RESTRICTED

PCR:IND 20166

I ThisReporthasbeenpreparedfor
ASIAN DEVELOPMENT BANK the exclusive use of the Bank.

PROJECT COMPLETION REPORT

OF THE

SMALL- AND MEDIUM-SCALE INDUSTRIES PROJECT

(Loan No. 855-IND)

IN

INDIA

December 1993
 CURRENCY EQUIVALENTS

Currency Unit - Rupee (Rs)

At Appraisal Date (October 1987)

Rs 1.00 $0.076
$1.00 = Rs13.106

Current (December 1993)

Rsl.00 = $0032
$1.00 = Rs 31 .37

ABBREVIATIONS

DFI Development Finance Institution

DSCR Debt-Service Coverage Ratio
IDBI Industrial Development Bank of India
MSI Medium-Scale Industry
OECF Overseas Economic Cooperation Fund
RBI Reserve Bank of India
ROE Return on Equity
SFC State Financial Corporation
SIDBI Small Industries Development Bank of India
SLR Statutory Liquidity Ratio
SMI Small- and Medium-Scale Industry
SSl Small-Scale Industry

NOTES

(I) The fiscal year of the Government of India and IDBI ends on 31 March.

(ii) In this Report, "$" refers to US dollars.

 PCR: IND 252

PROJECT COMPLETION REPORT

OF THE

SMALL- AND MEDIUM-SCALE INDUSTRIES PROJECT

(Loan No. 855-IND)

IN

INDIA

Note: A Project Completion Review MIssion comprIsing MarIo Fischel, Investment OffIcer (Mission
ChIef) and Yolanda Paniillo, SenIor Clerk (Project AdmInIstration) took place from 13 to 27
September 1993.
 TABLE OF CONTENTS

Page

BASIC DATA (ii)

I. BACKGROUND 1

A. The Bank Loan 1

B. History and Scope of Operations 1

C. Relationship with the Bank and Other Lenders 4

D. Rationale for the Bank Loan 4

IL IMPLEMENTATION 5

A. Lending Policies 5
B. Policy Environment 6

C. Characteristics of Subloans 7

D. Implementation and Operation of Subprojects 7
E. Operational and Financial Performance of Participating

Financial Institutions 8

F. Financial Statements and Ratios 11

G. Covenants 11

H. The Bank's Performance 11

Ill. EVALUATION 12

A. Loan Appraisal 12

B. Implementation 13

IV. CONCLUSIONS AND RECOMMENDATIONS 13

A. Conclusions 13

B. Recommendations 14

APPENDIXES 16
 (ii)

BASIC DATA

A. Loan Identification

1. Country India
2. Loan Number 855—IND
3. Loan Title Small— and Medium—Scale Industries Project
4. Borrower Industrial Development Bank of India (IDBI)
5. NameofDFl Industrial Development Bank of India
6. Amount of Loan $100.0 million from ordinary capital resources

B. Loan Data

1. Appraisal
- Date Started 06 July 1987
- Date Completed 24 July 1987

2. Loan Negotiations
- Date Started 14 September1987
- Date Completed 17 September 1987

3. Date of Board Approval 03 November 1 987

4. Date of Loan Agreement 16 December 1987

5. Date of Loan Effectiveness

- In Loan Agreement 15 March 1988
- Actual 24 February 1988
- Number of Extensions None

6. Closing Date for Commitments

- In Loan Agreement 24 February 1991
- Actual 24 February 1991
- Number of Extensions None

7. Closing Date for Disbursements

- In Loan Agreement 24 February 1992
- Actual 24 February 1993
- Number of Extensions Two

8, Terms to the Borrower

- Interest Rate Variable interest rate
- Maturity 15 years
- Grace Period 3 years
- Repayment Terms 15 years including 3 years grace
(fixed —type amortization)

9. Terms of Relending
- Interest Rate a) 10.0 per cent per annum for
(IDBI to State Financial small—scale industries (SSIs)
Corporation (SFCs) (9.0 per cent in backward areas)
b) 10.5 per cent per annum for
medium—scale industries (MSI5)
- Maturity 8-9 years
- Grace Period 1-2 years
- Free Limit H None
- Repayment Terms Maximum of 15 years, including
maximum grace period of 3 years


('ii)

10. Interest Rate for Subloans

- Original (SFCs to sub-borrowers) a) 13.5 per cent for SSIs
(12.5 per cent in backward areas)
b) 14.0 per cent for MSIs
- Latest Ceiling of 18 per cent

11. Disbursements
- amount disbursed $88,209,178.69
- amount cancelled $11,790,821.31

C. Implementation Data

Number of Subloans Made 1,332 (net of cancellations)

2. Sectoral Distribution of Subloans

Actual Loan Utilization
Actual
No. of Amount
Type of Industries Subloans ($ million) %

a) Food Products 132 7.7 8.7
b) Textiles 164 8.8 10.0
c) Wood and Wood Products 12 0.8 0.9
d) Paper & Paper Products 71 4.5 5.1
e) Leather Products 41 2.7 3.1
f) Rubber Products 43 2.2 2.5
g) Chemical Products 173 10.5 11.9
h) Fertilizers 7 0.2 0.2
I) Nonmetallic Products 31 1.8 2.0
j) Basic Metal industries 44 2.9 3.3
k) Metal Products 72 3.8 4.3
I) Machinery 37 2.1 2.4
m) Electrical/Electronic Equipment 136 9.4 10.7
n) Transport equipment 32 1.8 2.0
0) Construction 7 0.6 0.7
p) Electricity-Gen & Distn. 1 0.1 0.1
q) Services 49 4.3 4.9
r) Miscellaneous 280 24.0 27.2
Total 1,332 88.2 100.0

3. Size of Subloans
No. of Amount
Ran gJ Subloans ($ million)

a) Less than 30,000 320 4.8 5.5
b) 30,000 - 40,000 162 5.3 6.0
c) 40,000 - 50,000 149 6.1 7.0
d) 50,000 - 75,000 238 13.6 15.4
e) 75,000 - 100,000 149 11.5 13.1
f) 100,000 - 125000 120 10.2 11.5
g) 125,000 - 150000 71 8.0 9.0
h) 150,000 - 175000 38 5.3 6.0
i) 175,000 - 200,000 19 2.9 3.3
j) 200,000 - 300,000 39 7.6 8.7
k) 300,000 - 400,000 12 3.9 4.4
I) 400,000 - 500,000 1 0.4 0.5
m)Above 500,000 14 8.6 9.8
Total 1,332 88.2 100.0


(iv)

4. Other Breakdown of Subloans

No. of Amount
By Geographical Distribution Subloans (S million) %

a) Northern a! 37 2.6 3.0
b) North-Eastern bI 7 0.2 0.2
c) Eastern ci 85 4.4 5.0
d) Central di 301 18.2 20.6
e) Western e/ 272 14.7 16.7
f) Southern fi 630 48.0 54.5
Total 1 332 88.2 100.0

By Maturity

a) Upto3 years 1 0.1 0.1

b) Over 3 years to 5 years 37 3.0 3.4
c) Over 5 years to 7 years 322 24.8 28.1
d) Over 7 years to 10 years 951 59.1 67.0
e) Over 10 years to 12 years 21 1.3 1 .4
Total 1,332 100.0

By Purpose

a) New Companies 1,162 78.4 88,8

b) Expansion 170 9.8 11.2
Total 1,332 88.2 100.0

By Size of Project Cost

a) Less than As 1 million 4 0.2 0.2

b) As 1 million to As 5 million 830 47.0 53.3
27.3
c) As 5 million to As 10 million 407 24.1


d) As 10 million to Rs 20 million 58 8.8 9.9

e) Rs 20 million to Rs 30 million 24 4.0 4.6

f) As 30 million to Rs 40 million 5 2.8 3.2

g) Rs 40 million to As 50 million 4 1.4 1.6

Total 1 ,332 88.2 100.0

B y SFC

a) Karnataka State Financial Corporation (KSFC) 243 20.7 23.4
b) Andhra Pradesh State Financial Corp. (APSFC) 184 16.0 18.2

c) Uttar Pradesh Financial Corporation (UPFC) 261 15.6 17.7
d) Gujarat State Financial Corporation (GSFC) 241 13.2 14.9

e) Tamil Nadu Industrial Investment Corp. Ltd. 11.3 12.9
(TIIC) 203
f) Bihar State Financial Corporation (BSFC) 80 3.2 3.6

g) Madhya Pradesh Financial Corporation (MPFC) 40 2.6 3.0

h) Maharashtra State Financial Corporation (MSFC)
31 1.6 1 .8
I) West Bengal Financial Corporation (WBFC) 5 1.2 1.4

j) Haryana Financial Corporation (HFC) 17 1.1 1.2

k) Delhi Financial Corporation (DFC) 12 1.0 1.1

I) Aajasthan Financing Corporation (RFC) 8 0.5 0.6

m) Assam Financial Corporation (AFC) 7 0.2 0.2

Total 1,332 88.2 100.0

aJ Comprises stes of Haryana, Mimachal PraOesh. Jammu and Kashmir, Punjab, Rajasthan. union territories of
Chandigarh and Delhi.
bI Comprises states of Assam, M,anipur, Meghalaya, Nagaland. Tripura. Aranchal. Mizoram and Sikkim.
c/ Comprises states of Bihw, Orissa, West Bengal and unon territory of Andaman and Micoba, Islands.
d/ Comprises states of Madhya Pradesh and Uttar Pradesh.
e/ Comprises states of Guarat, Maharasha. Goa, union territory of Da&a and Hagar Havell and Daman and Diu.
ff Comprises states of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and union territories of L.akshackweep and Pondicherry.


(v)

Amount
0/
B y Country of Ori gin of Procurement (U S$'OOO) /0

a) Austria 130.5 0.5

b) Belgium 101.5 0.4
c) Canada 408.8 1.7
d) China, People's Republic of 7.2 0.0
e) Denmark 543.3 2.3
f) France 631.7 2.6
g) Hong Kong 1,169.7 4.9
h) Italy 7,104.6 29.7
i) Japan 1 ,973.9 6.2
j) Korea 643.1 2.7
k) Malaysia 265.5 1.1
I) Netherlands 324.7 1.4
m) Singapore 599.0 2.5
n) Switzerland 869.4 3.6
o) Taipei, China 201.5 0.8
p) United States 2,319.9 9.7
q) United Kingdom 1,423.0 5.9
r) Germany 5,224.9 21.8
23,942.2 100.0

D. Data on Bank Missions

No. of No. of Specialization
Name of Each Mission Date Persons Man-days of Members

1. Fact-Finding Mission 24 March - 9 April 198 3 51 Sr. Dev. Bank Specialist

Sr. Dev. Bank Specialist
SSI Specialist

2. Appraisal Mission 6-24 July 1987 5 81 Sr. Dev. Bank Specialist
Sr. Dev. Bank Specialist
Industrial Engineer
Senior Counsel
Sr. Programs Economis

3. Inception Mission 6-7 June 1988 1 2 Sr. Dev. Bank Specialist

4. Review-cum-Fact- 23 April - 8 May 1991 5 72 Sr. Dev. Bank Specialist
Finding Mission Investment Officer
(2nd Bank Loan to IDBI) Young Professional
Young Professional
Economist

5. PCR Mission 13-27 September 199 2 30 Investment Officer

Sr. Clerk(Project Acim.)

E. Related_Loans
Amount Approved
Loan No. Date of Agreement (S mn. equivalent)

To same DFI None

To other DFIs in same Country

ICICI I 778-IND 03 April 1986 100.0

IFCI 975-IND 24 October 1 989 150.0
ICICI II 1072-IND 18 December 1990 120.0
 I. BACKGROUND

A. The Bank Loan

1. In November 1987 the Bank approved a $100 milkon loan to the Industrial
Development Bank of India (IDBI) for onlending to private sector small- and medium-scale
industries (SMIs) through selected State Financial Corporations (SFCs). SFCs are state-level
institutions established under the State Financial Corporations Act, 1951 for financing and
promoting SMIs in their respective states. They are owned by the state governments (49 per
cent), IDBI (49 per cent), and various other financial institutions. The loan comprised two parts:
$50 million to finance equipment imports of medium-scale industries (MSls), and $50 million to
meet both foreign and local currency requirements of small-scale industries (SSIs) 1 . Bank
funding was to cover 65 per cent of the IDBI refinance of SFC subloans to SSIs, in order to limit
the amount of local cost financing involved. IDBI -- the main shareholder, source of refinance,
and supervisory agency for the SFCs -- was designated as the apex institution for administering
the Bank loan and monitoring SFC performance. The loan became effective in February 1988
and was closed in February 1993.

2. The loan had two main objectives: (i) to augment IDBI's resources for financing
the establishment, modernization, and expansion of SMIs; and (ii) to help improve the credit
delivery system through measures aimed at institutional strengthening of the SFCs. The loan
set performance targets to be met on a continuous basis by all participating SFCs, and assisted
IDBI in drawing up an action program aimed at improving their performance. The latter
comprised, inter alia, the establishment of annual collection ratios in consultation with IDBI,
institution of semiannual portfolio reviews for early identification o' problem accounts, setting up
of a Default Review Committee to improve recovery performance, periodic review of key financial
indicators, and improvement of training facilities. The performance targets for entry qualification
were a minimum return on equity (ROE) of 5 per cent, a minimum debt-service coverage ratio
(DSCR) of 1 .05, and a maximum arrears ratio of 30 per cent. Stricter targets were set for
subsequent years. Based on these targets, 8 out of 18 SFCs were initially selected to participate
in the loan. Five SFCs were subsequently added, while 3 were disqualified due to failure to meet
the targets.

3. The Bank fielded a Project Completion Review (PCR) Mission from13 to 27

September 1993. The Mission held discussions with IDBI and the newly established Small
Industries Development Bank of India (SIDBI), and visited SFCs in five states (Karnataka, Andhra
Pradesh, Uttar Pradesh, Maharashtra, and the Union Territory of Delhi), accounting for over 60
per cent of loan utilization. The Mission also visited a small number of assisted units.

B. History and Scope of Operations

4. IDBI was established in 1964 as the apex institution for industrial term finance in
India. Its principal tasks are to promote and finance industrial development, and to support and
coordinate the activities of other institutions engaged in this field. IDBI was set up under its own

Currently, SSIs are defined as enterprises with total investment in plant and machinery
of up to Rs 6 million (Rs 7.5 million in case of export-oriented units or ancillaries). While
there is no statutory definition of MSls, the latter usually have fixed assets of less than Rs
50 million, and net worth of less than Rs 30 million.
Act, and is wholly Government-owned following transfer of ownership from the Reserve Bank of
India (RBI) in 1976. IDBI's principal activity is the extension of term loans for large-scale
industrial projects. As part of project finance, 1DB! also provides loan guarantees and
underwriting services and directly subscribes to debt and equity securities. In addition to direct
assistance to industrial concerns, IDBI engages in bills finance, and provides resource support
to other financial institutions, such as leasing companies or SFCs. IDBI's refinance operations
with regard to SFCs were, however, spun off to SIDBI, a wholly-owned subsidiary, in 1990.

5. In response to emerging opportunities in the wake of financial sector deregulation,

and to new constraints on the availability and cost of funds, IDBI is diversifying its operations and
broadening the range of activities. In the past, IDBI relied primarily on low-cost, Government-
directed sources of funds for its financing requirements. This included notably long-term loans
from the National Industrial Credit fund of RBI, and Government-guaranteed statutory liquidity
ratio (SLR) bonds held by commercial banks for reserve purposes. The availability of RBI and
similar public sector loans is, however, declining in line with budgetary constraints and changes
in Government priorities; and the average SLIR is due to decline from 38.5 per cent to 25 per
cent under the Bank-supported Financial Sector Program 1 , while access of all development
finance institutions (DFIs) to such bonds is to be gradually phased out. In view of the drastic
decline in traditional sources of finance, 1DB! had to resort to large-scale commercial borrowings
over the last two years. It has successfully floated two public bond issues in FYi 993, raised
substantial amounts of certificates of deposit, and borrowed from institutional investors such as
insurance companies and mutual funds. While IDBI has, thus, been able to tap alternative
sources of funds in order to maintain its growth momentum, the increased reliance on
commercial borrowings has significant implications for its operational strategy, notably the need
to maintain a sound portfolio quality and strong capital and liquidity ratios, and the need to earn
adequate returns on its loans and investments in order to service the higher cost resources.

6. In parallel to changes on the resource mobilization front, IDBI faces increased

competitive pressures in its lending operations, as a result of the ongoing financial sector reform.
Competition in particular now emanates from (i) other DFls, as the earlier consortium lending
arrangement is gradually replaced by a system of voluntary, market-based loan syndications; (ii)
nonbank finance companies, such as leasing and venture capital firms; (iii) the capital market,
which has expanded tremendously over the last few years and represents an attractive source
of debt and equity finance for the more established companies; and (iv) commercial banks,
which increasingly engage in term lending in addition to their traditional role as providers of
short-term working capital finance. With further declines in the SLR, and the planned
recapitalization and partial privatization of commercial banks, banks are likely to emerge in the
long run as formidable competitors for DF!s in the area of industrial finance. In response to
these challenges, 1DB! is diversifying its product mix by reducing the proportion of project-related
term lending and focusing on other activities such as (i) short and medium-term finance, e.g.,
leasing or bridge loans against capital issues, which allow it to improve the asset-liabilities match
and to broaden the range of services offered; (ii) design of complete, specifically tailored
financing packages for prime customers, including term loans, underwriting, asset credit, etc.;
and (iii) non-fund, fee-based activities, such as merchant banking, foreign exchange services,
and debenture trusteeship. IDBI also continues to play a key promotional role with regard to the

As of November 1993, the SLR has been reduced to 34.75 per cent.
 3

overall financial system, by helping establish new kinds of financial intermediaries and services
such as credit rating, share registrars and transfer agents, and an automated national securities
exchange.

7. India's 18 SFCs were established under the SFCs Act, 1951 1 to help fill an
important gap in the financing structure by providing term finance to SSI enterprises. SFCs are
jointly owned by the respective state governments (49 per cent) and lDBl (49 per cent), with the
balance 2 per cent held by miscellaneous financial institutions. The primary function of SFCs
is to extend term loans for SSI projects in their states. They can also provide guarantees for
deferred payments to machinery suppliers, and working capital finance. In line with their
developmental mission, SFCs undertake a variety of promotional activities, such as providing
seed capital to new entrepreneurs or new technologies, organizing entrepreneurship
development programs, conducting market surveys to identify attractive investment opportunities,
and participating in trade fairs and exhibitions. SFCs also operate a number of social schemes,
e.g., in favor of women entrepreneurs. Several SFCs have recently attempted to diversify into
new areas such as leasing, merchant banking and factoring. The SFCs Act, 1951, however,
tightly circumscribes the range of activities to be undertaken by SFCs, and amendments to the
Act are currently under consideration to, inter alia, permit greater diversification.

8. SFCs currently face a significant challenge to their operations, as declining access

to traditional sources of finance, notably automatic refinance by IDBI and SIDBI and allocations
of SLR bonds, coupled with poor loan recovery pertormance, have led to a severe resource
shortfall. Unlike IDBI, most SFCs are unable to compensate for the decline in traditional sources
of funds through commercial borrowings because of their poor portfolio quality and financial
condition. Several SFCs had to curtail sanctions and disbursements, and a number are unable
to meet their debt repayment obligations towards 1DB!. More fundamentally, the justification and
role of the SFCs in the emerging competitive financial sector environment needs to be carefully
reassessed, especially vis-a-vis banks who have access to a wide retail deposit base and
increasingly engage in term lending as a result of (i) the relaxation of restrictions on such
lending, (ii) the increasing share of term deposits in their resource mix, and (iii) the flattening of
the yield curve. The comparative advantage of the SFCs, i.e., their project finance and appraisal
skills (vis-a-vis banks), and their extensive local networks (vis-a-vis all-India DFls), needs to be
sharpened and translated into viable long-term business plans. In addition to the scope and
modalities of operations, the latter needs to define an appropriate resource mix, organizational
structure and ownership pattern for the SFCs.

9. SIDBI was established in March 1990 as a wholly-owned subsidiary of 1DB! to

serve as the apex agency for financing and promoting SSIs. The objective was to focus attention
and efforts on the specific needs of the SSI sector, and to devise programs and schemes
specifically suited to their requirements. 1DB! transferred its entire SSI loan portfolio to SIDBI,
and SIDBI took over IDBI's refinance operations for SSI loans. 1DB!, however, retains the
shareholding and Board representation in SFCs, as well as general regulatory oversight, resulting
in some duplication of authority. SIDBI's overall performance during its first three years of
operation has been satisfactory. Total loan and investment approvals reached Rs 36 billion in

Except for the Tamil Nadu Industrial Investment Corp. Ltd., which was set up in 1949
under the Indian Companies Act.
 4

FY1993, comprising about Rs 20 billion refinance, Rs 9 billion bills discounting and

rediscounting, and Rs 7 billion term loans to other financial institutions and direct loans and
equity support to industrial undertakings. SFCs account for 60 per cent of refinance, banks for
33 per cent, and SIDCs for 7 per cent. SIDBI also continually strives to enhance the institutional
network of support services available to the SSI sector, e.g., by promoting and supporting
factoring companies, SSI marketing organizations, infrastructure development, etc. SIDBI's
financial position is sound, with a return on equity of 16.7 per cent in FYi 993, and a debt/equity
ratio of 9.8, It is, however, facing similar challenges as other DFIs with regard to the availability
and cost of funds, and has devoted considerable efforts to mobilizing alternative sources of
funds over the last two years. SIDBI has floated certificates of deposit and unsecured bonds,
and borrowed from bilateral aid agencies such as the Overseas Economic Cooperation Fund
(OECF) of Japan. It also recently benefited from a Government decision requesting that foreign
banks who failed to meet priority sector lending targets deposit the shortfall amount with SIDBI.
SIDBI will, however, remain dependent on IDBI and/or Government support in future, as its main
refinance lending rates, which allow a 3 per cent spread to the on-lending state level institutions
and banks, are insufficient to cover the cost of servicing purely commercial sources of funds.
SIDBI is also vulnerable to the weak financial condition of SFCs, which constitute a major
proportion of its portfolio, though it is attempting to increase the share of banks in refinance, and
to expand direct industrial financing.

C. Relationship with the Bank and Other Lenders

10. IDBI has received only one Bank loan, but has carried out a large number of
World Bank and bilateral projects, for a variety of purposes. The performance of IDBI under
these various projects was generally satisfactory. lDBl also engaged in substantial commercial
borrowings from the international financial markets before India's credit rating was downgraded.
SIDBI has received substantial assistance from OECF for onlending to SFCs and SSIs. As of 31
March 1993, outstanding borrowings from OECF amounted to Rs 7.6 billion. A comprehensive
impact study was carried out in 1992 to assess the utilization of a Rs 3.35 billion OECF credit
line targeted at SSIs. Its findings were generally positive, with 91 .5 per cent of assisted units
commissioned and operational, and significant socioeconomic benefits, including the creation
of 250,000 jobs and Rs 3.2 billion incremental exports. The World Bank had provided two loans
for a total of $65 million to SFCs prior to the Bank's loan. The results of these loans were mixed,
and the difficulties encountered in their implementation were taken into account when formulating
the Bank's SMI Project, notably by devising the action program and setting strict participation
criteria for SFCs.

D. Rationale for the Bank Loan

11. The project was to assist the growth of the SMI sector, which was considered
critical to the Bank's operational strategy in India in view of its focus on industrialization, the
importance of the SMI sector in the industrial structure of the country, and its potential for
employment generation, export development, dispersal of industry to backward areas, and
strengthening of linkages with the agriculture sector. Therefore, the primary objective of the loan
was to augment the resources available for financing the establishment, modernization and
expansion of SMI enterprises. Typically, the availability of term finance for SMIs is limited in
developing as well as many industrialized countries, and special government-directed lending
programs targeted at SMls are created. While market-oriented allocation of financial resources
is generally considered preferable, opinion is divided as to whether such schemes can be
justified by the socioeconomic benefits of SMI investments and the gap in the financing structure.
However, it is clear that any specific lending allocations or targets for SMls must be kept small
and flexible in order to avoid undue pressure on financial institutions to meet ambitious targets,
and thus support poor quality projects 1 . In addition to fostering SMI investment, the Project
aimed at strengthening the capabilities and performance of the SFCs, both by creating incentives
to meet the performance targets set for their participation in the loan, and by drawing up action
programs designed to address their organizational shortcomings. The main risks identified at
appraisal were the generally higher credit risk of SMI projects, and the risk of slow loan utilization
in case not enough SFCs met the participation criteria. The risk of subproject failure, however,
was considered minimal because loan utilization was restricted to the sounder and better
managed SFCs.

II. IMPLEMENTATION

A. Lending Policies

12. While maintaining its traditional focus on project finance, lDBl is broadening its
range of activities as a result of both emerging opportunities (such as the growth in capital
market activities), and increased competitive pressures (e.g., from banks, leasing companies and
the capital market). IDBI places increasing emphasis on fee income and capital gains in its
operational strategy, as lending margins are eroded by the growing proportion of commercial
borrowings in total resource mix. The spread on IDBI's basic term lending operations remains
positive only because of the predominance of previous low-interest RBI loans and SLR bonds
in its liabilities. As a result, short-term and medium-term finance, nonproject lending, and
nonfunded activities assume increasing importance, and are expected to make a growing
contribution to profits in future. Concurrently, there is a relative decline in indirect finance
activities, as other financial institutions gradually become self-sufficient, and SSI refinance spun
off to SIDBI.

13. The scope of operations of SFCs, lending criteria, and terms and conditions of
assistance are defined by the SFCs Act, 1951, and are further determined by guidelines issued
periodically by lDBl and the Central Government and state governments. Some latitude is
provided to adapt to local circumstances, e.g., by allowing individual SFCs to set stricter project
financing norms than the minimum standards prescribed by IDBI. Many SFCs have adopted a
somewhat less developmental and more commercially oriented lending approach over the last
few years by (I) insisting on stricter project financing norms (i.e., lower debt/equity ratio, higher
promoters' contribution); (ii) focusing on established companies and/or promoters with proven
track records; (iii) conducting detailed market surveys to assess the demand-supply balance in
various subsectors and regions prior to sanctioning assistance; (iv) enhancing loan
security/collateral requirements; and (v) generally according precedence to subloan supervision
and recovery over sanction and disbursement targets. Also, SFC managements increasingly
delegate authority to local branch offices in order to enhance responsiveness and accountability.

In this perspective, current priority sector lending targets in India affecting 40 per cent of
outstanding bank credit, appear clearly excessive.
 6

The average time taken for project appraisal is presently 2-3 months. The appraisal process
comprises a relatively thorough assessment of the technical, commercial, and economic viability
of a project, with technical as well as financial staff included in the project team. Sanctioning
authority depends on the size of the loan, as does review of project viability by the refinancing
agency. Despite the satisfactory organizational setup, SFCs remain vulnerable to political
pressure to increase disbursements and/or favor specific borrowers. Also, despite continuous
training efforts, the capacity to appraise projects in certain areas such as new technologies or
exports remains somewhat limited.

B. Policy Environment

14. The policy environment for SSI finance has undergone a number of significant
changes since appraisal. In addition to the general market-oriented reforms introduced in India,
SSI interest rates have been substantially liberalized, with only an 18 per cent per annum ceiling
(about 18.5 per cent including interest tax) now applicable to loans above Rs 200,000.
Previously, interest rates charged on SSI loans were limited to 13.5 per cent, and those on MSI
loans to 14 per cent. Concurrently, subsidized rates for backward areas (previously 12.5 per
cent), and for modernization-rehabilitation investments (previously 1 1 .5 per cent), have been
abolished. The new interest rate regime represents a substantial improvement over the past,
with the current 18 per cent ceiling on loans above Rs 200,000 deemed adequate to allow the
charging of market-related rates that reflect the costs and risks associated with SMI lending.
However, the spread allowed to SFCs by IDBI and SIDBI in their refinance operations has been
reduced from 3.5 per cent at the time of appraisal, to 3 per cent. While this remains in
conformity with the Bank-required minimum of 3 per cent for SSI and 2 per cent for MSI loans,
it appears insufficient to ensure viability with average SFC collection ratios in the range of 50-70
per cent (in terms of current demand).

15. A number of other key issues relating to the policy environment remain to be
addressed, notably: (I) the ownership and management of SFCs, which remain subject to strong
government control; (ii) the priority sector lending targets, which require commercial banks to
allocate 40 per cent of credit to priority sectors (including SSls and agriculture); and (iii) the
continued product reservation policy, which artificially restricts production of 836 items to SSI
units. However, some progress in the policy framework is noted in line with overall economic
reform. Relaxation of the SSI reservation policy is currently under consideration, including both
a pruning of the reserved items list and a removal of restrictions on large companies provided
50 per cent of production is earmarked for export. As regards SSI finance, the availability of
choice and competition have increased with the easing of restrictions on term lending by
commercial banks, more liberal regulations affecting the operations of leasing and venture capital
companies, and the establishment of the Over-the-Counter Exchange of India. Also, some SFCs,
as well as State Industrial Development Corporations 1 , are now giving serious consideration to
including significant private sector participation in their shareholding. However, such plans are
still at an early stage, and serious obstacles remain to be overcome, including the 25 per cent

State Industrial Development Corporations are owned by state governments and provide
equity as well as debt finance for industrial projects, usually in joint venture with private
sector partners. They also undertake promotional activities such as establishment of
industrial estates.
 ':4

limitation on private ownership imposed by the SFCs Act, and the poor financial condition and
profitability of many SFCs.

C. Characteristics of Subloans

16. Utilization of the Bank loan and performance of the subprojects financed are
considered relatively satisfactory overall. A total of $88.2 million was disbursed for 1,332
subprojects, against about 1,000 expected at appraisal. While the SSI portion was fully utilized
within two years of loan effectiveness, the MSI allocation remained partly unutilized. MSI
subloans originally carried a slightly higher interest rate (14 per cent per annum) than SSI
subloans (mostly 12.5 and 13.5 per cent). In 1991, IDBI requested the Bank to reallocate the
unused MSI balance to SSI subloans, In view of Bank concerns about subsidized interest rates,
the Bank authorized such reallocation only under the condition that SSI subloans carry a
minimum rate of 14 per cent. While SSI lending rates subsequently rose to 18 per cent, the 14
per cent minimum hindered full utilization of the Bank loan. Repeated rupee devaluations also
contributed to the shortfall in loan utilization, as sanctions in local currency terms became
insufficient to cover the increased cost of imported equipment, leading to some cancellations.
Overall, SSls accounted for $73.9 million or 84 per cent of total disbursements, and MSIs for the
remaining $14.3 million or 16 per cent. Local cost financing represents an estimated 85 per cent
of SSI loans, and hence about 70 per cent of the entire loan amount.

17. Key characteristics of assisted subprojects are summarized in the Basic Data. As
originally expected, subprojects cover a wide sectoral and geographical spread, though over 80
per cent are accounted for by five states (Karnataka, Andhra Pradesh, Uttar Pradesh, Gujarat,
and Tamil Nadu), as a result of the selectivity in choice of participating SFCs and the relative
dynamism of the SFCs in those states. About 80 per cent of subprojects are in the Rs 1-10
million project cost range. A majority of Bank subloans were between $50,000 and $150,000.
On average, the Bank financed an estimated 25 per cent of total subproject cost. Most SFC
subloans carried a 13.5 or 14 per cent interest rate, and had a maturity of 7-8 years and a grace
period of 1-2 years. New projects accounted for close to 90 per cent of both number of
subprojects and disbursements, probably reflecting the special low interest rates available for
modernization investments and the effect of the product reservation policy, which makes
establishment of new units often more attractive than expansion of existing ones. Procurement
was carried out in accordance with Bank guidelines (see also Basic Data).

D. Implementation and Operation of Subprojects

18. Detailed data on implementation status, operational and financial performance,

and economic impact of the subprojects financed are not systematically available. While this can
to some extent be attributed to the small-scale and dispersed nature of the subprojects, it also
points to deficiencies in the management information systems of SFCs. Estimates were derived
from data collected from the five SFCs visited, findings of a 1991 Review Mission that covered
a sample of 272 subprojects, and results of an OECF impact study for a line of credit targeted
at SSI enterprises with similar characteristics (see para. 9 and Appendix 1). Performance data
are subject to interpretation to a certain extent, because of varying policies on grace periods and
contingency factors. Some SFCs tend to limit allowances for both in order to maintain pressure
on borrowers to contain costs and accelerate repayments. This may result in a somewhat
exaggerated incidence of cost overruns and debt deferments and rescheduiings. Also, a
 8

definitive picture of operational performance will only emerge after another 1-2 years, when all
teething problems have been overcome and loan principal is being repaid.

19. A review of the data available suggests that approximately 80 per cent of
subprojects are performing relatively satisfactorily, while around 20 per cent were failures. The
failures comprise subprojects that are either not operational or are experiencing serious
difficulties, including inability to service Bank subloans from the SFCs. Among the 80 per cent
of subprojects that are considered broadly successful, some three-quarters (60 per cent of total)
are deemed fully satisfactory, i.e., have been implemented and are operating in line with original
expectations. A small number are still under implementation, but are proceeding according to
schedule. The remaining one-quarter of subprojects (20 per cent of total) have faced some
difficulties, such as implementation delays of up to 12 months, cost overruns of up to 50 per
cent, technical start-up problems or slow market build-up. This category also includes some
subprojects that had to request rescheduling of their SFC loans. However, most have been
properly implemented and are likely to remain viable in the long run.

20. Implementation delays occur relatively frequently, for a variety of reasons

including: (i) nontimely availability of finance, particularly promoters' contribution; (ii) late arrival
of imported equipment, caused, for instance, by slow customs clearance; (iii) delays in utilities
connections, notably electricity; and (iv) delay in obtaining various governmental approvals,
notably state pollution control board clearances. Similarly, the incidence of cost overruns is
relatively high, linked mainly to implementation delays. Cost overruns were also due to the
repeated currency devaluations during the loan implementation period. Operations of
implemented units are affected by lack of working capital in some cases, despite RBI directives
aimed at coordinating working capital lending by commercial banks with term finance from DFIs,
and special SIDBI schemes such as bills discounting, promotion of factoring, and the single
window scheme (whereby long-term and working capital finance are provided through the same
institution). Also, capacity utilization is often relatively low, with nearly half of all units surveyed
by the OECF study operating at less than 75 per cent of their capacity. This can partly be
attributed to the recessionary conditions in a number of industries over the last two years, and
the increased competitive pressures as a result of liberalization.

21. At appraisal, the loan was expected to benefit about 1,000 SMIs, generate a
minimum of 20,000 new jobs and result in additional investment of $240 million. It was also
expected to promote new entrepreneurs and help disperse industry to less developed areas.
These expectations were largely fulfilled and, in some respects, exceeded. The actual number
of subprojects financed is 1,332, and the total volume of investment catalyzed is about $350
million. About 15 per cent of subprojects are located in backward areas. While no firm data
are available, employment generation is likely to be above original estimates. Using an average
investment cost of Rs 77,000 per job as in the OECF study (which is far above the Rs 19,000
average estimated for the whole SSI sector), the number of jobs created would be about 80,000.

E. Qperational and Financial Performance of Participating Financial Institutions

22. Despite increased competitive pressures in resource mobilization and deployment

(see paras. 4-7), lDBl's operational and financial performance continue to be satisfactory.
Financial statements for the last five years are shown in Appendix 2, and key financial indicators
are presented in Table 1. IDBI's total sanctions reached Rs 95 billion in FYi 993, equivalent to
 9

an average annual compound growth rate of 12.5 per cent since FY1987, close to the 14 per
cent as originally expected. Thus, by stepping up commercial borrowings, IDBI has successfully
maintained growth momentum despite the drastically curtailed access to Government-guaranteed
loans, IDBI's financial condition remains sound. As of 31 March 1993, the debt! equity ratio was
9.8 against a projected 9.6 at appraisal, and return on average equity was 18.9 per cent
(projected 11 .9 per cent). IDBI's portfolio quality is also satisfactory, with 92.5 per cent of assets
considered standard as per the new RB! classification guidelines, 3.1 per cent substandard, 4.3
per cent doubtful, and only 0.1 per cent loss assets. The overall collection ratio is over 90 per
cent, and over 85 per cent if refinance is excluded. However, IDBI's lending margins are under
pressure with the higher proportion of commercial borrowings in its resource mix, and it is likely
to depend increasingly on fee income and capital gains to maintain profitability.

Table 1: IDBI - Ke y Financial Indicators

(Rs million)

Actual Peedb
Fiscaj Yaar a.1 19.86/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1991/92

Approvals 46.619 54.737 46,733 81.501 68,274 75.900 94,594 89450

Total Assets 109,985 131,831 158,551 193.522 224,349 277,077 305,327 235,937
Loans, Investments and Discount Portblio 100,159 103,316 118.825 140,682 169.711 200.537 216,654 228241
Net Income after Tax 1,439 1,800 1,620 2,610 3,517 4,741 4,869 2,119
Equity 9,784 11.530 13,294 16.381 20.831 25,069 28,720 19,745
Long-Term Debt 90,962 107,950 127,308 154,998 182,216 215,243 238.365 189,756

Ratios:

DebtfEquity Ratio io.s 10.5 10.5 10.4 9.5 10.0 9.8 9.6
Debt-Service Coverage (times) 2.7 2.5 2.7 2.0 1.5 1.8 1.5 2.7
Return on Average Equity 17.0 18.3 18.7 18.9 19.0 18.9 18.9 11.9
Administrati'e Expenses/Average Total Assets 0.2 0.2 02 0.2 0.2 0.2 0.2 0.3
Current Ratio 2.9 2.6 2.4 2.6 2.5 2.1 2.3 1 .6

aJ Years ending 30 June until 1987/88 and 31 March thereafter. Nine months data for 1988/89.
b/ At Appraisal.

23. In contrast with IDBI, the performance and financial condition of most SFCs are
not satisfactory. While there are considerable differences between SFCs, reflecting differing
organizational capabilities as well as different industrial climates in their respective states, the
overall portfolio quality and loan recovery record of the SFCs is inadequate. Consequently,
many SFCs suffer from an acute shortage of funds, as they are unable to compensate for the
declining access to traditional sources of funds through commercial borrowings. This affects not
only the growth in their traditional lending operations, but also their ability to undertake new lines
of business susceptible to boost profitability.
 10

24. As per recommendations of a Government committee, SFC funding requirements

should be met by the following resource mix:

SIDBI/IDBI Refinance 55 per cent

SLR Bonds 25 per cent
Fresh Equity 10 per cent
Internal Resources (net profit after tax and 10 per cent
dividends + loan recoveries less repayments

Total 100 per cent

However, the availability of all four of these funding sources is affected by varying and mutually
reinforcing difficulties. SLR bond allocations have become insufficient as a result of competing
claims for a dwindling pool of such resources; fresh equity support by IDBI has not been
forthcoming over the last two years (nor has SIDBI taken up shares in SFCs); loan recoveries
are mostly inadequate to meet internal resource generation targets; and increasing pressure is
applied by IDBI and SIDBI to reduce the amount of refinance, as these institutions' access to
cheap, long-term sources of funds is curtailed. While all-India DFls can raise commercial funds,
SFCs would first have to be restructured and recapitalized, given their poor portfolio quality and
financial condition. A number of SFCs have sought credit ratings, which are mandatory to gain
access to public savings, but only Karnataka State Financial Corporation has so far been able
to secure an investment-grade rating. IDBI has recently issued guidelines for the classification
of SFC assets, provisioning, and capital adequacy norms. Though phased implementation over
a four-year period was recommended, compliance with even this extended timetable appears
to pose difficulties for many SFCs. A high-level meeting was recently conducted in Delhi under
the auspices of the Ministry of Finance to review the provisioning guidelines and formulate action
plans for restructuring the weaker SFCs. Discussions with regard to future Government policies
for the SFC sector are ongoing.

25. Many SFCs suffer from significant organizational and managerial weaknesses,
mainly because the state government controls their Boards and key managerial appointments,
the managing directors have short tenures, and most of their staff lack private sector experience.
Application of the action program drawn up in 1987 by IDBI with assistance from the Bank (see
para. 2) has been inconsistent. While some progress has been made in portfolio supervision,
loan recovery efforts, and training, no major improvement is discernible except perhaps in SFCs
that already displayed stronger and more progressive management at the time. Greater private
sector participation in the capital and management of SFCs would clearly be desirable to
enhance efficiency. However, in addition to statutory limitations (private ownership of more than
25 per cent would require an amendment to the SFCs Act), the poor financial condition and low
profitability of many SFCs is likely to be a major obstacle to any privatization effort. In addition
to full compliance with the new provisioning and capital adequacy guidelines, attracting private
investors to SFCs is likely to require greater operational autonomy, more commercially oriented
lending guidelines, an increase in the basic spread from the current 3 per cent level, and greater
contribution of other activities, such as merchant banking and leasing to overall profits.
 11
F. Financial Statements and Ratios

26. Key performance indicators and ratios of IDBI and participating SFCs are
presented in Appendixes 2-7. While the performance and financial condition of IDBI are sound
and substantially in line with original expectations, that of SFCs is uneven and, for the most part,
below initial projections. Loan approvals fell somewhat short of projected levels mainly due to
the shortage of resources, as well as the stricter project financing norms applied. Also, low
demand for loans resulted from depressed market conditions and high interest rates during the
last two years, and contributed to slower operational growth. As regards the covenanted
financial performance ratios, targets for SFC entry qualification were a minimum ROE of 5 per
cent, a minimum DSCR of 1.05, and a maximum arrears ratio of 30 per cent. Ratios were
expected to improve in subsequent years, with the ROE reaching 6 per cent after the second
year, the DSCR 1 .1, and the arrears ratio 20 per cent. With some minor exceptions, participating
SFCs were able to meet the target ratios during the loan implementation period. However, three
SFCs, those in Maharashtra, Bihar, and Assam, were disqualified because they failed to meet
the performance targets. Also, based on latest available data, only four SFCs would comply with
all three target ratios to be achieved after two years of loan participation. Further, relatively sharp
year-on-year fluctuations are noted in several key ratios, probably pointing to somewhat
inconsistent application of accounting standards. These are, however, expected to improve with
the new income recognition, asset classification, and provisioning guidelines issued by RBI and
lDBl.

G. Covenants

27. The loan covenants were generally complied with, except for some late
submission of reports, in particular financial statements of SFCs. Details of compliance are
provided in Appendix 8. While the annual review of the three covenanted performance ratios by
IDBI provided a useful means to review and adapt the list of participating SFCs, several of them
failed to meet the target ratios subsequent to the loan sanctioning period, with significant
shortfalls in some cases. This may partly be attributable to somewhat inconsistent application
of accounting standards in deriving the relevant ratios.

H. The Bank's Performance

28. Though there was only one specific Review Mission, the Bank maintained close
and continuous contact with the Executing Agency through other visits to the country. The 1991
Review Mission also carried out a very comprehensive and thorough assessment of project
implementation and performance, because the Bank was considering a further loan to lDBl,
targeted at the capital goods subsector. The Mission visited several SFCs and assisted units,
and analyzed a broad sample of subprojects in detail.

29. In 1991. upon request from 1DB!, the Bank authorized reallocation of unused MSI
funds to the SSI sector, provided that subloans to SSls carry a minimum interest rate of 14 per
cent. As this was above normal SSI lending rates, the latter condition has impeded full utilization
of the Bank loan. Nevertheless, the position taken by the Bank at the time is considered fully
justified, since sustainable SSL lending critically depends on market-related interest rates being
charged, reflecting the risks and costs that are invariably associated with such lending.
 12

30. The Executing Agency considered that disbursement procedures, in particular the
issuance of qualified commitments for opening of letters of credit, were somewhat cumbersome
and time-consuming.

Ill. EVALUATION

A. Loan Appraisal

31. Loan Appraisal was sound and thorough, including a comprehensive review of the
industrial sector, financial sector, and participating financial institutions. The policy framework
was also carefully analyzed, and its deficiencies identified at appraisal. However, the scope for
addressing any shortcomings and distortions through policy dialogue was limited at the time.
Given the socioeconomic importance of the SSI sector, the Bank's strategic focus on
industrialization in India, and the gap in industrial finance, the Project was nevertheless justified
in attempting to channel resources towards SMI projects, particularly if the credit delivery system
could be strengthened at the same time.

32. Many SFCs suffered from serious institutional deficiencies at appraisal, e.g., with
regard to such key aspects as the application of commercial principles in lending decisions, the
adequacy of loan supervision and recovery procedures, and the reliability of accounting systems.
However, partly because of the difficult environment for policy dialogue and reform at the time,
measures aimed at institutional strengthening in the loan were not very incisive. For instance,
no sanctions were imposed for failure to implement the action programs, and IDBI continued to
set annual refinance allocations for each SFC irrespective of the SFC's eligibility for Bank
funding. In this context, even greater selectivity could have been applied in the choice of
participating SFCs. While the performance targets helped eliminate some of the least sound
SFCs, the eligible SFCs still account for over 80 per cent of total SFC operations, and include
weaker alongside better managed institutions. Finally, the minimum spreads of 2 per cent on
MSI loans and 3 per cent on SSI loans, which were judged adequate to cover the costs and
risks of SMI lending, appear inadequate for sustainable operations of the SFCs because (I)
average collection ratios range from 50 to 70 per cent (in terms of current demand), and (ii)
SFCs do not derive ancillary benefits from deposit-taking and account-servicing, which cross-
subsidize SMI lending by banks in many developed countries.

33. As regards subproject performance, part of the problems experienced by the

industrial sector, including SMls, can be attributed to the ongoing reform process in India,
particularly the industrial slowdown caused by Government expenditure cutbacks, and to the
increase in competition resulting from trade liberalization and internal deregulation. While these
events may have been difficult to foresee at appraisal, stronger financial intermediaries might
have selected subprojects better able to withstand more challenging conditions.

B. Implementation

34. The Bank relied extensively on IDBI to supervise SF0 performance and monitor
loan implementation. This two-tier arrangement, with IDBI as the apex institution and the SFCs
as line agencies, is considered appropriate, since supervision of SF0 operations is part of IDBI's
regular functions and therefore imposed little additional burden on it. Direct interaction between
 13

the Bank and SFCs, on the other hand, would have been extremely difficult to manage. The
Bank also carried out a very thorough and comprehensive project review in 1991. The review
could have taken place a bit earlier, though, as the loan was substantially committed and utilized
at the time. Also, while the target performance ratios for SFCs provided a useful means to
eliminate the least per-forming SFCs, and were easily verifiable by IDBI on an annual basis, their
significance was affected by weaknesses and inconsistencies in the accounting systems of
SFCs. Inclusion of a properly defined collection ratio, duly verified as part of the annual audit,
may have better reflected portfolio quality and recovery efforts than did the return on equity and
debt-service coverage indicators, which can be influenced by differing accounting treatments.

IV, CONCLUSIONS AND RECOMMENDATIONS

A. Conclusions

35. Overall, loan utilization and subproject performance are deemed satisfactory, with
$88.2 million disbursed for 1 ,332 subprojects, of which approximately 60 per cent are operating
satisfactorily, and another 20 per cent, while having experienced some difficulties, are likely to
remain viable. However, about 20 per cent of the subprojects were clearly unsuccessful and are
in default on Bank subloans from the SFCs. In contrast, the financial performance and condition
of most SFCs, including those participating in the loan, is generally unsatisfactory, with most
SFCs affected by poor loan recovery performance and consequent shortfall in resources, and
some experiencing severe financial difficulties. The generally better performance of Bank
subloans can mainly be attributed to the selectivity in choice of participating SFCs, the
predominance of more modern and sophisticated firms under the MSI portion of the loan as a
result of the focus on imported equipment, and a certain tendency on the part of intermediaries
to submit sounder subprojects for Bank refinance. In conclusion, the Project was relatively
successful in terms of achieving its primary objective, i.e., channeling resources towards
worthwhile SMI projects, but achieved limited results with regard to its secondary objective, i.e.,
improving the credit delivery system and strengthening the SFCs

36. While the Project included several measures aimed at remedying the institutional
deficiencies of the SFCs, the overall policy environment was, in final analysis, not conducive to
sound SMI lending, especially with regard to such key factors as the interest rate regime,
ownership and management of SFCs, and guaranteed access by DFls to low-cost, Government-
directed sources of funds. The combination of state government control over SFC management,
and guaranteed access to finance from national sources (lDBl refinance and SLR bonds), turned
out to be particularly ill-advised, as it created overwhelming political pressure to step up
disbursements without adequate consideration to loan quality. Addressing these deficiencies
in the policy and institutional framework would have required a combination of (i) stricter criteria
for participation of SFCs, to further restrict the number of eligible SFCs; (ii) additionality of Bank
finance to regular IDBI refinance for each SFC, to create stronger incentives for meeting the
performance targets; and (iii) dedicated technical assistance to the weaker SFCs, to improve
their accounting standards, management information systems, and loan appraisal, supervision
and recovery procedures.
 14

B. Recommendations

37. Based on a review of the performance and problems of the SFC sector, the
Mission makes 11 recommendations for the sector:

(i) Substantial private sector participation should be included in the ownership,

Boards, and managements of SFCs. Essential prerequisites are compliance with
the new asset classification and provisioning guidelines, prior recapitalization
where needed, and adoption of a more commercially oriented operating
philosophy.

(ii) Annual refinance allocations by IDBI and SIDBI should be made conditional on
implementation of action plans similar to that devised in 1987, and on meeting
minimum standards of financial performance, particularly with regard to collection
and arrears ratios.

(iii) In the long run, the Government needs to define a proper role for SFCs in an
increasingly diversified and competitive financial sector environment, where
alternative sources of finance for SMIs become increasingly available (such as
term loans from banks, lease finance, venture capital, over-the-counter listings,
etc.). This fundamental reassessment must encompass not only the scope of
operations of SFCs, but also the attendant optimal resource mix, lending
modalities and organizational structure.

(iv) In concordance with (iii), the Government should further liberalize the operating
environment for SFCs by allowing complete freedom for resource mobilization and
deployment, subject to general prudential guidelines as for all financial
institutions.

(v) The SSI product reservation policy, which artificially restricts competition and
prevents SSIs from exploiting their potential for growth and economies of scale,
should be abolished. The respective roles of the SSI, MSI, and large-scale
industry sectors should be determined by market forces, with each sector
specializing in producing those items for which it is best suited. Countries that
do not pursue similar SSI reservation policies, nevertheless have dynamic and
successful SSI sectors.

(vi) The current dual oversight of SFCs by IDBI and SIDBI should be ended, with
responsibility for SF0 supervision, refinance, and share ownership transferred to
a single institution. SIDBI appears more suited to that role because of its
specialized focus on the SSI sector, while IDBI is engaged in a broad range of
activities.

(vii) The Government should consider making SF0 loan loss provisions tax deductible,
especially those implemented in compliance with the new RBI/IDBI provisioning
guidelines. Such provisions are tax deductible in many countries.
 15

(viii) SFCs should gradually introduce differentiated interest rates, taking account of the
nature of the borrower and the risk profile of the project.

(ix) In order to draw lessons for their future lending as well as existing portfolio
administration, SFCs should improve the collection and analysis of data on
implementation and performance of subprojects.

(x) SFCs should make further efforts to coordinate with other state-level bodies, such
as State Electricity Boards and State Pollution Control Boards, to ensure that
essential government clearances and services are obtained in time for project
implementation.

(xi) The institutional capabilities of SFCs need to be improved by continuing efforts

at training and human resource development, and by setting salary scales
sufficient to attract and retain high caliber staff. Managing Directors should be
appointed for a minimum tenure of three years.

38. In addition, four general conclusions can be derived with regard to Bank DFI
loans:

(i) If the policy environment in a particular country or subsector is not conducive to

sound, viable DFI lending, the Bank should either include substantive policy
conditionalities in the loan to address major shortcomings, or refrain from lending.
In particular, the interest rate regime and the ownership and management
structure of the participating financial institutions need to be satisfactory to ensure
efficient use of Bank resources. Intermediaries that are not run on commercial
lines, and are not viable in a free-market environment where they must compete
for resources as well as customers, should be excluded from Bank loans.

(ii) Dedicated technical assistance for institution building, and strict requirements for
implementing corresponding action plans (including sanctions in cases of
noncompliance), should be included in loan design if institutional strengthening
is considered a critical objective.

(iii) The adequacy of local accounting and auditing standards should be carefully
assessed at appraisal, and if necessary improved through special technical
assistance, especially if critical loan covenants depend on them;

(iv) Bank Review Missions should be fielded before the majority of loan funds are
committed, i.e., normally within two years of loan effectiveness, to ensure that any
significant shortcomings in the performance of the intermediaries, appraisal of
subloans or implementation of subprojects, can be addressed in a timely manner.
 16

APPENDIXES

No. Title Page No.

1 Implementation Status and Operational Performance of Subprojects 17

2 IDBI Financial Statements 18

3 Summary of Operations 21

4 Loan Approvals of the Participating SFCs 22

5 Key Financial Indicators of Participating SFCs 23

6 Performance Ratios of the Participating SFCs 24

7 Loan Recovery of the Participating SFCs 25

8 Compliance with Loan Covenants 26


AppendEx 1

17
IMPLEMENTATION STATUS AND OPERATIONAL PERFORMANCE OF SUBPROJECTS

1 Karnataka State Financial Corporation 3. Utiar Pradesh Financial Corporation

No. of Subprojects Financed under Bank Loan 249 No. of Subprojects Financed under Bank Loan
Amount of Bank Finance (Rs Million) 355.8 Amount of Bank Finance (As Million)
Total Project Cost (Rs Million) 1168.7
Subprojects: No. Per
Subprojects: No. Percent Implemented 223 10C
Fully Implemented 224 90.0% of which:
Under Implementation: Operating Satisfactorily 109
No Problems except Minor Delays 21 8.4% Irregular in Debt Servicing 114
Serious Problems 4 1.6% Total 223
Total 249 100.0%
As of 31 March 1993: As M
Operating Fully Satisfactorily 184 73.9% Bank Subloans Outstanding
Minor Operational Problems 43 17.3% Overd ues
Major Operational Problems 15 6.0% Arrears Ratio
Under Uquidation/Restructuring 7 2.8%
Total 249 100.0%

2. Andhra Pradesh State Financial Corporation 4. Sample of Bank Subloans Reviewed in 1991

No. of Subprojects Financed under Bank Loan 183 Implementation Status of Subpro;ects:
Amount of Bank Finance (Rs Million) 266.6
No. Pe
Subprojects: No. Percent Implemented 165
Implemented 140 76.5% Under Construction 107
of which: of Which:
Opeiating Satisfactorily 76 41.5% As Scheduled 79
Facing Difficulties 64 35.0% Over6mo. Delay 18
Subtotal 140 76.5% Construction not yet Started 6
Abandoned by Sponsors 4
Under Implementation 43 23.5% Total No. of Subprojects Surveyed 272
Total 183 100.0%
Operational Performance of Implemented Projects:
As of 31 March 1993: Rs Million No. Pe
Amount Outstanding in Units At Early Stage of Operation with no 210
Assisted under Bank Loan 526.4 Major Problems
Amount in Arrears 102.0 Operating Profitably 19
Arrears Ratio - Bank Assisted Units 19.4% With Major Technical or Financial 11
Problems
Not Operational 6
Total No, of Subprojects Surveyed 246


Appendix 2
Page 1 of 3
18

INDUSTRIAL DEVELOPMENT BANK OF INDIA FINANCIAL STATEMENTS

BALANCE SHEETS
(In As million)

A c t u a I Projected bJ
Fiscal Year at 1986/87 1987/85 1988/89 1989/90 1990/91 1991/92 1992/93 1991/92
ASSETS

CashandLiquidAssets 5465 7.114 14,536 22.663 20.555 15.161 11,180 3.326;

CurrerdPortionofLans 17.755 20,622 23,005 26.365 22,571 30,322 42,519 35,000;
Other Assets and Advances 3,911 4,530 6,300 7,486 10,836 30.323 33,333 3.900
CurrentAssets 27,131 32.266 43.841 56.514 53.962 75.806 87.082 42.226!

Leans and Investments (Rupees) 79,330 94,812 109,732 132,139 160,402 190.200 213,496 179.275
Foreign Currency Loans 4.226 6,183 7,430 8,959 12,386 18,569 21,720 18.239;
Bills Discounted and Rediscounted 16,603 18,710 20,039 21.621 19,494 22.090 23.957 30.727!
L.ess Current Portion (17,755) (20,622) (23,005) (26,365) (22,571) (30,322) (42.519) (35.000)
Leased Assets 0 0 0 0 0 15 646. 470
Total 82,404 99,083 114,196 136,354 169,711 200,552 217,300 193,711
Net Fixed Assets 450 482 514 654 676 719 995 -
Total Assets 109,985 131,831 158,551 193,522 224,349 277,077 305,327 235,937

LiABILiTIES AND EQUITY

PaebIes 6,602 7,459 9,869 12,066 12,834 16,621 16,063 23,436;

Current Portion of Long-Term Debt 2,637 4.892 8080 10.077 8.468 20.144 21.680 3.000!
Current Liabilities

1Rupee Bonds
10,796 47,649 58.284 67,050 79,695 136,158 145,281 107,482
RBI Loans 29,378 32,111 37,474 42,223 37,052 35,766 36,790 27,218
Foreign Currency Debt 6,127 9.101 15,377 21 .969 14,848 27.859 30.691 22,706
Deposits and Market Borrowirs 6.318 10,350 10,868 14,361 20,368 26.298 34,100 25,228
Other Term Debt 4,127 2.996 4,619 6,827 7,620 9.306 13,682 10,122
Less Current Portion (2,637) (4,892 (8.468 (20.144
Long-Term Debt 90,962 107,950 27,308 154,998 182,216
Paid-up Capital 4,750 4,950 5.400 6,370 7,030 7.530 7,530 8,200
Free Reserves 4,288 5,706 6,935 8,909 12,670 14,810 16,442 9,131
Ear - marked Reserves 746 874 959 1,102 1,131 1,108 1,069 2,414
Special Reserves 11 -
Total Equity

Total Liabilities and Equity 109,985 131,831 158,551 193,522 224,349 277,077 305,327 235,937

Contingent Liabilities 3.506 3.572 2,454 4,265 4,431 6,938 7.285 -

RATIOS
Current Ratio (x) 2.9 2.6 2.4 2.6 2.5 2.1 2.3 1.6
Debt/Equity Ratio (x) 10.5 10.5 10.5 10.4 9.8 9.4 9.8 9.6

e. Years ending 30 ,June to 1987/88 and 31 March thereafte. Nine months data for 1988/89,
-. At Appraisal


Appendix 2
Page 2 of 3
19

INCOME STATEMENTS
(In As million)

Actual Projectedt
Fiscal Year aJ 1986)87 1987)88 1988/89 1989/90 1990/91 1991192 1992/93 1991/9

INCOME

Interest on Loans 8,695 10,961 9,644 15,475 19,266 22,141 27.984 19.58
Other Income 1,208 1,314 1,225 2,107 2,541 4,648 4,396 3.07
Lease Rentals 0 0 0 0 0 1 34 -

Total Income 9,903 12,275 10,869 17.582 21,807 26,790 32,414 22,66

EXPENSES

Interest on borrowings 6,825 8,684 7,833 12,922 15,872 18.803 23.203 1640
Other Financial Expenses 78 92 103 171 213 125 202 13
Admiiistrative 205 239 205 321 380 45.4 556 36
Depreciation 21 28 30 41 41 41 147 9
Prosions 1,335 1,432 1,078 1,517 1,784 2.623 3,437 3,46

Total Expenses 8,464 10,475 9.249 14,972 18,290 22.049 27,545 20,46

NE INCOME 1,439 1,800 1.620 2.610 3,517 4,741 4869 2,19

RATIOS (%)

Return on Average Equity 17.0 18.3 18.7 18.9 19.0 18.9 18.9 11.
Return on Average

Total Assets 1.4 1.5 1.5 1.5 1.8 1.9 1.6
Administrative Expenses!

Average Total Assets 0.2 0.2 0.2 0.2 0.2 0.2 0.2

a! Years ending 30 June to 1987/88 and 31 March thereafter. Nine months data for 1988/89.
b/ At Appraisal


Appendix 2
Page 3 of 3

CASH FLOW STATEM ENTS

(In Rs million)

Act ua I
Fsc& Year a! 1987/88 1988/89 1989/90 1991/92 1992/93
SOURCES

Profit Before Interest 8.265 10,484 9,453 15.532 18,962 20,707 27.811 5,868
AcId Back: Non-Cash Charges
Depreciation 21 28 30 41 41 41 147
Provisions i 1,432 1.078 1.517 1784 2,623 3.437
Operational Cash Flow 9,621 11,944 10,561 17.090 20,787 23,371 31.395 5,868
Loan Collections 15,544 18,482 16,020 24,414 17,728 22,564 30,322 31,609
Sales of Investments 103 299 421 306 702 2.040 931 971
Available for Debt Service (A) 25,268 30,725 27,002 41,810 39,217 47,975 62.648 38,448
Increase in Share Capital 300 200 450 970 660 500 0 907
Borrowing Draw down - LC 15,328 19,908 18,587 31,507 21.556 27,504 39137 24,982
Borrowing Draw down - FC 2,049 3,493 5,504 5,353 6,606 4.346 3.255 2,078
Decrease in Cash and Uquid Assets 0 0 0 0 2,533 6.061 3,981
Total Sources 42,945 54,326 51.543 79.640 70,572 86,386 109,021

APPLICATIONS

Interest Charges 6.825 8,684 7,833 12.922 15,062 17,721 19.993

Loan Repayments 2,703 3,827 2.256 7,834 10,506 8,468 20.144 2,870
RequiredforDebt-Servjce (B) 9,528 12.511 10,089 20,756 25,568 26,189 40.137 2,870
Disbursements 32,318 40,119 33,591 50,706 44,308 57,586 64,853 63,000
Capital Expenditure 121 60 62 181 - 1.685 3.101
Sebi/ERAF Grants 0 0 75 0 0 0 0
Dividend Payments o 442 488 479 696 926 930 370
Increase in Uquid Assets 977 1,195 7,238 7.519 0 0 0 175
Total Applications 42,945 54,326 51,543 79,640 70,572 86.386 109,021

RATIO
Debt-Service Coverage Ratio (WB) 2.7 2.5 2.7 2.0 1.5 1.8 1.6 2.7

a Years enthng 30 June to 1987/86 and 31 March thereafter. Nine months data for 1988189.
b At Apprats&


Appendix 3
21

SUMMARY OF OPERATiONS
(In As Million)

Actual Projected
Fiscal Year a! 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1991/9

APPROVALS

Direct Assistance 16194 20,589 18416 37,691 41,177 49,717 70,644 32,200
Refinance Loans 18,105 21,128 17,229 26,275 8,712 6811 5.467 37,150
Bills Discounted 10,386 10,746 8,975 12,420 11,703 13,109 14,304 16,850
Others 1,934 2,274 2113 5,115 6,682 6,263 4,179 3,250
Total 46,619 54,737 46,733 81,501 68,274 75,900 94,594 89,4

DISBURSEMENTS

Direct Assistance 9,914 14,568 13,191 17,157 24,424 36,528 48,817 37,500
Refinance Loans 13,057 14,982 11,090 18,505 5,323 5,238 4,301 9,724
Bills Discounted 7,766 8,070 6,735 9,226 8,578 9,389 10,282 11,344
Others 1,543 2,576 2,794 5,930 6,269 6,473 3,285 3,630
Total 32.580 40,196 33,810 50,848 44,594 57,628 66,685 62,198

at Years ending 30 June to 1957/88 and 31 March thereafter. Nine months data for 1968/89.
b! At Appraisal
 Appendix 4

22

LOAN APPROVALS OF THE PARTICIPATING SFCs

(In Rs million)

Actual

SFCs 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1992/93

APSFC 1,353 1,333 1,679 1,933 2,669 2,191 1,946 2,544

DFC 214 140 195 204 117 203 347 243

KSFC 1,118 1,302 1,422 1,836 2,465 3,266 3,282 3,802

MPFC 670 704 599 616 753 480 556

TlIc 1,015 1,055 1,125 1,127 1,859 2,331 n.a. 2,564

BSFC 1,006 1,341 577 351 232 276 n.a. 331

UPFC 1,864 1,741 1,793 1,803 1,943 2,187 1,720 2,388

MSFC 829 786 803 1,013 1,673 2,369 n.a. 2,611

AFC 94 125 123 134 78 n.a. 89

GSFC 882 1,442 1,553 2,159 2,830 n.a. 3,245

HFC 207 273 539 450 925 n.a. 1,061

RFC 889 981 1,097 1,253 1,621 n.a. 1,858
WBFC 502 544 606 623 647 n.a. 742

AFC-Assam Fjnancjaj Corporation; /PSFC-Mth ya Pradesh$tate Fjnancj Corporation; BSFC-Br State Financial Corporation;
DFC-Delhi Financial Corporation; GSFC-Gujarat State FinanciaJ Corporation; HFC-Nwyana State Financial Corporation:
KSFC-Karnata}ca State FUWIC6I Corporation: MSFC-Watwashtra State Financial Corporation; MPFC-Mahya Pradesh Financial Corp.:
RFC-Rajasthan Financial Corporation; 11IC-Tarnil Nadu lndusfrial Investment Corporation; LPFC-Ur Pradesh Financial Corporation;
WBFC-Vst Bengal Financial Corporation


Appendix 5

23

KEY FINANCIAL INDICATORS OF PARTICIPATING SFCs

(as of 31 March 1993)
(In As Million)

APSFC DFC KSFC MPFC mc BSFC UPFC MSFC AFC GSFC HFC RFC WB

Total Assets 7,315 785 6,330 3,601 6,165 5,879 8,798 5,555 689 6,398 1,843 5,049 2,

Equity 1,326 273 1,229 753 885 702 1,240 811 150 865 285 1,122

Long Term Debt 3,364 359 4,508 1,426 3,099 3,413 4,621 2,745 276 3,096 972 2,177 i,

Loan Portfolio 6,783 695 7561 3,313 5497 5,031 7,987 4,946 621 5,924 1,762 4,467 2,

Arrears 4,459 334 4410 2,441 4,438 3,126 4,800 1,911 456 3,877 612 3,141 1,1

Net Profit 0.3 0.8 0.7 0.3 0.6 (1.0) 0.1 1.1 (0.7) 0.3 0.8 0.6

Ratios:

Debt/Equity Ratio 4.7 1.6 5.4 3.5 5.0 3.9 5.9 5,3 3.3 6.2 5.0 3.3
Return on Average Equity (%) 3.1 8.4 7.3 3.4 5.6 (9.9) 1.1 11.3 (6.7) 3.1 7.9 5.8
Interest Spread (%) 1.6 6.5 3.5 (1.8) 2.5 1.2 1.1 4.9 2.1 3.6 3.8 4.3
Administrative Expenses!
Average Total Assets 0.8 1.2 2.6 1.0 2.0 1.1 1.3 2.3 1.4 2.0 3.0 2.8
Current Ratio 1.26 1.54 3.37 2.08 1.83 0.27 3.56 1.27 1.78 5.30 0.75 2.55
Debt Service Coverage 1.18 1.90 1.20 0.90 1.20 0.80 1.07 1.50 0.78 1.26 1.41 1.40
Arrears Ratio a! 14.9 10.6 20.9 34.6 24.0 n.a. 20.0 19.0 32.3 n.a. n.a. 21.0

AFC -Assam Financial Corporation; APSFC-Andhra Pradesh State Financial Corporation; BSFC- Bihar State Financial Corporation:
DFC-Delhi Financial Corporation: GSFC-Gujarat State Financial Corporation; HFC-Ha-yana State Financial Corporation:
KSFC-Karnataka State Financial Corporation: MSFC-Maharashb'a State Financial Corporation: MPFC-Madhya Pradesh Financial Corp.:
RFC-Rasthan Financial Corporation: TIIC-Tamil Nadu Industrial Investment Corporation: UPFC-Uttar Pradesh Financial Corporation:
WBFC-West Bengaj Financial Corporation

a! Total Loans ri Arrears

Total Loan Portfolio excluding CurTent Portion

Source : Industrial Development Bank of India



PERFORMANCE RATIOS OF PARTICIPATING SFCs

Return on Equity (%)_______ Debt-Service Coverage Arrears Ratio (%)

1986/87 1987/88 1988/89 1989/90 1990/91_1991/92 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92

APSFC 6.9 7.8 6.0 7.9 5.3 3.1 1.1 1.1 1.2 1.3 1.2 1.18 11.7 12.7 15.0 16.4 37.2 36.1
DFC 6.6 7.1 7.8 9.9 8.5 8.4 2.0 1.4 1.5 1.8 1.7 1.9 4.2 5.6 5.1 7.9 9.9 6.0
KSFC 11.1 6.8 8,8 7.5 5.6 7.3 1.1 1.3 1.5 1.5 1.4 1.2 17.6 18.9 17.6 18.0 17.0 17.3
MPFC 11.9 12.9 13.4 12.2 (7.7) 3.4 1.1 1.3 1.2 1.1 0.8 0.9 10.9 15.5 21.0 35.0 27.4 34.6
TIIC 6.7 5.5 - 5.1 6.6 5.6 1.1 1.1 1.0 1.2 1.2 1.2 23.2 23.5 21.4 20.8 27.1 18.5
BSFC 7.8 5.1 0.5 - (11.1) (9.9) 1.2 1.2 1.0 - 0.6 0.8 30.2 20.6 24.3 - 31.1 46.6
UPFC 8.2 6.0 6.2 4.2 2.2 1,1 1.1 1.1 1.1 1.1 1.0 1.1 19.2 22.3 20.9 17,6 17.6 19.6 r'.)

MSFC 5.7 4.0 - 4.7 3.1 11.3 1.2 1.1 - 1.3 1.1 1.5 28.8 30.6 - - 17.1 6.8
AFC - 6.8 7.6 9.1 (13.6) (6.7) 1.2 1.9 - 0.7 0.8 30.4 27.6 33.0 - 34.0 32.2
GSFC - 5,1 5.3 1.9 1.9 3.1 1.3 1.3 - 1.2 1,3 19.9 18.6 18.1 - 34.0 22.1
HFC - - 6.2 7.0 9.1 7.9 1.4 1.4 - 7.7 7.0 - 21.6 4.8
- - 7.8 5.2 6.1 5.8 - 1.3 - 1.2 1.4 - 24.3 24.0 - 5.2 22.6
WBFC - - 5.7 5.2 6.0 2.6 - 1.1 - 1.0 0.9 - 20.3 17.0 - 24.1 16.4

AFC-Asam Financial Corporation: APSFC-Andhra Pradesh State Financial Coporatlon; BSFC-Bihar State Financial Corporation:
DFC-Delhi Financial Corporation; GSFC-Gujarat State Financial Corporation: HFC-Haryana State Financial Corporation:
KSFC-Karnata State Financial Corporation; MSFC-Maharashtra State Financial Corporation; MPFC-Madhya Pradesh Financial Corp.;
RFC-Rajasthan Financial Corporation; TIIC-Tamil Nadu Industrial Investment Corporation; UPFC-Uttar Pradesh Financial Corporation;
WBFC- West Bengal Financial Corporation

ci.
Source Industrial Development Bank of India
0)


Appendix 7

25

LOAN RECOVERY OF PAR11CIPATING SFCs

As of 31 March 1993

Recovery/Total dues (%) Current Recovery/Current Dues (%)

SFCs 1986/87 1987/881988/891989/90 1990)91 1991/92 1992/93 1986/87 1987/88 1988/89 1989/90 1990191 1991/92 1992/93

APSFC 61 52 60 50 29 50 n.a. 102 63 52 56 31 61 na.

DFC 57 51 80 70 67 66 77 99 40 80 84 76 81 86

KSFC 56 47 51 52 49 49 51 78 63 63 63 67 68 74

MPFC 43 35 25 27 24 24 30 71 50 38 46 32 38 49

TIIC 37 33 36 30 36 36 n.a. 81 50 56 63 39 46 na.

BSFC 36 31 20 19 17 12 n.a. 105 48 41 20 29 37 n.a.

UPFC 35 34 44 45 46 43 na. 83 57 57 63 65 57 n.a.

MSFC 32 31 31 33 28 35 43 86 53 65 66 48 55 64

AFC 27 24 21 20 19 22 n.a. 88 22 27 25 22 27 n.a.

GSFC 36 26 53 51 30 33 36 67 65 70 71 47 43 34

HFC 37 37 71 48 55 48 n.a. 121 102 77 74 85 70 n.a.

RFC 33 37 37 39 40 43 37 58 62 66 34 38 46 46

WBFC 43 30 37 39 39 33 31 67 55 51 54 65 65 57

AFC—Assam Financial Corporation: APSCF—Andhra Pradesh State Financial Corporation: BSFC—Bihar State Financial Corporation:
DFC—Delhi Financial Corporation; GSFC—Gurat State Financial Corporation: HFC—Haryana State Financial Corporation:
KSFC—Kamataka State Financial Corporation; MSFC—Maharashtra State Financial Corporation: MPFC—Madhya Pradesh Financial Corp.;
RFC—Rasthan Financial Corporation; TIIC—Tamil Naclu Indurial Investment Corporation: UPFC—Uttar Pradesh Financial Corporation:
WBFC—West Bengal Financial Corporation

Source : Industrial Development Bank of India

 26

Appendix 8
COMPLIANCE WITH COVENANTS

Reference to

Covenants Loan Aqreemer Remarks

1. Furnish all information that the Bank may reasonably Section 4.03 Complied with
request including quarterly reports covering the (a)— (c)
execution of the Project.

2. Submit annual accounts audited by independent Section 4.04 Complied with
private auditors acceptable to the Bank not later (a)— (d)
than four months after the close of the fiscal year.

3. Maintain a ratio of consolidated debt of the Borrower Section 4.07 Complied with
and all its subsidiaries to the consolidated equity of
the Borrower and all its subsidiaries not higher than 12:1.

4. Maintain a debt service coverage ratio of

not less than 1.1:1 Section 4.07 Complied with

5. Maintain a return on equity of not less than 8 per cent. Section 4.07 Complied with

6. Procurement procedures to adhere to the Schedule 3 Complied with

Bank guidelines.

7. Borrower shall select as Participating State Financial Schedule 4 Complied with
Corporations (SFCs) only those SFCs whose Para. 1
performance satisfies the participation/entry criteria
and continues to satisfy the performance targets.

8. Borrower shall not refinance any subloan in Schedule 4 Complied with
an amount exceeding Rs 6.0 million. Para. 2

9. Participating SFCs shall maintain a minimum Schedule 5 Complied with
interest spread of 3 per cent per annum for Small— Para. 2
Scale Industries; and 2 per cent per annum for
Medium—Scale Industries, over and above the
interest rates payable to the Borrower.

10. Participating SFCs shall furnish to the Bank through Schedule 5 Complied with
Industrial Development Bank of India (IDBI) all reports Para. 15
and information as the Bank may reasonably request.

11. Participating SFCs shall furnish to the Bank Schedule 5 Complied with
through IDBI such accounts and financial Para. 16
statements and the audit thereof as the
Bank shall reasonably request.

12. Participating SFCs shall maintain a ratio of the Schedule 5 Complied with
consolidated debt of the participating SF0 concerned Para. 18
and all its subsidiaries to the consolidated equity
of the participating SFCs concerned and all its
subsidiaries not higherthan6:1.