India - Third Industrial Credit and Investment Corporation Project

R E S T R I C T E D F E ,2pX Report No. P-235 This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED October 19, 1960  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT REPORT AND RECOMiENDAITIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTiENT CORPORATION OF IDTIA LIMITED 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to U.S.$ 20 million to The Industrial Credit and Investment Corporation of India Limited (ICICI). PART I - HISTORICAL 2. ICICI was established in 1955 to foster private industry in India, by providing risk and loan capital, by promoting widespread distribution of industrial securities and by providing technical and administrative assistance for new industry. Its original capital of Rs.50 million ($10.5 million) was subscribed by private investors in India, the United Kingdom and the United States. The Bank assisted in ICICI's founding and has already made two loans to it, each of $10 million, the first in March 1955 and the second in July 1959. The Government of India contri- buted by granting ICICI an interest-free, thirty-year advance of Rs.75 million ($15.8 million) in 1955 when the corporation was founded and in 1959, in conjunction with the Bank's second loan, extended an interest- bearing, twenty-year line of credit of Rs.100 million ($21 million). 3. The proposed loan and a $5 million loan which is being granted by the Development Loan Fund would provide ICICI with the foreign exchange it expects to need in the next two years. 4. Negotiations were undertaken in October with ICICIts General Manager, M,r. H. T. Parekh. The terms of the loan were approved by ICICI's Board of Directors in a meeting on October 12. 5. This loan would be the Bank's twenty-fifth loan to India ard would increase the total amount of Bank loans to India to $682 million, net of cancellations. The status of the previous loans is as follows:  -2- As of Sept.30, 1960 ($ million) Total '. (net of cancellations) 662.1 Less amount sold 59.8 602.3 Amount repaid 46.5 Less repayments to third parties 27.8 18.7 Net amount held by the Bank 583.6 The proposed loan would increase the net amount held by the Bank to $603.6 million. 1/ Including $149.8 million not yet disbursed. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The main features of the proposed loan are: Borrower: ICICI Guarantor: India Amount: $20 million equivalent in various currencies Interest rate: When a portion of the Loan is credited to the Loan Account, the rate of interest charged on that portion will be the Bank's rate current at the time the credit is made. Commitment charge: 3/4 of 1% accruing from the time the Loan Account is credited, on the amount so credited. Term: 10 years, including 3 years of grace; may be extended to 14 years by agreement wlhen a project is approved for credit to the Loan Account. Amortization: 15 semiannual payments beginning November 1, 1963 and ending November 1, 1970, unless the term of the loan is extended. 7. The variable rate would be in accordance with the established pattern of Bank lending to development institutions and the terms of repayment would be similar to those for the 1959 loan to ICICI. Under that loan, ICICI could make a loan of $100,000 or less for any project without the Bankts approval,  - 3 - up to a total of $1,000,000. Under the proposed loan, similar limits would be agreed from time to time commencing with $300,000 for any project up to a total of $3,000,000. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 8. Attached are a draft Loan Agreement between the Bank and ICICI (No.1), a draft Guarantee Agreement between India and the Bank (No.2), a draft side letter in which the Bank informs the Borrower of the limits established in accordance with Section 2.02(b) of the Loan Agreement (No.3), and the report of the Committee provided in Article III, Section 4(iii) of the Articles of Agreement (No.4). 9. Attention is directed to the following provisions in the Loan Agreement: (a) The interest rate and repayment provisions referred to in paragraph 6 above are covered in Sections 2.05 and 2.08; the provision for smaller projects referred to in paragraph 7 above, in Section 2.02(b). (b) A default under the first loan or under the second loan will constitute a default under the proposed loan and vice versa (Schedule 2, paragraph (g) and Sections 6.01, 7.01 and 7.02). PART IV - APPRAISAL OF THE FROPOSED LOAN The Project 10. A detailed and up-to-date appraisal of ICICI and its operations is attached (No.5). 11. ICICI has now completed more than five years of operations. As of June 30, 1960, it had sanctioned investments totaling Rs.154 million ($32 million), of which Rs.139 million represents loans and Rs.15 million direct equity participations. Almost 60 percent of the total amount of loans approved was in foreign exchange. The relative importance of foreign exchange lending has been increasing and during 1959 and the first half of 1960 foreign exchange loans amounted to twice local currency loans. Under- writing continues to be an important part of ICICIts operations. Completed underwriting transactions totaled Rs.S8 million ($18 million) of which Rs.36 million have been taken up by ICICI. Sales of some of these investments have already realized a capital gain. 12, ICICI's management and staff have been strengthened and are satis- factory. Its profits and reserves are small but increasing. Additional profits are expected from capital gains on sales from its portfolio of  - 4 - equity investments, which increased markedly during the past year. It distributed a dividend of 3.5% in 1956, 4% in both 1957 and 1958, and 5% in 1959. Since the last was subject to tax it was comparable to a dividend of 3.5% on the earlier basis. Retained earnings amount to Rs.5.4 million ($1.1 million). 13. The Bank's first loan of $1l0 million has been almost entirely committed, for 14 projects. Of the second $10 million loan, $1,945,000 has been committed for four projects, while six other projects, a total of $1,793,000, have already been approved by ICICI, received the required Bank clearance and are subject to completion of outstanding matters in India. Nine other projects totaling $5,810,000 have been approved in principle by ICICI and are under consideration by the Bank. The remainder will probably be committed by the end of 1960. 14. Achievement of the Third Five-Year Plan's targets for employment and production will depend upon maintaining the rapid rate of expansion of private industry achieved in the Second Plan. Roughly 40% of total industrial investment during the Third Plan (1961-66) is expected to be in the private sector. Manufacturing is attracting a growing volume of private foreign investment, but many enterprises must depend on other sources for foreign exchange. While ICICI's contribution is necessarily relatively small, it is performing a vital service through its financial and other assistance and is filling a gap in the Indian capital market through its underwriting of equity issues. About half the companies it has assisted have been new enterprises. 15. Over the last year and a half, ICICI has been approving foreign exchange loans at an annual rate of about !10 million, a considerable increase over the rate previously achieved. Its program for the next twfo or three years calls for continued lending at this increased rate. That the funds provided by the second Bank loan little over a year ago have been committed much more rapidly than was then expected is evidence of the high rate of industrial activity, the vitality of the private sector and ICICIts improved facility in processing applications, as well as of the continued shortage of foreign exchange. ICICI intends to direct a considerable part of its new foreign exchange funds, especially those from the Development Loan Fund, to smaller projects. It hopes also to increase its rupee investment and lending. Its rupee resources are adequate for several years since it has not yet draim upon the Rs.100 million line of credit extended by the Government last year. 16. ICICI's financial conditions and prospects indicate that it should be able to meet service payments for the proposed loan, after distribution of dividends and allocations to reserves. Its portfolio of investments appears sound and it has obtained adequate security for all the loans it has made using Bank funds. Taking into account the proposed loans from the Bank and the Development Loan Fund, ICICI's debt would be well within its statutory limit of three times the sum of equity, reserves and the Government advance.  The Economic Situation 17. The progress of India's economic development and the prospects for the Third Five-Year Plan were reviewed in the report of the recent Bank economic mission, which was circulated to the Executive Directors in August (SecM 60-161). The report emphasized that massive external assistance would be needed to carry out the investments proposed for the Third Plan, and that if this assistance were not forthcoming, India would have to adopt a totally different approach to development. The report was considered at a meeting of interested countries convened by the Bank in Paris on September 12-1h. It was the general viewq of the meeting that the objectives of the Third Plan were reasonable, even though they might be difficult to achieve, and that the target rate of growth in national income was by no means excessive. The participants emphasized that, while they had by their actions given clear evidence of their continuing support for India's economic development, no assurances could be given in advance that all the external assistance sought by India would be forthcoming. It was agreed that another meeting of the group should be held to review the situation early in 1961 when it was hoped that clearer indications could be given of the assistance that might be provided for the early period of the Plan. 18. No marked change in the current economic situation in India is apparent since the mission's report was written. Rough estimates of national income in the Indian fiscal year 1959/60 suggest that real income in that year was about the same as in 1958/59. Industrial pro- duction was up by about 10 percent between the two years, but this increase was offset by a 3 to 4 percent decline in agricultural production. It was not to be expected that the remarkably good harvest of 1958/59 would be repeated, but the fall in production in 1959/60 now appears to have been somewhat more severe than earlier estimates indicated. Outputs of food- grains, oilseeds, cotton and jute all declined substantially, and sugar- cane was the only major crop to show a significant increase. 19. It is too early yet for reliable predictions to be made about crop production for the agricultural year which began*in July 1960. First estimates were encouraging, but they have since been revised downwards because of widespread flood damage, particularly in Orissa, Andhra and Punjab. So far as foodgrains are concerned, the inventory position is good, and the assured flow of PL 480 imports should have a moderating effect on prices. 20. Considerable concern has been expressed in India over the rise in commodity prices during the past twelve months, the index of wholesale prices having risen by 7 percent between September 1959 and September 1960. This rise is mainly attributable to prices of raw cotton, jute and oil- seeds, all of which have soared as a result of last year's poor crops. With a view to checking inflationary pressures the Reserve Bank of India announced in September that commercial banks would in future have to pay more for borrowing from the Reserve Bank. While the Bank rate formally  - 6 - remains unchanged at 4 percent, "penalty rates" of 5 and 6 percent have been fixed for borrowing in excess of prescribed quotas - a move which has been characterized as the introduction of "three Bank rates" in place of the traditional one. At the same time commercial banks have been directed to raise their lending rates, a minimum rate of 5 percent being laid down for all advances except advances to other banks, including cooperative banks. 21. India's foreign exchange reserves have fallen further since the beginning of July. At the end of September the Reserve Bank's holdings of gold and foreign exchange amounted to Rs.2.57 billion ($5h0 million). This represents a fall of Rs.0.58 billion ($122 million) since the beginning of the current Indian fiscal year. The latest Indian balance of payments forecasts prepared at the end of August would imply that, after allowing for all external aid committed to date (including fresh aid indicated at the Paris meeting), the reserves would be maintained at approximately their present level during the remainder of the current year - i.e. up to the end of March 1961. However, the Indian authorities have since announced a number of fresh cuts in import quotas for the period October 1960 to March 1961, and there may be some rebuilding of reserves during the next six months. The Indian forecasts assume export earnings of Rs.6.40 billion ($1.34 billion) in 1960/61, as compared with Rs.6.23 billion (pL31lbillion) in 1959/60. This forecast is in line with the trend in. the first five months of the year (April - August 1960) iwhen exports were about Rs.O.10 billion higher than in the corresponding period of 1959/60. 22. According to the latest information available, India's external public debt, excluding U.S. loans repayable in local currency, now amounts to approximately $2,600 million. This figure includes suppliers' credits to the public sector, but excludes those to the private sector. Annual service payments on the debt are estimated to average about $240 million over the next ten years. The peak years are 1964/65 - 1966/67, when payments are expected to be of the order of $280 million a year. This is equivalent to about 16 percent of India's present foreign exchange receipts on current account. The proposed loan would add another $3.3 million annually to the total service from late 1963 onwards. 23. India has an excellent debt record and she should be able to meet her obligations. PART V - COMPLIANCE WITH ARTICLES OF AGRESIENT 2h. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank.  - 7 - PART VI - RECOIMENDATIONS 25, I recommend that the Bank make a loan to the Industrial Credit and Investment Corporation of India Limited, to be g'.aranteed b- Tndia, in an amou-nt in various currencies equivalent to <.c20 million f:or a teim of 10 years writh provision for extensions by an additional four years on such terms and conditions as are specified in the attached draft Loan Agreement and draft Guarantee Agreement and that the Executive Directors adopt a resolution to that effect in the form attached (No0 6). Washington, D.C. Eugene R. Black October 19, 1960 President