India - Industrial Finance and Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY L.A/ Z9Z42"- /A/ Report No. P-4762-IN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO INDIA IN AN AMOUNT EQUIVALENT TO US$310 MILLION AND TO THE STEEL AUTHORITY OF INDIA LIMITED IN AN AMOUNT EQUIVALENT TO US$5O MILLION FOR AN INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT March 7, 1988 This document ha a restricted distnruion and may be used by recpienb only In the performance of their official duties. Its contents may not otherwise be disclosed without Wodd Bank authorization.  CURRENCY EQUIVALENTS Rs 1 = US$0.077 Rs 13.00 - US$1.00 FISCAL YEAPS Government of India: April 1 - March 31 IDBI : July 1 - June 30 ICICI : January 1 - December 31 SAIL : April 1 - March 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BIFR - Board for Industrial and Financial Reconstruction BMR - Balancing, Modernization or Replacement Projects DAF - Development Assistance Fund DFI - Development Finance Institution GIC - General Insurance Corporation of India 0OI - Government of India ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India IFCI - Industrial Finance Corporation of India LIC - Life Insurance Corporation of India MRTP - Monopolies and Restrictive Trade Practices Act RBI - Reserve Bank of India SAIL - Steel Authority of India Limited SCICI - Shipping Credit Investment Corporation of India SFC - State Financial Corporation SIDC - State Industrial Development Corporation SSI - Small-Scale Industries TA - Technical Assistance UTI - Unit Trust of India  FOR OFFCIAL USIE ONLY INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT LOAN AND PROJECT SUMMARY Borrowers : a) The loan to India: India, acting by its President. b) The Technical Assistance Loan: Steel Authority of India Limited (SAIL) Guarantor of : India, acting by its President SAIL Technical Assistance Loan : Beneficiaries : Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), and Steel Authority of India Limited (SAIL). Amount : US$360 million comprising: a) The loan to India: US$310 million b) The technical assistance loan to SAIL: US$50 million Terms : The proposed loans would be made at the Bank's standard variable interest rate and would have a term of 20 years including 5 years of grace. Re-lending Terms : The Loan to India of US$310 million would be relent in local currency to IDBI and ICICI at 11% p.a. The lending rate to the final sub-borrowers would be 14% p.a. initially. These rates would be reviewed periodically to ensure that the rate to final borrowers remains positive in real terms, reflective of market conditions and provide a reasonable spread to the development finance institutions (DFIs). The Cc-aernment would bear the foreign exchange and interest rate risks on its loans to the DFIs. Financing Plan : IDBI US$ 55.0 million ICICI US$ 27.0 million Subproject sponsors US$ 225.0 million Credit and Capital Market Sources US$ 150.0 million SAIL US$ 51.0 million Bank US$ 360.0 million Total US$ 868.0 million Economic Rate of Return : Subprojects financed by IDBI and ICICI would have a minimum economic rate of return of 12%. Staff Appraisal Report : Report No. 7058-IN. Map : IBRD No. 20713 This document has a restricted distribution and may be used by recipients only in tt. AeI.uVnance of their official duties. Its contents may not otherwise be disclosed without World B& ik authc ization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON TWO PROPOSED LOANS TO INDIA AND STEEL AUTHORITY OF INDIA FOR AN INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT 1. The following memorandum and recommendation on proposed Bank loans of US$310.0 million to India and US$50.0 million to the Steel Authority of India Limited (SAIL) with the guarantee of India, is submitted for approval. The proposed Bank loans would be for 20 years, including 5 years of grace, at the Bank's standard variable interest rate to help finance an Industrial Finance and Technical Assistance project. 2. Background. Manufacturing in India accounted for about 17% of GDP and about 732 of exports in FY86, employing approximately 25Z of the country's organized labor force. During the Sixth Five Year Plan (FY81-85), the performance of manufacturing was disappointing as growth in manufacturing gross value added averaged only 4.3% p.a. in real terms and manufactured exports expanded only 2.8% p.a. The Government has recognized the need for reform in industrial policies and has begun to place greater reliance on price signals and market forces. In particular, the new policies have emphasized greater domestic competition through delicensing and reduction of Government controls, and improved export competitiveness through exchange rate management and greater access by exporters to imported inputs at world market prices. There is evidence that the reforms to date are having posi- tive effects. Average annual manufacturing output growth accelerated to almost 9% p.a. in real terms in the last three years and growth in manufac- tured exports reached 9.3% in FY86 and 11.8% in FY87. 3. Rationale for Bank Involvement. The proposed Industrial Finance and Technical Assistance Project would support the substantial progress in policy reform made over the past three years and the concomitant adjustments in both the industrial and financial sectors. As the Government becomes less involved in determining industrial capacity for the Indian market through the licensing system, the responsibility for selecting industrial projects falls more on the financial system, especially the development finance institutions (DFIs), creating a need for them to improve appraisal and risk assessment capabilities. Increased competition is also causing a shake-out of less efficient firms with potentially adverse implications for the portfolios of financial institutions, requiring improved project supervision and stricter portfolio management. Finally, it has become increasingly apparent that industries in key subsectors are in need of restructuring in order to bring industrial production costs and product quality closer to international standards. 4. Project Objectives. The proposed project would assist the Government in dealing with the adjustment process in both the financial system and the industrial sector. It would provide: (a) financial and technical support to the two largest DFIs, the Industrial Development Bank of India (IDBI) and the Industrial Credit and Investment Corporation of India Ltd. (ICICI), to help them meet their requirements for long term resources and to strengthen their capacity to appraise projects effectively in a less regulated environment and to cope with the more difficult portfolio management problems stemming from the adjustment process; and (b) technical assistance to the major Government steel company, SAIL, to enable it to prepare through appropriate studies the physical restructuring of its operations in order to be able to produce steel at lower costs to downstream users in the domestic economy. The proposed loans would be the first to support the direct lending of IDBI and to support SAIL, but would continue the Bank's long standing association with ICICI.  -2- 5. Project Description. The proposed project would provide: (a) US$200.0 million to IDBI and US$100.0 million to ICICI for on-lending to to medium and large industrial enterprises to finance economically and finan- cially viable projects (the US$300.0 million represent approximately 1.2% of the two DFI's total resource requirement for the period 1988-1992, and 13% of their foreign exchange requirements for the same period); (b) US$5.0 million each to IDBI and ICICI for technical assistance to support their institution building programs through development of staff training programs in India and abroad; implementation of computerization programs necessary to improve management information, credit decisions and portfolio management; and consultancy services to upgrade the quality of management and technical advice provided by the DFIs to their clients and associated institutions; and (c) US$50.0 million for technical assistance for steel sector restructuring, to finance consultancy assignments, training activities, productivity studies and technical assistance related equipment to help SAIL improve its operational efficiency. The total cost of the prcject is US$868 million with an estimated foreign exchange component of US$365 million (42%). The possibility is being explored of obtaining 450 mil- lion yen (US$ 3.3 million equivalent) from the Japanese Cofinancing Grant Facility with the Bank. A breakdown of costs and financing plan are shown in Schedule A. Amounts and methods of procurement are shown in Schedule B. A timetable of the project's key processing events and the status of Bank Group operations in India are given in Schedules C and D, respectively, and a map is also included. The Staff Appraisal Report, No. 7058-IN, dated March 2, 1988, is attached. 6. Agreed Actions. The Government has agreed: (a) to relend to IDBI and ICICI proceeds of the $310 million loan under terms and conditions specified in subsidiary loan agreements (to be signed before loan effectiveness) at an interest rate of 11X p.a., and to allow the DFIs to charge a final rate of 14% p.a. to subborrowers, with the foreign exchange risk borne by the Government; and (b) to review the relending rates periodically in relation to changes in inflation (present and projected inflation rates are 61 p.a.) and other market conditions and adjust the relending rates as necessary to ensure that the rate applicable to new subloans remains positive in real terms, reflective of market conditions and sufficient to provide a reasonable spread to the DFIs. 7. IDBI and ICICI have agreed to: (a) conduct their activities in accordance with the policy, strategy, and collection statements, approved by their respective boards, which cover a wide variety of issues including institutional objectives, financial projections, and measures to improve appraised standards and portfolio management; (b) maintain a maximum debt:equity ratio of 12:1 and a minimum debt service coverage ratio of 1.2:1; (c) utilize lending procedures and sub-loan Bank eligibility procedures acceptable to the Bank, including a maximum limit on amount of proceeds from the Bank loan for a single enterprise of $20.0 million, minimum economic and financial rates of return on subprojects of 12% and 15% respectively, maximum subloan maturities of 15 years including a maximum of three years of grace and free limits of US$6.0 million for IDBI and ICICI with the first ten subloans of IDBI subject to prior Bank approval; and (d) submit to the Bank for comment three months before the beginning of eack fiscal year their annual training programs and the list of candidates for foreign training programs. SAIL has agreed to: (a) carry out its technical assistance program in accordance with an implementation program agreed with the Bank;  -3- and (b) submit to the Bank for comment the list of candidates for foreign training programs. 8. Benefits. The proposed project would provide operational support to the on-going dialogue on industrial policy reform in India and assist in the adjustment process as it affects both the DFIs and the industrial sector. The technical assistance programs and the policy, strategy and loan collec- tion statements that were prepared in the context of appraisal of the Project would support the DFrs in improving the quality of appraisals and the manage- ment of risk and portfolio in the more difficult environment which is emerg- ing as part of deregulation. The loan would provide needed term financing to the DFIs and finance about 80 subprojects, resulting in investments of about US$750 million. The subprojects financed are expected to generate about 28,000 new full-time work places at an average cost per job of US$26,785. 9. The Steel TA component would assist SAIL in complementing its restructuring programs, aimed at lowering steel prices. This achievement would benefit downstream users of steel, a group which, directly or indirectly, includes almost all segments of the economy. 10. The project would also have positive effects on the environment as the DFIs have incorporated strong environment protection objectives in their policy statements and the technical assistance to SAIL would help it comply with the Government' s environmental standards. 11. Risks. The quality of the portfolio of the DFIs could deteriorate further as a result of the more competitive environment and the effect of possible future exchange rate adjustments on the repayment capacity of enterprises which have borrowed abroad. The technical assistance programs and collection strategies provided for under the Project would reduce this risk. 12. The risks on the steel technical assistance component are minimal. SAIL is committed to the technical assistance program, is expected to have sufficient internal cash generation to finance its share of the costs of the technical assistance program and has made adequate arrangements for the management and staffing of the various studies. 13. Recommendation. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the oroposed loans. Barber B. Conable President Attachments Washington, D.C. March , 1988  -4- SCHEDULE A INDIA INDUSTRIAL FINANCE AND TECHNICAL ASSISTANCE PROJECT Estimated Costs: ---------(US$ Million)--