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Centre plays rescue angel to IFCI again

New Delhi, Nov. 13: After the government decided in principle last month to cobble a bailout package for Industrial Finance Corporation of India (IFCI), it is stepping in again to get the ailing financial institution off the hook.

This time the government has decided to stand guarantee for the funds that IFCI needs to raise from domestic banks in order to repay foreign loans worth $ 100 million (about Rs 500 crore) that it had borrowed five years ago.

The foreign creditors have exercised their put option to recall the loans and IFCI is scrambling to raise the funds to avoid a potential default. The domestic lenders have told IFCI that they will not lend to the ailing institution unless there is a government guarantee. The government has been forced to step in since a default on a foreign borrowing by IFCI could hurt its sovereign credit ratings.

“The Cabinet will have to clear the proposal before the due date of November 29 failing which the default will affect the country's sovereign ratings,” sources said.

The government is keen to avoid the publicity that IFCI will generate in the event of a payment default, sources said.

The financial institution, whose future existence depends on the bailout package whose size has not been determined as yet, had raised the money in 1997 at around 7 per cent rate of interest from a syndicate of banks led by Bank of Tokyo Mitsubishi. The syndicate of lenders included nine Asian banks that stumped up $ 67 million, three European banks who put up $ 17 million and two Indian banks — State Bank of India ($ 13 million) and India Bank ($ 3 million).

IFCI officials say the need arose as the syndicate has decided to exercise the ‘put option clause after 5 years’ though the loan is for a seven-year period.

This is the third time the government has been forced to extend its guarantee to IFCI. On the first occasion, the institution had to settle payments of around Rs 500 crore for its floating rate notes (FRN) issue and the second was for the Rs 300-crore SLR bonds. This takes the total worth of guarantees extended till date to IFCI to Rs 1,300 crore.

IFCI has of late run into rough weather due to its high-cost borrowings, discontinuation of SLR bonds from the RBI and payment defaults by around seven to eight well-established corporate groups each to the tune of Rs 800-1200 crore.

The institution is looking at different ways of generating revenues and, as part of this exercise, has decided to lease the seventh and eighth floor of the institution’s headquarter building to consumer electronics major Samsung India.

Last month, finance secretary S Narayan had a meeting with the institution’s equityholders and lenders to decide on the nature and modalities of the bailout package.

The financial institution is straddled with a net deficit of Rs 884.7 crore for the year to March 31, 2002 and has reported a higher loss of Rs 222 crore in the first quarter of 2002-03 up from Rs 27.8 crore in the year-ago period. Its non-performing assets (NPAs) stood at a whopping 22.1 per cent worth Rs 3,897 crore.

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