India - Seventh Industrial Credit and Investment Corporation Project

FHAE COY ~~~~RESTRICTED Report No. P-565 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED August 30, 1967  REPORT AND RECO01wDENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $25 million to the Industrial Credit and Investment Corporation of India Limited (ICICI). PART I - HISTORICAL 2. The Bank has already made six loans to ICICI for a total of $140 million. The first was made in March 1955 for $10 million and the last in May 1965 for $50 million. Cancellations aggregate about $1.5 million. Out of the total of $138.5 million of loans outstanding as at July 31, 1967, the ICICI Board of Directors had approved sub-loans of $124 million, of which $107 million had been actually credited to the Loan Accounts. Repayments to the Bank had totaled $27 million by July 31, 1967, 3. In view of the anticipated reduction in the amount of _ts unallocated foreign exchange resources, ICICI requested further Bank financing towards the end of 1966. In March 1967 an appraisal mission visited India to appraise ICICI. Negotiations on the proposed loan were held in Washington from July 28 to August 14, 1967. ICICI was repre- sented by its Chairman, Mr. G. L. Mehta, and its Deputy General Manager, Mr. S. S. Mehta; India, the Guarantor, was represented by Mr. Rabi Ray, First Secretary, Finance, Embassy of India. 4. The Bank has made 35 loans to India, including 26 which are fully disbursed. The Association has made 21 credits, including 10 which are fully disbursed. A summary statement of Bank loans and IDA credits to India as of July 31, 1967 appears on the following page of this Report.  -2- Loan or Credit Anount (US$ million) Number Year Borrower Purpose Bank IDA Undisbursed 269 1960 ICICI Industry III 19.5 0.2 294 1961 Calcutta Equipment II 19.2 1.6 Port 14 1961 India Salandi Irrigation 8.o 3.2 307 1961 IISCO Coal Mining 19.5 9.5 19 1962 India Durgapur Power 18.5 3.5 312 1962 ICICI Industry IV 19.7 1.0 21 1962 India Sone Irrigation 15.0 0.1 23 1962 India Purna Irrigation 13.0 1.5 24 1962 India Koyna Power II 17.5 6.5 27 1962 India Bombay Port 18.0 9.6 37 1963 India Kothagudem Power I 20.0 3.2 340 1963 ICICI Industry V 29.7 3.8 L.14 1965 ICICI Industry VI 50.0 42.7 416 1965 India Power Transmission 70.0 61.4 417 1965 India Kothagudem Power II 14.0 4.6 88 1966 India Railways IX 68,o 27.6 89 1966 India Beas Equipment 23.0 16.8 456 1966 IISCo Balancing Scheme 30.0 29.9 92 1966 India Industrial Imports III 150.0 70.3 97 1966 India Industrial Imports IV 65.0 64.9 Loans/Credits fully disbursed 726.6 h73.1 Total less cancellations 998.2 889.1 of which has been repaid 322.3 Total now outstanding 675.9 Amount sold 108.1 of which has been repaid 99.1 9.0 Total now held by Bank and IDA 666.9 889.1 Total undisbursed 154.7 207.2 361.9  5. IFC had made ten commitments in India as at July 31, 1967 for an amount totaling $23.4 million, of which $18.3 million represents loans and $5.1 million equity. The largest investment, amounting to $11.5 million, was in Indian Explosives Ltd. (a company whose principal business is the manufacture of fertilizer) and became effective on June 26, 1967. The amount disbursed by IFC amounted to $7.2 million. The Corporation has under consideration several further industrial projects, of which the principal ones are in the field of fertilizer production. 6. Delays in disbursements continue to occur in respect of sane Bank and IDA projects in India. The Closing Date for the Calcutta Port Project (Loan No. 294-IN) has been extended to permit payment for certain floating craft which had been ordered from a foreign supplier who subsequently became insolvent; undisbursed amounts totaling about $1.8 million were cancelled earlier this year. My report dated August 4, 1966 (IDA R66-18) describes proposed changes in the Salandi Irrigation Project (Credit No. 14-IN); these were approved by the Executive Directors on August 18, 1966, and have since been implemented. In the case of the Third Indian Iron and Steel Project (Loan No. 307-IN) almost one-half of the Loan, which was made in 1961, remained undisbursed at July 31, 1967; Bank and IFC staff have quite recently undertaken a field review of this Project and, in association with a consultant, are now reviewing plans for its completion. 7. In the Durgapur Power Extension Project (Credit No. 19-IN) delays occurred as a result of the liquidation of a foreign supplier Pfter accep- tance of orders; work is now proceeding satisfactorily, although delays in receiving some minor items of equipment may lead to a request for an extension of the Closing Date. The First Kothagudem Power Project (Credit No. 37-IN) is proceeding well, but the Closing Date was extended to cover retention payments and the purchase of additional substation equipment and spare parts. In the case of the Bombay Port Project (Credit No. 27-IN), considerable delay has occurred in the execution of the main civil engineering works and the ordering of minor items; the balance of the Project should be completed by the Closing Date, December 31, 1967. So far as the Power Transmission Project (Loan No. 416-IN) is concerned, the Government has taken steps to ensure that all orders for equipment are placed no later than March 31, 1968. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrower: Industrial Credit and Investment Corporation of India Limited (ICICI). Guarantor: India, acting through its President. Purpose: To assist in meeting the foreign exchange costs of projects to be financed by ICICI. Amount: The equivalent in various currencies of $25 million.  - 4 - Amortization: In semi-annual installments beginning January 1, 1970 and ending not later than July 1, 1985. The Bank and ICICI wil from time to time change the amortization schedule to conform substantially to the aggregate of the amortization schedules applicable to ICICI's sub-loans made out of the proceeds of the loan. Interest Rate: Each part of the loan credited for sub-loans will be allocated its own interest rate, which will be the Bank's current rate for new loans to similar borrowers at the time that part is credited to the Loan Account. Commitment Charge: 3/8 of 1 percent per annum. PART III - THE PROJECT 9. An appraisal report entitled "Appraisal of Industrial Credit and Investment Corporation of India Limited" (Report No. DB-37a) on the proposed project is attached. 10. ICICI was established in January 1955 to provide assistance to private industry in India through medium and long-term loans, equity investments, undergritings and guarantee obligations. It is the largest de.-velopment finance company sponsored by the Bank and has resources (share capital, sur- plus, reserves and long-term borrowings) totaling the equivalent of about $199 million, of which about $134 million are borrowings in foreign exchange. Apart from share capital and reserves of about $15 million equivalent, rupee resources representing the equivalent of $50 million have been derived from loan funds provided by the Government of India either directly or through the medium of the Government-owned Industrial Development Bank of India. ICICI, with a Board of Directors composed of distinguished men from industry, finance and law, is well organized and functions smoothly under capable and experi- enced management. Just over 70 percent of the Corporation's shares are held by Indian investors and the balance by overseas institutions in France, Germany, Japan, the United Kingdom and the United States of America. 11. As of December 31, 1966, ICICI had provided assistance to 546 projects, all in the private sector, of which 304 were completed, 146 were under con- struction and the remainder were still at the planning stage. The number of companies assisted totaled 425, of which 157 were new and 73 involved entre- preneurs entering industry for the first time. Its loan and investment port- folio is well distributed among newer industrial sectors of the economy with ferrous metal products representing 22 percent of the value of all ICICI assis- tance as at the end of December 1966, as compared to 14 percent for chemicals, 11 percent for electrical equipment and 10 percent for machinery other than electrical. ICICI estimates that its financial assistance will result in a total capital mobilization of the order of US $1.4 billion and provide employment for about 166,000 workers. Total maximum annual production  - 5 - capacities anticipated from past operations include about 7.5 million tons of cement, 175,000 tons of nitrogeneous fertilizers, 220,000 tons of super- phosphate and 225,000 tons of steel tubes. ICICI's role in bringing to- gether local and foreign technology and investment is demonstrated by the fact that over one-half of the enterprises financed have foreign collabo- rators and 30 percent involve foreign investment. Within India itself ICICI has been noted for its high professional standards and its insistence on careful preparatory work in projects submitted for consideration. 12. The cumulative total of sanctions by the ICICI Board of Directors up to the end of 1966 amounted to the equivalent of $224 million, while commitments in the form of effective agreements between ICICI and its sub- borrowers were $197 million and disbursements $164 million. As of the same date, the ICICI Board had sanctioned foreign exchange loans of $139 million, $ll4h million of which had been committed and $95 million disbursed. Apart from Bank loans, ICICI has obtained foreign exchange resources through loans from US-AD of -$4.5 million net and from Kreditanstalt fur Wiederaufbau of ii 60 million (Us $15 million equivalent). Another loan from Kreditanstalt of DM 5 million (US $1.25 million equivalent) is being negotiated and additional loans from this source of the equivalent of US $5 million are expected by the end of 1970. 13. The demand for ICICI assistance in both rupees and foreign exchange has generally shown a relatively steady increase. However, there have been setbacks, the latest being very marked and having started during 1966; foreign exchange approvals for the eighteen month period January 1966 - June 1967 amounted to only $15 million as compared to $23 million for the twelve months of 1965. This slackening of demand coincided with adverse economic and business conditions in India which were the result of several factors, notably two successive years of drought. In addition, the devaluation of the rupee in June 1966 led to a reconsideration by a number of sub-borrowers of their projects. Recently, however, there has been a substantial increase in the number of applications and inquiries to ICICI for new foreign exchange loans. Firm applications on hand at August 10, 1967 totaled $7.1 million, which would leave ICICI with about $7 million of the IBRD loans unconmitted if these applications were approved. In- quiries for additional loans amounted to $10.2 million as of the same date. ICICI expects a substantial increase in business over the next year or so which is reasonable if, as appears possible, the economy rebounds some time next year. Nevertheless, in view of the present uncertainty about the forthcoming volume of ICICI foreign exchange business, I have decided to recommend a loan of only $25 million at this time rather than one of $50460 million as had been requested by ICICI. 14. ICICI's financial performance in past years has been quite satis- factory. Profits on total funds employed have remained practically constant, but have increased in relation to net worth by almost 100 percent between 1962 and 1966, having risen from 7.2 percent to 13 percent. Net profits increased almost three fold in the same period with ICICI compensating for a rise in the cost of borrowed funds through a gradual increase of its  - 6 - lending rates and a lowering of the relative weight of its administrative expenses. In 1966 the dividend rate was raised from 8 percent to 9 percent and dividends represented 51 percent of net profit as compared to h7 per- cent in the previous year. Over the past three years as a whole, ICICI has been able to allocate about 50 percent of net income to reserves which now amount to the equivalent of $4.6 million, or 45 percent of share capital and h percent of the investment portfolio. ICICI's cash position is strong and its debt service coverage satisfactory. 15. The Bank's previous loans to ICICI now provide for a debt/equity ratio of 4:1. It is proposed to change the basis of computing this ratio in the proposed Loan Agreement by including in "equity" only that amount of the first Government loan which is payable after the final maturity of the Bank's loans and including the remaining Government indebtedness in "debt". To reflect these changes, and in view of the satisfactory record of ICICI, the debt/equity ratio would be increased to 9:1 which is equiva- lent to a debt/equity ratio on the old basis of between 5 and 6:1. (See paragraphs 59 and 60 of the attached appraisal report.) PART IV - LEGrAL INSTRUMENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and the Industrial Credit and Investment Corporation of India Limited, the draft Guarantee Agreement between India and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii), of the Articles of Agreement are being dis- tributed to the Executive Directors separately. 17. These draft Agreements contain currently accepted provisions for projects of this kind. Attention is drawn to the following provisions of the Loan Agreement: (a) The interest rate will be fixed with respect to each portion of the Loan when it is credited to the Loan Account (Section 2.05). (b) Amortization will conform substantially to the aggregate of the amortization schedules applicable to ICICI's sub- loans and investments (Section 2.08(a)). (c) The proposed loan will carry the Bank's normal commitment fee on the entire undisbursed amount of the loan starting sixty days after the signing of the Loan Agreement (Section 2.04). (d) The introduction of a new debt/equity ratio. (Section 5.05). PART V - THE ECONOMY 18. The last report on the Indian economic situation was distributed to the Executive Directors on June 2, 1967 (R67-79). An economic mission from the Bank was in India during July and is now preparing a report on recent economic developments for distribution later this year.  - 7 - 19. The slow tempo of economic activity noted in the last economic report has continued during the past six months, with the most marked recessionary effects being evident in industries producing textiles and engineering goods. The recession is one result of the poor harvests of the last twio years, which sharply boosted food prices, reduced non-food demand, and limited the availability of agricultural raw materials. A cut-back in government investment plans as part of a tight financial policy designed to combat inflation has also affected capital goods indus- tries adversely. 20. In these circumstances, industrial import demand has been sluggish despite the introduction a year ago of a more liberal maintenance imports policy. Nevertheless, India's balance of payments position has continued to be difficult this year, largely because of last year's export decline and the expectation of only a small recovery this year combined with the need to pay for food imports and to meet the mounting service on external debt. Aid in a free exchange form which would ease this year's difficulties has, up to now, fallen considerably short of requirements, and reserves have been continually under pressure and stood at about $600 million at the end of June. 21. On the other hand in certain key respects there have been encouraging developments. So far this year the rains have been satisfactory, and if they continue to be so, the coming harvest may well reach a record, reflecting also, in part, encouraging progress in the new programs of expanding agri- cultural production. In spite of some set-backs, the family planning effort is proceeding well. Furthermore, despite uncertainties in the immediate outlook, many private industrialists are undertaking expansion programs to meet increases in demand which are expected to materialize two or three years hence. Nevertheless, considering the need to rebuild food stocks and the uncertainties of food imports, one good crop may not be enough to induce a rapid revival of the economy. Moreover, without a substantial aid pro- gram (including assistance in freely-disposable foreign exchange, other non- project aid and selective project aid) it will be difficult both to sustain the recovery and at the same time adhere to the present program of import liberalization. 22. I outlined our general policy toward lending to India in a statement to the Executive Directors on June 28, 1966 (SecM 66-217). On the Bank side, I referred to the great accumulation of India's external debt and stated, "In fact, in the foreseeable future I do not believe that the Bank should increase its net investment in India much beyond the present level - something below $600 million. For the future I expect Bank lending to be concentrated mainly in the field of high priority projects for private industry. - - - In general, I would expect to limit new commitments to the $50-60 million a year which India is scheduled to repay to the Bank on earlier loans, although this could be exceeded if the hoped-for incentives attract substantial fertilizer production projects."  - 8 - 23. So far as Bank loans to India are concerned, we are still operating well within that general policy. In fact, the Bank's net investment on loans to India, which stood at nearly $550 million at the end of 1962, has been gradually declining and reached $523 million on April 1, 1967 and $512 million at the present time. Taking into account our estimated disbursements on loans to India (including the loan, which is now before you, but not any further loans which I may recommaend), assuming no further sales of Indian paper from our port- folio, and without making allowance for any rescheduling of amortiza- tion payments, this figure is expected to become $532 million by April 1, 1968 and $537 million by April 1, 1969. Of course, the Bank has an additional stake in India at the present time in the form of the special accounts with the Reserve Bank of India which will build up to about $48 million by March 31, 1968. However, as you know, this is a purely temporary arrangement, pending the outcome of the dis- cussions which are proceeding among the members of the Consortium regarding a longer-term rescheduling of India's external debt. PART VI - CMIPLIANCE WITH ARTICLES OF AGREEMIENT 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECO101ENDATION 25. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to the Industrial Credit and Investment Corporation of India Limited in an amount equivalent to US $25,ooo,000 to be guaranteed by India. RESOLVED: THAT the Bank shall grant a loan to the Industrial Credit and Investment Corporation of India Limited to be guaranteed by India, in an amount in various currencies equivalent to twenty-five million United States dollars (US $25,Ooo,ooo), to mature on and prior to the date or dates to be determined as set forth in the form of Loan Agreement (Seventh Industrial Credit and Investment Project) between the Bank and the Industrial Credit and  - 9 - Investment Corporation of India Limited, to bear interest at the rate or rates to be determined as set forth therein, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the said form of Loan Agreement, and the form of Guarantee Agreement (Seventh Industrial Credit and Investment Project) between India and the Bank, which have been presented to the meeting. George D. Woods President by J. Burke Knapp Attachment Washi.ngton, S. C. August 30. 1967