the absence of effective follow-up by the SFCs, have also been important contributing factors. 36/ For details see PCR, paras. 4.01-4.12 and Annexes 12-21. 37/ The on-lending rate under the IDA Credit was 1% to 2% above IDBI/SFC rupee loans because the monetary authorities were reluctant to equalize the two lending rates. The foreign exchange risk in all instances is borne by the Government. IDBI indicates that it has been instrumental in the streamlining and decentralization of import licensing proce- dures. Also, IDBI suggests that adoption of more flexible procedures for SMI project lending might have increased the utilization of the Credit (Appendix A, pages 30-31). - 16 - 24. The sectoral, geographic and size distribution of the subprojects supported by IDA funds has been satisfactory, but their implementation and operating performance has been below expectations and their financial results mixed.38/ The target groups were by and large properly identified and the funds reached the designated groups through the 18 participating SFCs. There was, however, inordinate emphasis in supporting new units (about two-thirds of the total number of subprojects financed) whose performance has been well below projected levels. The regional dispersion showed heavy concentration (68% by number of projects and 71% by amount) in four states (Maharashtra, Karnataka, Gujarat, Tamil Tadu), in part because these states were relatively more industrialized and the SFCs more aggressive. However, the subprojects were equally distributed between backward and more advanced areas. The loan proportion in the total investment cost averaged 72% and the sponsors' own equity 28%; but the foreign exchange component of the project cost amounted to only 19%. Of the 86 subprojects in operation, about one-third were completed within estimated costs, while the remainder experienced cost over- runs averaging 26%. Only 10% of the subprojects in the sample were completed on time, while the rest were delayed by 14 months on average. Time and cost overruns are attributed primarily to changes in project design, delays in arrival of imported machinery, shortage of building materials, unavailability of infrastructural facilities, particularly power shortages, and administra- tive hurdles (cumbersome licensing procedures, etc.). 25. The operating performance of the subprojects fell short of expecta- tions at appraisal. In the first two years, actual value added was 81% of estimated figures, sales were 75% of projected levels, exports were 81% of targeted levels, average capacity utilization was less than 50% and below the estimated target of about 70%, and profits were 29% of the estimated amount. Out of 57 projects for which reliable data are available, only 30 were profitable. The repayment performance of the subprojects paralleled that of the other subprojects supported by the SFCs. The main reasons cited for the poor financial performance of IDA financed subprojects are unavailability of raw materials and infrastructural inputs, change in market conditions and implementation delays, inadequate appraisal, strained cash flow, and premature loan approval reflecting the SFCs' drive for a high level of approvals. Poor management, particularly among smaller units, was also a factor. Labor was less of a problem in small units, but in some nediua- sized units labor unrest disrupted operations and affected profitability. Domestic Resource Cost (DRC) calculations for 7 subprojects show that 4 of these had DRCs greater than the prevailing exchange rate, indicating economic inefficiency. Based on data available for 65 subprojects in operation, some 8,500 new jobs were created at an average cost of US$5,085 and a median value of US$6,370. The investment costs per job created ranged from US$265 to US$52,030, reflecting support for industrial activities of varying capital intensity and size of establishement, including such relatively more capital intensive subsectors as chemicals, food processing and engineering. Nonethe- less, the mean and median values suggest support of mostly medium sized and relatively labor-intensive activities. 38/ Based on a fairly representative sample of subprojects. - 17 - VI. IMPACT OF IDA'S ASSOCIATION WITH IDBI 26. At appraisal, IDA had not fully appreciated the magnitude of the institution-building task at hand and the true dimensions and complexity of the issues involved. The difficulties were further exacerbated by the large number of SPCs supported by the project and IDBI's inability to take a firm stance vis-w-vis the SFCs as an apex institution, in part due to an array of systemic reasons (para. 17). At a high manpower cost, IDA identified defi- ciencies in the SFCs' organizational and institutional set-up and operations, provided constructive criticism, contributed to the formulation of SFC upgrading programs, and supported IDBI's efforts to help SFCs introduce institutional reforms. Arguably, IDA could have made a greater contribution had the project been more narrowly designed, had it recognized at a much earlier stage the need for working out more specific action programs for the institutional upgrading of the SFCs, and had it been more directly involved in their subsequent formulation and implementation. But again, in view of the prevalent strong countervailing forces and its indirect (i.e. through IDBI) involvement, it is doubtful that IDA could have had greater institu- tional impact. Thus, the institution building impact of the project has been below expectations and IDA's efforts largely ineffectual. 27. As part of an agreement reached in connection with the second line of credit to IDBI and ozr-lent to SFCs, IDBI commissioned a study of SSI incentives.39/ However, because of its too restrictive approach and scope, limited coverage and lack of policy focus, this study has had no perceptible impact (PCR, para. 4.13). Except for this study, the two Bank projects did not attempt to initiate a policy dialogue on small-industry with the Central Government (PCR, para. 5.03 (iii)). Issues affecting SMI that deserved the attention of the authorities and conceivably could have been addressed in the course of implementation of Bank SMI projects, industrial sector or macrc- economic dialogue include working capital availability, justification and rationalization of the numerous concessionary interest rates SFCs apply to various classes of subborrovers, deficiencies in the inter-state distribution system of industrial inputs, tax and incentive structure, effectiveness of the reserved product list, and the serviceability of industrial estates, par- ticularly in rural areas. VII. CONCLUSIONS 28. The thrust of IDA's effort in the project under review has been to upgrade the 18 SFCs and thereby improve India's credit delivery system to SMI. However, the progress so far has been limited. As the PCR (para. 3.13) 39/ IDBI, Efficacy of Incentives for Sma11 Industries, 1982. - 18 - accurately points out, -by any yardstick, the overall SFC institutional up- grading program has not been successful and creditworthiness has deter- iorated. On the collections and arrears side, the credit did not meet its objectives. On the management and other institutional aspects, the record was mixed-. Progress was made in strengthening IDBI's refinance organiza- tional set-up and procedures, although there is room for further improve- ment.40/ IDBI's SFC monitoring and review procedures and instruments could also be further strengthened. 29. In the face of the large number of SFCs involved, their deep-seated problems and the extensive assistance requirements to deal with them, the scope of the project was overly ambitious. Concentration on a limited number of SFCs, at least at the initial stage, could have made possible their appraisal at a greater depth, could have led to better appreciation of their problems, and could have made the institution building effort more manageable-although not necessarily more successful (paras. 6, 7). Appar- ently, the enormity and complexity of the institution building task was not fully appreciated at appraisal, while IDBI's capability as an apex institw- tion to monitor and to oversee the implementation of the SFC upgrading pro- grams was overestimated. In part because of IDBI's inadequate monitoring system and complacent attitude in its dealings with the SFCs, but also because of little appreciated systemic factors such as institutional arrange- ments and political interference at the state level, the presumed influence and impact of IDBI on SFCs turned out to be minimal as IDBI's efforts were effectively neutralized. Action programs with adequate specificity have been worked out and monitoring devices, including annual evaluation reports, Business Plans and Resources Forecasts (BPRFs), operational guidelines and procedures, have been put in place. But the problem remains the low level of receptivity and limited compliance by SFCs, IDBI's inability to assume a more assertive posture and the lack of support by state governments for SFC insti- tution building, reflecting different perceptions, priorities and expediew- cies regarding the role of the SFCs (para. 13). 30. The majority of SFCs have made little progress in improving their organizational structures; they continue to be plagued by the high turnover of staff at all management levels, as well as by their inability to attract and retain high caliber professional staff. Management information systems are inadequate; the quality of their appraisals continues to be deficient in important aspects; and supervision and collection procedures have been per- sistently weak. The operations of the SFCs grew rapidly over the years, as excessive emphasis has been placed on the indiscriminate creation of new 40/ For instance, IDBI could help expedite SFC approvals if projects approved by the SFC's board and for which IDBI's directors have voted in favor could be made automatically eligible for IDBI refinancing--which comprises the major part of SFC approvals. This would entail doing the indepth review of the project by IDBI's Directors in the process of deciding whether or not to support it at the SFC board presentation and not after it has been approved by the SFC's board and referred to IDBI for refinancing. - 19 - units without rigorous appraisal and supervision procedures; but at the same tine, arrears have kept mounting and have reached unacceptable levels. With a few notable exceptions, insufficient attention has been given to collection and the need to devise an appropriate strategy and course of action against the various categories of defaulters, including the requisite financial and technical assistance. Profitability has been on the whole low in nominal terms and negative in real terms, suggesting a degree of erosion in the DFCs' equity base (paras. 17-22). The sectoral and size distribution of the sub- projects supported by IDA funds has been satisfactory, but their implemen- tation was marred by time and cost overruns, their operating performance in key variables has been below projected levels, and their financial results mixed (paras. 23-25). 31. Despite the inadequacies and the need for remedial action to improve the serviceability of the technical assistance delivery system, the project did not press for remedial action and coordination between the delivery of credit and the delivery of technical assistance to SMI. Similarly, no serious attempt was made to establish a firm link and effective coordination between term lending by SFCs and working capital availability from the commercial banks. In both instances, the subborrowers were left to fend for themselves. Efforts to date to improve coordination between SFCs and commercial banks in this, as well as related matters (e.g. security sharing, recovery of overdues), have not been successful, suggesting lack of commonality of interest and the need for intervention by RBI to rectify the situation (paras. 6-11). 32. Virtually all problems that were afflicting the SFCs at appraisal (enumerated in para. 3) persist in most SFCs, although to a varying degree. As a result of their failure to implement fully the upgrading programs worked out and to improve their operating performance, the creditworthiness of the SFCs has been impaired. To ensure unimpeded development and to improve their financial viability, SFCs would have to focus on institution building in its various facets; IDBI would have to take a more assertive stance in the dis- charge of its functions as a shareholder, creditor and overseer; and the states would have to become more cooperative, supportive and respectful of the SFCs' managerial autonomy. The SFC Act may have to be amended to limit the role of the states to providing only the general policy framework within which SFCs should operate, to strengthen IDBI's hand and to enhance the SFCs' managerial independence. In this regard, the possibility should be consid- ered that SFC boards be empowered to appoint the managing director, who need not necessarily come from the ranks of the civil service. Individuals with experience in banking and/or industry would be excellent candidates also worth considering. Improving the credit delivery system at the state level and advancing the cause of SMI would further require concerted efforts on the part of the central and state governments, RBI, IDBI and the SFCs, to better the performance of the technical assistance delivery system, to make it more - 20 - responsive to the needs of the SMI and to link it with the credit delivery system. Finally, addressing the array of other sectoral issues affecting SHI (para. 27) would also help improve SMI performance. 41/ 33. Even though the objective of institution building has met with limited success, IDA's decision to support the SFCs was conceptually cor- rect. To be sure, there is room for improvement, which can be speeded up through greater receptivity and a higher degree of commitment by the SFCs and state authorities. An indigenous institutional capacity for term financing is developing as a result of the project, albeit very slowly, catering to the needs of the SMI, especially in the more backward areas. IDA's association, although not as fruitful as originally expected, helped identify deficiencies in the SFC's organizational and institutional set-up and operations, led to the development of realistic upgrading programs, and supported IDBI's efforts to help SFCs introduce institutional reforms. Henceforth, there is little the Bank can contribute in support of SMI, and the audit concurs with the conclusion in the PCR (para. 6.03) that "after nearly ten years of Bank in- volvement with IDBI and the SFCs, this is an appropriate juncture for the Bank to reassess its strategy for involvement in India' small to medium industrial sector-. With the proper attitude and support (paras. 29-32) IDBI could perform this task effectively. 34. Apex lending in India, where the Bank worked exclusively with IDBI (the second tier) which retained primary responsibility on important policy and institutional issues, has had partial success; nonetheless, the experi- ence has been instructive in many respects. It suggests that: (a) there is need for full understanding and appreciation of the institutional arrange- ments, political realities, attitudes and, more generally, of the way business is conducted in a particular country, prior to introducing organiza- tional and institutional reforms; (b) a gradual approach, in the sense of focusing on a smaller number of institutions and fewer tasks instead of fol- lowing an all-embracing approach, could make the institution-building and supervision effort more direct and manageable and could avoid dissipation of effort; (c) commitment by financial intermediaries and unswerving support by state governments to institutional development is extremely important if set objectives are to be achieved; (d) the quality of top management is a power- ful driving force behind the development and growth of an institution and frequent changes, resulting in instability and lack of leadership and direc- tion, tend to undermine the effectiveness of organizations; (e) the attain- ment of corporate objectives can be vitiated in the absence of managerial autonomy and appropriate managerial incentives; (f) access to working capital is crucial for the success of SMI operations; (g) establishing a link between financial and technical assistance of the requisite quality at all stages of the project cycle is essential for the viability of smaller undertakings; (h) 41/ In this respect, it is encouraging that recently IDBI has reviewed the three decades of SFC involvement in industrial development financing and that a number of new initiatives regarding the strengthening of SFCs are now under consideration by the Government. - 21 - staff compensation remains a vexing issue in state-owned financial intermedi- aries; (i) in the face of high turnover among seasoned staff, training pro- grams and adoption of modern management techniques cannot materially improve the existing state of affairs, unless complemented by affirmative government and board action on staff remuneration and career development; (j) although time and cost overruns can be ascribed to a degree to factors beyond the control of a lending institution, there is need for greater effort during subproject appraisals to review more carefully technical designs, to assess more realistically project costs, to allow for adequate price escalations and physical contingencies, and to develop more realistic financing plans and implementation schedules; (k) studies of earlier project experiences on a subsector-by-subsector basis can provide valuable feedback and can strengthen considerably appraisal work; and (1) studies of industries with high rates of defaults can help diagnose the nature of the problems they face, ascertain the composition of defaulters and fashion appropriate measures to deal with such issues. 35. Concerning apex type lending, the project experience indicates that the extent of responsibility assigned for institutional and operational upgrading to the participating financial intermediaries should be commer- surate with the apex institution's actual delivery capability within a given time frame, taking also into account the political realities of the situa- tion. Excessive optimism with respect to what can be achieved could result in supervision requirements well beyond levels originally envisaged by the Bank. Also, design of apex lending operations with specific subsector focus, instead of open participation based on globally assessed investment potential in SMI, would give the apex institutions involved, as well as the Bank, better opportunities to influence actual project design and implementation within the framework of sectoral policies and thus make their developmental assistance more effective. - 22 - APPENDIX A COMMENTS RECEIVED FROM THE BORROWER INDUSTRIAL DEVELOPMENT BANK OF INDIA General Comments on the PCR/PPAR - IDA Credit 356-IN orld Bank has sought comments of I!SI on *e Project Performance Audit Report CFEAI) relating to the first IA ,redit (^redLt 35 I) which was extended for the use of State Financial Corporations (SPCs). PPAR is based on the conclusions arrived at in the Project Completion feport (POR) on the same cr edit. No comments/views of III, however, bad been called before finalising PCR. The discussions in PPAR and PCR touch upon several aspects of the fun ctioning of IMI and SVCs. This note covers the main issues/observations made in PPAR/PCR concerning the ful- filment of ovcrall objectives of the credit as reflected in the opercttional thrust and performance of SFCs, the organisational and institutional improvements made over the last 10 years and the role pl3yFd by IDBI in implementing and monitoring the upgradation progrmnme. Detailed cor:ents on specific points =ad& in the reports are given in the Attachment. These general views together with specific comments would facilitate IDAL to evaluate the effectiveness of the credit in proper perspective. Bacaround - Overall Environmental Factors The operational thrust of SF s and the expansion in their business h-ve to be viewed in the background of the overall national objective of Government towards development of small scale industries, through promotion of neu arstr epreneurs. New avenues %er e cr eat ed by backwar d and forward link ages and anc.2arisation of core industrial sectar in which substantLal investment was being made during successive Five Year Plans. The - 23 - APPENDIX A process was also aided by incentives offered for development of backward r egions. As described in detail in PPAR, the small industry sector faced several problems, scme of which were directly reflecting the economic difficulties and external factors viz. the oil crisis, drought conditions in different parts of the country in 1978 and 1979, industrial recession etc. The small industry sector is more susceptinle to these external factors due to the linkages within th, economy. The degree of sickness in this sector is, therefore, relatively high. Also, the transaction cost involved in small industry financing is high. The financial institutions catering to this sector have, therefore, had to adopt innovative measures to reduce the pressure affecting the operational viability of small industry pro je cts. It is ne edles s to point out that the health of the small industry sector depends crucially e- the strength of large units. PPAR/PCi have not given due weightage to theFe external factors hile comparing the operations of SFCs with those of the all-India financial ins-itutions. Credit Objectives The credit objectives and goal were identified and set by the World Bank/ IDBI as follo.s : a) to upgrade SFCs as financial Institutions and thereby improve the credit delivery system at the State level; b) to support the establishnent of new small and medium industrial units through exp mision, diversification and modernis ation; c) to provide finance for import of eaquipent and for permanent voriing capital to the SSI sector; and d) to review and improve IDBI's own organisational SLt up and and procedures far refinance operations. - 24 - APPENDIX A It is quite clear that the primary objective has been the institutional upgradation of S3Cs as instrument for providing credit to small and medium enterprises. These objectives of the Credit 356-IN, according to IIBI perception as detailed below, were basically fulfilled and a sound framework has been created within which the gains of upgradation could be accelerated in future. Tbrld Bank Observations The main observations made by the 1Wbrld Bank in PPAR and P,R are - (i) By any yardstick, the overal" SP institutional upgrading progravme has not been successful and creditworthiness has deteriorated (para 3.13). (ii) SI-Cs have placed undue emphasis on loan approvals to new units without rigorous appraisal and super- vision procedures and that this has overshadowed their attention to collections and arr ears (para 18 and 3.01) (iii) The most significant weakness in the management of SFCs was the fr uent rotation of the Government. appinted Chief ecutives (para 3.11) (iv) Organisationally Sns remained rather static through-out the period (para 3.12) (v) The line of credit could have been limited to selected SFCs with the selection made on the strength of the institutions (para 5.03) (vi) I3BI's. performance under the project was disappointing ....(para 3.20) IDBI Comments Upgradation Programme The observation that the overall SEC upgradation programme has not been successful does not highlight the positive effect of efforts made by S30s during the last one decade. SFCs' - 25 - APPENDIX A operations during the last decade have shown a sharp increase. - The number of loan applications increased from 6783 in 1972-73 to 1+2458 in 1982-83. - The level of loan approvals increased seven-fold from Rs.848 million in 1972-73 to s. 5913 million in 1982-83. Figures up- dated and text - The share of assistance to the small and tiny industrial amended in sector increased to 80% from a level of about 60% PPAM, para. in 1976-7. 18 - SCs have been reaching the smaller of the small and medium entrepreneurs. The average size of SF loan declined frcm Rs.0.21 - 0.22 million during 1976-79 to as.013 - 0.17 milLion during 1979-G3 (Anneture-I). - About 50% of the approvals relate to projects located in specified backward re gions in the coutry. - Total loan disbursements of SPCs Increased from Ps.446 millicn in 1972-73 to is.14045 million in 1982-83. I4hile investment catalysed is a fair index of the degree of progress, performance indicators of SFCs put the picture in better perspective. Certain indicators regardLng key operational paramEers, are summarised in Annexur-3l. - There had been a steady annual gDotb of over 20% in the assets of SFCs and the return on capital employed ranged between 6% and 7%. Reflected - Debt S ervice Coverage Ratio (cash basis) as Indicator Re flete of SFCs' viability has Improved over the ye ars paras. 18 from 0.97 in 1976-77 to 1.19 in 1981-82. and 20 - 0veraes as a percentage of loans outstanding has been contained at around 25%. In order to sustain the level of growth in the operations and Reflected conscious of the need for loan supervision, SICs took appropriate in PPAM, para. 18, steps to upgrade their organisational structure and loan review footnote 34 system. There was also a sigrfficant improvement in the quality of their apprqisals. ILBI has been constantly monitoring the overall operations of SFCs through its annual programre of - 26 - APPENDIX A evaluation and the exercise of Business Plan and Resources Fbrecast (BPRF). With the continuing association over the years, SFCs kza have emerged as important intermediaries far institutional finance for small and medim industry; their aggregate sanctions and disbursements per year have now exceeded those of IFCI or ICICI. It is mtntioned tlcAt the raaon programe and credit supervision could have been more effective i the facility had ben extended only to a few selected 8Cs, based Cn the strength of the institution and sub-sector concentration. This view seems to be narrow and does not fully reflect the sp2rit behind the credit. The primary objective of the line of credit was to upgrade the level of functioning of Sls through appropriate, prescribed development progriume. Exclusion of wealcer SIMs from the purview of the credit would have defeated the very purpose of credit. Undae emphasis on loan approvals The observation that SFCs have placed undue emphasis on loan approvals without rigorous supervision procedures, is not Reflected in PPAM, a fair one and does not adequately tAlce notice of changing para. 16, footnote ethos in SFCs. In the earlier years, the major focus of top 24 management in SFCs was to create an impressive volume of new loan spnctions as a consequence of which there was a disproportionately greater involvemet of the starr in the exemise of lom sanctions. This position has undergone a total clange since 1979-80 when IDBI introduced the exercise of BPRF. There is now a planned approach on each of the different areas of activities, as a result of which target of loan approvals are beiag set aftcr - 27 - APPENDIX A taking into account the organisational and resource mobilisatiU effort of each SPC. This reorientation has been amply revarded inasmuch as the actual per fozan ce in s anct ions, disbur soments and recovery has remained very close to PPRP targets. Frequent changes of Managing Directars There were frequent changes in the top management of SPCs resulting in lack of continuity vhich in turn reflected in the dilution of efforts towards institutional upgradation. In October 1980, Chairman, IDBI issued to the -Chief Secretari as Reflected of all State Governments comprehensive set of guidelires regard. In PPAK, para. 17, ing appointment, tenure, change etc., of Managing Dir ectors footnote 26 of SMs. This communication was followed up by a letter from the Union Minister for Finance to the Chief Ministers of the State Govts. These measures seem to have created awareness in the minds of State Governments about the need for giving reasonably long tenure to the Managing Directors. IDBI has been firm in dealing ith the cases where the change has been made prempturely. At present, in as many as 13 SFCs, the tenure of office of the Managing Directors is for 2 years or more. Organisational Appects Alongside the increase in loan operatios, S-rCs have devoted considerable attention to improving the organisational structure. Some SFCS (e.g. Gujarat, Himachal Fradesh, Haryana, Andbra Pradesh, Kerala, Madhya Pradesh and Karnatska) have separate appr is A epart_0ts In ordgr to strqngther the quality and effectiveness of loan processing and supervisian. - 28 - APPENDIX A Thd nunber of professional staff in SICs increased from 377 at the end of March 1973 to 1729 in March 1982. The Reference is made in ppAM, number of other staff also rose from 10) in Marc* 1973 para. 7, foot- n6te 27 to 14200 in March 1982. During the sae period, more than 50o professionals underwent training in project appraisal and supervision courses run by the M anagagnt Development Institute, Bankers Training College, Reserve Bank of India and by IDBI. These tr aining courses have proved extrenely us eful in improving the quality of staff in SPCs, Recovery performance Poor recovery performance and low IBCR were weak areas for many of the SFCs. This phencmenon was partly de to the lack of necessary alertness on the pwt of management Reflected in PCR, para. 13, owing to absence of enihasis in the ob3etives of some of the footnote 3 SFCs and partly due to energence of adverse external factors. In the wake of improved economic situation, recovery position of SPCs as also IECR has shoun substantial improvement.Actual recoveries Zor all SFCs during 1981-82 aggregated as. 1909 million and exceeded the BPLLF target of Rs.1891 million. As many as 15 of the SFCs have either reached BPRF target closely or even exceeded the EMRE xmgmt of same (Annexure-III). Most of the SFCs had IBCR of 1.0 or above in 1982-83(Annexure-IV). In the assessment of the functioning of SFCs (IBCR beigg the norm), account should be taken of the fact that whereas in the early '?Os the resources mix of SFCs had a substantial. proportion of market borrowings in the form of bonds, in later years, this source of finance has decreased substantially. The proportion of market borrowings has decreased fran about - 29 - APPENDIX A' 29-35% during 1976-77 to a level of 17% in 1982-83. The resources gap of SFCs was largely met through refinance from IDEE. The change in the patbrn of financing of SFCs operations has had an adverse effect on their liquidity. eflected in PCR, para. While on the one hand the cost of borrowing was higher, in 3.13, foot- note 3 the case of refinaice relative to market borrowing, the period of maturity also posed severe constraint. Insta2aents that were dae for pajsmelt under refinance were higher than for the market borovings. This placed undue strain on the repayment obligations of SPCs and in tuzn affected their BCR. This single Important factor, over * which SFCs had no control, has not been taken cognizance of in the PCH. If the pattern of financing had not shown devation, INCR perform ance of SPCs would have been.better and most of the S1Cs would have crossed the ISCR norm prescribed by tho Vbrld Bank. I]El Per form an ce It is stated that because of the low level of receptivity and limited compliance by SFCs with the operational guidelines Para. 13 of and procedures prescribed under the Credit, III's efforts PPAM provides the details vere effectively neutralised. It is also stated in PPAR that that led to the conclu- IEBI was unable to assume a more assertive posture in dealing sions reached in para. 29, with SICs. In the same tone in para 5.01 of the PR it is implicitly referred to stated -that IDBI took a strong position against debling with here S1s and on occasions, it acted on A1 own accord in suspending SICs from all refinance facilities because the State Govts. bad r amov ed or transferred Managing Directors. The statement in PPAR contradicts with evaluation made in PCR. Similarly in para 3.08 of PCR mention is made of the Impact of SPCs institutional upgradation programme but at another place the - 30 - APEDI A point is made that ILIS could not effectively ezrcise its m. date over SFCs (para ?.a)). The statanents are not only Reflected in PCR, para. a Inconsistent but are sweeping in nature and subjective. 3.13. foot- note 2 and IDM over the last 10 years has put in concerted efforts in steadMt para. 3.20, footnote 1 building up the organigational struCturd and operational effectiveness of SFCs which is reflected, particularly since 1977, in more than four-fold increase in their operations, profess ionalising the management set-up and overall improve:ment in key performance indicators. These achievements mhen viewed in the background of the difficult environmental settgng, are impressive.. The critism that IDBI failed to create three divisions of appraisal, operaticna and follow-up within its Refinance Text of foot- note 16 in PPAM, Department is also not correct. Before decentralisation, para.12 modified; also text in the refinance operations in IDBI's Refinance Departumnt at PCR, para. 3.17 the Head Office had an appraisal and supervision division with a separate ving fbr review of appraisal reports prepared by state level institutions. Further, opportunity was taken during the periodical inspection and azijual evaluation of SPCs to review their loan portfolio and 'isit some of the units assisted by SFCs. And we believe that with decentra- lisation, IDBI's supervision and monitoring of SFCs have became more effective. Certain proceduaral benefits flowed f!rcm the operation of the credit. In order to ensure smooth operations under Reflected in para. 23. foot- the credit and also to help intendIg entrepreneurs k btain note 37 import licences easily, the Govt.of India at the instance of IlI effected relaxations in the licensing procedures. The -31 - APPENDIX A procedures were relaxed and decentralised to such an extet that the entrepreneur could obtain a licence from the regional licensing officer and could exercise his option either to avail of the facility under the lines of credit or Dom the free foreign exchange reserve of the Government. The under utilisation/ cancellation of sub-project appraisals under the IDA 356 IN have to be viewed in the context of the Improved foreign exchange situations of the country, it distortion in the inter est rate structure and the talent displayed by local entrepreneurs in manufacturizg equip- ment domestically at lower cost compared to their count-3r-part - imports. To the extent the needs cobld be met Vrom domestic sources, the promoters of small industry projects did not resort to import of e quiXpment from abroad, and hence, cancelled SFC approvals under the credit; instead, they obtained normal rupee loans from SFCs for finaicing the purdbase of equipnant. The pr evailing inter est fate structure was also not condacive Reflected in ) PPAM, para. )to borrowing under the lines of credit. 23 and foot- ) note 37; PCR,) para. 4.10, ) An aspect which has not been touched upon in PCR/PPAR, in footnote 2, ) and paras. )conteit of low utilisation/ cancellation of sub-projects under 4.11, 4.12 ) IDA 356 IN, is the procedure adopted in operating the credit. Perhaps a mcre flexible procedure would meet the requireent of small and medium incustry projects betWr tht adopting the procedure meant for large projects. And a more helpful and understandirg attitude in the matter of interest rate structure could have improved the credit Lutilisation substantially. - 32 - APPENDIX A - Summing up SFCs, fbr the first- time, vere exposed to the financial dis cipline and operational efficiency prescribed by an Int - national organisation and have become conscious of the need for upgrading the level of efficiency of their operations. It is our view that the lines of credit with the associated I. institutional development progr ame and the perfarmace achievements in the last oAe decade have consider ably strengthened SFCs as lead institutians in the finaencing cf small and medium sectors of industry. The World Bankfs evaluation of the performanoe of SFCs ought to take cognizance Reflected ) of these achievements. in PPAM. ) ) Also, in the evaluation of the perfbrmance of SFC9, the para. 33 ) World Bank has perceived cbly the financial aspects concerned ith the project operation. Along side the financial aspects, record should be made of the role of SPCs in the pranotlon of small industry units. Perhaps the World Bank has not grasped the promotional functions undertaken by SPCs and the efforts- made by I]BI in encouraging and devbloping the outlook of SlCs in the matter of promoting and financing small industry projects. Slqs have over the years made ceaseless efforts in fostering and developing the growth of labour-intensive small and medium sectors of in dstries which fozma a very significant part of the industrial sector in the country. The business outlook of S1Cs is promising. The operational policies, procedures and the institutional development programmes evolved during the last de cade are shoving results and SFCs to Oay ar e much better equipped for successfully meeting these tasks. BYa - Average gize of Assistanoe sanotioned & Retinance hereagaiust (h. in Million) ** gg year AgEsjitanoe sanotioned b SPO0 Åverage Ret~anoo ganctiond by B IVerage (Tears April - Marh) alge (Year s July - Jn) slae 1976-77 7938 1633 0.21 6250 1492 0.24 1977-78 7659 166q 0.22 5397 1124 0.21 1978-79 9643 2007 0.21 10321 1939 0.19 1979-80 17816 2638 0.15 18969 2354 0.12 1980-81 28915 3705 0.13 22786 2857 0.13 1981-82 32048 5096 0.16 28467 3773 0,13 1982-83 33611 5902 0.16 28777 5042 0.18 ** Souroe i Developmnt Banking 1962-83. Appenaix 68. g* Sourc * Obtal=nd trom Corporate Statistit1/DBI Anmal ROport. Indicators 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1. Rate of growth in assets 24.0 17.8 19.5 21.9 19.2 22.1 24.8 2. DER 4.7 16 4.4 4.5 4.2 4.o 1. 1 3. Cost of borrowings 6.6 6,7 6.05* 6.6* 6.3* 6.2* 6.9 14. Return on capital 10.2 11.0 10.14* 10. 5* 9.9* 9.8* 10.6 employed 5. Recoveries as % of collectibles 36 34 36 36 35 39 37 6. Ploughback(qs.million) (*)21 (-)86 (-)142 (-)107 77 293 243 7. DSCR (cash basia) 0.97 0.95 0.94 0.91 1.04 1.19 1.12 8. Overdues as % of loans 19.4 24,6 27.0 27.0 25.3 26.1 25.5 outstanding 9. Admn,.costs as % of 1.09 1.09 1.05 1.04 1.12 1.13 1.21 average total assets * Reduction due to adoption of cash system of accounting by major SFCS - 35 - APPENDIX A Recovery Performance of SFCs (Principal & Interest) (s. million) -------------------- -------------------- - Corporations FY 80 FY 81 FY 82 Actuals Target Actuals Target Actuals ------------- ----------- ---------------- ------- --------- Andhra Pradesh 104 168 154 195 213 Assam 14 8 12 10 15 Bihar 3U 50 50 80 78 Delhi 26 36 28. 43 43 Gujarat 116 261 200 251+ 275 Haryana 50 63 64 67 83 Himachal Pradesh 15 25 16 22 21 -Tammau & Kashmir 35 38 38 46 1+6 Karnataka 65 96 83 125 129 Kerala 43 82 146 101 57 Madhya Pradesh 28 44 38 63 50 Maharashtra 175 260 214 265 274 Orissa 39 80 52 90 101+ Punjab 63 76 69 75 77 Rajasthan 59 110 88 141 123 Tamil Nadu 103 130 112 135 11+0 Uttar Pradesh 64 100 104 135 141 West Bengal . 22 29 28 45 142 S------------------------------- TOTA1L 1049 1656 1394 1891 1909 ------------------------------ - 36 - APPENDIX A tonU oash baste) o£ SMOs CorporPations f 1978 PY1979 I 1980 PY 1981 PY 1982 And1wararadesh 1.10 1.42 1.51 1.39 1.50 Assaa 1.10 0.79 1.35 1.03 1.03 Bihar 0.30 0.26 0.43 0.64 0.90 Delhi 1.08 1.12 1.03 1.11 1.37 Gujarat 0.62 0.68 0.67 0.82 1.28 Hwra~ 1.12 1.18 1.00 1.24 1.81 Hinaabal Pradesh 1.49 0.91 0.87 1.08 1.12 Ja~ & ~KahmIr 1.49 2.14 1.50 1.49 1.63 Karnataka 0.76 0.69 0.95 0.81 1.03 Kerala 0.85 0.63 0.66 0.58 0.79 adh^a 1radesh 1.17 1.50 0.84 1.00 1.02 Maharashtra 0.96 0.84 1.07 1.11 1.21 Orisa 0.80 0.54 0.89 1.10 1.28 Punjab 1.10 1.18 0.89 1.28 1.12 Rajastan 1.04 0.94 0.70 1.06 1.10 Tamil Hada 0.92 0.94 1.09 0.91 1.16 Uttar Pradesh 0.91 0.79 0.81 1.07 1.22 West Begal 0.35 0.43 0.52 0.51 0.65 M.B: Injection of oapital nnt nL:PQied4 Detailed comments on points made in the PCR and PPAR I. PIoject Completion Reort Performance of Implementing Agencies IBBI_Comments 1. The DSCR position of nearly all mh DaCR position of all SFC9 for the.fiscal years SFCs deteriorated consistently - (Ppra 3.05). 1974, 1976, 1981 through 1983 indicates that sixteen SFCs recorded DCR (adjusted) of nearly I or above during 1982-83. Only Assam and Phar SFCs had DSCR of 0.80 and 0.93 respectively. There were fluctuations Pmong the different 8FCs and the DSCR of each SFC has Reflected in PCR, para. 3.13 to be seen in the context of the zaource mix, the footnote 3 N. a economic situation in the State, the external environment and other factors affecting the performance of the FC. As indicated in the background note, if the SFC were to have a proper mix of resources, their operational performance and profitability would have shown a different pattern. The fact that even under' difficult situation, the GFCs have been able to pull through and continueto render financial assistance to the small and tiny sectors itself is testimony of their resilience. In regard to collection of arrears, most of the bFCs have taken positive steps by instituting measures for increasing collection of dues. While they have taken positive steps against wilful defaulters, they have lent a helping hand in overcoming difficulties faced by several borrowing units. ). By any yardstick, the overall SFC This general statement is made in direct reference institutional upgrading programme has not been successful and credit- to the performance of some of the weak SFCs, The worthiness has deteriorated (Para 3.13). statement does not reflect the positive efforts made by SFCs in instituting measures which were designed to I improve their working. As Indicated in the general note, the level of performance, the operational standards, weaknesses and achievements of each SFC have to be evaluated in the general background of the environment, the prevailing economic conditions, the chronic nature of overdues,.management deficiencies,. etc. which are being corrected in gradual stages. Institution building is a slow process. In view of the varied level of development of each SFC and also because of the fact that FCs are functioning within the overall framework obtaining in different States, any measure towards improving the level of functioning of $FCs will meet with varied results. IDBI has been pursuing a policy of selective approach in dealing with dFCs and does not intend to disturb the institu- tional fabric overnight, IDBI ia hopeful that SFCs Reflected in PCR, para. 3.13, will, over a period, themselves assume greater footnote 3 responsibility in revamping their organisational structure and management, achieve greater efficiency in operations and show satisfactory financial results. There is no gainsaying that the institutional upgrading programme has had a salutory effect. The rapidity with which change needs to take place and the degree of improvement which has taken place is a matter of perception. And to state that credit- worthiness of BFCs has deteriorated is too sweeping a statement not borne out by their financial soundness and/or operations. If at all, the inherent financial, strength of the 8FCs has improved considerably over the past ten years. 3. IDBI did not have a say equal to the The vievs expressed in para 3.11 do not reflect State r1overnments' (eventhough it was an equal shareholder) due to the State the real situation. IDBI has been pursuing a policy level influences and the reluctance of IDBI to involve other Central Government of restraint and adopting P positive posture towards agencies (Ministry of Finance) in reviewing the actual situation in the the functioning of 3FCs. Where situations demanded, 8FCs (Para 3.11). IDBI has not hesitated in taking punitive measures, viz, in May 1981, in order to drive home to the state Government and the management of Kerala Financial Cor3poration, the imperative need for setting ite house in order, MDBI took the unusual step of stopping the flow of refinance to the Text in PCR zodified as appropriate Corporation. This penal measure was revoked only after a series of consultation between IDBI and the State Government which resulted in substantial toning up of the organisational set up and bringing about adequate emphasis on collection of overdues. The DSCR of this Corporation (cash basis) has improved . substantially from 0.37 in.1980-81 to 0.60 in 1981-82 and further to 1.07 in 1982-83. Also in order to improve the efforts of the Corporations towards institutional upgradation through continuity in the tenure of managing directors, IDBI Chairman issued to the Chief Secretaries of all the State Governments in October 1980 comprehensive set of guidelines re3arding appointment, tenure, change, etc. of Managing Directors of 8FCs. This communication was followed by a letter from the Union Finance Minister to the Chief Ministers' of all the State Govern-ents. These measures seem to have created awareness in the minds of the State Governments about the need for giving a reasonably long tenure to the Managing Directors. IDBI has also enforced its writ more firmly in cases where the change has been made prematurely, e.g. Maharashtra and Delhi FCs. In these cases, IDBI suspended the availability of refinance to -these Corporations, until the State Governments initiated dialogue with IDBI in the matter. At present, in as many as 13 8FCs, the tenure of office of Managing Director is for 2 years or more. This statement contradicts with that made at 3.16(i) that it was defficult for IDBI to sell its experience eveAthough it potentially carried a great deal of influence over the GFCs. IDR. pernocvos the role uf SoCs as comnlementury to De and therefore respects the autonomy of these organisationse And being State level c.gencietsj sensitive to the needs of the local people, IDBI encourages MICs/ntate Governments to tske responsibility for their operntions. In the matter of directions, eb)BI norsialy prefers to use persua- dion rather then the clout which IDBI obviously has. The shokAd World Panei view seems to be thet such clouttave been used more vigorously and more often. This again is a matter of perception. +.A number of recommendations, such Most of the State Governments as stated in the earlier as continuity in Menaeotent, establishment of special recovery section, acted upon the communication from the IDBI/ department and appointment oft an experienced General Manager to oinistry of Finance in the matter of appointments and head the Department remain to be acted upon in some AFCs(Para 3.16). tenure of the Managing Directors, ost of the Fes have established recovery cells headed by senior management staf . (General Managers are being appointed. IDHI performance under the project There is lack of appreciation of IDBI's role in the was disappointing due to the factors mentioned .. (Pars 3.20) upgrading programmes. IDBI hs taken several measures for fostering the growth of aFCsparticularly with regard to achieving greater operational efficiency, re-organ isa- tion of the administrative structure, laying down procedures for loan processing, improving standard of appraisal, for effective co-ordination between/among other State Text modified in PCR, para. 3.20; level agencies and commercial banks, special efforts in see also footnote 1 in para. 3.20 recovering the dues, tendering advice and counselling. SFCs Conference served as a forr for excbe.nging informa- tion and experience on various aspects of the functioning of BFCs. IDBI has not been a passive observer of BFCs, operations. obai did take strong measures against those .s, where such actions deemed necessary. 6. Despite IDBI's substantial It is not correct to say that at the heart of IDBIs shareholnnings, at times it was ineffective in pushing for inability to influence the outcome was the Intrusion of implementation of the institutional upgrading programme and in political pressure, as reflected in changes inIDBI's ooaining ihdprovements in the SMC's collections (Para 5.02(1) )* own management and interference by State Governments in SFC matters Where justified and warranted, IDBI never hesitated to take measures to correct the deficiencies and has h d in fact introduced special measures in achieving the stated objectives and goal. Text amended in PCR The changes in the top management of IDBI did not in any way affect the progress under the upgrading programme To some extent the effectiveness of the programme was diluted on account of external factors which hindered the scope of achieving the results within the stipulated period, 7. notwithstanding the concern for the no. of institutions involved, it may have been preferable to established, include a few commercial banks in the second credit line IDBI's project reviews". (Para 5.03(ii) ). 8. ........,. IDA Credit' 356 and IDA Credit 356 I did have some impact on the policies loan 1260 had limited impact in reviewing or influencing Government and procedures concerning small industries development, of India's polie0es and mechanisms for small industries development In order to ensure that intending entrepreneurs (5.o3(1ti) ). obtained licences easily Government of India at the instance of IDEI effected relaxations in the licensing procedures from time to time. While SFCs provided the term loan requirements of small and tiny units Text amended tn PCR as appropriate commercial banks primarily provided working capital requirements of these units. The benefits under the credit have reached the target group as prov4d by the demonstration effect-of the credit; it has succeeded in bringing about a substantial transformation in the approach towards the development oV small scale sector 1 ad also the institutional developmnt. II. Project Performance Audit Report 1. Project did not attempt to link It is mentioned that the country was replete with and co-ordinate the delivery of BFC credit with the delivery of technical agencies and the project team did not technical assistance (Para 8s). consider it necessary to include any technical assistance in the project. IDBI over the years has been instrumental in creating a chain of technical consultancy organisations (TC0s) for providing technical services to the financial institutions for the development of the small scale sector. The TCOs Reflected in PPAH, par. It act as referral centres for resolving technical and footnote 2 and para. 8, footnote 10 other difficulties experienced by the 81 sector. The TCOs have also been acting as central pool for communicating technology information service for the benefit of small industries. They continue to focus their strategy on promoting, paokaging and implementi $8I projects; they also undertake studies for rehabilitation of sick units. In 1981-82, as many as 206 such studies were completed by TCOs. IDBI has also been organising entrepreneurial development programmes (EDPs) and has recently established a national training cnd research centre (Entrepreneurship Development Institute of India). IDBI recotnises that mhn power development is an integral part of the institutional upgradation and has therefore been providing training facilities to both entrepreneurs and management personnel of the. It would perhaps be pertinent to mention in this context that the line of credit (either first or the second) could have included a technical component for training of senior eoecutives in the SFCb in order that theybbenefatndkfrom training programmes undertaken by the international organisations like HDI of the World Bank, ADFIAP, etc. This technical component could have opne a long way in exposing theI senior personnel to International development banking scenario and helped achieve greatei efficiency in the management and opeorations of FCs 2. Manypsmall industrialists claim In line with the recommendations of the working group on that they had difficulty in raising working capital from co-ordination between VFCs and bnks, seI has been commercial banks when they had term financing from SM3. There exhorting the commercial banks ath Statelevel Institut1 Is obvious need for co-ordination between SFC9 and comercial banks to effect co-ordination in their operations. 16 FCS has (Para 9).- orgonised Zeminars so as to familarize the staff idth the requirements, policies and procedures of each other and IDBI's initiatives are discussed also to ensure smooth implementation of the recommendations in PPAM, pars. 10 and 11, footnote 14 of the Working Group, IDBI has been exhorting the 8FCs to interact with ban's in order to promote greater co-operation in the matter of adoption of comvion applications for term loan, joint appraisal, follow-up, provision of working capital funds by banks well,in time before the unit commences production, etc. There are administrative and technical difficulties in achieving effective co-ordination between the CFCs and banks but efforts are being continued in this regard. 3. Toint appraisals are difficult This is not correct. It Is difficult for a small industry because small borrowers keep changing their ban',cers(Para 11. ~unit to change its bankers from time to time. The commercial bank concerned comes into the picture only when the project is implemented and about to commence operationse footnote 13 Having known the party closely, it does not appear to be dIfficult for the bankersto grant working capital on time. Some of the small scale units however, still complain of difficulties in obtaining timely and adequate working capital funding from the banks and this has affected the working of projects. Since theXre4s a clear demarcation between commercial banks and the SFCs for the provision of working capital and term loan requirements, the alternative solution suggested in the PPAR that SFCs might extend working capital to small projects would upset the institutional set-up. The suggestion would need to be carefully considered. 1+. The problem was compounded by the The statement that changes in IDBI's own management and large number of 8FCs involved, which made supervision of SFCs staff have hindered IDBI's effectiveness in supervising very difficult ............ (Para 12). the dFCs and that this was primarily due to large number of SFCs involved in the programme is not correct. The changes in top management of IDBI has had no effect on the supervisory role played by DBI over the 8FCs nor Reflected in PPAM, para. 12, footnote 17 with regard to the implementation of the upgradation programme. This is borne out by the fact that there have been no basic policy changes in IDBI in this regard. If at all, with the delinking of IDBI from RBI, the supervision over bFCs has qualitatively improved as mentioned in the POR. The systems and procedures within rDBI are structured. in such a way that their effectiveness is not affected by changes at the top management level. The problems connected with the instttutional development programmes were mainly external. 6FCs themselves have been making conscious efforts in implementing the upgradation programmes. 8FCs achievement under difficult situation and critical environment should be considered very sattsfactory. .,u.... IDBI Directors sitting on This observation does not seem to be correct. Recognising .8FCs Boards have not been able to away the decision making process the fact that bFCs are autonomous bodies with independent in directions conducive to implement- ing institutional reforms .......... boards, IDBI does not interfere in their day-to-day IDBI's ability to fulfil its functions (Para - 13). operations. 1D)!3I did exercise its powers in influencing the lending policies and procedures of these institutions. I3)BI directors along with RBI directors on the roard of Reflected in PPAM, para. 13. SFCs have been playing a useful role and have influenced footnote 21 to a large extent expeditious implementation of measures for improving the working of SFCs. As given in the general note, the powers of State Governments vis-a-vis SFCs are well delineated, I1I has been taking only such actions as would improve the working of the Corporations and improve their effectiveness. Decisions at Board level in 8FCs are generally taken on consensus of all Board members; the views of IDBI/RBI Directors afxt zzy always respected. No instances have been cited to the contrary. 6. Inspite of its supervisory role and its The BPRF lays down operational targets in the presence on the Boards of 8FUs, IDI has yet to use the BPRY as an instrument to context of the investment needs In the State and help the SFOs set and enforce realistic operational objectives and targets .... resource aviabiltty to the 6FCs. Op-.ortunity (Para 16). is also taken to impress won the SFCs the need for -naximising recoveries in order that bhe reliance on IDBI refinsnee could he reduced. The quotation from IDBI's own remarks dhile determining the key operational targets, on BPRFs cited in PPAM, para. 16 seems the performance of the 4F(;s in the Drevious year to indicate otherwise is tepien into account. Over the rp lrs the n is accepted by srCs as an instrument in regulating the flow of resources and in achieving the key opera tll variables. There is no basis for the statement made in PtAR. 7.More importantly, 8FCOs have piaced undue This statement is not borne out by facts. It emphasis on loan approvals to new units urithout riporous appraisal and super'- is true that there has been a substantial increase vision lrocesures with the result that C arrearsf have kept mounting despite the in 6FCr operations; there has also been a rrIid growth in the voeinn of lending anid extensive re ched'ulingsh(Para 18). substantial change in the orgnisational structure, the appraisal procedures and the standard of appraisal to srort the increase in bsiness. In keeping with the increase in the loan operations, l] SVCs have geared themselves to meet the challenges of 1980s by rationalising the systems and procedures. While the results may not have been fully positive and uniform, efforts are being made to achieve the objectives. It is worth mentioiting that industrial efforts in reaching remote, under developed backward areas, through several innovative ideas and maintaining a structure suitable to introduce, administer and operate several developmental schemes have been overwhelming. With Reflected in PPAM, para. 18, respect to collection of overdues, SFC9 have shown footnote 34 improved performance in the last 2-3 years. Moreover, the observation that IDBI could help expedite SFC approvals if projects approved by the SFCs Board and for which IDBI Directors have voted in favour could be made automatically eligible for IDBI refinancing, goes contrary to this view. 'IDDI has introduced automatic refinance upto ls.O.5 million assistance per project. In case of assistance beyond R.0.5 million, eventhough IDBI's representatives on the Board of SFCs have considered the loan proposals, MDBI considers it necessary to make an indepth review of the appraisal before granting refinance. This process has favourable impact on the quality of the loan portfolio of the FCs. - 52 - PROJECT COMPLETION REPORT INDIA - IDBI/SFC TROJECT (CREDIT 356-IN) I. Background A. Introduction 1.01 IDA Credit 356-IN for US$25 million, lent to the Government of India (GOI) in January 1973, represents one of the World Bank's first projects in small scale industry, and its first involvement with the Industrial Development Bank of India (IDBI) and India's State Financial Corporations (SFCs). A second IDBI/SFC project (Loan 1260-IN) for US$40 million is in the final stages of implementation (revised closing date Narch 31, 1983). Due to delays in project implementation and IDBI's data collection, this Project Completion Report (PCR) covers a long period from.1973 to 1981 and includes information and observations pertinent to Credit 356 and Loan 1260. B. Sector Framework for Small and Medium Industries (SKI) 1.02 In 1972 it was estimated that small scale industry (SSI) accounted for 50% of value-added and over 80% of employment in India's manufacturing sector. At that time, GOI defined a small scale manufacturing unit as one with investment of less than Rs 750,000 in plant and equipment. In June 1975 the former limit was increased to Rs 1 million and in 1979 to Rs 2.5 million, which is the official definition at present. In 1977, it was estimated that there were 500,000 small scale units operating in India. Important policy instruments affecting the SKI sector in the seventies were licensing of investment and imports, and targets set by the Reserve Bank of India (RBI) for commercial bank lending to priority sectors, such as SSI. In 1974, GOI set up a Capital Goods Ad-hoc Committee (CGAC) which was responsible for allocating all foreign exchange reserve loans up to Rs 1 million. Another policy measure was the reservation of product groups for exclusive production in the small-scale sector; in 1976, there were 124 manufactured items on the reserved list; GOI's Industry Policy Statement of December 23, 1977 expanded the list to 504 items, and in 1979 GOI extended it to 807 items. 1.03 Incentives. SSI had been granted a variety of incentives, including lower interest rates and lower security margins on loans, special schemes for government procurement of SSI output at prices favorable to SSI units, simplified licensing procedures, and the availability of a Credit Guarantee Scheme (CGS) administered by RBI. In addition, each state provided wide ranging tax concessions for location in "backward districts" where many small scale units are concentrated; currently, there are 247 such districts in India. Because of the concern that GOI's extensive incentive schemes were 1/ This report was prepared by IDA, using data provided by IDBI and the SFCs, whose assistance is much appreciated. - 53 - possibly inefficient, the second SFC loan included a provision that GOI would complete within a year (by mid-1977) a study of the financial and economic efficiency of selected SSI subsectors in relation to the incentives granted to SSI (para 4.13). C. Institutional Framework 1.04 India has a highly developed network of specialized financial and technical service agencies. In addition to the all-India term-lending institutions (ICICI, IDBI and IFCI), there are the State Financial Corporations (SFCs), the State Industrial Development Corporations (SIDCs) 1/, and the State Industrial and Investment Corporations (SIICs). In addition, the Small Scale Industries Corporations (SSICs) and the National Small Industrial Corporation (NSIC) were active in hire-purchase financing to SSI in the mid-seventies. The bulk of financing to the small and medium scale sectors is provided by commercial banks, mainly for working capital; in the seventies term lending also became an important activity for the banks. 2/ In the areas of promotion, technical assistance and extension services, IDBI sponsored the creation of eight Technical Consultancy Organizations (TCOs) which operate as non-profit, state-level agencies. 3/ The TCOs have performed an important function in project identification and preparation, particularly for small-scale units. In December 1977, GOI announced the creation of District Industries Centers (DICs) to assist the SSI sector. 1.05 IDBI was established in 1964 as the apex term-lending institution in India. For the first twelve years it was a wholly-owned subsidiary of the Reserve Bank of India (RBI) until 1976 when GOI took over its ownership. At that time, the wing of RBI responsible for monitoring and supervising SSI lending was transferred to IDBI, which already was providing refinance to the SFCs. Over the years, IDBI has grown rapidly and today provides about 50% of tGZal industrial sanctions (direct and indirect) by term lending financial institutions. In FY81, IDBI's total sanctions were Rs 19.0 billion (US$2.3 billion), consisting of direct loans (Rs 6.5 billion), refinanced loans (Rs 6.9 billion) and other financing operations (Rs 5.6 billion) such as bills rediscounting, guarantees and export finance. In addition, IDBI chairs a I/ SIDCs promote and finance projects and industrial estates. The SIDCs, with refinance from IDBI, are involved in the implementation of IBRD Loan 1511 (Joint Sector) for which there is also an institutional upgrading program administered by IDBI. 2/ In the late 1950s and early 1960s, the commercial banks became active in financing small industry, with the nationalization of 14 commercial banks in 1969 and RBI's adoption of targets for priority lending to SSI. 3/ IPCI and ICICI sponsored five TCOs in the states where they had lead responsibilities under the consortium (para 1.05). - 54 - consortium (the Inter-Institutional Committee) of all-India term-lending institutions, which includes ICICI, IFCI, the Life Insurance Corporation (LIC), Unit Trust of India (UTI), and the General Insurance Corporation (GIC). The shares of total investment accounted for by these specialized financial institutions are shown below; the share of all eighteen SFCs ranked second after IDBI: Table 1 Sanctions and Disbursements of Financial Institutions (Rs in billion) Institutions Sanctions Disbursements Cumulative up to Cumulative up to FY80 FY81 March 31, 1981 FY80 FY81 March 31, 1981 Amount - Amount - IDBI 10.6 12.8 52.5 44 6.6 8.9 36.4 44 SFCs 2.6 3.8 18.9 16 1.8 2.5 13.1 16 ICICI 2.0 3.1 15.7 13 1.4 1.7 10.9 13 IFCI 1.4 2.1 12.0 10 0.9 1.1 8.0 10 SIDCs 1.6 2.2 8.5 7 0.9 1.3 5.1 6 LIC 0.8 1.1 7.2 6 0.7 1.1 5.5 7 UTI 0.7 0.4 3.0 3 0.6 0.5 2.3 3 GIC 0.6 0.3 1.7 1 0.5 0.4 1.3 2 IRCI 0.2 0.2 1.0 1 0.1 0.2 0.8 16 Total 20.6 26.1 120.0 100 13.5 17.8 83.4 100 Source: IDBI's report on Development Banking in India, 1980-81. 1.06 The SFCs were established under the SFC Act of 1951 to provide term-finance, underwriting, and guarantees to small and medium scale enterprises. I/ In 1972 the SFC Act was amended to provide for a seed capital fund for projects in Backward Areas. In FY81 the combined net sanctions of the SFCs were Rs 3.8 billion. The State Governments and IDBI each hold about 50% of the shares of the respective SFCs; IDBI's shareholding amounts to Rs 646 million. To supplement their resources, the SPC's issue bonds (Rs 3.52 billion or 33% of their liabilities in FY81) with the assistance of IDBI. While these resource mobilization figures appear impressive, they must be seen in the context of India's administered financial system under which all bond issues are controlled by RBI. As of March 31, 1981, the SFCs' combined staff strength was 4,743 persons. Other details on the SFCs' operations are given in Chapter 3. L/ The Tamil Nadu Industrial Investment Corporation (TIIC) was established in 1949 under the Companies Act, but is treated as a regular SFC. - 55 - D. Economic Environment 1.07 Performance. The period covered in this PCR was one of substantial change in the Indian economy. In the initial years, the economy was characterized by shortages both in foodgrains and in critical inputs for industry such as power, transportation, and certain basic raw materials. From FY72-FY75, GDP grew by only 3%. However, a good harvest in 1976, due to favorable weather, increased fertilizer usage and improved irrigation, helping India to reduce its food imports. The improved performance in the agriculture sector and large remittances from Indian workers in the Gulf States boosted foreign exchange reserves from US$1.4 billion in March 1975 to US$5.8 billion in March 1978. This improvement in India's foreign exchange reserve position led to the adoption of open general licensing (OGL) and a reduced role for the CGAC (para 1.02). 1/ Industrial output growth was low during most of these years, although it 13creased in later years from 1% in FY74 to 5% in FY78. Industrial investment maintained its aggregate level as declines in private sector investment were offset by the increased level of public sector investments. In 1977 the Janata Government took over from the Congress Party administration and issued a new Industrial Policy Statement which emphasized cottage and rural industries. A serious drought in 1979, continued shortages of critical industrial inputs, and reduced demand caused industrial output to decline by 1.4% in 1979-80. Partly due to improved weather conditions, economic performance improved significantly in 1980-81. In 1981-82 there were large increases in output of selected industries e.g. cement, fertilizer and engineering plants. Industrial output grew by 8% compared to real GDP growth of 5.5% in 1981-82. 1.08 Improved performance was attributable to increased supplies of power, reduction of transportation bottlenecks, and improved availabilities of intermediate goods used as inputs by small znA medium-scale manufacturing enterprises. As a result of greater liberalization of imports announced in July 1980, industries have been able to obtain essential inputs, which were in short supply in previous years, and thereby attain higher capacity utilization. The liberalization measures, although limited in scope, represented a significant change from India's strict import policies of the mid-seventies. However, the impact on SSI production was not as noticeable since small units depend more on local raw materials. 1.09 Investment Trends. The contribution of SFC loan approvals to total investments (gross domestic capital formation) in the manufacturing sector during FY77-81 is shown below: I/ The availability of free foreign exchange contributed to the credit's utilization problems (para 4.11). - 56 - Table 2 (Rs billion) SFC Dis- SFC Dis- bursements GDCF /a Total /b SFCs bursements as % of Total Reg. Manuf. Disbursements Disbursements as % of GDCF Disbursements FY77 24.24 5.97 1.05 4.33 17.59 FY78 28.61 7.04 1.07 3.74 15.20 FY79 43.78 9.31 1.35 3.08 14.50 FY80 51.80 13.00 1.85 3.57 14.23 FY81 69.33 17.29 2.48 3.58 14.34 Total 217.76 52.61 7.80 3.58 14.83 /a Gross domestic capital formation. 79 Includes disbursements of All-India Financial Institutions (IDBI IFCI3 ICICI, IRCI, LIC, UTI) SFCs and SIDC. Sources: World Bank Report No. 3872-IN: Economic Situation and Prospects of India, April 7, 1982, Table 2.5; IDBI's Operational Statistics. Registered manufacturing increased from 15% of GDCF in FY77 to 27% in FY81; unregistered manufacturing is estimated at about 8% of total GDCF; total GDCF in ranufacturing was about 30% of total GDCF at the end of FY81. The total disbursements of all-India financial institutions, SFCs, and SIDCs have been maintained at about 25% of GDCF in registered manufacturing, of which 3.5% was from SFCs. About 15% of total disbursements were from SFCs. 1.10 Interest Rates and Inflation. During the project period, India's inflation varied from 5% p.a. to 20%; the average rate was about 10%. GOI's rigid interest rate policy led to negative real interest rates in some years and a marginal negative real rate on average during this period. In 1972 the term lending rate was about 9% and by 1980 this rate had been increased to about 12%, with lower rates maintained for projects in backward areas (10%). II. THE PROJECT A. Objectives and Project Development 2.01 While the appraisal report for Credit 356 did not specifically list the project's objectives, IDA, IDBI and the SFCs clearly understood the objectives to be as follows: Ci) to finance the import component of high priority projects in the small and medium scale sectors; and (ii) to assist - 57 - in upgrading the operations and procedures of the SFCs 1/ largely through the review and refinance operations of IDBI. An implicit objective was to upgrade these functions of IDBI. Other objectives for the Bank Group were to diversify its involvement in India's industrial sector 2/, by assisting small scale industries, and to improve India's credit delivery system at the state level. Although in 1971 the small scale sector was a new area for the Bank, India had several SSI programs which had been in existence since the 1950's. Awareness of the benefits of small scale industries was heightened by a review of the sector in India, carried out by the Bank and the Swedish International Development Authority (SIDA). 3/ At about the same time as the Bank/SIDA team was preparing its report, a 3-man Bank team visited India in October/November 1971 to appraise the IDBI/SFC project and to finalize the design of the institutional arrangements. B. Project Description 2.02 The project had features similar to development finance company (DFC) loans and SSI operations. Because India was already replete with technical assistance agencies and because IDA believed that its impact would be greatest on the credit delivery system, the project was focussed on term lending operations. The project did not include promotion or technical assistance components because these were already available to the target group. In essence, the project was a multi-agency DFC credit for on-lending to small and medium scale enterprises. 2.03 Subloan Criteria. The eligibility criteria for subloans clearly placed the project in the small and medium scale sectors. All SFC subloans which qualified for IDBI's refinance were, in principle, eligible as IDA subloans. According to the SFC Act: (i) SFC's loans were restricted to Rs 3 million in size; (ii) eligible enterprises had to have a total equity of no more than Rs 10 million; and (iii) units had to have fixed investment costs (excluding land) of less than Rs 20 million, compared to the lower SSI limits stated in para 1.02. The IDA credit and IBRD Loan 1260 were to finance imports, mainly in the form of capital equipment and also raw materials that constituted permanent working capital in a project. ID: was to finance and 1/ As reflected in the Bank's supervision reports and in the Staff Appraisal Report for Loan 1260-IN (Report No. 1158-IN, May 1976). 2/ The Bank's involvement in industry in India had consisted mainly of credit lines to the Industrial Credit and Investment Corporation of India (ICICI) and direct lending to fertilizer, steel and other industrial projects. By 1972, the Bank had made seven loans to ICICI, amounting to US$229 million for on-lending to large industry. By 1982, the Bank had lent ICICI US$690 million through 14 loans. 3/ Small Scale Industry in India, Report No. SA-33a, May 22, 1972. The study was circulated to the Bank's Board of Directors in June 1972. - 58 - disburse against 40% of IDBI's refinance disbursements on a given subproject. However, the first year of credit utilization showed the foreign exchange content to be about 62%, which led IDA to raise its disbursement percentage to 60%; under Loan 1260, IBRD fixed its disbursement proportion at 65% of IDBI's refinance amou:ts. The Bank's decision to not finance rupee costs was different to its treatment of SSI projects in other countries. I/ 2.04 Terms and Conditions. GOI on-lent the proceeds of the credit to IDBI at 5% p.a. and IDBI on-lent to SFCs at 6.5%. SFCs re-lent the proceeds to their subborrowers at 9%, which was the prevailing term lending rate at the time of negotiations in November 1972; these rates provided a spread of 2.5% to the SFCs. Under Loan 1260, the spread was increased to 3.5% by an increase in the re-lending rate to subborrowers (11.5% for units covered under the Credit Guarantee System and those located in Backward Districtss and 12.0% in other cases). The foreign exchange risk was borne by GOI. Only those SFCs which adopted and continued to meet the requirements of the upgrading program were to be eligible to participate under the credit. The free limit under Credit 356 was Rs 1 million in terms of the project's loan amount (not IDA's subloan). 2/ C. Institutional Arrangements 2.05 Complexities in the design lay in the magnitude of an all-India program and the labyrinth of 19 institutions-IDBI and 18 SFCs-included in the project. IDBI was selected as the apex agency for the project because: (i) IDA felt that IDBI could channel the funds effectively since it already had a refinance role in India's financial system; and (ii) through its SFC shareholdings and its monitoring and review responsibilities, IDBI was considered to be capable of exerting financial discipline over the SFCs and of upgrading their operations. 3/ IDA incorporated all 18 SFCs in the project, subject to their adoption of the agreed institutional upgrading programs and their maintenance of an agreed debt-service coverage ratio (para 2.07). 1/ This did not seem to induce a capital-intensive bias in IDA's sub- projects, as the average investment costs per job of the SFCs' projects financed by their own resources was similar to that under Credit 356 (Chapter 4). 2/ Under Loan 1260 the free limit was raised to Rs 2.5 million. The SFC loan size was limited to Rs 3 million by the SFC Act (para 2.04). 3/ The February 1976 change in IDBI's ownership from RBI to GOI (para 1.05) and the transfer of SFC monitoring and inspection responsibilities from RBI to IDBI did not affect the project or the carrying out of these functions in reality, since the relevant RBI staff were moved to IDBI. However, it did mean that IDBI had a firmer mandate for its review functions. - 59 - D. SFC Upgrading Program 2.06 The project included an upgrading program for the SFCs which was agreed between IDA and RBI/IDBI. The eight-point program focussed on: (i) Management. The key to improving the operations of the SFCs was the need to achieve greater continuity among the chief executives who were moved around excessively by the state governments. The project required IDBI to monitor this aspect closely, and to use its influence where possible to achieve continuity. (ii) Organizational Aspects. When RBI had been carrying out inspections of SFLs, no attempt was made to assess the adequacy of the SPCs' organizational structures. The upgrading prcgram included restructuring of the functions and procedures of the SFCs' appraisal, follow-up and disbursement departments. The inspections therefore were to be much broader than the central bank type of audit inspection. (iii) Appraisal Standards. Key weaknesses were noted in the appraisal standards of SFCs, particularly in the economics and marketing areas, and in the assessment of sponsor competence. Method- ology and components were outlined in the operational guidelines which were formulated for the credit. (iv) Project Supervision. All SFCs were extremely weak in project follow-up and supervision, and improvements in follow-up systems and procedures were recommended. The program included targets for plant visits: annual visits for regular projects and quarterly visits to companies in arrears. Follow-up reports were to be written for each visit. (v) Arrears. A key concern, as early as 1972, was the SFCs' arrears situation. The summary program contained recommen- dations on measures SFCs could take to improve collections and reduce arrears; a first step was for the SFCs to conduct detailed analyses of their arrears portfolios to identify deliberate defaulters from those with serious problems, and to isolate the causes of problems. A phased program for reduction of arrears was drawn up, which was to be closely monitored. (vi) Debt Service Capacity. Since basic creditworthiness of the SFCs could be judged by the adequacy of their debt-service- coverage ratios (DSCR), this ratio was chosen as the key instrument for measuring progress in upgrading the financial operations of SFCs. Section 2.02(b) of the Project Agreement stated that proceeds of the IDA Credit would not be provided - 60 - to any SFC that had a DSCR of less than 1.0 as of October 1, 1973, less than 1.10 as of April 1, 1974 and less than 1.25 to 1 as of April 1 in any succeeding year. 1/ (vii) Staffing. Many of the SFCs were found to be carrying vacancies in staffing, particularly in the professional categories. Total staff of the SFCs (professional and others) was to be increased by about 45% by March 31, 1975. In 1972, the SFCs' total staffing strength was 1,200, ranging from 10 persons in Himachal Pradesh and 200 in Maharashtra. (viii) -Training The upgrading program called for the SFCs to take suitable steps to train their staff by (a) sending them to courses at the Bankers Training College of the RBI, SIET at Hyderabad, the Institute for Financial Management and Research of Madras, and courses organized by RBI in each region; (b) deputing senior officers to IDBI and other term-lending institutions; and (c) arranging in-house seminars and lectures. Attached to some of these measures, such as staffing were targets to be reached during a three-year period. During 1975, RBI/IDBI developed detailed institutional upgrading programs for each SFC covering the above areas, which were based on IDA's February/March 1974 superviaion mission (para 3.14). III. PERFORMANCE OF THE IMPLEMENTING AGENCIES A. SFC Operations 3.01 Investment. Annex 1 shows SFCs' gross sanctions and disbursements from FY73-74 to FY79-80, while Annex 2 summarizes other aspects of SFC operations for the later years, FY77-81. Total net sanctions increased from Rs 1.1 billion in FY74 to Rs 3.7 billion in FY81, or an increase of about 22% p.a. Salient features are: 1/ DSCR equals net earnings (net Income and adding back depreciation and interest charges) plus repayments of loan principal by debtors divided by debt service obligations on all indebtedness, which includes aggregate amortization, interest and other charges on debt and sinking fund con- tributions for bond repayments. An unusual feature in this DSCR defini- tion was that the calculations were to be done on the basis of 6 months actuals and 6 months projections. The intent was to obtain a DSCR for monitoring purposes that was as current as possible. However, due to difficulties in projecting accurately, the definition for Loan 1260 was changed to incorporate actuals for the preceding 12 months (end-March). - 61 - (a) the private sector continued to receive the bulk of SFC assistance; (b) public sector units were assisted only through joint financ- ing with the SIDCs; (c) assistance to backward areas represented about 55% of total sanctions; (d) small scale industries received about 65% (by amount); (e) about 60% of total sanctions were for new projects; and (f) five subsectors accounted for almost 50% of total sanctions, i.e. chemicals and chemical products (13%), food processing (12%), textiles (9%), metal products (8%) and machinery (6%). Additional data on subsector distribution are shown in Annex 3. Light engineering (metal products, machinery etc.) accounted for about 20% of the SFCs' cumlative disbursements. Annex 4 shows the increase in lending to SSI, Annex 5 the lending to backward areas, and Annex 6 the type of projects financed. Six SFCs (Maharashtra, Gujarat, Andhra Pradesh, Uttar Pradesh, Tamil Nadu and Rajasthan in that order) accounted for more than 60% of loan activity (Annex 5). The high growth figures in these annexes illustrate the problem endemic to all the SFCs: a heavy emphasis on sanctions which overshadowed their attention to collections and arrears. The main factor causing the rapid growth in sanctions in a period when SFCs should have been consolidating their portfolios and reducing their arrears, was that the SFCs' managements were judged by the state governments on their ability to finance an ever increasing number of projects. In addition, both the center and state governments were emphasizing the goals of identifying small projects and those located in backward areas where possible. 3.02 Arrears. A breakdown ot arrears by SFC for FY74-81 is shown in Annex 7. In FY74, the SFC's total arrears were Rs 265 million, which - represented about 12% of their combined portfolio at that time, ranging from 3% (Andhra Pradesh) to 26% (Tamil Nadu). By FY81 the arrears had grown to Rs 2.6 billion, or about 27% of the SFCs' combined portfolios at that time, which is very high. The "infected" portfolio (treating all arrears plus outstandings as potential defaults) was about 45%. Assan (56%), Kerala (50%), Bihar (38%), Haryana (38%), West Bengal (36%) and Gujarat (34%) had more than one-third of their portfolio in arrears in FY81. In FY74, Gujarat, Haryana and Kerala had less than 12% of their portfolios in arrears, which indicates the deterioration taken place since the commencement of the project period. Only Orissa (a small SFC) had improved its arrears position (to still a high level of 28%) by the end of the period. The SFCs' arrears are disturbing for two reasons: (i) as a proportion of portfolios, these levels are very high; and (ii) except for FY81, the arrears have worsened every year since FY72. Only in FY81 and FY82 was there a slowdown in the growth in arrears. - 62 - 3.03 Collections. The details by state of the SFCs' collections performance for FY78-81 is shown in Annexes 8(a) and 8(b), and are sumarized below. 1/ Table 3 FY78 FY79 FY80 FY81 Collections (Rs millions) 662.4 863.9 1,057.8 1,379.2 Collection Ratios /a - A 39% 38% 39% 39% - B 63% 65% 71% 68% 7a A = Collections as percent of total dues excluding suit-filed amounts. B = Collections as percent of amounts falling due. The overall collections percentage remained highly unsatisfactory at 39% of total dues in FY80 and FY81; seven SFCs had ratios below 35% in FY81. Of most significance was the performance of the six largest SFCs: Naharashtra (40%), Gujarat (34%), Andhra Pradesh (46Z), Uttar Pradesh (54%), Tamil Nadu (60%), and Rajasthan (48%). 3.04 A clearer indicator of collection performance is collections as a proportion of amounts falling due, shown in Annexes 8a and 8b (broken down by principal and interest). During the period FY77-81, SFCs as a whole collected about 63-71% of amounts falling due, which is low. The six largest SFCs had collection performances rangiv3 from a low of 52% for Gujarat to 95% for Tamilnadu in FY79. By collecting half of amounts falling due, and with other accounts long overdue, the arrears of some SFCs increased rapidly. 3.05 Debt-Service Coverage Ratio (DSCR). Since the SFCs were having difficulty in meeting the DSCR covenant (para 2.07) two modifications were requested by IDBI, while another change was added by the Bank informally, without a formal change to the covenant: (i) In November 1976 the Bank allowed a temporary relaxation of the DSCR from 1.25 to 1.0, provided that satisfactory recovery and follow-up action programs were adopted by the SFCs. 1/ Collection percentages data not shown for earlier years in the project period due to data differences, principally the treatment of amounts under legal claims (suit-filed amounts). Including suit-filed amounts would decrease the overall collections from 39% to 33% of total dues in Table 3 above. - 63 - (ii) In March 1977 the Bank agreed to modify the DSCR definition to include additional share capital, if paid-in within nine months after the end of the fiscal year; and (iii) Since the SFCs in their a counts recorded interest accrued, the bulk of which was uncallected, in April 1980 the Bank recommended the use of the DSCR on a cash basis which was considered to be a more realistic test of creditworthiness than the accruals basis contained in the covenant. 1/ Annex 9 shows the DSCR (on an accruals basis) for each SFC from FY74 to FY81; for FY79-81 the cash basis is also shown. Except for FY81, when some improvements were noted, the DSCR position of nearly all SFCs deteriorated. consistently. Under the original provision, only one SFC (Jama-Kashmir) was able to meet the DSCR requirement of 1.25 and above in all years. 2/ In FY81, two other SFCs showed satisfactory DSCR: Haryana at 1.39 accruals and. 1.11 cash basis; and Andhra Pradesh at 1.23 accruals and 1.36 cash basis. Three SFCs (Gujarat, Assam and Kerala) had a DSCR below 1.0 (accruals). In the case of Kerala, its 0.84 DSCR included a share capital increase; without the infusion of share capital its DSCR was 0.65 (accruals) and 0.37 (cash basis). In FY80, the last year of disbursements under the Credit, 11 of 18 SFCs bad a DSCR of below 1.0 (accruals basis), even after including additional share capital paid in by state governments and by IDBI to ten SFCs. Thus, the infusion of share capital substituted for shortfalls in collections and became an indirect subsidy to the SFCs. On a cash basis, 15 SFCs had a DSCR of less than 1.0 in FY80. The actions the Bank took in this regard are described in Chapter V. 3.06 Evaluation of the DCSR as a norm. It was appropriate for the Bank to insist on monitoring the DSCR as a test of creditworthiness. However, the covenant of 1.25 to 1, in retrospect, was set too high in light of declining collections. The Bank was fully justified in sticking to the 1.0 limit, which is the minimum indicator of creditworthiness. Where the Bank erred was in allowing infusion of share capital to be included in the numerator of the DSCR, as it took the pressure off SFCs to improve their DSCRs through increases in collections. The infusion of share capital, however, did improve the capital structure of the SFCs, many of which were seriously undercapitalized in the mid-seventies. Different views exist about the treatment of bond issues and sinking fund provisions in DSCRs. The definition contained in the legal documents for Credit 356 and Loan 1260 (para 2.07) was standard in that: (i) it excluded bond issues from the 1/ The cash basis definition excludes uncollected interest income in the numerator and excludes sinking fund provisions in the denominator. 2/ Jamm-Kashmir SFC is not considered to be representative since there are few industrial units in the state and JKSFC submitted only one subproject under the credit. - 64 - numerator; and (ii) it included sinking fund provisions in the denominator. An argument can be made for taking into account the ability of the SFCs to rollover their debt, by excluding sinking fund provisions from the denominator except for portions which are not rolled over. This would have changed the DSCRs somewhat; however these changes would not have been as significant as the conversion to a DSCR on a cash basis (para 3.05). 3.07 Operations. Annex 10 provides a summary of pertinent financial statistics of SFCs for FY78-FY81 and Annex 11 shows the consolidated balance sheet for all SFCs FY72-81. Cumulative commitments were 98% of net sanctions while cumulative disbursements were only 62% of commitments, which indicates the large proportion of undisbursed funds on committed projects. The high proportion of net sanctions which were committed indicates premature commitments, considering the high rate of cancellations (para 4.10). During the period FY72-81, SFCs' total assets/liabilities grew from Rs 1.9 billion to Rs 10.9 billion and their combined share capital grew from Rs 231 million to Rs 1.2 billion. The combined debt/equity ratio of the SFCs was 4.5 in recent years, while individual debt/equity ratios ranged from 2.0 to 10.0 (the limit under the SFC Act). Profit margins decreased due to a reduced spread and increased administrative costs; for example SFCs had a combined 9.3% return on equity in FY78 which decreased to 5.5% in FY81. B. SFCs' Performance in Upgrading 3.08 Until 1978, there were signs that the SFC institutional upgrading program was making some impact in the key areas listed in para 2.07. However, in 1978 and 1979 the performance of the SFCs deteriorated significantly. The April 1980 supervision mission concluded that the institutional obLectives of the loan were only being partially fulfilled and that the upgrading program was being threatened by the SFCs failure to implement the Bank's and IDBI's recommendations and action programs. The April 1981 supervision report reiterated these points and concluded that the major problem facing the project was the continued deterioration in the creditworthiness and financial viability of the SFCs, due to their poor collection performance, weak management and their failure to implement necessary institutional changes. The May 1982 supervision mission noted some improvements in collection performance but did not comment on the overall result of the upgrading program since this was to be the function of this PCR. 3.09 As an illustration of some of the problem areas that SFCs faced and the recommendations made by IDA and IDBI, Attachment 1 summarizes developments at three SFCs: (i) Gujarat, a large, problematic SFC; (ii) Andhra Pradesh (APSFC) an active, high performer; and (iii) Kerala (KFC) a smaller SFC with serious management and arrears problems. As the second largest SFC with 548 staff at present, GSFC has been highly active due to the industrial base in the state and aggressive project promotion. However, not all projects were well appraised and this, combined with poor management at times, led to low collections and widespread arrears. Twice GSFC was almost declared ineligible to withdraw under the IBRD loan; however, infusion of - 65 - share capital and the corporation's formulation of a satisfactory arrears recovery program led to the Bank/IDA treating GSFC as having met the covenant. Only in recent years has GSFC shown improvements in its institutional upgrading and collections; provisional figures tur FY82 indicate that GSFC's DSCR was 1.29 (on a cash basis), up from 0.68 in FY79. Andhra Pradesh has had the lowest arrears and highest collections while it maintained an active loan approvals program. The key feature in APSFC has been continuity in management. Kerala SFC, on the other hand, developed the worst arrears level, experienced high turnover of management and loss of key staff. Political difficulties in the state and heavy migration to the Gulf states aggravated KFC's problems. 3.10 In FY81 and FY82, collection performance and DSCR of almost all the SFCs improved. As of March 31, 1982, three SFCs (Bihar, Kerala and West Bengal) were below the 1.0 DSCR covenant on both the accruals and cash bases. However, improvement must be seen in the context of the low base that had developed by FY80. Andhra Pradesh is the only SFC which was shown good collections in most years, while Maharashtra, Delhi, Baryana and Punjab have shown barely adequate performance. Kerala, West Bengal, Assam, Bihar, Orissa, Himachal Pradesh, Madhya Pradesh, Rajasthan and Uttar Pradesh SFCs all developed substantial arrears and DSCR difficulties in most years. Considering the overall high level of arrears, the long-term downward trend over the past six years, and the degree of pushing that the Bank and IDBI had to do, only to achieve marginal improvements, one can conclude that the collections/arrears aspect of the institutional upgrading program failed in its objectives. 3.11 Management Aspects. The most significant weakness in the management of SFCs was the frequent rotation of the government-appointed chief executives (usually a managing-director) who were mainly officers of the Indian Administrative Service (IAS). 1/ For example, during the period FY77-81, the SFCs each averaged three changes in their chief executives, while four SFCs experienced four or more changes. After IDA voiced its serious concern about the SFC management situation, IDBI became more insistent in seeking a minimum term of three years for MDs and on being consulted by State Governments prior to appointment of chief executives. However, IDBI does not have a veto over appointments or removals. Although IDBI tried to build-up the second tier of management in the SFCs, this has been a slow process with mixed results. Despite IDA's and IDBI's efforts in 1/ Under the IAS procedures, officers are allocated to a specific state or group of states (cadres). Within his cadre, he could be moved from one government department or corporation to another, but usually not from one cadre to another; thus, the MD of one SFC would not be rotated to another SFC, which was unfortunate in the case of MDs who had performed well in a given SFC. - 66 - this area, 1/ discontinuity in SFC management persisted. IDBI's initiatives ran counter to the IAS customs which provide for frequent rotations within a cadre of civil service. Good MDs were soon tapped for other service, while a few officers pursued study assignments abroad, sometimes soon after taking office in the SFC. It was unrealistic to expect that IDBI's recommendations could change this system through other than gradual improvements and careful use of restrictions on refinancing. IDBI did not have a say equal to the state governments (even though it was an equal shareholder) due to the state-level influences. The reluctance of IDBI to involve other central government agencies (e.g., the Ministry of Finance) in reviewing the actual situation in the SFCs, reflected a policy of restraint ad a positive posture towards the functioning of SFCs.2/ 3.12 Organizational Aspects. Some SFCs did improve their organizational structures and procedures (e.g. Gujarat, Haryana, Andhra Pradesh). However, most remained rather static throughout the period and were particularly deficient in creation of separate appraisal and loan supervision departments, and in instituting systematic supervision procedures. Although recovery drives were instituted, these were of a temporary nature and have not been sustainable over a long period; yet the SFCs equated these drives with implementation of collections and follow-up systems. The creation of separate recovery departments in some SFCs occurred only after IDBI and the Bank had drawn repeated attention to existing shortcomings. Some of the SFCs' branch offices in the larger states were set up before adequate procedures and criteria were established, which aggravated their collection difficulties. An area in which institutional objectives were met was the SFCs' recruitment of professional staff, who grew from 360 officers in FY72 to a combined total of 1,545 as of March 31, 1981. However, emphasis in staff deployment was in new project processing rather than on supervision and collection activities. 3.13 Summary. By any yardstick, the overall SFC institutional upgrading program has not been successful and creditworthiness has deteriorated. On the collections and arrears side, the credit did not meet its objectives. On the management and other institutional aspects, the record was mixed. The major increases in SFC activity were in loan sanctions, which exacerbated collection problems due to inadequate supervision and follow-up.3/ During the 1/ On several occasions IDBI suspended refinance to SFCs which experienced excessive management shifts, e.g. Maharashtra, Delhi and Kerala. 2/ IDBI's posture in this particular situation is elaborated in Appendix A, page 39. 3/ IDBI's own viewpoint is that the strain on SFCs' repayment capacity was due to a change in the financing pattern over which SFCs had no control (Appendix A, page 29), and that viewed against the background of differing circumstances, SFCs' strengths have improved considerably over the past 10 years. - 67 - project period, ICICI and IDBI also experienced a rise in their arrears, due to a difficult climate in the country (power shortages, recession and labor problems). However, the decreases in their collections wei.e far less pronounced than in the case of the SFCs. The drive to accelerate project approvals also created problems of project viability in some cases, particularly in backward areas where the necessary infrastructure, management and technical skills often were unavailable (Chapter 4). Recent improvements in collections are beginning to show results, but it is too early to tell whether these can be sustained. The SFCs now say that "collections is their number one priority." If the SFCs had not become so reliant on infusions of share capital from state governments and IDBI in recent years, and if IDBI had been more forceful in this regard, the collections thrust would have been reflected much sooner in the SFCs' strategy. C. IDBI's Performance 3.14 IDBI's Role in the SFC Upgrading Programs. The institutional arrangements for the IDA Credit and IBRD loan were intended to give to IDBI the pivotal role for monitoring, guiding and improving the performance of the SFCs. The intent at the time of appraising Credit 356 was that IDBI/RBI would carry out an annual review of the institutional and operational progress of each SFC. Since these reviews were incomplete and very late, the task fell to IDA in the iDitial years. RBI and IDBI had jointly formulated the original institutional upgrading programs for the SFCs which were agreed to by the Bank in November 1972 (para 2.07). However, the first supervision mission in February/March 1974 found the targets set by the upgrading programs to be of little value in assessing the performance of individual SFCs. 1/ 3.15 In 1975, IDBI and RBI developed detailed institutional upgrading programs for each SFC covering the eight areas listed in paragraph 2.07. Recommendations were based on IDA's 1974 supervision report. IDBI/RBI presented to the SFCs specific measures to: (i) Expedite review of loan applications; (ii) Improve appraisal standards, including preparation of industry profiles; (iii) Expedite disbursements and introduce systematic reviews of slow disbursing projects; 1/ In order to gain a first-hand knowledge of the SFCs, the supervision mission visited 13 states and prepared 19 "appraisal-style reports" (on 18 SFCs and IDBI). For each SFC, a number of recommendations were made dealing with financial and organizational structure, appraisal, follow-up and supervision standards. Later missions continued the SFC visits. - 68 - (iv) Improve pre- and post-implementation procedures and strengthen follow-up and project supervision, including coverage and frequency of supervision reports to be prepared for SFC managers; (v) Pursue legal and other remedies to resolve overdue accounts; and (vi) Expand recruitment and training of professional staff. 3.16 The SFCs and IDBI had difficulty in adopting these measures. IDBI was expected to assist the SFCs in implementing the institutional upgrading programs through a variety of support methods: inspection visits, evaluation reports, deputations and SFC conferences. Yet for many SFCs, the programs were only on paper; actual systems and procedures were not changed. As implementation of Credit 356 progressed, it emerged that: (i) IDBI'. own systems for project supervision *ere weak. 1/ This made it difficult for IDBI to "sell" its experience; even though it potentially carried a great deal of influence over the SFCs; (ii) IDBI consistently underestimated the amount of time required for completing tasks, such as the evaluation reports, cancel- lation of subloans, disbursements and DSCR reporting; (iii) The SFCs, due to their turnover of management and staff, and organizational changes within IDBI (para 3.17), were required to deal with many new officers in IDBI. The same recommen- dations kept on being repeated with little actual progress made; and (iv) IDBI was not abreast of actual progress in subproject imple- mentation and it did not anticipate the SFCs' high rate of cancellations (para 4.11). What was clearly missing from the IDBI/SFC interactions were specific action programs covering the changes and improvements SFCs were to introduce and the steps and dates by when these would took place. Without this, IDBI did not have a structure on which to pin its institutional support measures. Much discussion was made of the need to develop "time-bound" programs, but the time-bound programs were not formulated. IDBI did introduce into the evaluation reports on the SFCs, sections summarizing their progress in implementing the institutional upgrading programs. A number of the recommendations, such as continuity in management, establishment of a special 1/ As IBRD has experienced in the context of Loan 1511 (Joint Sector). - 69 - Recovery Department, and appointment of an experienced Deputy General Manager to head the department, remain to be acted upon in some SFCs. 3.17 Organizational Changes. With the passage of the revised IDBI Act in February 1976 (para 1.05), two new departments were added in IDBI: (i) the SFC/OSLA 1/ Division; and (ii) the Import Loans Department 2/ to handle all foreign currency refinance, including Bank/IDA subprojects. As part of the framework for Credit 356, IDBI bad agreed to create three divisions within its Refinance Department (Appraisal, Operations and Follow-up). This change was introduced before the decentralization together with the creation of a special cell at headquarters to process SFC refinance applications under the IDA credit and later the IBRD loan. In 1976 IDBI decentralized most of the SFC evaluation and inspection functions to its regional offices in Delhi, Madras, Calcutta and Ahmedabad. This has apparently led to more effective monitoring and supervision of SFCs in recent years. 3.18 Evaluation Reports and Other Assistance Measures. From 1977, IDBI prepared annual evaluation reports on each SFC along the lines of IDA's earlier reports, which helped to reduce the Bank's supervision coefficients. The main purpose of IDBI's inspections was to check compliance with provisions of the SFC Act, whereas the evaluation visits were broader in scope. Although IDBI's evaluation reports were sufficiently comprehensive, they tended to be too descriptive with insufficient analysis of specific problems facing the SFCs. Attachment 2 summarizes IDA's assessment of IDBI's reports, prepared in April 1978 (one year after the original closing date of the credit). Over the past five years there has been improvement in IDBI's reports and the quality of discussion between IDBI and the SFCs also has improved. However, the reports were used mainly to meet IDA's reporting requirements, and not as management information tools by IDBI and the SFCs. Since the mid-1960's, IDBI has held 21 conferences for chief executives of SFCs to discuss their key problems, such as arrears. After the eighteenth such SFC conference in 1976, IDBI covened a Working Group as Arrears, composed of the MDs of four SFCs and IDBI and RBI officials. Various legal and other measures were discussed to facilitate collections. During 1978-80 several institutes and consulting firms were engaged to conduct management and institutional audits on the SFCs, which IDBI reviewed and discussed with the SFC concerned. 3/ Acting on the recommendations made by the Lank's 1980 1/ Other State Level Agencies (OSLA). 2/ In March 1982, IDBI renamed this department the Resources Management Division. 3/ e.g., local consulting firms conducted management and accounting studies on Gujarat and Kerala SFCs; the Indian Institute of Management at Ahmedabad conducted a study on Karnataka SFC; the Development Banking Center of the Management Development Institute of New Delhi completed a study on Himachal Pradesh Financial Corporation in 1981. - 70 - supervision mission, IDBI assisted the SFCs in developing annual business plans and resources forecasts (BPRF), which are now part of the annual evaluation exercise; the plans have provided a useful framework to assess progress each year, which in turn have improved the SFCs' planning process and IDBI's reports. 3.19 Subloan Appraisals. Under Section 2.02(c) of the Credit 356 Project Agreement, IDBI was to review the quality of the SFCs appraisals, and in particular to see if the loan was made in accordance with the operating guidelines adopted by each SFC. In the early years of the project period, the SFCs' appraisal reports were deficient in key areas, e.g., marketing and economic viability. Since 1976, the appraisal reports improved, although data were sometimes lacking in the economic justification sections. IDBI's reviews have been satisfactory, although at times it was unable to detect projects not of serious intent; hence, the high number of cancellations (para 4.11). 3.20 Summary IDBI's performance under the project was disappointing due to the factors mentioned above and others discussed in Chapter 5.1/ IDBI's shareholdings and review responsibilities over the SFCs provided it with a mandate which was not always as effectively exercised as might have been desirable, particularly during the earlier period of the credit. Some improvements were noted in recent years, and it would be wrong to conclude that IDBI was just a passive observer. IDBI did take strong measures against those SFCs where such action was deemed necessary. However, it acted with restraint and a benign attitude in the interest of maintaining its long-term effectiveness as an apex institution within the given political context. IV. SUBPROJECT PERFORMANCE A. Ex-Post Results of Credit 356 Subprojects 4.01 The Sample. IDA authorized 442 subprojects under Credit 356-IN; 115 were cancelled subsequently, leaving 327 net of cancellations. 2/ To evaluate the impact of subprojects financed, a review was made of the ex-post results of a sample of 115 subprojects. 3/ The 26% sample, which consisted of nearly 1/ IDBI's own assessment is more positive. It is made against the background of a difficult environment in which impressive efforts were indeed made that must be recognized, despite the more limited results as measured by IERD's perhaps overly ambitious expectations. Partial successes recog- nized by IDA therefore, appear to IDBI as contradictions to this expres- sion of overall disappointment (Appendix A, pages 29 and 30). 2/ Reasons for the high cancellations are given in para 4.11. 3/ For some indicators, the results utilize a smaller sample base due to data which are not uniform and which vary from state to state. - 71 - all "A" subprojects (79 in number) and 36 or 15% of the 240 "B" subprojects, were selected at random from 16 SFCs. 1/ Thus, 16 "A" subprojects which were cancelled or which did not start production were included in the sample; this reduced the number of subprojects for which actual performance figures are available. IDA's requirement that IDBI revise the sample and write-up analyses of subproject performance for every state resulted in a 24-month delay in the PCR. 2/ 4.02 Geographical Distribution. As shown in Annex 12, four states - Maharashtra, Karnataka, Gujarat and Tamil Nadu - accounted for 68% of projects by number (223 out of 330) and 71% by amount (US$11.7 million out of US$16.6 million disbursements) (Annex 12). This concentration is due partly to these states being more industrialized and having aggressive SFCs. IDA's "first-come-first-serve" policy allowed these SFCs to take a larger share of the credit. Subprojects were equally distributed between backward and non-backward areas. 4.03 Size of Subloans and Subprojects: In a sample of 61 "A" subloans, most were concentrated in the range between Rs 0.5 million and Rs 1.5 million (Annex 13). As is to be expected, the "B" subloans were mostly below Rs 0.5 million. The average size of "A and B" subloans were Rs 1.15 million and Rs 0.32 million respectively. The average size of "A and B" subproject costs were Rs 6.25 million and Rs 1.68 million respectively, so that, on average, "A and B" subloans under the Credit financed 18% and 19% of respective subproject costs. The "A" subprojects varied in size from Rs 1.0 million to Rs 13.8 million and were distributed evenly across the cost range. Although only 19 subprojects in the sample belonged to the small scale sector, i.e. fixed investmet.t of less than Rs 1.0 million for earlier units, Rs 2.5 million for later units, about 60% of the "B" subprojects fell within the SSI definition. 4.04 Profile of Projects. Annex 14 shows the financing pattern of 113 subprojects. The foreign exchange content was Rs 88.9 million equivalent or an overall 49% of the total amount of IDBI's refinance of the SFCs' loans. IDBI's refinance (foreign exchange and rupee loans) constituted about 70% of the SFCs' loans overall. The bulk of financing came from local funds, including sponsors' equity. Of 107 subprojects, 69 were new, 35 involved expansion and 3 modernization (Annex 15). Gujarat and Tamil Nadu SFCs promoted the highest number of new subprojects-13 and 11 respectively-while Maharashtra had the highest number of expansion subprojects (14). 1/ "A" subprojects were those above the free limit, "B" below the free limit (para 2.05). The total number of A subprojects was 87; sample data did not include two SFCs (Himachal Pradesh and Jammu and Kashmir) due to few subprojects in those states. 2/ The delay, however, allowed the Bank to evaluate the institutional upgrading program over a longer period. - 72 - 4.05 Subsector and Regional Distribution. Annex 16 shows the subsector distribution of 261 subprojects. The light engineering subsector, including electrical machinery, electronics and metal products, was dominant with 115 subprojects; they accounted for about US$6.4 million or 45% of disbursements. The miscellaneous category (consumer items, plastic goods etc.) accounted for 54 subprojects and US$2.2 million or about 16% of total lending. Manufacture of transportation equipment had 21 subprojects and utilized US$1.3 million or 10% of total disbursements. The more capital intensive paper subsector accounted for only 9 subprojects but US$1.1 million or 8% of total lending. In the leather subsector, 11 subprojects were financed involving almost US$1.0 million or 7% of total lending. Subprojects in the engineering and transport subsectors were concentrated in Maharashtra, Karnataka and Gujarat; most leather subprojects were in Tamil Nadu; paper mill subprojects were in Karnataka and Maharashtra. 4.06 Project Cost Estimates and Completion. Of the 86 active subprojects in the sample, 28 projects, or 32.5%, were completed within the costs estimated in the subproject appraisals. The remaining 58 overran estimates by an average of 26% (Annex 17). Only 9 subprojects in the sample were completed on time. The remaining 76 were delayed by 13.7 months on average. Most delays and cost escalation were due to late arrival of imported machinery or due to non-availability of infrastructural facilities, particularly power shortages. In some cases, changes in project design had to be made. In other cases, delays and cancellations were caused by lack of effective interest on the part of sponsors, interest rate differentials and changes in India's foreign reserves position (para 4.11). 4.07 Financial Performance. The parameters indicate that actual performance of subprojects fell short of the SFCs' appraisal estimates (Annex 18). In the first two years, actual sales were only 75% of expected sales; actual profit before tax for the same period were 29% of the estimated amount; average capacity utilization was less than 50% and fell short of the estimated target of about 70%. Out of 57 projects for which reliable data are available, 30 were profitable, most of which were located in Tamil Nadu and Maharashtra. The reasons cited by IDBI and the SFCs for the poor financial performance were non-availability of raw materials and infrastructural inputs, changes in market conditions, and implementation delays. The existence of these factors demonstrates that loan approval was premature in many instances, which again reflects the SFC's push for increased sanctions. Poor management was also a major factor in some companies. Many of the small units were run by families with a strong tradition in that subsector; while they knew production aspects, their managerial styles were outdated and decision-making was ad-hoc. Labor was less of a problem in the small units, but in some of the medium-sized units, labor unrest reduced profitability. 4.08 Economic Performance. Data on economic indicators for 56 subprojects (Annex 19) show that actual exports were 81% of the estimated level, actual employment (5,257 jobs created) was close to the estimated figures (5,358 - 73 - jobs). The average ex-post investment cost per job I/ for US$5,710 (Annex 20). The most capital intensive subsectors were chemicals (US$14,990/job) and food processing (US$15,460/job). Textiles (US$2,260/job), leather (US$2,855/job) and transportation equipment (US$4,160/job) were the most labor intensive. The largest subsector, light engineering, had an investment cost per job figure of US$6,300. Actual value added was about 81Z of the estimated figures. Domestic Resource Cost (DRC) calculations for 7 subprojects (Annex 21) show that 4 of these had DRCs greater than the prevailing exchange rate, indicating economic inefficiency. On the whole, the data on economic indicators show that while the projects achieved lower returns than estimated, the projects financed were of economic merit. 4.09 Procurement. IDA's review of procurement practices for the 115 projects in the sample of ex-post results confirmed that the SFCs had insisted on competitive shopping of at least three quotations; in their appraisal reports they usually had included a statement explaaining the procurement procedure followed and the basis for selection of the equipment tendered. IDBI also had checked that the Bank's guidelines were followed. B. Credit Utilization and Cancellations 4.10 Annex 22 shows projected and actual disbursements of Credit 356. After the credit became effective in May 1973, authorization of subloans moved slowly. As of April 1974, IDA's authorizations stood at US$1.8 million with zero disbursed; as of January 6, 1976, authorizations were US$14.4 million and US$2.7 million had been disbursed. By April 1976, when Loan 1260 was presented to the Board, US$23 million of Credit 356 had been authorized and US$6.1 million disbursed. As the Credit was not fully authorized by June 30, 1975 (the original terminal date for submission of subprojects) the deadline was extended to March 31, 1976. The Credit's closing date of June 30, 1977 was extended, first to June 30, 1977 and later to March 31, 1980. By March 31, 1976 ID& had authorized 442 subprojects and the Credit was fully committed. However, during 1977-78, the SFCs encountered widespread cancellations from subborrovers. The SFCs failed to notify IDBI in time, which in turn did not notify IDA until after the March 1976 terminal date. Thus, in 1977-78 IDBI had to request cancellations from IDA without being able to substitute other subprojects. The 115 subproject cancellations reduced net credit utilization to US$16.6 million. This high level of cancellations reflects a major shortcoming of the credit.2/ 4.11 A number of factors led to the high level of cancellations: 1/ Investment costs per job exclude land from fixed assets, and include buildings, machinery, equipment and permanent working capital. 2/ IDBI's comments on this aspect are contained in Appendix A, page 31; they further illustrate the points made below in para. 4.11. - 74 - (i) Implementation Slowness and Sponsor Interest. The major cause of cancellations was the slow implementation on the part of subborrowers and the absence of effective supervision from the SFCs who either were not aware that a large proportion of the projects were not moving ahead, or if they were, they did not inform IDBI and IDA until too late. In a number of instances two years had elapsed after subloan authorization, and no disbursements had occurred. Some sponsors cancelled their subloans because they lost interest in implementing the subproject. The seriousness of their intent should have been more thoroughly checked when the SFC first carried out its appraisal. 1/ (ii) Improvements in India's Foreign Exchange Reserves. The country's net foreign exchange reserve position improved markedly in 1977-78, which led to availability of foreign exchange through open general license (OGL). Some sponsors who were still in the initial stages of implementation, applied for OGL financing through commercial banks. This factor would normally reduce pipelines, but not affect approved subprojects. However, some sponsors appeared to have preferred not to subject their project to the scrutiny of the SFCs, and cancelled their subloans if alternative financing was available. (iii) Disparity in Interest Rates. During 1976-78 interest rates on IDBI/SFC rupee loans (particularly loans to projects in Backward Areas) were 1% to 2% below the relending rate under the IDA Credit, despite IDA's request to GOI to equalize lending rates. Consequently, some entrepreneurs wished to cancel their subloans and applied for, and were granted, rupee loans from SFCs' regular resources. IDBI did not try to block this, nor did the CGAC (para 1.02) which could have refused OGL financing for projects previously financed by IDA. Thus, the availability of scarce foreign e2 hange from IDA for the SFCs' subprojects was disregarded in these instances. 2/ 4.12 A small portion of the cancelled funds related to exchange rate changes. Since IDA authorized subprojects at different rates, depending on 1/ Of the 16 cancelled "A" subloans in the sample (para 4.01), 11 were on account of cancelled projects; 2 found alternate financing; and 3 were cancelled due to implementation difficulties; data on 32 cancelled B subloans show similar patterns. 2/ The last two factors in para 4.11 (OGL financing and interest rate dif- ferentials) also resulted in slow utilization of Loan 1260, the closing date of which was extended by nearly two years until March 31, 1983. - 75 - the prevailing exchange rate at the time, the net utilization on any subproject could have differed from the authorized amount. However, this would have affected only the later years of disbursements during which the exchange rate depreciated from Rs 8.0 to Rs 9.0 to US$1, or by about 12%. Since some of the subprojects were also subject to overestimation of costs, it is difficult to know exactly the amount of cancelled funds arising only from exchange rate changes; a rough estimate is that exchange rate changes resulted in about US$0.8 million of lower disbursements. C. SSI Incentives Study 4.13 As part of the agreements reached on Loan 1260 1/, IDBI commissioned a study of SSI incentives which bears directly on the framework of Credit 356. The study was undertaken by a local consultant. 2/ By studying SSI units in various industries, the study was to assess whether policy incentives had affected their performance to any noticeable degree. Most of the units studied had received loans from the Maharashtra, Karnataka, Andhra Pradesh and Rajasthan SFCs respectively and had been in operation for at least three years. The Bank's review of the draft volumes indicated that the study adopted too restrictive a definition of incentives, which was taken to mean the availability of term loans from the SFCs. Thus, the broad range of GOI and state government policy incentives were not analyzed. Due to the narrow constructs adopted in the study, and its lack of a policy focus, there has been no follow-up with GOI. 3/ V. ROLE OF IDA AND LESSONS LEARNED A. IDA's Role 5.01 In formulating the SFC upgrading program in conjunction with RBI and IDBI, and in stipulating the reporting requirements which the SFCs and IDBI were required to follow, IDA gave itself a demanding task which was compounded by the weaknesses within IDBI. The 57 man-weeks shown in the Basic Data (up to March 1980) were in mission time only; added to this was the time spent in review of 18 evaluation reports each year. This input of L/ Agreed of Minutes of Negotiations, dated April 1976. 2/ Efficacy of Incentives for Small Industry, in 5 volumes by Professor J.C. Sandesara, Department of Economics, University of Bombay, and associates. The first volume on Bombay was completed in November 1979, two years late; the other volumes on Bangalore, Hyderabad and Jaipur were submitted in June 1980, as well as the summary volume. 3/ The Bank's January 1981 letter to the consultants recommended distribu- tion of the study to financial and technical service institutions. - 76 - Bank time was known in advance and was budgeted accordingly. Given that the credit was closed nearly three years late, the total supervision time would have been extremely high, had economies of scale not been achieved by combining supervision of Credit 356 with Loan 1260. Also, as IDBI took on more tasks, the Bank's coefficients decreased over time. Throughout credit implementation, IDA brought to the attention of GOI and IDBI deficiencies in the SFCs' operations. In 1977 it suspended two SFCs (Kerala and Tamil Nadu) and in April 1981 five SFCs (Bibar, Himachal Pradesh, Kerala, Karnataka and West Bengal) from participating under the IBRD loan, as their DSCRs were less than 1.0. Except for Kerala, these suspensions were lifted in September 1981, on the basis of recovery programs formulated by the four SFCs which were approved by IDBI and IDA as a proxy for DSCR compliance. Thus, IDA's role served as a useful bulwark for IDBI, which found its ability to take a strong position against delinquent SFCs greatly strengthened by being able to cite IDA's views in these areas. On occasion IDBI acted on its own accord, e.g. in 1980 and 1981 it suspended Maharashtra and Kerala SFCs from all refinance because the state governments had removed or transferred Managing Directors without IDBI's concurrence. However, these suspensions were lifted after short intervals, partly as a result of influence from the state governments, who wielded considerable power in protecting their SFCs from IDBI's remedial actions. B. Lessons Learned 5.02 The implementation of Credit 356 provides important lessons: (i) Impact of the Apex Agency. The Bank in Credit 356 and in Loan 1260 overestimated the degree to which IDBI could effect changes in organization and procedures of state level institutions. Some of the difficulties are common to apex agencies in other countries, particularly in large countries. Despite IDBI's substantial SFC shareholdings, at times it was ineffective in pushing for implementation of the institutional upgrading program and in obtaining improvements in the SFC's collections. In expecting -more drastic measures, IDA perhaps ignored too much the context of a complex system of required central and state level government interaction through a variety of institutional and managerial processes not directly controlled by IDBI. (ii) Delays in Implementation. The credit suffered from long delays in subloan submission, progress reporting, and disbursement processing, partly as a result of the layer of institutions involved. Due to the number of institutions, a two-tier system was necessary. However, IDBI took an excessive time to carry out the basic functions of SFC evaluation, subproject review, disbursements and reporting. The Bank made suggestions for shortening of reports, inclusion of action status sections, and speedier review of reports by IDBI's management; only in recent years were improvements noted in these areas. - 77 - (iii) Financial Norms. Several modifications were made to the DSCR, which undermined the effectiveness of this covenant. The treatment of share capital contributions as part of the DSCRL unfortunately worked as an indirect subsidy in lieu of collections. Although the share capital infusions did improve the capital structure of the SFCs, the Bank could have pushed for this while continuing to exclude these from the DSCR. On the other hand, strict insistence on the original DSCR limit %.ould have resulted in less Bank influence with IDBI and the SFCs. (iv) Subloan Cancellations. When the repeat Loan 1260 was presented to the Board in April 1976, US$23 million of Credit 356 had been committed, and US$6.1 million or 25% disbursed. The follow-on of a second Bank operation, given this degree of credit utilization was in accord with standard DEC procedures. However, the large number of subproject cancellations resulted in GOI's forfeiture of US$8.4 million in cancelled IDA funds. If IDBI would have been more abreast of the subloan implementation performance, there would not have been a need to cancel so large a proportion of IDA funds. 5.03 In addition, some shortcomings in design can be seen with the benefit of hindsight. (i) Number of Institutions: Managing an Upgrading Program. The difficulties for IDBI and IDA in assessing the performance of 18 SFCs and in effecting institutional improvements on so broad a group of intermediaries became more apparent in the late 1970's. The argument in favor of including all SFCs in the first credit line was clear: IDA did not know which SPC con- stituted reliable intermediaries and which ones would present "bankable subprojects" without a detailed involvement with all SFCs. The second credit line could have been limited to selected SFCs, with the selection made on the strength of the institutions and subsector concentrations by state, but this was not possible under IDBI's all-India mandate. Moreover, in 1976 the Bank did not have a strong case for exclusion of some SFCs, although this emerged later. (ii) Notwithstanding the concern for the number of institutions in- volved, it may have been preferable to include a few commercial banks in the second credit line, as this would have provided a larger branch network and it would have allowed a closer tie-up between term lending and working capital. However, the commercial banks were themselves reluctant to participate as they did not wish to complicate their approval procedures and were unwilling to subject themselves to IDBI's project reviews. project reviews. - 78 - (iii) Policy Impact and Target Group. Although GOI's policies and mechanisms for small industries development underwent substan- tial changes in the 1970's (e.g. GOI's December 1977 New Indus- trial Policy Declaration, including the creation of District Industries Centers), IDA's Credit 356 and Loan 1260 had little impact in reviewing or influencing these policies. REI's targets for commercial bank lending to SSI rema-ined a cornerstone of GOI's policies for the priority sectors; yet the project did not exercise a role in analyzing the extent and nature of this credit allocation system. However, other Bank studies did examine aspects of India's commercial bank credit system. The project's incorporation of SFCs and exclusion of commercial banks provided a partial view of the sector-essentially the larger end of the small-medium scale sector-while commercial banks financed the smaller, more widely dispersed projects. The small size of Credit 356 and Loan 1260 did not provide the Bank with an appropriate vehicle to initiate a policy dialogue with GOI. IDBI feels nevertheless, that the credits succeeded in bringing about "a substantial transformation in the approach towards development of the small-scale sector as also the institutional development" (Appendix A, page 44). VI. CONCLUSIONS 6.01 The major conclusions on Credit 356 have been discussed in Chapters 3-5. In summary, the Credit served a useful purpose for GOI, IDBI and the SFCs, and to some extent the Bank. It assisted in the financing of viable small and medium scale projects by providing foreign exchange resources to the SFCs; it provided review advice to IDBI; and it assisted GOI in monitoring the performance of key financial agencies. The Credit allowed IDA to be involved in small industry issues and it provided the Bank with a better understanding of state-level financial institutions. 6.02 However, the Credit suffered from a number of problems, which reduced its impact. The institutional upgrading program, which was of prime importance, was not implemented satisfactorily. Collections and financial performance of the SFCs deteriorated, and a serious level of arrears developed. While other financial institutions in India, such as ICICI and IDBI, also experienced a rise in arrears in the late seventies, the SFCs developed the most serious problems. IDBI's impact on the SFCs was less than expected; this was partly due to overly ambitious design of project objectives and partly due to the longer than expected time required for IDBI to put into place a managerial and procedural system to effectively supervise the SFCs and their operaticns. Experience with this credit therefore reflects a learning process on the part of all participants, including the Bank. A high level of subloan cancellations was a major shortcoming of credit performance, due to premature commitments, slow disbursements, and subsequent factors beyond IDBI's and the SECs' control (interest rates and - 79 - free foreign exchange). Although the subprojects, as appraised, were of econoLic merit, many incurred delays and cost overruns which reduced their financial and economic returns. In 1980 and 1981 the IDBI/SFCs project was included in the Bank's problem-projects list, and was reviewed by the Regional Vice President. 6.03 Due to the problems cited, a repeat loan along the lines of Credit 356 and Loan 1260 is not recommended. After nearly ten years of Bank involvement with IDBI and the SFCs, this is an appropriate juncture for the Bank to reassess its strategy for involvement in India's small to medium scale industrial sector. PROBLEMS AND ACTIONS OF SELECTED SFCS A. Cularat State Financial Corporation (GSFC) 0GFC's levels of operations are the second largest after Haharshtra. Although GSFC has been successful in promoting now projects, it developed serious arrears problems in the last five years. Below are eummarized some of the problems and actions which CSFC took to improve its financial position and organisational systems. Selected indicators of GSFC's operations in PY73 and FY81 are shown in Table 1. PROBLEH CATECORY ACTION/RESULTi 1. INSTITUTIONAL (a) 14anagementi The Chief Executive and some other management (a) IDDI had limited Impact in obtaining greater continuity nEficials were appointed by the state government on a short-term of managing director.. Rowever, CSFC evidenced more basis. This resulted in frequent changes, and inability of some continuity than other SFCs and reasonably good leader- mnaging directors to have an impact on the organization. ship in the last two years. (b) Kanpower Plannings OSFC as an institution has not kept pace with b In FY81, GSFC's total staff increased to 530, compared to the growth in lending. There has been no systematic study of staff 3 at the end ot FY80. Three senior management positions needs and some areas, such as recovery and follow-up, are still yere filled6 Additional recruitment is required in Accounts under-staffed. GSFC's proportion of professional to non-professional and Recovery Divisions. staff Is low (77s530 as of Harch 31, 1981). (a) Appraisal Standardst Appraisal standards remain weak, especially (c) GSFC has a small marketing cell, but Improvements In opera- in the areas of economic and market analysis, working capital tional procedures end standards will require training and requirements, technical know-how, ete. Follow-up and supervision closer management scrutiny of appraisal reports. standards remain inadequate. (d) Supervision Proceduress GSFC did not undertake (d) OSIC has improved Its supervision, particularly through the regular or systematic superilsion of projects in implementation or creation of regional offices. It designed supervision forms operation. Its follow-up visits were often informal and few and is visiting projects on a more regular basis (quarterly supervision or progress reports were prepared. far problem projects; annually in other cases). Strengthening of procedures and Increased management review of problem projects is still needed. (e) Information Systemes The accounts of the corporation were not (4) OSYC's computerized data system Is operative after two years of up-to-dates Information on overdues, defaulting unite, issue of delays. The accounts department has also Improved Its billing bills and notiees were often delayed, reducing the feedback to the system. relevant operational departments. With the increasing delegation of authority to regional offices for sanctions and disbursements, the need for speedy and reliable Information Is critical. H edir PROILit CATBOORT ACTION/R88VUS 2. FINANCIAL (a) Arrears: The major problem facing OS7C is ite low recoveries (a) After repeated urging from IDBE and IDA, GSFC took a number of and high arrears. The percentage amount received to measures to Improve collections. It recruited a Senior General receivable wse 24.8, 26.3, and 34.4, for FY?9, FY80, and FY81 Manager for Recoveries and Rehabilitation and created a special respectively, which is very poor. By mid-1980, GSFC had 6,643 department for Recovery and Follow-up. The officers analyzed accounts in arrears, of which 654 were in default with amounts tho composition of defaulters and concentrated their efforts on exceeding Re 1 million. Thus, IO of the number of overdues the large defaulters. The accounting system was overhauled and accounted for 702 of the overdue amounts. billings were brought up to date. Chronic defaulters (95 case.) were sued, although results are Ieely to be slow due to the court aystem. In FY81, GSFC' collection Increased by 742 and reached Re 200 million, compared to R 115 million in FY80. Progress In settling claims under the Credit Guarantee Syatem (CGS) which has boon slow, Improved in Y80 and FY8. As of rarch 31, 1981, sSFC had 5,d83 accounts eligible undr the CS; of these' 440 claims bad been submitted to the Reserve Bank of India RRr) which had approve 208 claims aountin to 9.5 million. Thus, 232 claims were still pending with Rl. (b) DSCR: The DSCR for SiC at the and of 1c1 wut 0.75on an e an (b) SFC was able to Increase its DSCR flrcm 0.751 In FY81 to a.cu b accrual basis and 0.57ol on a cash basis. A GSFO's share as of March 3t, L982. capital Is at the limit prescribed i n the S rC Act (Re 100 million), it will not be able to rely an Infusion of share capital to Increase the DR,AS (a) Rnforcement of RecovorX Actiont Rven after legal settlements () After detailed study of the legal implications GSFC lawyers have recovery was still delayed* GSFC had not availed Itself of the prepared documents providing for recourse by SFC to provisions Revenue Recovery Act which(allows speedier recovery of loan, of the Revenue Recovery Act. oowever, It has only tested this by attaching land revenue (aes) In lieu of loam Installments withthhe state legal authorities for loans which recently fell due. into default. The Revenue Recovery Act should also be applied to old loans, which form the bulk of SFo' arrears. (d) An GSFC's interest income was calculated on an accrual baaee, Cd) In order to Improve its cash flow management, SFC decided to its cash Inflow wee le than Indicated in the revenue chagets accounting system from en accrual to a cash basis, accounts, resulting In a liquidity problem. which has been completed. a 3ho of tese 440clame ad ben ubated o te Rserv Bak o Inda (BI whchhadappovd 28 lais aoutin t Rs9. allo.Tu, 3 lieweesilpndnIihR1 (b) sm as ale o inreae it DSR frm 07511in Y81 o 101s So Kerala Financial Corporation (KFC) The performance of the Kerala Financial Corporation showed the most serious deterioration of all SFCs. Difficulties in the state (political turmoill and heavy migration of skilled or smt-skilled workers to the Gulf countries) compounded the internal problems which RIC developed. Inaction on the part of KFO's management and the State Government to take actions resulted in KFC being declared ineligible to submit subprojects for three of the years since 1977. PROBLEM CATEGORY ACTION/RESULT 1. INSTITUTIONAL (a) The Managing - Director position was subjected to too &any (a) Both IDA and IDBI took the matters up with state Officials changes. twho undertook, as before, to allow continuity in management. (b) The Ceneral Manager Position was vacant for about two years. (b) In August 1981 a new GH was appointed, but was abruptly replaced In April 1982, without the consent of IDBI. This action led to IDBI's suspending KFC from all refinance. (a) Other key management position (e.g. Deputy General Manager (c) IDBI repeatedly urged KFC to fill these positions. After remained vacant for 2-3 years. no action 1IB seconded three of its staff to Kerala but they could not function effectively due to interference from RFCs management and Board. (d) Follow-up and Supervisions Systems remain Inadequate. (d) A local cunsultancy firm. Besant Raj Consultancy carried out a study on KFC's organization and procedures during April - September 1980. The study report recommended a number of useful organizational changes and means of strengthening follow-up and recovery systems. After review of the study by KFC's Board and Management and by IDBI, some of the recommendations were implemented. A special cell for sick units is not functioning adequately. (e) Due to migration to the Gulf States and laternal diffi- (e) KFC has taken measures to recruit staff for its disburse- culties in Kerala states IC lost a nmber of Key Staff. ment and recovery wings in particular. *M *i PROBLEM CATBCORY ACTIOIESULTO 2. FINANCIAL (a) KFC's collection's declined from 432 of total dues in (a) XFC created a recovery wing but it has npt yet analysed FY80 to 201 in FY81. Of amounts falling due, collection@ Itoverdae accounts systematically; staff vacancies &te vera only about 501. hampering its efforts. (b) KPC's DSCR (accruals basis) declined from 1.36 in FY14 (b) IDA twice declared KFC Ineligible to submit subprojects to 0.65 in FY81. On a cash basis, Its DSCR was only and IDBI suspended XFC from all refinance. KFC's 0,37 in FY81. management appears to appreciate the eriousness of its position but Improvements have still to be demonstrated. (c) Other problems and actions, much as cash basis, accounting, (c) IDA twice declared KFC Ineligible to submit subprojects COS claims and enforcement of Revenie Recovery Act, are and 1DBI suspended XIC from all refinance. KIC'm same as for Gujarat discussion above. management appear. to appreciate the seriousness of Its position but Improveents have till to be demonstrated. C. Andhra Pradesh State Financial Corporation (APSFC) APSFC recorded the strongest performance of all (FCs during the project period. Stability in the state, effective project promotion by other agencies, and good management In APSPC all helped to strengthen APBFC's performance; as with other SFC's collection performance should be Improved furbher. PROBLE4 CATEGORY ACTIONESULT: 0 1. INSTITUTrIONAL (a) An effective Managing - Director held office for a (a) No actinn was required on this aspect. sufficient period to allow continuity in management (b) APSFC had vacancies In a few mid-management Positions. (b) ar t positions were filled. ) Staff recruitment needed to be expanded bc) Satisfactory recruitment took place during the project period. APC's staff grew from Cp In FY74 to 349 in FY81, of ich 69 were officers (professionals). d SC sanctions had grown rapidly, ereating supervision AS) APSFCs sanctions continued to accelerate, In difficulties for the orgAnLzation. 75-80 APSFC was the third '-rgest SFC In term Of volume of sanctions (Annox 8). In July 1980 a Recovery Cell was established with four deputy I~ Managers. 0 12. FINSTINAL (a) Arreae. Ai C's arrears stood at 10 of its portfolio (a) Even though It had the best record, APFC continued snffici and was the lowest of all SFCo. to strengthen It's collection efforts. (b) DSCR. On an accruals basis, APSFC'm CR was 1.23 in (b) APSFC needs to sustain Its collections molentl to FY81 and 1.36 on a cash basis. This compareo with 1.67 achieve further Improvements In the DSCR. in FY74 and 1.0 in FY75; thus after deterioration ImprveAents occurre - 84 - ATTACHMENT 1 Table 1 GUJARAT STATE FINANCIAL CORPORATION (GSFC) Selected Indicators 1973 1981 - No. of Loan Applications Received 1,874 2,293 - Gross Sanctions (Rs millions) 147.2 453.4 - Disbursements (Rs millions) 70.6 275.1 - Number of Professional Staff 49 77 - Nominal Spread 2.9% 3.5Z - DSCR (accrual basis) 0.58:1 0.75:1 (cash basis) 0.57:1 - Provisions as Z of Average Total Assets 1.4 0.6 - Profit after Tax as Z of Year-End Share Capital 5.4 5.3 Debt/Equity 5.9:1 6.5:1 - Income from Term Loans as % of Average Term Loan Portfolio 8.3 10.2 - Cost of Term Debt as % of Average Term Debt 5.4 6.8 - Amount Received to Receivables (%) - 34.4% - Financial Cost as % of Average Total Assets 4.5 6.0 - Administrative Cost as % of Average Total Assets 1.6 0.8 -8s- 'i§milli t22 *i u uau *0 Èä ll f - -114 r i z-A- lf Mil -=-- ja ·~ iii=-. ffi~ ~Z~fe: 1 -l~ 1.13I2 . = aala e à 1 INDIA CREDIT 356: PROJECT COMPLETION REPORT SFC's Sanctions and Disbursements, FY75-80 (Ra. millions) 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 Sane. Diab. Sane. Diab. Sane. Disb. Sane. Diab. Sane. Dieb. Sane. Diab. 1. Andhra Pradesh 99.3 57.1 126.6 68.2 149.5 73.6 203.3 100.4 291.1 166.6 373.9 258.1 2. Assam 8.8 7.5 9.2 9.2 14.4 8.0 12.2 12.9 17.5 8.6 16.9 8.6 3. Bihar 75.2 34.4 102.0 44.9 124.5 52.0 140.2 59.9 150.4 72.0 134.5 81.7 4. Delhi 31.0 18.1 36.1 26.5 38.8 20.5 31.8 17.3 15.0 27.8 17.5 32.0 5. Gujarat 204.5 143.2 197.9 121.1 185.1 122.0 245.4 139.5 284.8 187.4 363.5 222.9 6. Haryana 92.7 49.1 99.4 60.6 46.6 38.0 36.8 27.6 39.9 31.4 63.4 36.5 7. Himachal Pradesh 30.2 11.1 25.8 24.3 35.3 19.0 22.4 19.0 14.7 15.2 30.2 19.9 8. Jamu & Kashmir 21.5 18.5 31.3 25.3 38.2 26.8 28.2 16.6 35.6 30.6 56.7 40.2 9. Karnataka 104.0 75.1 96.8 71.8 110.6 80.1 101.3 71.7 106.1 78.0 173.3 124.3 o 10. Kerala 69.8 26.6 106.0 50.4 70.5 63.7 97.7 52.1 79.0 62.9 121.8 73.0 ' 11. Madhya Pradesh 56.2 11.4 38.0 20.6 48.4 30.2 62.7 37.5 65.6 40.1 85.8 55.6 12. Maharashtra 248.9 116.9 263.1 163.6 272.3 189.2 275.6 180.7 327.4 209.1 371.2 236.5 13. Orissa 30.6 11.1 62.1 21.9 84.9 32.1 54.2 33.8 125.9 52.4 161.1 107.8 14. Punjab 101.0 60.4 104.4 57.3 72.2 50.1 79.8 51.8 89.1 52.7 98.9 '64.4 15. Rajasthan 70.6 28.3 80.0 38.6 74.0 50.3 90.3 52.3 143.2 79.7 315.4 179.4 16. Tamilnadu 154.9 79.7 194.4 115.4 154.6 113.6 111.1 72.0 118.5 82.6 171.9 102.6 17. Uttar Pradesh 128.9 47.5 85.2 49.1 186.3 48.0 201.7 74.9 248.4 108.0 332.0 166.5 18. West Bengal 43.0 17.4 85.3 26.8 102.8 41.7 54.4 45.6 99.0 41.6 95.8 42.8 TOTAL: Gross Sanctions 1,571.1 802.9 1,743.4 994.5 1,809.0 1,048.9 1,849.1 1,065.6 2,282.2 1,347.6 3,015.2 1,888.0 and Disbursements a=n= == ===== =mum= ===== ===am== na"Unan uMau.t muu=muu = =nuum. ....... Net Sanctions 1,633.0 1,661.0 2,007.0 2,638.0 Souree: IDBI INDIA CREDIT 3561 PROJECT COMPLETION REPORT Sumary of SICs Oerations (Re. millions) 777 7178 PY79 FY80 rY81 FY77-FT81 Total Sanctions (Net) 1.633 1 661 2,007 2 638 3.774 11 713 (Disbursements) C 1,052) 1 :.074) 1,349) 1:848) 2,481) 7,10) <i Percentage of Total Sanctions to$ A. Backward Areas 47.2 55.8 56.6 52.7 51.0 52.5 B. S8 (Net of SRTO) Jf 64.9 63.4 58.9 63.1 73.0 65.9 C. New Projects N.A. NOA. 57.9 58.8 62.9 59.9 D. Private Sector 95.2 95.0 88.8 85.6 84.9 89.9 3. Industries - Food 12.3 12.9 11.5 13.3 12.2 12.4 - Textiles 9.1 10.7 7.9 9.9 9.0 9.3 - OTemicals 12.9 15.5 13.0 13.5 11.6 13.3 - Netal products 9.1 8.9 6.6 7.7 8.1 8.1 - Machinery 4.8 4.4 6.4 5.6 6.4 5.5 - Services 2/ 5.3 3,6 13.2 13.6 12.2 9.6 - Others 3/ 46.5 44.0 41.4 36.4 40.5 41.8 7. Number of Units (000) 4/ 8.0 8.1 10.6 17.9 30.5 75.1 Average per Unit Res. '000 214 211 199 154 132 182 USDollars (Re. 9t91) 23,777 23,444 22,111 17,111 14,667 20,222 Sourcei ID8I/SFC Operational Statistics J. 551 * Small-Scale Industrias SRTO * Small Road Transport Operators 2/ Includes SRTO 3/ Includes paper (4.2X), Rubber (1.4X), Fertiliser (0.07X), Cemsnt (2.0%), Basic Metal. (4.02), Electrical Machinery (4.3%), Transport Equipment (2.81) and Others (23.03%). 4/ Amounts for FY77-FY81. Based on Gross Approvals Aid Unit. Note: Some percentages are approximate figure@ due to non-availability of detailed breakdown for some SFCs Sources IDBI INDIA CREDIT 3561 PROJECT COMPLETION REPORT SFC's Net Sanctions and Disbursementst Distribution by Subsector (Re. millions) Net Sanctions Disbursements Cumulative Z of Cumulative % of up to Cumulative up to Cumulative Industries FY80 FY81 end FY81 Assistance PY80 FY 81 end FY81 Assistance 1. Food 351.6 460.7 2,333.9 12.4 224.4 291.1 1,644.2 12.5 2. Textiles 260.6 340.9 1,924.5 10.2 176.8 231.3 1,440.8 11.0 3. Paper 92.3 218.0 860.1 4.6 63.5 90.0 461.1 3.5 4. Chemicals 355.2 436.7 2341.2 12.4 229.7 302.6 1,561.8 11.9 5. Rubber 37.0 43.6 288.1 1.5 28.6 34.4 217.5 1.7 6. Fertilizer 1.9 2.0 8.3 - 2.6 3.4 7.4 - 7. Cement 76.4 97.8 206.8 1.1 20.9 27.4 141.5 1.1 8. Basic Material Industries: (a) Iron & Steel 94.0 136.7 979.2 5.2 93.3 132.4 722.4 5.5 (b) Non-Ferrous 0.3 4.6 5.8 - 1.5 1.9 5.5 - 9. Metal Products 202.3 304.8 1,384.0 7.3 147.0 197.5 1,018.2 7.8 10. Machinery 147.1 240.4 1,108.5 5.9 117.0 144.8 745.9 5.7 11. Electrical Machinery 101.2 158.6 902.3 4.8 75.7 105.7 593.7 4.5 12. Transport Equipment 53.7 94.2 496.7 2.6 51.5 51.5 37.5 2.9 13. Elec. Generation 0.9 1.1 78.2 - 1.2 3.9 62.2 0.1 14. Services 358.2 461.6 1,952.5 10.4 248.3 335.0 1,398.5 10.7 Others 505.5 771.8 3,992.8 21.6 365.3 527.8 2,719.1 21.1 .TOTAL 2,638.2 3,773.5 18,862.9 100.0 1,847.5 2,480.7 13,114.8 100.0 Unowmam Monona= WMWWfti= woman "woumn anu... Nowommon ==WNW Ef Brror due to rounding-up. Source: IDBI ND4 CREDIT 356: PROJECT COMPLETION REPORT Assistance (Disbursements) to Small Scale Industries. FY75-80 (Ra. millions) FY7 FY76 FY77 FY78 LY79 71OO Amt. to I of total Amt. to Z of total Amt. to Z of total Ant. to X of total Ant, to Z of total Ante to Z of total Name of SFC 91's assistance SSl's assistance 6S's assistance SSI's assistance SSI'A assistance 8i's assistance 1. Andhra Pradesh 31.8 56 38.9 66 48.4 66 61.0 62 112.7 66 173.2 67 2. Assan 2.5 33 9.2 - 2.6 29 4,4 54 5.6 65 5.7 66 3. Blihar 27.7 81 35.4 79 41.6 80 47.2 79 56.0 78 44.1 54 4. Delhi 11.6 77 20.2 79 19.3 94 13.5 78 23.2 83 27.5 86 5. Oujarat 94.1 66 88.6 73 79.1 65 105.1 15 136.1 73 155.7 70 6. Haryana 30.7 63 27.8 46 19.1 52 14.8 54 24.8 79 27.8 72 7. limachal Pradesh 7.8 70 18.8 81 11.6 61 9*8 52 9.0 59 19.9 - 8. Jammu A Kastmir 16.2 88 25.3 - 26.2 98 16.3 98 29.0 95 38.7 96 9. Karnataka 48.6 65 36.3 St 40.2 50 31.7 44 31.9 41 74.0 62 10. Karata 25.4 95 40.5 80 37.0 69 41.6 80 48.8 77 40.6 64 11. Madhya Pradesh 6.1 54 6.7 33 11.6 38 13.0 35 16.3 41 27.3 49 12. Maharashtra 68.1 59 83.2 52 109.5 58 124.1 69 145.0 70 162.5 69 13. Orisea 6.3 57 16.6 76 25.6 80 31.1 92 45.6 87 106.6 99 3 14. Punjab 36.4 72 40.0 70 34.8 69 33.7 71 37.0 71 37.3 69 15. Rajasthun 20.7 73 21.1 55 26.2 52 40.1 71 65.3 82 139.1 79 16. Tamiladk 35.8 45 44.4 38 45.3 40 32.4 S1 38.8 47 38.5 38 17. Uttar Pradesh 37.4 79 28.0 57 28.0 57 56.9 76 80.2 73 132.5 79 I. vest keal 9.0 52 10.2 38 22.4 54 2 A H9.0 46 26.6 62 TUTAL 516.2 65 508.2 60 628.5 60 702.3 66 926.0 69 1287.7 69 .me.. .dW eased *m ... Wenmes oo CMas Mello woodn U" INDIA CREDIT 356: PROJECT COMPLETION REPORT SFC's Loan Assistance to Backward and Other Areas, FY75-80 (Re. millions) SFC's Cumulative Total Relative Sanctione Sanctions Size of SFC FY80 FY75-FY80 FY75-80 Backward Other Backward Other All (volume of SFC Areas Areas Areas Areas Areas sanctions) Andhra Pradesh 177.0 196.9 627.1 619.6 1,246.7 3 Assam 11.8 5.1 52.5 26.5 79.0 18 Bihar 82.3 52.6 397.0 330.2 727.2 8 Delhi - 47.5 - 225.2 225.2 15 Gujarat 135.6 227.9 610.0 871.2 1,481.2 2 * Haryana 19.2 44.2 118.0 260.8 378.8 13 o Himachal Pradesh 28.5 1.7 122.8 35.8 158.6 17 Jammu & Kashmir 56.7 - 204.8 4.7 209.5 16 Karnataka 87.8 85.5 336.9 355.0 691.9 7 Kerala 55.3 66.5 221.2 323.6 544.8 9 Madhya Pradesh 54.8 29.0 261.5 93.2 354.7 14 Maharashtra 147.8 223.4 678.7 1,079.8 1,758.5 1 Orissa 48.7 115.4 138.4 383.4 521.8 10 Punjab 49.0 49.9 209.7 305.7 515.4 11 Rajasthan 196.8 113.8 423.0 345.7 768.7 6 Tamilnadu 92.6 79.3 479.1 426.3 905.4 5 Uttar Pradesh 209.8 122.2 630.5 552.0 1,182.5 4 West Bengal 57.5 38.3 267.4 212.9 480.3 12 TOTAL 1,511.2 1,499.2 5,770.7 6,486.6 12,265.3 Source: IDBI CREDIT 356: rOJECT COMPLETICH PORT Type of As9Astance BanationUd by SYCe (Re. million.) 1976-77 1977-78 1978-79 19-70 Supple- lupple- Supple- luppla- mentary m*ntary motary atary Nev Aagiøt- Nav Ansat-- New Asett- Nev Aistet- ome of BVe Unit. Expanston anee Unit$ Expansion ane Unit§ Expanulon APc nit. Eggensio. 1. Andhra Fradeoh 135.36 11.92 2.32 187.68 14.54 1.13 260.04 31.88 2.70 - - 2. Angam 10.91 3.50 - 10.06 1.67 - 12.77 4.76 - 11.90 4.95 . lhar 124.40 - 0.06 140.13 - 0.03 134.36 15.99 - 116.48 18.14 4. Delhi 20.53 18.31 - 20.19 11.64 - 26.15 18.90 - 25.90 21.59 5. Gujarat 1532.15 26.27 - 190.49 43.16 - 252.78 30.44 - - - 6. Haryana 34.66 9.96 1.94 29.93 6.42 0.50 35.73 3.70 0.50 54.92 5.51 7. Rimehal Pradesh 33.72 1.17 0.76 20.69 0.47 1,30 13.80 0.11 0.81 - - - 8. Jansu 6 Kamhir 36.92 0.40 0.90 24.94 2.15 1.10 30.07 3.42 0.15 53.99 1.99 0.60 9. Karnataka 85.89 12.43 11.40 74.99 21.12 3.96 82.87 21.81 1.44 141.34 24.12 7.84 0. Kerala 60.28 3.57 1.37 83.40 1.61 2.16 46.99 6.36 1.45 - - . Nadhya Prådesh 33.64 12.83 1.91 45.56 16.57 0.53 50.79 14.81 - 51.18 28.89 2. Maharaahtra 174.00 98.30 - 176.50 98.80 - 249.23 78.21 - . - - 3. Orim - - - - - - . Punjab 56.43 15.70 - 70.38 9.43 - 84.21 4.91 - - , - S. ajaethan 38.84 .11.11 - 48.02 16.08 - 95.19 9.01 - 226.90 64.55 å. Tamladu 91.26 71.17 3.94 64.18 43.31 2.45 71.26 46.10 1.12 119.80 52.11 7. Uttar Pradesh 180.87 5.25 0.20 194.81 6.70 0.20 233.32 13.76 1.40 - - 8. Nest Bohal 78.24 23.86 - 40.44 13.48 - 77,42 21.32 69.7 _5- TOTAL 134.11 325.75 24.80 1422.39 307.15 13.36 1756.98 325.49 9.57 872.18 247.43 8.52 INDhIA CaBDIT 3561 VROJ=C CQttLBTIOW IMPORT Trend in Arrears y. !V4-81 (Re. million) FT74 WC79 180 ArrTars"SO Arrears 2 Arres Arrears Total Loan Arrears/ Arrears total Loan Arrears/ Arrears Total fas Areeral Portfolio 3/ portfolio portfolio Portfolio Portfolio fortfolio Portflo 2. 2 2 . I 1. Andhra Pradesh 4.64 3 69.14 505.76 14 9683 735,74 13 94.55 960.69 10 2. Asses 16.33 42 44.63 91.29 49 47.01 89.59 52 50.13 88.7 58 3. 1thar 6.43 10 124.66 323.56 39 179.21 491.81 36 224.91 59s.66 36 4. Delhi 6.50 4/ 26.43 132.20 20 30.53 151.70 20 42.35 171.30 25 5. ajarat 41.12 / 12 320.51 785.46 41 401.77 949.92 42 382.99 1,123.45 34 6. 1srYas 7.17 6 112.06 291.25 38 114.32 315.53 36 129.78 340.58 38 . llsachul Pradesh 1.32 6 19.87 81.01 25 26.63 92.66 29 .33.48 1g.62 28 8. Jammu & KashWir 1.42 5 11.54 92.10 13 11.93 106.30 it 13.82 134.90 10 9. Karnataka 19.33 A/ 10 152.07 441.72 34 199.60 529.87 38 167.16 626.69 27 10. Kerala 14.54 12 79.46 358.40 22 153.22 425.70 36 252.45 S02.36 50 11. Madhya Pradesh 9.6 t1 33.08 198.48 17 4.66 245.08 2 50.07 298.54 17 lt. Maharashtra 28.27 8 207.69 948.80 22 264.83 l.118.80 24 320.10 1,310.00 24 13. Oriessa 6.44 20 78.33 166.37 47 79.96 255.25 31 111.58 401.37 28 14. Punjab 2.21 3 36.84 271.63 21 63.36 306.57 21 75.06 355.14 31 15. Rajasthan 2.31 3 77.83 300.80 26 79.30 460.69 17 100.03 664.64 15 16. Tamil Madu 46.63 26 101.45 567.60 18 101.18 608.70 17 179.59 774.70 23 17. Uttar Pradesh 28.56 I/ 1s 163.90 430.20 38 217.99 573.21 36 222.55 787.76 28 Ig. Vest Bengal 17.72 23 67.62 245.23 28 98.77 291.94 34 125.37 349.51 TOTAL 265.60 1,748.13 6,232.06 262 2,171.50 7,751.26 268 2,577.97 9,642.93 271 1/ Includes suit-filed amounts at end of period, but net of amount rescheduled and interest in suspense account, if ay. 2/ Principal and Interest in Arrears as shown in Annex 15 of Staff Appraisal Report for Loan 1260 (May 1976). / Arrears as a percentage of total loans outstanding as shoun in Annax 15 of above report. 4/ December 1974 rather than March 1974 figures. INDIA CREDIT 356o PROJECT COWLETION &BMRT Collection Performance of SPC. VT78 FY79 (Re million) 7T80 FT81 Current Total Current Total Current Total Current Total SIC Overdues Dues Dues Collection I Overdue: Dues Dues Collection k Overdues Dues Wus Collection I Overdue. DaL Do" Collectiou & 1. Andhra Pradesh 25.8 74.7 100.5 52.8 ' 53 47.6 105.9 153.5 89.7 58 63.8 128.1 192.0 105.7 55 91.5 196.6 288.1 131.9 46 (6.3)a/ (7.5) (5.9) ( 5.3) 2. Ass@& 22.6 13.2 35.8 8.8 25 26.6 14.6 41.2 8.9 22 31.8 13.6 45.4 13.9 31 31.5 17.1 48.6 11.9 24 (10.3) (12.3) (13.0) (15.5) 3. Bihar 52.6 50.3 102.9 20.4 20 79.7 67.8 147.5 27.1 18 120.3 87.0 207.3 30.6 15 172.2 99.4 271.6 49.5 18 ( 3.8) ( 3.7) ( 3.9) ( 4.2) 4. Delhi 12.1 24.0 36.1 20.4 57 '13.3 26.2 39.5 22.3 56 14.1 30.4 44.5 25.8 38 15.4 31.1 46.5 27.9 60 ( 6.3) ( 7.7) (12.3) (15.1) S. Gujarat 99.5 120.7 220.2 78.8 36 177.2 160.4 337.6 84.0 25 253.6 185.4 439.0 115.5 26 323.6 258.9 582.5 200.3 34 (35.8) (60.4) (66.9) (78.2) 6. Haryana 37.1 59.7 96.8 37.7 39 53.8 63.9 117.7 39.2 33 48.8 62.9 111.7 50.1 45 55.1 62.7 117.8 55.6 47 (24.6) (26.9) (63.3) (59.2) 7. Iimachal Vradesh 5.3 23.1 28.4 14.3 50 5.2 22.6 27.8 16.3 59 8.6 20.4 29.0 15.5 53 11.3 18.0 29.3 15.8 54 (3.7) (10.8) (11.3) (15.3) 8. Jamu & Kashair 7.8 26.0 33.8 21.9 65 9.8 26.4 36.2 29.4 81 6.8 34.6 41.4 34.7 84 6.7 40.0 46.7 37.8 80 ( 2.0) ( 2.8) ( 5.5) ( 5.2) 9. Karnataka 52.5 75.8 128.3 40.2 31 87.9 89.6 177.5 52.6 30 128.0 101.8 229.8 65.2 28 134.7 118.9 253.6 82.6 32 (16.9) (21.3) (24.1) (65.1) 10. Kerala 37.6 50.6 88.2 23.2 26 39.5 70.4 109.9 34.5 31 50.6 76.0 126.6 43.3 34 51.1 177.2 228.3 45.8 20 (16.4) (20.8) (28.9) (34.1) 11. Madhya Pradesh 14.6 22.8 37.4 13.5 36 14.4 29.3 43.7 20.7 47 17.2 36.3 53.5 28.8 54 25.7 64.4 90.1 40.5 45 (25.2) (14.8) (15.9) (16.2) 12. Maharashtra 42.7 175.2 217.9 122.3 56 92.1 232.4 324.5 155.3 48 129.5 239.2 368.7 175.4 48 170.3 362.9 533.2 214.1 40 (65.3) (79.0) (78.2) (94.5) 13. Orissa 43.1 23.6 66.7 10.8 16 55.8 44.4 100.2 24.2 24 69.9 40.5 110.4 40.6 40 72.4 100.4 172.8 61.2 35 ( 6.4) ( 8.4) ( 8.7) ( 7.9) 14. Punjab 14.1 60.5 74.6 44.9 60 19.6 68.2 87.8 54.7 62 26.5 69.6 96.1 62.6 65 26.8 117.3 144.1 69.1 46 (12.6) (23.8) (30.4) (36.8) 15. Rajasthan 29.1 41.2 70.3 28.1 40 42.2 60.5 102.7 37.8 37 64.9 81.6 146.5 58.6 40 71.4 112.2 183.6 88.3 48 ( 8.3) (15.5) (12.9) ( 7.9) 16. Tamil Nadu 81.8 106.0 187.8 69.2 37 81.8 138.1 219.9 101.5 46 92.2 135.2 227.4 105.5 46 91.6 106.2 197.8 117.9 60 ( 1.2) ( 1.2) ( 9.2) * ( 9.6) 17. Utter Pradesh 43.5 70.8 114.3 38.2 33 68.7 63.9 132.6 47.6 36 77.7 84.3 162.0 64.1 40 93.3 92.3 185.6 100.7 54 (26.3) (50.3) (86.2) (124.7) Is. West Bengal 19.7 28.3 48.0 16.9 35 30.3 35.6 65.9 18.1 27 44.6 56.1 100.7 21.9 22 72.8 56.7 129.5 28.3 22 (14.3) (19.9) (23.2) (26.0) Collection Ratio A 1688.0 662.4 391 2265.7 863.9 382 2732.0 1057.9 39M 1379.2 39t 1 (285.9) 342 (387.1) 332 (499.8) 332 (620.8) 332 a/ Figures in brackete indicate suit-filed amounts (not included under TOTAL DUES column). NOTV The closing and opening figures of overdue. may not tally on account of suit-filed/recalled accounts. reachedulements. write-offs ate. A - Collections as percent of total dues 5 * Collections as percent of total dues Plus suit-filed amounts. INDIA CREDIT 356: PROJECT COMPLETION REPORT SFC COLLECTION PERFORMANCE COLLECTIONS AS A PERCENTAGE OF AMOUNTS FALLING DUE State Financial Year Ended March 31, 1979 Year Ended March 31, 1978 Corporation Principal Interest Total Principal Interest Total Andhra Pradesh 71.9 99.9 84.7 63.6 78.4 70.7 Assam 56.8 63.6 60.2 70.5 62.7 66.5 Bihar 28.2 48.3 39.9 28.4 49.4 40.4 Delhi 81.3 88.5 84.7 77.8 92.8 85.3 Gujarat 50.2 55.6 52.3 65.2 65.3 65.3 Haryana 55.1 68.5 61.2 57.1 71.2 63.2 Himachal Pradesh 76.5 66.7 72.7 54.3 76.7 61.8 Jammu and Kashmir 109.6 114.7 110.9 90.1 93.0 91.2 Kerala 60.0 58.4 59.1 49.3 56.0 52.3 Madhya Pradesh 89.7 53.4 70.7 71.1 67.5 69.2 mharashtra 76.6 75.6 76.2 71.9 67.0 69.7 Karnataka 43.7 61.6 51.8 42.0 59.7 50.4 Orissa 50.7 58.5 54.6 38.3 56.1 45.7 Punjab 77.2 83.3 80.1 64.9 85.3 74.3 Rajasthan 55.8 71.5 62.5 66.6 70.0 68.2 TamUi Nadu 85.7 106.4 95.4 112.0 106.2 109.2 Uttar Pradesh 72.3 76.0 74.5 49.6 58.3 54.3 West Bengal 56.0 47.6 50.9 62.6 57.6 59.8 Source: IDBI INDIA CREDIT 3561 POECT COWLnTIO REPORT Debt Service Coverape Ratio (DSCR) of SFCs, TV74-61 ry74 FY75 FY76 VY77 FY78 F579 FY80 ftal Ar I MarI lgnal Aeenal Acrnal sCsh Acerual Cah Adjusted menal Cas at 1. Andra Pradesh 1.67 1.42 1.00 1.01 1.10 1.12 1.42 1.22 1.31 - 1.23 1.36 - 2. Assm 0.76 1.00 0.87 1.20 1.10 0.70 0.79 1.03 0.97 - 0.88 1.04 o.h8 3. iber 1.67 1.21- 1.02 0.92 1.02 0.93 0.26 0.52 0.43 0.73 0.76 0.62 1.13 4. Delhi ,1.40 1.05 1.06 1.13 1.08 1.02 1.12 0.93 0.96 1.12 0.99 1.01 l.15 . Gujarat 1.33 1.45 1.02 097 079 0.78 0.68 0.73 0.71 0.83 0.75 0.55 0.75 6. veryan 1.12 0.88 1.26 1.16 1.12 1.18 1.19 0.88 0.97 0.91 1.39 1.11 - 7. timachal Fradesh 1.65 1.51 1.16 1.09 1.17 1.01 0.91 0.78 0.77 0.76 0.93 1.03 1.11 8. Jamen A usamir 4.70 2.80 1.70 1.94 1.49 1.90 2.14 1.44 1.59 - 2.16 1.73 - 9* Karntak& 1.46 0.88 0.81 .09 0.76 .0.61 0.63 0.78 0.67 0.63 0.86 0.76 1.02 10. WEralS n.a. 1.36 0.92 0M 0.65 0.74 0.84 0.68 0.53 0.68 0.065 0.37 0.64 11. MAdhya Pradesh 1.40 1.20 0.87 0.69 0.96 0.96 1.50 0.64 0.65 0.67 0.94 0.65 1.17 1 12. Maharashtra 2.07 1.17 1.15 1.18 1.17 1.24 0.69 1.09 1.13 - 1.15 1.22 - 13. Orissea 0.73 1.00 0.97 094 00 0.75 0.54 0.79 0.87 0.87 1.01 0.94 - 14. Punjab 1.86 1.22 1.40 1.09 1.10 1.09' 1.18 0.90 0.67 1.02 1.11 0.61 - 15. Rajasthan 0.87 1.43 1.00 1.02 1.04 0.85 0.94 0.89 0.86 1.16 1.14 1.01 - 16. Tat INdu 0.55 0.78 1.01 0.96 0.92 0.73 0.94 0.66 0.89 0.68 1.09 1.88 - 17. Uttar Predesh a.a, n.a. 0.93 0.92 0.91 0.89 0.79 0.86 0.69 0.99 0.92 1.11 1.12 18. West Bengal 0.63 1.06 1.02 0.95 1.03 1.13 0.43 0.73 0.44 0.64 1.06 0.72 - A. No. of SFCs with DSCR below 1.00 9 10 12 14 15 II 9 6 3 3. No. of SFC's declared Ieligible by Bank 5 3 DSCR Definition A. Accrual - Nat profit before interest, non-cash charges. plus collection of principal amount f Repayment of interest and principal, deposits and bond repayments and/or sinkina fund provision. B. Caeh - Net profit before interest, con-cash charges, plus collection of principal amount less uncellected Interest revenue a Repayment of interest and principal, deposits, and bond repayment. C. AdJusted- Same as Accrual but additional share capital contributed within 9 months after and of fiecal year is added to numerator. -96- ANNE 10 INDIA CREDIT 356: PROJECT COMPLETION REPORT Summary of Financial Statistics: All SFCs (Rs. Millions) FY78 FY79 FY80 FY81 Financial Assistance Sanctions (Net) 1,861 2,282 3,004 4,026 Commitments 1,936 2,937 3,026 2,997 Disbursements 1,074 1,342 1,855 2,483 Financial Position 1/ - Total Resources 5,907 7,057 8,383 10,276 - Outstanding Loans 5,290 6,232 7,751 9,643 - Networth 1,030 1,266 1,540 1,888 Equity: paid-in ( 625 ) C 750) ( 910) ( 1,162) Reserves: general ( 3499) ( 447) ( 547) ( 620) - Bad debt provisions ( 56) ( 69) ( 83) ( 106) - Total Debts 4,877 5,791 6,843 9,026 IDBI Loans 2,205 2,755 3,566 4,602 IDBI Equity in SFCs 247 307 383 504 Total IDBI 2,452 3,062 3,949 5,106 - % of Total IDBI/Total Resources 42% 43% 47% 50% - Debt/Equity Ratio 4.73 4.57 4.4 4.6 Financial Performance - Gross Revenue 543 610 735 845 - Net Profits 96 99 109 104 - Net Profit/Revenue (%) 18% 16% 15% 12% - Return on Equity (%) 9.3% 7.8% 7.1% 5.5% - Administration Expense/ 1.1% 1.4% 1.0% 1.2% Total Assets (%) - Profit before Taxes, Interest, 458 509 611 674 and Provision (EBIT) 1/ Source: Statement on Financial Resources of SFCs, IDBI INDIA CREDIT 356: PROJECT COMPLETION REPORT Consolidated Balance Sheet of SFCs, FY72-81 (Re millions) LIABILITIES FY72 FY74 FY76 FY78 FY80 1981 Share Capital 231.7 263.3 404.3 625.0 950.4 1,167.4 Reserves 81.8 116.3 227.8 405.2 629.2 726.9 Bonds 844.3 1,160.1 1,556.2 2,106.3 3105.2 3,518.0 Borrowings from - RBI 47.7 34.3 133.1 8.0 34,2 63.0 - IDBI 438.2 673.0 1,282.5 2,204.9 3,609.7 4,593.3 - Others 33.1 26.4 38.7 24.4 15.0 40.3 Fixed Deposits 130.9 140.2 368.1 331.6 216.4 117.1 Other liabilities 110.4 223.2 291.7 379.8 594.1 686.4 Total 1,918.1 2,636.8 4,302.4 6,285.2 9*154.2 10,912.4 ASSETS Cash and bank balance 102.1 108.2 227.3 322.4 457.9 336.0 Investments - Government securities 33.3 28.6 13.9 13.7 40.9 12.0 I Shares & debentures 104.5 109.9 116.2 120.8 124.6 115.4 Loans and advances 1,566.7 2,186.2 3,644.7 5,427.4 7,925.4 9,709.0 Guarantees & Underwritings 16.2 59.4 60.8 50.4 34.3 16.0 Other Assets 95.3 144.5 239.5 350.3 571.1 724.0 Total 1,918.1 2,636.8 4,302.4 6,285.2 9,154.2 10,912.4 source: IDBI INDIA CREDIT 356: PROJECT COMPLETION REPORT SFC's Sanctions and Disbursements under IDA Credit 356 (Re millions) IDA No. of Sanctions Disbursements IDA Contribution as Sub- SFC IDBI SPC IDBI Contribution Proportion of No. Name of SFC AcronyM Projects Loan Refinance Loan Refinance (US$ Mill) IDBI Refinance 1/ I Andhra Pradesh State APSFC 12 9.2 8.1 8.6 7.5 0.58 65.0 Financial Corporation 2 Assan Financial AFC 3 7.4 6.4 6.9 6.4 0.42 55.2 Corporation 3 Bihar State Financial BSFC 2 1.4 1.3 2.2 1.7 0.12 59.3 Corporation 4 Delhi Financial DFC 15 4.2 4.0 4.2 4.0 0.26 54.6 Corporation 5 Gujarat State GSFC 44 38.6 32.8 35.3 29.4 1.96 56.0 Financial Corporation 6 Haryana Financial RFC 10 7.8 6.2 7.4 7.4 0.50 56.8 Corporation 7 Rimachal Pradesh RPIC 4 1.7 1.6 1.7 1.6 0.11 57.8 Financial Corporation 8 Jamn and Kashmir State JESFC 1 0.3 0.1 0.3 0.1 0.01 84.0 Financial Corporation 9 Kerala Financial KFC 5 12.4 10.5 11.3 10.5 0.71 56.0 Corporation 10 Madhya Pradesh MPFC 8 3.8 3.5 3.2 2.9 0.22 63.8 Financial Corporation 11 Maharashtra State MSFC 87 52.4 46.6 50.7 43.7 3.00 57.7 Financial Corporation 12 Karnataka State KSFC 48 54.1 46.8 52.4 46.4 3.40 61.6 Financial Corporation 13 Orissa State OSFC 0 - - - - - - Financial Corporation 14 Punjab Financial PFC 7 5.9 4.8 5.3 4.8 0.32 56.0 Corporation 'o 15 Rajasthan RFC 8 10.4 8.9 11.5 10.0 0.51 42.9 Financial Corporation 16 Tamil Nadu Industrial TIIC 54 48.7 47.7 46.1 45.7 3.20 58.9 Investment Corporation 17 Uttar Pradesh UPFC 12 13.3 10.5 12.0 10.5 0.75 10.0 Financial Corporation 18 West Bengal WBFC 10 7.1 5.8 '7.1 5.8 0.38 55.1 Financial Corporation TOTAL 330 278.7 245.6 266.2 238.4 16.4 2/ 57.8 I/ Exchange rate used (Re 8.4062 per US Dollar) was average during the project implementation period (1974-80). 2/ Discrepancy between this figure and actual disbursement of US$16.56 million is due to rounding-up. ir -100- CIT 356: PROCT CWDLETION REPORT SIZE DISTRIBUTION OF SUBPROJECTS AND SUBLOAS (la mallion) 'A' Subproleets 'B' Subprojecta N. Affiouftt NO. * Amout Re. 1 million & under 21 1.0 9 4.9 Ra. 2 milli= - e. 2 -4111"= 3 4.9 6 9.1 Ra. 2 m111n - Ra. 3 miln 7 18.3 3 7.4 Ra. 3 =Illin - s. 4 m11i=n 8 27.3 3 10.8 Ro. 4 million - Ra. 5 mi11on 8 35.6 1 4.7 Ra. 5 million - Ra. 6 uillon 6 33.3 - - Ra. 6 million - Ra. 7 million 7 45.5 - - R. 7 illion - R. 8 million 5 36.9 - - Ra. 8 million - Ro. 9 Million 8 67.5 - - Ra. 9 million & above 10 4.5- 83 393.8 22 36.9 Average size of 'A' subproject - Ra. 6.25 million Average size of '3' subprolect - Ra. 1.68 milln 'A' Subloan '3' Subloan NO Aount NO Aount Ro. 0.25 million & under 1 .2 7 .9 Ra. 0.25 mill:nn - Re. 0.5 uillion 3 1.10 14 4.0 Ra. 0.5 ifillion - Ra. 1 Million 20 14.2 3 2.0 Ro. 1 million - Rs. 1.5 mi1lion 23 31.1 1 1.2 Ra. 1.5 million & above 14 23.6 0 - 61 70.0 25 8.1 Average size of 'A' subloan - Ra. 1.15 iillion Average size of '3' ubloan - Ro. 0.32 million Source: IDil INDIA CREDIT 356: PROJECT COMPLBTION REPORT Financing of Subproiects under IDA Credit 356-IN (Re. millions) Total Total SFC Loans Other Sponsors Other No. of Project Cost IDBI Refinance Loans 1/ Equity Financing 2/ Tog SC Prolects st. Act. FE Ha Ra Re Ra FE Re 1. Andhra Pradesh 4 18.50 23.50 2.94 2.39 5.30 6.82 6.08 2.94 20.59 2. Asam 3 15.70 22.00 3.10 3.83 - 4.80 5.30 3.10 13.93 3. Bihar 1 .61 2.14 .79 .37 .06 .60 .32 .79 1.35 4. Delhi 2 .76 .71 .43 .07 - .20 .06 .43 .33 5. Gujarat 16 73.01 65.47 15.46 9.88 8.99 22.25 12.03 15.46 53.15 6. Haryana 4 21.36 33.14 3.88 4.59 12.52 10.49 1.66 3.88 29.26 7. Himachal Pradesh 1 1.32 1.21 .32 .39 .29 .30 .22 .32 1.20 8. Jamnu & Kashmir 1 .31 .34 .06 .26 .03 .10 - .06 .39 9. Karnataka 8 41.10 54.00 8.50 8.70 12.19 13.76 11.01 8.50 45.66 10. Kerala 4 23.30 24.26 6.25 5.02 4.98 5.76 2.27 6.25 18.03 11. Madhya Pradesh 1 .52 .38 .08 .01 - .29 - .08 .30 12. Maharashtra 27 79.13 74.57 15.51 13.90 14.63 19.69 16.34 15.51 64.56 13. Orissa - - - - . . - - 14. Punjab 3 11.67 14.17 4.11 .52 2.30 6.33 .98 4.11 10.13 15, Rajasthan 4 19.69 20.83 1.86 7.37 - 6.14 5.48 1.86 18.99 16. Tamilnadu 23 88.34 104.51 15.57 21.62 10.04 25.06 32.37 15.57 89.09 17. Uttar Pradesh 6 30.43 16.45 5.76 7.74 3.11 10.34 5.13 5.76 26.32 18. West Bengal 5 21.66 14.22 4.23 4.57 2.87 8.68 1.95 4.23 18.07 TOTAL 113 447.41 471.90 88.85 91.23 77.31 141.61 101.20 88.85 411.35 1/ Provided by SFCs and other institutions, including commercial banks. 3 Other forms of financing such as blls rediscounting and seed capital in some cases FE - Foreign Exchange Tource: IDBI INDIA CREDIT 3561 PROJECT COMPLETION REPORT Type of Assistance Sanctioned by SFCs under IDA Credit 356-IN (Re. millions) Balancing Equipment/ New Expansion/Diverelfication Modernisation No. of No. of No. of SiC Projects FE Ra Total Projects PE Ra Total Projects FE Re Total 1. Andhra Pradesh 3 2.15 1.57 3.72 - - - - - - - 2. Assaa 4 2.88 4.47 7.35 3 1.37 0.20 1.57 - - - - 3. Bihar - - - - - - - - 1 0.47 0.37 0.84 4. Delhi 1 0.49 0.01 0.50 - - - - - - - - 5. Gujarat 13 13.48 11.66 25.14 2 1.51 0.93 2.50 - - - - 6. Haryana 2 2.67 2.73 5.40 1 0.71 0.21 0.92 - - - - 7. Himachal Pradesh - 0.36 0.36 0.72 - - -- - * N 8. Jamau & Kashmir 1 0.06 0.26 0.32 - - - - - - - - 9. Karnataka 8 9.32 7.96 17.28 2 0.93 1.92 2.85 - - - - 10. Kerala 3 5.69 2.69 8.88 1 0.56 2.09 2.65 1 0.14 - 0.14 11. Madhya Pradesh 5 1.64 1.27 2.91 3 0.53 0.35 0.88 - - - - 12. Maharashtra 5 3.16 7.06 10.22 14 11.75 7.64 19.39 1 0.32 - 0.32 13. Oriess - - - - - - - - - - - - 14. Punjab 2 3.66 0.47 4.13 - - - - - - - 15. Rajasthan 5 3.33 6.84 10.17 - - - - - - - - 16. Tasilnadu 11 6.66 6.78 13.43 8 3.15 4.94 8.09 - - - - 17. Uttar Pradesh 4 2.29 4.40 6.63 - - - - - - - - 18. West Bengal 2 1.48 3.47 4.95 1 0.49 0.3 07 TOTAL 69 59.30 61.98 121.25 35 20.99 18.72 39.70 3 0.92 0.37 1.29 CRIT 35, FROJECT C2ltro. N RUOMT Subosetor Diatribution of subprojacts Financed <USÓ 000, Gularat Karnataka T=t N Kadu Kaharashtra Other states Total Industries .o. A.. N!. Amt. M2o. Amt. No. &t. !Lo. -t, No.. At, A by Aut. 1. ~ood I 3.3 0 0 1 151.0 3 103.0 2 91.1 7 348.4 2,5 2. ThXtiles 2 40.0 2 100.0 0 0 4 89.9 9 226,8 17 456.7 3.3 3. faper I 192.2 3 502.0 1 168.8 4 226.4 0 1089.4 9 1069.4 7.7 4. ChmIcale I 14.3 0 0 2 94.9 9 285.4 3 116.9 Is 51145 3.6 5. Rubber 1 200.4 1 40.7 0 0 3 145.1 2 66.4 7 452,6 3.2 6. Yorttliger 0 .0 0 0 0 0 0 0 0 0 0 0 0 7. Cement I 29.1 l 114.9 0 0 l 20.6 1 32.8 4 297.4 2.1 8. Engifering 1/ 17 954.4 30 1987.1 4 519.7 31 882.2 33 2025.3 115 6368.7 45.2 9. Transport Iq&p1eent 6 234.1 2 301.7 0 0 9 69997 4 107.9 21 1343.4 9.6 10. Serviceas 0 0 0 0 0 0 0 0 l 28.7 1 28,7 0.2 11. Leather 0 0 0 0 9 944.9 0 0 2 36.6 11 981.5 7,0 12. Othars 6 106.3 9 390.4 4 428.1 Li 523.2 14 245-4 5 392.4 15.6 TOTAL 36 1774.0 48 3436.8 2132 2307.5 85 1974.5 71 3076ø5 261 i4070.0 100,0 j/ tncludes electrical goodo and machinery, electronig goods and metal products. 2/ For Tamil Nadu, data for all nubprojects ara not avallable. INDIA CREDIT 356: PROJECT COMPLETION REPORT Subproject Implementation Performance Cost Overrun Delay No. of No. of As a No. of Average Projects Projects Percentage Projects No. of Delay Capaiy - Within That of No. of Projects Completed Projects in 1/ to Initial Exceeded Estimated Haking Name of SFC On Time Delayed Months aot* . Ct.' Estimate Cost Eat. Cost 2/ Profits Losses 1. Andhra Pradesh 0 6 17.3 82% 59% 0 4 27 2 2 2. Assam - - - - - - - - - - 3. Bihar 0 1 50.0 - - 0 1 250 - 4. Delhi 1 0 8.0 39% 24% 1 - - 1 0 5. ujarat 2 12 14.9 67% 32% 7 7 20 2 10 6. Haryana 0 4 17.5 70% 59% 1 3 68 3 1 7. Himachal Pradesh - - - - - - - - - - 8. Jamau & Kashair - - - - - - - - - - 9. Karnataka 1 6 12.0 82% 59% 0 7 31 1 6 10. Kerala 0 4 14.5 76% 38% 1 3 7 3 1 11.I adhya Pradesh 0 1 9.0 - - - - - 0 1 12. Maharashtra 3 16 14.3 74% 43% 7 12 18 11* 6 13. Orissa - - - - - - - - - 14. Punjab 0 3 9.3 69% 46% 2 1 29 1 1 15. Rajasthan - - - - - - - W - 16. Tamil Nadu 2 18 10.6 65% .58% 5 15 25 13 5 17. Uttar Pradesh 0 4 8.8 83% 50%' 2 2 16 1 3 18. West Bengal 0 3 16.0 69% 42% 2 1 12 2 1 TOTAL 9 76 13.7 68% 44% 28 58 26.2 30 37 1/ Average for projects which were delayed; excludes projects completed on time. 2/ Average for projects which incurred overruns; excludes projects completed without overruns. INDIA CREDIT 356: PROJECT COMPLETION REPORT Financial Performance of Projects Aesited Under IDA Credit 356-IN (Ra millions) Total Sales Gross Profit (Lose) Profit (Loss) Before Tax No. of let Year 2nd Year let Year 2nd Year lit Year 2nd Year SiC Prolects Est. Act. Est. Act. et. Act. Eat. Act. Est. Act. Est. Act. 1. APSFC 4 10.1 4.5 14.1 4.1 2.8 1.0 4.1 0.7 0.6 0.06 1.4 0.1 2. AFC 0 - - - - - - - - - - - - 3. BSFC 0 - - - - - - - - - - 4. DFC 2 2.0 1.1 - - 0.2 0.2 - - 0.09 0.08 - - 5. GSPC 14 92.9 55.2 125.5 93.2 17.2 12.7 28.8 8.8 8.4 10.5 19.3 0.1 6. RPC 0 - - - - - - - - - - - - 7. PFC 1 1.7 0.1 2.1 0.5 0.2 0.02 0.2 0.5 0 0 0 0 so JKSIC 0 - - - - - - - - 9. VPC 5 36.8 23.4 42.8 37.0 3.6 2.9 7.5 8.3 2.6 6.4 3.7 3.9 10. MPFC 1 0.9 0.7 1.1 0.8 0.3 0.3 0.3 0.2 0.1 0.2 0.1 0.1 11. M8FC 20 173.7 154.4 197.7 165.6 29.2 19.9 31.9 26.2 10.8 (1.5). 14.2 (1.8) 12. KSFC 6 4.4 18.9 9.1 28.7 0.1 4.1 1.9 6.7 (0.1) (1.2) 2.1 (0.4) 13. OSFC 0 - - - - - - - - - - - - 14. PFC 2 9.5 4.7 13.8 8.6 0.4 - 0.3 - 0.8 0.3 3.7 0.1 15. RFC 2 6.1 5.2 7.7 6.2 0.4 0.2 0.6 0.3 0.3 0.2 0.4 0.2 16. TIIC 16 11.7 33.0 63.4 60.5 7.1 7.2 10.9 10.1 1.3 3.1 3.3 2.7 17. UPIC 2 1.6 2.0 2.1 - 0.2 0.3 0.2 - 0.1 (0.3) 0.2 - 18. wBFC 3 24.2 10.7 35.9 14.6 3.6 1.2 7.4 2.7 1.4 0.06 5.3 0.8 Total 78 383.6 258.7 515.3 419.8 65.3 49.8 94.1 64.6 26.5 17.7 53.6 5.8 VON mamam mun .um" man. Numm man. ==wn unun "Olm= NNW=r mum nun INDIA CREDIT 356: PROJECT COMPLETION REPORT ECONOMIC INDICATORS OF SUBEPROJECTS FINANCED (Ra. In million) Value of Exports ftmloyment Value Added No. of First Year Second Year SIC Projects Estimate Actuals Estimate Actual atjatg Atuals ZaeLUI= Actuals 1. APSPC 4 Nil Nil Nil Nil 150 150 N.A. N.A. 2. AFC .- - - - - - - - - 3. BSFC - - - - - - - - - 4. DFC 2 - - - - 65 59 0.60 -.36 5. GSPC 12 9.0 1.81 16.86 3.68 880 511 15.44 5.95 6. HFC - - - - - - - - - 7. HPFC - - - - - - - - - o 8. J& KSFC - - - - - - - 9. KaSFC 6 - 2.41 - 4.06 194 399 0.48 .10.88 10. KFC 4 3.77 3.25 2.25 12.08 566 681 10.55 6.29 11. HPYC - - - - - - - - - 12. H8FC 16 52.31 47.52 65.05 49.64 2006 2101 42.56 27.01 13. OFC - - - - - - - - - 14. PIC 1 - - 0.80 - 172 250 - - 15. RIC 3 2.5 1.44 2.0 0.60 340 333 32.89 33.37 16.T IC 5 - .05 - - 737 617 - - 17. UPIC 1 - - - 20 11 - - ; 18. WBFC 2 - - - - * 238 140 2.70 2.01 TOTALs 56 67.58 56.47 86.97 70.06 5358 5257 105.17 85.86 SFUrce: IDBI - 107 - ANNEX 20 INDIA CREDIT 356: PROJECT COMPLETION REPORT Actual Investment Costs per Job by Subsector 1/ Investment Investment Cost Per Cost Per No. of Project Job Job Sub- Incremental Cost (Rs M per (US$ per Subsector Projects Employment (Rs M) Worker) Worker) 2/ Food 2 157 20.35 0.130 15,464 Textiles 1 150 2.85 0.019 2,260 Paper 5 612 39.43 0.064 7,613 Chemicals 1 53 6.69 0.126 14,988 Rubber 1 100 8.50 0.085 10,111 Fertilizer 1 - - - - Cement 0 Light Eng. 27 2,798 148.40 0.053 6,305 Transp. Equip. 4 800 27.90 0.035 4,163 Services 0 - - - - Leather 8 1,504 36.27 0.024 2,855 Others 7 470 25.84 0.055 6,542 Total 56 6,644 316.23 0.048 5,710 1/ Employment figure used corresponds to maximum capacity attained. However, figures may be overstated because SFCs have given aggregate employment figures for the firm rather than for the specific subproject in some cases. 2/ Exchange rate used (Rs 8.4062 per US Dollar) was the average rate prevailing during the project implementation period. SoWO; IDBi - 108 - ANNEX 21 INDIA CREDIT 356: PROJECT COMPLETION REPORT Domestic Resource Cost of Selected Subprojects 1/ Exchange Name of Firm Subsector SFC DRC Rate 1. Investment and Precision Light Engineering Gujarat 19.30 9.0 Castings 2. Keltron Magnetics Light Engineering Kerala 10.04 9.1 3. Bharat Springs Transport Equipment Maharashtra 7.98 8.5 4. Aaydee Corporation Textiles Maharashtra 7.29 8.5 5. Annapoorna Paper Mills Paper Karnataka 11.50 8.5 6. Punjab Semi-Conductor Electrical Punjab 8.10 8.0 Devices 7. Usha Atlas Rydraulic Light Engineering West Bengal 9.10 8.5 Equipment 1/ Data submitted by the SFCs on DRC are inadequate in terms of specification of time horizon and assumptions used. Source: IDBI -lo9- AINE 22 CEDT 356: Pn Er C=mom r ESTD&ATD ANlD AC~A DM~itilET Actual as 2 Dimburaant Vitdraes Etimted1/ Artual af Estimated by Bal l3llomilil 7n.a. - 0 July SePet 1.8 1.0 0 0 Ortober-Decer 9.3 1.0 0 0 J&Wå-mch 8.7 3.0 0.5 16.7 APril-J~m r . 4.0 1.5 37.5 30.6 18.4 July-Septer5.6 7.5 2.0 26.7 Ocober ur 25.9 11.0 2.7 24.5 January-Narch 31.4 13.3 5.8 43.6 APril-June .25. 15.6 6.7 42.9 38.5 53.1 PY 77 July-sept'fber 7.2 17.9 8.2 45.B ctober-Decoober 13.5 20.2 8.6 42.6 January,March 4.2 22.3 9.6 42.7 APril-June 11.8 25.0 12.9 51.6 76.7 46.0 py 78 July-Septe.r (Atual 7.6 13.3 53.2 October-Decower (Actaml) 6.2 14.1 56.4 Janury..Nrch (Ememe.te) 25.0 14.5 April-JUa (Estisate) 35.0 15.0 73 .8 U6.3 rY 79 July-Ste ar 7.0 4.2 15.22 Septber-Dceffbr 21.4 13.5 15.47 April-je 15.93 16.23 Fy 8o jul"O-ambatr 16.35 Octaber-D-c-er 16.54 J&aUUr-~eCba 16.56 16.56 j/ A deuoremment chedule ws nat included In tbe appr~isa1 report em5matem prepared by the Februery 1974 Supervision Kleuson.