Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3428 PROJECT PERFORMANCE AUDIT REPORT INDIA--INDUSTRIAL CREDIT AND INVEST1ENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) April 24, 1981 Operations Evaluation 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. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT INDIA-INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) TABLE OF CONTENTS Page No. Preface .........*.******....... * * ...* * * *........********* Basic Data Sheets ................................... . ******* ii Highlights ......... o..........o..................o................... iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. Bank Objectives .................. .... ......... .. 1 II. Utilization of Bank Funds .............................. 2 Overruns ............ ..................... ... . .... 2 III. Overall Operations and Performance ..................... 3 General ............................... ....... 0 .... .. 3 Geographic Distribution ... ...... ................. ... 4 Arrears .. ............................................. 5 Financial Performance .... . ....................... 6 IV. Institutional Aspects ................................... 7 Project Identification and Promotion .................. 7 Appraisal/Supervision ................................. 7 Lending Strategy ...................................... 8 V. Conclusions ......................................... 9 Annex 1 - ICICI's Foreign Borrowings .............................. 10 Annex 2 - Regional Distribution of ICICI's Approvals ........ 11 Attachment A: Comments Received From the Government .............. 13 Attachment B: Comments Received From the Borrower ................ 15 Attachment C: Project Completion Report Background ............................................. 41 Environment ......................................*...... 42 Loan Utilization .....................* ..... 42 Operations-Approvals, Commitments, Disbursements ....... 43 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) - 2 - Page No. Underwriting/Direct Subscription ........................ 45 Guarantees ........................................... 46 Financial Performance ................................... 47 Trends in Arrears ....................................... 47 Development Impact Study ................................ 48 Institutional Aspects ................................... 50 Economic Analysis .................................... 50 ICICI's Promotional Role ............................. 51 Diversification of Assistance ........................ 51 Public Sector Lending and Industrial Policy .......... 52 Merchant Banking ..................................... 52 Mobilization of Resources ............................... 52 Foreign Exchange ..................................... 52 Domestic Currency .................................... 53 Projects Financed ....................................... 53 Summary of 'A' Sub-projects ............................. 57 Conclusions ............................................. 58 Annexes: 1. Approvals, Commitments and Disbursements- Projected and Actual, 1971-1977.......................59 2. ICICI-s Contribution to Fixed Investments in Industry, 1971-1977................................60 3. Income Statements, for Years Ended December 31, 1971- 1977--Projected and Actual............................61 4. Cashflow Statement for Years Ended December 31, 1971- 1977--Projected and Actual............................62 5. Balance Sheets Statements as of December 31, 1971- 1977--Projected and Actual................... 63 6. Classification of Arrears...............................64 7. Trends in Arrears 1970-1977.............................65 8. Development Impact......................................66 9. Synopsis of 'A- Projects................................67 - 1 - PROJECT PERFORMANCE AUDIT REPORT INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) PREFACE This report represents a performance audit of achievement under the ninth and tenth Bank loans (loans 789-IN and 902-IN), to the Industrial Credit and Investment Corporation of India Ltd. (ICICI). These two loans, in amounts of US$60 million and US$70 million, were approved in October 1971 and June 1973 and closed in December 1976 and December 1978, respectively, with a total cancellation of US$10.7 million. An audit report covering the sixth, seventh and eighth Bank loans to ICICI was issued in December 1975 (SecM75-858). The audit memorandum is based on the attached Project Completion Report (PCR) prepared by the Bank's South Asia Regional Office, file review and discussions with Bank staff. The PCR provides a factual review of ICICI's operations during the period covered by the two loans (1972 to 1978). The memorandum focusses on ICICI's effectiveness in promoting and shaping the growth of Indian industry. Comments received from the Government and ICICI have been taken into account in finalizing the report; they are reproduced as attachments A and B to the audit memorandum. - ii - PROJECT PERFORMANCE AUDIT REPORT INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOAN 789-IN) BASIC DATA SHEET Amounts (in US$M) As of 02/28/81 Original Disbursed Cancelled Repaid Outstanding Loan 789-IN 60.0 56.7 3.3 46.4 10.3 CUMULATIVE LOAN DISBURSEMENT 1972 1973 1974 1975 1976 1977 (i) Planned 4.2 18.4 40.3 55.9 60.0 - (ii) Actual 10.5 35.2 51.2 55.1 56.5 56.7 (iii) (ii) as % of (i) 250 191 127 99 94 95 PROJECT DATA Actual Board Approval October 26, 1971 Loan Agreement October 27, 1971 Effectiveness December 20, 1971 Loan Closing December 31, 1976 MISSION DATA No. of No. of Date of Month, Year Weeks Persons Manweeks Report Appraisal August 1971 n.a. 3 - 10/71 Supervision/a Feb./Mar. 1974 - 2 - 05/31/74 Supervision October 1975 1 1 1 12/18/75 Supervision December 1976 3 3 9 02/18/77 Supervision September 1977 1-1/2 2 3 10/14/77 Supervision December 1978 2 2 4 02/06/79 Supervision December 1979 2 2 4 12/79 FOLLOW-UP LOANS Loan 902-IN for US$70 million approved in June 1973. Loan 1097-IN for US$100 million approved in April 1975. Loan 1475-IN for US$80 million approved in July 1977. Loan 1843-IN for US$100 million approved in May 1980. /a Annual supervision. - iii - PROJECT PERFORMANCE AUDIT REPORT INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOAN 902-IN) BASIC DATA SHEET Amounts (in US$M) As of 02/28/81 Original Disbursed Cancelled Repaid Outstanding Loan 902-IN 70.0 62.5 7.5 29.7 32.8 CUMULATIVE LOAN DISBURSEMENT 1974 1975 1976 1977 1978 1979 (i) Planned 4.0 18.3 42.9 63.2 70.0 - (ii) Actual 2.0 19.5 48.8 59.9 61.8 62.5 (iii) (ii) as % of (i) 50 107 114 95 88 89 PROJECT DATA Actual Board Approval June 7, 1973 Loan Agreement August 16, 1973 Effectiveness December 31, 1973 Loan Closing December 31, 1978 MISSION DATA No. of No. of Date of Month, Year Weeks Persons Manweeks Report Appraisal January 1973 n.a. 3 - 05/73 Supervision/a Feb./Mar. 1974 - 2 - 05/31/74 Supervision October 1975 1 1 1 12/18/75 Supervision December 1976 3 3 9 02/18/77 Supervision September 1977 1-1/2 2 3 10/14/77 Supervision December 1978 2 2 4 02/06/79 Supervision December 1979 2 2 4 12/79 FOLLOW-UP LOANS Loan 1097-IN for US$100 million approved in April 1975. Loan 1475-IN for US$80 million approved in July 1977. Loan 1843-IN for US$100 million approved in May 1980. /a Annual supervision. - iv - PROJECT PERFORMANCE AUDIT REPORT INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) HIGHLIGHTS The two loans under review were the ninth and tenth of a series of thirteen loans totalling US$615 million made to date to the Industrial Credit and Investment Corporation of India Ltd (ICICI). The Bank's association with ICICI dates back to the corporation's establishment in 1955; by the time the two loans were approved in 1971 and 1973, ICICI had already reached high operating standards; it has since been consistently praised as a sound, mature and efficiently managed institution, worthy of the Bank-s confidence as an effective instrument for the transfer of Bank funds to India. The Bank's expectation that ICICI would expand its clientele and the geographic coverage of its operations and, altogether, assume progressively a more active role in the identification and selection of projects was only partially met. ICICI did expand markedly its operations in designated back- ward areas; such operations, however, were located mostly in the backward areas of the more advanced states where ICICI-s operations have traditionally been concentrated; overall, the geographic pattern of ICICI-s lending and its focus on the western part of the country recorded little change under the two loans. ICICI's project promotion efforts have remained limited in relation to its overall activities and, benefitting from a sufficient flow of project referrals from the Government's industrial licensing authorities, its project selection process has kept a somewhat passive profile (PPAM, paras. 4.01 and 4.02; PCR, paras. 20 and 22). Other points of interest are: - the marked increase in ICICI's local currency lending (PPAM, para. 3.01; PCR, paras. 7 and 8); - the measures taken by ICICI to deal with the increase in arrears (PPAM, paras. 3.08 and 3.09; PCR, paras. 14 to 16); - the strengthening of ICICI-s supervision department (PPAM, para. 4.04); - the strengthening of ICICI's regional offices (PCR, para. 23); and - ICICI's efforts at raising foreign currency funds on international markets (PPAM, para. 3.12; PCR, para. 27). PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) I. Bank Objectives 1.01 The Industrial Credit and Investment Corporation of India Limited (ICICI) is one of the largest development finance companies supported by the Bank. Established in 1955, it has grown to become an essential element of India-s financial system, accounting for the largest share of institutional foreign exchange financing available to industry. The Bank-s association with ICICI has been of long duration, spanning the twenty-five years of the Corpo- ration's existence during which time thirteen successive loans were made for a total amount of US$615 million. The two loans under review, in respec- tive amounts of US$60 million and US$70 million, represented the ninth and tenth lines of credit granted by the Bank to ICICI. They were approved in October 1971 and June 1973 and closed by December 1976 and December 1978, respectively. 1.02 When the Bank approved these two loans, it considered ICICI to be a sound, mature, efficiently managed and profitable institution. It thus considered further lending primarily as a means of supporting industrial development in India and, except for general statements of expectations, did not attach any specific objectives to the two loans under review. These were viewed as continued assistance to ICICI towards achieving the general objec- tives set out in the preceding loans which referred to resource mobilization, project appraisal and follow-up techniques, general lending procedures and promotion activities. In respect of most of these objectives, substantial progress had been achieved in the past. The audit report covering the sixth to eigth Bank loans, issued in December 1975, concluded that ICICI had reached very high operational standards and was financing economically viable enter- prises. Since then, further institutional and operational progress was made; this reinforced the Bank's assessment of ICICI as an effective financing intermediary able to allocate efficiently Bank loans to the industrial sector. This confidence was reflected in the Bank's recent decision to raise the free limit on the utilization of its funds from US$4 million to US$6 million-- the highest granted by the Bank to any DFC--and that of raising ICICI-s debt:equity limit from 9:1 to 11:1--once again, the highest granted by the Bank to any DFC. 1.03 Specific areas on which the Bank suggested that ICICI focus its attention under the two loans under review included foreign resource mobiliza- tion, geographical diversification of operations and promotional activities. More particularly, the Bank estimated at the time of appraisal that there was scope for increased involvement by ICICI in promoting new industrial - 2 - enterprises, partly as a means to increase its financial assistance to back- ward areas. The emphasis placed on the objectives of foreign resource mobili- zation and industrial promotion testified to the high degree of maturity the Bank recognized in ICICI, and reflected its expectation that the institution could progressively reach higher levels of efficiency. II. Utilization of Bank Funds 2.01 Even though a slowdown in private investment marked the period covered by this review (1972 to 1978) ICICI was able to utilize the ninth and tenth loans, except for cancellations amounting to US$10.8 million (8 percent of their total amount), within their respective projected commitment and disbursement periods. A review of the profile of sub-projects financed under the two loans reveals a substantial concentration of ICICI's assistance among expansion, modernization and balancing activities, many of them repeat opera- tions. Out of a total of 392 projects financed under the two loans, 60 projects (15%) were new ventures, with the remaining 332 projects (85%) being for expansion, modernization and balancing operations. In terms of amount, the ratios were 30% and 70% respectively. The corresponding percentage of new projects financed under the sixth, seventh and eighth loans was 16%, which indicates that this pattern had existed for a number of years. 2.02 Overruns. Cost overruns proved to be a major problem for the sub- projects financed under the two loans, particularly under the tenth loan. Of a total of 314 sub-projects, for which data are available, 150 projects (48%) experienced cost overruns. Of these, 79 had overruns exceeding 10% of the original cost estimates (see para. 33 of the PCR). A major reason for such overruns was the sharp increase in prices following the oil price hike in 1973-74. Among other factors were (a) the delays in obtaining import licenses, which generally resulted in price increases for imported equipment, (b) exchange rate fluctuations, and (c) occasionally, changes in project design. Price increases associated with imported equipment were further aggravated by increases in the amount of customs duty. Though ICICI usually made contingency provisions in its project estimates, these have generally proven to be insufficient. While it may have been difficult for ICICI to forecast accurately the wave of inflation which was to affect the implementa- tion of sub-projects under the ninth loan, and thereby more adequately provide for it, ICICI could have been able to estimate more accurately the necessary contingencies during the commitment period of the tenth loan (1974-1976), by which time the impact of inflation had already been felt1/. 1/ Commenting on the report, ICICI mentions that the introduction of higher contingencies in project cost estimates on the basis of past inflationary trends and expected future price increases often faces strong resistance on the part of entrepreneurs. While this should not deter ICICI from insisting on proper project cost estimates at appraisal, a reason for not including the full price contingencies might be, as the Bank staff notes, that this gives the DFC control over overrun financing. However, when the full contingency is not included in the loan approval, project viability should still be tested against a realistic estimate of the cost overrun. - 3 - 2.03 Among the problems affecting a large number of sub-projects financed under the loans was that of power shortages. Power availability has indeed represented a major risk factor to industry. In this context, it would have been appropriate for ICICI to undertake an economic benefit/cost analysis of the merits of captive ower based on a power sen§itivity analysis as part of its project appraisalsf/. The issue of power shortage is being addressed in two separate studies now being conducted by ICICI. III. Overall Operations and Performance 3.01 General. Net cumulative annual approvals during the seven-year period covered by the two loans (1972 to 1978) exceeded projections by 27% on the average. Net foreign currency loan approvals, however, were on the average only 13% higher than projections, and the major element responsible for the increase in overall approvals was the significant jump in ICICI's domestic currency (Rupee) loans, which grew at an average rate in excess of four-times that of foreign currency loans, exceeding the latter since 1976. This sharp expansion in domestic currency lending reflected the increasing availability of domestic resources to ICICI, as also the greater availability of free foreign exchange within the country (which allowed investors to avoid carrying any foreign exchange exposure), and the introduction of rehabilita- tion loans for some industries. 3.02 Actual net commitments and disbursements during the review period were, on the average, higher than projected by 10% and 5% respectively, average annual approvals exceeding commitments by approximately 20%. Factors responsible for the excess of approvals over commitments were (i) ICICI's practice of sanctioning sub-loans in anticipation of Bank loans, and (ii) the relatively long lags between its approvals and commitments due to procedural delays in obtaining import permits and other official clearances after loan approval. 3.03 It is noteworthy that, even though the share of ICICI's opera- tions within total institutional credit to industry declined during the review period (from 15.7% in FY72-/ to 11.3% in FY77), its relative share of private industrial investment more than doubled over the same period (from 1/ ICICI does test the sensitivity of project viability to a decline in output. Moreover, it closely examines the power arrangements for energy- intensive projects and ensures that projects are equipped with stand-by sources of power. The need for captive power can rarely be demonstrated on the basis of its own merits. Clearly, a steady supply of power from public utility is the least-cost solution for the majority of industries, and the occasional relative advantage of captive diesel or thermal generation can be demonstrated only under the assumption of power shortage. 2/ ICICI-s fiscal year runs from April 1 to March 31. 3.9% in FY72 to 10.3% in FY77) (Annex 2 to the PCR). Equally significant was the fact that ICICI-s foreign currency disbursements during the review period averaged 85% of total foreign currency lending to industry. This confirmed ICICI's virtual monopoly situation in the long-term foreign exchange market and, thereby, its importance as a major development catalyst in the country. 3.04 Geographic Distribution. During loan negotiations, the Bank, as it had done in the case of previous loans, expressed its concern over the high geographic concentration of ICICI's investments in western India (Maharashtra and Gujarat states). In line with its role as a national (all-India) develop- ment finance institution, ICICI was urged by the Bank, and agreed, to devote greater efforts to ensuring a broader geographic distribution of its assis- tance, particularly as regards designated backward areas. 3.05 The geographical distribution of ICICI's assistance hardly widened since the two loans were approved: during the two-year period 1977-1978, the two states of Maharashtra and Gujarat accounted for 42.4% of ICICI approvals, down from 43.2% during the two-year period 1971-1972. The dispersion of ICICI-s assistance has thus remained skewed in favor of the region where the company first developed its operations (see Annex 2 to this memorandum). An important development, however, has been the recent strengthening of ICICI-s regional offices, following the emphasis placed on this aspect by the Bank. This led to an improved position for ICICI in a number of industrialized areas where its previous exposure was comparatively limited; West-Bengal is a case in point. ICICI-s operations in the areas of the country designated as "backward" by the Government showed remarkable growth, increasing from an average of 12% of cumulative approvals in 1970 to around 40% in 1974-76. It is noteworthy that, reflecting the overall distribution of ICICI's portfolio, most of the assistance to backward areas benefitted mainly those areas located in the more advanced states (para. 23 of the PCR). 3.06 The record of ICICI-s operations should be viewed in relation to the pattern of industrial investment in the country, and the factors behind it. The states of Maharashtra and Gujarat have traditionally received the bulk of private industrial investment--though not to the extent that ICICI's portfolio would tent to suggest. As of 1977, these two states accounted for 45% of ICICI's cumulative approvals whereas, in terms of value added, their share in industrial production was 34% in that particular year!/. In this regard, the development of stronger regional offices is a welcome development which should strengthen ICICI's role as an all-India financial institution. 1/ The geographic distribution of paid-up capital of private companies in 1972 suggests that 41% of private investment had taken place in Maharashtra and Gujarat, whereas these two states accounted for 48% of ICICI's cumulative approvals at the time. - 5 - 3.07 Since 1972, the Government has instituted various measures designed to stimulate the development of backward areas. However, in the least devel- oped states, the efficiency of those measures has been limited by the lack of suitable infrastructure, as also often the absence of a local enterpreneurial base able to spark industrial development. As a result, private investment in backward areas (which benefitted from special fiscal or other advantages) was concentrated among the more developed states of the country. Overall, it appears that the distribution of ICICI's portfolio has evolved more or less in line with that of private investment as a wholel/. ICICI has been respon- sive to the needs of entrepreneurs who intended to set up projects in less developed areas of the country, but has done little to promote new enterprises in those states where development has hitherto been limited.Z/ 3.08 Arrears. During the period covered by the ninth and tenth loans, ICICI experienced a sharp increase in its arrears. As a percentage of loans outstanding, arrears ranged between 1.75 and 2.2 during the period 1972-77; they represented 2.1% as of September 30, 1979. The percentage of the loan portfolio affected by arrears peaked in June 1977, reaching 21.7%, and then declined to 17.6% by December of that year following a rescheduling program/. Arrears have only marginally declined subsequently, amounting to 15.6% of total loan portfolio in September 1979. They have, however, remained within manageable proportions and the level of ICICI's provisions and general reserves appear adequate to absorb possible losses. 3.09 ICICI has taken major initiatives to reduce the level of its arrears. These include a proposal to the Government to provide export incen- tives for such products as dry cell batteries, coated paper, and tires and tubes, which could help alleviate low capacity utilization in these particular sectors. ICICI has also reorganized its follow-up activities, setting up a special cell to deal with problem projects with emphasis on management issues. The cell focusses its activities on the rehabilitation of companies facing 1/ Whereas 15% of ICICI's approvals during the 1974-1980 period went to backward areas in less developed states, the same ratio for industrial licenses issued by the Government was 11%; the two numbers, however, are not really comparable, as licenses are not systematically translated into actual investment. Moreover, industrial licensing data refer to number of licenses while ICICI assistance is in terms of amount. 2/ While agreeing that ICICI could intensify its promotion activities, the Bank staff considers that ICICI's effort should concentrate on promoting industries in promising product groups, especially those geared to exports, rather than focus on setting up industries in backward areas. 3/ Between June and December 1977, ICICI undertook to reschedule sub-loans in arrears for a total outstanding of Rs 280 million, i.e., 46% of its loan portfolio affected by arrears as of June 1977. As a result, the percentage of its loan portfolio affected by arrears dropped from 21.7% as of June 30, 1977 to 17.6% as of December 31, 1977. - 6 - specific problems; suggested measures include change in management, modifica- tion of product mix and/or the infusion of fresh funds. ICICI has also initiated legal action with a view to recovering its funds in those cases where little or no prospect for revival appears likely (paras. 14 to 16 of the PCR). 3.10 Financial Performance. ICICI's lending rate increased from 8.5% to 9.5% in 1974, and further to 10.5% in 1975 and 11% in 1976. These successive step increases were approved by the Government partly in response to the Bank's urging, and were intended to reflect and compensate for ICICI's higher borrowing costs and rising operational charges. The Bank-s advice to raise long-term interest rates was well-placed, reflecting as it did a changing environment for ICICI. Recommendations on interest rate policy, however, involved a host of macroeconomic considerations and it would have been more appropriate for the Bank to base such (otherwise ad hoc) recommendations on a study of the interest rate structure prevailing in India and of the economics and implications of the proposed increases. Increased interest rates, coupled with a higher than projected volume of activity, resulted for ICICI in record profits which allowed for an increase in the dividend rate from 10% to 12%. 3.11 For the first time in 1975, ICICI was enabled to issue Government guaranteed debentures. As a result of large subsequent bond raising, its debt/equity ratio increased in excess of the 9:1 limit specified in its loan agreement with the Bank. Due to ICICI's then forthcoming share capital increase, the Bank agreed to waive this covenant temporarily. Later, in 1979, the Bank agreed to increase ICICI-s contractual debt/equity ceiling from 9:1 to 11:1 on the basis of an agreed program of share capital increases (PCR, para. 13). 3.12 Given ICICI's maturity and financial strength the Bank has, over the years, encouraged ICICI to diversify its sources of foreign currency borrowing, thereby reducing its reliance upon Bank funds. ICICI's initial efforts at raising funds on the euro-dollar market proved unsuccessful for reasons mainly beyond its control. Early attempts at arranging a US$10 million euro-currency loan failed because of unfavorable market conditions. Later, efforts were made in 1973 to raise a US$15 million Euro-currency loan, which failed to materialize because of delays in obtaining the Government-s approval and subsequent changes in market conditions. ICICI did succeed in floating a 15-year 8% bond issue through a Swiss bank in late-1973 for Sw F 8 million. This was followed by unsuccessful negotiations with the Kuwait Investment Company for a US$17 million loan due to lack of agreement on interest rates. During the period 1970-1977 ICICI received from the Govern- ment eight KfW loans for a total of Dm 57 million and six U.K. tied loans for a total of h1O.9 million. Overall, ICICI has, since June 1971, received 16 foreign currency loans from sources other than the Bank, of which 14 were official aid loans and two originated from the capital market (including a floating-rate Euro-dollar loan) (see Annex 1 to this memorandum). In addi- tion, ICICI recently raised two syndicated loans on the Euro-currency market: one for US$20 million and a second, a mixed currency loan, for US$20 million and DM 20 million, to be blended with Bank funds. - 7 - IV. Institutional Aspects 4.01 Project Identification and Promotion. As already mentioned in reference to the use of Bank funds, ICICI's operations have been concentrated on expansion/modernization projects, a high percentage of these consisting of equipment balancing programs. This obviously reflected ICICI's role in financing medium and large-sized industries as well as the level of entrepre- neurship and the relatively advanced stage of development reached in the more industrialized regions of India where ICICI's operations are concentrated. While there is no denying that continued support for existing enterprises is essential if these are to attain viable levels of operation or take advantage of market expansion, the pattern of ICICI's operations in the past underscores its concentration on the established segment of Indian industry and its reliance upon projects conceived by existing enterprises and already cleared by the industrial licensing authorities as a principal source of business. The extent of industrialization achieved in India, large as it is, is not commensurate with the country's size and needs. Moreover, the Government has been encouraging new entrepreneurship as a means to carry the country through to a higher stage of industrialization. The need for a more active promo- tional role on the part of ICICI has long been an area of concern and a topic of discussion within the Bank. During the negotiations for the tenth loan (902-IN) ICICI pledged to increase its promotional role by (i) playing an active part in the early review of projects not requiring industrial licenses, (ii) collaborating with other financial institutions in the preparation of feasibility studies, (iii) intensifying its working arrangements and tradi- tional contacts with state level institutions, and (iv) diverting a larger share of its total assistance to backward areas. 4.02 In 1973, ICICI established a project promotion unit staffed by four professionals as part of its Development Department. This unit was expected to identify projects enjoying formal linkages with existing enterprises, aiming at specific production bottlenecks, located in backward areas and/or promoted by new entrepreneurs. To date, two projects promoted by ICICI are under implementation (an acetylene black project and an industrial cutting tool project), while about ten more projects are under review. Project promo- tion has, however, remained a minor activity for ICICI, partly for its feeling that assuming a larger promotional role would involve a duplication of efforts with other specialized institutions engaged to an extent in the field, notably the Technical Consultancy Organizations, some of which ICICI has assisted in establishing (para 22 of the PCR), and State Industrial Development Corpora- tions. Rather, ICICI has preferred to concentrate its efforts in establishing in 1973 a merchant banking unit to expand the range of financial services offered to its clients (e.g., market research, management of underwritings, debenture and share capital issue, accounting, etc.). This unit has proved successful in using ICICI's expertise to promote the development of the capital market (para 26 of the PCR). 4.03 Appraisal/Supervision. Generally, the Bank has considered ICICI's appraisal work to be of a high standard. In those areas, such as marketing and distribution arrangements, where the Bank noted the need for sharpening - 8 - ICICI's analysis, such improvements have been made. The quality of ICICI's economic analysis has also improved considerably over the years. As agreed at the negotiations for the tenth loan, ICICI has regularly included a detailed Little-Mirrlees ERR analysis for its larger sub-projects, being the first DFC to formally agree to do so. For smaller projects, ICICI has con- tinued to calculate the effective rate of protection and domestic resource costs as efficiency indicators (see para. 21 of the PCR). 4.04 The need for improvement in ICICI-s follow-up activities was noted in the performance audit covering the sixth, seventh and eighth Bank loans. This was also mentioned in the appraisal for the ninth and tenth loans. In particular, staff strength in the follow-up department and the organization of follow-up activities were not considered to have kept pace with the growth of ICICI-s portfolio; and, during the negotiations for the tenth loan, ICICI-s plan for strengthening its follow-up department was discussed. ICICI has since established five separate units for conducting follow-up activities: an implementation unit, responsible for supervising new clients; a regular follow-up unit, dealing with existing clients; a rehabilitation unit, dealing with problem projects; a small loan section; and a coordination section. ICICI's follow-up staff now conduct regular plant visits, problem projects being visited at least once a year. 4.05 Lending Strategy. In 1977 ICICI's Board approved a Statement of Financial and Operating Strategy, setting out in broad terms the direction which the Corporation-s lending operations should take; this strategy state- ment identified six priority areas of concentration: (i) export industries; (ii) power and transport; (iii) agricultural inputs and outputs; (iv) indus- tries essential to industrial expansion, (v) mass consumption goods; and (vi) balancing and modernization. This lending strategy clearly addresses itself to a number of areas vital to India's economy. However, it only gives passing note to assistance to backward regions and promotion of new enterprises/-- two areas central to the Bank's objectives at the time of appraisal. 4.06 ICICI has, for years, prepared forecasts of its operations-- basically quantitative estimates of its projected lending, investment and underwriting operations--, which have proven quite accurate. ICICI could, however, provide a sharper focus to its operations by structuring increasingly its programming exercise, an approach based on techniques of management by 1/ ICICI's operations are confined to medium- and large-size enterprises. Clearly, only rarely do new entrepreneurs take up medium and large projects, the entry point for new entrepreneurs being usually the small scale segment of industry unattended by ICICI. However, the two objec- tives of project promotion and expansion of entrepreneurial base are not necessarily incompatible as far as ICICI is concerned. The spectrum of enterprises is a continuous one, and project promotion can take the form of assistance to smaller enterprises in getting into a larger segment of activity. - 9 - objectives, which need not be inconsistent with its growth strategy or introduce undue rigidities. Such a lending program, articulated around a number of broad goals, would reflect the impact which ICICI would like to make, in line with Government policies, in refocussing its operations on specific directions within a particular time frame. It would also provide ICICI with a better basis for monitoring its overall effectiveness in reaching specific objectives. V. Conclusions 5.01 In comparison with the performance of other DFCs supported by the Bank, ICICI's operational achievements during the period under review--in terms of volume of operations, profitability and standards of procedures--were very satisfactory. Yet, using more ambitious yardsticks in line with the sophistication of the institution, the conclusion must be drawn that ICICI did not fully capitalize on its recognized maturity and stature to develop into a more dynamic and pace-setting institution in its efforts at supporting the development of Indian industry. In particular, ICICI's project promotion efforts have remained limited in relation to its overall principal activities; and its reliance upon projects already cleared by the industrial licensing authorities as a source of business has resulted in a somewhat passive profile. The Bank's expectation that ICICI would expand its clientele and the geographic coverage of its operations and, altogether, assume a more active role in the identification and selection of projects was well-placed. Alongside other factors such as government incentives and availability of infrastructure, credit availability can be instrumental in influencing the pattern of industrial investment. As it is, ICICI has exercised its control over the majority of foreign exchange credit available to private industry in a neutral manner, adjusting progressively its operations to meet market demand within its traditional sphere of operations. Inasmuch as the Bank considers ICICI as more than just an effective instrument for the transfer of Bank funds, it might intensify its dialogue on the feasibility for its borrower to take on newer and greater initiatives commensurate with its maturity. These could be supported by a more structured programming of ICICI's lending activities in the context of its existing financial program- ming exercise. Such a program would not need to suggest rigidity and, within its framework, the Bank could consider adopting a "target approach" for the use of portion of its funds to underline its objectives more firmly.!Y 1/ The Bank staff considers that, in the case of ICICI, which is a mature institution with an established ability to allocate resources efficiently to economically viable projects, adopting a "target approach" for the use of Bank funds would be inappropriate, and that the best way for the Bank to influence the direction of ICICI-s lending operations is through its on-going dialogue on policies and by encouraging ICICI to intensify its project promotion effort. - 10 - ANNEX 1 PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) ICICI's Foreign Borrowings Maximum Drawing Date of Amount (Net of Maturity Rate of Without Loan No. Agreement Cancellations) (Grace Period) Interest Creditor-s Approval Kreditanstalt (Years) % fur Wiederaufbau (DM Million) (DM Million) 70 65 105 6/22/71 10.0 30 5-1/2 2,000,000 (8) 72 65 143 9/30/72 5.0 30 6 2,000,000 (8) 73 65 083 6/15/73 5.0 30 6 2,000,000 (10) 73 65 158 3/31/74 5.0 30 6 2,000,000 (10) 74 65 719 6/06/75 7.0 30 7-1/2 2,000,000 (10) 75 65 575 6/25/76 10.0 30 7-1/2 2,000,000 (10) 76 65 615 12/04/76 10.0 50 7-1/2 2,000,000 (10) 77 65 977 8/08/79/a 10.0 50 7-1/2 2,000,000 (10) Total 144.5 United Kingdom (h Million) h I. 11/12/71 1.0 - - 250,000 II. 1/01/74 1.5 - - 500,000 III. 10/07/74 1.0 - - 500,000 IV. 9/12/75 2.5 - - 500,000 V. 2/21/77 4.0 - - 500,000 VI 2/22/78 6.0 - - 500,000 Total 17.8 Swiss Bond Issue (SF Million) I. 10/18/73 8.0 15 8 (4) Euro-dollar Market Borrowing (US$ Million) I. 10/19/78 20.0 7 1 over (2-1/2) LIBOR /a Not yet effective. - 11 - ANNEX 2 PROJECT PERFORMANCE AUDIT MEMORANDUM INDIA--INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED (LOANS 789-IN AND 902-IN) Regional Distribution of ICICI'S Approvals (Rs million) Annual Average Annual Average 1971-1972 1977-1978 Region Amount % Amount % Eastern 28.4 6.3 141.5 10.1 Northeastern 6.8 1.5 2.5 .2 Northern 61.4 13.6 195.0 13.9 Central 36.7 8.1 126.0 9.0 Western 195.5 43.2 596.5 42.4 Southern 110.7 24.5 309.5 22.0 Union Territories 12.7 2.8 35.0 2.5 TOTAL 452.2 100.0 1,406.0 100.0 - 12 - - 13 - ATTACHMENT A COMMENTS RECEIVED FROM THE GOVERNMENT 0 O 0 cio Z*294 NEWDELHI 60 291140IST 04 04 ETAT INDEMBASSY WASHINGTON DC FOR DR Y V REDDY TA TO ED(BANK) FROM: A K PAL UNDER SECRETARYECOFIARS NEW DELHI(.) 4L cc REGARDING OUR COMMENTS ON THE NINTH AND TENTH IBRD LOANS (NOS 789-IN AND 902-IN) TO ICICI(.) OUR COMMENTS HAVE BEEN DESPATCHED TODAY BY DIPLOMATIC BAG (.) WE CONCUR IN THE COMMENTS OF ICICI ON THE PPAR WHICH HAVE ALREADY BEEN FORWARDED DIRECTLY TO THE BANK (.) REGARDS (.) FOREIGN COLLS:- Z-294 789-IN 902-IN 0 r. MEA/YPS/291155 PL ACK 0o c* cm I - 15 - ATTACHMENT B COMMENTS RECEIVED FROM THE BORROWER SOOHARTH S. EHTA Chairman & Mnagirg Decto Regstared Office 163, Badcbay Reclmation Bombay 400 020 ge .ntM Cret and weawi corporilon of bxfla Wited 2038 January 6, 1981 Mr. Shiv S. Kapur Director Operations Evaluation Department UNDm The World Bank CERTIFICAT 1818 H Street, N.W. OFRPsTING Washington D.C. 20433 U.S.A. Dear Mr. Kapur: Thank you for your letter of November 19, 1980, enclosing a draft Report on the performance of ICICI, by the Operations Evaluation Department, during the period of the Ninth and the Tenth Loans to ICICI. I enclose a note setting out ICICI's comnents on the draft Report. As you will observe, on several of the observations contained in the Report, ICICI has expressed its disagreement. We believe, that our comments will receive your full consideration. Yours sincerely, Encl.: S. S. Mehta Tel Management: 245115 General Office:242535 Grams: CRDCORP Bombay Telex: 11 3062 ICIC IN - 16 - CONFIDENTIAL: ICICI'S COMENTS ON THE PROJECT PERFORMANCE AUDIT REPORT. The Operations Evaluation Department of the World Bank has circulated-for our comments a draft memorandum entitled Project Performance Audit Report (PPAR) covering the completion of the Ninth and Tenth Loans of the Bank to ICICI. After reviewing ICICI's operations, PPAR concludes that ICICI has been concentrating its activities mainly in financing existing enterprises and that not enough of its assistance has been going to new projects, new companies and new entrepreneurs. PPAR concedes that ICICI has been expanding its assistance to backward areas but points out much of this assistance has been to backward areas in the industrially more developed States. In this context PPAR is somewhat critical of the Bank's recent decision to allow a higher free limit ($ 6 million as compared to the previous $ 4 million) to ICICI; in its view, this might militate against the Bank assuming a role in directing ICICI assistance towards a more broad ... 2 - 17 - based lending (in backward areas etc.). PPAR recommends a nmore structured programming of ICICI's lending" and within it a "target approach" for use of a portion of Bank funds channelled through ICICI. These general issues apart, PPAR has commented on the unfavourable ovet-run experience of projects financed by ICICI under the Ninth and Tenth loans. as also on the power shortages affecting ICICI clients. PPAR recommends better estimates of contingency margins in appraisal preparation, cnd power sensitivity.analysis. One other aspect dealt with in the Report is ICICI's arrears position. While it notes some of the adverse influences leading to a grovth in ICICI's arrears position PPAR seems to be generally satisfied with the steps taken by ICICI in handling this problem. ICICI finds itself unable to agree with PPAR on several of the issues raised In the Report. This note gives ICIC;'s own assessment of the position on the points at issue but, before going into the details, some general observations seem to be in order. ... 3/- - 18 - General Observations: An assumption which runs through the entire Report is that ICICI as a large and experienced institution could have "played a strong pace-setting role", and shaped the character of industrial development in the country, by making an impact on the development of backward regions. Much as ICICI would like to use its strength and experience towards contributing to country's industrial development, ICICI is only too well aware that it is only one amongst the many agencies with responsibilities in this field. Singly, ICICI contribution can at best be a modest one in relation to the tasks awaiting to be performed. Industrial development and in particular its broad based regional dispersal calls for effectively coping up with certain structural problems. These include overcoming infrastructural deficiences by planning, executing and financing of new facilities, as well as in ensuring certain policy conditions (fiscal protection, price assurance or import/export facilities) for the successful operation of industrial enterprises. Apart from massive resources required for financing ...4 - 19 - various infrastructural facilities, the nature of the physical tasks involved also demands a direct involvement of the Central and State Governments in such activities. So far as the policy conditions are concerned, it should be stressed, that the role of financial institutions like ICICI is circumscribed by the fact that many other judgements besides their own are involved in the final decision making. In short, ICICI singly, has neither the financial resources, nor the authority or the sanction to assume a "pace setting role" in dealing with various problems including that of backward areas development. An oft-repeated point in the PPAR is that ICICI relies on industrial licensing authorities for much of its business. The suggestion here seems to be that ICICI ought to have been promoting projects in the backward areas which otherwise receive only a limited number of projects through the normal operation of industrial licensing. In regard to promotion of projects in the backward areas, the catalytic role in India has been with the State Governments or the State agencies charged with sui a responsibility. Where the infrastructure facilities and incentives are already well provided ...5 - 20 - by the State agencies, investments have generally moved in with the full backing of financial institutions such as ICICI. A further assumption in the PPAR is that "repeat" operations whether it be financing of expansion or diversification,or modernisation/balancing programme of an txisting company are not as good as financing a new project or a new company. PPAR seems to equate, perhaps as a statistical approximation, financing of new projects with financing of new entrepreneurs. Perhaps also PPAR is not aware of ICICI's own demarcated field in the term-financing area, which is to finance mediwm and large projects, the smaller projects being generally looked after by State Financial Institutions and cormmercial banks. PPAR concludes that rather a small port',on of ICICI assistance has gone towards financing new projects (and new companies). Only in a very limited se;se do new entrepreneurs take up medium and large projects; the entry point for new entrepreneurs is mostly thq small industry for which ICTCI provides hardly any financing. ...6 - 21 - Another factual position to be noted is that many new medium and large companies have been and are being st'-rted under the auspices of established business houses. For obvious financial and economic considerations, existing companies must keep expanding to seize market opportunities and also must undertake diversification into new areas as well as modernisation and balancing of their existing investments. ICICI believes that it has served the cause of both industrial growth and health by allowing a significant portion of its financing to go towards expansion, diversification and modernisation/ balancing investments. ICICI also believes that the interests Qf backward areas themselves have often been better served by existing companies undertaking expansion and diversification activities. Development of Backward Areas: PPAR acknowledges a remarkable growth in ICICI assistance to backward areas, but considers this of a limited significance in view of the fact that a greater portion of ICICI assistance to backward areas has been - 22 - for projects in the more devuloped States. The bare facts of ICICI's operations during the period 1974-1980 (upto September), are as follows: (i) Of ICICI's overall sanctions, in terms of amount, 69% went to seven developed States (Gujarat, Hqryana, Karnataka, Maharashtra, Punjab, Tamil Nadu and West Bengal) and 31% to less developed States. (ii) Again in terms of amount, 33% of the assistance to developed States was to backward areas, the corresponding percentage in less developed States was 48. (iii) Considering ICICI's assistance to backward areas alone, developed States received 61% of the assistance as against 39% by the less developed States. Though PPAR has made no attempt to compare the industrial licensing position with that of ICICI's operations in the backward areas, the comparison is ..8 - 23 - relevant because industrial licences typically cover projects financed by ICICI, and reflect-the investment conditions and promotional impulses as existing in the respective States. Between 1975-1979, industrial licences issued to less developed States were 29% of the total. The share of backward areas of all the States together in the issue of licences was 25%. Of these, backward areas of developed States accounted for 55%. Thus, the pool from which investment prQposals could be considered for assistance was small in respect of less developed States and their backward areas. ICICI's assistance to backward areas during 1975-1979 was 38%, which was significantly higher than the proportion of industrial licences to backward areas (25%). Of this, assistance to backward areas of industrially less developed States accounted for 40%, about the same as their share (45%) in the total industrial licences issued to backward areas. (Comparisons cannot be exact here, as the figures of ICICI assistance are in terms of amount while ...9 - 24 - industrial licensing data refer to number of licences issued, apart from the timing differences between the two series. Moreover, there has been a steady increase in the number of backward districts assisted by ICICI - from 48 at the end of 1971 to 125 in 1980 (September 1980). As would be observed from the following table, the penetration was greater in backward areas of industrially less developed States, the number of districts receiving assistance registering a more than three fold increase since 1971: Number of Backward Districts assisted by ICICIL As at the end of Dec.1971 Dec.1975 Sept.1980 Industrially Developed States 25 38 48 Other States 23 40 77 Total ..... 48 78 125 ...10 - 25 - These figures help atleast to underscore the qualitative changes that have already been brought about. ICICI has been and will continue to support all eligible projects in backward areas. Many structural problems including lower plan outlays, lower growth of electricity generation, inadequate incentives for attracting industries, and lower tax base, have all contrVbuted to insufficient growth of industrial investment in the less developed States. Among the less developed States, Andhra Pradesh in recent years has shown indication of overcoming some of these structural problems, and has been receiving a rising volume of ICICI assistance. An indication of the limited absorption capacity of the less developed States is the continued stagnation in their share of commercial bank advances. The less developed States of Bihar, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh accounted for 11.5% of the bank credit at the end of 1970; their share improved only marginally to 13.3% at the end of 1978. . ..11 - 26 - Repeat Operations Vs. New Projects: We have earlier commented upon PPAR's undue stress on new projects, and have indicated how, given ICICI's position in the institutional framework in India, this stress is unjustified. Expansion of capacity to attain viable economic levels of operation, and diversification to take advantage of business opportunities are desirable in themselves and should not be frowned upon. The same holds good for modernisation and balancing programmes. Strictly speaking diversifications, expansions and properly spelt out programmes of modernisation are all to be regarded as projects. on this basis, roughly 82% of ICICI financing can be said to be project financing; the respective shares of different categories of projects being 25% for new projects, 10% for diversification projects, 35% for expansion projects and 12% for modernisation projects. ...12 - 27 - Incidentally, PPAR's sample to illustrate its point about ICICI's concentration in repeat operations would not be corroborated by ICICI's cumulative operations covering its foreign currency and rupee business. Out of ICICI's cumulative operations upto September 30,1980 numbering 2853 and amounting in all to Rs 14.3 billion, more than half by number (1455) were first time operations (amounting to Rs 6.6 billion). First time operations would include both new companies as well as existing companies seeking assistance from ICICI for the first time. The tumber of first time operations,. cumulatively, increasqd from 613 in 1570, 1011 in 1975 and 1455 in September -980, and is indicative of the progressIve extension cf ICICI's clientele over the years, remembering that most new medium and large enterprises requiring institutional finance normally and do in fact approach ICICI for assistance. Programming and Target Lending: Based on its inferences and reasoning PPAR advocates a programming of ICICI's operatiw so as to achieve certain pre-determined goals particularly *91 - 28 - assistance to backward areas and new entrepreneurs. The fact is that ICICI for many years has been observing certain industrial priorities in conformity with objectives of national planning and guidelines issued by Government in this behalf to the financial institutions and, alongwith this, has also accepted as a desirable goal, support to backward areas and new entrepreneurs. ICICI has, however, not adopted any programming of its operations based on sectoral (industrywise or regional) targets as it considers such targetting inconsistent with its legitimate role in the economy, in which capacity it must stand ready to adjust its operations to meet shifts in the financing needs of a dynamic and growing industrial economy. Sectoral targetting (whether it be on an industry basis or regional basis or related to financing of new entrepreneurs) as applied to ICICI's operations can only mean rigidities. in the allocation of resources, resulting in pressures to lend to particular sectors irrespective of inherent merits as also possible ...14 - 29 - prolonged idle holding of funds, while awaiting suitable financing proposals. Sectoral targetting will be also unsuitable under the Indian financing framework, where consortium arrangements govern most lending decisions, and where ordinarily no single institution takes responsibility for providing 100% financing for a project or an industrial sector. ICICI continues to be interested in supporting backward areas and new entrepreneurs and these objectives are implicit in its role as a development institution. ICICI's field of operation comprises medium and large projects and as is to be expected, new entrepreneurs in this area are few in number. As a development bank, ICICI alongwith othat similar institutions, has been extending unwavering support to projects promoted by such e4treprereurs and new industrial groups. Over the years, a part of ICICI assistance has gone to several small medium and medium sized projects often by way of underwriting 4ssistance. . ..15 - 30 - In this context the PPAR's suggestion that the Bank by raising the free limit for ICICI has denied it- self an opportunity of channelling ICICI's operation more purposefully calls for only a brief comment. The concept of setting a freelimit for ICICI was not at any time intended as a tool for sectoral deployment of funds nor should it be re-designed for this purpose. The free limit, as it had evolved over the years, largely representeg an expression of confidence by the Bank in ICICI. The relationship between the Bank and ICICI allows for a continuous dialogue on matters bearing on ICICI's field of operation. All reasonable proposittons serving country's development interest will receive the best attention of ICTCI and this would be so irrespective of the size of the free limit allowed to ICICI from time to time. Over-run Experience and Contingency Provisions: The period of the Ninth and Tenth loans covered an abnormal pha8e of high inflation and high exchange fluctuations, causing an unusual degree of cost ...16 - 31 - escalations in ICICI financcd projects. The effective sanction period for projects under the Ninth loan was 1972 while that for the Tenth loan was 1973-74. This period saw a rapidly rising price situation in India and abroad when appraisal estimates of costs of projects were continuously overtaken by subsequent price increases. A practical problem in all appraisal making exercises is that past inflationary experience can be used only within limits in persuading entrepreneurs to accept cost revisions on estimates made by them. The rate of price increases has varied from time to time and there have been years during the late seventies when there have been negative increases in price. This will perhaps help to answer the point made in the PPAR that ICICI has not made sufficient use of past inflationary experience in its appraisals to contain cost over-runs. Exchange fluctuations have been another major factor contributing to cost escalation in projects and these have been compounded to a significant extent by import duties which are levied on an ad-valorem basis. ...17 - 32 - Import duties themselves have been revised in stages, during the period of the Ninth and Tenth loans from 27 % in 1971-72 to 40% in 1973-74. Exchange fluctuations affecting World Bank assisted projects have been of two types: firstly large adverse exchange rate movements affecting Indian rupee vis-a-vis major currencies such as Deutsche Marks, Swiss Francs, Yen and U.S. dollars and secondly, composition of currencies disbursed by the World Bank. During the period of implementation of most of the projects covered by the Ninth and Tenth loans, escalations of major currencies (Deutsche Marks, Swiss Francs, Yen and U.S. dollars) ranged between 20% to 95% and these escalations were on an accelerated basis between 1973 and 1976. The composition of the currencies disbursed by World Bank also tended to enlarge the impact of currency fluctuations on ICICI's assisted projects. For instance, the share of the four major currencles (showing persistent and large escalations against the Rupee) which was 58% under the Ninth loan increased to 77% under the Tenth loan. .. .18 - 33 - Tiie currency escalati-ns and inflationary increases in prices of imported equipment together with the impact of import duties have accounted for as much as 33% of cost escalations in 40 of the assisted products studied by ICICI during the period 1974-1980. The actual impact perhaps was more if allowances are made for the indirect impact on locally produced equipment using imported components and raw materials. PPAR points out that cost escalations have been somewhat severe on ICICI assisted projects under the Tenth loan as compared to the Ninth loan. In percentage terms, while the number of projects affected was same in both the loans, cost increase on an average were around 33% under the Tenth loan projects as against 23% under the Ninth. The main explanation for this appears to be the higher impact of exchange fluctuations and import duty increases on the Tenth loan projects. The Tenth loan projects were disbursed for the most part during 1974-76, when the Indian rupee declined sharply against ...19 - 34 - the four major currencies as compared to the two preceding years when the Ninth loan disbursements were active. The currency fluctuations were further compounded during the Tenth loan by impor, duty increases effected by Government in 1973-74 and a compositional shift towards the four currencies in World Bank disbursements. Coming to PPAR'S suggestion t4iat ICICI should consider larger contingency provisions in project costs we should point out certain serious shortcomings that would result from adopting it. Firstly, project cost finalisation is not a unilateral exercise by ICICI, but a joint work of the entrepreneur and ICICT. Large contingency provisions, if they are to be incorporated in project costs, would have to be justified with reference to various specific cost elements in a project. Promoters are not easily persuaded, purely on grounds of past inflationary experience to accept large contingency provisions. Secondly, laz-ger contingencies might encourage laxity in project expenditures and might hinder enforcement of tighter financial controls during the project implementation period. ...20 - 35 - The problem of cost over-runs has been exercising the minds Of all the major financial institutions. Cost over-runs are a product of several factors, some within the control of the project management and some from factors outside their control. None of the tools available to the financial institutions will be of much avail in coping with factors external to a project. Solution probably lies in a combination of steps, ensuring faster implementation of projects, more efficient project management and whatever improvements institutions themselves can bring about to assistthis process. Power Sensitivity Analysis: Instead of doing a formal sensitivity analysis for power, ICICI while appraising projects,has taken into account the susceptibility of a project's viability to a decline in output due to inadequacy of power or any other factor affecting capacity utilisation. Projects with a high break-even point are subjected to a more ...21 - 36 - rigorous appraisal by ICICI as a general practice. Projects which are energy-intensive (such as aluminimum, caustic soda) are subjected to a closer scrutiny with regard to arrangements for power. Further, in order to insure against the possible power shortage (which occurs despite an assurance of adequate power supply by the concerned public utilities), ICICI ensures, while appraising a project, that adequate power would be available, if necessary, from captive generation capacity installed as a standby or a supplementary source. Several companies, both existing and new, have approached ICICI for assistance for financing captive facilities to secure fuller utilisation of capacity, and with such additional production were in a position to substantially augment the profitability of their operations. While no formal economic cost-benefit analysis of standby generation capacity is made, it is obvious that diesel generation is less preferable to captive ...22 - 37 - thermal generation, both of which being inferior economic alternatives to a steady supply of power from public utility. We might also mention that the computation of economic indicators of ICICI - assisted projects allow for captive diesel generation, wherever it forms part of the project cost. Ex-Post Analysis: PPAR has commented on the absence of any ex-post economic data on ICICI assisted projects. ICICI nad earlier represented to the World Bank that more appropriate timing for an ex-post ERR would be the year next to the one in which normal capacity output is reached, which would be approximately fifth year from the year of 4anction. After reaching an understanding with the Bank, ICICI has now commenced work for calculation of ex-post ERRs in respect of projects assisted during 1975 and has agreed to do this exercise on a contiruing basis. ..23 - 38 - Conclusions: Industrial development and its broad based regional dispersal calls for effectively coping up with certain structural problems. ICICI singly has neither the financial resources nor the authority or the sanction to assume a "pace setting role" in dealing with these problems which are rather more acute in backward areas more so in many of the industrially less developed States. Much progress was, however, made during the past decade to step up the share of ICICI's financial assistance to backward areas. In general, backward areas received a larger share of ICICI assistance than their share of industrial licences,and the number of backward districts in the less developed States receiving ICICI assistance reigstered a more than threefold increase during the last decade. PPAR places an undue stress on financing new projects (in the sen4e of new companies) and seems ..24 - 39 - to equate such operations with financing new entrepreneurs. In the Indian institutional framework, ICICI's role in the financing of medium and large industry requires it to assist all categories of projects, new as well as expansion, diversification and modernisation progress. ICICI's clientele were progressively extended during the last decade, both by making its assistance available to most new medium and large enterprises requiring ICICI assistance and by way of first-time operations to existing companies. Equally, PPAR's suggestion that ICICI goes for a structured programming of its lending to particular sectors is not suited to its role in India's planned economy; nor does it fit in with the existing consortium arrangements for lending in India. The period of the Ninth and Tenth loans of the World Bank was marked by a higher rate of inflation and currency fluctuations affecting ICICI assisted ..25 - 40 - projects. These external factors contributed greatly to the over-run experience of projects, and, by their very nature, tools available to financial institutions are not of much avail in such a situation. January 6, 1981. - 41 - ATTACHMENT C PROJECT COMPLETION REPORT ON THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED LOAN 789-IN AND LOAN 902-IN 1/ 1. Loan 789-IN for US$60 million and Loan 902-IN for US$70 million were the ninth and tenth Bank loans made to ICICI in 1971 and 1973 respec- tively. Both loans were granted as a continuing support to ICICI in financing private productive enterprises in India with special emphasis on increasing assistance to small firms and industries in the backward areas. Relevant statistics on these loans are as follows: Loan 789 Loan 902 Amount Approved US$60 million US$70 million Date Approved October 26, 1971 June 7, 1973 Date of Loan Agreement October 27, 1971 August 16, 1973 Date of Effectiveness December 20, 1971 December 31, 1975 Latest Date of Authorization December 31, 1973 December 31, 1975 Scheduled Closing Date December 31, 1976 December 31, 1978 Actual Closing Date December 31, 1976 December 31, 1978 Net Amount Withdrawn 2/ US$56.7 million US$62.5 million Interest Rate 7-1/4% p.a. 7-1/4% p.a. Free-Limit US$4.0 million US$4.0 million Maturity Composite 3/ Composite 3/ Background 2. ICICI was established in 1955 and to date has, received 12 loans from the Bank totalling US$490 million. 2/ As of November 30, 1979, this amount represented 8% of total assistance to development finance companies and 6.5% of total assistance to India by the Bank and IDA. In the 25 years of development finance operations, ICICI has developed into one of the more "1mature", well-managed and sound DFCs associated with the Bank. Its free- limit of US$4.0 million, which is the highest granted to a DFC, was estab- lished in 1970 with its eighth loan from the Bank. ICICI has been allocating 1/ This report is based to a large degree on completion reports on these loans prepared by ICICI. The ICICI reports include detailed analysis of sub-projects financed under these loans and are available on request. 2/ Net of Cancellations. 3/ Repayment schedule is a composite of the repayment schedules of the sub- loans of ICICIDs borrowers. - 42 - resources to economically efficient projects, and its achievements in indus- trial financing have been satisfactory. These findings are confirmed by a joint study done in 1973 by ICICI and the Bank, which evaluated ICICI's developmental impact, and by a performance audit done by the Bank's Operations Evaluation Department in 1975 on IGICI's sixth, seventh, and eighth loans. Environment 1/ 3. The period from the approval of the ninth loan to the closing date of the tenth loan covers seven years - FY72 to FY78. During the start of this period, India was characterized by shortages in foodgrains, agricultural and industrial inputs, foreign exchange, and power accompanied by a fairly high inflation rate. For three years till the end of FY75, the gross domestic product of India showed a growth of only 3.0% with declines occurring in FY73 and FY75. Beginning in FY76, these shortages (except for power) had virtually disappeared due to bumper harvests resulting from favorable weather, increased fertilizer usage, and improved irrigation. This situation contributed to the improvement of India's balance of payments together with a step-up in exports, increase in foreign aid and a substantial rise in invisible receipts. It is estimated that by March 1978, foreign exchange reserves increased to US$5.8 billion from US$1.4 billion in March 1975. Industrial growth has been low, except in FY77, although at an increasing trend: 1% in FY74, 2.5% in FY75, 5.5% in FY76, 10% in FY77. It is estimated that in FY78, industrial output decelerated to a 5% growth rate. Industrial investment remained at about the level of FY73 with declines in private sector investment starting in FY75. The decline resulted from the overall sluggish growth of total indus- trial production. The general liberalization of controls and the streamlining of procedures should encourage private investment in the future. 4. Over the same period, there was more emphasis on the development of small-scale, labor intensive and export-oriented industries. In addition, GOI announced a modernization program for five selected industries, i.e. cotton textiles, jute, cement, sugar, and engineering. Loan Utilization 5. Despite the overall slowdown in the economy and depressed private sector investment, utilization of the ninth and tenth loans has been within the project timetable. 1/ Full assessment is contained in the Bank's Report No. 2431-IN: "Economic Situation and Prospects of India", April 9, 1979. - 43 - DISBURSEMENTS (US Dollars Millions) Loan 789 Loan 902 At Appraisal Actual At Appraisal Actual 1971 - 1972 4.185 10.501 1973 14.210 24.693 - 2.001 1974 21.940 15.997 4.000 17.488 1975 15.620 3.897 14.300 29.269 1976 4.045 1.395 24.600 11.054 1977 - 0.237 20.300 1.928 1978 - - 6.800 0.211 Total 60.000 56.720 70.000 61.951 Both loans were fully committed; but due to cancellations/withdrawals, total percentage utilization was 95% for the ninth loan and 89% for the tenth, which is normal for ICICI (past loan utilization ranges from 90% to 99% of approved amounts). ICICI disbursed the bulk of the loans at a faster pace than estimated at the time of appraisal. Minor amounts were disbursed after the scheduled closing dates. The major reason for the high past utilization is that ICICI proceeded to approve loans in anticipation of the Bank loans. The result was that ICICI had approved loans for the total amount of the ninth loan by the end of 1972 and fully committed the same by the scheduled latest date for authorization. Operations--Approvals, Commitments, Disbursements 6. Annex 1 shows a comparison of ICICI's projected and actual opera- tions in net approvals, net commitments and disbursements for 1971 to 1977. During the period, actual figures were on the average higher than projected figures as follows: approvals + 27%, commitments + 10%, and disbursements + 5%. In terms of growth rates, the comparison is as follows: Average Percentage Changes Per Year Projected Actual Approvals 11% 15% Commitments 11% 18% Disbursements 14% 14% Thus, from 1971 to 1977, total approvals amounted to Rs 5,218 million (Rs 4,095 million projected); total commitments Rs 4,520 million (Rs 4,094 million projected); and total disbursements Rs 3,937 million (Rs 3,747 - 44- million projected). ICICI's disbursements in terms of its contribution to investments in India have been as follows: 1/ ICICI Disbursements as Percentage (%) of: /a IFI- Total Private Investments in Disbursements Industrial Investments Machinery and Equipment FY72 15.7 3.9 1.1 FY73 18.3 4.3 1.3 FY74 14.6 4.8 1.2 FY75 10.6 5.4 1.0 FY76 14.0 7.7 1.2 FY77 11.3 10.3 1.2 /a Indian Financial Institutions. ICICI figures are adjusted to their fiscal years ending March 31. Source: IDBI's Annual Reports/Operational Statistics. 7. It is noted above that while ICICI's contribution to investments in machinery has been maintained at about 1.2%, its share in total investments (disbursements) made by industrial financing institutions in India decreased from 15.7% in FY72 to 11.3% in FY77. However, its shares in total private industrial investments, where its financing is primarily directed to, has more than doubled from 3.9% in FY72 to 10.3% in FY77. This is mainly due to the slow (almost stagnant) growth of private industrial investment during the period, against ICICI's growth of 14% per year in disbursements. Also, ICICI accounted for the bulk of the foreign exchange disbursements made by IFIs, although the percentage share of ICICI has slowed down to about 12% during FY75 to FY77 due to availability of free foreign exchange and SFCs' disburse- ments in foreign exchange under the Bank's Credit 356-IN and Loan 1260-IN (IDBI/SFC). Its rupee disbursements have been significantly higher and grown at a faster rate than foreign currency disbursements due mainly to avail- ability of domestic capital goods. This is shown as follows: 1/ Refer to Annex 2 for details. - 45 - Comparison of ICICI Disbursements and Disbursements by IFIs (Rs in million) FY72 FY73 FY74 FY75 FY76 FY77 FY78 (i) IFI loan disbursements in: a) foreign currency 239 321 293 346 470 473 529 b) rupees 1,532 1,563 2,407 3,592 3,592 4,791 5,560 c) Total 1,771 1,884 2,700 3,938 4,062 5,264 6,089 (ii) ICICI loan disbursements in: a) foreign currency 205 280 263 291 399 389 463 b) rupees 80 79 138 137 163 217 389 c) Total 285 359 401 428 562 606 852 (iii) 2(a)/1(a) - % 85.8 87.2 89.8 84.1 84.9 82.2 87.5 (iv) 2(b)/1(b) - % 5.2 5.1 5.7 3.8 4.5 4.5 7.0 (v) 2(b)/2(c) - % 28.1 22.0 34.4 32.0 29.0 35.8 45.7 (vi) 1(b)/1(c) - % 86.5 82.9 89.2 91.2 88.4 91.0 91.3 8. At the end of FY78, ICICI's disbursements in rupee loans were 7.0% of total IFI's disbursements in rupees (5.2% in FY72) and 46% of ICICI's total loan disbursements (28.1% in FY72). This trend followed the overall direction of total IFI's disbursement in rupee loans, which as a percentage of total IFI loan disbursement increased from 86.5% in FY72 to 91.3% in FY78. This was due to improved availability of domestic capital goods and access to foreign exchange. Underwriting/Direct Subscription 9. While securities and capital market activities are the responsibility of UTI and LIC, 1/ ICICI also contributed through underwriting and direct sub- scription of equity shares and debentures; the various percentage share of IFI's to total disbursements in underwriting and direct subscription were as follows: 1/ Unit Trust of India and Life Insurance Corportion of India. - 46 - Percentage (%) of Total IFI Disbursements in Underwriting/Direct Subscription (Rs in million) /a UTI/LIC- ICICI IDBI SIDCS FCI SFCs FY72 42.3 12.7 10.0 25.4 5.6 4.0 FY73 50.7 12.5 14.1 12.8 7.9 2.0 FY74 53.7 10.9 15.0 14.1 4.7 1.6 FY75 57.2 8.3 8.6 22.0 3.2 0.7 FY76 35.7 18.2 20.5 17.1 7.4 1.1 FY77 40.4 15.0 15.8 23.7 4.5 0.6 FY78 32.2 12.2 21.6 26.7 6.9 0.4 Average 44.6 12.8 15.1 20.3 5.7 1.5 /a Unit Trust of India and Life Insurance Corporation of India. IRCI had no disbursements during the period. 10. As expected, UTI/LIC accounted for the largest portion of total disbursements (45% on average); the second largest share was that of SIDCs at 20%, which is not surprising as SIDCs' main function is to promote new enterprises and to invest in equity. The contributions of IDBI, ICICI, and IFCI were 15%, 13%, and 6% respectively. 11. The volume of ICICI's activities in underwriting and direct subs- criptions has generally been increasing, though it was lower than the amounts projected. During the period 1971-1977, ICICI was relatively active in share underwriting, when actual approvals and commitments were up to projected levels and actual disbursements exceeded projected amounts by 19%. Also, actual approvals of direct subscriptions in debentures were equal to projected approvals, but actual commitments and disbursements were only about 50% of projected amounts. 12. Guarantees. Beginning in 1973, guarantee operations were projected at Rs 10.0 million per year, or a total of Rs 50.0 million over 5 years (approvals and commitments were equal). Actual cumulative approvals on guarantees of Rs 81.1 million exceeded the projections by Rs 31.1 million or 62%. These approvals occurred from 1972-1976, with the major portion in 1976. As of September 30, 1978, ICICI's cumulative guarantee operations are as follows: Rupee Foreign Currency Total (Rs million) Approvals 17.5 181.4 198.9 Commitments 11.7 181.4 193.1 Disbursements 2.7 - 2.7 - 47 - Financial Performance 13. Annexes 3 to 5 give a summary of ICICI's projected and actual financial statements for the period 1971 to 1977. The actual profitability throughout the period was higher than projected due to higher levels of activity than anticipated. Although ICICI increased its lending rate from 8.5% p.a. in 1973 to 9.5% in 1974 and 10.5% in 1975, 1/ the cost of borrowing offset this and an average interest spread of 2.1% was recorded in 1975 and 1976, against a forecast of 2.4%. However, in 1976 the lending rate was again increased to 11% and the interest spread increased to 2.4%, resulting in record net profits of Rs 53.54 million. In view of the reasonably high profits, ICICI was able to increase its rate of dividend from 10% in 1971 to 12% in 1975, in line with generally increased interest levels. The higher rate of dividend resulted in an increase in the payout from Rs 7.8 million in 1971 to Rs 18.8 million in 1977. ICICI's average debt service coverage ratio (DSCR) for the 1971-77 period was 1.18, equal to the level projected. However, as a result of ICICI exercising its option to redeem Rs 60 million in debentures ahead of schedule, 2/ the DSCR in 1975 fell below 1. At the same time, ICICI refinanced its domestic resources by issuing Rs. 137.5 million in new debentures, guaranteed, for the first time, by GOI (para. 28). Throughout the period, ICICI maintained a satisfactory current ratio of more than 2:1. Its debt/equity ratio averaged 7.8:1 with a high of 9.2:1 in 1976, which was in excess of the contractual limit of 9:1. However, due to an imminent share capital increase, this covenant was temporarily waived by the Bank in 1977. Since 1967, the contractual limit had been 9:1 with only a definitional adjustment in 1975, which excluded from debt: (a) amounts of maturities of less than one year, and (b) proceeds of any debts kept in liquid assets. With the exception of 1976, ICICI's debt/equity ratio was kept within this limitation. However, in 1979 the Bank increased the contractual limit to 11:1, subject to an agreed program of share capital increases. Trends in Arrears 14. During the period of the ninth and tenth loans ICICI arrears showed an increasing trend; the total arrears (principal and interest) increased from about Rs 40 million in 1970 to Rs 117 million in June 1977 and the total number of companies in arrears increased from 46 to 140. Principal in arrears increased from 1.30% of total loans outstanding in 1971 to 2.23% of total loans outstanding in June 1977. The core of problem projects as of September 30, 1976 consisted of about 35 companies (5.94% of the portfolio value) in arrears over 12 months, including 14 (2.14% of the portfolio value) in arrears over two years (Annexes 6 and 7). 1/ The rate for foreign currency loans; rupee loans bore interest at 9% p.a. in 1974 and 10.25% p.a. in 1975 and 1976, and thereafter at the same rate as foreign currency loans. 2/ Scheduled for redemption in 1977. 15. The increase in arrears was due mainly to the special problems faced by the Indian economy in general and industry in particular since 1972, i.e. the oil crisis and power cuts in 1973, credit restrictions in 1974, and the business recession in 1975. Compared to 1974, two subsectors-metals and metal products, and electrical equipment--accounted for a major share of the arrears. 16. While the increase in the arrears has been rapid, it is still within manageable proportions and has not seriously affected the quality of ICICI's loan portfolio. 1/ At the same time, ICICI has taken steps to reverse this trend: it had proposed that GOI provide excise duty relief and export incentives for such products as dry cell batteries, coated paper, and tyres and tubes. Newly completed projects in these sectors, facing diffi- culties in meeting contractual obligations, have benefitted from this relief. ICICI has also re-organized its normal follow-up work by setting up a special cell to deal with problem projects. The main task of the cell is the rehab- ilitation of companies facing difficulties. This was often brought about by a change in management, change in product mix of the company, or a fresh infusion of funds. Development Impact Study 17. In 1972, a special study of ICICI's developmental impact was launched as a combined effort by the Bank and ICICI. 2/ The principal objec- tives of the study were to: (a) estimate, through an appropriate sample, the ex-post economic rate of return (ERR) of projects in ICICI's portfolio; (b) appreciate the factors responsible for the economic quality of ICICI's portfolio, including those deriving from the policies and practices of ICICI itself; and (c) deepen the understanding of ICICI's role in resource mobili- zation, both directly and through its influence on its clients. One element of the study comprised a review of the development benefits resulting from the funds that passed through ICICI, as used by its sub-borrowers. This involved the calculation of the ERR of a broadly selected sample of 42 proj- ects financed by ICICI. Unlike the practice in other similar studies under- taken at the same time, ICICI was primarily responsible for the technical work on this portion, with Bank assistance in formulating the methodology. The other element of the study, an evaluation of ICICI's development impact as an institution, was conducted by the Bank. I/ Provisions for loans (principal) amounted to Rs 27 million or about 1% of the outstanding loan portfolio in 1975. This compares favorably with an actual write off of bad debts amounting to Rs 4 million from 1971 to 1976. 2/ Report No. 320-IN dated January 25, 1974. - 49 - 18. The study was completed in mid-1973 and the results of ICICI's analysis showed that the sample 1/ had a weighted average ERR of 19.3% and a weighted average financial rate of return of 17.5% p.a. These results demonstrated satisfactory returns for the projects sampled, though it was not possible, because of a lack of suitable data, to compare the returns with overall industrial averages. Another sample batch of 140 projects completed between 1967 and 1970 also displayed satisfactory performance, based on partial economic indicators. The typical project sampled employed some 350 persons at an average cost per job of Rs 40,000 (US$4,706 2/) and operated at about 65% of capacity. The financial performance of the companies involved in these projects was satisfactory, with a return on capital employed of 14%, somewhat higher than the average for the corporate sector as a whole, 3/ and an asset turnover ratio of 0.91, compared to the sector average of 0.97. Pre-tax profits were divided about equally between taxation, dividends and retained earnings and, although most of the output was sold domestically, the companies' export performance was better than the sector average, at 3.4% of sales. 19. Concerning the mobilization of resources, the study found ICICI at a disadvantage in mobilizing primary savings. This disadvantage stemmed from two major points, which remains the case today: First, the specialized institutions 4/ were permitted to offer special advantages, which enabled them to tap primary savings direct. 5/ Secondly, ICICI's interest rates were fixed at a level where it was unable to borrow from primary savers and maintain an adequate spread. Commercial banks were able to do this as their lending rates were higher than ICICI's and companies were also able to offer more attractive rates to primary savers. Consequently, apart from the sale of its shares to small investors, ICICI was not well placed to mobilize primary savings and had to rely for its domestic resources on indirect sources of savings, i.e. mainly institutions (para. 28). Indirectly, however, ICICI did encourage some mobilization of primary savings through persuading clients to make public offerings of shares or debentures. At the project level, ICICI provided about 20% of total cost, which meant that for every rupee in assistance, four more were invested; including three provided by promoters and internal generation. 1/ After excluding one large pharmaceutical project with a negative rate of return that would have substantially distorted with results. 2/ At then (1973) prevailing prices and exchange rates. 3/ Based on a Reserve Bank of India study of 1,501 companies. 4/ Life insurance companies, particularly the Life Insurance Corporation, and the Unit Trust of India. 5/ Prior to ICICI receiving Government guarantees on its bonds (para. 28), its bonds were at a disadvantage. - 50 - 20. The Bank portion of the study concluded that ICICI had had an appreciable impact on development and that its lending to private industry was reasonably broadly based. However, it pointed out some shortcomings, partic- ularly in the area of promotion and ICICI's role in influencing industrial policy making. Concerning promotion, the study found that ICICI had generally not taken the lead in organizing a promotional effort or adding new functions providing services to the industrial sector. The study also found that ICICI's new promotion plans were ad hoc and recommended a work program to give focus to these efforts. It was found that ICICI had not sought an active role in influencing industrial policy and recommended that, by using its extensive data base, ICICI could identify some of the factors responsible for productivity improvements and some bottlenecks in the industrial sector. These findings would then be useful in policy formulation. Finally, the study recommended that ICICI should finance medium scale public sector enter- prises as well as joint sector enterprises, in which the Government held a majority position. ICICI has attempted to address these points through institutional changes made since 1973 (paras. 22 to 26). Institutional Aspects 21. Economic Analysis. At the time of negotiating Loan 789-IN, ICICI appraisal reports carried a brief appendage on the "economic considerations" of projects being evaluated. Subsequently, ICICI began incorporating a fuller analysis covering, inter alia, the following areas: (a) a brief discussion of the industry, plan targets and government policies affecting it; (b) an analysis of the external effects of the project in terms of the backward and forward linkages associated with it; (c) the external viability of the project, including its export performance and a quantitative assess- ment of its comparative advantage, using effective rate of protection and domestic resource cost calculations; and (d) the employment impact of the project. However, after completion of the developmental impact study, ICICI agreed at negotiations for Loan 902-IN in June 1973, to provide a detailed little-Mirrlees ERR analysis for all projects with total assistance in excess of Rs 5 million and projects with capital costs exceeding Rs 25 million. 1/ ICICI, thus, became the first DFC associated with the Bank Group to use systematically an advanced economic methodology for its project appraisals. Between August 1973 and June 1976, ICICI had evaluated 86 projects with the use of this method. The weighted average ex-ante ERR for these projects was greater than 20%, with a range of 8% to 50%. The weighted average FRR was above 14% with a range of 11.2% to 28%. The results of this analysis confirms the high economic quality of the ICICI portfolio as brought out by the joint study, and also show that ICICI continues to perform satis- factorily in allocating scarce resources. Annex 8 gives the details of returns for projects for three time periods. 1/ For smaller projects, ICICI continued to calculate the effective rate of protection and domestic resource cost, with the exception of balancing and modernization projects with assistance of less than Rs 1 million and service related projects, where no economic analysis was required. - 51 - 22. ICICI's Promotional Role. During negotiations of Loan 902-IN, ICICI undertook to increase its promotional role by identifying new projects and entrepreneurs, particularly in backward areas. The various approaches available to ICICI in industrial promotion were discussed and a broad under- standing was reached that ICICI's role would be largely complementary to the existing institutional framework. First, ICICI was expected to divert a larger share of its total assistance to backward areas. Secondly, ICICI would play an active part in an early review of projects which did not need indus- trial licenses, and would collaborate with other financial institutions in the preparation of feasibility studies. Finally, ICICI was expected to continue its traditional contacts with state level institutions, including the training and development of staff for local and foreign development banks. ICICI set up a Project Promotion Department in 1973 with a staff of four profes- sionals. The Department was expected to identify projects which would have linkages with existing units, would fill gaps in the industrial sector, would be located in designated backward areas and be promoted by new entrepreneurs. To date, two projects promoted by ICICI have been implemented and ten are under review. ICICI has also joined other all-India institutions in contri- buting to the initial capital of four new technical consultancy organizations in four states. These organizations have assisted SFCs and commercial banks to complete techno-economic evaluations of a number of their proposed projects. 23. Diversification of Assistance. To assist in the promotion of regional development, ICICI substantially increased its lending to backward areas, from 12% of total approvals in 1955-70 to around 40% in 1974-76. 1/ However, a significant proportion of ICICI's assistance to these areas was in backward regions of the more advanced states, resulting in a continuation of the skewed geographical distribution in favour of Western India. 2/ To address this problem, the Bank recommended the strengthening of the two regional offices in Calcutta and Madras 3/ and establishing a new office in Delhi, to enable them to provide stronger regional promotion ability. How- ever, these offices remained understaffed until, at Bank insistence in 1976, ICICI increased the staffing and facilitated some delegation of authority. In 1976, ICICI also opened the third regional office in Delhi to serve as a liaison with Government. These offices currently undertake a more autonomous and active role in regional project appraisal and relations with clients. 24. As of June 30, 1976, approvals of assistance by ICICI aggregated Rs 7.2 billion for 1,919 projects and 1,070 clients. Of these 1,919 projects, 849 (or 44%) were sponsored by clients who had received financial assistance 1/ Changes in GOI's definition of "backward areas" has distorted the comparison somewhat. 2/ In 1976, the regional distribution was: Western India 53%; South India 25%; North East India 6%; North India 14% and East India 2%. In 1969, Western India represented 41%. 3/ Established in 1969. - 52 - from ICICI previously. In terms of amounts financed, these projects repre- sented 48% of total approvals, which is a reasonable ratio for a mature DFC with well established clients. Some 142 projects, accounting for 6% of total ICICI financing were promoted by new entrepreneurs. 1/ 25. Public Sector Lending and Industrial Policy. Although ICICI has financed mainly private sector industries, it has also financed some joint sector companies, in which Government has a minority share. As of June 30, 1974, its total assistance to these joint sector companies was Rs 241 million to 27 companies. However, by June 30, 1976, it had doubled this assistance by Rs 469 million to 54 companies, which represented 6% of its total approvals at that date. Following the recommendation of the Bank that ICICI should undertake public sector financing (para. 20), ICICI declined to embark on a full scale program of lending until the role of other term lending institu- tions had been defined. Nonetheless, by June 30, 1976, ICICI had financed 13 projects, totalling Rs 108 million, in which Government had a majority share. In response to the Bank's recommendation on ICICI taking a more direct role in the formulation of industrial policy, ICICI indicated that its role was necessarily limited to areas where it had direct project experience. However, the continuing dialogue and close relations between ICICI and GOI, particularly through GOI's directors on ICICI's Board, continued to make an indirect contribution to policy making. Subsequently, an export study ini- tiated in 1976 and other more recent ad hoc studies, have resulted in ICICI having a more direct role. 26. Merchant Banking. In 1973, ICICI established a merchant banking unit to offer a broad range of financial services to clients, including: the management of underwritings, debenture and share capital issues, account- ing, market research and other financial services. By October 1976, this unit had successfully managed seven capital issues and had arranged four term loans totalling Rs 377 million. ICICI derived Rs 3.8 million in fees from these services. In view of its long experience and close contacts in the financial field, ICICI was able to make a significant contribution to clients through these services. In addition, this unit has had an important promotional role. Mobilization of Resources 27. Foreign Exchange. The Bank has long encouraged ICICI to diversify its sources of foreign exchange borrowings to reduce its dependence on Bank funds. At the time of negotiating Loan 789-IN, it was thought that ICICI could raise a US$10 million euro-currency loan, but market conditions subse- quently proved unfavourable. In 1973, at the time of negotiating Loan 902-IN, ICICI had arranged a euro-currency borrowing of US$15 million. However, Government approval for the loan was so delayed that changes in the euro- market made it impossible for ICICI to finalize the loan. Although the euro- currency borrowing fell through, ICICI was able to float a 15 year 8% bond 1/ Persons who had no previous ownership of industrial ventures. - 53 - issue through a Swiss bank for SFr 8 million (US$2.1 million 1/) in late 1973. Adverse market conditions and difficulties in obtaining Government approvals prevented ICICI from approaching the market again until 1977, when negotiations were conducted with the Kuwait Investment Company for a US$17 million equivalent loan. These negotiations were unsuccessful because of a lack of agreement on interest terms. During the period 1970 to 1976, ICICI received eight KfW loans totalling DM 57 million at rates between 5.5% p.a. and 7.5% p.a. and five UK Government tied loans totalling E 6.9 million at between 6.25% and 7.75% p.a. 28. Domestic Currency. During the period 1970 to 1976, ICICI raised a total of Rs 131 million from IDBI by means of five issues of special fourteen year debentures, bearing interest rates ranging from 6.25% p.a. to 6.75% p.a. In addition, ICICI made six public debenture issues for a total of Rs 570 million. The four issues before mid-1975 were for maturities of ten twelve years at rates of 6-6.25% p.a. However, in late 1975, ICICI was able to obtain for the first time a Government guarantee on its bond issue and was able to raise Rs 137.5 million for fifteen years at 6.25% p.a., followed by a similar issue in 1976. Obtaining The Government guarantee was an important development as it confers the status of an "approved security" on ICICI*s debentures. As ICICI is able to offer a slightly higher rate of interest than other government securities, its bonds have been in demand by government regulated institutions, commercial banks and trusts who are compelled to hold approved securities. ICICI also raised Rs 62.5 million in the period 1971-1976 and increased its retained earnings and revenues by Rs 79 million. Projects Financed 29. A total of 392 projects were financed out of the ninth and tenth loans. From the table below it will be seen that 60 were new projects, which accounted for Rs 360 million or 30% of the total assistance; another 120 were for expansion/diversification and a further 212 were for balancing and modernization schemes. The latter two categories accounted for 43% and 27% of total assistance respectively. 1/ At the then prevailing exchange rate. - 54 - Nature of Projects Financed Under Loans 789-IN and 902-IN (Rs million) Foreign Underwriting and No. of Exchange Rupee Direct Subscrip- Type of Project Projects Loans --Loans tion to Shares/Bonds Total New 60 (15) 259 50 50 359 (30) Expansion/ Diversification 120 (31) 462 56 9 527 (43) Balancing Equipment/ Modernization 212 (54) 306 8 13 327 (27) Total 392 (100) 1,027 114 72 1,213 (100) /a Includes assistance for the same project financed and other loans. Note: Figures in brackets are percentages to totals. 30. To conform with the general economic policy objectives of GOI, ICICI was expected to finance an increased number of projects in backward areas and small scale enterprises. ICICI's assistance to backward areas was $6.5 million covering 25 projects under the ninth loan and $18.5 million for 38 projects under the tenth loan. Given that small-scale enteprises are mainly financed by SFCs (Credit 356-IN and Loan 1260-IN), it is not surprising that only 6 projects, with an assistance of $0.0181 million out of the 182 projects financed of the ninth line, were small scale units 1/ and only 3 (total assistance $0.119 million) under the tenth line. The table below shows that the size distribution of loans out of the ninth loan is about the same as those of the tenth loan. Loans for less than $250,000 accounted for two thirds of the numbers of loans, but only for 15% by amount. 1/ Small scale units are defined as those where investment in plant machinery is less than Rs 1 million. - 55 - Assistance Sanctioned by Size of Loan Amount of Loan No of Amount T($ million) Projects ($ million) 789-IN 902-IN 789-IN 902-IN Less than 0.250 120 (66) 142 (68) 7.851 (14) 9.985 (15) 0.251 to 0.500 28 (15) 20 (10) 10.238 (19) 7.330 (11) 0.501 to 0.750 14 (8) 19 (9) 8.767 (15) 11.696 (18) 0.751 to 1.000 5 (3) 12 (6) 4.242 (7) 10.631 (17) More than 1.000 15 (8) 17 (8) 25.622 (45) 24.841 (39) Total 182 (100) 210 (100) 56.720 (100) 64.393 (100) Note: Figures in brackets are percentages to total. 31. More than half the projects financed were subject to delays in imple- mentation. For the ninth loan, of the 157 projects for which data was avail- able, only 43 (27%) were completed on schedule, while 69 (44%) were delayed for more than six months. The situation was similar for projects financed under the tenth loan: 49 of the 176 projects (28%) were completed on schedule, while 70 (40%) were delayed more than six months. Delays in Project Implementation Extent of Delay (by number) Type of more than Project Loan No Delay 0-6 months 6-12 months 12 months Total 1) New 789-IN 3 7 4 9 23 902-IN 5 10 3 14 32 2) Expansion/ Diversification 789-IN 9 15 13 11 48 902-IN 16 16 8 20 60 3) Balancing Scheme/ Modern- ization 789-IN 31 23 13 19 86 902-IN 28 29 10 17 84 - 56 - The delays in completion were caused by such factors as delays in obtaining import licenses, delays in shipment, changes in suppliers of equipment, weak management, changes in the scope of the project etc. By and large, the delays in obtaining import licenses were the most important reason for delays in project implementation and costs overruns. 32. Of the 157 units financed out of Loan 789-IN, almost half (71) had overruns in their project costs. The same holds true from projects financed out of Loan 902-IN, where 84 out of the 172 projects had cost over- runs. The incidence of cost overruns was greatest in the case of new proj- ects: 45 of the 53 projects financed by the two loans had costs overruns. Cost Overrun: Loan 789-IN and 902-IN No of Projects Completed With: Total Savings in No. of Type of Project Costs No Overruns Costs Overruns Projects New 3 5 45 53 Expansion/ 16 21 47 84 Diversification Balancing Equipment/ Modernization 30 99 63 192 Total 49 125 155 329 33. Data were available for 314 out of the 329 projects financed by the ninth and the tenth line of credit. The table below gives the frequency distribution of projects completed within cost estimates and with overruns between 10% and 40% of original costs estimates. 164 out of the 314 (or 52%) projects were completed within cost estimates while only 56 projects showed overruns of more than 20% of original cost estimates. Size of Cost Overrun No. of Projects- with costs overrun between No of Overruns /b 0-10% 10%-20% 20-30% 30%-40% >40% Loan 789-IN 79 40 13 9 2 2 Loan 902-IN 85 31 13 10 5 25 Total 164 71 26 19 7 27 /a For which data were available. /b Includes projects completed with savings in costs. - 57 - 34. The reasons for the cost overruns lie in the factors causing delays in project implementation. Thus, delays in obtaining import licenses may result in an increase in prices of imported equipment and preoperative expenses. Furthermore, increases in prices due to exchange fluctuations caused increased customs duties payable etc. ICICI provided for contingency margins on both rupee and foreign currency components of project cost at appraisal, but these provisions were inadequate to meet the cost escalation due to inflation and exchange rate fluctuations. 35. Partial economic indicators are available for some projects on an ex-post and ex-ante basis. The following table shows that the appraisal estimate is quite different from the actual figures for some projects. Partial Economic Indicators for Projects: 789-IN and 902-IN Investment Exports (Rs '000) Employment Per Worker Value Added Name Estimate Actual Estimate Actual Estimate Actual Estimate Actual ---(Rs '000)--- ---(Rs '000)--- 789-IN 1) Eurokote (India) 1,800 NIL 95 20 240 1,160 1,825 NA 2) Graphite (India) - 279 400 399 125 138 NA NA 3) Jasons Electronics 480 - 375 244 53 84 1,930 2,207 902-IN 1) Orissa Textiles 20,600 28,474 5,000 5,000 130 - - - 2) CTR Mfg. Ind. 2,250 16 180 120 21 60 - 3) Tata Exports NA 3,398 680 433 68 125 - Summary of 'A' Subprojects 36. There were five 'A' subprojects 1/ financed out of Loan 789-IN and seven out of Loan 902-IN. The total assistance authorized in the former was $11.53 million and for the latter $12.23 million. Due to cancellations and/or transfers to later lines of credit (1097-IN), the effective amount of loans sanctioned was $8.577 million and $3.80 million respectively. Most of 1/ Loans above free limit of US$4.0 million. - 58 - the twelve cases were authorized without the Bank raising major questions. In two cases, the Bank raised several questions with regard to technical issues, market, technical assistance, cost of project and environmental aspects. These questions were satisfactorily resolved. However, one of these projects has been facing long term difficulties and is now in arrears on interest and principal, while the other project has been successful in its operations. Annex 9 gives a detailed review of "A" subprojects financed. Conclusions 37. During the period of the Ninth and Tenth Bank loans, ICICI made considerable financial and institutional progress. The overall volume of approvals was higher than anticipated, resulting in increased profits and larger dividend payouts. Although the arrears position deteriorated somewhat, it remained at a reasonable level and did not have a serious impact on the quality of ICICI's portfolio. ICICI was also able to take the first step in diversifying its foreign exchange resources by raising Swiss bonds and, at the same time, was able to broaden the demand for its domestic bonds by obtaining Government guarantees. The joint ICICI and Bank developmental impact study showed that ICICI has performed satisfactorily in allocating resources to economically viable subprojects. Following the study, ICICI became the first development bank associated with the Bank Group to institute a formal system of economic evaluation of projects, which has subsequently shown that ICICI has continued to support only economically viable projects. Also, as a result of the study's findings, and through the continuing close dialogue with the Bank, ICICI implemented several institutional changes aimed at improving its services to clients and increasing its developmental impact. These changes included the creation of a promotion and merchant banking activity, as well as strengthening branch offices. Some start was also made in lending to public sector enterprise and ICICI substantially increased its volume of assistance to designated backward areas. In addition, ICICI further broadened its dialogue with the Government, with the objective of having a more direct input on policy formulation, and has subsequently undertaken specific studies to enhance this role. 38. During the period of the loans, the Bank initiated steps that have resulted in an evolution in the relationship that existed with ICICI prior to 1971. As a result of a more active involvement by the Bank with more concen- tration on the institutional impact of ICICI, a better dialogue has been established, which has resulted in an improved relationship in recent years. Starting with the developmental impact study, the Bank has paid closer atten- tion to institutional developments at ICICI, as a means of achieving a greater impact on the industrial sector as a whole. In particular, the Bank has focussed attention on the development and strengthening of ICICI's branch offices as as means of achieving enhanced regional promotion to address the bias towards Western India in ICICI's assistance. Also, the Bank has had considerable input on promotion activities in general and the form and focus of the studies ICICI has undertaken, with the objective of improving ICICI's direct impact on policy formulation. These initial steps have formed the basis for a closer dialogue with ICICI and the design of integral parts of subsequent loans to ICICI. ICICI - IDANS 789-IN AND 902-IN APPROVALS, COMMITMENTS AND DISBURSEMENTS (IN MILLIONS OF RUPEES) PROJECTED AND ACTUAL, 3971-1977 1971 1972 1973 1974 1975 1976 1977 PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL A. NET AVPROVALS Foreign Currency loans 240.0 264.1 260.0 430.8 330.0 441.7 360.0 514.5 375.0 353.1 410.0 414.8 440.0 260.6 Domestic CurIency loans 120.0 158.3 118.0 113.5 103.0 174.3 111.0 173.9 140.0 200.6 155.0 425.6 177.0 669.9 360.0 422.4 378.0 544.3 433.0 616.2 471.0 688.4 515.0 553.7 565.0 840.4 617.0 930.5 (.,urantees 2/ - (12.8) - 3.7 10.0 .1 10.0 - 10.0 30.8 10.0 59.3 10.0 - Iinderwriting 21 22.0 24.5 48.0 43.7 48.0 44.0 54.0 37.1 66.0 47.1 74.0 71.3 84.0 36.6 Inveslment 24.0 29.7 18.0 33.5 39.0 34.2 45.0 (2.9) 54.0 80.7 61.0 1.4 69.0 60.6 TOTAL 406.0 463.8 444.0 625.2 530.0 694.5 580.0 722.6 645.0 712.3 710.0 972.4 780.0 1027.7 1. NET COMMITMENTS Foielgn currency loans 271.5 299.2 285.0 272.1 360.0 551.6 360.0 376.6 390.0 349.1 415.0 502.8 440.0 352.8 Do1eStic cutrency loans 101.9 91.4 95.8 88.9 100.0 134.6 107.5 173.4 128.5 106.4 147.5 250.7 167.5 441.0 373.4 390.6 380.8 361.0 460.0 686.2 467.5 550.0 518.5 455.5 562.5 753.5 607.5 793.8 G.idranLees 2/ - - - - 10.0 1.5 10.0 6.3 10.0 - 10.0 89.8 10.0 - U1,erwriting 22.1 21.6 46.3 43.1 44.5 32.6 51.0 23.9 60.0 51.4 70.0 37.9 79.0 72.1 1nveuL.entL 2/ 20.8 8.9 14.3 15.7 38.5 25.0 44.5 4.8 53.5 39.4 60.5 24.0 68.5 30.5 TOTAl 416.3 421.1 441.4 419.8 553.0 745.3 573.0 585.0 642.0 546.3 703.0 905.2 765.0 897.2 C. DJSIitSEMENTS Foreign currency loans 211.2 271.0 242.1 351.9 346.2 359.2 369.0 369.2 408.5 371.0 427.0 377.1 456.0 427.1 Domestlc currency loans 86.3 83.1 94.4 75.8 113.0 106.1 103.0 157.7 123.5 134.2 140.0 219.3 162.5 347.6 297.5 354.1 336.5 427.7 459.2 465.3 472.0 526.9 532.0 505.2 567.0 596.4 618.5 774.7 (;uarantees - - - - - 2.0 - 0.1 - 0.1 - - - - Unde[Wr 2/ting2 12.0 8.9 26.2 18.2 17.5 14.4 19.5 21.0 23.5 24.2 27.0 25.9 30.5 25.0 invebtints - 21.5 9.0 15.0 15.1 37.5 22.3 44.5 8.3 53.0 16.3 60.0 42.1 68.0 33.9 TOTAL 331.0 372.0 377.7 461.0 514.2 504.0 536.0 556.3 608.5 545.8 654.0 664.4 717.0 833.6 I/ I'Pjected tigures are based on Bank's appraisal reports: 1971 to 1972 (Los 719-IN) and 1973 to 1977 (Loan 902-IN). 2/ Including investments underwriting in shares and debentures. - 60 - ANNEX 2 THE INDUSTRIAL CREDIT AYD TNVESTNENT CORPORATION OF INDIA ICICI'S CONTRIBUTION TO FIXED INVESTMENTS IN INDUSTRY, 1971-1977 (Rs. in billions) FY72 FY73 FY74 FY75 FY76 FY77 Gross fixed capital formation1/ 71.59 81.89 88.87 107.82 131.08 146.90 of which, Industry 17.79 21.45 20.71 19.17 22.82 22.49 Private 7.73 9.37 9.15 8.34 8.93 6.49 Public 10.26 12.08 11.56 10.83 13.89 16.00 by type of assets: Construction 43.49 49.83 53.18 63.76 80.07 90.98 Machinery/equipment 28.10 32.06 35.69 44.06 51.01 55.92 2/ ICICI Disbursements-V 0.30 0.40 0.44 0.45 0.61 0.67 IFI Disbursements-- 1.91 2.19 3.02 4.25 4.35 5.92 IFI Disbursements as % of: -total investment 2.7 2.7 3.4 3.9 3.3 4.0 -total industrial investment 10.7 10.2 14.6 22.2 19.1 26.3 -investments in machinery/ 16.8 6.8 8.5 9.7 8.5 10.6 equipment ICICI Disbursements as % of: - -IFI Disbursements 15.7 18.3 14.6 10.6 14.0 11.3 -total private industrial ivestment 3.9 4.3 4.8 5.4 7.7 10.3 -investments in machinery/ equipment 1.1 1.3 1.2 1.0 1.2 1.2 1/ Fiscal years ending March 31; at current prices in Economic Report 1978. Sources: Bank 2/ As ICICI's fiscal year ends December 31, ICICI disbursements were adjusted accordingly; Source - IDBI's Annual Reports/Operational Statistics. 3/ Industrial Financing Institutions (IDBI Annual Reports) ICIGI - LOANS 789-IN and 902-IN INCOME STATEMENTS, FOR YEARS ENDED DEC. 31, 1971-1977 (IN MILLIONS OF RUPEES) PROJECTED - AND ACTUAL 1971 1972 1973 1974 1975 1976 1977 PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED AGIIAL A. INCOME: Interest on loans, debentures 97.23 104.51 117.31 121.74 144.48 152.62 169.50 180.12 194.43 218.76 220.01 245.01 745.90 288.81 Dividend income 5.93 6.78 6.13 8.19 6.79 7.57 7.46 6.50 8.30 8.01 9.26 9.50 10.38 11.15 Capital gains 4.00 7.59 1.50 6.92 4.80 6.79 5.60 3.93 6.40 6.05 7.20 5.98 8.00 ).', Income on short term Investments and deposits 3.19 4.63 2.10 6.14 6.95 7.85 6.40 8.94 4.40 7.98 4.24 9.29 4.02 I . 7 Underwriting commission & brokerage 0.49 0.43 0.90 0.57 1.10 0.57 1.32 0.59 1.56 0.95 1.81 0.59 2.94 0.81 Guarantee commissions 0.38 0.38 0.35 0.35 0.37 0.31 0.44 0.33 0.49 0.32 0.52 0.85 0.5t 0.I Other Income 0.30 0.48 0.30 0.37 0.30 0.53 0.30 0.55 0.30 1.04 0.30 3.14 0.30 5.48 TOTAL INCOME: 111.52 122.86 128.58 144.28 164.79 176.24 191.02 200.96 215.88 243.11 243.34 274.36 2/1.20 326.2' B. EXPENSES: Interest on borrowings 72.83 73.85 85.23 89.41 111.22 115.34 131.31 136.4t 149.79 169.95 171.18 189.58 190.62 224.42 Salaries etc 4.10 3.88 4.70 4.64 5.20 5.56 6.00 6.34 6.90 9.09 7.90 9.23 9.000 11.02 Other administrative expenses 2.05 2.59 2.24 2.64 3.26 4.08 3.50 4.29 3.66 6.20 3.93 6.74 4.19 7.56 Provision for doubtful debts 1.27 1.42 1.27 1.44 2.56 - 2.56 - 2.56 1.54 2.56 0.82 2.56 5.60 Bad debts written off - - - 1.12 - 0.07 - 1.94 - 0.80 - - - - TOTAL EXPENSES: 80.25 81.74 93.43 99.25 122.24 125.05 143.37 149.03 162.92 187.58 185.58 200.37 206.37 248.60 Profits before taxes 31.27 41.12 35.15 45.03 42.56 51.19 47.65 51.93 52.96 55.53 57.77 67.Q9 64.88 77.65 Taxes 12.92 18.32 15.27 21.73 20.24 26.24 22.51 25.29 24.82 20.49 26.83 29.95 29.97 24.11 NET PROFIT: 18.35 22.80 19.88 23.30 22.31 24.95 25.15 26.64 28.14 35.04 30.94 38.04 34.85 53.54 C. APPROPRTATIONS: Dividends 7.81 7.81 10.00 10.00 10.63 10.21 12.50 12.50 13.75 16.50 15.00 18.00 15.00 18.75 Specific reservee - doubtful debts 3.00 3.00 3.00 3.00 3.00 3.00 3.00 7.00 Other reserved & inappropriated profits 7.54 6.88 8.69 9.65 11.39 12.94 16.85 22.67 TOTAL: 18.35 22.80 19.88 23.30 22.31 25.15 28.14 30.94 34.85 48.42 Dividend Payout Ratio (%) 42.6 34.2 50.3 42.9 47.7 40.9 49.7 46.9 48.9 47.1 48.5 47.3 43.0 35.0 Net Profit/Average Equity (%) 10.1 13.3 10.0 11.7 9.9 11.3 10.2 10.2 10.3 11.4 10.3 12.0 10.9 14.8 Interest Spread (W) 2.5 2.9 2.6 2.8 2.6 2.7 2.5 2.5 2.4 2.1 2.4 2.1 2.4 2.4 Administrative Expenses/Aver. Total Assets 0.4 0.4 0.4 0.4 0.4 0.5 0.4 0.5 0.4 0.6 0.4 0.5 0.4 0.5 Profit before tax & interest/averae total assets() 6.9 7.6 7.2 7.9 7.7 8.4 7.7 8.4 7.8 8.4 7.9 7.9 7.9 8.0 Dividends/Average Share Capital (.) 9.6 9.6 10.7 10.7 9.5 9.1 10.0 9.9 10.0 11.9 10.0 12.0 10.0) 11.1 1/ Projected figures for Annexes are based on Bank's Appraisal reports: 1971 to 1972 (Loan 789-IN) and 1973 to 1977 (Loan 902-IN). ICICI - LOANS 789-IN AND 902-IN CASH FLOW STATEMENT FOR YEARS ENDED DEC. 31, 1971-1977 (IN MILLIONS OF RUPEES) PROJECTED- AND ACTUAL 1971 1972 1973 1974 1975 1976 1977 PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL SOURCES: Profits before tax 31.2 38.4 35.1 45.0 42.5 51.2 47.6 51.9 52.9 58.4 57.7 68.0 64.8 50.5 Plus: non-cash charges 1.3 1.7 6.1 2.9 3.0 0.4 3.0 2.3 3.0 0.9 2.9 1.2 2.9 1.7 TNTERNAL GENERATION OF FUNDS 32.5 40.1 41.2 47.9 45.5 51.6 50.6 54.2 55.9 59.3 60.6 69.2 67.7 82.2 Collections: domestic currency 44.5 48.9 47.2 45.5 48.6 53.8 60.0 71.5 63.5 56.5 76.9 54.3 87.1 206.5 foreign currency 98.1 85.0 120.1 109.9 144.1 146.1 187.4 156.1 226.0 241.4 253.5 266.1 291.4 309.4 Portfolio sales: shares 8.0 5.3 10.0 13.7 12.0 11.7 14.0 6.7 16.0 6.4 18.0 6.0 20.0 5.4 debentures 5.0 4.4 5.0 5.9 5.0 3.3 5.0 1.1 5.0 4.3 5.0 5.5 5.0 2.0 188.1 188.7 223.5 222.9 255.2 266.5 317.0 289.6 366.4 367.9 414.0 401.1 471.2 523.3 Increase in share capital 12.5 12.5 12.5 12.5 25.0 25.0 - 1.8 25.0 23.1 - - - 37.5 Foreign currency borrowing 211.2 204.7 242.1 265.8 421.2 271.3 312.7 293.5 408.5 368.0 427.5 377.1 456.0 427.1 Domestic currency borrowing 18.0 18.0 100.0 89.7 80.0 109.0 130.0 110.6 120.0 240.1 150.0 300.1 230.0 330.1 Sale of temporary investments - - - 1.8 - - - - - 5.5 - - - - TOTAL SOURCES 429.8 423.4 578.1 592.7 781.4 671.8 759.7 695.5 919.9 1004.6 991.5 1078.3 1157.2 14G0.3 USES: Debt service: repayments: domestic currency 16.8 16.8 32.6 32.6 36.4 36.3 39.4 39.4 42.0 102.0 44.7 44.5 107.6 47.1 to foreign currency 89.5 76.4 116.4 100.2 217.1/1 131.8 121.6L1 163.4 209.8 227.5 228.7 254.9 264.7 298.8 on UK funds 4.5 6.1 18.0 8.4 20.0 3.9 20.0 20.9 20.0 30.5 20.0 19.9 20.0 21.1 110.8 99.3 167.0 147.2 273.5 172.0 181.0 223.7 271.8 360.0 293.4 319.3 392.3 367.0 Lending operations: domestic currency 86.3 87.6 94.4 73.3 113.0 114.1 103.0 161.0 123.5 147.3 140.0 238.0 162.5 480.1 foreign currency 211.2 204.7 242.1 265.8 346.2 271.0 369.0 293.5 408.5 371.1 427.0 377.1 456.0 427.1 Investments in: shares 19.3 17.3 15.5 18.3 27.5 23.8 33.0 19.1 40.0 32.8 45.5 31.9 52.0 37.6 debentures 14.2 2.9 25.7 11.1 27.5 16.4 31.0 10.3 36.5 2.2 4.5 21.5 46.5 23.7 Taxation 12.9 15.6 15.3 21.7 20.2 26.2 22.5 25.3 24.8 23.3 26.8 30.0 30.0 27.0 Dividends 7.8 ; 7.8 10.0 10.0 10.6 12.5 10.2 13.7 12.5 15.0 16.5 15.0 18.0 Increase in fixed assets 1.3 - 1.3 .8 1.5 2.0 1.5 1.0 - 3.1 - 3.3 - 2.7 temporary investments .6 5.1 1.9 - 1.2 .6 - 1.2 - - - - - - Change in net current assets (34.6) (16.4) 4.9 44.5 (39.8) 44.9 6.2 (49.8) 1.1 52.3 1.8 40.7 2.9 17.1 TOTAL USES 429.8 423.4 578.1 592.7 781.4 671.8 759.7 695.5 919.9 1004.6 991.5 1078.3 1157.2 1400.3 Debt Service Coverage L2 1.40 1.37 1.30 1.19 1.09 1.21 1.13 1.10 1.14 0.96 1.18 1.09 1.07 1.35 1/ Projected figures are based on Bank's appraisal reports: 1971 to 1972 (Loan 789-IN) and 1973 to 1977 (Loan 902-IN). 2/ DSC = net profit after taxes + interest + loan collection + sales from portfolio - capital gains/interest and loan repayment (902-IN Appraisal Report). ICici - LOANS 789-IN AND 902-IN BALANCE SHEETS STATEHENTS AS OF DEC. 31, 1971-1977 (IN MILLIONS OF RUPEES) PROJECTED - AND ACTUAL 1971 1972 1973 1974 1975 1976 1977 PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL CURRENT ASSETS Cash and Bank 36.7 28.1 34.7 45.0 151.1 146.6 52.7 84.3 47.9 140.8 43.5 156.3 39.9 129.0 Short term investments 11.3 15.8 13.2 14.0 16.7 14.6 16.7 15.8 16.7 10.3 16.7 10.3 16.7 10.3 Other assets, deposits and advances 74.0 106.5 84.0 106.1 190.0 119.4 149.0 147.8 165.7 160.5 182.5 237.1 200.1 272.3 122.0 150.4 131.9 215.1 257.8 280.6 218.4 247.9 230.3 311.6 242.7 403.7 256.7 411.6 PORTFOLIO ASSETS Shares 168.2 169.0 173.7 173.5 189.1 184.1 208.1 196.5 232.1 222.9 259.6 248.8 291.6 280.9 Debentures 140.8 125.1 161.5 130.3 152.8 143.3 178.8 152.5 210.3 150.3 246.8 166.4 288.3 188.1 Loans - domestic currency 286.5 283.4 333.7 311.3 375.7 371.6 418.7 461.1 478.7 550.0 541.8 732.6 617.2 1005.7 - foreign currency 854.3 842.3 976.3 998.6 1220.6 1134.1 1402.2 1270.5 1584.7 1785.8 1758.2 1957.8 1922.8 2120.5 TOTAL PORTFOLIO ASSETS 1449.8 1419.8 1654.2 1613.7 1938.2 1833.1 2207.8 2080.6 2505.8 2709.0 2806.4 3105.6 3119.9 3595.2 FIXED ASSETS: (net) 7.6 6.6 8.7 7.4 8.6 10.3 9.7 11.3 9.3 13.8 9.0 16.4 8.7 18.6 TOTAL 1579.4 1576.8 1785.8 1836.2 2204.6 2124.0 2435.9 2339.8 2745.4 3034.4 3058.1 3525.7 3385.3 4025.4 CURRENT LLABILIIES 53.3 57.7 62.3 79.9 99.0 100.6 1IZ.3 116.5 125.7 145.1 138.9 190.0 152.6 176.9 1 BORROWINGS Domestic currency 548.2 548.2 615.6 605.4 649.0 678.1 739.6 749.3 817.6 889.3 922.6 1149.8 1045.3 1435.5 Foreign currency 805.1 785.8 912.8 937.8 1216.8 1091.6 1331.6 1200.8 1510.3 1695.7 1688.6 1859.2 1859.9 2011.5 TOTAL LONG-TERM DEBT 1353.3 1334.0 1528.4 1543.2 1865.8 1769.7 2071.2 1950.1 2327.9 2585.0 2611.5 3009.0 2905.2 2447.0 EQUITY Share capital 87.5 87.5 100.0 100.0 125.0 125.0 125.0 126.8 150.0 150.0 150.0 150.0 150.0 187.5 Other reserves and unappropriated profits 85.3 97.6 95.1 113.1 114.8 128.7 127.4 146.4 141.8 154.3 157.7 116.7 177.5 214.0 TOTAL EQUITY 172.8 185.1 195.1 213.1 239.8 258.7 252.4 273.2 291.8 304.3 307.7 326.7 327.5 401.5 TOTAL 1579.4 1576.8 1785.8 1836.2 2204.6 2124.0 2435.9 2339.8 2745.4 3034.4 3058.1 3525.7 3385.3 4025.4 Guarantees Outstanding 48.5 47.8 61.6 46.3 67.4 41.2 73.3 34.1 82.0 92.8 89.9 80.0 Current Ratio 2.3 2.6 2.1 2.7 2.6 2.8 1.9 2.1 1.8 2.2 1.8 2.1 1.7 2. Long-term Debt/Equity 7.8 7.2 7.8 7.2 7.8 7.0 8.2 7.1 8.0 8.5 8.5 9.2 8.9 8 Debt/Equity (Bank Loan Agreement) 8.2 7.6 8.5 7.8 8.2 7.8 8.9 8.0 8.6 7.9 9.2 9.0 9.6 9 1/ Projected figures are based on Bankts appraisal reports: 1971 to 1972 (Loan 789-JN) and 1973 to 1977 (Loan 902-IN). The Industrial Credit and Investment Corporation of India Limited Classification of Arreare (Ra Million) /1 Principal in Arrears as Principal Outstanding as Z A) Age of No. o Companies Principal Outstanding Total Arrear- uttanng of Total Lbans Outstanding Arrears A B A B A A B B 0-13 monthe 18 33 38.99 105.81 5.10(11) 24.40(25) 0.23 0.63 2.42 4.17 3-12 months 17 56 24.48 199.00 2.80(6) 38.77(40) 0.13 0.89 1.52 7.85 12-24 months 7 21 9.28 96.32 4.93(1]) 18.42(19) 0.28 0.41 0.58 3. 80 Over 24 months 11 14 36.95 54.15 33.07(72) 16.55(16) 1.05 0.33 2.29 2.14 Total 53 124 109.70 455.28 45.90000) 98.14(100) 1.69 2.26 6.81 17.96 I ndutrial Breakdown Automobile Cycles 2 6 0.83 17.98 0.57(1) 2.93(3) 0.03 0.08 0.06 0.71 Chem. & Petro Chem. 6 11 20.82 55.27, 5.03(11) 15.99(16) 0.27 0.38 1.29 2.18 Electricah Equip. 4 27 6.62 80.76 1.59(3) 16.26(17) 0.07 0.42 0.41 3.18 Fertilizers 6 Pesticides 1 3 0.11 25.95 0.11(-) 3.43(3) 0.01 0.01 0.01 1.02 Food Products 1 2 2.27 5.74 0.46(1) 1.22(1) 0.01 0.05 0.14 0.23 Machinery Refg. 8 8 11.17 13.52 3.96 (9) 2.83(3) 0.14 0.06 0.69 0.53 Glass, Pottery etc 5 8 25.39 27.29 17.01(37) 5.98(6) 0.66 0.18 1.58 1.08 Ne1tals 6 Metal ProductB 9 28 24.64 87.64 13.94(30) 29.53(30) 0.35 0.63 1.53 3.40 Pulp and Paper 2 7 3.60 43.63 0.43(1) 5.78(6) 0.03 0.14 0.23 1.72 Rubber Products 2 3 1.80 24.17 0.42(1) 1.18(1) 0.03 0.05 0.11 0.95 Textiles 1 6 2.14 17.98 0.30(-) 2.92(3) 0.01 0.08 0.13 0.71 Wood, Cook & Board 1 1 2.48 2.54 - (-) 0.14(-) - 0.15 0.10 Printing & Publish. 2 4 1.52 2.52 0.09(-) 0.70(-) - 0.02 0.09 0.10 Miscellaneous 9 10 6.31 34.02 1.99(4) 6.91(71 0.08 0.18 0.39 1.35 Total 53 124 109.70 455.28 45.90(100) 98.14(100) 1.69 2.26 6.81 17.96 NOTE: A: Data as of June 30, 1972 B: " " " September 30, 1976 Figuresa in brackets are % to total. Figures may not add up due to rounding off. 1±: IncludesiiateOutstanndpoinasp% The Industrial Credit and Investmlcnt Corporation of India Limited Trends in Arrears 1970-1977 (Rs Million) No. of Principal Principal and Interest in Arrears-lPrincipal in Arrears as % Principal Outstanding as X Year Co-panL-s Outstanding Principal Interest Total of Total Loans Outstanding of Totnl Loans Outstanrdin-, 1970 46 121.70 24.80 15.10 39.90 2.50 12.40 1971 41 99.90 14.70 12.60 27.30 1.30 8.90 1972 48 107.86 23.02 13.35 36.37 1.75 8.19 1973 42 107.63 23.84' 17.04 40.88 1.58 7.14 1974 47 124.74 30.00 21.02 51.02 1.73 7.20 1975 77 256.27 35.35 24.68 60.04 1.51 10.97 1976 97 457.17 53.80 40.47 94.27 1.99 16.97 June 77 140 611.78 62.89 54.63 117.52 2.23 21.74 1.1 1.6 0.9% u 1/ While total arrears have doubled from Rs. 60 million to Rs. 118 million bEtween 1975 and June 1977, they are less than 2% of the total loans sanctioned by the corporation (net of cancellations). Total loans (FE & RL) approved by ICICT as of 1975 was Rs.5713.8 million and as of June 1977, Rs.7075.7 million. - 66 - ANNEX 8 Industrial Credit and Investment Corporation of India Limited Development ITDact Economic and Financial Rates of Return for Subprojectsa Period of No. of Range Weighted Weighted Analysis Subprojects ERR (%) b/ FRR c/ Ave. ERR(%) Ave RR (%) 8/73 to 39 80-50.1 11.2-24.1 20.3 14.0 6/74 1975 30 11.0-70.0 12.0-28.0 22.6 14.8 1/76 to 17 9.0-40.0 13.0-25.0 29.5 15.6 6/76 a/ Subprojects requiring economic rate of return calculations from August 1973 to June 1976. b/ ERR: Economic Rate of Return c/ ERR: Financial Rate of Return - 67 - ANNEX 9 SYNOPSIS OF 'A' PROJECTS Loan 789-IN A-1 Tata Iron and Steel Co. Ltd. (TISCO) IBRD authorized $4.3 million to complete a $8.4 million financing package partially financed under previous loans. Purpose of the loans were to undertake a balancing and modernization programme at TISCO. Later in- creases amounted to $208,000, of which $353,615.90 was subsequently cancelled. As a result of several successive modernization schemes, the gross fixed assets of the company increased by 12% between 1976 and 1978. The companies production of saleable steel reached its highest level of 1.601 million tonnes in 1977-78, and production of ingots increased from 1.908 million tonnes in 1976-77 to 1.968 million tonnes in 1977-78. The operating profit as percent- age of total income increased from 5.4% in 1976 to 6.5% in 1977, but declined substantially to 2.6% in 1978. This large decline was mainly due to uncompen- sated cost increases, as the price of steel is controlled by GOI. A-2 Bihar Alloy Steels Ltd. IBRD authorized, with reservations, $2.88 million to set up an alloy steel plant with foreign collaboration. Subsequently a sum of $72,046.56 was cancelled. The reservations were with respect to such areas as technical issues, timing, market, technical assistance, and costs. These questions were subsequently resolved. The project was completed with a cost overrun of 40% over initial estimates. The reasons for the increases were (a) under- estimation of building costs and (b) exchange rate fluctuations. The capa- city utilization of the company has improved from 25% to 80% over four years as against an appraisal estimate of 50% to 80% in three years. As a result of the capital cost overruns and slow build-up of capacity, the financial performance has been poor. The company has accumulated losses 1/ of Rs 95.5 million over 3 years (1975-77) as against an appraisal estimate of profits of Rs 20 million. The company is expected to break even in 1979 with operating profits of Rs 70 million. 1/ The domestic resource cost of the project at the time of appraisal was Rs 5.18 per US$ and ERP was -20%. A-3 Tata Engineering and Locomotive Co. IBRD authorized $1.75 million with no questions. The purpose of loan was to undertake a modernization and replacement scheme as a commercial vehicle operations at Jamshedpur. The operations of the company are good. In the three year period 1976-78, sales increased from Rs 2,700 million to Rs 2,811 million and operating profits increased from Rs 86 million to Rs 104 million. I/ After providing for depreciation. - 68 - ANNEX 9 page 2 A-4 Gujarat State Fertilizers Ltd. IBRD approved $700,000 as an additional amount to a previous loan of $4 million for the establishment of a Nylon-6 chips plant. Major questions on the economic viability of the project and on the market aspects were raised at the time of the original approval. However, no further questions were raised in approving the additional amount, which was subsequently cancelled. Loan 902-IN A-1 Goodyear India Ltd. IBRD had authorized previously $1.9 million under the ninth line of credit and then transferred it to the tenth line. The purpose of the loan was to set up facilities for the manufacture of industrial rubber products and balancing equipment in the tyre plant. As the company was not able to obtain an import license, it dropped the industrial rubber project. An amount of $1,452,649 was cancelled from the loan. A-2 Tata Engineering and Locomotive Co. IBRD authorized $1.5 million for the establishment of an alloy iron foundry. The Bank raised certain questions concerning the specifications of the equipment, pollution control, phases of the project and the market for castings. The foundry commenced operations in August 1975 as against the appraisal estimate of October 1975. The production of castings was 1,450 tonnes in 1975-76 and 3,400 tonnes in 1976-77 against the appraisal estimates of 1,000 and 4,000 tonnes respectively. The financial performance of the company has been good.
Группа Всемирного банка · Project Performance Assessment Report
India - Ninth and Tenth Industrial Credit and Investment Corporation Projects
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