India - Industrial Export (Engineering Products) Project

Document or The World Bank FOR OFFICIAL USE ONLY ,/ A).- 4s; S;, - -rJt Report No. 5649-IN STAFF APPRAISAL REPORT INDIA INDUSTRIAL EXPORT PROJECT--ENGINEERING PRODUCTS September 19, 1985 Water Supply DibfIn This document has a restricted distribution and may be used by recipients only in the performmnce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT (As of September 19, 1985) US$ 1.00 = Rs. 12.32 Rs 1.00 - US$ 0.08 Rs 1 million = US$ 81,169 The Rupee/US$ exchange rate is subject to change. On December 31, 1981, the rate was Rs 9.10 to US$1; 1982, Rs 9.63; 1983, Rs 10.49; 1984 Rs 12.46. Conversions in thi.s report have been made at US$1.00 to Rs 12.00. FISCAL YEAR GOI - April 1 - March 31 ICICI - January 1 - December 31 Export-Import Bank - January 1 - December 31 Commercial Banks - January 1 - Decembex 31 ABBREVIATIONS AIBI - Association of Indian Engineering Industries BB - Bank of Baroda CCS - Cash Compensatory Support EEPC - Engineering Export Promotion Council EMW - Export Marketing Fund Ex-Im - Export-Import Bank of India FERA - Foreign Equity Regulation Act GOI - Government of India ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India I8CI - Industrial Finance Corporation LIBOR - London Inter-bank Offered Rate PF - Productivity Fund MRTP - Monopoly and Restrictive Trade Practices PNB - Punjab National Bank REP - Replenishment Licenses RBI - Reserve Bank of India SBIG - State Bank of India Group SSI - Small Scale Industries  FOR OFFICIAL USE ONLY INDIA INDUSTRIAL EXPORT PROJECT--ENGINEERING PRODUCTS Table of Contents Page No. LOAN AND PROJECT SUMMARY ...... ............................. I. INTRODUCTION AND SUMMARY ............. ....................... 1 II. MANUFACTURED EXPORTS - STRUCTURE AND PERFORMANCE ............ 5 A. Trends in Industrial Exports ................... 0....... 5 B. Role of Engineering Products ............................. 5 C. Policies--Impact on Competitiveness ...................... 6 III. STRATEGY FOR EXPORTS OF ENGINEERING PRODUCTS ................ 10 A. Policy Analyses ............. .0........ ...,..0... 10 B. Recent Policy Changes . ......... ......... ... . 12 C. Institutional Moves ....................................... 15 D. Product-Market Potential ......... 17 IV. ROLE OF FINANCIAL INSTITUTIONS ................. ........ 18 A. Role of ICICI ........ ....................... o ...... 18 B. Commercial Banking System ... .... ........... o... 19 C. Export-Import Bank of India .. 21 V. THE PROPOSED PROJECT .... o ....................... o........... 23 A. Objectives, Components, and Financing Plan ... o........... 23 B. Financing Export-oriented Projects ................... .... 25 C. Ancillary Financing Component .... 28 D. Export Marketing Fund ............... . ..... 33 E. Productivity Fund ........................ ............... 34 F. Monitoring and Evaluation .................... ........ 36 VI. THE LOAN ........................ o..................... 37 A. Arrangements for Two Loans ........... ...... o............ 37 B. Loan to ICICI ...38......................... 38 C. Loan to GOI - Ancillary Component ..... ................... 39 D. Export Marketing and Productivity Funds . ................. 40 VII. BENEFITS AND RISKS .......................................... 41 VIII. RECOMMENDATIONS ....... ........................... 43 This report is based on the findings of an appraisal mission which visited India in September 1984. The mission comprised N. Barry, D. Berthelot, 1. Dalla, M. deNevers (ASPID) and Andrew Singer (Consultant). A short post-appraisal mission took place in January 1985. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES 1. Program for Financing Ancillary Development 2. Export-Import Bank Export Marketing Fund - Draft Statement of Policies and Operating Procedures 3. ICICI Productivity Fund - Draft Statement of Policies and Operating Procedures 4. ICICI - Organization, Operations, and Financial Performance 5. Estimated Commitment and Disbursement Schedule 6. Documents Available in Project File TABLES A. Export Market Trends - Major Engineering Products B. Commercial Banking System 1. Balance Sheet 2. Sectoral Breakdown of Commercial Bank Credits 3. Advances to SSIs by Bank 4. Commercial Bank Lending to Engineering Industries  INDIA INDUSTRIAL EXPORT (ENCINEERING PRODUCTS) PROJECT Loan and Project Summary Borrowers: GOI Loan: India, Acting by its President. ICICI Loan: Industrial Credit and Investment Corporation of India, Limited (ICICI). Cuarantor of India, acting by its President ICICI Loan: Amount: US$250 million equivalent, consisting of: GOI Loan: US$90 million, and ICICI Loan: US$160 million Terms: GOI and ICICI Loans: 20 years, including 5 years' grace, at the standard variable interest rate. GOI would bear the interest and exchange risks on its loan and ICICI's sub-borrowers would bear the interest and exchange risk on the ICICI loan. Relending GOI Loan: (i) For Engineering Ancillary Credits. From GOI to Terms: participating commercial banks (PCB), funds are to be treated as equity contribution by GOI to the PCB. From PCBs to Engineering Ancillary sub-borrowers, 15% per annum with a repayment period of 3-10 years, with 1-3 years' grace. (ii) For the Productivity and Market Development Funds. From GOI to the Exim Bank and ICICI, respectively, funds provided would be treated as non-reimbursible contributions. ICICI Loan: From ICICI to sub-borrowers at a margin of 2% over the standard variable interest rate, with repayments of up to 15 years, including up to 3 years' grace. Project The project would consist of two loans as follows: Description: (a) GOI Loan: A US$90 million IBRD loan to GOI for financing: (i) the foreign exchange costs of credits made to engineering ancillary firms by selected commercial banks for expansion and upgrading (US$70 million); (ii) a Productivity Fund, in the amount of $10 million, to finance up to 50% of the cost of activities aimed at improving product quality and plant productivity; and (iii) an Export Marketing Fund, in the amount of US$10 million, to finance up to 50Z of the costs of eligible development activities of firms engaged in exporting products identified for "export" thrust; and  -ii- (b) ICICI Loan: A US$160 million IBRD loan to ICICI, with Government guarantee, to finance the foreign exchange portion of subloans, for export- oriented subprojects, with US$100 million earmarked specifically for engineering subprojects. The reform measures announced by the Government during 1985 represent major moves to address the problems blocking efficiency and exports of manufactured products; these measures are expected to achieve significant improvements in cost competitiveness, quality and subsequently, the volume of exports. As with all projects, risks exist that the capabilities of the implementing agencies will be inadequate to commit the funds on schedule to subprojects which meet agreed eligibility criteria. Based on past experience, we anticipate no difficulties in ICICI or Exim Bank complying with their responsibilities under the project. In the case of commercial bank financing of engineering ancillaries, there is a risk of slow commitments at the outset of the project. However, the participating commercial banks have now prepared action programs for implementing the ancillary financing com- ponent which are considered satisfactory. Full implementation of this component is expected to commence only in 1986. There is also the risk that GOI may not sustain the policy initiatives taken recently. However the changes already announced by GOI are unlikely to be withdrawn and there is every indication that, rather than revert to earlier policies, GOI is following an agenda of reform that will lead to further relaxation of controls in the near future.  Financing Plan: Project Financing (US$ million) -- Foreign-------Lcd------- IBRD Commercial ICICI PCBs Sponsors Total ICiCI 160 1/ 160 180 - 260 760 Commercial Banks 70 2/ - - 60 70 200 Productivity Fund 10 l 7 - - - 10 20 Export Marketing Fund 10 /- - 10 20 Total 250 160 180 60 350 1,000 ==: -= - 55 Estimated Commitments FY86 FY87 FY88 FY89 and Disbursements: Commitments Annual 47.0 126.8 73.0 3.2 Cumulative 47.0 173.8 246.8 250.0 Disbursements Annual 5.0 72.6 126.3 46.1 Cumulative 5.0 77.6 203.9 250.0 Appraisal Report: No. 5649-IN, dated September 19, 1985. I/ ICICI Loan. 2/ GOr Loan.  INDIA INDUSTRIAL EXPORT PROJECT--ENGINEERING PRODUCTS STAFF APPRAISAL REPORT I. INTRODUCTION 1.01 In 1955, India's manufacturing sector was second only to China among developing countries; by the mid-seventies, India's rank had slipped to fifteenth. India's export growth in manufacturing also has been outstripped by LDCs overall. This performance can be explained in large part by the industrial strategy and policies which have prevailed. With the objective of achieving self-sufficiency, substantial investment--primarily in the public sector--has been made in heavy industry. Investments have been protected and directed by elaborate controls over capacity expansion, imports, and investment flows. This strategy has been coupled with strong protection of small industry, reflecting the desire to disperse wealth and generate the employment which heavy industry could not provide. Thus, a second layer of protection and rigidities in the industrial structure emerged. At the same time, restrictions were placed on growth of major firms, many large only by Indian standards. The result of these policies has been a diversified industrial base; however, the costs have been high and the results mixed. With import-substitution opportunities approaching saturation-for the goods Indian industry was supplying--industrial growth rates declined. Export opportunities were missed, particularly in Light industrial product lines in which India should be competitive. 1.02 Concern with India's industrial performance has led GOI to reassess industrial strategy and the related system of controls. During the past several years, a more pragmatic approach to industrial development has been manifested, with an emphasis on improving infrastructure, balancing and modernization in heavy industry, reducing capacity licensing controls, and relaxing trade restrictions. Also, several measures to reduce anti-export biases and to attract foreign collaboration were instituted. Movement has been in small increments, gaps exist between policy pronouncements and implementation, and the mixed objec- tives underlying industrial policy have strong roots. However, there has been growing recognition that past policies have not yielded the desired results in industrial, export, or employment growth. 1.03 Bank's Role. Over the past ten years, Bank lending for industry has been dominated by general lines of credit to finance private firms through development banks, and loans for public sector fertilizer, coal, and refinery operations. Loans to development banks have totaled US$855 million and loans/credits to public enterprises amounted to US$3.2 billion. IFC's portfolio of loans and equity investments totals about US$90 million, with 30Z in engineering products. With the exception of two loans to the Industrial Development Bank of India (IDBI), industrial loans involving financial intermediaries have met or exceeded the performance targets set at appraisal. A Project Performance Audit Report on the Ninth and Tenth ICICI loans (Report No. 3428, April 24, 1981) concluded that project implementation was satisfactory and that ICICI, as a mature, well managed and profitable corporation, should be more involved in project promotion in promising product groups. The most recent Project Completion Report (PCR) for ICICI XIII (Ln. 1843-IN) confirmed this finding and supported ICICI's strategy of continuing to reduce its reliance on Bank resources in meeting its general for-  -2- eign currency needs. The two loans to IDBr, although now fully disbursed, were less successful. While loan disbursement targets were met, with some delays, the objectives of strengthening management, project selection, and collection perfor- mance were not attained, and no further general credit lines for IDBI are proposed. The lending strategy for FY85-89 reflects a significant shift in the size and scope of IBRD lending for industry. During this period, industrial lending is expected to increase as a percentage of total Bank Group operations in India. Bank-financed industrial development projects will be shaped to support GOt policy and institutional reform measures which are geared to increase com- petitiveness and exports of Indian industry. Lending will focus on overall export development and on subsectors for which improved policy, institutional and finance would result in substantial increases in industrial output, efficiency and exports. These projects will be timed to provide finance and institutional support, as GOI takes steps to address the policy problems inhibiting industrial development across-the-board and in major product groups. 1.04 Industrial Export Project--Engineering Products. The proposed project represents the first of this series of industrial lending operations. The Project is rooted in sector work on Industrial Export Development and Finance, conducted over the past three years. The objectives of this work were to assess how policies and institutional support could be geared to increase efficiency and foreign exchange earnings--particularly in labor- and skill-intensive product groups in which Indian manufacturers are or should be competitive--and how Bank operations could support this process. By focusing on the engineering subsector, which accounts for about 20Z of manufactured exports, it was possible to identify changes which would have an impact on manufactured exports overall as well as measures to increase competitiveness and exports of engineering products. The report on Light Industrial Exports traced disappointing export performance to policy-induced problems in industrial structure and performance (paras. 2.03-2.10), and outlined a potential project to complement policy reforms. Officials of the economic ministries indicated that the GOI was coming to similar conclusions. The establishment and outcome of the high-level Kapur Committee on Engineering Exports demonstrated GOI's recognition of the importance of engineering products to India's exports and the need for policy change to tap growth potential (paras. 3.02-3.03). 1.05 Since the beginning of 1985, GOI has announced significant changes in industrial and trade policies and procedures which are consistent with the find- ings and recommendations of the GOI Committee on Engineering Exports and with our sector work (para. 3.05). In the Budget and subsequent notifications, GOI has reduced constraints on entry and expansion of larger firms across industry. The definition of firms falling under the Monopoly and Restrictive Trade Practices (MRTP) Act has been raised from Rs 200 million to Rs ' billion in fixed assets. As a result, in the engineering subsector the number of MRTP companies has been reduced from about 100 to 20. Only five firms in the engineering product groups with strong identified export potential fall within the new MRTP size definition; these five firms represent about 12Z of capital employed and output of India's top 100 engineering companies. In a subsequent move effective from May 22, 1985, GOI established a list of major product groups in which firms could enter and  -3- expand regardless of size, provided that the product line is not reserved for small-scale industry. This new measure effectively eliminates the MRTP size limitations for firms expanding or entering in the product groups specified. The list includes most engineering products with strong export potential, including two-, three- and four-wheeled vehicles, automotive components, machine tools, and castings. The incentives for firms to stay small have been reduced. The Budget announced a substantial increase in the definition of SSIs and ancillaries, and excise tax exemptions for small firms have been replaced by a graduated phasing out of such relief as firms expand to larger scale. To encourage increased competition and reduce procedural delays, the Budget delicensed a range of product groups with strong export potential. In the engineering subsector, products under thi*s delicensing provision include the major groups identified by the Kapur Committee and our sector work as having strong export prospects, including vehicle components, cycles, handtools, machine tools, diesel engin'zs, iron castings, and industrial machinery. While caveats still surround delicensing, the relaxation of controls over growth of large and small firms should make delicensing provisions more effective than they have been in the past. 1.06 In addition to these modifications in industrial policy, the Budget and the new Import-Export Policy contain measures to reduce anti-export uiases, facilitate exports and related imports, and increase firms' access to imported technology and capital goods. Tax benefits have been introduced on export profits. Imports of many grades of steel have been decanalized, allowing private firms direct access and reducing delivery uncertainties and delays. An import export passbook scheme has been introduced for manufacturer-exporters to enable duty-free import of inputs for export production. To meet the requirement of machinery for modernization in industry groups with strong export potential, the list of imported machinery available under Open General License has been increased substantially, in engineering and other product groups, and import dutics on capital goods for investment projects have been reduced from an average of 65% to levels of 0% to 45%. 1.07 These significant changes in industrial and trade policies, which are seen as the first in a series of initiatives under active consideration by GOI, reflect key policy statements made in the 1984-85 Budget and Economic Survey. These documents highlight the importance of improving industrial export perfor- mance during the Seventh Plan period. The erosion in India's share of world export trade is seen to be rooted in the "high structure of costs and prices in the industrial sector" which has "severely impaired the competitiveness of Indian manufactured products in world markets." The survey recognizes that "i .Z- ficiency and high costs are due largely to the fact that technology in many industries is obsolete and the scale of production is often well below optimum." The Survey notes that industrial policy will need to reflect the fact that "industry's ability to grow, diversify, and absorb an expanding labor force will depend critically on the sector's success in efficiently deploying and generating resources. This calls for a fresh look at the structure of industrial and trade policies. Instruments of regulation which were devised in the early stages of our planned industrial development may not all be appropriate in the diversified and sophisticated industrial structure of the present day." The Survey reinfor- ces the importance of prudent debt management, and notes that the import capacity of the country during the Seventh Plan period will depend critically on export performance. "It is important to recognize that this is not simply a matter of  -4- designing appropriate incentives for exporters while leaving the industrial sector suffering from high cost and low quality. It is necessary to act on industrial policy to achieve cost effectiveness and product quality in Indian industry. This must be combined with appropriate incentives if our exports are to expand rapidly." 1.08 Major objectives of the first Industrial Export Project--Engineering Products would be to: (a) support policy and institutional reforms made by COI to increase competitiveness and exports of India's manufactures in line with its dynamic comparative advantage; (b) help ICICI play a more active role in promoting and financing projects which would improve efficiency and exports of firms manufacturing engineering and other promising products; (c) reorient the commercial banks' involvement in small industry financing to give greater emphasis to modernization, specialization, and expan- sion, by building programs to finance engineering ancillaries; and (d) strengthen institutional and financial support by ICICI and Ex-Im Bank to individual companies in improving productivity and export marketing. The proposed project would involve about US$1 billion in total financing, with US$250 million in IBRD funding to support the four project components: (a) term loans by ICICI for eligible export-oriented subprojects, with 60% earmarked for enterprises manufacturing engineering products (IBRD, US$160 million); (b) financing of small- and medium-scale engineering ancillary firms by participating commercial banks (US$70 million); (c) the Export Marketii.7 Fund, monaged by the Export-Import Bank of India (US$10 million); and (d) the Productivity Fund, to be managed by ICICI, in close collaboration with the Association of Indian Engineering Industries (US$10 million). The institutional reforms introduced and main elements financed under the proposed project are designed to improve competitiveness and exports of India's engineering products. ICICI, s mature and successful development bank, will play a more active role in promoting export-oriented projects, particularly in the engineering subsector. Having Ex-Im Bank and ICICI manage the Export Marketing and Productivity Funds will reduce policy and procedural impediments to getting foreign expertise in these key areas, and enable use of competent institutions to support actions by private companies, which is where the initiatives need to occur. The project also will enable our first direct involvement in industrial financing by the commercial banks, which should help strengthen this major source of industrial finance.  -5- II. MANUFACTJRED EXPORTS--STRUCTURE AND PERFORMANCE A. Trends in Industrial Exports 2.01 In spite of India's substantial industrial base, resource endowment and pool of skilled manpower, industrial growth hes been sluggish and India's share of LDC exports has slipped during the past thirty years. The growth rate in manufacturing declined in each decade since 1950, and averaged only 3.8% p.a. from 1971 to 1980. During the same period, industry's contribution to GDP increased only marginally, reaching about 16Z in 1981. While rndian manufactured exports grew at a more rapid rate than output, India's 6.8% annual export growth was outstripped by LDCs overall, which have averaged nearly 12% p.a. growth in exports in the past 20 years. Within this relatively slow export growth in manuiactured exports, there has been a shift from traditional products. In 1950/51, jute goods and cotton textiles accounted for about 86% of manufactured exports; by 1982/83, these products contributed only about 12%. During the same period, exports of light industrial products grew rapidly and now constitute over 80Z of India's manufactured exports: engineering products (20% of total in 1982/83), handicrafts (9Z), leather and products (10%), garments (14%), gems and jewelry (211). During the 1970s, exports of cut gems, clothing and handicrafts grew by 30X p.a. These products have benefitted from being highly labor- intensive, requiring modest capital investment, and having limited economies of scale in production. Policies limiting expansion and entry by larger firms and constraining access to imported technology have hampered export growth in these product groups less than for others. Also, these products being highly export- oriented, exports have not fluctuated as a residual of domestic demand. B. Role of Engineering Products 2.02 Engineering products contribute about 20% to India's manufactured exports. Light engineering products, 1/ constituting about 40% of engineering exports, experienced more rapid export growth during the seventies than the 22% average for engineering goods overall. Yet, India's US$1.3 billion in engineer- ing exports in 1982/83 represented less than 0.2% of world trade. Also, exports of engineering goods from other LDCs and newly-industrialized countries (NICs) grew more rapidly during the seventies, with nominal annual increases averaging 35%. During this period, India's share of LDC exports of engintsring products dwindled from 9.1% to 3.3%. India has strong growth prospects in the export of several engineering products. Processes involved in major product-market seg- ments are labor- and skill-intenbive, giving India competitive advantages. Other semi-industrialized countries have overcome probLems of distance and quality demands of Western markets, which constitute 60% of world trade in engineering products and 56% of LDC's engineering exports. Only 22% of India's engineering product exports go to Western Europe and North America; the majority is sold to other LDCs and the Middle Eastern countries. While LDC markets will remain important, volume requirements from many countries are low, necessitating disper- sion of marketing efforts. Also, several traditional markets are approaching saturation for existing Indian products due to import-substitution policies, 1/ Mainly auto components, bicycles and parts, handtools, diesel engines, iron castings, machine tools.  -6- foreign exchange constraints, and low price, better quality alternative sources. To accelerate export growth, changes in industrial poLicies are netded to induce Indian manufacturers to upgrade quality and reduce costs to achieve international standards, particularly to increase penetration of dominant WesLorn markets. C. Policies--Impact on Competitiveness 2.03 Sector analysis 1/ demonstrated that a key barrier to competitiveness is India's industrial structure, which reflects the strategy and policies which have prevailed. Concerns with equity, self-sufficiency, resource conservation and employment have been expressed in: capacity licensing designed to prevent output in excess of domestic needs, regulations severely limiting growth of larger firms and foreign collaboration 2/, protection for small-scale industry, and controls on imports, technology transfer, and foreign exchange. The result has been a large and diversified industrial base. However, the costs have been high and the results mixed. A second layer of protection and rigidities in the industrial structure emerged, as incremental output of many light industrial products was reserved for the small-scale sector, and small firms were given tax exemptions and priority credit access which made expansion to medium scale unattractive. At the same time, restrictions were placed on growth of major firms, many large only by Indian standards. The insulated domestic market and rigid capacity expansion policies promoted poor quality products, created a bias in the risk-reward structure favoring domestic sales over exports, and made both efficient subcontracting and economies of scale in production and marketing difficult. With import-substitution opportunities approaching saturation--at least for the goods Indian industry was supplying--industrial growth rates declined. Export opportunities were missed, particularly in light industrial product lines in which India has comparative advantage. There is strong evidence that India should exploit and enhance its engineering capabilities by rectifying distortions in the industrial structure, securing effective market and technology links, and motivating stronger firms to expand and upgrade to meet market requirements. 2.04 Exports as Residual. With the higher profits and lower risks afforded by protection and controlled capacity expansion, manufacturers of engineering products have had little motivation to expand exports. Exports represent only 10% of output, and have been viewed by most manufacturers as a residual means of using temporary capacity surpluses, in periods of domestic recession or lumpy expansions. As a result, the majority of India's engineering exports are domes- tic models which happen to be acceptable in export markets which require similar low price, lower quality goods. Ironically, larger firms with greater capabilities to meet quality and volume requirements of major export markets have exported a lower portion of their output, beirg most affected by constraints on capacity expansion. Also, producing more competitive products, larger firms are 1/ Paras. 2.03 - 2.11 summarize the policy analysis incorporated in the Light Industrial Export Development and Finance report, August 1983 and subsequent policy assessments during project preparation missions. 2/ Monopoly and Restrictive Trade Practices Act, 1969 (MRTP) and Foreign Equity Regulation Act (FERA).  -7- the last to be affected by domestic recession. Reservation and other incentives for SSIs to underinvest and export directly have fragmented exports and created India's image as a low quality, unreliable producer. While the top 200 exporters of engineering products still represent about 70X of engineering product exports, about 1,800 firms exported less than Rs 1 million in 1978/79, with half of these in and out of exports from one year to the next. The lOOZ export scheme, free trade zones, and other incentives based upon majority exports have had limited impact as they do not address relative profits of domestic vs. export sales, and do not enable the use of domestic markets to achieve economies of scale and serve as a buffer to swings in exports. Also, these schemes have a limited effect on prices and quality of industrial products for the local market. 2.05 Capacity Controls. Analysis highlighted capacity constraints among larger, more capable firms, particularly in major engineering export lines: handtools, cutting tools, bicycle parts, auto parts, diesel engines and pumps, and machine tools. In the early eighties, some MRTP regulations and other licensing controls were relaxed; however, most modifications were for "export capacity", which is both difficult to differentiate and unattractive within the present risk-reward structure. Some expansion was allowed--if the applicant was not an MRTP company, if the product was not reserved for SSI, and if expansion would not flood the domestic market. Until recently, MRTP companies were allowed to expand only in specified, highly sophisticated, mainly capital intensive items. Advantages of vertical integration and scale in production and marketing have been recognized only recently for main line, light industrial product groups (para. 3.05). 2.06 Capacity controls have limited India's export prospects in several ways. First, with licensed capacity based largely on domestic requirements, the size of the domestic market determinea whether Indian engineering firms will have the scale to compete internationally. Also, with the high profits available in local markets protected from external competition (through quotas and tariffs) and internal competition (through capacity controls and SSI reservation), most manufacturers of engineering goods have had little motivation to improve quality or efficiency. Licensing provisions have been highly specific in the quantities and products which could be produced, making it difficult for firms to compete in meeting changing market opportunities. Finally, while firms may have gotten eventual approval to expand, by the time the several years have passed to get approvals and implement the project, market requirements had changed, costs had escalated and technical edges had been eroded. Analysis demonstrated that MRTP and other capacity controls needed to be removed or reduced, at least in lines with strong export prospects, and procedures had to be streamlined to achieve competitiveness and quality improvements. Ideally, both tariffs and quantitative controls also would be adjusted, to approach more uniform effective protection and promote growth in lines in which India has comparative advantage. Yet, with substantial relaxation in capacity controls, larger firms would compete with each other, reducing relative profits for domestic sales, stimulating firms to improve designs and quality, motivating manufacturers to expand and sustain exports as a permanent fearure, and enabling exports to larger, quality-sensitive markets.  -8- 2.07 SSI Protection. Larger manufacturing firms have advantages in exports when achieving adequate quality it difficult, complex selling and distribution practices are involved, and technical and marketing tie-ups are critical for market access. Most engineering products have these characteristics. Smaller firms have a strong potential role as subcontractors. With appropriate equipment to make a few components in volume, ancillaries can develop manufacturing techni- ques over a limited range of operations. Producing to others specifications, they need limited design or selling organizations. Overheads are kept low, and small firms can continue to realize labor advantages, paying performance-related wages. However. analyses of the bicycle, diosel engine, handtool and auto parts industries indicate that SSI reservation and other incentives to stay small and export directly have hindered the development of efficient subcontracting and exports. SSIs have had strong inducements to purchase cheap, antiquated, general-purpose equipment, often incapable of making required tolerances in spite of the skill and industriousness of much of the work force. Without the threat of backward integration by larger firms, SSIs have limited motivation to upgrade designs or processes. Under these circumstances, incentives are strong for large firms to produce as much as possible in-house to maintain quality standards. Leading firms indicate they would subcontract substantially more if there were reliable ancillaries. If larger firms are allowed to enter and expand and if incentives for firms to stay small are reduced, the complementary advantages of large and small manufacturers could be realized. 2.08 Technology Transfer. In both ICICI and mission survey work, a correla- tion was found between foreign collaboration and export performance and profits. If the agreements are properly structured, Indian firms benefit from access to changing and often proprietary design and process improvements, management methods, and market access through brand image and direct efforts by the foreign party. Over 80% of FERA firms in the major engineering product groups are engaged in exports; 50% are among the top 200 exporters. However, foreign col- laboration and technology transfer have been discouraged for many engineering products. The list of products for which foreign technical or equity collabora- tion has been "deemed unnecessary" has included many engineering products with high export potential. When foreign collaboration is allowed, indigenous angle and foreign exchange clearance procedures have limited the prospects for acquir- ing foreign consultants, technology or marketing agreements. In the engineering product groups studied, isolation from international pressures has led to designs and quality well behind the competition. Also, while India has strong labor cost advantages, these often are offset by poor equipment and methods, which reduce productivity and product quality. Payments and duration allowed on technical licensing agreements often have been inadequate. Arrangements need to be improved to help Indian manufacturers identify and gain access to suitable joint venture partners, sources of technology, and market ties. In-house R&D could update technology, but the marketing and industrial infrastructure in India is too small and insulated for this to happen adequately. India would do well to adopt the practices of other LDCs and semi-industrialized countries, exploiting the R&D of others through technology transfer.  -9- 2.09 Export Incentives. Analyses indicate that export incentives are less critical in stimulating exports than are industrial policies which address rela- tive risks and returns of exports vs. local sales and close the quality gap between Indian products and international requirements. However, in the short- to medium-term, export incentives will be important to reduce anti-export biases and to encourage firms to produce products which meet international price and quality standards. Cash Compensatory Support (CCS), considered the simplest and most important export incentive, would need to be maintained and in some cases increased, as present CCS levels often do not cover direct and indirect taxes and duties. Alternative or complementary measures which manufacturers indicated to be strong export incentives are: revision of duty drawback rates to incorporate indirect taxes; more generous tax exemption on export profits (or sales as a rough proxy); and liberal tax writeoffs or other financial incentives for market development expenditures. On import controls for exporting firms, analysis indicated strong arguments for extending the duty exemption scheme, with close monitoring, to avoid tying up exporters' funds. Also, import of capital goods required further liberalization, to enable local firms to get adequate equipment and to spur capital goods manufacturers to improve quality. The need for sub- stantial streamlining of export and related import procedures has been emphasized by exporters. 2.10 Industrial Procedures. Several measures to liberalize licensing and import of capital goods and inputs have been introduced in the last several years. Expansion of industrial licensing capacities has been allowed, with the caveats noted above. Quantitative import restrictions have been reduced. Imports allowed under Open Ceneral License (OGL) have been increased. In 1984, changes were made which provided for simultaneous approval for industrial licenses, capital goods imports, and foreign collaboration; in practice, however, procedures and practical considerations meant that these approvals have been made sequentially. Since the application process has been sequential for about 90% of cases, the total time taken can amount to more than a year. Analysis demon- strated that simplifying capacity licensing, indigenous angle, MRTP and foreign collaboration clearance procedures would encourage firms to invest in capacity to produce exportable engineering goods.  -10- III. STRATEGY FOR EXPORTS OF ENGINEERING PRODUCTS A. Policy Analysis 3.01 The First Industrial Export Project is rooted in policy and institutional analyses conducted by GOI, ICICI and a series of IDF missions over the past three years. The purposes of sector work on Industrial Export Development and Finance were to illustrate how policies and institutional support could be geared to meet strategic export objectives, and to identify ways in which Bank lending operations could help tap growth prospects in line with India's comparative advantage. By focusing on engineering and leather products, which account for nearly 40Z of India's manufactured exports, it was possible to identify key policy changes which would have an impact on industrial exports overall, as well as measures needed to increase efficiency and exports in these two major product groups. Work on the engineering subsector involved: interviews of over 200 firms to determine how companies were responding to existing policy signals; assessment of data on industrial and export structure and performance; and analysis of public and private institutions providing finance and other services to manufacturers and exporters of engineering products. In addition, world trade patterns and India's relative per- formance were assessed, relative costs and incentives of India vis-a-vis major East Asian competitors were compared, and the key success factors for penetrating dominant Western markets were analyzed. 3.02 Committee on Engineering Exports. During the same period, a high level Committee on Engineering Exports, under the chairmanship of Mr. D.V. Kapur, Secretary, Heavy Industries, also was assessing policy and institutional measures needed to improve competitiveness and exports of engineering products. Many of the report's recommendations have been implemented with GOI's new Budget and the Import-Export Policy announced in March-April 1985, and in subsequent policy announcements (para. 3.05). The basic finding of the Kapur Committee was that a major breakthrough in exports of engineering goods will be possible only if the basic structure of domestic industry becomes internationally competitive in technology, scale and cost levels. Unless general upgradation is achieved, the gap between what is produced for the domestic market and what is needed in world markets remains too large to be bridged by a system of incentives applied only to exports. 3.03 In addition to improving incentives for the full range of industries, the Committee recommended that a special effort be made focusing on promising product groups with high value added, dynamic comparative advantage for India, and a reasonably small gap in achieving competitive price, quality and technology. This thrust industry approach reflected difficulties in introducing radical policy change across the board, budgetary constraints, and the advantages of focusing on products and markets with strong identified export growth potential. The products selected for focus encompass over half of India's present exports of engineering products, meaning that the policy changes proposed would have substantial impact on the engineering subsector overall. The products identified for the first priority-- Group I--incorporate the product groups identified by our sector work* as having strong potential, particularly in the large, promising developed country markets: o auto spares, ancillaries > o handtools * o bicycles, parts * o castings and forgings * o machine tools * o chemical, process plants o commercial vehicles, scooters * o industrial valves o diesel engines, pumps *  -11- Also, within the concept of selectivity, the Committee recommended concentration on the major US and European markets and emphasis on fewer LDC and OPEC countries. The policy reforms proposed by Committee on Engineering Exports for thrust engineering industries were the following: CAPACITY LICENSING - Expansion and entry of MRTP and FERA companies in thrust industries would be permitted freely. This could be done by treating thrust industries as having national importance in the context of Section 22A of the MRTP Act, or by treating all investments in thrust industries as export- oriented, using the provision that MRTP companies can expand freely in export-oriented products. - Firms would be allowed to enter and expand, regardless of size, in spite of the existence of SSI reservation in product lines falling into thrust industry categories "... for rapid upgradation of selected industries to internationally competitive levels. SmaLl firms would benefit from increased opportunities and incentives for ancillarization." IMPORT OF TECHNOLOGY - Thrust industries would be covered under the 1984/85 Import-Export Policy which provides for technology imports for selected industries on Open General License (OGL). - Technology imports for thrust industries would be removed from the list of industries for which technology imports "are not deemed necessary", and would be treated as industries given priority for import of technology. - Foreign collaboration would be actively encouraged. Maximum royalty and lump sum payments would be increased, taxes on technology payments would be reduced. DOMESTIC AND EXPORT SALES - These changes in licensing and technology policy would apply to both export and domestic production and would not be specificaLly linked to export obligations or performance. RAW MATERIALS - Raw materials for export production would be at international prices. - Exporters allowed direct duty free import of steel, alloy steel, pig iron. - Import of raw materials, including steel, should be decanalized. - International Price Reimbursement Scheme for steel extended to cover alloys and special steels used for exports.  -12- CASH COMPENSATORY SUPPORT - CCS revised to fully reimburse taxes and duties incurred in the course of export production, not kept artificially low due to budgetary constraints. REP LICENSES - Higher levels of replenishment licenses should be given to exporters related to not foreign exchange earnings and REP facilities should be allowed for import of raw materials and capital goods. FINANCE - Interest rates for investments in thrust industries would not be subsidized. Rather development banks would give priority to financing thrust industries. 3.04 During 1984 and 1985, other task forces and committees were established to assess important trade and industrial policies. Major issues being analyzed include: (a) additional means to reduce and streamline procedures for capacity licensing, import of technology and capital goods, exports and related imports; (b) ways of replacing incentives for firms to stay small with promotion of growth and modernization of SSIs, and allowance of entry and expansion firms regardless of size, in areas with scale economies; (c) development of a strategy for export development, which would integrate fiscal, trade and industrial policy measures to encourage competitiveness, as well as strengthen export promotion. Additional measures in these areas would further enhance the policy environment for competitiveness and exports. The Government has demonstrated commitment to translate analysis and recommendations into policy change. B. Recent Policy Changes 3.05 Beginning in March 1985, GOI has announced a number of significant chan- ges in strategy and policy which will improve competitiveness and exports of engineering and other manufactured products. These changes can be grouped into those affecting: industrial structure; anti-export biases; access to imported inputs, capital goods and technology; and industrial and export procedures. The recent changes in policies and procedures are significant, and are seen as only the first of a series of initiatives under active consideration, many of which are likely to become policy during the next six months. For example, the Ministry of Finance announced recently that in the 1986 Budget, remaining quan- titative import restrictions would be replaced with tariffs. The list below summarizes policy changes made to date which are expected to have a positive impact on efficiency and exports in the engineering subsector.  -13- INDUSTRIAL STRUCTURE - Monopoly and Restrictive Trade Practices Act (MRTP). On March 16, 1985, COI raised the definition of companies falling under the restricted growth provi- sion of MRTP from Rs 200 million (US$17 million) to Rs 1 billion (US$83 million) in value of assets. As a result, the number of engineering and metal product firms falling under MRTP has dropped from about 100 to about 20. Most firms falling within the new MRTP definition manufacture basic metals, ships, and heavy equipment. Only five firms in engineering product groups identified for export thrust remain within the new MRTP size definition, while 83 of India's major exporters of engineering products were MRTP companies previously. These five MRTP companies represent only 12% of output and capital employed in the top 100 engineering and metal product firms. In a subsequent further liberalization of MRTP restrictions effective from May 22, 1985, CO announced a list of major product groups in which firms could enter or expand regardless of the firm's size or dominance, provided that the product line is not reservGd for SSI production. The list contains most major engineering products with strong export potential. Removal from MRTP treatment means that firms can: expand or enter any product line rather than being constrained to a "priority" list; take advantage of the existing automatic expansion provisions; and avail of the recent delicensing moves in major engineering product groups. - Delicensing of 25 Industries. Among the 25 industries delicensed on March 16 are the major product groups identified for export thrust in our sector work and in the Kapur Report: automotive ancillaries, cycles, machine tools; hand, small, cutting tools; diesel engine sets; and industrial machinery. The effectiveness of this delicensing will be enhanced by the recent liberalization moves affecting MRTP companies, small-scale industries, and industrial approval procedures. However, additional measures are needed on the SSI reservation and procedural fronts. - Small Industry Policy. Protection and incentives for SSIs to stay small have been diluted by measures in the Budget. The definition of small industry has been raised from Rs 2 million to Rs 3.5 million in fixed assets, excluding land and buildings; the definition of ancillaries has been increased from Rs 2.5 million to Rs 4.5 million (US$400,000) which is adequate to attain scale economies in some product-price-quality segments of engineering. In addition, the excise tax exemptions which were available to very small firms (with sales not exceeding Rs 750,000) have been replaced by a graduated phasing out of excise tax exemptions as firms grow. Full excise tax exemp- tion will be available for up to Rs 2.5 million in sales, and gradually declining excise tax exemptions will be available for up to Rs 7.5 million (US$600,000) in sales.  -14- -Flexible Use of Licensed Capacity. In the case of motor vehicles, components, and machine tools, GOI has introduced flexibility in the use of licensed capacity, with manufacturers allowed to make whatever vehicles and machine tools the market requires with their installed equipment, rather than having to make the product mix fixed at the time the license was issued. This flexible definition of licensed capacity releases major vehicle manufac- turers from MRTP clearances. EXPORT INCENTIVES -Tax Incentives. In addition to reducing corporate and income tax levels across the board, the Budget introduced a 50% tax exemption on profits from export sales. Since profits from domestic vs. export sales are difficult to determine, exports as a percentage of sales are used as a proxy. This represents a strong incentive to export, reducing the anti-export biases. -Import-Export Passbook Scheme. The new Import-Export Policy announced in April 1985 introduced a provision for manufacturer exporters to obtain duty free imports of inputs and components without requiring a firm order. Imports would be registered in the passbook; imported inputs not used in export production would be subject to duty. This facility has the benefits of eliminating the financing costs and delays in in the duty-drawback system. - Replenishment Licenses. Flexibility in use of REP licenses for manufacturer- exporters has been enlarged, for imported inputs and capital goods. IMPORTED INPUTS, CAPITAL GOODS AND TECHNOLOGY - Import duties on capital goods for investment projects have been reduced significantly, from a minimum of 65% to duty levels of 0% to 40%. -Provision for rapid approval of import of capital goods, technology knowhow, and consultancy services has been raised to cover amounts up to Rs 10 million equivalent (US$800,000). -Import of capital goods for several engineering product groups, notably the automotive industry, have been placed under Open General License, with the objective of enabling firms to make the modernization moves necessary in reaching international competitiveness. -Many grades of steel have been decanalized, meaning that manufacturers will be able to import steel directly. This liberalization is intended to facilitate the timely delivery of proper grades of steel by engineering product firms. -The International Steel Price Reimbursement Scheme has been extended to include alloys and special steels for exports. Thus, all major inputs for engineering products now are made available at international prices. -Procedures for companies to hire foreign consultants have been liberalized and streamlined, removing "indigenous angle" clearances and reducing the number of approvals required.  -15- C. Institutional Moves 3.06 Substantial policy changes have been made recently and additional measures are anticipated to encourage competitiveness and exports of India's manufactured products, notably in the major engineering subsector. Complementary institutional support now is needed to finance export-oriented enterprises and their ancillaries, and to promote fitm-level improvements in productivity and export marketing. Project preparation involved detailed analysis of the institu- tions best positioned to provide these services. The Industrial Export Project would complement policy moves made by COI by: (a) supporting ICICI in playing a more active role in financing projects which would improve efficiency and exports of firms manufacturing engineering and other promising products; (b) reorienting commercial banks' involvement in small industry financ- ing to give greater emphasis to modernization, specialization, and expansion, by building programs to finance engineering ancillaries: (c) strengthening institutional and financial support by ICICI and Ex-Im Bank to individual companies which are connitted to improving productivity and export marketing. 3.07 Role of ICICI. Under the Industrial Export Project--Engineering Products, ICICI will assume a number of responsibilities to enhance its role as a mature and successful development bank. ICICI will increase its focus on promot- ing and financing promising export-oriented projects, with a particular emphasis on engineering products. In addition, it will managp a Productivity Fund, which is designed to assist private firms manufacturing engineering products to assess and make moves needed to improve process and product technology (paras. 5.30- 5.34). In appraising subproject viability, ICICI will utilize market surveys done and export strategies developed by firms, independently or using Ex-Im Bank's Export Marketing Fund. In addition, ICICI will coordinate with par- ticipating commercial banks to help ensure effective operational links between the larger engineering firms and ancillaries financed under the Industrial Export Project. Finally, ICICI will monitor the impact of recent and planned policy changes and project inputs on competitiveness and exports of engineering products. The Corporation will undertake these expanded responsibilities under the proposed project, while reducing reliance on IBRD funds as a source of for- eign exchange financing. These measures are consistent with ICICI management objectives to make the institution a leader in improving the competitiveness and exports of Indian industry, with an initial special focus on enterprises manufac- turing engineering products. ICICI has developed the technical expertise and client base to play a major role in this process. 3.08 Ancillary Financing. With accelerated growth in exports of engineering products--and reduced protection and incentives for firms which stay small--there will be substantial scope for smaller firms which specialize, modernize and expand as ancillaries. Given the relatively small size of most engineering ancillaries, the commercial banks have several advantages as financial inter- mediaries for ancillary units. The banks have an ongoing relationship with the clients, presently meeting their working capital and a portion of their term lending requirements, which has given the commercial banks effective leverage for  -16- collecting on term loans. Also, the banks have developed project appraisal and supervision skills through their SSI lending. In the major zonal offices where most ancillary lending activity would be concentrated, the leading commercial banks have established Industrial Credit Departments to handle working capital and term lending needs of their industrial clients. Recognizing the importance of commercial bank term financing of small- and medium-sized firms, in 1984 RBI raised commercial banks' maximum term lending limit for independent loans to Rs 10 million. 3.09 Export Marketing. Sector analysis demonstrated that, if India is to recapture its share of LDC engineering exports and exploit more effectively its comparative advantage particularly in Western markets, major improvements in export marketing will be required. Analysis indicates that export promotion measures should be guided by the following basic strategy: (a) Selectivity. Promotional measures should give selective encourage- ment to activities which lead away from the "trader approach" toward long-term commitment to exports. (b) Concentration on Company-level Promotion. Most export promotion activi:ies are effectively undertaken or commissioned by individual firms, to enable the focus on a firm's particular strengths and weaknesses relative to the requirements of target markets. (c) Shared Financial Commitment. The company should have a significant financial stake in measures supported--to increase the company's commitment to obtaining value for money. (d) Freedom of Choice between Service Suppliers. Wherever possible, the company should be free to choose between private or public service suppliers, or to undertake export promotion activities internally. 3.10 Project preparation work included an assessment of existing export promo- tion measures and institutions 1/ to identify the most appropriate organization to help finance company-level export marketing moves under the project. Ex-Im Bank was established to play a catalytic role in promoting product and project exports, through financial and other means of assistance. Ex-Im is in a rela- tively strong position to assess country conditions and the merits of market penetration efforts. Being 100% Government owned, with Board representation of top officials of the Ministries of Commerce, Industry and Finance, Ex-Im will be an appropriate channel for official funding of company export promotion activities. At the same time, being a well-run financial institution focusing on exports, it will be able to do even-handed scrutiny on the merits of individual proposals, and should not be seen by other institutions as competing in the "retailing" of export promotion services. Finally, by sponsoring these activities, Ex-Im Bank would build its own product and market know-how, and be in a better position to provide information to ICICI and other lenders on the market viability of investment proposals. 1/ This assessment of export promotion institutions is available in the Project File.  -17- 3.11 Productivity Improvement. Under the project ICICI, working in close collaboration with the Association of Indian Engineering Industries (AIEI), would manage a Productivity Fund. The Productivity Fund would help finance engineering firms or groups in making moves to increase the exportability of products including: identification of the gap between present process/product levels and international standards, formulation of a strategy for bridging the gap, and roves to step up process and product upgrading. Significant capital investments and technology transfers emanating from this analysis would be considered as modernization investments, falling under the term lcnding component. Through its professional services, AIEI works as a catalyst for developing and influencing policy in the engineering industry. AIEI's 1,648 members represent large and small engineering companies, in the private and public sectors. AIEI also has 33 affiliated associations and five affiliated technical institutions. Due to the effectiveness of AIEI's information, advisory and consultative services to industry and Government, AIEI was selected to help ICICI promote the use of the Productivity Fund among appropriate engineering firms. D. Product-Market Potential 3.12 Light engineering products have constituted over 40Z of India's engineer- ing product exports. From 1970/71 to 1982/83, exports of light engineering products grew more rapidly than the 22% average for engineering products overall. India has impressive engineering capabilities, labor cost advantages, and a low present market share. High export growth rates should be possible now that COX has taken substantial first steps in rectifying policies which have undermined competitiveness of Indian industry. 3.13 Comparative Advantage. Mission and ICICI analyses indicated that India has dynamic comparative advantage in light engineering products. Domestic resource cost calculations by ICICI indicate that production costs of larger light engineering companies compare favorably with international costs. Except for industrial castings, light engineering products were among those with the most favorable DRCs, particularly when adjusted for international steel prices. However, as with most DRC calculations, these comparisons hide major quality discrepancies between Indian products and those of international standard. Measures are needed to both reduce costs and improve quality for a given product, if Indian manufacturers are going to expand sales to major markets. 3.14 Production organization, costs and process technology were analyzed for major engineering export product groups. In all cases--including bicycles and parts, vehicle components for the after-market, stamped and cast handtools, and low to medium quality castings--Indian costs are below international levels, but for inferior products for which there is limited scope in expanding exports. Analysis by mission engineers indicated that after making capital investments required to upgrade technology, expand scales of production and improve product quality design, Indian production costs would compare favorably with interna- tional levels. The subsector report analyzed major product-market segments in which Indian manufacturers would be strongly competitive. With liberalized capacity expansion allowances, reduction in anti-export biases, and availability of inputs at international prices, engineering firms making the upgrading moves will be well positioned to compete in export markets.  -18- IV. ROLE OF FINANCIAL INSTITUTIONS 4.01 India's organized financial system is composed of: the Reserve Bank of India (RBI); a large nationalized commercial banking system; 27 small private banks; 16 foreign banks; specialized development finance institutions at the national, state, district, and village levels; and a number of savings institutions. In addition, the system includes a number of capital market organizations and non-bank financial institutions including finance companies, hire-purchase companies, and rural banks. 4.02 Institutional Finance for Industry. The main sources of term finance for medium and large industries are the all-India financial institutions 1/ followed by the commercial banks. At the state level, the State Finance Corporations (SFCs) finance small- and medium-scal& industries, and the State Industrial Development Corporations promote and lend to larger industries with government shareholdings. The commercial banks are the major sources of term and working capital credit for small industry. In 1982/1983 gross fixed capital formation in industry amounted to Rs 138 billion, or 26% of CDP. Of this, investments by the private corporate and cooperative sectors amounted to Rs 34.7 billion. While term lending institutions financed only 13% of gross fixed irdustrial investment in 1982/1983, their disbursements totaled Rs 17.9 billion or 51.5% of investment in the private sector. 4.03 The Industrial Development Bank of India (IDBI) coordinates the activities of all-India institutions and provides financing Lhrough SFCs, SIDCs, and commercial banks. IDBI and IFCI have concentrated on the financing of tradi- tional subsectors, e.g. textiles, sugar, food products, cement and electricity generation and on joint/public sector projects. ICICI is involved more in sub- sectors such as engineering products, chemicals and petrochemicals, electrical equipment and electronics. Joint financing of larger projects now is well- established. ICICI is the most important source of foreign currency financing for private industry, accounting for about 80% of institutional foreign exchange lending. A. Role of ICICI 4.04 ICICI, set up in 1955 to promote and finance private industry in India, was one of the first development finance companies assisted by the World Bank Group. ICICI remains a successful and well-managed DFC. On December 31, 1984, ICICI's assets totalled Rs 17.6 billion; its outstanding loan and investment portfolio equalled Rs 15.7 billion. In the 1980-1984 period, ICICI increased its lending op--ations at a compounded annual rate of about 222. ICICI has diver- sified its operations and now offers a broad range of banking services. 1/ Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI).  -19- 4.05 Impact and Characteristics of Past Lending. As of December 31, 1984, ICICI had approved direct financing of Ro 30.0 billion for 4,100 projects. Engineering-- consisting of metal products, mechanical and electrical machinery and transport equipment--accounted for 24% of total approvals. Other main sub- sectors finsnced are: chemical and petrochemical industries (22%); textiles (12X); basic metals (9%); cement (92); and pulp and paper (6%). ICICI's clients are medium LO large private enterprises. In 1983, the average fixed asset base of ICICI's borrowers was about Rs 120 million. ICICI loans averaged Rs 14 million. About 55% of ICICI's financing was for balancing, modernization, replacement and expansion (BMRE). The geographical distribution of projects reflects industrial concentrations and infrastructure, particularly in Western India. However, ICICI has diversified its portfolio; about 362 of ICICI's financiag over the last five years has been for projects in backward areas. 4.06 Lending to Engineering Firms. Table 1 summarizes ICICI's foreign cur- rency loan sanctions to engineering product firms in the 1982-1984 period. Table 1: FOREIGN CURRENCY LOAN SANCTIONS (1982-1984) 1982 X 1983 Z 1984 2 Metal Products 83 8 45 3 63 4 Machinery (except electricals) 176 15 210 14 120 7 Electrical Equipment 103 9 136 9 222 13 Transport Equipment 233 21 46 3 236 15 Subtotal, Engineering 595 53 437 29 644 39 Other Industries 517 47 1080 71 1008 61 TOTAL, F.E. Sanctions 1,112 100 1,517 100 1,652 100 Source: ICICI Foreign currency sanctions to the engineering subsector during the 1982-1984 period averaged about Rs 558 million, or 39Z of the total foreign currency sanctions. With the actual and planned changes in industrial licensing procedures, ICICI has more scope and motivation to promote projects in promising product groups. Also, the increase in the ceiling for direct, independent lend- ing by term-lending institutions from Rs 10 million to Rs 30 million has given ICICI more flexibility to finance projects without going through the consortium. B. Commercial Banking System 4.07 In 1969, GOI nationalized 14 large private banks, with the objective of using them to accelerate development in priority areas--small-scale agriculture, industry and retail trade. In 1980, GOI nationalized six more private banks; the share of public sector banks in total deposits increased to 92%. In 1982, the system consisted of 28 government-controlled banks of which eight were part of  -20- the State Bank of India Group (SBIG), 27 private banks and 16 foreign-owned banks. Together they had 35,000 branches. By the end of 1982, the commercial banking system's assets totalled Rs 830 billion. In 1982, SBIG accounted for 35% of assets and 36% of advances. Foreign banks represented only about 4% of total assets of the system. Over 40% of assets are held in cash resources and invest- ments in securities specified by GOI and RBI, which reflects GOI's desire to allocate savings to priority sectors, specialized institutions and the Central Government. 4.08 Indian banks are having difficulties operating internationally due to their low capital base. To strengthen this base, in 1982 and 1983 COI increased paid-in capital of the nationalized banks and allowed them to retain up to 40X of overseas profits. One of GOI's objectives during the Seventh Plan period is to build up the equity base of nationalized banks. The proposed project will sup- port this objective by agreeing to GOI's retaining the proceeds of the ancillary financing component as capitalization of the participating banks (para. 6.06). 4.09 Term Lending to Industry. As of December 31, 1933, commercial bank lending to industry amounted to RS 131.9 billion. Outstanding term loans to industry totalled Rs 28.4 billion. Commercial banks' substantial role in industrial finance should increase, now that restrictions have been lifted. The banks now can lend independently to industrial firms when project costs do not exceed Rs 15 million. On larger projects, the banks' involvement in term lending has been passive co-financing while the banks have become a major force in term lending to small- and medium-scale firms. Table 2: COMMERCIAL BANKS' OUTSTANDING TERM LOANS (1979-1983) (Rs billions) Z of Term Loans Period Ending June 30 Term Loans Total Bank Credit Term Loans to Industry 1979 31.4 168.3 18.7 11.9 1980 39.3 184.3 21.3 13.8 1981 50.4 213.2 23.6 17.6 1982 (March) 68.8 291.6 23.6 24.0 1983 (March) 81.3 344.3 23.6 28.4 Source: Reserve Bank of India: Report on Trend and Progress of Banking in India 1982/83. 4.10 Lending to SSIs. Outstanding loans to about one million SSIs at the end of 1982 amounted to Rs 42.5 billion. The average loan size was extremely small-- Rs 40,000--which reflects the tendency to proliferate the number of SSIs, rather than building the capacities of more capable small firms. While all banks are expected to lend to SSIs as part of their priority lending, five banks are major term lenders (Table B-3). SBIG accounted for about 28%; Punjab National Bank, 9%; Bank of Baroda, 7%; Bank of India, 6%; and Canara, 5%.  -21- 4.11 Financing Engineering Industries. As of March 31, 1984, outstanding loans by commecial banks to firms manufacturing engineering products amounted to Rs 50 billion, with term loans totalling Rs 3.5 billion (Table B-4). Four major commercial banks dominate industrial lending in general and financing of engineering industries in particular: State Bank of India, Bank of Baroda, Punjab National Bank and Canara Bank. As of December 30, 1980, about one-third of the loans were below Rs 2.5 million; 25% was between Rs 2.5 and Rs 10 million. Commercial banks' loans to the engineering industries are mainly in five states in which industrial activity is concentrated: Maharastra (28.8%), West Bengal (13.7Z), Tamil Nadu (9.3%), Delhi (8.5%), and Karnataka (7.9Z). With 70% of existing engineering loans in five centers, a geographically focused approach for funding engineering ancillaries is possible. C. Export-Import Bank of India 4.12 The Ex-Im Bank was organized in January 1981 to finance and promote Indian exports. Operations were launched in March 1982. Export finance func- tions of the International Finance Wing of rDBI were transferred to Ex-Im Bank. With the Ex-Im Bank Act of 1981, Ex-Im is empowered to undertake a broad range of export finance and promotion activities. Ex-Im has initiated operations in: export bills rediscounting; lines of credit to foreign governments and financial institutions for importing Indian goods; direct financial assistance to Indian exporters; export credit refinance; and overseas investment in Indian joint venture abroad. Recently, Ex-Im Bank has decided to provide a limited amount of term finance for export enterprises, and to support export marketing activities of Indian firms. 4.13 Ex-Im has authorized capital of Rs 2.0 billion of which Rs 1.28 billion was paid-in at the end of 1984. As of December 31, 1984, its total assets amounted to Rs 6.7 billion consisting of loans and advances (55Z), investments (25.3%), bills purchased and discounted (7%), cash and bank balances overseas (72), and other assets (6Z). Assets were financed by borrowings from the Reserve Bank and COI (64.8Z), equity and reserves (22.2%), bonds and debentures (7.9%) and other short term liabilities (5.1%). During 1984, the Ex-Im Bank recorded growth of 25% in assets. With its relatively conservative debt:equity ratio of 3.2:1 and rapid increase in volume, the Ex-Im's net profit in 1984 increased by 36% over 1983 to Rs 120 million. The Ex-Im Bank has started raising funds in international commercial markets and has obtained substantial short term lines of credit. 4.14 The Ex-Im Bank is well-managed. It has a board of 12 members, which includes Secretaries of the Ministries of Finance, Commerce, External Affairs, and Industry. Other key members are the Deputy Governor of the Reserve Bank of India, Special Secretary of the Ministry of Finance, Chairman of IDBI, presidents of selected commercial banks, and members of the export community. Ex-Im's organization is divided into six groups: project finance; trade finance; over- seas investment; planning; administration; and coordination. Due to Ex-Im's liberal compensation policies and dynamic management, it has been able to attract and retain high-caliber staff. Ex-Im Bank is welL-positioned to discharge its responsibilities under the proposed project.  -22- Interest Rates and Inflation 4.15 Interest rates on bank deposits and lending are set by the Covernment. Rates are differentiated on the basis of activity, purpose, maturity, size, and region. While market forces are not the main determinant of interest rate levels, India has maintained positive real interest rates for term lending for industry. During 1978-84, the annual average inflation rate as determined by the Wholesale Price Index was 8.3%, well below the normal industrial term lending rates of 14% to 15Z. The ability to maintain positive real rates has been in part a function of conservative fiscal and monetary policies, which has helped protect the Indian economy from external shocks. The inflation rate over the next few years is expected to average about 62, roughly the same as the projected rate of international inflation. The proposed lending rates under the project are projected to be positive over the life of the Loans (paras. 6.02, 6.06).  -23- V. THE PROPOSED PROJECT A. Objectives, Components, Financing Plan 5.01 Objectives. The proposed Industrial Export Project--Engineering Products is designed to complement and support policy measures recently taken and planned by GOI to increase competitiveness and exports of engineering and other manufac- tured products. The policy measures and institutional moves are designed to improve competitiveness of India' s engineering industry, which should result in substantial export growth over the medium-term (para. 7.01). Many measures are geared to improving the cost and quality of Indian engineering goods, recognizing that structural change is a prerequisite for major, sustained export growth. With liberalization in capacity licensing and size controls on large firms, reduction in incentives for firms to stay small, and improvements in export incentives--financial institutions now need to respond with term finance geared to efficiency and scale improvements in larger firms and their ancillaries. The project embodies a set of institutional measures by ICICI, the commercial banks, and Ex-Im Bank to support engineering and other firms in increasing competitive- ness and exports. For the first time, the leading commercial banks, which are major sources of term finance particularly for small and medium industry, will be Lncluded as intermediaries in an IBRD loan for industrial finance. In this operation, the commercial banks will be responsible for term loans to engineering ancillary firms, helping to shift their focus from financing a proliferation of SSIs to promoting the growth, modernization and specialization of smaller firms as ancillaries. 5.02 The project also shifts the focus of export promotion from general market information and trade trips sponsored by government and quasi-government agencies to direct support of strategic marketing measures by individual companies. Under the project, the Export-Import Bank would share the costs of eligible export marketing activities by individual engineering firms, which is where export initiatives need to take place. Likewise, in encouraging firms to improve efficiency, the project would help fund foreign consultants and technicians hired by engineering firms to assess means to improve costs and quality of products and processes. ICICI would manage the Productivity Fund, working in close collabora- tion with AIEI and other industry associations. The institutional arrangements under the first Industrial Export Project should be effective both in realizing the objectives of this operation and in providing a sound institutional basis for expanded future lending to private industry.  -24- 5.03 Total costs of the Industrial Export Project would be US$1 billion equivalent, with US$250 million in IBRD financing to cover foreign exchange portions of the four project components: (a) Term Lending by ICICI. US$160 million of IBRD funding will be lent to ICICI for term financing of medium and large enterprises which meet agreed eligibility criteria, with 60Z earmarked for export- oriented investments by firms making engineering products. 1/ (b) AnciLlary Financing Component. US$70 million of IBRD funds will be made available through GOI to selected commercial banks for financ- ing expansion and upgrading investments of engineering ancillaries. (c) Productivity Fund. ICICI will manage a US$10 million Productivity Fund, to help finance consultants, technicians and small hardware inputs needed by larger engineering firms and ancillaries in improv- ing productivity and quality. (d) Export Marketing Fund. The Export-Import Bank of India will manage a US$10 million Export Marketing Fund, which will help finance eligible export development activities of engineering firms in product groups identified for export thrust. 5.04 Financing Plan. Under the Industrial Export Project, IBRD financing would cover the foreign exchange portions of eligible term loans made by ICICI and participating commercial banks. With foreign exchange expected to average about 40% of subproject costs, the IBRD loans would help mobilize substantial local currency financing for export oriented engineering firms and their ancil- laries from ICICI, the commercial banks, and private sponsors' equity. In addition, ICICI would at least match the US$160 million IBRD loan with foreign commercial financing. Under the Export Marketing and Productivity Funds, IBRD financing would cover up to 50% of individual firms' expenditures for eligible export marketing and productivity improvement moves; the complement would be financed by private sponsors. Thus, while the Industrial Export Project would require no GOI budgetary funding beyond the IBRD-financed amounts, substantial counterpart funds would be mobilized from the financial institutions and private industry. The US$1 billion in total project costs (with about US$450 million in foreign exchange for equipment and inputs), is geared to cause a significant shift in the actions taken and investments made by private manufacturers in increasing competitiveness and exports. The following table summarizes estimated project costs and sources of funds: 1/ Defined as product groups falling in categories 69, 71, 72 and 73, of the United Nations Standard Industrial Trade Classification and castings from category 36.  -25- Table 3: Project Financing Plan (US$ million) Foreign Private IBRD Commercial ICICI PCBs Ex-Im Sponsors Total ICIcI 160 160 180 - - 260 760 a/ Commercial Banks 70 - - 60 - 70 200 Productivity Fund 10 - - - - 10 20 Export Marketing Fund 10 - - - - 10 20 Total 250 160 180 60 - 350 1,000 a/ Anticipates a 50:50 blending of IBRD and foreign commercial funding on 60% of IBRD loan. B. Financing Export-oriented Projects 5.05 Under the proposed Industrial Export Project, an IBRD loan of US$160 million on standard Bank terms and conditions will be made to ICICI, with a GOI guarantee. IBRD funds would be used to finance foreign exchange portions of ICICI subloans for balancing, modernization, expansion and new private sector investment projects which meet agreed eligibility criteria. Of the US$160 mil- lion in IBRD funding, US$100 million (over 60%) would finance eligible invest- ments by firms manufacturing engineering products. The remaining US$60 million would finance export-oriented investments in other product groups. All projects financed would need to meet the following eligibility criteria in addition to normal standards of financial viability: (a) Firms which manufacture products with strong export potential, confirmed by ICICI's market appraisal as well as attractive DRCs and internal economic rates of return, demonstrating comparative advantage; (b) Investments consistent with a significant expansion of sales to more demanding export markets. ICICI would establish that the quality, scale and productivity improvements would have significant impact on enhancing the exportability of a firm's products; and (c) Firms which have prepared a strategic export plan which: (i) treats expanded exports as an important element of overall strategy, (ii) incorporates measures to reach international price and quality standards in the product-market segment on which the firm intends to concentrate, and (iii) includes appropriate marketing and technological arrangements which are consistent with a significant expansion in exports.  -26- In addition, priority would be given to firms which meet one or more of the following criteria: (a) investments geared exclusively to expanding exports; (b) products identified as "thrust industries" (para. 3.03); tc) investments resulting in substantial development of ancillaries/sub-contracting; and (d) firms which have proven capabilities and concrete plans for entering Western markets, which have strong scope for Indian exports of light engineering products. Bi-annually, ICICI will monitor firms' activities and investments as they relate to expanding exports, as well as planned vs. actual export levels (para. 5.35). 5.06 Quantitative means to define the export-oriented nature of eligible subprojects (e.g. at least 10% of output exported before, 20% after the investment) were considered. However, such thresholds were considered inad- visable since: exports will depend upon the success of policy measures in reduc- ing the gap between profitability of domestic and export sales; export obliga- tions are difficult to enforce; and firms presently exporting are not necessarily those capable of expanded exports. In addition, a major objective is to improve the productivity and quality of engineering products, through increased domestic competition and upgrading moves. With these concerns, and given that both GOI and ICICI share the objective of increasing engineering product exports, more qualitative and firimi-specific eligibility criteria are considered appropriate. 5.07 For the US$60 million of the IBRD loan to ICICI for financing non- engineering enterprises, the IBRD loan would help finance export-oriented investments, in subsectors in which Indian manufacturers have revealed competitiveness. Major subsectors are expected to include textiles and garments, leather products, computer software, and some agroindustries. Projects will meet agreed thresholds relating to financial viability, economic rates of return, and domestic resource costs; these investment projects also would incorporate firm- level export plans. The 601 of the ICICI loan allocated to export-oriented engineering subprojects will result in a significant shift in the volume and type of engineering investments financed by ICICI, particularly since IBRD funds would be combined with foreign commercial borrowings in financing eligible subprojects. The remaining portion of the loan to ICICI (representing 24Z of the IBRD-financed package) will help ICICI move the focus of its overall operations to include a higher proportion to export-oriented enterprises, building upon the economic and promotional work already undertaken by ICICI. ICICI recently completed an exten- sive export survey of its clients, as agreed under the Fourteenth IBRD Loan, and was a partner in our sector work on export development and finance. The project's proposed targeting of export-oriented engineering products--with a relatively small component for other export-oriented investment projects is consistent with our approach on the policy front, where our sector work and the recommendations of the Kapur Committee focussed on engineering products-but heve informed industrial policy reform across industries.  -27- Organization and Staffing 5.08 To enhance its product group expertise, ICICI management reorganized operations on subsector lines in 1983. Its Operations Group now is divided into four divisions. Operations Divimion IV handles engineering products: electrical equipment, machinery, transport equipment and metal products. The Deputy General Manager (Operations) will be responsible for the segment of the loan earmarked for engineering subprojects, the Productivity Fund, liaison with the commercial banks involved in financing engineering ancillaries under the project, and monitoring of overall project activities and their impact. Present staffing of Division IV includes: 8 financial analysts, 5 engineers, and 5 lawyers. Division IV will be expanded by at least four staff members to enhance economics, export marketing and technical expertise of the Division. A new Unit has been created to manage the Productivity Fund and to work with Division IV in identify- ing and promoting export-oriented engineering projects. A competent manager for the Fund has been appointed and the initial staffing plan developed (Annex 3). Initial staffing plans were agreed upon during negotiations; prior to loan effec- tiveness the agreed additional staff for Division rv and the Productivity Fund will be in place. Financial Aspects 5.09 Portfolio Quality. ICICI's financial performance has been impressive, particularly since 1981. During the 1981-1984 period, net profits after tax as a percentage of average net worth averaged 23Z compared with 16% in 1980. Improved profits were due to larger volumes, lower effective tax rates and cost controls. ICICI's spreads averaged 2.82 from 1980-1984; administrative expenses as a per- centage of average total assets declined from 0.6% in 1981 to 0.5% in 1984. The quality of ICICI's portfolio remains sound. At the end of 1984, there were 241 projects in arrears ikivolving Rs 1.8 billion, affecting 11.71 of ICICI's portfolio. However, the principal amounts in arrears totalled Rs 195 million, or 1.3% of the principal outstanding. ICICI's good collections are due to its supervision and collection systems and concentration on large, well-managed companies. Collection ratios have averaged over 852 during the 1980-1984 period. Most ICICI loans are secured by fixed assets and reserves are adequate to cover potential write-offs. 5.10 Prospects and Key Ratios. With the continued improvement in the invest- ment climate and promotional efforts, business prospects for ICICI are good. ICICI's management expects its lending operations to increase by 20Z annually in current prices over the 1985-1989 period, which is achievable given ICICI's track record and the relatively small base. In 1984, ICICI's approvals totalled Rs 5.2 billion and are projected to reach Rs 13.0 billion by 1989. Foreign exchange loans are expected to average 302 of annual lending, with reliance on commercial borrowings for the majority of ICICI's foreign exchange sources of funds. ICICI's net profits after taxes are estimated to increase from Rs 228 million in 1984 to Rs 497 million in 1989. Return on equity is projected to remain above 17% throughout the 1985-1989 period. The loan and investment portfolios are expected to increase at about the same rate from Rs 15.7 billion in 1984 to  -28- Rs 34.3 billion in 1989. ICICI's debt service coverage ratio is projected to remain above 1.2:1 through the 1985-1989 period assuming that the loan collection ratio remains above 80%. With its past performance and strong management, ICICI should have no difficulty complying with the minimum debt service requirement of 1.1:1 under the project. ICICI plans to continue strengthening its equity base. In September 1984, ICICI raised Rs 67 million by issuing new shares. ICICI's debt:equity ratio is projected to remain well below the 12:1 limit required under the project. 5.11 Commercial Financing. From January 1, 1985 to June 30, 1987, ICICI would need about US$490 million to meet its foreign exchange requirements. As of December 31, 1984, ICICI's total foreign exchange resources amounted to US$94 million, leaving a gap of US$396 million. Under the project, ICICI would under- take to mobilize foreign commercial borrowings to at least match the US$160 million in IBRD funding between ICICI Loan signing and December 31, 1988. Since the commercial loans would tend to have shorter maturities, ICICI is likely to continue blending commercial and IBRD sources in financing projects. ICICI has established a sound reputation with international banks, and has received favorable terms on its commercial borrowings. In connection with the Fourteenth Bank Loan, ICICI complied with the agreement to raise US$150 million from commer- cial sources ahead of schedule, and ICICI should be able to raise the necessary commercial borrowings during the project period. Strategy Statement 5.12 In 1977, ICICT adopted a Statement of Financial and Operating Strategy, which set out, in general terms, ICICI's lending strategy. Six broad areas were given priority: export industries, power and transport, enterprises related to agriculture, basic industries mass consumption goods, and balancing and modern- ization projects. With the Fourteenth Loan, ICICI updated this Statement with the objective of sharpening priorities, and emphasizing project promotion activities. The revised Statement also reflects ICICI's resource policy includ- ing plans for further diversification on foreign currency sources. Under the proposed project, ICICI will amend its strategy statement to reflect: the expanded emphasis on export-oriented projects, with a particular focus on engineering products; eligibility criteria; operations of the Productivity Fund; means for coordinating with the Ex-Im Bank and the commercial banks; and monitor- ing and evaluation criteria. The revised draft ICICI Strategy Statement was discussed and agreed in substance during negotiations and would need to be approved by ICICI's Board prior to loan effectiveness; future changes would be made with prior consent of IBRD. C. Ancillary Financing Component 5.13 Under the proposed project, US$70 million of IBRD funding will be used to finance engineering ancillaries. The US$70 million is small relative to commer- cial banks' present financing of the engineering subsector, which constitutes about 25% of the banks' total term lending to industry. The amount under the proposed project is considered appropriate since this represents the first Bank Group involvement with the commercial banks in term lending to industry and the  -29- objective of the component is to focus commercial banks' attention on financing existing smaller engineering ancillary firms in their expansion, modernization and specialization efforts. The foreign currency portion of term loans by a participating commercial bank to an eligible engineering ancillary firm would qualify for IBRD financing. Four major banks--State Bank of India Group, Bank of Baroda, Canara Bank, and Punjab National Bank--would take the lead under the Industrial Export Project. These banks are relatively efficient, have estab- lished term lending capabilities for smaller firms, and are in a position to execute the project with relatively modest changes in organization, staffing and procedures. Eligible Enterprises and Activities 5.14 Engineering product firms which supply a substantial portion of their output (components, processes and finished products) to a larger engineering firm or which have satisfactory arrangements for such a tie-up would be eligible for financing under the project. Preference would be given to firms which are sub- contractors to engineering firms financed by ICICI, to help ensure operational linkages. Funding could cover import of equipment and inputs, and lump sum paymentR for import of technical know-how. Major features of eligible sub- pro- .b would be: Size of the Enterprise : Up to US$2 million in fixed assets (excluding land and buildings) prior to the credit Maximum Amount of Foreign Currency : US$500,000 Credit Minimum Foreign Currency Credit : US$50,000 Promoter's Contribution : At least 20Z of the cost of engineering ancillary project Debt:Equity Ratio of the Enterprise : Not exceeding 2:1 normally but in no case exceeding 3:1 Debt Service Coverage : Not less than 1.5 Domestic Resource Cost : Acceptable Terms of Assistance to Subborrower o Lending Rate to Subborrower : 15% per annum 1/ o Repayment Period 3 to 10 years including a grace period of 1 to 3 years o Commitment Charge : Up to 1X p.a. on undrawn balance 1/ Maximum non-subsidized rate for commercial bank's term loans to industry, established by Reserve Bank of India.  -30- Participating Commercial Banks (PCB) 5.15 SBIG is well organized for term lending and should be able to participate in the proposed project with minor adjustments in internal procedures. The three other banks have developed term lending capabilities, and have established measures to strengthen organization and staffing to enable effective ancillary financing operations. Each PCB will need to comply with agreed conditions of participation including: (a) agreed organization, staffing and training to help ensure effective implementation of the ancillary financing component; (b) ratification by the PCB Board of a satisfactory Statement of Policies and Operating Procedures for this component; (c) installation of adequate procedures for appraisal, supervision, and collections; and (d) adoption of standard report- ing formats. A series of meetings were held with management of the commercial banks, RBI, and the Ministry of Finance to outline features of the ancillary component ard to detail conditions of participation. During negotiations, the detailed action programs of each PCB were reviewed, agreement on conditions of participation were confirmed. 5.16 State Bank of India Group (SBIG) is the largest and oldest bank in India. Established as the Imperial Bank of India, SBIG consists of the State Bank of India and seven subsidiaries. RBI owns 93% of SBI's shares; the balance is held by private shareholders. In 1982, SBIG accounted for 34.8% of the total assets of the commercial banking system and 36% of advances. With its network of over 9,000 branches, SBIG has national coverage, with strong organization for industrial lending in major production centers (Maharashtra, Tamil Nadu, Delhi, West Bengal, Karnataka and Andhra Pradesh). SBIG is fairly decentralized. Its operations are divided into 13 circles, each managed by a Chief General Manager, who reports directly to the Managing Director; each circle oversees about 50 regional offices. The Head Office of SBIG undertakes corporate functions, with staff responsible for planning, monitoring and support services. Industrial term loans of up to Rs 10 million are approved at the circle level. However, proposals of above Rs 2.5 million are referred to the Industrial Finance Department (IFD) at the Corporate office for comments and clearance to ensure quality control and bank-wide consistency. SBICts appraisal reports are of good quality, including marketing and financial aspects. They do not include the calculations of internal economic rate of return or domestic resource cost analysis, which would be required for subprojects financed under the Industrial Export Project. As the largest of the banks, SBIG has a substantial exposure to industrial lending, notably in the engineering subsector. In 1983, its industrial loans amounted to Rs 55.9 billion, with Rs 12.2 billion in engineering. Term loans to industry totalled Rs 2.9 billion in '983. SBIG management has prepared an action plan for implementing the ancilliary financing component which includes: organization and staffing at head office and major industrial branches; formats for subproject appraisal and supervision; and training/orientation for this program (Project File). SBIG management has agreed that appraisal formats will include key elements to ensure adequate technical and marketing arrangements by engineering ancillaries as well as IERR and DRCS. During negotiations GOI confirmed that measures would be taken to ensure appropriate equity arrangements enabling SBIG's effective participation in the project.  -31- 5.17 Bank of Baroda (BB). The Bank of Baroda was founded in 1908 as a private bank; together with other commercial banks, it was nationalized in 1969. BB has continued to perform well since nationalization. In 1983, with its total assets of Rs 58 billion and a branch network of more than 1,700, it was the second largest bank in India. Bank of Baroda has the largest overseas branch network among Indian banks with 58 offices in 13 countries. Local branches are concentrated in: Uttar Pradesh (293), Rajasthan (218), Maharashtra (200), West Bengal (57), Tamil Nadu (62), Andhra Pradesh (38), and Delhi (39). Bank of Baroda is still relatively centralized. Lending decisions involving over Rs 5 million are taken by the Credit Committee at the Head Office. Commercial and industrial credit loans are processed and appraised at the Zonal office or major branches and are passed on to the General Manager in charge of credit. Term lending to industry accounts for about 6Z of BB's total industrial lending. Bank of Baroda would need to make some modifications in its structure and procedures to enable it to participate in the project. Prior to participation, management would implement an agreed initial action program on organization, staffing, training, and systems. 5.18 Punjab National Bank (PNB). Punjab National Bank was nationalized in 1969. As of December 31, 1983, PNB's total assets totalled Rs 5.8 billion, slightly lower than Bank of Baroda and Bank of India. In 1983, PNB had 2,000 branches throughout the country and 4 branches in the United Kingdom. PNB has about 40 regional offices and 11 zonal offices which supervise the branches. PNB's lending has been concentrated in Delhi followed by Uttar Pradesh, Punjab and Maharashtra. PNB is now one of the fastest growing nationalized banks and among the most profitable. The bulk of PNB's lending is from 200 major branches, which are staffed with engineers and financial analysts. PNB appears to be applying relatively rigorous standards. Appraisal reports include discounted cash flows and stipulate a maximum debt:equity ratio of 2:1 and a minimum debt service ratio of 1.2. As with Bank of Baroda, PNB is fairly centralized in its lending decisions; all proposals over Rs 4.0 million are passed to Head Office for final approval. The General Manager, Credit in the Head Office is respon- sible for all major credit decisions in consultation with the Executive Director and the Chairman. Overall, PNB is well positioned to participate in the project, once conditions of participation are met. 5.19 Canara Bank. Canara Bank is the fourth largest bank in India, with assets totalling about Rs 44.2 billion at the end of 1983. Canara's main base is in the Southern states with its Headquarters located in Bangalore, Karnataka. Of its total 1,393 branches in 1982, 398 branches were in Karnataka followed by Tamil Nadu (312), Maharashtra (122), Andhra Pradesh (100), Bihar (53), Delhi (32) and West Bengal (29). The bulk of term loans to industries are generated in major branches in Bombay, Bangalore, Madras and Hyderabad. Canara would be in a relatively strong position to focus on financing engineering ancillaries in Southern India. Canara is well managed. Its organizational structure is similar to that of the Bank of Punjab and Baroda of Baroda. Canara Bank has prepared a draft Statement of Policies and Operating Procedures for the ancillary develop- ment program. The Statement incorporates arrangements for organization, staffing and training at the head office and key branches; eligibility criteria; terms and conditions and appraisal standards.  -32- 5.20 Flow of Funds. During project preparation and appraisal, alternative arrangements for involving the commercial banks in financing engineering ancil- laries under the proposed project were explored. GOI, RBI, and IBRD recognized that commercial banks were the appropriate intermediaries for this component. Various means were pursued to ensure that the involvement by the commercial banks would represent a profitable operation and not merely another "priority" requirement. This financial inducement--combined with the banks' direct par- ticipation in an engineering export program with World Bank support--were judged to be important in getting commercial bank management to reinforce their capabilities in financing the growth and modernization of stronger small- and medium-scaLe firms as ancillaries. After pursuing a series of alternativeos, GOI proposed that the IBRD-financed amounts lent by participating commercial banks for eligible engineering ancillary subprojects remain with the banks as OI equity, with GOI responsible for repaying IBRD. This arrangement has major advantages. Commercial banks will have strong financial inducements for lending to eligible engineering ancillaries under the project. In addition, this use of funds meets one of COI's central objectives in the Seventh Plan--to increase the equity base of the commercial banks, which are severely undercapitalized. Alsc, IBRD would have direct operational links with the commercial banks and with subprojects financed through supervision, subproject review, and procurement and disbursement procedures, which is important, since this component represents the first involvement of the banks in IBRD-financed term lending to industry. 5.21 Legal Arrangements. To ensure proper appraisal, end-use, and collections by the participating commercial banks: (a) The Loan Agreement between the Bank and GOI specifies for the ancil- lary financing component: subproject eligibility criteria; par- ticipation conditions for the banks; onlending terms and conditions to final borrowers; appraisal standards; procurement, disbursement, and reporting requirements; funds flow arrangements; and provisions for subproject review and monitoring by IBRD. These features are summarized in Annex 1. (b) OI would sign a Financial Agreement satisfactory to the Bank with each PCB, for the onlending up to US$70 million in the aggregate contain the same major elements as Bank-GOI Loan Agreement. Prior to Loan effectiveness, GOI would sign agreements, satisfactory to IBRD, with at least two banks which had met conditions of participa- tion (para. 5.15). During negotiations, OI submitted the draft statements of policies and procedures, organization and staffing plans, and action programs prepared by each PCB to implement ancil- lary financing component. (c) Adequate arrangements would have been made to ensure close coordina- tion between ICICI and the commercial banks in financing larger export-oriented engineering enterprises and their ancillaries.  -33- D. Export Marketing Fund 5.22 Under the proposed project, the Export-Import Bank would manage a US$10 million Export Marketing Fund, to be utilized in supporting strategic export marketing moves mainly by individual companies. EMF support will be concentrated on the following product groups, chosen for high export growth potential: - auto ancillaries and spares - commercial vehicles and scooters - bicycles and parts - electric motors and starters - diesel engines and pumps - chemical and process plants - handtools - industrial valves - machine tools and accessories - computer software - castings and Eorgings 5.23 Eligible Company-level Activities. The Fund will concentrate financial support on the following company-level marketing activities: (a) desk mirket research within India, to seLect overseas markets for more intensive field research, (b) overseas field market research, to formulate a firm's export marketing strategy for target markets, (c) minor product adaptation, when indi- cated as required by market research, (d) overseas travel by company executives, limited to purposes directly related to a properly researched marketing strategy, 'e) product inspection services, to reinforce a company's claims of reliable product quality, (f) training related to export marketing, (g) planning and startup of overseas operations, including warehousing and foreign offices, but not covering actual operating costs, and (h) travel to India by potential buyers, invited by Indian companies, when a key element in a marketing strategy. Support will be for costs of technical and advisory services and travel expenses. 5.24 Eligible Back-up Activities. In addition to these company-Level measures, support will be given to the following back-up activities: (a) strengthening service supply from management consultants and other groups in India; (b) provision of trade information in small product-specific libraries, mainly run by subsector industry associations; and (c) group marketing activities, either when companies undertake eligible activities as a group, or when new marketing information is collected on behalf of a subsector and published, to lead to cost-effective firm-level market research. 5.25 Basis cf Support. During the three-year commitment jeriod of the project, US$10 million in IBRD finance would be made available to the EMF, to be utilized primarily for a 50% support to all but one of the e.igible expenditures. EMF finance for trade libraries will be limited to the first three years, with 75% support in the first year, 50% in the second, and 25% in the third. EMF support would be in the form of non-reimbursable development expenditures. The US$10 million amount is based upon detailed unit cost estimates of activities to be financed, firm-level interviews and questionnaires, and estimates of the number of firms likely to avail of the facility during the three year commitment period. Detailed projections and assumptions are available in the Project File. Financial support for market development is an accepted practice under GATT. Under the GATT Code on Subsidies and Countervailing Duties, Article 14, the key issue for an LDC is whether a measure causes "serious prejudice to the trade or production of another signatory country". Support to market development repre- sents a very small percentage of the total costs of an exported product.  -34- 5.26 Organization and Management. The EMF will be managed by a new Group within Ex-Im Bank, staffed by the Manager-EMF and four Product Officers, one at each regional centre (DeLhi, Madras, Calcutta and Bombay). This team will sell to potential exporters the benefits of improved marketing performance using the incentive of EMF support, help clients prepare their proposals, and supervise end use and impact of activities financed. During appraisaL, the draft Statement of Policies and Procedures for the EMF, staffing leveLs and qualifications, the action program for launching the EMF, and the quarterly planning cycle for the EMF team were agreed with Ex-Im management (Annex 2 and Project File). The operations of the EMF will be guided by the EMF Steering Committee, chaired by the Secretary of Commerce, and including high level representation from the Ministries of Finance, the Ministry of Industry, ICICI, EEPC, AIEI and Ex-Im. The Steering Committee will have the following functions: (a) approval of the Statement of Policies and Operating Procedures and any modifications; (b) review of the progress of the Fund, on the basis of quarterly reports submitted by Ex-Im; and (c) decision on proposals for over US$50,000 in EMF support. GO1 will delegate to Ex-Im powers to approve smaller proposals of up to US$50,000 equiv- alent in EMF support, except in cases in which minimum GOI consultancy approval procedures are required. In such cases, GOI has ensured that such consultant approvals will take less than 15 days. 5.27 Processing Proposals. Applications will be by a written proposal from a company, providing such information as is needed for sensible scrutiny including: background of the activity proposed, activities leading to it; objectives, methodology, expected results, time schedule, and an itemized budget of expected costs. The Policy Statement outlines screening and approval processes for individual cases (Annex 2). A provisional list of around 100 service suppliers already has been prepared. This list will be updated quarterly for submission to IBRD. 5.28 Action Program and Monitoring. Pre-launch actions include those required as conditions of effectiveness: approval by Ex-Im's Board and by the EMF Steering Committee of the Statement of Policies and Operating Procedures; neces- sary procedural streamlining to ensure delegation to Ex-Im of all approval powers for amounts up to US$50,000 in EMF support; and completion of recruitment the EMF team. In January 1985, the Board of Ex-Im Bank, which includes the Secretaries of Comerce, Finance and Industrial Development, approved in principle the con- tent of the Statement of Policies and Operating Procedures. Ex-Im will prepare an action plan for each year of operation. The quarterly reports by Ex-Im to the Steering Committee also will be submitted to IBRD. Any changes in the Statement of Policies and Operating Procedures would need to be agreed by the Steering Committee (representing GOI), Ex-Im and IBRD. E. Productivity Fund 5.29 Under the project, ICICI, working in close collaboration with AIEI and its affiliates, -nuld manage a US$10 million Productivity Fund. Firms eligible for assistance will be larger enginee-ing firms and ancillaries which manufacture engineering products or components with identified export prospects, and wiiich have specific plans to enhance productivity. Groups of firms also would be eligible under the scheme on the same cost sharing basis. Priority would be  -35- given to firms in thrust industries selected for special promotion due to iden- tified export prospects in line with comparative advantage. Expenditures would cover mainly foreign consultancy, technical support and supervisor training to help larger firms and ancillaries improve productivity or adapt products in response to market requirements. Assistance could be related to: (i) cost reduction and quality improvements which firms could make with or without addi- tional fixed investments with a focus on material handling, processing methods and tooling to increase production efficiency and achieve consistent quality; (ii) choice of process and product technologies which would be compatible with a significant expansion in exports to more demanding markets; and (iii) establishment of Productivity Cells. Also eligible would be small hardware expenditures (not to exceed US$25,000 in PF funding) for: acquiring process/design know-how; R & D with a view to adapting products to export requirements; prototype imports; and jigs, fixtures and tools needed to remove identified production bottlenecks or enable significant breakthroughs in quality and productivity. 5.30 Organization and Management. ICICI, which will manage the Productivity Fund, will coordinate with AIEI and its affiliates to promote the use of the facility among appropriate firms. ICICI and AIEI have developed a program for promoting the Fund. Proposals would be presented either by individual firms or groups to ICICI's Productivity Fund staff which would help sponsors refine their proposals, and would do preliminary screening. Proposals would be considered by an Advisory Committee consisting of a minimum of four qualified members, two from ICICI, one from AIEI and one outside technical person. The Committee will be chaired by ICICI. ICICI, as the financing agency for the Productivity Fund, will have final decision-making authority. 5.31 Role of the Steering Committee. The Steering Committee would oversee PF operations. Its responsibilities would be to: (a) ratify the Statement of Policies and Operating Procedures and make modifications if required; (b) review quarterly reports prepared by ICICI -n activities financed, end-use and impact; and (c) approve projects which involve PF financing in excess of US$100,000. GOI would delegate to ICICI clearance powers for foreign currency and hiring of foreign consultants and technicians for eligible activities of up to US$100,000, with only the minimum government clearances required, not to exceed two weeks. The Steering Committee, chaired by the Secretary, Department of Industrial Development, would have representatives of the Ministries of Industry and Finance, DGTD, AIEI and ICICI. 5.32 Financing Arrangements. The Productivity Fund, with US$10 million of IBRD financing, will be lent to GOI on standard terms, with ICICI managing the Productivity Fund for GOI. As with the EMF, the amount of IBRD funding for the Productivity Fund is based on: analysis of average unit costs of eligible activities, firm-level quest.onnaires and interviews, and estimates of the number of firms likely to avail of the facility. ICICI's administrative costs to operate the Fund would be covered from its spread for direct lending operations under the project rather than charging the Productivity Fund account. The Productivity Fund would be utilized to cover up to 50% of eligible expenditures  -36- on consultants, technicians, training, exposure trips, and small hardware investments. PF financing, which would be used to cover the foreign exchange portions, would be in the form of nonreimbursable development expenditures. Productivity Fund financing for a single subproject would not exceed US$200,000 in the case of software, and US$25,000 for hardware. 5.33 Key Actions. A Statement of Policies and Operating Procedures, drafted with ICICI during appraisal, has been ratified in substance by ICICI's Board and by the Ministry of Industries, which will head the PF Steering Committee. Organization and staffing needed for ICICI to manage the Fund have been agreed and the manager for the Productivity Fund designated (Annex 3). The following steps would be taken to launch operations: (a) formal approval of Statement of Policies and Operating Procedures by ICICI Board; (b) establishment of the Steering Committee, with Statement of Policies and Operating Procedures ratified and acceptance to IBRD; (c) startup staffing of Productivity Fund in place; and (d) delegation of approval powers to ICICI for PF expenditures not exceeding US$100,000 except for minimum GOI approvals. In addition, ICICI will develop applications, screening, monitoring and reporting formats for the Productivity Fund and promote the Productivity Fund with AIEI and its affiliates. Actions (a), (b), (c) and (d) would be the conditions of effectiveness. Changes in the Statement of Policies and Operating Procedures would require agreement by the Steering Committee, ICICI and IBRD. F. Monitoring and Evaluation 5.34 Under the Industrial Export Project, ICICI, the Export-Import Bank, and each PCB would prepare quarterly reports on activities financed under the project. These reports would be submitted to GOI, IBRD, and ICICI as the monitoring and evaluation agency for the project. Also, key characteristics of subprojects financed-particularly marketing and technology upgrading arrangements--will be submitted with authorization and approval requests. In addition, on a bi-annual basis, ICICI will prepare a monitoring and evaluation report covering: (a) the impact of relevant trade and industrial policies on competitiveness and exports, and an assessment of remaining policy constraints; (b) activities financed, actions undertaken, and impact to date of activities financed under the four project components; and (c) planned vs. actual produc- tivity measures and exports. During negotiations, the main elements of quarterly and bi-annual monitoring reports were agreed in substance. This monitoring and evaluation will assist in determining the effectiveness of policies, project activities, and eligibility criteria, helping to inform the design of future lending operations.  -37- VI. THE LOAN A. Arrangements for Two Loans 6.01 Financing. IBRD financing under the project would incorporate two IBRD loans: (a) one loan of US$160 million to ICICI, with a GOI guarantee, for financing foreign exchange requirements of eligible export-oriented suprojects, with US$ 100 million to increase competitiveness and exports of engineering products; and (b) a second IBRD loan to COI, of US$90 million, divided into three components: (i) US$70 million for commercial bank financing of engineering ancillary firms; (ii) US$10 million for the ICICI Productivity Fund; and (iii) US$10 million for the Export Marketing Fund managed by Ex-Im Bank. The rationale for a separate loan to ICICI is that direct IBRD financing--as with the past fourteen IBRD lines of credit--helps ICICI mobilize substantial foreign commercial funding on attractive terms. COI and ICICI find that direct IBRD lending to ICICI, with a GOI guarantee, signifies to commercial sources that ICICI, and not only the Government of India, is credit-worthy. For the other project components, significant COI commitment is required to ensure that ade- quate approval powers are delegated to ICICI and Ex-Im Bank, and to have COI take the foreign exchange risks and ensure adequate arrangements by the commercial banks in financing engineering ancillary firms. Since the project involves related components to achieve its objectives, it will be necessary that both Loans become effective simultaneously. Therefore, while two Loans be retained, with separate covenants, the effectiveness of the Loans to ICICI and GOI would be contingent on the other loan becoming effective. Conditions of effectiveness for the two Loans would be: (A) Loan to ICICI o Revised Strategy Statement ratified by ICICI Board, and acceptable organization and staffing for export-oriented engineering sub- projects and Productivity Fund in place. (B) Loan to COI o Commercial Bank Ancillary Financing. PCB Financial Agreements signed by GOI and at least two commercial banks, incorporating: GOI coverage of foreign exchange risk; interest rates; eligibility criteria; adequate organization and staffing; and Statements of Policies and operating Procedures (Annex 1). o Export Marketing Fund. Ratification by Ex-Im Board and Steering Committee of acceptable Statement of Policies and Operating Procedures (Annex 2). Adequate organization and staffing to manage the EMF.  -38- o Productivity Fund. Ratification by ICICI Board and Steering Committee of Statement of Policies of Operating Procedures (Annex 3). Agreed organization and staffing in place. Signing of Project and acceptable Financial Agreements. B. Loan to ICICI 6.02 Onlending Terms. The proposed IBRD loan of US$160 million will be made to ICICI at the Bank rate, under standard IBRD terms and conditions. ICICI will onlend IBRD funds to viable private industrial enterprises which meet the agreed eligibility criteria (paras. 5.05-5.07). ICICI would onlend Bank funds on a floating rate basis by adding an appropriate spread, of about 2% over the IBRD rate. I/ Foreign exchange and interest rate risks would be passed on to subborrowers. Subloans will have maturities of up to 15 years and grace periods of up to 3 years. ICICI will repay the loan on the basis of a fixed amortization schedule of 20 years, including a grace period of 5 years. This procedure will be a departure from prior loans to ICICI. ICICI now is allowed to have an over- seas account and will be able to protect itself against the foreign exchange risks by relending the funds in the same currency. As a part of the proposed project, ICICI will undertake to raise US$160 million from international commer- cial markets. In line with its financial objectives, ICICI has agreed that the maximum long-term debt to equity ratio for ICICI will be a maximum of 12:1 and the debt service coverage ratio will be at least 1.1:1. 6.03 Free Limits and Subproject Review. As under the previous IBRD loans to ICICI, subprojects for which cumulative Bank financing does not exceed US$6.0 million equivalent will not require prior Bank approval. ICICI will include estimates of DRCs and internal economic rates of return in addition to the finan- cial rate of returns for all subprojects financed under the Project. In addition, ICICI will supply IBRD copies of the export plans, product-market assessments, technology moves, economic analysis and DRCs of export-oriented subprojects at the time of seeking approval or authorization. 6.04 Procurement and Disbursement Procedures. Procurement for goods financed under the proposed ICICI Loan will be in accordance with ICICI's standard procedures, which are based on the evaluation of at least three quotations. Annex 5 providets the estimated disbursement schedule of ICICI and other components. The disbursements schedule assumes a slower rate of disbursement than under past operations with ICICI, due to the more selective subproject eligibility criteria under the Industrial Export Project. The ICICI Loan proceeds will be disbursed for up to 100% of the foreign exchange costs of machinery and equipment, against full documentation. In accordance with DFC practice, eligible expenditures incurred up to 90 days prior to the Bank's receipt of a subloan application would be eligible for financing. No retroactive financing is proposed. 1/ On its foreign exchange resources from international financial markets, ICICI has been lending on a floating rate basis (6 month London Interbank Rate plus a spread of 2%).  -39- 6.05 Reporting, Accounts, and Auditing. As ICICI is considered a Government company for auditing purposes, GOI appoxnts ICICI's joint auditors on the advice of the Comptroller Auditor General. ICICI's accounts always have been presented without qualification. Comprehensive reporting requirements have been estab- lished with ICICI. ICICI will submit quarterly progress reports to IBRD on its overall operations, and on activities financed under the ICICI Loan, including: enterprises financed broken down by product groups and firm-level export plans. ICICI also will prepare bi-annual reports evaluating overall impact of relevant changes in industrial and trade policies, and the impact of the four components of the Industrial Export Project on institutional developments, productivity improvements, export marketing measures and planned vs. actual exports of firms financed. During negotiations, agreement will be reached on the coverage and methodology of ICICI's reports. C. Loan to GOI - Ancillary Component 6.06 Onlending Terms. Under the proposed US$90 million Loan to GOI under the project, US$70 million will be for term financing of eligible engineering ancil- lary firms by participating commercial banks (PCBs). The Loan will be made to OI on standard terms and conditions. GOI will use part of the proceeds of the IBRD loan to finance foreign exchange portions of eligible credits by participat- ing commercial banks. These amounts will remain with the participating commer- cial banks as GOI equity contributions. Since the banks are under-capitalized, there will be a strong incentive for the commercial banks to comply with condi- tions of participation and to finance eligible enterprises. COI will bear the foreign exchange and interest rate risks on the IBRD loan. The participating commercial banks will charge the final borrower an interest rate of 15X; this rate will be reviewed and revised if necessary to ensure that the rate remains positive in real terms in relation to medium term inflation projections, and consistant with the non-subsidized term lending ratz for industry. The banks will finance ancillary units which meet the agreed eligibility criteria (paras. 5.14). The maturity of subloans normally will be 3 to 10 years including a grace period of 1 to 3 years. 6.07 Free Limits and Subproject Review. The minimum and maximum reimbursable credit amounts will be US$50,000 to US$500,000, covering up to 1002 of foreign exchange portions of these subloans. The Bank will need to review and approve the first five subprojects of each PCB; if these first subprojects of a PCB are found acceptable, only subloans above the US$250,000 free limit will require prior IBRD review and approval. Withdrawal authorizations for subprojects below the free limit will be made on the basis of summary reports by the PCB providing a description of: enterprise name; location and prc uct group; specific ancil- lary marketing arrangements; technical upgrading and expansion measures; enterprise, subproject and loan amounts; financing and economic rates of return. PCBs will prepare and present subproject reports in a format which is acceptable to the Bank. Calculations of financial rates of return and DRCs will be required for credits. Calculation of internal economic rates of return will be expected for subloans above US$250,000. Ex-post evaluations will be carried out during supervision missions.  -40- 6.08 Procurement, Disbursement, Reports, Accounting. Goods required under the proposed loan will be procured by ancillary industries either from overseas or from local commercial sources for foreign goods. Given the small size and variety of subloans, international competitive bidding will not be required. The PCBs will evaluate proposals based upon at least three quotations. PCBs will need to establish that goods and services are of competitive price and quality; for contracts of over US$20,000, PCBs will evaluate proposals based on at least three quotations. The Bank will disburse against statements of expenditures provided by PCB as it will not be feasible to disburse against full documentation, due to the number of transactions. PCBs will be asked to retain supporting documenLs, which will be available for periodic review by the Bank's supervision missions. The Bank will finance up to 100% of foreign exchange expenditures, subject to the maximum reimbursable subloan amount of US$500,000. PCBs will submit quarterly reports on activities under the project to GOI, ICICI and IBRD. These reports will include: subproject information including quarterly and cumulative commitments and disbursements, broken down by size, location and product group; collection data; and organization, staffing and training for the project. Contents of quarterly reports were agreed in substance during negotiations. Project accounts will be audited annually. D. Export Marketing and Productivity Funds 6.09 Of the IBRP loan to COI, US$10 million would be allocated to the Export Marketing Fund and US$10 million to the Productivity Fund. The Export-Import Bank would manage the EMF and ICICI, working in close collaboration with AIEI, would manage the PF, on behalf of G0I. Satisfactory draft Statements of Policies and Operations Procedures have been developed for each Fund (Annexes 2 and 3). These Statements, which have been agreed in principle by the Boards of ICICI and Ex-Im respectively, contain objectives, eligibility criteria for activities to be financed, cost sharing formulas, organization and minimum staffing of the Funds, role of the Steering Committee, delegation of approval powers by GOI, and accounting and reporting requirements. Satisfactory organization and staffing plans have been developed and pre-launch action programs have been initiated. Prior to effectiveness of the Loans, Statements of Policies and Operating Procedures, with form and content satisfactory to IBRD, would need to have been ratified by the respective Boards and Steering Committees, including the delega- tion of approval authority 1/ to ICICI for amounts up to US$100,000 in Productivity Fund finance per operation, and for up to US$50,000 for the Export Import Bank. In addition, minimum agreed staffing would need to be in place to enable effective implementation of each Fund, prior to Loan effectiveness. 1/ Except in the case of foreign consultants and technicians, which will require the minimum government approvals under the new streamlined procedures.  -41- VII. BENEFITS AND RISKS 7.01 Benefits. The significant policy changes recently introduced combined with the institutional support embodied in the first Industrial Export Project should result in substantial improvements in the competitiveness and exports of engineering products. If GOI sustains the substantial measures taken and con- tinues to remove the barriers to efficient development of the subsector, it could be possible for India to regain its 9% share of LDC export. of engineering products by the mid-1990, which would represent about US$15 million in exports; however, substantial additional investments beyond the amounts in the Industrial Export Project would be required to achieve this level of output and exports. In addition to significant export growth in the medium-term, the recent policy measures and institutional support under the project are expected to resulr in substantial improvements in productivity and quality, which have domestic benefits and are prerequisites to penetration of major export amounts. While the moves to improve economies of scale, productivity, and product quality would result in a net reduction in employment for a given output, the tapping of domes- tic demand for higher quality products and the increased contribution of exports from 10X to 20% of output could result in significant net incremental employment. 7.02 The Project would have substantial institutional benefits. ICICI would be active in the financial support of firm-level moves to increase competitive- ness and exports. The Productivity Fund should both support individual engineer- ing firms in determining measures to improve quality, scale, and efficiency, as well as providing ICICI with a bcrong promotional tool and means of strengthening its own technical appraisal capacity. The Project represents the first par- ticipation by Indian commercial banks in an IBRD-financed industrial development project. Their responsibility for financing engineering ancillaries will help shift the banks' focus from proliferation of smaLl industries to financing firms to grow, modernize and specialize as ancillaries. The institutional upgrading moves under the first Industrial Export Project should enable substantial future industrial lending through the commercial banks. Finally, GOI's decision that the proceeds of the IBRD Loan remain with participating banks as equity will contribute to the capital base of the commercial banks, while providing a strong incentive for the commercial banks to meet project objectives. 7.03 Both the Funds embody the recognition by GOI that improvements in efficiency and export marketing are best undertaken at the initiative of individual firms. The Funds will encourage the exposure of Indian companies to outside markets, competitors, and technical expertise--which is essential in achieving international competitiveness and significant market penetration. The cost sharing formula combined with ICICI and Ex-Im screening and advise will help ensure that the activities financed will support strategic moves to increase productivity and exports. By having two efficient financial intermediaries administer these Funds, with substantial delegated powers, the normal procedural delays affecting such private sector activities will be avoided. 7.04 The sector and preparation work preceding the processing of the first Industrial Export Project--and the positioning of the project to complement the policy reforms recently taken by GOI-represent a means by which the Bank can contribute to policy analysis and change. ICICI's role in export and subsector  -42- development, combined with the involvement by commercial banks and Ex-Im Bank under the project should represent effective implementing arrangements for this and subsequent industrial lending operations involving financial intermediaries. 7.05 Risks. The principal risks are that GOI will not sustain the policy initiatives taken recently, that procedural problems will undermine the impact of these policy changes, and that further measures designed to remove policy con- straints to efficient growth and exports of engineering products will not be instituted. Also, the effectiveness of these policies in generating exports will depend on COI maintaining real exchange rates which provide adequate incentives for manufactured exports relative to production for the domestic market. While these policy-related risks will continue to exist, they are lower than usual. The pronouncements made and measures taken during CY85 represent major moves to address the problems blocking efficiency and exports of manufactured products; these measures are judged to be adequate in achieving significant improvements in productivity and exports. The Government is adamant about the need to remove procedural bottlenecks; private industrialists and public policy-makers anticipate that the process of streamlining procedures will continue. The main area in which additional policy change would have a significant impact on com- petitiveness and exports of engineering products is: allowance of entry and expansion by firms regardless of size, in product groups reserved for SSI, at least in thrust industries. Also, while policies and procedures for import of technology and capital goods have been liberalized, additional measures would reduce the dependence of firm-level upgrading moves on the continued "liberal spirit" of government approval authorities. Further changes in these areas are under active consideration by GOI. A host of committees, task forces, and minis- tries have developed proposals on further decontrol of the industrial sector. While uncertainties exist as to which proposals will work their way into policy and how soon additional changes will be made, further measures to promote efficiency, economies of scale and exports are expected in the near term. 7.06 As with all projects, risks exist that the capabilities of the implement- ing agencies will be inadequate to commit the funds on schedule to subprojects which meet agreed eligibility criteria. We anticipate no difficulties in ICICI or Ex-Im Bank complying with their responsibilities under the project. ICICI has an excellent track record under past loans, and already has made most of the management, organization and staffing moves to ensure expeditious use of the amounts allocated to export-oriented engineering subprojects and to the Productivity Fund. ICICI will include in its bi-annual reports an assessment of planned vs. actual productivity improvements and exports of firms financed. This will enable GOI and the Bank to assess the effectiveness of eligibility criteria and investments in achieving project objectives. Likewise, Ex-Im has developed a detailed pre-launch plan, and the recent promotion of the Managing Director to Chairman should ensure that Ex-Im's commitment to implementing this component is maintained. In the case of commercial bank financing of engineering ancillaries, risks exist of slow commitments at the outset of the project. During the last six months, participating commercial banks have prepared detailed action programs for implementing the ancillary financing component, and the equity arrangements now make participation highly attractive to the banks. We envisage no difficulty in having the necessary two out of four banks meeting the conditions of participation by the time of loan effectiveness. Full implementa- tion of this component is expected to commence in early CY86, after which commit-  -43- ments should proceed rapidly. Frequent IBRD missions will be important, par- ticularly during the initial year of project implementation. VIII RECOMMENDATIONS 8.01 During negotiations, agreements and understandings were conf:rmed between COI, ICICI and IBRD on: (i) Contents of the Loan Agreement between IBRD and ICICI, including: Covernment guarantee, basis for onlending rate and spread, amounts allocated to export-oriented engineering firms and other enterprises; subproject eligibility criteria; provisions for sub- project review, procurement and disbursement procedures; foreign commercial financing requirements; debt-equity and debt service coverage limits; changes in Strategy StAtement; and organization iind staffing (paras. 5.05-5.12, 6.02-6.05). (ii) Contents of the Loan Agreement between IBRD and GOI and Financial Agreements between COI and PCBs as as they apply to comercial banks' financing of engineering ancillaries, including: subproject and subloan eligibility criteria, terms and conditions; conditions of participation; procurement, disbursement, subproject review and reporting requirements; arrangements for proceeds to be retained as equity by the banks, in amounts equal to eligible disbursements of IBRD funds; onlending rates and GOI assumption of foreign exchange risk and repayment obligation to IBRD; provision for IBRD supervi- sion of end use; reporting, accounting and auditing requirea-znts for project accounts (paras. 5.13-5.21). (iii) Contents of the Project and Financial Agreements for the Productivity and Export Marketing Funds. Statement of Policies and Operating Procedures for the Productivity and Export Marketing Funds (Annexes 2 and 3). Organization, staffing, and other plans to launch implementation of the Funds. Composition of the Steering Committee and delegation of approval powers to ICICI and Export-Import Bank. Arrangements to facilitate disbursements under the Fundp (paras. 5.34, 7.01-7.06). (iv) Contents, methodology and reporting arrangements for ICICI monitor- ing of the policy program, as well as activities and impact of the four components of the Industrial Export Project (paras. 7.07-7.08).  -44- 8.02 Both Loans will be made effective simultaneously. Conditions of effec- tiveness of the Loans will be: For the ICICI Loan ti) Revised ICICI Strategy Statement ratified by ICICI Board and agreed staffing of Division IV (6.01). For the GOI Loan (ii) PCB Financial Agreements signed between GOI and at least two PCBs which have complied with agreed conditions of participation, includ- ing minimum organization, staffing, and procedures to launch implementation of the ancilliary financing component (5.15, 5.21, 6.01). (iii) Signing of EMF Project Agreements and Financial Agreements, ratifica- tion of agreed Statement of Policies and Operating Procedures for the EMP by Ex-Im Bank's Board and by the EMF Steering Commitvee; and agreed minimum staff to manage the EMF hired (5.29, 6.01). (iv) Signing of PF Project Agreements and Financial Agreements, ratifica- tion of the PF Statement of Policies and Operating Procedures by ICICI's Board and the PF Steering Committee; and agreed minimum staffing in place (5.34, 6.01).  -45-. Annez 1 Page 1 of 3 INDUSTRIAL EXPORT PROJECT PROGRAM FOR FINANCING ANCILLARY DEVELOPMENT 1. Under the proposed Industrial Export Project, $70 million equivalent of IBRD Funds would be made available to participating commercial banks (PCBs) for lending to engineering ancillary units. Eligible Institutions 2. The main features of the component, i.e. eligibility of criteria, terms and conditions, procurement and disbursement procedures, supervision and reporting requirements, would be outlined in: (i) the IBRD Loan Agreement with OI (ii) Financial Agreemencs between OI and PCBs, and (iii) Statements of Policies and Operating Procedures of the PCBs. The Loan and Financial Agreements and Policy Statements will contain: (a) actions taken and planned by the PCBs to provide adequate organization, staffing and training to perform the engineering ancillary lending operation under this project; (b) eligible activities, lending rate, arrangements for channelling the funds to the PCBs! procurement and disbursement requirements; (c) PCBs quarterly reporting requirements covering: comitments, disbursements, staffing position for this activity, supervision and collection performance; and (d) IBRD supervision and reporting requirements. Eligible Enterprises 3. Engineering ancillary firms which supply a substantial portion of their output (components, processes and finished products) to a large engineering firm, or which has satisfactory arrangements for such a tie-up, would be eligible for assistance under the scheme. Preference would be given to engineering ancillaries which already have such tie-ups with medium and large engineering firms seeking assistance for BMRE investment under the term lending component from ICICI. Eligible Activities 4. The foreign currency portion of term loans provided by a participating commercial bank to an eligible ancillary engineering firm would qualify for finance under the program. Such finance would provide for import of equipment, foreign exchange elements of permanent working capital, and lump sum payments, if any, for import of technical know-how.  -46- Annex 1 Page 2 of 3 5. Subproject Eligibility Criteria Size of the Enterprise : Up to US$2 million in fixed assetB (excluding land and buildings) at the time of application. Maximum Amount of Refinanceable Foreign Currency Loan : $500,000 Minimum Refinanceable Amount $50,000 Promoter's Contribution : At least 20% project cost Debt:Equity Ratio of the Enterprise : Not exceeding 2:1 normally but in no case exceeding 3:1 Debt Service Coverage : Not less than 1.5 Domestic Resource Cost : Acceptable Terms of Assistance Lending Rate to Sub-borrowers : 15X per annum, non-subsidized rate for the term loans to industry Repayment Period : Up to 10 years including a grace period of up to 3 years Commitment Charge to Sub-borrowers 1X per annum 6. Free Limit and Appraisal. Appraisal formats for subprojects to be financed under the scheme would be prepared by PCBs in a form acceptable to IBRD, with the formats simplified in view of the small size of subloans to be refinanced. Appraisal reports would need to pay particular attention to marketing arrangements and technology upgrading moves made by the ancillary. The appraisal reports should assess financial viability with a close look at the cost structure, market arrangements, and the cost and quality of the proposed output vis-a-vis international standards, to help ensure that the subproject increases the expor- tability of the ancillary's output. 7. The first five proposals from each participating banks would have to be submitted to IBRD for approval irrespective of the amount of assistance. Thereafter, a free limit of $250,000 in respect of each proposal and outstanding amount of $500,000, including the proposed assistance in respect of repeat assis-  -47- Annex I Page 3 of 3 tance to each engineering ancillary firm would operate. All other appraisal memoranda below the free limit would be sent to IBRD for information, to ensure that eligibility criteria had been met. Flow of Funds 8. Under the Industrial Export Project, GOI will borrow US$70 million, on normal IBRD terms and conditions, for the ancillary financing component. GOI will make these funds available to commercial banks which have met conditions of participation. Commercial banks would onlend to eligible engineering ancillarie, at 152. Clients' obligations would be in rupee equivalent of amounts financed, calculated on the date of disbursement; COI would bear the foreign exchange risks on repayment of the IBRD loan. Funds received by each commercial bank under this program will be reflected as additional equity, not repayable to COI. 9. Procurement and Disbursement Procedures. The goods required under the proposed loan will be procured by ancillary industries either directly from over- seas or from local commercial sources. Given the small size and variety of subloans, it will not be feasible to follow international competitive bidding proeodures. The PCBs will be required to evaluate the proposal based on three quotations. IBRD will disburse against full documentation for subloans above the free limit. For subloans up to the free limit (US$250,000) disbursements would be made against statement of expenditures provided by PCB as it will not be feasible to disburse against full documentations, due to the large number of small transactions. PCBs will retain supporting documents, which will be available for periodic review by the Bank's supervision missions. The Bank will finance lOOZ of foreign exchange expenditures for eligible goods and services. 10. Reporting Requirements. All PCBs will be required to submit to GOI, ICICI and IBRD quarterly reports on comitments, disbursements, and collections, and biannual reports on organization, subprojects, and impact. Contents of quarterly and bi-annual reports were agreed with each PCB prior to negotiations and with GOI during negotfations.  -48- Annex 2 Page 1 of 5 EXPORT-IMPORT BANK EXPORT MARKETING FUND DRAFT STATEMENT OF POICIES AND OPERATING PROCEDURES Background and Objectives 1. The objective of the Industrial Export Project--Engineering Products is to increase competitiveness and exports of India's engineering products. The Export Marketing Fund has been designed to address one of the key factors contributing to the slide in India's shara of LDC exports of engineering products: poor marketing performance particularly in the industrialized export markets. These markets account for 60% of world imports and LDC exporto of engineering products. At the present, India exports only about 20Z of its engineering exports to Western Europe and North America. The Export Marketing Fund (EMP) will give encouragement and financial support to a range of strategic export marketing activities, with a particular focus on industrialized markets. 2. Eligible Product Groups. EMP support will be concentrated on a limited range of engineering product group:. chosen for high export growth potential, with most products having strong prospects in industrialized markets. The following products will be eligible for support: - auto ancillaries, spares - commercial vehicles, scooters - bicycles, parts - electric motors, starters - diesel engines, pumps - chemical, process plant - handtools - industrial valves - machine tools, accessories - computer software - castings, forgings This list will be subject to regular review and can be revised based upon mutual agreement between Ex-Im Bank, IBRD, and the EMF Steering Committee. 3. Eligible Activities. Most EMF expenditures will be to cover 50% of the costs of eligible company-level export marketing activities, with payments made toward technical and advisory services, and travel costs. Company-level activities eligible for such support will be the following: (a) Desk Research is an important measure in directing field research at most promising geographical areas, and product market segments. (b) Overseas Field Market Research, a main input into the formulation of an export marketing strategy, should aim to answer the four questions fundamen- tal to such a strategy: (i) Which products are required? (ii) what are the channels of distribution? (iii) who makes the purchasing decision? (iv) what factors affect this decision?  _49_ Annex 2 Page 2 of 5 (c) Minor Product Adaptation. When market research shows product adaptation to be requiredtjustifled, support will be given for advisory and technical services in product re-design, advice on packaging and product testing. Major product adaptation expenditures would be covered under the Productivity Fund and term loans from ICICI and the commercial banks. (d) Overseas Travel by Company Executives. Travel and subsistence costs would be supported for purposes directly related to the company's marketing strategy e.g. (i) finding and appointing agents and distributors; (ii) direct selling; and (iii) keeping up-to-date with product developments. This activity would be supported only when travel is directly related to a strategy based on adequate market research. (e) Product Inspection Services. In cases in which overseas buyers are concerned about product quality and consistency, companies should be encouraged to use the seal of approval of a recognized inspection agency. The choice of inspection agency will be open to the company, but it is likely that most buyers will be impressed by a seal of approval from an internationally recog- nized agency. (f) Training. To encourage a more informed, strategic approach to export marketing, particularly in industrialized countries, support will be given to training in export marketing, including: (i) export marketing methods such as pricing, distribution channels, and promotion methods; (ii) export market research; (iii) organizing an export department; and (iv) export procedures including GOI support schemes, shipping and forwarding. (g) Establishing Overseas Operations. While the direct operating expenses of overseas operations (e.g. warehouses, sales offices) will not be funded by the EMF, support will be given during the planning and start-up phases of such operations for travel by company executives and the costs of advisory and technical services on warehouse siting, recruiting local staff, and sales force organization. (h) Travel to India by Potential Buyers. Support will apply only where a buyer is invited by one or more exporters, and will extend only to the contribution to travel costs made by these buyers. 5. Support Expenditures. In addition to partial funding for company level activities, the EMF will improve support services: (a) Strengthening Service Supply. Costs by service suppliers in improving of services relevant to activities in paragraph 3 will be eligible for support. Such service suppliers would include market researchers, management consult- ants and training institutes. Eligible costs would incLude travel and tech- nical services. Typical uses would include: (i) travel overseas to estab- lish linkages with marketing consultants; and (ii) hiring of consultants to help structure export marketing courses.  _50_ Annex 2 (b) Published Trade Information. A good general trade information library exists at TDA, New Delhi. In addition, OOI is considering the establishment of a National Centre for Trade Information. There is a need for a second tier of libraries to concentrate on specific product groups, where coverage might extend to a regularly changing display of competitors' samples, overseas product catalogues, trade journals and market surveys from India and abroad. The Fund would support the establishment of such libraries, where relevant to eligible product groups, probably by product-specific trade associations. c) Crc:E Marketing Activities will be supported in two different cases. FIGEtly, if a group of companies wishes to undertake any of the activities listed in para 3, these activities would be eligible, but would be assessed using the same criteria applying to such activities undertaken by individual companies. The second case is when marketing information may be collected on behalf of sub-sector. This activity would be supported only when it is: ti) genuine addition to the existing database and not merely an update of statistics; (ii) designed to lead into company-specific market research; (iii) responds to a need for the information expressed by companies within the sub-sector; and (iv) work carried out by a competent market reseaLLcher. 6. Resources. During the three year commitment period of this project, the Export Marketing Fund will be supplied with US$10 million of IBRD funds, with 70Z earmarked for marketing activities targeted at industrialized countries. This will be utilized primarily for a 502 support grant for eligible firm and group expenditures. Support for trade information libraries will be limited to the first three years, on the basis of 75X support in the first year of operation, 502 in the second year and 251 in the third. The Ex-Im Bank will have the option of reducing this standard figure of 502 support in cases of unmanageable overdemand on specific eligible expenditures. For administrative simplicity, the standard 5OZ support will apply to all proposals, whether in foreign exchange or local currency. Direction and Management 7. The Steering Committee. The EMF will be managed by Ex-Im Bank. Operations will be guided by an EMF Steering Committee, which will: (a) approve the Statement of Policies and Operating Procedures and any updates of this Statement; (b) review progress on the basis of quarterly reports submitted by Ex-Im; (c) delegate to Ex-Im the power to approve proposals for EMF support of up to US$50,000 covering activities up to $100,000, full approval authority will be delegated to Ex-Im. The EMF Steering Committee will be chaired by the Secretary of Commerce; and will include high level representation from the Ministries of Finance and Industry, ICICI, EEPC, AIEI and Ex-Im. 8. Management Arrangements. Within Ex-Im, the EMF will be administered by a new Operating Group, Group VII-Export Marketing Fund. Initial staffing of the EMF Group will be one Manager plus four Product Officers. The Manager will be based at Head Office. One Product Officer will be based at each of the Regional Offices in Delhi, Bombay, Calcutta and Madras. This Group will have close links with Group V-Planning and Group VI-Coordination. Group V will provide information  '.51- Annex 2 Page 4 of 5 inputs on industrial capability and overseas market.. Group VI is responsible for the regional offices which will be utilized by the new group. Implementing Arrangements 9. Processing of Proposals. A client proposal would normally go through the following stages: (a) proposal preparation by the client and the responsible Product Officer, normally at the client's premises; (b) submission by the Product Officer to the EMP Manager and the Ceneral Manager in charge of Group VII; (c) decision by Ex-Im's Committee of Executives (COE), which can be convened weekly if required; (d) proposals over US$100,000 total expenditure referred for decision to the EMF Steering Comnittee; (e) decisions on proposals under US$50,000 expenditure will be exercised by the EMF Manager, in accordance with Ex-Im's existing arrangements for delegation of powers. All negative decisions are to be reported immediately to the COE; and (f) negative decision on proposals submitted will be conveyed to clients in person by the Product Officer responsible. In accordance with existing Ex-Im practice, proposals requiring urgent decisions (typically fire-fighting travel) will be dealt with by a special "fast-track" procedure. This will require the initials of any three members of the COE, to be reported ex-post at the next full COE meeting. 10. Approval of Services Suppliers. Ex-Im will draw up and maintain a list of service suppliers. A provisional list of about 100 suppliers has been developed. This list will be updated quarterly for submission to the Steering Comittee and IBRD. In addition, IBRD will need to approve the range of fee rates acceptable for categories of service. The approval procedure for new local service suppliers normally will require a visit by the Product Officer and the collection of prescribed information: (a) development of the practice including size, jobs done, number of representative offices; (b) membership in professional organizations, particularly those with mandatory codes of practice; (c) bio-data of all consulting staff to be used on EMF-funded activities; (d) fee-rate information; Ce) list of past clients in the activities concerned; and (f) Product Officer's assessment. 11. EHF Croup. Product Officers will be recruited with a first degree in engineering, an MBA and around five years of comercial experience in areas as closely related to export marketing and marketing consultancy as possible. The Manager of the Fund should have a similar academic background with longer experience, perhaps in the management of marketing consultancy operations or as an export manager. These new posts will be open to existing Ex-Im officers, as per  -52- Annex 2 Page 5 of 5 normal Ex-Im practice. The Produc'. Officer will form the primary point of contact and guidance for the individual company. The Manager of the Fund will have direct responsibility for service activities in support of individual companies. Product Officers will work on a quarterly planning cycle. Each quarter, they should: (a) visit each active client at least once; (b) attend at Head Office a quarterly review and planning meeting of Group VII, followed by a meeting with ICICI and AIEI, to coordinate with other project components; and (c) spend at least 50% of their time away from the office visiting companies, both active clients and prospects. The Manager of the EMF also should be away from base at least 50% of his time, on his direct responsibilities and to accompany Product Officers. 12. Administration. It is likely that Product Officers will be recruited at Scale III and the Fund Manager at Scale V. There will be an initial training program for this team, a proportion of which will be overseas, to give exposure to relevant markets. In addition, it is expected that each member of the team will undertake at least one short trip per year overseas, probably in conjunction with one of the overseas activities of a client. Junior officers from other groups within Ex-Im will be given an opportunity to accompany Product Officers, with the objective of developing new recruits to the team, maintaining continuity and developing links with other Groups. Ex-Im is to retain full documentation on all expenditures to support all statements of expenditure submitted to IBRD. 13. Action Plans. The detailed action plan for launching the fund has been developed, including the activities to bring the fund to the notice of potential users and service suppliers (Project File). 14. Ex-Im will prepare action plans for each year or partial year of operation. These are to be approved first by the EMF Steering Committee and then submitted to IBRD at least two months in advance of the year's start. Ex-Im will notify IBRD of any significant modifications to these plans. Quarterly reports by the management of the Fund also will be submitted to IBRD, to review progress and, where necessary, propose action by Ex-Im and/or the EMF Steering Committee. 15. Monitoring. Supervision missions by IBRD will take place regularly. These missions will include visits to individual plants, both with Product Officers and independently. These missions will have the rights of access to reports on and other outputs from activities supported.  -53. Annex 3 Page 1 of 4 ICICI PRODUCTIVITY FUND DRAFT STATEMENT OF POLICIES AND OPERATINC PROCED' RES 1. Objectives. Improvements in productivity, through introduction of relevant process and product technologies, will be needed in both large firmn and ancillaries to increase the export competitiveness of Indian engineering products particularly to larger, more demanding markets. The main objectives of the Productivity Fund would be to support engineering firms in devising and implement- ing appropriate measures: to improve production methods, productivity, quality control and maintenance systems; realize economies of scale; and bridge technology gaps, so as to increase their export capabilities. The scheme, at the level of individual firms or groups, would contain the following key elements: (i) an anal;sis nf the existing process/product technologies of relevant products; (ii) identification of the gap to be bridged between firms' present level of process/product performance and internationaLly acCepLable levels, and the measures which would be needed to bridge the gap; (iii) formulation of a strategy/action program for bridging the gap; (iv) preliminary moves to step up productivity and to initiate the process/product upgrading; and *v) implementation of the full program to improve the process/product quality. The proposed PF would concern itself with the first four items. When expanded exports are the immediate concern, capital investments and technology transfers which would normally result from steps (i) to (iv) would be considered as BMRE investments under the term lending component for engineering under the IndustriaL Export Project. In cases in which the exportability aspect is identifiable but not necessarily within immediate reach, PF assistance could also be used in help- ing firms identify and select appropriate BMRE investments as well as the techni- cal assistance, consultants, technicians and training required as a complement to the BMRE investments. 2. Eligibility Criteria. Firms eligible for assistance would be larger firms and ancillaries manufacturing engineering products and components with identified export prospects. The concerned firm, which need not be an ICICI client, would preferably be at least medium-sized. While any firm in the engineering subsector 1/ with plans to enhance productivity would be eligible for PF 1/ Defined as firms in Category 38 as well as castings and forgings, within the standard UNIDO classifications.  -54- Annex 3 Page 2 of 4 assistance, priority would be given to firms in thrust industries selected for special promotion due to identified export prospects in line with Indian compara- tive advantage. These thrust industries would include: handtools, vehicle parts, bicycles and parts, diesel engines and parts, machine tools, industrial and sanitary castings, commercial vehicles and scooters, and industrial machinery. Firms or groups of firms would be eligible for assistance under the Productivity Fund, on the same cost sharing basis. 3. Eligible Activities. Activities which would be eligible for cost sharing under the Productivity Fund Scheme would include: (a) Productivity Consultants and Technicians to assist in analyzing and implementing: i) cost reduction and quality improvement moves which firms could make with or without additional fixed investment but which would increase sales volume with a focus on improving material handling, processing methods and tooling to increase production efficiency and achieve consistent quaLity; (ii) choice of process/product technology which would be compatible with a sig- nificant expansion in exports to more demanding markets; (iii) setting up of Productivity Cells with specific work plans and with measurable achievements on projected yields and quality of production; or (iv) shared R and D effort to increase production efficiency. (b) Ancillary Develupment ConsuLtancy. Such assistance would be made available to supplier development departments of individual companies, as well as to groups of relevant firms. It could be used to identify with larger firms products suitable for production by ancillaries; to select ancillaries in a position to specialize, modernize and expand to meet a growing portion of a larger firm's requirements; and recom- mend appropriate internal organizations for more active ancillary development by larger firms. (c) Supervisor Training. Trainers and materials to develop and implement supervisor training in formal sessions and on the shop floor to improve the efficiency and effectiveness of supervisory functions, and enable needed improvements in productivity in relation to either the market in India or abroad. (d) Design and Product Adaptation. Consultancy and small material or capital expanditures to undertake design and product adaptation in response to identified market opportunities at unit level or through group cooperation and action. (e) Exposure to plants in competing countries and to other factories operated with foreign collaborators to tap the strong capabilities among Indian manufacturers to adapt appropriate production practices of others.  _55_ Annex 3 Page 3 of 4 Cf) Workshops, Seminars and firm level work by potential collaborators or institutions which see potential for expanding under exports, with such exercises directed at productivity and technology improvemet. (g) Expenditure if requiring Productivity Fund expenditureo of under US$25,000 incurred on: i) acquiring design/process know-how; (ii) R&D, especially of developmental nature witt a view to adapting product to export demand; (iii) prototnpe import; and (iv) jigs, fixtures and tools. 4. Provison of Funds to ICICI. The total size of the Productivity Fund will be US$10 million in IBRD funds. ICICI would administer the Productivity Fund on behalf of OI. To expedite payments, an amount of US$500,000 would be placed by COI in a foreign currency account; this would be replenished regularly, with the balance not to fall below US$250,000. All repayments to IBRD would be made directly by COI. ICICr would utilize the Productivity Fund to finance eligible development expenditures of firms or groups of firms. ICICI's administrative costs to operate the PF would be covered from its spread for direct lending under the Industrial Export Project. Auditing of transactions financed under the Productivity Fund will be done by an independent firm of auditors acceptable to 0oi, ICICI and IBRD. 5. In the case of "software" elements--consultants, technicians, training, exposure trips-the Productivity Fund would be utilized to cover up to 50X of the cost of the project, with PF financing being used to cover the foreign exchange portions. 1/ In the case of moderate amounts of hardware in removing production bottlenecks and in key areas to make significant breakthroughs in improving quality and productivity, at least 502 of these fixed costs would be covered by loans under the term lending component. The PP funds would be matched with the equity portion of the sub-project on a 50:50 basis with PF funding being used to cover a maximum of 25Z of sub-project costs. In the case of both software and hardware, PF financing for a single sub-project would not exceed US$200,000. 6. Management and Administration. The PF will be promoted jointly by ICICI and AIEI. Projects would be presented by individual firms, groups of firms or by engineering associations to an Advisory Committee. The Committee, which would meet at last monthly, would consist of at least four officers, two designated by ICICI, one by AIEI and one outside technical person with recognized stature in the engineering industry. The members would generally serve on the Committee for a period of two years. 1/ Thus, for example, in the case of hiring a foreign consultant, technicians or training teams, PF funds would normally cover fees, while the private sponsor would pay local taxes and maintenance expenditures for the consultant. In the case of exposure trips to foreign plants, the sponsor would cover the costs of tickets, with the PF being used for per diems.  -56- Annex 3 Page 4 of 4 7. The Deputy General Manager (Operation.) in charge of ICICI's Division IV and the Productivity Fund would chair these meetings. ICICI, as the financing agency for the Productivity Fund, would have final decision making authority. In preparation for its participation in managing the Productivity Fund, ICICI would establish a cell for promotional, advising and screening work for the Productivity Fund. The cell also would be responsible for supervising end-use and impact of activities financed. This work should generate new projects requiring term financing. Finally, the cell could provide assistance to normal lending and refinance operations when necessary,to help ensue that BMRE term loans will result in increasing the competitiveness and exports of engineering products. To carry out the tasks, it is envisaged that at full strength, the team of the cell would consist of 4 engineers-MBAs, an economist and a marketing officer. Initial staff would be the Productivity Fund Manager and two engineer-MBAs. IDEPUTY CENERAL MANAGER (OPERATIONS) I |Chief (Productivity Fundt} I I lEconomistI IMarketingi ITwo Engineers/MBAs Officeri I I l Officeri I l 8. The Steerring Committee for the Productivity Fund would be chaired by the Secretary, Heavy Industries. Members would include representatives of the Ministry of Industry and Finance, DCTD, AIEI and ICICI. 1/ The Steering Committee would oversee operations of the Productivity Fund. Its major responsibilities would be to: (a) Ratify the Statement of Policies and Operating Procedures for the Productivity Fund and make modifications if required; (b) Review quarterly reports by ICICI on activities financed, end-use and impact; (c) Delegate to ICICI the clearance powers for foreign currency allowan- ces and hiring of foreign consultants and technicians (except minimum GOI approvals), with ICICI ensuring that the activities and firms fall within the eligibility criteria established under the agreed policy statement, without requiring that each case be scrutinized by DGTD, or the Committee as a whole; and (d) Approve projects which involve PF financing in excess of US$100,000. 1/ If the Kapur Committee recommendations are implemented, the Steering Committee would have the same composition as the Empowered Committee.  -57- Annex 4 Page 1 of i1 INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI) ORGANIZATION, OPERATIONS AND FINANCIAL PROCEDURES I. INTRODUCTION 1. The Industrial Credit and Investmenc Corporation of India Limited (ICICI) was established in 1955. It has grown to become a major player in India's financial sysctm, accounting for 80% of insetiutional foreign exchange financing for industry. During the cwenty-seven years of the Corporation's existence, che Bank has made fourteen loans totalling US$765 milLion to ICICI. Over the last few years, ICICI has diversified its activities, and now provides a broad range of banking services iicluding working capital, mergers and acquisitions, ezport finance, supplier credits, underwriting and guarantees. ICICI also is playing a much more active role in assisting government in formulacing industrial policies, especially those related to the private sector. ICICI also has diver- sified its resource base, and is now established in the international financial markets. From 1981 through 1984, ICICI raised about US$250 million from the internal financial markets. ICICI is now a mature institution which could be used as an effective vehicle for reaching-specific target groups. _I INSTITUTIONAL ASPECTS 2. Ownership and Resources. Ownership of ICICI is dominated by public sector corporations, including LIC, UTI and a number of nationalized commercial banks. Of ICICI's issued share capital of Rs 337.5 million, public institutions hold 79%, foreign shareholders (mainly commercial banks) hold 14% and the remain- ing 7 is held by some 4,000 private Indian investors. As the public sector holds more than 50% of its shares, ICICI is classified as a Covernmenc compaly under the Companies Act for certain purposes such as the appointment of auditors. ICICI lends only to the private sector. 3. Resources. On December 31, 1984, ICICI's resources totalled Rs 19.3 bilLion. Foreign exchange equivalent to Rs 7.8 biLLion accounted for 41% of the total, while domestic resources provided the balance. The Bank has been the major source of foreign exchange resources for ICICI. Out of the total foreign exchange resources of US$626 million as of December 31, 1984, the fourteen loans from the Bank (net of cancellations and repayments) amounted to US$309.5 milLion, or 49Z. The balance consisted of commercial borrovings (US$254.5 million, or 412), other bilateral loans and export credits (US$63.7 million, or 10%). Although the Bank's share in ICICI's foreign exchange resources is still sizable, it has declined from 77Z in 1980 and 58% in 1983 to 49Z by the end of 1984. The Fourteenth Loan incor- porated an understanding that ICICI would raise matching resources (US$150 million) from international commercial markets. As of December 31, 1983, ICICI already has raised US$122 million on attractive terms (para. 17). The remaining balance was raised in May 1984 in Belgium. Under the proposed Industrial Export Project, iCICI is expected to intensify its resource diversification program (para. 18).  -58- Annex 4 Page 2 of 11 4. Orsanization. ICICI is well managed and operates effectively under a competent and experienced Board. The fifteen members of the Board represent OI (2 members), public financial institutions (1), foreign shareholders (2), the professions and business (8), and include two full-time executives of ICICI, Chairman and Managing Director and the Whole-Time Director. With Mr. S. S. Mehta retiring, Hr. S. S. Nadkarni became Chairman of the Board and Managing Director in early 1984. The Board meets regularly; it sets ICICI's overall financial and operational policies and decides on individual project proposals involving an exposure above Rs 20 million. Mr. Nadkarni initiated a major reorganization of ICICI in 1982 to enable the institution to operate effectively in the changed environment. ICICI's reorganization, which started in 1982, was completed by March 1983. 1/ The main objectives of the reorganization have been to decentral- ize authority and responsibility and to sLrengthen subproject appraisal, industry expertise, and supervision along subsector lines. There are nov four operating divisions, each responsible for different subsectors. 2/ The reorganization incorporates moves by ICICI to expand non-traditional activities, i.e., merchant banking, leasing, investment services to Indians overseas, and management services to other development banks. Also, the resource planning and mobilization function, especially from international financial markets, is given a more prominent role. ICICI is divided into five major groups: (i) operations; (ii) development and planning; (iii) finance; (iv) merchant banking and rehabilitation; and (v) regional offices. 5. The Operations Group, headed by the Ceneral Manager, 3/ is is the largest in professional staff and volume of business. The group is responsible for appraising new loans and monitoring the portfolio; in the past, the supervi- sion function was carried out by a separate department. Most legal staff, who were previously in a separate Legal Department, were brought into the Operations Croup. The objective is to reduce the period between appraisal and loan signing. However, some legal matters, which by their nature take time, and also legal issues not directly related to the loan documents will continue to be handled by the Legal Department which reports to the General Manager and Legal Adviser. The Finance And Resource Planning Group is headed by a Deputy General Manager, and is divided into two subgroups: foreign exchange and accounts; and resources and I/ A number of ICICI's middle-level managers will be retiring in 1984 and early 1985, which will mean more organizational changes. 2/ Operations I (paper, textiles, rubber products, goods, food, electricity generation and printing); Operations II (basic metal industries, metal products, cement, shipping and miscellaneous); Operations III (basic industrial, chemicals, fertilizers and pesticides, man-made fibers, sugar and other chemicals); and Operation IV (electrical equipment, machinery, transport, hotels and lines of credit). 31 The present General Manager also holds the position of Legal Adviser.  -59- Annex 4 Page 3 of 11 management information. With the increased importance of borrowings from foreign commercial sources, the resource mobilization function has been given a more prominent role in ICICI's structure. The merchant banking and rehabilitation functions are presently supervised by a Deputy Ceneral Manager assisted by an Assistant General Manager. The functions are divided into two departments, Merchant Banking and Rehabilitation. The Rehabilitation Department is responsible for the problem projects, which are transferred from the operating divisions if substantial measures are needed for their restructuring. The Development and Planning Croup has three functions: market and economic research; administration; and services to DPIs and other developmental activities. Regional offices report directly to the Whole-Time Director. ICICI now has three regional offices in New Delhi, Madras, and Calcutta. The New Delhi office is responsible for liaison with Government in addition to its lending functions. ICICI started its leasing opera- tion in early 1983 and this business has grown rapidly. The Leasing Division is headed by a competent middle-level manager in ICICI. A corporate office with a senior person as Executive Assistant was created to ensure that performance is evaluated through a comprehensive management information system. III. Operating Policies and Procedures 6. ICICI has no formal policy statement, but has relied on its Memorandum of Association, together with Government guidelines and the periodic resolutions of its Board, to provide a satisfactory operating policy framework. In 1977, ICICI's Board adopted a Statement of Financial and Operational Strategy which set out, in general terms, its lending strategy. Six broad areas were specified for priority attention: export industries; power and transport; agricultural related enterprises; industries basic to industrial growth; mass consumption goods; and balancing and modernization projects. With the Fourteenth Loan, ICICI updated this Statement to make it more specific in its priorities for lending and operations. The revised statement also reflects ICICI's resource policy and its intention to diversify its foreign exchange sources further. The statement out- lines ICICI's industrial promotion strategy. Under the proposed Industrial Export Project, ICICI will amend its strategy statement to reflect: the expanded emphasis on export-oriented projects, with a particular focus on engineering products; the eligibility criteria for these subprojects; the operations of the new Productivity Fund; and monitoring and evaluation criteria in assessing planned vs. actual results. This revised statement in a form satisfactory to the Bank would need to be approved by ICICI's Board prior to loan effectiveness of the Proposed Industrial Export Project. 7. Appraisal and Follow-up Standards. ICICI's appraisals continue to be of a high standard and incorporate a thorough treatment of technical, financial, market and economic aspects. Follow-up procedures and project supervision stand- ards also are satisfactory: clients submit detailed quarterly progress reports to ICICI for review and follow-up. Problem projects are visited at least once a year and a satisfactory system of reporting and management review exists. ICICI also reserves the right to appoint a director on its clients' board and has done so in 290 cases.  -60- Annex 4 Page 4 of 11 8. Onlending Terms. For both domestic and foreign currency loans, JCICI's standard rate of interest, except for subloans from euro-currency sources which now will bear a floating rate of 22 over six month. London Inter-Bank Rate (LIBOR), is 14Z. Interest rate on domestic currency loans ranges from 11.5Z to 15.5Z based on the type of the loan. Loans to new projects in designated backward areas receive a concession, depending upon the location, on the first Rs 20 million of institutional assistance of 1.5X p.a. on the standard rate. Also, loans for modernization receive a concession (on the first Rs 40 million) of 2.52 p.a. on the standard rate. In addition, a further 12 p.a. surcharge on interest is levied on companies whose shares are not listed on a stock exchange. Given the relatively low inflation rate in India, ICICI's interest rates have been significantly lIositive in real terms and are expected to remain so, based on the Bank's present inflation projection for India. Furthermore, ICICI's foreign exchange subborrowers bear the exchange risk which, in the past, has resulted in higher effective rates. ICICI continues to charge a 1Z p.a. commitment fee on foreign currency loans, and a commitment fee ranging between 0.252 and 12 p.a. on domestic currency loans after 180 days from the date of sanction up to the date of loan agreement, whichever is earlier. ICICI's standard terms provide for maximum loan maturities of up to 15 years including up to 3 years grace, which conform to those offered by the other all India term-lending institutions. IV. OPERATIONAL PERFORMANCE 9. Recent Performance. A summary of ICICI's operational performance for the last five years (1980-1984) is shown in Table 1. Table 1: Summary of Operations (1980-1984) (Rs Million) 1980 1981 1982 1983 1984 Z (1984) Operations Loan Approvals - Foreign Currency 766 1,065 973 1,390 1,653 29 - Local Currency 1,078 1,455 1,847 1,955 2,488 44 Total Loans 1,844 2,520 2,820 3,345 4,141 73 Guarantees 11 7 141 260 284 5 Underwriting 77 205 190 225 399 7 Direct Subscription 30 29 40 92 64 1 Suppliers Credit 341 78 298 370 567 10 Leasing - - - 122 223 4 Total Approvals 2,303 2,839 3,489 4,414 5,678 100 Commitments 2,254 2,797 3,465 4,031 4,366 Disbursements 1,692 2,226 2,922 3,348 3,881 Source: ICICI  -61- Annex 4 Page 5 of 11 As of December 31, 1984, ICICI had approved financing totalling Re 32.4 billion (US$2.6 billion), committed Rs 27.6 billion And disbursed Rs 24.3 billion. During the 1980-1984 period, ICICI increased its operations at a compounded annual rate of about 25%. Lending in foreign currency grow at a rate of 211 p.a., compared with the rate of 27X for rupee operations. During the period, ICICI's operations expanded in new areas with merchant banking and leasing operations becoming more important. Due to the substantial increase in non-landing operations, the share of foreign currency lending as a percentage of ICICI's total operations declined from 40X in 1981 to 29X in 1983. In 1984, ICICI's total disbursements of Rs 3.9 billion were equivalent to about 15X of those of all development finauce institu- tion. and roughly about 8% of total private industrial investment in India. 10. Impact and Characteristics of Past Assistance. As of December 31, 1984, ICICI had approved direct assistance totalling Rs 30.0 billion for some 4,100 projects. The sub-sectoral distribution of assistance reflect. ICICI's concentra- tion on non-traditional and technologically more advanced industries. The engineering sector including metal products, mechanical and eLectrical machinery and transport equipment accounted for about 24% of the total followed by the chemical and petrochemical industries (22Z). Other subsectors receiving a sig- nificant proportion of ICICI financing were: textiles (12%); basic metal (9%); cement (9Z); and pulp and paper (6Z). ICICI's clients are predominantly medium -a large sized private enterprises. In 1984, ICICI's average assistance per project was about Rs 13.9 million (US$1.1 million). However, only 45% of the firms had net fixed assets of less than Rs 100 million. ICICI has emphasized the modern- ization and upgrading of clients' plant and equipment to improve overall industrial efficiency. These efforts involve advising clients at the appraisal stage on technology choice. ICICI also provides technical assistance, through its merchant banking division, to industries which need financial restructuring. The geographical distribution of assisted projects is somewhat skewed toward the more industrialized states in Western India; however, ICICI has made progress in diversifying its portfolio geographicalLy, and its assistance now matches more closely that of other lenders and investors in states with the infrastructure necessary to attract medium and large private industrial projects. 1/ 11. ICICI carries out an annual review of the financial performance of ccnpanies in its portfolio. Of this sample analyzed for the year 1983, the average return on equity after tax was 14%, and return on capital employed was about 18%, which is good. Most companies financed by ICICI have a sound capital base with an average debt:equity ratio of 0.68. The economic impact of ICICI financed projects also has been setisfactory. The weighted average ex-ante economic rate of return for 96 projects approved in 1983 was 36%. These invest- ments are expected to create about 38,000 new jobs at an average investment cost per job of about US$19,400; this is reasonable in view of 'he concentration on balancing and modernization. Furthermore, a significant proportion of ICICI's cAients export, contributing 15% to 20% of India's manufactured exports. 1/ About 39% of approvals over the last five years (1980-1984) have gone to projects in backward areas.  -62- Annex 4 Page 6 1 12. Other Developmental Activitieo. lCICI undertakes a broad range of complementary activities and services aimed at enhancing its overall developmental impact. These activities include: industrial subsector and policy studies; identification and promotion of new projects; and training and advisory support for other domestic and foreign financial institutions. Most of these activities were initiated following the joint Bank/ICICI study of ICICI's developmental impact in 1973. ICICI's program of industrial subsector and policy studies was initiated under the Eleventh Bank Loan, with a study on the problems and prospects of manufactured exports. This was followed by a study of the automotive products subsector, carried out in conjunction with the Twelfth Loan. In addition to these major studies, ICICI has completed a number of shorter papers on, for examplo, price and distribution controls in the sugar and cement industries, the impact of industrial licensing, and the economics of small coment, steel and paper plants. These papers have been used by various Covernment Comittees in their policy reviews. The development of its capacity to provide training and conoultancy services to DFCs in other countries was a subsidiary focus. In connection with the Thirteenth Loan, ICICI undertook two studies: energy utilization and conser- vation in industry; and electrical equipment. During the Fourteenth Loan, a major study on exports was conducted by ICICI. The study consisted of two parts: first, an update of the previous analysis on relative profitability and incentives; and second, a survey of clients to determine constraints in either expanding or starting exports of manufactured goods. The Economics Department of ICICI deepened that firm-level analysis as a partner in Bank sector work on Industrial Export Development and Finance. The proposed project is an outgrowth of this work. V. Financial Aspects 13. Financial Results and Position. ICICI's financial results for the 1980-1984 period are summarized in Table 2. ICICI has performed exceptionally well, espe-ially sitice 1981. Net profits after tax as a percentage of average networth during the 1981-1984 period averaged 23% compared with 16% in 1980. The improvement in profit was due to higher margin, volume and lower effective tax rate. The interest rate spread increased from 2.8% in 1980 to 3.8% in 1983 and declined to 2.5% in 1984 due to the rapid increase in ICICI's borrowing from commercial narkets. Administrative expenses measured as percentage of average total assets declined from 0.6% in 1981 to 0.5% in 1984.  -63- Annex 4 Page 7 of 11 Table 2: Summary of Financial Conditions and Results (1980-1984) (Rs Billion) December 31 1980 1981 1982 1983 1984 ASSETS Current Assets & Short-Term Investments 0.8 1.7 1.9 1.3 1.7 Investments (Shares & Debentures) 0.6 0.6 0.6 0.8 0.8 Loans - Local Currency 3.3 4.3 5.8 7.7 9.4 - Foreign Currency 2.3 3.0 3.7 4.6 5.5 Fixed Asseti (Not) 0.0 0.0 0.0 0.1 0.2 Total Assets 7.0 9 12.1 1M 7.7 ... ... .... .... m... LIABILITIES & NETWORTH Current Liabilities 0.3 0.4 0.6 0.8 1.1 Rupee Borrowings 4.0 5.5 7.1 8.4 10.1 Foreign Currency Borrowing 2.1 2.9 3.5 4.1 5.1 Total Borrowings 6.1 8.4 10.6 12.5 15.2 Paid-In Capital 0.3 0.3 0.3 0.3 0.4 Reserves 0.3 0.5 0.6 0.8 0.9 Total Networth 0.6 0.8 0.9 1.1 1.3 Total Liabilities & Networth 7.0 9.6 12.1 14.3 17.6 Net Profit (after tax) Rs Million 89 164 203 232 232 Net Profit as % of average Networth 16.0 24.6 24.8 23.5 19.3 Administrative expenses as 2 of average total assets 0.6 0.6 0.5 0.4 0.5 Long-Term debt:equity ratio 9.7 11.4 11.7 11.5 11.5 Debt:EquiI7 ratio (as defined in the latest Bank agreement) 13.2 10.5 9.6 10.3 9.8 Source: ICICI. ICICI's total assets passed the Rs 10.0 billion mark for the first time in 1982 and increased further to Rs 17.6 billion at the end of 1984. Assets were financed by rupee borrowings (57O), foreign currency borrowings (29Z), other liabilities (6O) and networth (8%). The rapid growth in assets corresponded to the surge in ICICI's business from 1981. This was due to the improvement in investment climate and ICICI's concerted efforts to diversify and promote new business. Due to the increase in profit, ICICI's debt:equity ratio as defined in the latest Bank loan agreement, declined from 10.5:1 in 1981 to 9.8:1 by the end of 1984.  -64- Annex 4 Page 8 of 11 14 Quality of Portfolio. ICICI's portfolio quality remains sound. At the end of 1984, there were 241 projects in arrears involving a total amount Rs 1.8 billion, or 11.7X of the portfolio. However, the actual principal amount in arrears was only Rs 195 million, or 1.32 of total principal outstanding. Out of 241 cases, 74 were in projects facing severe difficulties involving a total prin- cipal of Rs 500 million. The actual principal in arrears were about Rs 96 million. These hard-core problem projects are handled by the Rehabilitation Unit under the Merchant Banking Department. ICICI has a policy of not accruing inter- est on non-performing assets and writing off the amounts in doubt annually as needed. ICICI does not make provisions for losses, as provisions are not tax deductible in India. Most ICICI loans are secured by fixed assets and the reser- ves are adequate to cover the potential write-offs. Since ICICI lends to large and fairly well established companies and has a good supervision system, it has been able to maintain eood collection ratios. Collection ratios on current amounts falling due have averaged over 862 during the 1981-1984 period and the collection ratios to total dues (including the past dues) have been maintained at around 752 in 1984. A major part of the arrears problem is due to consortium lending, especially in cases in which IFCI and IDBI are the lead institutions. ICICI has limited control on the speed in which other lead institutions act to recover the loans. To overcome this problem, ICICI is trying to increase its non-consortium business. Presently, ICICI can lend directly up to Rs 30 million without going to the consortium. This is a sound strategy and should at least enable ICICI to hold its present position regarding arrears.  -65- Annex 4 Page 9 of 11 VI. PROSPECTS 15. Projected Operations. Given the continued improvement in the investment climate, existing pipeline and ICICI's promotional efforts, the business prospects for ICICI are likely to be good. ICICI's management expects its lending opera- tions to increase at an annual rate of 202 in current prices over the 1985-1989 period. This is achievable given ICICI's track record during the 1981-1984 period and the relatively small size of ICICI. A summary of ICICI's projected operations is provided in Table 3. Table 3: Summary of Projected Operations (1985-1989) (Rs Billion) December 31 1984 1985 1986 1987 1988 1989 (Actual) APPROVAL Rupee Loans 1/ 3.1 3.7 4.5 5.4 6.6 8.0 Foreign Currency Loan 1.7 2.0 2.4 2.8 3.4 4.1 Total Loans 4.8 5.7 6.9 8.2 10.0 12.1 Investments (Shares & Debentures) 0.4 0.5 0.7 0.7 0.8 0.9 Total 5.2 6.2 7.6 8.9 10.8 13.0 =ao a.a now QX- COMMITMENTS Rupee Loans 2.7 3.1 3.7 4.3 5.2 6.3 Foreign Currency Loans 1.2 1.7 2.0 2.4 2.8 3.3 Total Loans 3.9 3.8 5.7 6.7 8.0 9.6 Investments (Shares & Debentures) 0.1 0.3 0.4 0.4 0.5 0.6 Total 4.0 5.5 6.1 7.1 8.5 10.2 === =-= =e fflQ === DISBURSEMENTS 3.8 4.2 5.1 6.0 7.2 8.7 Guarantees (Committed) 0.1 0.3 0.4 0.4 0.5 0.5 Leasing 0.2 0.2 0.2 0.2 0.2 0.2 I/ Including suppliers' credit. Source: ICICI. 16. Resource Requirements and Commercial Borrowings. From January 1, 1985 to June 30, 1987, ICICI would need about US$490 million to meet its foreign exchange requirements. As of December 31, 1984, ICICI's foreign exchange resour- ces amounted to about US$94 million leaving a gap of US$396.0 million. The proposed Bank loan of US$160 million under the Industrial Export Project will further reduce the gap to US$236 million. Given ICICI's established track record in raising funds from the commercial markets, direct co-financing is not proposed. Under the Industrial Export Project, ICICI would undertake to raise at least US$160 million from the international financial markets to match the Bank loan on a 50:50 basis. ICICI's planned commercial borrowings from January 1, 1985, until the proposed Bank loan becomes effective will be included in the package.  -66- Annex 4 Page 10 of 11 17. In 1981, ICICI agreed to raise US$150 million in commercial markets and export credits to meet the co-financing requirements of the Fourteenth IBRD Loan (2051-IN). As of December 31, 1984, ICICI has already raised US$150 million in various forms. This includes: a US$50 million euro-currency loan in October 1981; a floating rate note issue of US$30 million in October 1981; a U.K. export credit of US$8.0 million; and a two currency auro-credit of US$50 million in March 1982. The latest euro-credit was borrowed at attractive terms of seven years with a spread of 3/4Z over LIBOR. The balance of US$28 million was raised in Belgium in May 1984 through a tax bearing issue of US$30 million at a rate of 3/8 over LIBOR. 18. ICICI has intensified its resource mobilization efforts. It has already completed a Yen bond issue in Tokyo Capital Market in August 1984 for an amount of Yen 5 billion (equivalent to US$22 million). Thuse bonds carry a coupon rate of 7.92 (that is, the long-term prime rate in Japan without any mark-up) and an issue price of 1002. It has a maturity of 7 years including a grace period of 4 years to give an average life of 6.4 years. ICICI has also awarded the necessary man- date to Midland Bank (jointly with National Westminster) on tax-sparing basis. This loan is expected to be signed during the third week of September 1984. The loan is for a maturity of 8 years including a grace period of 4 years. Interest is payable on variable basis at a spread of 0.252 over LIBOR, with a front-end fee of 3/16X and commitment fee of 3/16X. ICICI will draw the loan in two tranches, that is, dollar tranche (US$25 million) and European Currency Units (ECU) tranche (of ECUs 30 milLion). Borrowing in ECUs would afford ICICI and its subborrowers benefit of averaging of interest rates as also exchange risks, as ECU is a com- posite of 9 European currencies. ICICI is presently negotiating a credit arrange- ment with a consortium of Swiss banks led by Union Bank of Switzerland. It is expected that this credit line would be for Swiss Francs 50 million to be utilized for financing imports from Switzerland. The line will be for a maturity of 10 years and carry interest spread of 1.75X over issuing rates in Switzerland (present issuing rate being 4-3/4Z, the rate applicable to ICICI works out at 6.5Z presently). Overall, ICICI has established good rapport with international banks and enjoys favorable treatment as regards terms and conditions on which it obtains resources as also in exploring new projects for borrowing funds. For instance, ECUs are being obtained for the first time in India. Also, terms that ICICI negotiated both for Yen bond issue and the proposed euro-loan in London are very attractive. It is expected that ICICI will be in a position to float euro-bond issues in the euro-markets in the near future. 19. Projected Financial Positions. ICICI's projected financial position and results are summarized in Table 4. Barring a major downturn in the Indian economy, ICICI is expected to continue to be a financially sound and profitable institution. ICICI's profits after tax are projected to increase from Rs 228 million in 1984 to Rs 497 million in 1989, roughly in line with the projected growth in total assets. Return on equity is expected to average about 19%, which is very good. The nominal interest spread on lending operations is expected to remain above 2.5% p.a., which is satisfactory. Dividends are expected to be maintained at 16Z, allowing an adequate ploughback of net earnings. Total assets are expected to grow from Rs 17.6 billion in 1984 to Rs 38.1 billion in 1989, an annual growth rate of about 17Z. The loan and investment portfolios are expected to increase at about the same rate from Rs 15.7 billion in 1984 to Rs 34.3 billion in 1989. ICICI expects to maintain its average debt uollection ratio at over 80%,  -67- Annex 4 Page 11 of 11 which should be attainable based on past performance and Lts strategy of increas- ing direct lending. On this assumption, the debt service coverage ratio would remain above 1.3:1 throughout the period, within the proposed limit of 1.1:1. In the second half of 1984, ICICI plans to issue Re 67 million in new equity issues. This will further strengthen the capital base of ICICI. ICICI's debt:equity ratio is projected to remain well below the 12.l contractual limit. Table 4: Sumuary of Projected FinanciaL Conditions and Results (1984-1989) (Rs Billions) December 31 1984 1985 1986 1987 1988 1989 (Actiial) -- ASSETS Current Assets 1.7 1.7 2.0 2.4 2.6 3.2 Foreign Currency Loan 5.5 6.2 7.0 7.8 8.8 9.9 Local Currency Loan 9.4 11.1 13.2 15.7 18.8 22.3 Total Outstanding Loans 14.9 17.3 20.2 23.5 277. 32.2 Investments (Shares & Debentures) 0.8 1.0 1.2 1.4 1.7 2.1 Fixed and Leased Assets 0.2 0.3 0.4 0.5 0.6 0.6 Total Assets 17.6 20.3 23.8 27.8 32.5 38.1 ,,nm ,,,, ,m _. _-in *- LIABILITIES AND NETWORTH Current Liabilities 1.1 1.2 1.4 1.6 1.8 2.1 Rupee Borrowings 10.1 11.9 14.1 16.7 19.8 23.6 Foreign Currency Borrowing 5.1 5.6 6.4 7.3 8.3 9.4 Total Borrowings 15.2 17.5 20.5 24.0 28.1 33.0 Paid-In Capital 0.4 0.4 0.5 0.5 0.5 0.5 Reserves 0.9 1.2 1.4 1.7 2.1 2.5 Total Networth 1.3 1 6 1 .9 2.2 2.6 3.0 Total Liabilities & Networth 17.6 20.3 23.8 27.8 32.5 38.1 ass= s=:s ses == = Net Profit (Rs Million) 228 324 322 413 407 497 Net Profit as Z of Avg. Ietworth 19.0 22.0 18.4 20.0 16.8 17.7 Administrative Expenses as Z of Average Total Assets 0.5 0.4 0.4 0.4 0.4 0.4 Debt Service Coverage Ratio 1.2 1.3 1.3 1.3 1.3 1.3 Total Debt:Equity Ratio 11.7 10.9 10.8 10.9 10.8 11.0 Debt:Equity Ratio (IBRD) 9.8 9.8 10.0 10.0 10.2 10.4 Source: ICICI.  INDIA First Industrial Ezuort Pr.ie-ett-oaoeriaz tro2uctS USTIKATID COIUITMWU AND DISIUUBEU scUIDUI (9UO mliion) Coieit-entc Disbursements ICICI Slu fX-l Ban ICICI (Pf Total ICICI Cf laI-in amn c ICICI V) Total IXli January - March 1986 15. 0 5.0 0.5 0.0 20.5 0.5 0.0 0.0 0.0 0.5 April - Juoe 1986 1j&0 ILi l.a O. 26A. La Li Li LAS la Total 30.0 15.0 1.5 0.5 47.0 2.0 2.5 0.5 0.0 5.0 July - 8eptmber 1986 20.0 10.0 1.0 0.5 31.5 4.5 2.5 1.0 0.5 8.5 S October - December 1986 20.0 10.0 1.0 0.8 31.8 8.0 5.0 1.0 0.5 14.5 January - March 1987 20.0 10.0 1.0 0.8 31.8 11.5 10.0 1.0 0.8 23.3 April - June 1987 20.0 10.0 1.0 0L 31.3 IJA 10.0 IA 0Li 21. Total 80.0 40.0 4.0 2.8 126.8 38.5 27.5 4.0 2.6 72.6 ms July - September 1987 20.0 10.0 1.0 1.0 32.0 15.5 10.0 1.0 0.8 27.3 October - Deember 1987 20.0 5.0 1.0 1.0 27.0 18.0 10.0 1.0 1.0 30.0 January - March 1988 10.0 0.0 1.0 1.0 12.0 22.0 10.0 1.0 1.0 34.0 April - Jun. 1988 0.0 0.0 IA Li -LA 2L3. k 0.0 1.0 IA0A ILk Total 50.0 15.0 4.0 4.0 73.0 78.5 40.0 4.0 3.8 126.3 nis July - Septiber 1988 0.0 0.0 0.5 1.0 1.5 12.0 0.0 1.0 1.0 14.0 October - Decmber 1988 0.0 0.0 0.0 1.0 1.0 10.0 0.0 0.5 1.0 11.5 January - Ksrch 1989 0.0 0.0 0.0 0.7 0.7 10.0 0.0 0.0 1.0 11.0 April - June 1989 Li Li 0.0 0L. La Li 0.0 0I6 9.6 Total 0.0 0.0 0.5 2.7 3.2 41.0 0.0 1.5 3.6 46.1 Grand Total 160.0 70.0 10.0 10.0 250.0 160.0 70.0 10.0 10.0 250.0 z . source: mission eatimate.. .  -69- Annex 6 Page 1 of-1 DOCUMENTS AVAILABLE IN PROJECT FILE A. India: Industrial Export Development and Finance - IDF Sector Reports 1. Lisht Industrial Export Development and Finance, August 12, 1983 2. Notes an Trade and Industrial Policy (for Ministries of Industry and Finance): - Background to Engineering Export Development Project - Industrial Policies and Procedures Affectirg Engineering Exports - Export Profitability and Related Incentives - Changes in Industrial Licensing, Foreign Collaboration, and Capital Coods Imports - Procedural Simplification for Export Marketing and Productivity Funds - Technology Upgrading - Procedural Aspects 3. Study of Market Trends, Importers' Reactions, and Comparative Costs between India and its East Asian Competitors - June 30, 1983 4. Light Industrial Export Development and Finance. Asian Exports and Incentives - Report on India and its East Asian Competitors, September 1, 1983 5. Tables on Export Patterns of Major Engineering Products - India and its Competitors B. Export Marketing Fund (EMF) 1. Organizations Involved in Export Promotion - Overview and Assessment 2. Implementation Plan for Export Marketing Fund 3. EMF - Costing and Projected Use 4. Export-Import Bank of India Act, 1981 and Annual Reports, 1982 and 1983 C. Productivity Fund (PF) 1. AIEI Annual Report 1983, Organization Chart 2. Action Program by ICICI and AIEI to Launch Operations of Productivity Fund D. Industrial Finance 1. Organization, Staffing and Action Programs by Participating Commercial Banks for Ancillary Financing Component 2. Operations of ICICI-Detailed Description and Statistics 3. Overview of Financial System and Industrial Finance  -70- Table A-1 Page 1 of 2 EXPORT MARKET TRENDS - MAJOR ENCINEERINC PRODUCTS EXPORTS OF SOME ENGINEERING PRODUCTS BY SELECTED DEVELOPING COUNTRIES 1 9 7 0 1 9 8 0 World World Country Commodity Value Exports Value Exports (USs MZ) (US$ K) World Tools (Hand Tools) 1,114.69 6,192.30 Exports Machine Tools 2,002.39 9,386.35 Paper Mill, Process Mach. 596.89 2,598.03 Heating, Cooling Equipment 1,880.15 10,492.27 Pumps, Centrifuges 2,172.77 13,942.20 Motor Vehicle Parts 5,756.92 31,295.26 Motorcycles, Parts 641.81 3,583.66 Bicycles (Non-motor), Parts 224.01 2,425.21 India Tools (Hand Tools) 5.45 0.49 60.04 0.97 Machine Tools 2.71 0.14 24.46 0.26 Paper Mill, Process Machinery 0.10 0.02 3.09 0.12 Heating, Cooling Equipment 1.53 0.08 14.24 0.14 Pumps, Centrifuges 3.10 0.14 28.15 0.20 Motor Vehicle Parts 7.13 0.12 49.18 0.16 Motorcycles, Parts 0.14 0.02 16.73 0.47 Bicycles (Non-motor), Parts 8.99 4.01 74.00 3.05 Taiwan Tools (Hand Tools) 2.90 0.26 173.29 2.80 Machine Tools 2.11 0.11 170.20 1.81 Paper Mill, Process Machinery 1.11 0.19 12.72 0.49 Heating, Cooling Equipment 0.50 0.03 7.11 0.07 Pumps, Centrifuges 0.76 0.03 39.92 0.29 Motor Vehicle Parts 0.95 0.02 94.70 0.30 Motorcycles, Parts 6.36 0.99 85.66 2.39 Bicycles (Non-motor), Parts 4.31 1.92 251.05 10.35 Korea Tools (Hand Tools) 0.23 0.02 25.89 0.42 Machine Tools 0.16 0.01 22.52 0.24 Paper Mill, Process Machinery 0.00 0.00 1.23 0.05 Heating, Cooling Equipment 0.04 0.00 44.10 0.42 Pumps, Centrifuges 0.10 0.00 7.26 0.05 Motor Vehicle Parts 0.21 0.00 20.48 0.07 Motorcycles, Parts 0.00 0.00 0.88 0.02 Bicycles (Non-motor), Parts 0.08 0.04 17.88 0.74  -71- Table A-1 1 9 7 0 1 9 8 0 World World Country Commodity Value Exports Value Exports (USs M) (X) (Us$ M) (Z) Singapore Toole (Hand Tools) 1.88 0.17 33.26 0.54 Machine Tools 0.85 0.04 38.36 0.41 Paper Mill, Process Machinery 0.06 0.01 2.64 0.10 Heating, Cooling Equipment 2.17 0.12 36.30 0.35 Pumps, Centrifuges 1.74 0.08 131.71 0.94 Motor Vehicle Parts 22.86 0.40 82.39 0.26 Motorcycles, Parts 0.96 0.15 1.89 0.05 Bicycles (Non-motor), Parts 0.32 0.14 12.68 0.52 Hong Kong Tools (Hand Tools) 2.12 0.19 46.62 0.75 Machine Tools 1.18 0.06 4.65 0.05 Paper Mill, Process Machinery 0.14 0.02 0.71 0.03 Heating, Cooling Equipment 1.07 0.06 8.09 0.08 Pumps, Centrifuges 0.21 0.01 6.60 0.05 Motor Vehicle Parts N.A. N.A. 0.84 0.00 Motorcycles, Parts N.A. N.A. N.A. N.A. Bicycles (Non-motor), Parts N.A. N.A. 4.17 0.17  -72- Table A-2 EXPORTS OF SELECTED 0hCINCERINC PRODUCTS TO DEVELOPED COUNTRY MARKETS 1970 1980 World World Exports to Exports to Developed Developed Country Country Country Comodity Value Markets Value Markets (UTS 9 ) (tUS M) WorLd Tools (Hand Tools) 826.57 4,443.53 Exports Machine Tools 1,420.19 5,972.69 Paper Mill, Process Mach. 432.60 1,786.64 Heating, Cooling Equipment 1,155.22 5,058.47 Pumps, Centrifuges 1,456.02 8,215.01 Motor Vehicle Parts 4,699.32 23,254.72 Notorcyclesp Parts 530.40 2,765.12 Bicycles (Non-motor), Parts 161.51 1,672.45 India Tools (Hand Tool.) 2.63 0.32 39.95 0.90 Machine Tools 1.o8 0.12 10.75 0.18 Paper Mill, Process Machinery 0.01 0.00 0.07 0.00 Heating, Cooling Equipment 0O05 0.00 0.60 0.01 Pumps, Centrifuges 0.88 0.06 6.16 0.07 Motor Vehicle Parts 0.85 0.02 6.36 0.03 Motorcycles, Parts 0.01 0.00 1.40 0.05 Bicycles (Non-motor), Parts 0.76 0.47 10.66 0.64 Taiwan Tools (Hand Tools) 1.38 0.17 155.39 3.50 Kachine Tools 0.15 0.01 141.50 2.37 Paper Mill, Process Machinery 0.04 0.01 0.22 0.01 Heating, Cooling Equipment 0.01 0.00 1.48 0.03 Pumps, Centrifuges 0.01 0.00 26.95 0.33 Motor Vehicle Parts 0.26 0.01 50.36 0.22 Motorcycles, Parts 4.71 0.89 25.11 0.91 Bicycles (Non-motor), Parts 1.60 0.99 156.21 9.34  -73- Tpable A A-2 Page 2 of 2 1 9 7 0 1 9 8 0 World World Exports to Exports to Developed Developed Country Country Country Commodity Value Markets Value Markets (uss M) (X) CUSS M) (X)F* Korea Tools (Hand Tools) 0.15 0.02 21.30 0.48 Machine Tools 0.16 0.01 18.89 0.32 Paper Hill, Process Machinery 0.00 0.00 0.07 0.00 Heating, Cooling Equipment 0.04 0.00 1.41 0.03 Pumps, Centrifuges 0.10 0.01 3.21 0.04 Motor Vehicle Parts 0.10 0.00 4.59 0.02 Motorcycles, Parts 0.00 0.00 0.04 0.00 Bicycles (Non-motor), Parts 0.07 0.04 9.29 0.56 Singapore Tools (Hand Tools) 0.26 0.03 6.87 0.15 Machine Tools 0.01 0.00 21.57 0.36 Paper Mill, Process Machinery 0.01 0.00 0.10 0.01 Heating, Cooling Equipment 0.01 0.00 3.96 0.08 Pumps, Centrifuges 0.07 0.00 52.36 0.64 Motor Vehicle Parts 1.02 0.02 12.06 0.05 Motorcycles, Parts 0.04 0.01 0.06 0.00 Bicycles (Non-motor), Parts 0.00 0.00 6.99 0.42 Hong Kong Tools (Hand Tools) 1.56 0.19 30.73 0.69 Machine Tools 0.01 0.00 0.29 0.00 Paper Mill, Process Machinery 0.00 0.00 0.01 0.00 Heatingt Cooling Equipment 0.50 0.04 5.54 0.11 Pumps, Centrifuges 0.09 0.01 2.57 0.03 Motor Vehicle Parts N.A. N.A. 0.47 0.00 Motorcycles, Parts N.A. N.A. N.A. N.A. Bicycles (Non-motor), Parts NA. N.A. 2.62 0.16 Source: U.Nt Trade Statistics  -74- Table A-3 Page 1 of 1 ANNUAL EXPORT GROWTH RATES OF SELECTED PRODUCTS-- COMPARISON OF INDIA WITH DEVELOPING COUNTRIES TO DEVELOPED COUNTRY MARKETS a/ 1970-1980 Commodity World Brazil Hong Kong India Korea Singapore Taiwan Hand Tools 18.3 16.3 34.8 31.2 64.3 39.0 60.3 Diesel Engines 13.5 n.a. n.a. no.& noa. 7.2 n.a. Machine Tools 15.5 22.7 37.4 20.9 61.2 108.6 98.8 Process Plants 15.2 34.5 16.0 50.7 32.6 30.2 19.8 Heating, Cooling Equipment 15.9 18.9 27.3 38.0 42.6 76.1 74.9 Pumps, Compressors 18.9 57.6 39.9 21.3 41.4 94.2 125.9 Auto Parts 17.3 36.4 n.a. 32.5 46.3 28.1 69.5 Bicycles, Parts 26.3 51.8 n.a. 32.2 63.0 141.2 58.1 1979-1983 (1979-81) (1979-80) Hand Tools -4.2 -4.1 9.3 -10.9 30.4 16.1 21.3 Diesel Engines -3.5 -8.7 n.a. - 4.8 110.0 -5.9 -- Machine Tools -7.0 1.5 20.1 - 1.6 59.4 -2.4 17.9 Process Plants -2.6 54.4 n.a. 27.0 -3.6 65.1 -4.3 Heating, Cooling Equipment 1.7 61.4 - 6.6 24.0 205.7 99.9 25.0 Pumps, Compressors -0.4 11.5 50.5 n.a. 19.7 28.0 95.7 Auto Parts 2.3 4.4 n.a. - 4.7 26.5 28.3 -1.2 Bicycles, Parts -0.1 5.8 -10.9 - 3.5 5.3 12.4 42.6 (a Exports are average annual compound growth rates to developed country market economies, according to the U.N. classification.  -75- Table A-4 PRODUCT SHARE IN MAJOR ENGINEERING PRODUCT EXPORTS (in percentages) Av. An. Growth 1979/80 1983/84 1970-80 Bicycles 5.5 4.1 20.8 Hand tools 6.8 3.7 30.0 Auto Parts 5.2 3.7 17.1 Diesels 6.5 4.6 36.4 Comercial Vehicles and Scooters 7.7 4.6 n/a EXPORT GROWTH OF SELECTED PRODUCTS. 1977-1981 (Average Annual Growth Rates) World Market Hong Products Economies Kong India Singapore Brazil Korea Auto Parts 17.2 25.2 3.6 23.8 15.2 Cycles, Scooters 17.3 219.8 48.0 4.2 47.0 Commercial Vehicles 11.0 188.5 ninas 21.0 31.4 52.0 Electric Motors, Starters 12.0 125.0 83.0 15.4 6.1 Pumps, Compressors 11.0 73.0 na 42.0 61.0 37.0 Heating, Cooling Equip. 9.4 38.5 25.0 53.0 55.6 172.0 Machine Tools 13.0 35.0 4.6 29.0 63.0 107.0 Hand Tools 13.0 27.0 13.0 27.0 27.0 26.0 Source: United Nations Yearbook of Trade Statistics, 1981.  -76- Table A-5 Pag 1 of 1 INDIAN EXPORTS OF SOME ENGINEERING PRODUCTS DURING THE 1970. (in millions of US$) Average 1970/71 1979/80 Crowth P.& 1. Automobiles and Auto Parts 28.4 117.4 17.1 2. Diesel Engines, Parts, Pumps 3.6 59.0 36.4 3. Bicycles and Parts 9.2 50.4 20.8 4. Hand Tools, Small and Cutting Tools 5.8 61.7 30.0 5. Iron and Steel Castings 6.0 41.7 24.0 b. Machine Tools 3.8 31.0 26.3 7. Transmission Line Towers 3.8 16.5 17.7 8. Mechanical Pumps 0.9 9.5 29.9 9. Air Compresrors and Parts 1.2 5.3 17.9 and Refrigeration Machinery 0.8 5.5 23.9 10. Chemical and Process Plants 0.4 13.0 45.7 TOTAL 64.0 411.0 23.0 TOTAL ENGINEERING liIDUSTRY: Rs 1157.7 7366.8 US$ 154.4 909.5 Average Compound Crowth Rate: These Groups: 1970/71 - 1979/80 - 22.95 (232) 1979/80 - 1983/84 - 0.51X Total Engineering Products: 1970/71 - 1979/80 - 21.8Z (22Z) 1979/80 - 1983/84 - 3.862  -77- ~~~~~Table 3-1 Page 1 of 1 INDIA INDUSTRIAL EXPORT PROJECT Commercial lankint System Balance Sheet (As of December 31, 1982) (Rs Billions) National- ized Private Foreign 9B1C /a Banks Subtotal Banks Banks Subtotal Total ASSETS Cash and Deposits with Banks 24.3 55.4 79.7 6.6 2.3 8.9 88.6 Money at Call 8.2 4.0 12.2 1.7 0.2 1.9 14.1 Investments 52.1 106.3 158.4 7.8 5.1 12.9 171.3 Loans 120.5 194.9 315.4 14.7 9.2 23.9 339.3 Bills Discounted A for Collections 72.0 90.3 162.3 6.6 13.1 19.7 182.0 Other Assets 11.4 21.9 33.3 0.3 1.4 1.7 35.0 Total Assets 288.5 472.8 761.3 37.7 3i3 830.3 mumEm EmEE 07mm :mmn 'mEum mm,m numm Percentage 34.8 56.9 91.7 4.5 3.8 8.3 100.0 LIABILITIES AND NETWORTH Deposits Current 37.8 69.5 107.3 5.1 4.8 9.9 117.2 Saving. 40.5 98.2 138.7 8.3 3.3 11.6 150.3 Fixed 81.8 197.3 279.0 15.5 7.6 23.1 302.1 Total Deposits 160.0 365.0 525.0 28.9 15.7 44.6 569.6 Borrowings 25.4 17.6 43.0 0.8 2.6 3.4 46.4 Bills Payable 61.7 51.2 112.9 4.5 10.2 14.7 127.6 Other Liabilities 38.4 36.0 74.4 0.4 2.5 2.9 77.3 Total Liabilities 285.5 469.8 755.3 65.6 820.9 Equity 0.1 i.l 1.2 1.0 0.0 1.0 2.2 Reserves 2.9 1.9 4.8 2.1 0.3 2.4 7.2 Networth 3.0 3.0 6.0 3.1 0.3 3.4 9.4 Total Liabilities and Networth 288.5 472.8 761.3 37.7 31.3 69.0 830.3 Profit before taxes (Rs Millions) 203 572 775 37 170 207 983 Number of Banks 8 20 28 27 16 43 71 Number of Branches 9,196 21,389 30,585 4,022 129 4,151 34,736 Employees 226,615 419,401 646,016 46,793 2,867 57,560 703,576 Source: Indian Banks' Association. /a The State Bank of India and seven subsidiaries.  -78- Table 5-2 ' , ~~~~~Page I On INDIA INDUSTRIAL EXPORT PROJECT Sectoral Breakdown of Co sse reial Bank Credits (R Billions) March karch March Sector 1982 3 1983 2 1984 X Public Food Procuremnt 21.3 7.3 29.6 8.6 40.3 :0.0 Non-Food Crocs Bank Credits (a) Priority Sectors - AgricuLture 46.2 15.8 52.7 15.3 61.3 15.2 - Small-Scale Industries 39.0 13.3 44.9 13.0 54.1 13.4 - Other Priority Sectors 21.6 7.4 25.6 7.4 32.9 8.1 (b) Industry (Medium and Large) 111.5 38.2 132.8 38.4 149.6 37.0 (c) Wholesale Trade 22.0 7.5 23.5 6.8 23.3 5.8 Cd) Other Sectors 30.0 10.3 35.8 10.4 42.0 10.6 Total Non-Food Credit 270.3 92.7 315.3 91.4 364.2 90.0 Total Gross Bank Credit 291.6 100.0 344.9 100.0 404.5 100.0 .m.. .mmuin -in .mm=m in mm... Percentage of Priority Sector Credits to Total Non-Food Credit 39.5 39.1 40.1 Source: Reserve Bank of India: Annual Report 1983-1984.  _79_ Table 8-3 Page 1 ofn INDIA INDUSTRIAL EXPORT PROJECT Advances to IS8s by Bank (December 31, 1982) (Re Millions) No. of Accounts Balance ('000) x Outstanding I State Bank Croup 512 48 14903 35 Punjab National Bank 74 7 3,3S6 8 Bank of Baroda 38 4 2,695 6 Bank of India 47 4 2,688 6 Central Bank 48 5 2,592 6 Canara Bank 51 5 2,259 5 Other Nationalized Banks 293 27 14,0S6 33 Total 1,063 100 42,549 100 Source: Reserve Bank of India. Term Lending to SSIs by Nationalized Come_rcial Banks (December 31, 1981) (Rs Millions) Term Loans (including Total Loan. and installment credits) Advances to SSIs Cranted to SSIm No. Balance No. Balance ('000) Outstanding X ('000) Outstanding X State Bank Group 470 13,394 35 57 1,984 25 Punjab National Bank 61 3,020 8 13 571 7 Bank of Baroda 30 2,352 6 3 330 4 Bank of India 41 2,525 7 6 404 5 Canara Bank 50 1,873 5 8 306 4 Other Nationalized Banks 8,716 14,754 39 82 4,289 55 Total 9,368 37,918 100 169 7,884 100 Source: Reserve Bank of India: Statistical Tables Relating to Banks in India, 1981.  -80- Table 3-4 Page 1 of I INDIA INDUSTRIAL EXPORT PROJECT Coumercial Bank Lending To Engineerins Industries Outstandins Loans (Rs Billions) June 1981 June 1982 March 1983 March 1984 All Engineering 32.7 38.3 44.0 50.0 (Term Loans) 2.2 2.6 /a 3.0 /a Industry /b 133.9 151.1 175.0 203.8 Total Non-Food Credits 236.9 269.5 310.2 362.2 Engineering as S of Industry 24.4 25.3 25.2 24.5 Engineering as X of Total Non-Food Credits 13.8 14.2 14.2 13.7 Industry as X of Total Non-Food Credits 56.5 56.0 56.4 56.0 Source: Reserve Bank of India: Annual Report 1983-1984. /a Mission's estimtes. lb Total of small, medium- and large-industries. *J