India - Second Industrial Development Bank of India Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6876 PROJECT COMPLETION REPORT INDIA SECOND IDBI/SFC'S PROJECT (LOAN 1260-IN) June 29, 1987 Industrial Development and Finance Division South Asia Projects Department 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. ABBREVIATIONS AND ACRONYMS APSFC - Andhra Pradesh State Financial Corporation AFC - Assam Financial Corporation BSFC - Bihar State 4Financial Corporation DFC - Delhi Financial Corporation DGTD - Directorate General of Technical Development GNP - Gross National Product GOI - Government of India GSFC - Gujarat State Financial Corporation HFC - Haryana Financial Corporation HPFC - Himachal Pradesh Financial Corporation ICICI - Industrial Credit and Investment Corporation of India IDB: - Industrial Development Bank of India IFCI - Industrial Finance Corporation of India IFD - Industrial Finance Department (of RBI) JKSFC - Jammu and Kashmir State Financial Corporation KFC - Kerala Financial Corporation KSFC - Karnataka State Financial Corporation MPFC - Madhya Pradesh Financial Corporation MSFC - Maharashtra State Financial Corporation OSFC - Orissa State Financial Corporation PFC - Punjab Financial Corporation RBI - Reserve Bank of India RFC - Rajasthan Financial Corporation SBI - State Bank of India SFC - State Financial Corporation SIDF - Small Industries Development Fund SISI - Small Industries Service Institute SSI - Small Scale Industries SSIC - Small Scale Industries Corporation SSIDC - Small Scale Industries Development Corporation SSIDO - Small Scale Industries Development Organization STC - State Trading Corporation TCO - Technical Consultancy Organization TIIC - Tamil Nadu Industrial Investment Corporation UPFC - Uttar Pradesh Financial Corporation WBFC - West Bengal Financial Corporation CURRENCY EQUIVALENTS (annual averages) Rs per US$1.00 US$ per Rs 1.00 Rs 8.0 US$0.125 Since September 1975, the Rupee has been fixed against a "basket" of currencies. As these currencies are floating, the U.S. Dollar/Rupee exchange rate is subject to change. Conversions in this report have been made at US$1 to Rs 8.00, which was the short-term average rate prevailing at the time of the project appraisal. FISCAL YEAR (FY) Government of India : April 1 - March 31 SFCs : April 1 March 31 RBI, IDBI : July 1 - June 30 THE WORLD BANK F OFFICIAL USE ONLY Washngton, DC 20433 USA O1f1ce of Osec0o-Geneai Opeassns Evalujatent June 29, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India - Second IDBI/SFCs Project (Loan 1260-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India - Second IDBI/SFCs Project (Loan 1260-IN)" prepared by the South Asia Projects Department. Under the modified system for project performance auditing further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document has a restricted distribution and ay be used by reciPients only in the performance of theit official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (LOAN 1260-IN) Table of Contents Page PREFACE .....................................**** i BASIC DATA SHEET ............................................. ii HIGHLIGHTS .******************* ********* iv I. INTRODUCTION ................................... 1 II. ECONOMIC ENVIRONMENT.................................. 1 Economic Performance ...................... 1 Recent Policy Changes................................ 2 Small and Medium Industries............................ 3 Investment Trends...............................a..... 3 III PROJECT......... ................................... 4 Project Objectives . ............ ............. 4 Project Design.........a.......................... .... 5 Institutional Arrangements..........aeo..........*..... 6 IV. PERFORMANCE OF IMPLEMENTING AGENCIES................... 6 SFCs Operations..................................... 6 SFCs Institutional Achievement............0............ 9 IDBI's Performance..................................... 11 V. SUBPROJECT PERFORMANCE ................................. 14 Outcome of Loan 1260-IN Subproject..................... 14 Summary ................................. 16 VI. CONCLUSIONS AND LESSONS LEARNED.. 0*00*...........0*..0.. 16 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. TABLE OF CONTENTS (cont'd) ANNEXES 1: SFC's Sanctions and Disbursements FY81-86 ...................... 19 2: Summary of SFC's Operations ................................... 20 3: SFC's Net Sanctions and Disbursements, Distribution by Subsector 21 4: Assistance (Disbursements) to Small Industries, FY81-86......... 22 5: SFC's Loan Assistance to Backward and Other Areas, 1981-86 ...... 23 6: Trends in Arrears of SFCs, FY82-86 ............................ 24 7: Debt Service Coverage Ratio of SFCs (DSCR), FY82-86 ............. 25 8a: Collection as Percentage of Amounts Falling Due ................. 26 8b: Collection Performance of SFCs ...................s............. 27 9: Summary of Financial Statistics$ All SPCs ...................... 28 10: Consolidated Balance Sheet of SFCs, FY82-86 ..................... 29 11: Summary of SFCs' Staffing Pattern, 1981/82 - 1984/85 ............ 30 12: SFCs Sanctions and Disbursements under Loan 1260-IN............. 31 13: Size Distribution of Subprojects and Subloans ................... 32 14: Financing of Subprojects under Loan 1260-IN..................... 33 15: Type of Assistance Sanctioned by SFCs .......................... 34 16: Subproject Implementation Performance ........................... 35 17: Economic Indicators of Subprojects Financed .................... 36 18: Financial Performance of Projects ............................... 37 19: Actual Investment Costs per Job by Subsector .......*. 0.... 4 38 20: Domestic Resource Cost (DRC) of Selected Subprojects ........... 39 21: Estimated and Actual Disbursements under Loan 1260-IN .......... 40 ATTACHMENT I - Comments Received from the Borrower ............................ 41 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (LOAN 1260-IN) PREFACE This report reviews the implementation of the second IDBI/SFCs Project (Loan 1260-IN) in India. It assesses the performance of the main project implementing agencies, namely, the eighteen State Financial Corporations (SFCs) which provide medium and long term finance to small and medium scale industries (SMI). It also reviews the impact of the project on India's credit delivery system for SMI and the economic impact of the SMI subprojects financed. The US$40 million loan was approved on May 16, 1976 and was declared effective on August 10, 1976. By March 1983, the entire amount of the Loan was disbursed. This Project Completion Report was prepared by the Industrial Development and Finance Division of the Projects Department, South Asia Regional Office, based on the findings of a project completion mission to India in October 1986 and data prepared by Industrial Development Bank of India (IDBI), the apex agency for the Project. Comments received from the Borrower have been taken into account as appropriate in finalizing the report and are reproduced as an Attachment. This projoct has not been audited by the Operations Evaluation Department. - 11 - PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (WAN 1260-IN) BASIC DATA SHEET (Amounts in US$m) Loan Status As of April 30, 1987 Original Disbursed Cancelled Repaid Outstanding Loan 1260-IN 40.0 40.0 21.4 18.6 Cumulative Loan Disbursement FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 (i) Planned 1.6 12.6 28.30 37.30 40.00 40.00 40.00 40.00 (ii) Actual - 2.0 7.10 14.64 22.92 31.22 35.78 40.00 (iii) (ii) as % - 15.90 25.00 39.30 57.30 78.05 89.45 100.00 of (i) Other Project Data Actual Board Approval May 18, 1976 Loan Agreement June 10, 1976 Effectiveness August 10, 1976 Loan Closing Or.ginal December 31, 1978 Actual March 31, 1983 Borrower Government of India Executive Agency IDBI PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (LOAN 1260-IN) MISSION DATA Month/ Number of Number of Staff Date of Year Weeks Persons Weeks Report Appraisal 05/75 6 4 24 10/75 Supervision 12/77 5 4 20 03/77 Supervision 01/78 3 2 6 03/78 Supervision 02/79 4 3 12 04/79 Supervision 03/80 2 2 4 04/80 Supervision 02/81 2 3 6 04/81 Supervision 05/82 3 3 9 07/82 Completion 10/86 2 1 4 03/87 - iv - PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (LOAN 1260-IN) HIGHLIGHTS 1. Loan 1260-IN, which financed the second IDBI/SFCs Project in India, was designed to support the objectives of the first Project. The two major objectives were: (i) to provide financial assistance to high-priority industrial enterprises in the SMI sector; and (ii) to upgrade 18 State Financial Corporations (SFC) through specific institution-building programs, in order to help improve India's credit delivery system to SMI. In the face of the large number of SFCs inaolved, their deep-seated problems and the extensive assistance requirements, the scope of the first Project was very ambitious; and the Project was only partially successful in realizing its institution-building objectives. The majority of SFCs still needed assis- tance to improve their organizational structures, the quality of appraisals and supervision and collection procedures. Under the second Project, therefore, the institutional upgrading program focussed on improving the quality of management and staff, streamlining procedures and strengthening appraisal capacity (para. 4.08). 2. The project partly achieved its objectives. There was rapid growth in the SFCs' lending operations during the first half of the 1980s. More resources were allocated for industrial enterprises in less developed areas. The eighteen SFCs fully disbursed the Loan of US$40 million to 604 sub- projects by March 1983. SFCs and Industrial Development Bank of India (IDBI) disbursed a total of Rs 628.66 million (equivalent of US$78.6 million) and refinancing of Rs 529.73 million (equivalent of US$66.2 million), respectively, for these subprojects. The Loan contributed 65% of IDBI's total refinances, as agreed with the Bank under the Loan. The sectoral and size distribution of the subprojects supported by the Loan was satisfactory. Subloans were concentrated in light engineering, chemicals, and electronics. Seventy percent of subloans were "B" projects (under Rs 2 million or US$250,000), indicating that adequate attention was given to smaller units (pdra. 5.01). 3. On the whole, the subprojects financed under the Loan indicate some improvement in the overall performance relative to those under the first Project. Based on the IDBI's ex-post review of the results of 69 subprojects, about 5,044 jobs, which representad 91% of the projected level, were generated; average investment cost per job was US$9,795; and annual export earnings estimated at Rs 59.2 million (US$7.5 million). Under this Loan, there was a considerable improvement in economic and financial perfor- mance of subprojects, compared to those under the first Project. Apart from direct benefits, such as incremental investment and employment generation, the Project also contributed significantly to the diffusion of modern tech- nology to small and medium industries. However, the delays in implementation and resultant cost overruns experienced in the first Project continued in ,this Project. Although some factors that caused time and cost overruns were beyond the control of the lending institutions, nevertheless SFCs could have dealt with these problems to a significant extent, if they had properly strengthened their appraisal capability to review more carefully technical designs, to assess project costs more realistically, to allow for adequate price escalations and physical contingencies and to develop more realistic financing plans and implementation schedules (paras. 5.04-5.08). 4. On the objective of institution-builaing, the project had a positive impact. Lessons learned and experience gained through the first Project enabled IDBI and SFCs to achieve some tangible results. IDBI,,as the apex development bank in India, substantially enhanced its interactions with SFCs and actively assisted them to implement the institutional upgrading programs during the project period. While IDBI devised effective communication chan- nels with SPCs, IDBI itself underwent changes in organizational structure in order to achieve higher efficiency. Most SFCs have extended the term of Managing Directors to two years or more, in order to retain the continuity essential for institutional upgrading. The management quality of SFCs has also improved to a significant extent. Clearly, there is room for further development in the area, and hence many SPCs are strengthening management and staff capability by various training programs offered by the Management Development Institute, Bankers Training College, RBI and IDBI. Several SFCs recently created separate appraisal and recovery departments which are to help refine the quality and effectiveness of loan processing and supervision; and others have adopted Management Information Systems which helped strengthen the personnel functions and streamline the procedures (paras. 4.09 and 4.18). 5. While an indigenous instxtutional capacity for term financing of SMI is developing, the serious problem of collections and arrears has persisted. The drive to accelerate project approvals without comparable results from improved collections led to an increased level of arrears. The high level of arrears tied up a large amount of resources, and led SFCs to increased dependence on external sources for financing their new loans, as well as their debt service obligations (paras. 4.02 and 4.04). In the past fiscal year, 1985/86, several SPCs initiated various sahemes to increase collection including$ (i) an incentive to subborrowers for timely repayment (funds for modernization and T.A.); (ii) exercise of SFCs' right (empowered by the SFC Act, Section 32G of 1985) to recover the certified amount in the same maner as arrears of land revenue; (iii) an incentive bonus scheme applied to the staff for successful collection; and (iv) strengthening project supervision and loan recovery activities. Ic is premature to assess the full impact of these measures on the arrears problem. Nevertheless, SFCs will have to make much greater efforts to resolve this long-standing problem in order to achieve the objective of becoming a sound credit delivery system serving the SKI sector (para. 4.03). 6. The implementation of Credit 356-IN and Loan 1260-IN provides an important lesson. The experience of lending through an apex agency subject to a system requiring interaction with central and state governments by means of institutional processes outside of its direct control may require some dilution of good banking practice. For example, the record of low collec- tions and mounting arrears suggests that there needs to be a common under- standing among all parties concerned of the objectives of financial institu- tions concerned. The SFCs were clearly unable to sustain internal account- - vi - ability for loan quality and IDBI was unable to effectively discipline these institutions, given the political priority accorded to rapid expansion in lending. It would help if IDSI were given some legal instruments to enforce financial disc'pline on the SFCs. Firm commitments by financial inter- mediaries and consistent support by state governments to institutional development is extremely important, if financial and institutional objectives are to be achieved. In particular, stability and quality of top management needs to be retained for the effectiveness of leadership and organizations. Moreover, commitment to the longer term financial viability must rank in importance with lending targets, and all concerned agencies must encourage the SFCs to make the firm decisions which will be necessary to improve col- lection performance. IDBI's continued support to SFCs should be. linked to collection performance as measured by specific targets (Attachment, page 4). PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (LOAN 1260-IN) I. INTRODUCTION 1.01 IDA Credit 356-IN of US$25.0 million, to the Government of India (GOI) in January 1973, was the first World Bank project for small scale industry in India, and the Bank's first involvement with the Industrial Development Bank of India (IDBI) and India's State Financial Corporations (SFCs). The second IDBI/SFCs Project (Loan 1260-IN) of US$40 million was approved in 1976 for the same purpose. In each project, IDBI was selected as the executing agency and the apex institution, because it was already provid- ing local refinancing for the tending operations of the SFCs. Also, IDBI was considered to be in a good position, on the basis of its equity shares in the SFCs to exert financial discipline on these state-level financial institu- tions and to provide technical assistance to them through an institutional upgrading program which the Bank Group supported. 1.02 The PCR and PPAR for the first IDBI/SFCs project were issued in 1982 and 1984 respectively. These reports assessed the institutional development of IDBI and SPCs as of the respective dates, and reviewed subproject perfor- mance of small and medium industries based on statistical data available up to 1980/81. Therefore, this PCR for Loan 1260-IN covers the remaining project implementation period, 1981-83 and thereafter up to 1985/86 with respect to SFCs' institutional development and subproject performance. II. ECONOMIC ENVIRONMENT Economic Performance 2.01 India's economy has grown more rapidly in the past ten years than in any previous decade since the early 1950s, and came through the difficult period after the first oil shock in 1973 without major economic disruptions. India adjusted to the first oil price increase mainly through additional export earnings supported by appropriate exchange rate and domestic policies, and hence industry and overall economic performance improved. In 1979, while India responded to the second major oil price increase with successful import substitution in foodgrains and petroleum, the real exchange rate appreciated and export, industrial and overall growth declined. Industry's contribution to GDP stagnated as annual growth of output barely kept up with GDP growth. The initially high growth of the iridustrial sector gradually declined from 8% in the late fifties to middle sixties to less than 6% during the decade of the seventies, and to 2% in the first years of the current decade. Underlying these trends were declining factor productivity, implying a steady deterioration in efficiency of resource use. Positive factor productivity in relatively few industries was offset by negative or zero growth in others. The long-term objectives of industrialization -- accelerated growth and productivity improvement -- therefore remain as priority objectives. -2- 2.02 The pattern of industrial activity during the implementation period of the second IDBI/SFCs Project (1976-83) is generally characterized by the major setback to India's industry. Manufacturing stagnated and capacity utilization slipped to the low level of the early seventies. The second oil shock of 1979 was severely compounded by wide-spread failure of the monsoon, resulting in a sharp decline in agricultural production. Consequent decline in inputs for important agro-industries depressed demand in rural areas for major consumer goods. The drought also influenced production through crip- pling infrastructural bottlenecks in power and transportation. Fortunately, external reserves were initially ample because of large inflows of workers' remittances and continuation of foreign aid disbursements. In addition, GOI negotiated a three-year program with the IMF using the Extended Fund Facility to stem the decline in reserves. Domestic constraints thus coincided with ample foreign currency resource availability at the beginning of the period. As import liberalization began to spread wider in subsequent years, competi- tive pressures on Indian industry began to develop, which increasingly revealed the need for modernization through technology-upgrading, rationalization and foreign collaboration arrangements to improve capacity utilization, efficiency and product quality. Recent Policy Changes 2.03 Since 1983, concern with India's industrial performance has led GOI to reassess its industrial strategy and related system of controls. During the past few years, a more pragmatic approach to industrial development has been manifested. Important modifications were introduced in the industrial, fiscal and capital market policy framework. The principal objective of the industrial policy initiatives have been those of deregulating the economy with a view to accelerate the growth and to achieve more efficient use of resources, especially of capital, thereby improving the competitiveness of Indian industry. In March 1985, a significant beginning towards deregulation was made, exempting companies other than MRTP and FERA companies from the purviews of licensing requirement. Initially, 25 broad groups of industries were delicensed, followed by 82 bulk drugs and related formulations in June 1985. To alleviate the problems arising out of capacity fragmentation, the Government announced, in May 1986, that letters of intent will be issued regarding the minimum capacity sizes for 65 major industries. Another change made in the licensing policy, i.e., "broad-banding" of licenses, aims optimum utilization of industrial capacity in keeping with the evolving market condi- tions of supply and demand. 2.04 The Long-Term Fiscal Policy (LTFP) was presented to Parliament in December 1985. Its objectives is to impart a greater degree of predict- ability and stability to the Government fiscal policy over the Seventh Plan period. The thrust of the FY86/87 Budget is directed towards rationalization and simplification of both direct and indirect tax arrangements as con- templated in LTFP. In direct taxation, the Government announced several measures to affect corporate taxation, and in indirect taxation introduced the Modified Value Added Tax (MODVAT) for rationalizing the excise duty structure and doing away with the cascading effects of indirect taxes. In order to encourage healthy growth of the capital market, Government has liberalized restrictions on capital markets; and both the equity and deben- ture markets have grown rapidly. -3- Small and Medium Industries 2.05 In the 1970s, India was making special efforts to develop small- and medium-scale industries (SMI) at both the federal and the state levels. This sector was considered important for actual and potential contribution to output, employment and income distribution. The development of small, labor- intensive industries was expected to function as an especially convenient vehicle for economic growth and export expansion in less developed areas. In 1972, small industries contributed about 502 of value added and 80% of employment in the entire manufacturing sector. At that time, GOI defined a small-scale manufacturing unit as one with investment of less than Rs 750,000 in plant and equipment (currently the official definition specifies the investment size of SSI unit less than Rs 3.5 million). Important policy instruments affecting the SKI sector in the 1970s were (i) industrial and import licensing and (ii) targets set by the Reserve Bank of India (RBI) for commercial bank lending to priority sectors, such as 88I. The Government initiated an array of fiscal and financial incentivej 1/ to stimulate the development of SSIs and reserved many product groups for exclusive production by the small-scale sector. In 1979, GOI extended the reservation to 807 items and in October 1986 to 863 items. 2.06 National and State institutions were established to provide technical assistance and infrastructural facilities to small industries. Commercial banks and State Financial Corporations (SFCs), the latter being specialized institutions providing term finance to small and medium size enterprises, have been the principal sources of SMI finance. IDBI, an apex term-lending institution, has played a major indirect role in financing SMI projects by refinancing SFC loans. Commercial banks have provided the bulk of financing, mainly working capital, to SMI enterprises. In the latter part of the 1970s, term lending also became an important activity for these banks. In the areas of promotion, technical assistance and extension services, IDBI sponsored the creation of eight Technical Consultancy Organizations (TC0s) which operate as non-profit, state-level agencies. In May 1986, 0OI announced the estab- lishment of a separate fund called Small Industries Development Fund (SIDF) in IDBI. This Fund is exclusively for the development, expansion, modernization, diversification and rehabilitation of the small sector, cover- ing a wide spectrum of small-scale, tiny, village and cottage sectors. Besides ensuring increased flow of financial and non-financial assistance to the SSI sector, the SIDF is intended to serve as a focal point for effective coordination of the promotional activities by various organizations, Investment Trends 2.07 The contribution of SFC loans to total investments (gross domestic investment) in the manufacturing sector during FY81-85 is shown below: 1/ Incentives included credit at concessionary terms, hire-purchase schemes, special deductions on income taxes for priority industries, simplified licensing procedures, and a Credit Guarantee Scheme (CCS) administered by RBI. In addition, each state provided wide-range tax concessions for location in"backward districts" where many small-scale units are concentrated. -4- Table 1: SFCs DISBURSEMENT PATTERN (Rs billion) SFC Dis- SFCs Dis- bursements GDI /a Total /b SFCs bursements as % of total Reg. Manuf. Disbursements Disbursements as % of GDI Disbursements FY81 60.48 17.29 2.48 4.10 14.34 FY82 71.98 20.64 3.18 4.42 15.41 FY83 73.06 23.58 4.04 5.53 17.13 FY84 79.61 28.93 4.35 5.46 15.04 FY85 91.27 34.08 4.99 5.47 14.64 Total 376.40 124.52 19.04 5.06 15.29 /a Gross Domestic Investment. /b Includes disbursements of All-India Financial Institutions (IDBI, IFCI, ICICI, IRCI, LIC, UTI) SFCs and SIDC. Source: Work Bank Report No. 6090-IN Economic Situation and Development Projects of India, May 9, 1986, Table 2.6; IDBI's Operational Statistics. The total disbursements of All-India Financial Institutions, SFCs and SIDCs have increased to about 35% of GDI in registered manufacturing in FY85 from a 25% level maintained during the second half of 1970s, of which 5.5% has been from SFCs. Of the total disbursements, all SFCs have maintained a 15% level over the past five years, FY81-85. Registered manufacturing increased from 15% of CDI in FY77 to 18% in FY85; unregistered manufacturing is estimated at about 6% of total GDI; the share of manufacturing in total GDI was about 23% at the end of FY85. III. THE PROJECT Project Objectives 3.01 Until 1973, Bank Group financing of industrial investment had con- sisted of medium and large scale units either through direct financing or through the financing of the Industrial Credit and Investment Corporation of India (ICICI). IDA Credit 356-IN (US$25 million) was the first Bank Group project to focus on the small scale industrial sector. The Credit was chan- neled through the Industrial Development Bank of India (IDBI) to -5- 18 SFCs 1/ for relending to small- and medium-scale industry with two basic objectives: (i) to finance the import component of high-priority i.dustrial enterprises in the SMI sector, and (ii) to assist in upgrading the operations and procedures of the SFCs through the review and refinance operations of IDBI. 3.02 In 1976 the Bank undertook the Second IDBI/SFCs Project (Loan 1260-IN; US$40 million). The objectives of this Loan were (i) to expand financial assistance to the small and medium scale industrial sector; and (ii) to contribute to the on-going institutional upgrading of the SFCs. At the time of the first Credit, the SFCs suffered from a number of weaknesses, including shortcomings in the quality of management and staff, inadequate procedures and appraisal standards, high arrears and insufficient provisions for possible losses. To assist SFCs in alleviating these shortcomings, IDBI and Industrial Finance Department (IFD of RBI) developed specific institu- tional upgrading programs, which IDA agreed to include in the first Project. In the initial two years, considerable progress was made, particularly in management, general operational procedures, and appraisal standards. However, in subsequent years, the upgrading programs themselves were found to be insufficiently detailed and not broad enough in scope. Accordingly, IDBI/IFD prepared revised upgrading programs 2/ based on IDA's recommenda- tions in March/April 1975. Implementation of these revised programs formed one of the major objectives of the second Project. Project Design 3.03 As in the previous Credit (356-IN), the Project involved a loan to IDBI, an apex institution, for on-lending to SMI through 18 SFCs, which covered the entire country. The Project did not include promotional or technical assistance components for SMI, because these were deemed to be already available and because the Bank expected to have greater impact by strengthening the credit delivery system. In view of the objectives to upgrade SFC standards and to support SMI enterprises, the lehding scheme required special arrangements to ensure effectiveness and efficient administration of the Loan. 3.04 Subloan Criteria. The eligibility criteria for subloans clearly placed the project in the small and medium scale sector. IDBI established basic financial and economic selection criteria for subloans, and these were approved by the Bank. Under the SFC Act, SFC subloans were limited to a maximum size of Rs 3 million. 3/ Eligible enterprises had to have a total equity (paid-up share capital and free reserves) of no more than Rs 10 1/ SFCs are responsible for providing medium and long term finance, under- writing facilities and guaranties to small and medium scale industrial units, and had total outstanding of Rs 2.8 billion as of March 31, 1975. (Appraisal Report No. 1158-IN) 2/ The programs included detailed recommendations on management, organiza- tion and staffing, policies and procedures, appraisal standards. 3/ It has been raised to Rs 6 million; and the SSI definition has been altered to enhance the limit of investment in plant and machinery from Rs 2 million to Rs 3.5 million (Attachment, page 5). -6- million. The Bank Loan financed imports, mainly of capital equipment but also raw materials that constituted permanent working capital in a project. The Bank fixed its disbursement proportion at 65% of IDBI's refinance to SFCs. 3.05 Terms and Conditions. The proceeds of the Loan were on-lent by IDBI to SFCs at an interest rate of 8% per annum in the case of SFCs re-lending to small-scale units covered under the Credit Guarantee Scheme, technician- entrepreneurs and units in specified backward districts. SFC re-lent to these subborrowers at 11.5%. In case of all other lending, the corresponding on-lending and re-lending rates were 8.75% and not less than 12.0%. COI on-lent the Bank loan to IDBI at an interest rate of 7.752 (excluding 0.25% rebate for prompt payment). These rates provided the SFCs with a spread of 3.52, which was larger than the 2.52 spread under the Credit 356-IN. This was mainly due to an increase in the re-lending rate to subborrowers. The foreign exchange risk was borne by 001. Only those SFCs that adopted and continued to meet the requirement of the upgrading program were eligible to participate under the Loan. The free limit was raised from Rs 1 million under the first loan to Rs 2.5 million under this loan. Institutional Arrangements 3.06 IDBI was selected as the apex agency for the Project because it already had a refinance role in India's financial system, and through its SFC shareholdings (50% of capital) and its monitoring and review responsibilities, IDBI was considered a capable institution to exert finan- cial discipline over the SFCs and to upgrade their operations. In an effort to improve SFC's operations, IDBI and RBI jointly,developed individual upgrading programs which IDA agreed to form a part of the first Credit. In the context of the first Project, deficiencies in these programs were identified, such as insufficient detail and limited scope (para. 4.08). The programs were therefore revised to tailor them to the specific needs of each SFC with detailed recommendations on management, organization and staffing, policies and procedures, appraisal standards, portfolio quality and financial management and planning. Along with the debt service coverage limitations, an agreement between IDBI and each SFC on these revised upgrading programs became the basis of each SFC's eligibility for participation under the Loan (1260-IN). IV. PERFORMANCE OF IMPLEMENTING AGENCIES SFCs Operations 4.01 Investments. Net sanctions for all SFCs increased by about two and half times between FY81 and FY86, rising from Rs 3.7 billion to Re 9.1 billion, a rate of nearly 202 per annum. Of these sanctions, 90% in value terms were new projects, 76% for SSI and 512 for units located in backward areas. Public sector units were assisted only through joint financing with the State Industrial Development Corporation (SIDC); and the private sector continued to receive the bulk of SFC assistance. Five subsectors accounted for almost 50% of total sanctions, i.e. chemical and chemical products (14%), food processing (112), metal products (9%), textiles (82) and machinery (5%). Additional data on subsector distribution of loans are shown in Annex 3. The average size of SFC loans decreased from Rs 210,000 in FY77 -7- to Ra 166,000 in FY84, but has risen since that time to Rs 310,000 in FY86. Annex 4 shows the increase in lending to SSI and Annex 5 the lending to backward areas. The high growth figures recorded in these annexes, taken together with the arrears problem discussed below, illustrate the problem endemic to all the SFCs: a heavy emphasis on loan approvals which outweights the attention to supervision, collection and arrears. The main factor caus- ing the rapid growth in approvals was that the SFCs' managements were judged by the state governments on their ability to approve an increasing number of projects. In addition, both central and state governments have emphasized the development of SSI and backward regions; and SFCs have accorded high priority to these twin tasks. 4.02 Arrears. The problem of collections and arrears remains. While SFCs have been seriously pursuing the upgrading programs (para. 4.09), their recovery position, as judged by the proportion of recoveries to outstandings, has not improved. A breakdown of arrears by SFC for FY82-86 is shown in Annex 6. In FY81, the SFCs' total arrears were Rs 2.6 billion, which repre- sented about 27% of the SFCs' combined portfolios at that time, ranging from 10% (Andhra Pradesh and Jammu and Kashmir) to 56% (Assam). In the two fol- lowing years (FY82 and FY83), the proportion decreased to around 25%, but increased thereafter reaching 31% of their combined portfolios by FY86. During the past 5 years, in only four States have the arrears position improved-Karnataka (261), Hadhya Pradesh (14%), West Bengal (17%) and Delhi (191); in all other states there was further deterioration. The causes are well identified in PPAR (Credit 356-IN). Although the growth of arrears are due in part to the rapid growth of the portfolio, a disquieting feature is their chronic nature, with a good part overdue for two years or more. Perhaps more disturbing is the existence of wilful defaulters, arising ini- tially from the soft attitude taken by the SFCs in handling their cases and the resulting impunity of borrowers to penalties for delinquency; and the weak recovery machinery of the SFCs, including insufficient iniormation on individual subborrowers (Attachment, page 4). 4.03 Recently, many SFCs have taken steps to reduce arrears, including: strengthening project supervision and loan recovery activities, reducing the differential between short- and long-term rates through a rebate scheme for prompt repayment and penal iates for delayed payments, and using recourse to Section 29 of SFCs Act for take-over of management, outright sale, and revenue recovery proceedings (Attachment, page 4). Also, Default Review Committees in SFCs monitor the arrears and review the defaulting accounts case-by-case. Each SFC has now assigned senior level officials to be in charge of collection activity. In addition, during FY86 three specific measures have been implemented. First, as an incentive to subborrowers to repay on time, SPC provides additional funds to them for modernization and other technical assistance. The fund comprises contributions from SFCs (40%), IDBI (40%) and the subborrower (20%). The scheme has already covered twenty-five units. Second, newly added Section 32G to the SFC Act (1985 Amendment) empowers SFCs to make an application to a state government for recovery of the amount due to the SFC, and enables the Collector to process recovery of the certified amount (by the State Government) in the same manner as arrears of land revenue. Third, to stimulate collection activity, some SFCs have devised an incentive bonus scheme, which provides a bonus up to 25% of annual salary for successful collection, compared to a normal maximum bonus rate of 8 1/3% for all staff members of SFCs. It is too soon to assess the impact of these measures on the overall collection performance. -8- Nevertheless, it is evident that IDBI and SFCs have been emphasizirg means to resolve long-standing problems of arrears and defaults in SFC operations. 4.04 Collections. The details of the SFCs' collection performance for FY82-85 is shown in Annexes 8(a) and 8(b), and are summarized below: Table 2: SFCs' COLLECTION PERFORMANCE FY82-86 FY82 FY83 FY84 FY85 FY86 Collection (Rs million) 1,866.5 2,261.8 2,886.3 3,473.9 4,316.0 Collection Ratios /a A. 38% 37% 36% 34% 35% B. 79% 73% 69% 67% 70% /a A = Collections as percent of total accumulated dues excluding suit-filed amounts. B = Collections as percent of amounts falling due. The overall collection as a proportion of total dues remained at highly unsatisfactory rate of 35% in FY86; ten SFCs had ratios below 35% in this year. Three SFCs show continuous improvement in the recovery performance: in FY86, Delhi (67%), Karnataka (45%) and West Bengal (42%); while four SFCs, on the contrary, exhibit significant deterioration between FY82 and FY86 from 83% to 34% (Jammu and Kashmir), 44% to 31% (Rajasthan), 41% to 29% (Maharashtra) and 40% to 27% (Gujarat). Collection ratio B in Table 2 (i.e. collection as percent of current dues) indicates that during the period FY82-86 the SFCs, as a whole, collected about 67-79% of amounts falling due each year, which shows some improvement as compared with 63-71% during FY77-81. The six largest SFCs had collection performances ranging from a low 51% for Rajasthan to 71% for Maharashtra in FY86. 4.05 In order to motivate SFCs to intensify their efforts and to evolve new strategies to improve their recovery performance, since April 1, 1982, IDBI has linked refinance availability to SFC's recovery performance. However, the PPAR (Credit 356-IN) suggested the way in which IDB1's refinance limits are determined enable SFCs to avoid facing squarely their arrears problem, and also suggested that IDBI, with greater discrimination in such unilateral initiatives, could induce SFCs to introduce financial discipline, to enforce collections and to bring about long overdue institutional changes. -9- 4.06 Debt Service Coverage Ratio (DSCR). 1/ Annex 7 shows the DSCR (on a cash basis) for each SF"# from FY82 to FY86. The Bank recommended in April 1980 the measure of the DSCR on a cash basis which was more realistic test of credit-worthiness than the accrual basis. Except for FY82, when 12 SFCs had DSCRs above 1.0, the DSCR position of a majority of SFCs deteriorated in the following two years. But, in FY86 the position slightly recovered with 9 SFCs having DSCRs above 1.0. The higher ratios were 1.59 (Delhi), 1.29 (Haryana) and 1.23 (Kerala). In the same year, 9 SFCs had DSCRs below 1.0, as compared to 15 SFCs in FY80 with a DSCR below 1.0. 4.07 Operations. Annex 9 provides a summary of financial statistics of SFCs for FY82-86 and Annex 10 shows the consolidated balance sheet for all SFCs during FY82-86. Cumulative disbursements were nearly 71% of commitments, as compared with only 62% during the period of FY72-81 (PCR for Credit 356-IN, para. 3.07). Under the Business Plan and Resources Forecast (BPRF) exercised by IDBI, targets of loan approvals are set, taking into account the organizational and resource mobilization effort of each SFC. As a result, gaps between loan sanctions and disbursements by SFCs has gradually narrowed over the past several years. During the period FY82-86, SFC's total assets/liabilities grew from Rs 13.3 billion to Rs 27.4 billion and their combined share capital grew from Rs 1.6 billion to Rs 3.8 billion. The combined debt/equity ratio of all SFCs was 4.1 in recent years. Profit margins decreased largely due to increased administrative costs; for example, on a combined basis the SFCs' return on equity declined from 7.8% in FY82, 4.7% in FY86. SFCs Institutional Achievement 4.08 Upgrading Programs. Under this Project, the upgrading programs initiated under the first IDBI/SFCs Project, were revised incorporating proposals to: (a) increase the role of the Boards of Directors and the sanctioning authority of the Executive Committee; (b) provide the continuity and smooth turnover of top management and the strengthening of the second layer of management; and (c) restructure IDBI/SFCs interest rate structures (para. 3.04). These revised upgrading programs, along with the debt service coverage limitation, formed the basis for an agreement between IDBI and each SFC to enable the latter to be eligible for withdrawal under the Loan. The program for each SFC envisaged improvements in management, organization, staffing, policies and procedures, appraisal standards, improvements in portfolio 1/ Upon IDBI's request, Bank made informally a few modifications to the covenant (Credit 356): - (i) In November 1976 the Bank allowed a temporary relaxation of the DSCR from 1.25 to 1.0, provided that satisfactory recovery and follow-up action programs were adopted by the SFCs; (ii) In March 1977 the Bank agreed to modify the DSCR definition to include addi- tional share capital, if paid-in within nine months after the end of the fiscal year. -10- quality and financial management and planning. (Appraisal Report No. 1158-IN). 4.09 Over the last five years, many SFCs notably, those in Karnataka, Madhya Pradesh, Orissa, Kerala, Andhra Pradesh, Bihar, Tamil Nadu, Punjab, H.P. and J&K, have restructured their organization and streamlined policies/procedures concerning loan sanctions. SFCs' achievements have been greatly facilitated by IDBI's influence and development measures taken under the institutional upgrading programs. IDBI monitors the overall operations of SFCs through its annual evaluation and through Business Plan and Resources Forecast (BPRF). The latter serves also as an instrument to evaluate the administrative structure, management and staffing of each SFC, to assess the operational policies and procedures, and to establish standards of appraisal and supervision. 4.10 Management. SFC Managing Directors are appointed by the state government in consultation with IDBI. Rapid turnover of Managing Directors has undermined the management continuity needed for institutional upgrading. In 1980, IDBI issued to all state governments a comprehensive set of guidelines in respect to appointment, tenure, change of Managing Directors of SFCs. Since then, state governments have increasingly been aware of the need for providing a reasonably long tenure to the top management. Currently, as many as 15 SFCs extend the term of Managing Directors for two to five years, while several States have set a minimum tenure of three years (Attachment, page 6). Overall, SFC management quality has improved to a significant exteat, while several SFCs have already adopted a proposed minimum three-year term. Also, the second layer of management has been considerably strengthened through the recruitment of qualified professionals from a variety of disciplines. 4.11 Staff. As a part of the upgrading program in the second IDBI/SFCs Project, the Bank emphasized the need to recruit additional professional staff, particularly to strengthen follow-up work, and to provide more techni- cal and legal expertise. Annex 11 shows the growth pattern of professional and other staff from FY82 to FY85 for each SFC. Total recruitment of profes- sionals in SFCs increased from 1,729 in end-FY82 to 2,168 in end-FY85, at the growth rate of 7.8% p.a., even though total employment of Bihar and Delhi SFCs slightly decreased over the period. The pay scales, which are linked ti State Government levels, had seriously constrained the recruitment of vir- tually all SFCs. IDBI reported that a recent revision of the pay scales has made them more competitive and may allow SFCs to attract more competent staff. 4.12 Training. For the past three years, considerable effort has been devoted to the training of professional staff. More than 900 professionals underwent training in project appraisal and supervision courses offered by the Management Development Institute, Bankers Training College, Reserve Bank of India and IDBI. This training has improved the quality of staff in SFCs. Prior to 1982, the SFCs generally suffered from deficiencies in appraisal standards, assessment of working capital requirements, evaluation of managerial competence of the entrepreneurs, cost estimates, implementation schedules and financial projections. SFCs' project appraisal performance has been gradually improving since then. Further, SFCs have been continuously improving their competence in financial appraisal including ratio analysis, evaluation of technical, organizational and managerial aspects. IDBI reports that all SFCs have expressed willingness to improve further their staff -11- skill3 in project appraisal through the training opportunities provided by IDBI. 4.13 Project Appraisal. Sanctioning authority has been decentralized to delegate the authority to SFC regional/branch offices in charge. It has greatly accelerated the appraisal process, especially in the case of small scale enterprises4 whose financial requirements are relatively small. Some SFCs have opened 'Guidance Cells" to assist and guide entrepreneurs in com- pleting applications and furnishing the required information. The loan application formats are standardised; and SFCs now maintain better liaison with other state-level financial institutions ard banks. Also, SFCs have introduced the concept of economic cost/benefit analysis to project appraisal. 4.14 Institutional Coordination. The success of SPCs' effort to develop industries depends considerably on the extent to which SFCs are able to bring about coordination among other state-level institutions and banks. Especially, such coordination is of particular help in providing entrepreneurs with assured flow of term loans and working capital finance during project implementation. Over the review period (FY82-86), the institutional coordination between SFCs, commercial banks and state-level agencies noticeably improved. Continuous persuasion was effective in getting commercial bank approvals of working capital finance to the projects which SFCs assisted. In the case of consortium financing, several SFCs (Karnataka, Kerala and West Bngal) adopted the system of exchanging appraisal memoranda with SIDCs and commercial batkks. IDBI is also promoting close coordination among various state-level institutions to enable SFCs to act on the improve- ment of the credit delivery system. 4.15 Summary. Overall, SFCs devoted considerable attention to the improvement of organizational structure during the secoid IDBI/SFCs Project. Some SFCs created separate appraisal and recovery departments in order to refine the quality and effectiveness of loan processinOland supervision, and adopted Management Information Systems (MIS), which helps strengthen the personnel functions and streamline procedures. However, while the second Project had some positive effect on the SFCs' management and other institu- tional upgrading aspects, it did not result in the improvement of collections and arrears position. The major increases in SFC activity were in loan sanctions. The drive to accelerate project approvals successively increased arrears without comparable results from improved collections. The recovery record has in fact deteriorated since FY82. Persistent high levels of arrears has tied up a large amount of resources, and has led to SFCs' increasing dependence on external sources to finance their new loans and to meet their debt service obligations. It is expected that the new incentives for the collection drive would bring positive results. IDBI's Performance 4.16 Under the Project, IDBI was assigned the pivotal role for monitoring, guiding and improving the performance of the SFCs. IDBI owns 50% of each SFC and the IDBI-SFCs relationship comprises .board membership, guidance in policies, financial, managerial and technical advice and more importantly provision of capital and financial resources to SCs. 4.17 IDBI for SFCs' Institutional Development Program. Under the Loan (1260-IN), the eligibility for'IDBI's refinancing facility was tied to SPCs -12- effort to implement the revised upgrading programs. RBI and IDBI had jointly formulated the original institutional upgrading programs for the SFCs, which the Bank agreed in 1972 as part of the first Credit (356-IN). Subsequently in 1975, IDBI and RBI developed detailed institutional upgrading programs for each SFC covering the eight areas listed in para. 4.08. Under the second Project IDBI/RBI presented to the SFCs specific programs to: (a) Expedite review of loan applications; (b) Improve appraisal standards, including preparation of industry profiles; (c) Expedite disbursement and introduce systematic reviews of slow dis- bursing projects; (d) Improve pre- and post-implementation procedures and strengthen follow-up and project supervision, including coverage and frequency of supervision reports to be prepared to SFC managers; (e) Pursue legal and other remedies to resolve overdue accounts; and (f) Expand recruitment and training of professional staff (PCR, Credit 356-IN para. 3.15). However, as identified by the PCR (for Cr. 356-IN), the absence of specific "time-bound" implementation of those programs was serious deficiency. For this reason, IDBI, through the annual evaluation report on the SFCs operation, recently introduced sections summarizing the progress and a timetable for implementing the institutional upgrading programs. Initially, IDBI's evaluation reports tended to be,,merely descriptive with insufficient analysis of specific problems facing the SFCs. Over the past few years, however, the quality of reports and discussions between IDBI and the SFC3 has improved, while the reports have also served as a vehicle to convey manage- ment information. 4.18 IDBI/SFCs Interaction. In the 1980s, IDBI actively assisted SFCs in institutional upgrading, especially with arrears/defaults, collections, continuity in management, 4nd identification of industrial problems specific to certain subsectors. To exchange views on problems of mutual interest, IDBI convened periodic conferences attended by the Chief Executives of SFCs, RBI, IDBI and Government representatives. The most recent conference was held in April 1986. These conferences have served as useful forum for SFCs/IDBI interaction, and also provided insight into various operational problems that SFCs were facing. For IDBI, such conferences have provided an opportunity to assess the progress in SFCs' implementation of upgrading programs as well as achievement in the key areas viz. recovery of dues, follow-up and monitoring projects, appraisal standards, manpower development and management capacity. Upon Bank's recommendation in 1980, IDBI has also assisted the SFCs in developing annual business plans and resource forecasts (BPRF). The annual exercise clearly provides a framework to establish objec- tives and to assess progress each year. 4.19 Some of the measures agreed upon at such conferences have had great impact on the SFCs performance when implemented. For example, in pursuance of the decision taken at 22nd Conference in December 1983, IDBI-appointed the Dave Committee, comprising representatives of SFCs, RBI, IDBI under the -13- chairmanship of IDBI's Executive Director, to examine the financial structure and operation of SFCs in all aspects and make appropriate recommendations. The Committee submitted its report in June 1984 with a pet of specific recom- mendations for containing the volume of arrears and developing balanced portfolios by diversifying into short/medium financing. Similarly, the 23rd Conference in April 1985 formed a Committee to examine computerization of Accounts and Systems Development of SFCs and establishment of a standard package for computer hardware as well as sqftware. IDBI accepted the Committee Report in January 1986 and forwarded it to the SFCs for their adoption. In fact, the PCR mission in October 1986 was informed that three SFCs (AP, Karnataka and Kerala) have already installed computers, while others are actively pursuing the recommendations of the Committee. 4.20 Organizational Changes. Under the first Project (Credit 356-IN), IDBI agreed to create three divisions within its Refinance Department -- Appraisal, Operations, and Follow-up; and in 1976 IDBI decentralized most of the SFC evaluation and inspection functions to its regional offices in Delhi, Madras, Calcutta and Ahmedabad. This change has resulted in more effective monitoring and supervision of SFCs in recent years. In addition, IDBI set up two new departments during FY86, i.e. the Market Research Department and the Technology Department, each headed by a General Manager. The former conducts research on demand potential, undertakes studies of marketing arrangements in various industries and monitors market developments. The latter assists in creating a technology data base, disseminating information on changing industrial technology, and providing advice on technology transfer arrangements. The two departments have been assisting project appraisals of financial institutions with particular respect to technology, market research and international competitiveness. To cater exclusively to the needs of Non-Resident Indian (NRI) entrepreneurs, IDBI created a special "NRI Cell" in the Head Office (Bombay). The primary objective is to work for greater interaction between NRIs and financial institutions. 4.21 Arrears and Recovery Measures. IDBI has continuously stressed to all SFCs the need to improve their recovery rates. As a result, the SFCs have adopted a two-pronged program of (i) sharpening appraisal tools to prevent time and cost overruns and to ensure a sound financing pattern for assisted projects and (ii) intensifying monitoring and recovery efforts by streamlin- ing procedures. In respect to default accounts, all institutions have held meetings of the Regional Executives (REMs) every two months in each region, reviewing and initiating remedial actions in close coordination with commer- cial banks. Also, most of SFCs have constit1ted Default Review Committees/Recovery Cells (Attachment, page 3). Throuih the Special Recovery Cell, IDBI monitors the recovery performance and stresses the credit records at the time of new project appraisal. 4.22 Summery. IDBI, as the apex development bank in India, has substan- tially enhanced its interaction with SFCs. Particularly, IDBI has actively assisted SFCs to implement the revised institutional upgrading programs under the Project (Loan 1260-IN). Some of the tangible outcomes weret (i) annual planning exercises by .the SFCs which enable them to assess progress each year against expected achievements (ii) overall upgrading of the skills of SFCs personnel; and (iii) enchanced interaction (e.g. conferences) between IDBI and SFCs to review SFC's financial/operational constraints. IDBI has now embarked on assisting SFCs in building up computer-based management informa- tion systems. However, despite substantial and systematic effort on the part of IDBI.'s management and staff in institutional upgrading, the impact on the -14- improvements in SFC's operational/financial performance has been generally limited. The state governments' power over the SFCs, has severely undermined IDBr's ability to fulfill its functions. State governmepts have constantly been involved in SFC matters -- for example, appointment of managing direc- tors and their premature transfer, emphasis on new loan approvals rather than strengthening existing firms, restrictions on staff recruitment to fill vacancies -- reflecting different perceptions, priorities and expediencies regarding the role of the SPCs. Nevertheles,s, some improvements were noted in recent years. IDBI has been continuously working on the establishment of a closer relationship with State governments on the SFC matters and, at the same time, on creating effeQtive vehicles to communicate with SPCs and advise on their performance. V. SUBPROJECT PERFORMANCE Outcome of Loan 1260-IN Subprojects 5.01 Sanctions and Disbursements. The Bank authorized 763 subprojects under Loan 1260-IN; 159 were cancelled subsequently, leaving 604 net of cancellations. The original closing date was December 31, 1978, which was subsequently extended twice to June 30, 1981 and to March 31, 1983. Extensions were requested by IDBI, largely because of slow proceeding of commitments and disbursements and partly because of a 2% interest premium of Bank funds over other funds available for designated backward areas. As of March 31, 1983, the actual closing date of this Loan, the entire amount of the Loan of US$40 million (equivalent of Rs 360 million) was sanctioned. SFCs authorized a total of Re 669.19 million, and IDBI authorized refinancing of Rs 545.35 million (Annex 12). As against the above authorizations, SFCs and IDBI disbursed Rs 628.66 million and Rs 527.73 million, respectively. The Loan contribution represented 65% of total IDBI refinannes (disbursed) in accordance with the agreement reached with the Bank under the Loan. 5.02 The Sample. To evaluate the impact of subprojects financed, IDBI reviewed a random sample of 123 subprojects, i.e. a 20% sample, consisting of 47 "A" subprojects and 76 "B" subprojects. 1/ The detailed evaluation of these subproject's performance is summarized below in respect to geographical distribution, size, profiles of projects, subsector distribution, cost and financial and economic performance. 5.03 Geographical Distribution. As shown 1I Annex 12, five states -- Mad- hya Pradesh, Tamil Nadu, Naharashtra, Gujarat -- accounted for 69% of sub- projects by number (415 out of 604) and 631 by amount (US$25.22 million out of US$40 million disbursements) (Annex 12). This distribution is due partly to these States being more industrialized and having aggressive SFCs. The SFC in Madhya Pradesh in particular has made a great progress in increasing the number of subprojects and disbursements during the project period (Loan 1260). The "first-come-first serve" policy enabled the more aggressive SFCs to take a large share of the loan uder the second Project. 1/ "A" subprojects were those above the free limit "B" below the free limit (para. 3.04). -15- 5.04 Size of Subloans and Subprojects. Most "A" subprojects were in the range between Rs 5 million and Rs 10 million. As regards "B" subprojects, the majority fell in the range of Rs 2 million and under. The average costs of "A" and "B" subprojects were Re 11.71 million and Re 2.13 million (equiv- alent of US$1.46 million and US$266,000), respectively. The average costs of subloans was Re 1.64 million (equivalent of US$200,000). "A" and "B" sub- loans financed 14% and 23% of respective subproject costs. Although only three subprojects in the "A" sample belonged to the small scale sector, i.e. fixed investment of less than Rs 2.5 million, about 70% of the "B" sub- projects fell within the SSI defirition. The sie distribution suggests that sufficient attention was paid for the development of small industries, in accordance with the project objectives. 5.05 Profile of Sub-Projects. Annex 14 shows the financing pattern of 88 subprojects. The foreign exchange content was Re 72.43 million, equivalent to 48% of the total amount of IDBI's refinance of the SFCs' loans. IDBI's refinance (foreign exchange and rupee loane) constituted about 45% of the SFCs' loans overall. The bulk of financing came from local funds, including sponsors' equity. Of 107 subprojects, 72 were new, 27 involved expansion and 8 modernization (Annex 15). The general pattern of SFCs financial assistance clearly indicates a strong bias towards new project approvals, rather than strengthening and modernizing the existing industrial enterprises. This is consistent with the first Project. 5.06 Project Cost Estimates and Completion. Of the 86 subprojects in the sample (net of cancellations), 47 subprojects, or 55%, were completed within the cost estimated in the subproject appraisals. The remaining 39 overran estimates by an average of 21% (Annex 16). Only 17 subprojects in the sample were completed on time; and the remaining 69 were delayed by 14.8 months on average. Causes for delay varied. Most delays were due to late arrival of imported machinery, delay in acquiring technical know-how, and changes in project designs. In some cases, arranging adequate bank support for working capital caused delays. In other cases, various government clearances through relatively cumbersome procedures resulted in a significant delay. 5.07 Financial Performance. The financial parameters indicate that actual performance of subprojects fell short of the SFCs' appraisal estimates (Annex 18). In the first two years, actual sales, in respect of 76 subprojects, were 75% and 81% respectively of expected sales; as against the estimated profits of Re 37.7 million (year 1) and Re 53.8 million (year 2), subprojects as a whole recorded large losses f Re 30.4 million and Rs 19.4 million, respectively; average capacity utilization was less than 59% and fell short of the estimated target of about 75%. Among 62 subprojects which reported their implementation performance, 40 projects (or 65%) made profits while 22 firms (or 35%) recorded losses during the second year (Annex 16). The reasons cited by IDBI for this unsatisfactory financial performance were, most of all, the increased costs due to time and cost overruns, infrastruc- tural problems, changes in market conditions, and implementation delays on average 15 months which resulted in large cost overruns. These factors demonstrate that loan approval was premature in many instances which reflects SFCs' drive to increase project approvals without simultaneous effort to maintain or improve appraisal standards. In India, many of the small industries are family-operations with a long tradition in the subsector. While they may know production aspects of the business, their management skills are outdated and decision-maving tends to be ad-hoc. Under the circumstances, SFCs' appraisal capability could have not only contributed to -16- their profitability, but also supported small industries generally by provid- ing the required training for management and technology advancements. 5.08 Economic Performance. Data on economic indicators for 69 subprojects (Annex 17) shows that export earnings increased from Rs 30 million in the first year to R9 59.2 million in the second year, or more than 96% increase over the previous year. This impressive growth was largely attributable to Tamil Nadu SFC projects -- i.e. the actual export earnings exceeded the , projected export value of Rs 25.0 million. These subprojects generated 5,044 jobs, and the average investment cost per job 1/ was US$9,795 (Annex 19). The most capital intensive subsectors were chemicals (US$22,156/job), elec- tronics (US$13,294/job), and paper (US$11,428/job). Printing (US$2,099/job) and services (US$2,565) were the most labor intensive. The largest subsector, light engineering, had an investment cost of US$8,279 per job. Actual value added was about 67% of the estimated figures. Domestic resource cost (DRC) calculations for 10 selected subprojects (Annex 20) show that 8 of these had DRCs less than the prevailing exchange rate, indicating economic efficiency and justification for these subprojects. 5.09 Summary. The overall implementation performance of the subprojects under the Bank Loan 1260-IN indicates that many of those incurred financial losses during the initial two years, largely due to delays in implementation and the resultant cost overruns. The number of subprojects implemented witbii, initial estiL-ates were about 55% of the projects reviewed, an increase from 35% under the first Project (Cr. 356-IN); cost overruns as percentage of estimated costs decreased from 26.2% to 20.7%; and the number of projects making profits rose to 65% from about 45% while the projects incurring losses declined to around 35% from 55% (Annex 16). IDBI views that a major factor causing time and cost overruns was the entrepreneurs' unwarranted optimism, as well as failure to perceive factors over which they had little control. Though the data base is limited on the economic performance of the subprojects, it can be observed that this Project (Loan 1260-IN) provided direct benefits such as additional investments and employment generation; and in addition, contributed significantly to the diffusion of modern technology into a number of small and medium enterprises. Consequently, many of them today produce quality goods for domestic and export markets. VI. CONCLUSIONS AND LESSONS LEARNED 6.01 Loan 1260-IN was the second IDBI/SFCs project for India. Continuing the objectives of the first Project, Credit 356-IN, the Loan provided foreign exchange resources to the SFCs for their financing of SMI projects; assisted IDBI and 18 SFCs in institutional development and in augmenting operational efficiency; supported GOI in monitoring the performance of key financial agencies; and allowed the Bank to participate in the development of small industries and also to broaden the knowledge regarding state level financial institutions. 6.02 During the decade when the two projects were implemented, IDBI and SFCs continuously pursued the project objectives of financing high priority 1/ Investment cost per job excludes land from fixed assets, and includes buildings, machinery, equipment and permanent working capital. -17- SMIs and institutional development of the eighteen SFCs. The PCR (1982) and the PPAR (1984) for the first Project both concluded that the institutional upgrading program had not been implement d satisfactorily; collections and financial performance of the SFCs had deteriorated, and a serious level of arrears had developed. The PCR further pointed out that many subprojects incurred delays and cost overruns, which reduced their financial and economic returns. During the second Project, the implementation of the institutional upgrading program improved, although much remans to be done. Many SFCs have restructured their organization and streamlined procedures, while IDBI has increasingly assisted the SPCs with various measures to enhance their opera- tional and financial capability. However, considering the long time period and sizable financial resources involved, what SFCs as a whole had accomplished by the completion of this project was far less than the expected outcome, i.e. a sound credit delivery system to SMI. 6.03 There remain several outstanding issues. First, the problem of collections and arrears has persisted, threatening the financial viability and creditworthiness of many SFCs. Only in the most recent year (FY86) have SFCs implemented incentive measures to reduce arrears and to increase collections. Their impact has yet to be assessed. Second, close coordina- tion between the SFCs and the commercial banks needs to be encouraged. The viability of small undertakings depends critically on access to working capital. The 1984 PPAR stressed that the timely provision of working capital to SMI was a pressing issue deserved RBI's full attention, study and intervention. IDBI reported that since FY82, the individual SFCs have worked out some coordination arrangements with other state-level agencies and com- mercial banks: some were successful in getting the commercial banks' favorable response to the demand for timely sanctions of working capital for the SFCs' subprojects; and in the case of consortium financing, other SFCs (Karnataka, Kerala, West Bengal) have adopted a system of exchanging appraisal memoranda with SIDCs and commercial banks. All SFCs need further encouragement to establish a firm link and effective coordination between term lending by SF.Cs and working capital availability from the commercial banks. However, until the SFCs can achieve collections that indicate sound banking practice, the commercial banks will be justified in their skepticism toward SFCs operations. Consideration should be given to linking continua- tion of commercial bank lending to repayment of SFC loans. Third, the implementation of subprojects was marred by time and cost overruns. Most delays and cost escalation were due to late arrivals of imported machinery, delay in acquiring technical know-how, and lack of bank support for working capital. These major problems should be overcome mostly by streamlining import procedures, providing access to new technology, and an effective coordination between SFCs, state-level agencies, and commercial banks. 6.04 During the second Project period, IDBI's efforts to help SFCs institutional development were much more effective than during the first Project period. With experience gained and its refinancing capability strengthened, IDBI, as the apex lending institution, has been making progress in monitoring, supervising and advising on the SFCs operations. IDBI has also been successful in refining monitoring devices, including annual evalua- tion reports, Business Plans and Resource Forecasts (BPRFs), operational guidelines and procedures to provide adequate support to the SFCs in implementing the upgrading programs. But the problem remains with the SFCs' deficient collection performance and mounting arrears. IDBI will have to take a much more assertive stance in resolving this long-standing problem as a shareholder, creditor and overseer of the SFCs. -18- 6.05 The Bank's involvement, though it attained less than expected results, helped identify deficiencies in the SFCs' organizational and institutional set-up and operations, led to the development of the realistic upgrading programs, and supported IDBI's efforts to help SFCs introduce institutional reforms. The 1984 PPAR recognized that as a result of the project, an indigenous institutional capacity for term financing was developing, albeit very slowly, catering to the needs of the SMI. 6.06 The implementation of Credit 356-IN and Loan 1260-IN provides an important lesson. The experience of lending through an apex agency subject to a system requiring interadtion with central and state governments by means of institutional processes outside of its direct control may require some dilution of good banking practice. For example, the record of low collec- tions and mounting arrears suggests that there needs to be a common under- standing among all parties concerned of the objectives of financial institu- tions concerned. The SFCs were clearly unable to sustain internal account- ability for loan quality and IDBI was unable to effectively discipline these institutions, given the political priority accorded to rapid expansion in lending. It would help if IDBI were given some legal instruments to enforce financial discipline on the SFCs. Firm commitments by financial inter- mediaries and consistent support by state governments to institutional development is extremely important, if financial and institutional objectives are to be achieved. In particular, stability and quality of top management needs to be retained for the effectiveness of leadership and organizations. Moreover, commitment to the longer term financial viability must rank in importance with lending targets, and all concerned agencies must encourage the SFCs to make the firm decisions which will be necessary to improve col- lection performance. IDBI's continued support to SFCs should be linked to collection performance as measured by specific targets (Attachment, page 4). April 1987 Revised: June 1987 PROJECT COMPLETION REPORT INDIA - SECOND IDB2/SFCs tROJECT (Loan 1260-IN) SFC's Sanctims and Disbursements FY8t-86 (Rs mitatons) State Financial 1980-81 1981-62 1962-83 1983-84 194-85 1985-86 Corporations Sanc. tsb. Sc. Dish. Sanc. Disb. Senc. Diab. Sanc. D1sb. Sanc. D1sb. Andhra Pradesh 466.8 296.1 616.9 371.6 699.9 449.6 738.9 478.6 907.4 593.7 1,063.9 665.1 Assa 9.1 6.5 40.7 20.4 36.1 37.4 26.0 18.0 28.6 18.6 30.9 22.2 Bihar 184.0 92.2 369.1 145.1 426.4 171.4 336.7 157.5 495.4 209.2 634.6 321.3 Delhi 50.1 35.6 58.8 40.9 77.7 47.6 63.0. 51.8 79.8 60.9 149.4 70.7 Gujarat 365.9 275.1 47f.5 330.5 645.3 421.0 581.9 383.2 655.4 412.5 746.7 454.9 Haryana 105.5 S1.2 166.6 92.7 312.3 168.0 170.9 135.9 127.7 158.8 240.8 147.7 Himachal Prades 103.5 34.6 107.8 65.7 73.1 61.7 96.0 60.9 165.3 85.6 199.1 125.5 Jamnu and Kashmir 73.3 50.2 93.4 62.1 119.4 96.0 122.3 88.8 160.0 128.7 182.6 130.5 Karnataka 210.5 144.1 321.7 216.4 437.6 314.4 582.7 434.6 763.2 846.3 1.035.7 682.9 Kerala 99.5 84.2 40.2 61.0 122.1 83.1 82.1 65.7 103.8 120.0 356.2 195.1 Madhya Pradesh 111.6 "6.1 162.9 . 3.5 239.4 140.6 332.9 210.8 419.3 271.6 664.5 353.3 Maharashtra 347.7 301.7 345.1 308.7 497.1 321.5 566.6 410.2 578.2 355.6 704.8 431.0 Orissa 293.7 176.3 425.0 2586.8 547.1 320.7 532.4 317.3 531.0 341.9 499.1 358.3 Punjab 93.3 80.1 109.1 67.5 280.0 136.4 224.3 155.7 29.8 106.6 313.9 112.1 Rajasthen 373.9 261.0 45t.4 299.6 556.2 375.2 531.7 388.0 526.3 393.0 641.1 359.7 . Test Nadu 362.3 222.5 519.9 345.2 555.3 395.6 595.5 411.1 675.5 493.1 923.0 600.0 "0 Utter Pradesh 413.0 249.9 557.8 310.2 544.0 360.5 624.5 458.9 924.8 842.8 1.562.2 780.3 West Bengal 114.2 54.4 153. 62.7 192.0 100.8 24.. 119.8 279.9 197.1 331.S 197, Total Grose 3.777.9 2.481.8 5,010.5 3.156.6 6,363.3 4,043.9 6.449.1 4.354.8 7.387.8 4.985.5 10,28.2 5.995.1 Sanctions and ===omns ==ama= uses= =a=== =mangs ==mana =n=m=s swas=== onsass Disbursements Net Sanctions 3,651.9 4,868.8 5,498.5 6.118.1 6,25143 .. 9,070.5 *uass usnmouss Moson wason anS==* Source: ID81 -20 - ANNEX 2 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Summary of SPC's Operations (FY82-86) FY82 FY83 FY84 FY85 FY86 FY82-86 Total Sanctions 4,868.8 5,498.5 6,118.1 6,251.3 9,070.5 31,807.2 (Net Disbusements) (3,156.6) (4,043.9) (4,354.8) (4,985.5) (5,995.1) (22,535.9) Percentage of Total Sanctions: Backward Areas 46 47 50 55 54 51 SSI (Net of 8TO) la 74 77 75 77 76 76 New Projects 91 90 91 92 90 91 Private Sector 98 97 98 97 97 98 Industries Food 11 11 13 11 11 11 Textiles 7 7 8 8 9 8 Chemicals 11 13 13 15 15 14 Metal Products 10 11 9 9 8 9 Machinery 7 5 4 4 4 5 Services 12 14 15 13 13 13 Other /b 42 39 38 40 40 40 Number of Units (000) Average per Unit (Net Sanctions) 32 33 31 31 29 156 Rs. '000 152.15 166.62 197.36 201.66 312.78 204 USDollars '000 17.74 19.42 23.01 23.52 36.47 23.79 (Rs.8.5755) /c Ia SSI - Small-Scale Industries. SRTO - Small Road Transport Operators /b Include Paper, Rubber, Cement, Basic Metals, Electrical Machinery, Transport Equipment and Others. /c Average rate during the project implementation period. Note: Some percentages are approximate figures due to non-availability of detailed breakdown for some SFCs. Source: IDBI PROJECT COMPLETION REPORT INDIA - SECOND ID81/SFCs PROJECT (Loan 1260-IN) SFC's Net Sanctions and Disbursements Distribution by Subsector (RS millions Net Sanctions Disbursements Cumulative % of Cumulative S of Up to Cumulative Up to Cumulative Industries FY85, FY86 and FY86 Assistance FY85 FY88 and FY86 Assistance Food 696.7 982.3 6.009.8 11.9 609.4 602.4 4.243.8 12.5 Textiles 496.3 748.1 4.494.8 8.7 383.4 320.4 3.095.0 9.1 Paper 174.0 347.2 2.004.0 3.9 132.5 152.3 1,405.3 4.2 Chemicals (nc. Fertilizers) 962.7 1,415.1 6.822.4 13.3 639.7 570.5 4.321.3 12.8 Rubber 103.7 170.1 941.2 1.8 94.0 56.0 578.2 1.7 Cement 138.4 17.1 104.3 0.2 75.9 4.6 382.7 1.1 Basic Metal Industries 175.5 308.6 2.223.4 4.3 196.0 163.7 1.523.2 4.5 Metal Products 541.5 780.1 4,658.5 9.1 383.7 356.6 2,875.9 8.5 £ Machinery 236.1 370.8 2,105.2 4.1 242.4 119.4 1.579.1 4.7 Electrical Machinery 257.0 301.7 2,022.1 3.9 189.8 172.4 1,389.9 4.1 Transport Equipment 93.9 103.9 943.2 1.8 77.5 51.1 678.9 2.0 Electrical Generation 22.1 36.5 337.0 0.7 9.1 14.0 125.9 0.4 Services 834.2 1,185.1 6.691.8 13.0 681.8 554.4 4.208.4 12.4 Others 1,519.9 2,303.9 11.955.7 23.3 1.270.3 980.9 7.435.5 22.0 Total 6,251.3 9.070.5 51,404.2 100.0 4.985.5 4,118.6 33,844.2 100.0 EWWWW WW== EW=&=W ZV==a= =wga2at aessaftcow ==vow PROJECT COMPLETION REPORT INDIA - SECOND IDB8/SFCG PROECT (Loan 1260-tN) Assistance (Dfsbursements) to Smalt Industries, FY8I-86 (ft. millions) FY81 State Financial Amount to % of Total FY82 PY8 Y84 pysFY8 Corporations SSIs Assistance Amount I Amount Amount -9 Amount _ Aount Andhra Pradesh 180.7 61 272.0 73 449.0 100 377.9 79 484.6 82 492.5 74 Assam 4.3 66 17.4 85 27.8 74 13.9 77 9.9 53 15.3 69 Bihar 82.0 89 124.0 .85 149.2 87 134.6 85 174.8 84 281.1 87 Delhi 33.6 94 37.9 93 46.2 97 37.6 72 50.0 82 67.5 95 Gujarat 188.5 69 244.0 74 338.1 80 313.1 82 336.2 82 427.4 94 Haryan 38.8 76 87.5 82 156.4 93 122.6 90 135.1 85 123.9 84 Himachal Prades 18.9 55 42.9 85 32.1 39 30;3 44 44.0 St b0.7 48 Jammu and Kashmr 41.5 83 51.3 83 82.3 86 67.9 76 108.4 84 118.3 91 Karnataka 81.9 57 166.1 77 242.7 77 335.6 77 413.8 76 551.7 81 Kerala 59.4 71 51.0 84 64.4 77 47.5 72 92.2 77 168.1 88 Madhya Pradesh 32.8 50 49.8 60 82.5 59 141.1 67 192.0 71 286.7 75 Maharashtra 222.0 74 253.6 82 291.4 91 371.9 91 322.8 91 373.3 87 Orissa 137.1 78 221.8 86 314.4 98 287.0 90 319.4 93 301.8 8S Punjab 41.1 51 80.8 69 109.6 79 119.8 .77 67.9 64 88.0 79 Rajasthan 213.9 82 282.4 94 342.3 91 367.3 95 356.6 91 318.9 89 Tamil Nadu 123.8 56 - 254.3 74 326.1 82 371.7 90 458.4 95 NA NA Uttar Pradesh 212.7 85 254.0 80 338.1 89 402.0 88 480.8 89 688.9 88 West Bengal 31.1 57 35.5 57 64.7 64 91.6 76 124.9 80 157.1 14 Total 1.744.1 70 2,486.3 79 3.457.3 85 3.633.3 83 4.171.8 84 4.S0l.2 75 -23- ANNEX 5 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SPCs PROJECT (Loan 1260-IN) SFC's Loan Assistance to Backward and Other Areas, 1981-86 (Rs millions) SFC's Cumulative Total FY86 Sanctions Sanctions State Financial Backward Backward FY81-86 Relative Corporations Areas Other Areas Other All Areas Sise of SFC (Volume of sanctions) Andhra Pradesh 676.8 387.1 2,409.0 2,131.5 4,540.5 2 Assam 30.9 - 161.2 10.2 171.4 18 Bihar 327.1 307.7 1,236.4 1,215.0 2,451.4 9 Delhi - 149.4 - 436.9 436.9 17 Gujarat 392.0 354.7 1,731.9 1,784.8 3,516.7 4 Baryana 123.1 125.7 436.1 559.2 995.3 12 Himachal Prades 199.1 - 706.6 41.4 748.0 15 Jamnu and Kashm 182.6 - 740.6 - 740.6 16 Karnataka 471.8 563.9 1,558.6 1,819.2 3,377.8 5 Kerala 191.2 165.0 429.2 356.5 785.8 14 Madhya Pradesh 554.3 110.2 1,515.6 405.0 1,920.6 10 Naharashtra 222.5 482.3 981.2 2,155.3 3,136.5 6 Orissa 227.9 271.3 874.7 1,916.2 2,790.9 8 Punjab 132.7 181.2 451.92 482.2 934.1 13 Rajasthan 434.8 206.3 1,902.4 1,199.1 3,101.5 7 Tamil Nadu 289.5 634.4 1,523.2 2,156.5 3,679.7 3 Uttar Praesh 954.7 607.5 2,731.8 1,901.1 4.632.9 1 West Bengal 155.7 175.8 630.4 686.9 1,317.3 11 Total 5,566.7 4,721.5 20,020.9 19,256.0 39,276.8 Raasa RERWS wWER m aRWRSEEW PROJECT COMPLETION REPORT INDIA - SECOND tDBI/SPCS PPOJECT (Loan 1200-IN) Trends in Arrears of SFCs PV2-8 /a (Rs in millions) FY92 FY83 FY84 FY85 FY6 Arrears Arrears Arrears Arrears !Arrears State Financial Portfolio Portfolio Portfolio Portfolio Portfolio Cororations Arrears S /b Arrears S /b Arrears S /b Arrears % /b6_ Arrears S /t Andhra Pradesh 126.6 11 163.1 11 2S9.8 15 347.8 Is 400.8 to Assam 53.5 50 61.9 44 85.4 56 98.7 58 113.2 62 Bihar 257.5 35 287.3 31 367.8 33 398.4 29 523.4 31 Delhi 42.0 22 43.9 20 46.9 19 35.5 14 57.6 19 Gujarat 412.2 30 464.5 28 598.1 33 816.8 40 1,066.4 46 Haryana 108.9 28 135.5 27 195.0 34 220.3 34 304.9 43 Himachal Prades 37.4 22 51.4 21 77.2 23 102.3 25 136.0 29 Jammu and Kashmir 17.4 10 29.6 11 58.1 18 98.1 22 144.9 27 Karnataka 268.6 32 281.9 26 371.0 27 470.9 28 54.7 26 Kerala 222.7 39 259.5 43 295.1 47 325.5 47 350.3 43 Madhya Pradesh 63.4 17 80.4 16 102.2 16 141.3 16 179.3 14 Maharashtra 402.7 28 536.7 33 652.7 35 880.4 36 1,058.8 47 Orissa 111.2 t8 235.8 27 185.5 17 265.4 19 406.8 24 1 Punjab 93.1 23 91.3 18 110.4 18 159.3 24 205.6 29 Rajasthan 107.3 11 253.0 20 250.4 16 438.9 24 512.0 25 1 Tamit Nadu 279.0 29 355.2 28 523.9 34 634.9 33 773.5 34 Uttar Pradesh 254.4 24 351.8 26 476.6 27 667.7 31 858.6 31 West Bengal 147.3 38 161.6 3S 215.3 39 128.8 17 139.7 17 Total 3.005.2 25 3,844.2 26 4,871.4 27 6.231.0 29 7,790.3 31 ==== Wn 0 ==wn /a Includes suit-filed amounts at end period, but not of amount rescheduled and interest in suspense account. /b Arrears as a percentage of total loans outstanding. - 25 - ANNEX 7 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PPOJECT (Loan 1269-IN) Debt Service Coverage Ratio of SFCs (DSCR), FY82-86 State Financial Corporations FY82 FY83 FY84 FY85 FY86 Andhra Pradesh 1.48 1.38 1.21 1.21 1.18 Assam 1.17 0.64 0.46 0.82 0.92 Bihar 0.96 0.78 0.80 0.65 0.83 Delhi 1.22 1.31 1.49 1.24 1.!' Gujarat 1.02 1.02 1.08 0.96 0.96 Haryana 1.49 1.61 0.89 1.14 1.29 Himachal Prades 0.83 1.01 0.86 0.83 0.89 Jammu and Kashmir 1.56 0.95 0.55 0.87 1.04 Karnataka 0.88 0.96 1.23 1.23 0.87 Kerala 0.60 1.07 0.97 1.17 1.23 Madhya Pradesh 0.87 0.88 0.91 0.80 1.04 Maharashtra 1.31 1.11 1.17 1.10 1.09 Orissa 1.25 0.92 0.73 0.65 0.84 Punjab 1.04 1.24 1.17 1.10 0.99 Rajasthan 1.03 1.03 0.97 0.77 0.80 Tamil Nadu 1.10 1.11 1.01 0.95 1.08 Uttar Pradesh 1.03 1.07 1.07 0.86 1.00 West Bengal 0.77 0.85 0.92 1.02 0.92 DSCR Definition Accrual: Net profit before interest, non-cash charges, plus collection of principat Repayment of interest and principal, deposits and bond repayments and or sinking fund provision Cash: Net profit before interest, non-cash charges, plus collection of principal less uncollected interest revenue Repayment of interest and principal, deposits and bond repayment Adjusted: Same as Accrual but additional share capital contributed within 9 months after end of fiscal year is added to dumerator. PROJECT COMPLETION REPORT INDIA -IDBI/SFCs PROJECT (Loan 1260-IN) Collection as Percentage of Amounts Falling Due Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended March 31, 1986 March 31. 1985 March 31, 1984 March 31, 1983 March 31, 1982 March 31, 1981 State Financial Princ- Princ- Princ- Princ- Princ- Princ- Corporations ipal Interest Total ipal Interest Total ipal Interest Total 1pal Interest Total oaf Interest Total ipal Interest Total Andhra Pradesh 61.7 71.3 65.9 64.2 70.2 66.9 69.4 70.9 70.0 74.1 74.0 74.4 75.0 79.9 77.1 75.8 84.7 79.9 Assam 33.6 62.0 48.9 52.3 73.5 61.7 49.2 67.7 57.1 64.3 76.7 70.3 88.7 83.3 86.0 73.6 65.9 69.8 Bihar 46.6 96.2 72.5 42.9 73.8 59.6 37.4 83.6 62.9 82.2 75.1 77.4 41.9 74.8 62.3 28.0 67.5 49.8 Delhi 85.1 86.7 #5.9 87.3 91.4 89.2 89.4 93.4 91.4 88.8 90.7 90.4 92.8 94.4 93.3 -98.5 91.6 95.3 Gujarat 61.6 65.6 63.5 61.2 66.0 63.5 75.4 69.1 72.1 82.3 88.0 85.1 99.8 84.3 90.4 59.3 111.1 77.3 Haryana 105.3 97.8 102.2 104.4 120.1 110.4 112.8 107.7 110.6 103.2 92.9 98.5 60.0 77.1 79.2 100.3 102.9 101.7 Mimachal Prades 45.9 76.1 62.5 47.8 73.7 62.1 42.2 75.5 59.5 62.1 84.3 74.2 68.5 83.6 76.7 76.9 84.5 80.5 Jammu and Kashmir 60.8 61.9 61.4 59.2 60.3 59.7 SO.5 60.0 54.6 75.3 74.8 76.3 91.1 89.8 90.7 95.9 94.0 95.2 Karnataka 82.4 84.6 83.5 65.9 74.7 69.8 68.8 80.4 73.9 69.4 88.9 77.9 62.0 90.5 74.3 60.6 81.2 69.4 Kerala 86.7 83.3 85.0 81.1 78.3 79.7 58.1 85.3 72.6 NA NA 67.4 NA NA 59.0 49.0 55.1 51.9 Madhya Pradesh 55.2 66.1 61.1 66.4 78.0 72.9 86.9 81.7 84.1 79.7 84.9 82.3 53.6 89.6 91.4 78.7 88.8 84.0 Maharashtra 71.5 69.7 70.6 72.7 67.3 69.9 71.4 67.4 69.4 68.1 66.3 67.2 81.3 69.6 75.4 76.7 76.4 76.6 Orissa NA NA NA 51.1 67.7 61.7 45.9 69.1 55.4 34.1 51.8 41.9 113.8 108.1 110.9 65.4 74.1 69.1 Punjab NA NA 73.3 60.7 71.4 66.2 83.0 85.9 84.5 114.6 91.9 101.9 77.8 84.6 81.0 84.7 85.4 84.9 Rajasthan 42.8 61.0 51.3 39.3 66.7 52.0 75.7 64.2 69.0 43.0 75.0 57.3 58.7 73.5 65.3 68.4 90.2 78.6 Tamil Nadu NA NA 58.8 56.9 74.9 63.8 68.7 65.9 67.5 73.5 70.9 72.3 68.7 82.1 74.5 55.8 64.4 59.7 Uttar Pradesh 60.9 71.4 57.4 66.7 69.3 68.2 52.2 64.3 59.2 59.7 71.9 67.0 78.4 76.4 77.0 97.5 116.6 109.1 Mest Bengal 80.3 67.4 72.9 70.3 87.4 88.5 52.5 55.3 54.1 69.8 61.2 64.7 42.1 66.7 54.9 45.8 52.9 49.9 NA - Not Available. I PROECT COMP18TIO0 REPORT INDA -10BI/SCa PROJ6CT (t.~an 1260-4 colleçtIon PerforSmance of ~C, FV42-86 (fl. In 11t1itens __________Pve2 PV63 Py94 Fv65 FYSe OteteFinancial ver- Current Total Cot$cc- över- Current Total Coltoc- Over- Current Total Cotiec- Over- Current Tota Cottc- Over- C.rrent Total Ca.13ec- Corporationg Oues D~s Du~e lian _ s Duos tlon 0~ u ~e Dvo* tfon IL Dues ue Oues tion Doos Du. oueg tlon _ Andra Prodesh 101.6 236.5 338.1 213.3 83 128.8 319.5 446.1 286.4 64 183.1 490.5 653.6 369.4 57 259.8 575.0 $34.8 437.5 Sf 347.8 686.9 1.034.7 534.8 52 Asa~ 50.2 17.4 67.6 15.0 22 53.5 26,0 79.5 18.2 23 61.9 34.8 96.7 19.9 21 85.4 38.4 123.9 24.4 20 98.7 52.5 151.2 28. 19 ethar 219.0 120.8 339.8 74.5 22 257.5 128.8 388.3 99.0 28 287.3 201.6 488.9 117.0 24 367.8 228.9 598.7 $38.4 23 398.4 271.3 6m9.7 96.7 29 Delhi 37.9 35.8 73.7 33.4 45 42.0 41.7 83.7 37.5 45 43.9 45.8 89.7 49.7 55 46.9 50.4 97.3 55.0 57 .35.5 62.0 97.5 85.0 67 Gujarat 378.9 302.3 681.2 272.4 40 412.2 338.3 750.5 286.0 38 4~4.5 479.3 943.8 345.7 37 598.1 552.9 1.151.0 351.1 31 816.8 617.4 1.434.2 392.3 27 maryane 129.6 70.5 200.3 82.8 41 108.9 G0.4 189.3 95.7 st 135.5 103.9 239.4 114.9 48 195.0 126.5 321.5 139.7 43 220.3 149.3 369.6 152.7 41 MI*che Prodes 30.4 28.8 57.0 21.2 37 37.4 41.9 .79.3 30.9 39 51.4 82.1 113.5 37.1 33 77.2 79.3 156.5 49.2 31 102.3 105.6 207.9 68.0 32 ja^u and Kam4er 13.8 39.9 43.7 38.3 83 17.4 49.7 67.1 37.5 56 29.6 67.8 97.2 36.9 38 58.l 10s.t 159.2 53.0 33 98.1 321.0 219.1 74.3 34 Karnatoka 236.1 143.4 379.5 106.6 28 248.6 207.0 475.8 161.3 34 281.9 291.3 573.2 255.0 44 371.0 491.0 862.0 331.0 38 470.9 541.0 1.011.9 451.7 45 Karel& 182.5 98.2 280.7 58.0 21 222.7 112.0 334.7 78.0 23 259.5 130.2 389.7 94.5 24 -495.1 149:6 444.7 119.2 27 325.5 185.0 490.5 140.2 29 dhya Prodesh 50.1 54.5 104.8 49.9 48 63.4 77.2 140.6 83.5 45 80.4 108.2 188.6 91.0 48 102.2 157.9 260.1 115.1 44 141.3 288.0 409.i 163.7 40 Neherashtre 311.9 389.7 61.6 279.9 41 402.7 409. 811.4 274.7 34 586.7 482.7 9.019.4 334.8 33 852.7 622.0 1.274.7 396.0 31 89.4 630.7 1.511.I 445.0 29 GrIs 107.6 93.6 201.2 103.8 52 111.2 223.0 334.2 93.4 28 235.6 252.4 488.0 139.8 29 185.5 270.5 458.0 186.9 37 25.4 242.8 506.2 204.1 40 PunJob 75.1 95.1 170.2 78.6 43 93.1 89.6 12.7 98.8 54 91.3 122.8 213.9 103.6 48 110.4 144.7 255.1 95. 38 159.3 173.6 332.9 127.3 38 Rejathan 01.4 184.5 275.9 120.5 44 107.3 335.3 442.8 188.4 38 253.0 434.3 687.3 230.8 34 250.4 547.4 797.8 284.4 36 438.9 645.2 1.084.1 331.1 31 Tamst Ndu 231.8 245.1 438.9 137.8 31 279.0 274.8 583.8 198.4 36 355.2 373.9 729.1 252.3 35 523.9 507.3 1.031.2 323.8 3I 034.9 691 8 1.328.7 407.0 31 Utter Predeos 222.6 188.3 410.9 141.8 34 254.4 2609.0 523.4 10.2 34 351.8 376.3 728.1 222.6 31 476.6 443.0 919. 302.1 33 67.7 613.8 1.281.3 409.6 32 1 West een9el 125.4 76.4 201.8 41.9 21 147.3 .5 233.8 IM .24 181. 131.9 293.5 71.3 4 2t.3 it.2 35.5 93.3 2 128.8 172.3 301.1 125.7 42 Ttet 2.594.1 2.358.8 4.954.7 l.866.5 38 3.005.2 3.109.2 6.114.4 2.261.8 37 3.844.2 4.199.4 8.033.6 2.886.3 30 4.871.4 5.222.1 $0.093.5 3.473.9 34 6.231.0 $.210.0 12.441.0 4.318.0 35 -4 . . ....... ...... ... =... a es. .sa.... aawassa = . ..... . . ... .... .... ....... ........ ....... .. ....... ....... ........ ......= fl Moteeas g/ Arromra Include munta involved on Buit-filed case~ or where Recovery Certifictet have ben fasued. b/ The costnt and openng fi9ur« of overdue cy not tal ry on account of ouit-ftllted/recaled accounta. rechedulent. «rite-oft. etc. - 28 - ANNEX 9 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PPOJECT (Loan 1260-IN) Summary of Financial Statistics: All SFCs (Re in millions) PY82 FY83 FY84 FY85 FY86 Financial Assistance Sanctions (Net) 4,868.8 5,498.5 6,118.1 6,251.3 9,070.5 Commitments 6,321.7 7,174.2 8,236.3 9,396.0 11,605.2 Disbursements 3,156.6 4,043.9 4,354.8 4,985.5 5,995.1 Financial Position Total Resources 12,562.0 15,720.0 18,809.0 22,131.0 26,130.0 Outstanding Loans 11,980.0 15,100.0 18,103.0 21,443.0 25,495.0 New Worth 2,497.0 3,080.0 3,679.0 4,361.0 5,248.0 Equity: Paid-up 1,555.0 2,000.0 2,496.0 3,055.0 3,775.0 Reserves: General 862.1 982.9 1,069.7 1,282.3 1,311.9 Bad Debt Provisions 79.9 97.1 113.3 123.7 161.1 Total Jebts IDBI Loans (Refinance) 5,735.0 7,540.0 9,016.0 10,382.0 11,960.0 IDBI Equity in SFCs 648.1 874.3 1,136.0 1,392.9 1,738.0 Total IDBI 6,383.1 8,414.3 10,152.0 11,774.9 13,698.0 % of Total IDBI/Total Resources 50.8 53.5 54.0 53.2 52.4 Debt/Equity Ratio 4.0 4.1 4.1 4.1 4.0 linancial Performance Cross Revenue 900.4 1,332.8 1,438.8 1,850.3 2,312.4 Net Profits 194.4 280.5 181.8 194.9 248.6 Net Profit/R venue (%) 21.6 21.0 12.6 10.5 10.7 Return onquity (%) 7.8 9.1 4.9 4.5 4.7 Administration Expenses/ Total Assets (%) 1.13 1.21 1.28 1.12 1.15 Profit before Taxes, Interest, and Provision (EBIT) 734.3 1,077.3 1,138.3 1,499.5 1,896.6 ource: IDBI - 29 - ANNEX 10 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PPOJECT (Loan 1260-IN) Consolidated Balance Sheet of SPCs, FY82-86 (RUs in millions) Liabilities FY82 PY83 FY84 ?Y85 PY86 Share Capital a/ 1,555 2,000 2,496 3,055 3,775 Reserves 242 1,080 1,183 1,306 1,473 Bonds 4,159 4,870 5,858 7,191 8,734 Borrowings from - RBI 57 60 24 44 90 - IDBI 5,735 7,540 9,016 10,382 11,960 - Others 38 80 114 63 72 Fixed Deposits 133 150 142 134 116 Other Liabilities 702 840 883 1,212 12217 Total 13,321 16,620 19,716 23,387 27,437 Assets Cash and Bank Balances 466 530 665 864 836 Investments 119 100 105 96 97 Loan and Advances 11,980 15,100 18,103 21,443 25,495 Other Assets 756 890 843 984 1r009 Total 13,321 16,620 19,716 23,387 27,437 a:"=== ===a Rumn a/ Including loans in lieu of capital and Share Applicaton Money. PROJECT COMPLETION REPORT INDIA -IDBI/SPCs PROJECT (Loan 1260-IN) Summary of SPCa* Staffing Pattern During fY82 to FY85 (O in eittIon r, State olnncial Staff on hand as of 03-31-82 Staff on hand as of 03-31-83 Staff on hand as of 03-31-84 Staff on hand as of 03-31-9 Corporations Professionals Others Total Professionall -Othe" Total Profesetonate Others Total Prpsionals Others gtgl Andhra Pradesh 122 365 487 141 400 541 1S 392 547 289 301 590 Assee NA NA NA 47 60 107 40 64 104 44 70 114 Bihar 118 308 426 152 216 368 152 213 365 ISO 213 363 Delhi 21 117 138 21 111 132 22 122 144 22 114 136 Gujarat 126 426 552 131 512 643 153 535 666 161 566 729 Haryana 12 284 296 16 263 299 18 291 309 1 296 316 Himachal Prades 27 37 64 30 36 66 30 37 67 2 49 Of Jammu and Kashmir 21 135 156 19 13S IS4 19 141 160 28 173 203 Karnataka 57 241 298 72 282 354 123 331 454 96 404 500 Kerala 60 253 313 61 253 314 61 253 314 63 236 321 Madhya Pradesh 64 S 120 78 66 134 75 73 148 83 96 161 Maharashtra 394 567 961 390 609 999 390 649 1.039 423 653 1.076 Orissa 105 348 453 NA NA NA NA NA NA 52 516 See Punjab 67 202 269 32 189 221 68 192 260 56 231 287 Rajasthan 139 245 384 209 429 638 253 455 708 162 677 639 Tamil Nadu 93 213 306 44 259 303 61 304 365 126 280 406 Utter Pradesh 251 331 582 246 337 583 276 370 646 293 429 721 West Bengal 52 94 146 16 173 19 169 le6 70 112 162 Total 1.729 4,222 5.951 1.707 4.322 6.029 1.915 4.591 6.506 2.168 5.445 7.613 won= ==man an== =nou ==so a=== ==a *=u fll se - ANNEX 12 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SPCs PPOJBCT (Loan 1260-IN) SFCs Sanctions and Disbursements under Loan 1260-IN (Rs in millions) Loan 1260 Sanctions Disbursements Loan 1260 Contribution as State Financial no of SPC IDBI SPC IDBI Contribution Proportion of Corporations Subprojects Loan Refinance Loan Refinance (USI mill) IDBI Refinance Andhra Pradesh 43 49.74 42.04 49.74 37.62 3.18 72.6 Assam 3 2.11 1.73 2.11 1.64 0.13 68.3 Bibar 6 12.69 9.63 12.69 8.87 0.67 64.9 Delhi 28 9.54 9.54 9.54 8.78 0.61 59.8 Gujarat 69 75.13 71.37 71.37 71.37 5.02 63.5 Naryana 7 13.49 12.15 11.84 11.84 0.89 65.0 Himachal Pradesh 7 16.53 15.48 15.39 15.39 1.17 65.4 Jama and Kashair 2 1.73 1.43 1.65 1.43 0.13 79.0 Karnataka 9 13.75 13.75 13.75 13.75 0.91 60.8 Keralo 4 5.55 5.55 5.55 5.55 0.40 65.0 Nadbya Pradesh 160 144.68 126.17 123.60 121.82 9.24 65.9 Naharashtra 85 104.59 72.21 104.59 69.79 5.42 67.0 Orissa 5 9.39 8.54 9.39 8.54 0.64 65.0 Punjab 8 20.54 17.58 15.64 15.64 1.18 65.0 Rajasthan 13 18.50 18.01 17.53 17.53 1.35 66.4 Tamil Nadu 101 118.92 73.26 118.92 72.81 5.54 65.3 Uttar Pradesh 18 21.65 20.72 20.72 20.72 1.50 62.4 West Bengal 36 30.66 J6.25 24.64 24.64 2.02 69.2 Total 604 669.19 545.35 628.66 527.73 40.00 65.0 Notes Exchange rate lused (Rs 8.5755 per US$) was average during the project implementation period (1976-83) - 32 - ANNEX 13 PROJECT COMPLETION REPORT INDIA - SECONDIDBI/SPCs PROJECT (Loan 1260-IN) Size Distribution of Subprojects and Subloans (Re in millions) 'A' Subprojects 'B' Subprojects No. Amount No. Amount Re 1 million and under - - 19 9.66 Rs above 2 million - Rs.2 million 1 1.60 15 22.50 6' above 2 million - Rs.3 million 2 4.47 3 7.51 Rs i0ove 3 million - Rs.4 million - - 3 10.93 R iove 4 million - Rs.5 million - - - - Ra above 5 million - Rs.6 million 3 17.40 1 5.95 Rs above 6 million - Rs.7 million 4 26.27 1 6.02 Ra above 7 million - Rs.8 million 2 15.22 2 14.90 'Rs above 8 miLlion - Rs.9 million 2 17.50 - - Rs above 9 million and above 22 339.12 2 20.40 36 421.58 46 97.87 A 8:L# size of 'A' subproject - Rs 11.71 million Average size of 'B' subproject - Re 2.13 million 'A' Sub-loans 'B' Sub-loans Rn. 0.25 millioh and under - - 15 1.98 Re 0.25 million - Rs 0.5 million 1 0.49 18 6.32 Rs 0.5 million - Rs 1 million 4 3.35 8 5.56 Rn 1 million - Rs 1.5 million 4 5.32 5 5.91 Rn 1.5 million and above 33 59.59 2 3.15 42 68.75 48 22.92 Aea sWWze of 'WWWi Average size of 'A' subloan - Re 1.64 million Average sise of 'B' subloan - Rs 0.48 million Sourtes IDBI PROJECT fOPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Financing of Suborojects uog*r Loan 1260-IN (Ra millions) SPC Loans Other Sponsors Other Project Cost 1D1 Refinances Loans Equity Financing Total State Financial -------------~-~ -------~~-~~~~-- --------------- Corporations Projects Est. Act. FE RS Re /a Rs Rs /b FE Ra Andhra Pradesh 4 25.99 30.84 3.52 3.24 10.70 6.90 6.48 3.52 27.32 Assam 1 1.43 1.45 0.41 0.05 Nil 0.97 0.02 0.4t 1.04 Bihar 4 31.83 S1.29 - 9.99 28.35 11.45 1.50 - 51.29 Delhi 2 2.38 2.61 0.62 0.79 - 0.79 0.41 0.62 1.99 Gujarat 7 61.99 73.41 10.55 8.36 24.13 20.06 10.31 10.55 62.86 Haryana 3 25.27 26.63 - 6.90 7.70 6.89 5.14 - 26.63 Himachal Prades 6 54.17 72.07 9.60 4.51 25.36 18.29 14.31 9.60 62.47 Jammu and Kashmir 2 3.14 2.48 0.82 0.91 - 0.75 - 0.82 1.66 Karnataka 11 34.96 34.54 9.16 3.45 10.81 6.64 4.48 9.16 2S.38 Kerala 1 9.00 10.90 0.40 2.10 2.46 2.41 3.53 0.40 10.50 Madhya Pradesh 3 18.98 19.02 3.67 2.14 8.84 4.89 1.48 3.67 15.35 Maharashtra 17 87.47 92.46 14.19 15.21 24.26 24.24 14.56 14.19 78.27 Orisda 3 29.94 35.67 3.80 4.10 13.23 10.25 4.29 3.80 31.87 Punjab 3 18.29 14.91 3.49 2.45 3.40 4.49 1.08 3.49 11.42 Rajasthan 3 28.84 29.09 2.73 6.27 5.99 5.70 6.40 2.73 26.36 Tamil Nadu 11 21.84 22.00 6.96 2.42 4.60 4.75 3.27 6.96 IS.04 Utter Pradesh 2 21.48 19.15 - 4.35 10.33 2.97 1.50 - 19.15 West Bengal 5 13.59 12.20 2.51 2.11 3.65 2.60 1.33 2.51 9.69 Total 88 490.59 550.72 72.43 79.35 181.81 135.04 82.09 72.43 478.29 /a Provided by SFCs and other institutions, including commercial banks. /b Other forms of financing such as bills rediscounting and seed capital in some cases. FE Foteign Exchange. PROJECT COMPLETION REPORT INDIA - SECOND IDSI/SFCs PROJECT (Loan 1260-IN) Type of Asaistance Sanctioned by SFCs (Rs millions) New Expansion/Diversification Balancing Equipment/Modernization State Financial No. of No. of No. of Corporations Projects FE Ra. Total Projects FE Rs. Total Projects FE Rs. ToVal Andhra Pradesh 7 6.63 6.95 13.58 - - - - - - - - Assam - - - - 1 0.41 0.05 0.46 - - - - Bihar 4 - 9.13 9.13 - - - - ~ - - - Delhi 4 3.22 0.96 4.18 1 0.76 - 0.76 - - - - Gujarat 3 3.80 4.85 8.65 3 4.34 4.56 8.90 - - - - Haryana 3 - 7.84 7.84 - - - - - - - - Himachal Pradesh 7 13.20 3.91 17.11 - - - - - - - - Jammu and Kashmir 1 0.74 0.86 1.60 - - - - 1 0.10 0.20 0.30 Karnataka 10 12.72 3.51 16.23 2 1.31 0.58 1.89 2 2.33 1.69 4.02 Kerala 1 0.42 2.08 2.50 - - - - - - - - Madhya Pradesh 2 3.31 2.69 6.00 - - - - 1 0.38 - 0.38 Maharashtra 9 7.62 10.90 18.52 15 7.24 5.00 12.24 2 2.78 0.49 3.27 Orissa 3 3.00 3.10 6.10 - - - - - - - - Punjab 2 2.91 3.09 6.00 1 1.82 0.28' 2.10 - - - - Rajasthan 4 5.48 6.52 12.00 1 0.39 0.11 0.50 - - - - Tamil Nadu 5 5.69 1.54 7.23 1 0.07 0.21 0.28 2 1.16 0.59 1.75 Utter Pradesh 4 0.35 9.03 9.38 - - - - - - - - West Bengal 3 2.09 2.91 5.00 2 9 Qa08 1.31 - - - Total 72 71.18 79.87 151.05 27 17.30 11.14 28.44 8 8.75 2.97 9.72 as WWW WWE aaRE WR asag mms WRR a WW 822 E I PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Subproject Implementat*vn Performance Delay No. of No. of Cost Overrun No. of Average Ca0acity Projects Projects As a Projects No. of Delay UtiTTzation Within That Percentage No. of Projects State Financial Completed Projects in g/ Est. Act. Initial Exceeded Estimated Making Corporations On Time Delayed Months % % Estimate Cost Est. Cost b/ Profits Losses Andhra Pradesh 1 4 12.0 NA NA - 4 18.7 NA NA Assam 1 - - 82 NA - 1 1.4 1 - Bihar - 4 19.5 77 42 1 3 61.1 1 3 Delhi - 2 6.5 80 83 1 1 22.8 2 - Gujarat 1 4 22.0 76 78 - 5 23.1 5 - Haryana - 3 17.6 S5 55 2 1 14.4 2 1 Himachal Pradesh - 6 16.5 NA NA - 6 33.0 NA 2 Jammu and Kashmir 1 1 4.0 NA NA 2 - - 2 - Karnataka 2 5 20.2 NA NA 8 2 20.0 7 - Kerala - 1 36.0 90 60 - 1 21.1 - I Madhya Pradesh - 3 14.3 66 79 2 1 11.7 2 1 Maharashtra 2 15 15.0 80 52 12 5 17.0 5 a Orissa - 4 11.2 - 80 46 - 3 19.1 NA 1 Punjab - 2 3.0 NA NA 1 1 3.8 1 2 Rajasthan 1 3 13.7 70 29 2 1 13.1 NA 2 Tamil Nadu 4 7 24.0 79 65 10 1 39.0 10 1 Utter Pradesh 2 2 13.0 NA NA 3 1 8.6 1 NA West pengal 2 3 3-0 NA NA 3 2 24.4 1 NA Total 17 69 14.8 76 59 47 39 20.7 40 22 --"" as mas= me 33 33 3= s3=s as as a/ Average for projects which were delayeds excludes projects completed on time. b/ Average for projects which incurred overrunas excudes projects completed without overruns. PROJECT COMPLETION REPORT INDIA - SECOND ID81/SFCs PROJECT (Loan 1260-IN) Economic Indicators of SubprJects Financed CRs in minlion) Values of Export Employment Value Added State Financial No. of First Year Second Veer Corporations Subprojects Estimate Actual Estimate Actual Estimate Actual Estimate Actual Andhra Pradesh 3 0.250 0.210 0.200 0.230 436 418 6.010 3.330 Assam 1 - - - - 250 274 0.800 0.994 8ihar 4 - - - - 130 143 5.620 0.680 Delhi 2 - - - - 83 65 1.230 0.570 Gujarat 9 22.530 8.940 29.850 12.320 394 407 16.150 17.320 Haryana 2 9.000 5.160 10.500 5.320 305 110 4.440 0.910 Himachal Pradesh 5 NA 0.010 NA 0.070 329 337 16.030 5.160 Jbmu and Kashmir 2 - - - - 64 42 1.250 0.540 Karnataka 4 3.000 0.403 3.000 1.820 463 378 14.832 13.374 Kerala 1 - - - - 61 69 1.410 (1.720) Madhya Pradesh I - 0.621 - 0.621 200 200 3.080 2.370 Maharashtra 11 3.130 1.080 3.330 2.93, 1.072 945 30.800 19.510 Orissa 2 - - - - 87 60 2.610 1.650 Punjab 3 - - - - 475 336 8.320 8.010 Rajasthan 1 - - - 114 39 2.030 (0.960) Tamil Nadu 11 12.500 13.120 25.000 35.210 729 671 14.000 9.370 Uttar Pradesh 2 - - - - 218 164 3.760 4.760 West Bengal 5 NA _0.600 NA 0.640 195 6 7.030 7.120 TOTAL 69 50.410 30.144 71.880 59.161 5.537 5.044 139.402 92.988 SW RtWR Umassa assman agasa Rasa SWata WEasW 2W PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Financial Performance of Suborojects (Rs in million) Total Sales Gross Profit/(Loss) Profit/{Loss) Before Tax State Financial No. of First Year Second Year First Year Second Year First Vear Second Year Corporations Subpr. Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual Estimate Actual Andhra Pradesh 1 2.020 2.380 2.300 1.480 0.100 (0.080) 0.120 0.870 0.050 (0.180) 0.070 0.650 Absam 1 0.036 0.036 0.038 0.016 0.003 0.008 0.003 0.002 0.001 0.001 0.001 0.001 Bihar 3 11.060 4.400 12.970 6.750 3.040 (1.610) 3.910 (1.020) 0.310 (2.460) 1.470 (2.330) Delhi 2 3.390 2.830 3.920 3.910 0.790 0.560 0.930 0.840 0.410 0.080 0.560 0.150 Gujarat 9 91.250 81.180 116.230 98.930 13.200 12.890 18.210 18.290 11.860 0.72C 8.630 4.380 Haryana 1 6.000 5.370 7.000 6.265 1.960 0.290 2.100 0.3!0 1.220 0.290 1.420 0.337 Himacnal Pradesh 5 56.710 7.750 71.240 20.610 8.290 (0.340) 14.040 1.180 4.090 (3.210) 7.230 (1.670) Jammu and Kashmir 2 1.840 0.520 13.770 5.320 0.650 0.500 1.220 0.370 0.040 0.090 0.600 (0.210) Karnataka 9 44.490 24.970 62.100 39.870 6.790 2.050 9.490 4.020 1.800 (3.280) 3.220 (4.720) Kerala 1 2.830 2.430 5.350 2.790 0.170 (0.990) 0.730 (0.840) 0.170 (0.990) 0.730 (0.840) Madhya Pradesh 3 32.000 6.350 37.220 13.420 7.550 1.110 9.940 3.710 4.340 (2.170) 6.550 (0.950) Maharashtra 13 104.080 80.620 109.060 93.230 24.080 3.260 27.130 0.460 8.530 (8.950) 11.990 (11.590) W Oriss& 2 7.100 3.390 10.660 3.480 2.410 (3.930) 3.580 (7.990) 1.200 (6.150) 2.020 (10.750) -4 Punjab 3 51.480 59.280 54.680 78.210 3.420 3.130 4.090 3.450 0.960 (1.750) 1.780 (0.890) Rajasthan 3 14.900 13.609 17.500 12.470 4.200 (3.610) 4.510 (1.290) 1.200 (3.110) 1.700 (2.330) Tamil Nadu 11 97.430 78.420 108.290 90.680 8.140 5.260 9.170 6.680 2.790 0.590 4.030 1.290 Uttar Pradesh 2 3.640 11.950 3.370 20.750 (2.160) 0.320 7.820 8.440 (2.070) 0.370 0.480 7.710 West Bengal 5 32.650 35.840 36.290 45.910 4.140 3.370 4.750 5.130 0.820 (0.290) 1.340 2.350 Total 76 562.906 421.325 671.988 544.091 86.773 22.188 121.743 42.612 37.721 (30.399) 53.821 (19.412) Co - 38 - ANNEX 19 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Actual Investment Costs per Job by Subsector Investment Investment No. of Cost Per Cost Per Sub- Project Job (Rs. M Job (US$ Subsector Projects Employment Cost Per worker) Per Worker) (Ras. M) Food 4 256 19.11 0.075 8,746 Paper 1 174 17.04 0.098 11,428 Chemicals (including fertilizers) 9 757 143.75 0.190 22,156 Electronics 8 493 56.44 0.114 13,294 Light Engineering 12 767 54.27 0.071 8,279 Printing 4 358 6.55 0.018 2,099 Services 3 101 2.19 0.022 2.565 Leather 4 44 23.68 0.053 6,180 Others 14 995 42.88 0.043 5,014 Total 59 4,345 365.91 0.084 9,795 * Exchange rate used (Rs 8.5755 per US Dollar) was the average rate prevailing during the project implementation period (1976-83). - 39 - ANNEX 20 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Domestic Resource Cost (DRC) of Selected Subprojects No. of the Name of the Subproject Subproject Subsector SFC DRC (Exchange Rate) A-36 Pennar Paper Ltd. Paper Andhra 8.13 Pradesh (12.50) A-46 Tishu & Fibres Ltd. Paper Himachal 6.95 Pradesh (12.50) A-48 Kapco International misc. Himachal 9.77 Ltd. Pradesh (12.50) A-12 Pioneer International Misc. Jamu & 12.63 Sports Co P. Ltd. Kashmir (12.50) A-10 Orcee Electronics P. Electronics Karnataka 31.00 Ltd. (8.50) A-28 M. P. Veneer & Misc. Madhya 5.99 Plywood P. Ltd. Pradesh (8.50) A-24 Flexpak Ltd. Misc. Karnataka 5.69 (8.50) A-25 Vijay Wires & Misc. Karnataka 6.95 Filaments P. Ltd. (8.50) A-34 Scottie India Ltd. Electronics Karnataka 5.85 (8.24) A-38 Mysore Chrome Tanning Karnataka 7.49 Co. Ltd. Leather (8.50) - 40 - ANNEX 21 PROJECT COMPLETION REPORT INDIA - SECOND IDBI/SFCs PROJECT (Loan 1260-IN) Estimated and Actual Disbursements under Loan 1260-IN Disbursement Withdrawals Estimated Actual Actual as % by IDBI 60% of Estimated Rs million US$ million Up to June 1981 378.88 246.27 30.784 30.011 97.49 PY81-82 Jul-Sep 81 9.48 6.16 0.686 0.667 97.23 Oct-Dec 81 7.61 4.95 0.549 0.538 98.00 Jan-Mar 82 40.08 26.05 2.894 2.784 96.20 Apr-Jun 82 17.42 11.32 1.258 1.175 93.40 PY82-83 Jul-Sep 82 4.89 3.18 0.353 0.330 93.48 Oct-Dec 82 ] ] 59.09 39.41 4.268 3.835 89.85 Jan-Mar 83 ] Mar-Jun 83 10.28 6.68 0.742 0.660 88.95 Total 527.73 343.02 41.534 40.000 96.31 Page 1 of 9 P.C. Df1R iDLR SECQTAiovermmet of India (Bharat Garkar) Ministry at Finance (Vitta Mantralaya) D9partmnt of Eowomic Mtairs (Arthik Karya Vibbag) Sftwvft/New Delbe the tb aune 87. Dear at- U(A,,dk- Res Project Completion Report on India - Second IDBI/SCs Project (Loan 1260-IN) Kindly refer to Hro Alexander Nowicki, Division Chief, OED's telex of 2nd June,1c 87 extending deadline for comments on the POR for 2nd IDBI/$FCs ProJ. (Ln.1260-IN) upto end of June,1987. 2. I enclose herewith a copy of the detailed coments offered by IDBI on the above kCR which may kindly be passed on to Oe. With kind regards, Yours sincerely, Shri C.i. VA6UDEV, Adviser to ED(Bank), C/o Indian Embassy, Washington G.L Ricl as above. 42-AACHMENT I Page 2 of 9 DR TA=LE MM A (M21AMRx Mz Project objeotive The Project partly Considering the performance of achieved its objectives. IDDI and SFCs vis-a-vis the (Para 2 of ffighlights) objectives of the Project via. providing assistance to high priority SKI sector and institutional upgradation of SFCs to ensure sound credit delivery system to SKI sector, the Project should be considered as having significantly achieved its objective. The rapid growth in SICs lending operations over the Project period and its impact have been highlighted in PCR itself in Para 4.01. As acknowledged in PCR (Para 4.09 to 4.15), there has been noticeable improvement in the quality of management and staff, policies and procedures and appraisal capacity of SFCs. The institutional uperadation programme belag effected through different mechanisms-like annual evaluation studies, statutory inspections, nominations on the Boards, discussion with Chief fxeoutives, dialogue with the operational stat, besides Conferences and Seminars and guidelines, is an on- going process and the efforts in this direction are continuing for achieving further improvements. Tim " 1 Cot m The delara U' deplementatioo r As acknowledged, same of the and resultaunt vot vverrans -factors vaustig e experienced in the first overrun are beyond She Oontrol0or Project continues in this Sycal b.tterdOnpir"ea Project. someifactors that te d r"o A or the sPCs have alfeady a"engtheod Althouh some factors that thbr 1.aab t,un caused time and cost guidance -of IDBI. Through overruns were beyond the instigational development progra 43 ATTACBMENT I Page 3 of 9 control of the lending ame, the Process of human resources institutions, nevertheless, development and upgradation of SC could have dealt with skills ia in progress in the these problems to a signi- majority of BPCs. The project cst ficant extent, if they had estimates. including contingency properly strengthened their provision, financing plan and appraisal capacity to review implementation schedules of sub more carefully technical projects particularly in medium designs, to assess project sectors are also broadly cost more realistically to scrutinised by IDBI for the purpose allow for adequate price of refinance and, wherever escalation and physical necessary, SICs have been given contingencies and to develop proper guidance. more realistic financing plans and implementation Govt. has already formulated a long schedules. term export-import policy and the (Para 3 of Highlights) import policy and procedures 'have been streamlined. The licensing The implementation of sub- procedures for Import of know -how projects is marred by time have also been simplified. A and cost overruns. Venture Capital Fund has been set up in IDBI to encourage development Some delays and cost of indigenous technology and escalations were due to late commercial adaptation of imported arrivals of imported machi- technology. nery, delay in acquiring technology, know how and lack of bank support for working capital. These majQr problems should be overcome woatly by stream- lining Import procedures, providing access to new technology and effective coordination between SCs, State level agencies and comm ercial Banks.(Para 8.03). - 44 - ATTACHMNT I Page 4 of 9 Collecti ad Arrearg: Recoveries have shown significant improvement between FY 82 and FY 86 The serious problem of when the overall collections have collection and arrears has more than doubled from Ro.846 persisted (Para 5 of the million to Ra.4318 million. The Highlights). compound growth rate of collections at 28% P.a. over WY 82-86 exceeded The problem of collection the growth rate of 23% P.a and 20% and arrears has persisted pa. for sanctions and threatening the financing disbursements respectively during viability and credit the same period. worthiness of many SFCs (Para 6.03). The total collections as percentage of total duos (excluding suit filed Perhaps more disturbing is accounts), have also increased the existence of high though marginallys from 34% in WY - percentage of wilful defaul- 85 to 35X in VY-88. Similarly, ters arising from the soft there has been an improvement in attitude taken by SFCs in collection of current dues from 67% handling their oases (Para to 70 o during this periodn h 4.02). The problem of recovery has The problem remains with the persisted largely because of SFCs' deficient collection certain external factors like performance and mounting infrastructural bottlenecks, arrears. IDdI will have to particularly power shortage, take a much more assetive drought and flood situations, stance in resolving this delays in getting ertain long standing problem clearances etc. Over th last 2 (Para 6.04). years, several S , mostly at the instance of IDI, intiated various ID8I's continued support measure to step up collections. to 870z should be linked to The two-ronsed progr mentioned collection performance as in Para 4.21 of Pre has been measured by. supecific*. targets. adopted --at. t)w-"instance -of, IDBI. (Para 8.06). 'In respect of default accounts, *SFCs a.re holding Regional Executive hretings periodically for initiating remedial action in close coordination with commercial bank . Sost of the SdCe have contituted Default Review Committees/Reoovery cells. Although, as observed in PCR, it is .preMature to eaaess th full impact OR,pctake of these measures, Iu mrovo sts in illctn para zo.21 durJjw FY 87 and the performance Is likely to improve further in the coming years.  - TTACHME I - 45 -Page 5 of 9 Reflected in Regarding coment on wilful PCR, para. 4.02 defaults and soft attitude of SFCs, and 4.03 it may be stated that while there could 'be a few instances of wilful defaults, SICs are taking stern steps, including recourse to Section 29 of SCs Act for take over of management, outright sale, initiating recovery proceedings and, as a last resort, filing suits. During the annual BPRF exeroises special targets are being fixed for recovery in terms of absolute amount as well as percentage of overdues. Collection performance is closely monitored through reviews and periodical reports. IDBI' a continued support is in fact already linked with the recovery performance of SCs, as acknowledged in FCR (Para 4.05). Further, the norms prescribed by Dr. Dave Comittee (to which a reference has been made in FOR) is also being observed while determining refinance limits. Reflected Experience of lending through This is rather a bold and very in PC, an apex agency subject to a unclear observation. IDB as an paras. 6. system requiring inter-action apex instizutical is specifically and 6.06 with Central and State Govts. assigned the task of coordinating by means of institutional the working of institutions engaged processes -outside of its in financings promoting and direct control may be developing Industries both at State Incompatible with sound and national level. IDBI itself is banking practice. a government owned bank as are (Para 6 of ighlights and several development banks in other 6.06 of Chapter VI). developing countries. As a Development Bank, it is concerned directly or indirectly with all problems relating to term financing of industries and is expected to adopt and ensure a system of Priorities in vzonotins industrial development. DBa in having %omtinuous dialogue with All India and Stato level institutions connected with Industrial financing and development, and is having close inter-action with the aovt. both Central as well as Stted In evaluation of existing Industrial -46 - ATTACHMEN I Page 6 of 9 policies and formulation of appropriate new policies to meet the changing needs. It guides State level institutions through periodial issue of guidelines/instructions. Over the years, IDBI has emerged as an effective apex level organisation in purveying industrial credit. in view of the above, there is no incompatibility between lending through such an apex agency and sound banking policy. But IDBX, by itself, cannot fully resolve some of the issues that may arise between Central and State Govts. In a federal structure and resolve Central and State level perspectives on any given issue. SIA ua nltz Mnd The rapid expansion in lending is an disciolinet outcome of both sharp focus given to this sector and overall growth SPCs were clearly unable to taking place in the economy. As sustain internal aooounta- mentioned in para 4.01 of PCR, the bility for loan quality and Central and State Govts. have IDBI was unable to effec- emphasised the development of 881 tively discipline these and backward areas. Thus lending to institutions, given the these sectors constitutes a national political priority accorded priority and as rightly observed in to rapid expansion In PCR. (Para 5 of Highlights), SFCs lendin. (Para 6 of Bigh-. which subserve the national lights and 8.02 of objective have accorded due priority Chapter VI). to development of these sectors through liberalisation of the A heavy emphasis on loan schemes, eto. In fact, in line with approvals outweighed the this objective, the ceiling of Reflected attention to supervision. amount of loan sanctionable by SPCs in PCR, collection and arrears. to a project has been raised from paa 3.0 4 The main factor causing Rs.3 million to Rs.8 million Qnd Foo the rapid growth in definition of SSI has been widened, approvals was that S7Cs' by enhancing the limit of investment management were judged by in plant and machinery from Rs.2 the State Government on million to Rs.3.50 million. the ability to improve -the inordasiW nubb bf "By Wo' emons, however, -£0s are projects. (Para 4.01). absolved of their internal accountability for loan quality, and project viability continues to be the main criterion for sanction. ATTACHMENT I - 47 Page 7 of 9 In view of the substantial growth in sanctions already achieved by 8MCs, IDBI has since laid emphasis on consolidation In their activities through stop up of collections and disbursements, with a view to improving their liquidity and reducing the undisbursed commitments. While this has been a serious problem in the past, there has been The stability and quality significant improvement in the Rer e of top management needs quality of management in recent eectec to be retained for effeti- years. Several States have given a in PCR, veness of leadership and minimum tenure of 3 years to the MDs para. 4.10 organisation. of their 81C. In fact, MDs of 15 (Para 6 of Highlights and SFCs have had a term of 2 to 5 Para 6.06 of Chapter VI). years. The improvement in situation has been brought about duo to continued dialogue of IDBI with the State Governments and the organisational and management evaluation studies carried out by independent agencies at the instance of IDBI. InsitutinalThe impact of institutional upgradation programme is already Despite substantial and reflected in improved performance of systematic efforts on the SICs. As has been observed in PCR part of IDBI it 11 par of 1DB tFara 4..09 to 4. 15), iparovemeat has In institutional upgrada- been effected In areas Of tion, the impact on the organisational structure, develop- Improvement in SvCa' mt of skillso standards of operations/financial appraisal and supervision. performance has been Improvements have also been brought generally limited. The about In SCs' business, collections State Govt.! power over ad plouabback as well. SIC. has severely undermined IDBI's ability to fulfil its functions. The relationship between State Govt. The State Govt. have and IBBI have been generally constantly been Involved harmonious and there has bee U. we's -Matters - vaitIve and constructAve .response e.g. appointment of MDs from State Govt. to VB! Is and their premature trans- suggestions. Ther have been for, emphasis on new loan differences in vien points regarding apTroval rather than remOval, appointment, tenure of n 48 ATTACHMENT I Page 8 of 9 strengthening existing but there is lot of improvement in firms, restriotions on recent years. On matters of staff recruitment to fill staffing and their compensation$ the vacancies - reflecting some SCs have faced problems, but differet perceptions, within the overall constraint of pay priorities and expediency structure among State employees, regarding role of SCs State overnments have tried to be (Para 4.22). more cooperative. The SYCs have also adopted professional approach in their operations. odOver the period F 77-86, the loan atassistance of over Rs.30 billion has been channelled through SIC. Considering the long time to 81I, yielding an annual period and sie of thnan- compound growth rate of 20% In cial resources involved matters of recovery, arrears what SICs an a whole had position etc. also SFCs have accomplished by the shown Improvement. In fact, the completion of this proJect contribution of SCz has been was far less than expected adequately reflected in their outcome i.e. Sound Credit operations as highlighted in Delivery System to SMI paragraph 4.01 of raR itself. (Para 6.03). G2ox1ns12n btimAs mentioned in PCR itself, there has been noticeable improvement in coordinatio among SFC,commerial Close coordination between banks and other State level -Soe and Crcial agencies, but it needs to needs to be encourased. All be improved further. Besides, IDe SFC. need.further-enoura- has been constantly Promoting close --e4t- to. establish-.& firm coordination avmng wawious Saink and effective co- institutions to improve the Credit ordination between term Delivery System (vide paragrap lending by SYCs and 4.14). working capital availa- bility from the commer- The need for further refinement in oial Banks. the system is already engraing the serious attention of ID)BI and RBI. Fuirther until SICz can RBI has Issued fresh guidelines to achieve collections that commercial banks in this regard indicate sound banking and IDSIO too, issued p atine, commercial Banks -tcomplementary instructions to n"etified their ds1Cs. All the agenciesbeeoegd SCks1a1;v towards SFCa are thus already addressing Operations. Consideration themselves to this Issue. The should be given to matter is being discussed at linking continuation,of different forums including annual ATTACHMER2 I 49- Page 9 of 9 commercial Banks lending conferences of state level to repayment of S?'Cs insbitutions in search of enduring loans (Para 6.03). solution. Nominee directors of both RBI and IDDI are also monitoring the progress in this direction. Attempts have been made in the past to make the banks an effective instrument of collection of dues. But the suggestion will be given serious thought once again.