India - Fifth Industrial Credit and Investment Corporation Project

RESTRICTED FILE COPY Report No. P-322 This report was prepared for use within the Bank and its affiliated organizations. They do..not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED May. 27, 1963  INTERNATIOTIAL BANIK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOI*T7`TDATIO:';S OF THE PRESIDENT TO THE ECEGUTIVE DIRECTOUS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND IVEVSTME\NT CORPOF?ATIOIT OF INDIA LDIITED 1. I submit herewzith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $30 million to the Industrial Credit and Investment Corporation of India Limited(ICICI). PART I - BACKGROUND 2. The proposed loan would be the Bankts fifth loan to ICICI and thirty- first to India. The status of previous loans as of April 30, 1963 is as follows: ($ Million) Total Loans, net of cancellation 1/ 817.4 of which has been repaid 124.7 Total now outstanding 692.7 Amount sold 75.7 of which has been repaid 53.9 21.8 \Tet amount held by Bank 670.9 1/ Including $,19.5 million not yet effective and $129.4 million not yet disbursed. The Association has now made 13 credits to India totaling $300 million, including $20 million not yet effective. As of April 30, 1963, $24.8 million had been disbursed.  - 2 - PART II - DESCRIPTIOM OF THE PROPOSED LOAN 3. The main features of the proposed loan are as follows: Borrower: ICICI Guarantor: India, acting by its President Amount: $30 million equivalent Interest, including commission: Variable - when a part of the loan is credited to the Loan Account, the rate of interest charged on that part will be the Bank's rate current at the time the credit is made. Commitment Charge: 3/4 of 1% per annum accruing from the time the Loan Account is credit- ed on the amount so credited. Term of Amortization: At the time the Loan Account is credited for each part of the Loan, the Bank and ICICI will agree on an amortization schedule for repayment of such part. Such amortization schedules will provide for semi- annual repayments on June 1 and December 1 and for final repayment not later than December 1, 1978. Purpose: To meet foreign exchange cost of projects to be financed by ICICI. PART III - APPRAISAL OF THE PROPOSED LOAN The Project b. A detailed appraisal of the project is attached (No. 1). 5. ICICI has become by far the largest development bank associated with the Bank. The Bank has made four loans to ICICI since its establishment in January 1955, in 1955, 1959, 1960 and 1962, totaling $60 rnillion. Its total resources of share capital, long-term borrowings, surpluses and reserves amounted to $122 million equivalent at the end of 1962. It has now approved assistance for two hundred projects, involving 183 firms for a total amount of $127 million. Of this sum, nearly half is accounted for by foreign exchange loans, a fourth by rupee loans and the balance by underwriting operations and direct equity investments. It is estimated that the proposed loan together with the balances available from existing loans will meet ICICI's foreign exchange requirements until the early part of 1965.  - 3 - 6. ICICI's management and operations continue to be satisfactory. ieserves have been strengthened and now amount to 32 per cent of paid-up share capital and to 6.5 per cent of total investment. Income has been growing at an average annual rate of about 30 per cent since 1959. The price of ICICI's shares has reflected this strength and recently reached par for the first time. 7. I believe that the Bank should now agree to allow ICICI freedom to request credits to the Loan Account of up to $2 million for any investment project without the Bank's prior approval. Since ICICIts present practice is to limit its foreign exchange investment in any company or group to about $2 million, only exceptional cases will be submitted to the Bank for prior approval. It is further proposed that no limit be set on the total amount of such credits which may be requested out of the Loan. ICICI would continue to send a full appraisal report and contract for each investment, thus keeping the Bank fully informed about the purposes for which funds are being used. 8. ICICI's financial position is sound and its prospects are good. It should be able to meet debt service payments on the proposed loan and other borrowings as well as to maintain satisfactory dividend payments and allo- cations to reserves. Its investment portfolio is sound and well diversified. The recent emergency increase in the profits tax will undoubtedly have some effect on the finances of ICICI's borrowers, but not to the extent of im- pairing their capacity to meet obligations to ICICI. 9. ICICI has requested that the permissible lirmit on its outstanding debt be increased up to four times its equity. The present agreed limit is three times equity and although the debt-equity ratio is at present under two to one, the ratio is expected to exceed the current limit by 1965 and reach nearly four to one in 1967. In my view, such an increase would not cause undue risk for the Bank lending to ICICI, and I propose to approve it. The Economy 10. An economic report (Sec.M63-75) was distributed to the Executive Directors on April 16, 1963. This report, among other matters, was dis- cussed at the meeting of the Indian Consortium held on April 30 and iiay 1. These discussions were preliminary to another meeting of the Consortium in June which will consider aid contributions with a view to meeting India's foreign exchange requirements in 1963/64, the third year of the Third Plan. The Consortium recognized the need for providing a larger proportion of aid as non-project assistance and on terms which will not impose too heavy a debt repayment burden. Service on present externally held public debt, now about Th4,000 million, will reach a peak at the beginning of the Fourth Plan, amrounting to almost one-fifth of the country's current account earnings at that time.  PART IV - LEGAL INSTRUNENTS AND LEGAL AUTHORITY 11. Attached are a draft Loan Agreement between the Bank and ICICI (No. 2), a draft Guarantee Agreement between India and the Bank (No. 3), and the report of the Committee provided in Article III, Section 4 (iii) of the Articles of Agreement (No. 4). The agreements follow substantially the same pattern as the Bank's fourth loan for ICICI and other recent loans for development banks. PART V - ODlMPLIANCE WITH ARTICLES OF AGREEAENT 12. I am satisfied that the Borrower and the Guarantor will be able to fulfill their respective obligations under the agreements and that the pro- posed loan complies with the requirements of the Articles of Agreement of the Bank. PA,RT VI - RECOIflIENDATIONS 13. T recommend that the Bank make a loan to the Industrial Credit and Investmen-t Corporation of India Limited, to be guaranteed by India, in an amou-t in various currencies ecquivalent to `P30 rrillion with final repayment not later than December 1, 1978 on such terms and conditions as are specified in t,-.e attached draft Loan Agreement and draft Guarantee Agreement and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). George D. Woods President Washington, D. C. May 27, 1963