RESTRICTED

PCR:IND 20166

ASIAN DEVELOPMENT BANK I ThisReporthasbeenpreparedforthe exclusive use of the Bank.

PROJECT COMPLETION REPORT

OF THE

SMALL- AND MEDIUM-SCALE INDUSTRIES PROJECT(Loan No. 855-IND)

IN

INDIA

December 1993

DFIDSCRIDBIMSIOECFRBIROESFCSIDBISLRSMISSl

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

Development Finance InstitutionDebt-Service Coverage RatioIndustrial Development Bank of IndiaMedium-Scale IndustryOverseas Economic Cooperation FundReserve Bank of IndiaReturn on EquityState Financial CorporationSmall Industries Development Bank of IndiaStatutory Liquidity RatioSmall- and Medium-Scale IndustrySmall-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 (MissionChIef) and Yolanda Paniillo, SenIor Clerk (Project AdmInIstration) took place from 13 to 27September 1993.

TABLE OF CONTENTS

Page

BASIC DATA

(ii)

I. BACKGROUND

1

A. The Bank Loan

1B. 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

5B. Policy Environment

6

C. Characteristics of Subloans

7D. Implementation and Operation of Subprojects

7

E. Operational and Financial Performance of ParticipatingFinancial Institutions

8F. Financial Statements and Ratios

11G. Covenants

11H. The Bank's Performance

11

Ill. EVALUATION

12

A. Loan Appraisal

12B. Implementation 13

IV. CONCLUSIONS AND RECOMMENDATIONS

13

A. Conclusions

13B. Recommendations

14

APPENDIXES

16

(ii)

BASIC DATA

H

A. Loan Identification

1. Country2. Loan Number3. Loan Title4. Borrower5. NameofDFl6. Amount of Loan

B. Loan Data

1. Appraisal- Date Started- Date Completed

2. Loan Negotiations- Date Started- Date Completed

3. Date of Board Approval

4. Date of Loan Agreement

5. Date of Loan Effectiveness- In Loan Agreement- Actual- Number of Extensions

6. Closing Date for Commitments- In Loan Agreement- Actual- Number of Extensions

7. Closing Date for Disbursements- In Loan Agreement- Actual- Number of Extensions

8, Terms to the Borrower- Interest Rate- Maturity- Grace Period- Repayment Terms

9. Terms of Relending- Interest Rate

(IDBI to State FinancialCorporation (SFCs)

- Maturity- Grace Period- Free Limit- Repayment Terms

India855—INDSmall— and Medium—Scale Industries ProjectIndustrial Development Bank of India (IDBI)Industrial Development Bank of India$100.0 million from ordinary capital resources

06 July 198724 July 1987

14 September198717 September 1987

03 November 1 987

16 December 1987

15 March 198824 February 1988None

24 February 199124 February 1991None

24 February 199224 February 1993Two

Variable interest rate15 years3 years15 years including 3 years grace(fixed —type amortization)

a) 10.0 per cent per annum forsmall—scale industries (SSIs)(9.0 per cent in backward areas)

b) 10.5 per cent per annum formedium—scale industries (MSI5)

8-9 years1-2 yearsNoneMaximum of 15 years, includingmaximum grace period of 3 years

('ii)

10. Interest Rate for Subloans- Original (SFCs to sub-borrowers)

- Latest

11. Disbursements- amount disbursed- amount cancelled

C. Implementation Data

Number of Subloans Made

2. Sectoral Distribution of Subloans

Type of Industries

a) Food Productsb) Textilesc) Wood and Wood Productsd) Paper & Paper Productse) Leather Productsf) Rubber Productsg) Chemical Productsh) FertilizersI) Nonmetallic Productsj) Basic Metal industriesk) Metal ProductsI) Machinerym) Electrical/Electronic Equipmentn) Transport equipment0) Constructionp) Electricity-Gen & Distn.q) Servicesr) Miscellaneous

Total

3. Size of Subloans

Ran gJ

a) Less than 30,000b) 30,000 - 40,000c) 40,000 - 50,000d) 50,000 - 75,000e) 75,000 - 100,000f) 100,000 - 125000g) 125,000 - 150000h) 150,000 - 175000i) 175,000 - 200,000j) 200,000 - 300,000k) 300,000 - 400,000I) 400,000 - 500,000m)Above 500,000

Total

a) 13.5 per cent for SSIs(12.5 per cent in backward areas)

b) 14.0 per cent for MSIsCeiling of 18 per cent

$88,209,178.69$11,790,821.31

1,332 (net of cancellations)

Actual Loan UtilizationActual

No. of AmountSubloans ($ million) %

132

7.7

8.7

164

8.8

10.0

12

0.8

0.9

71

4.5

5.1

41

2.7

3.1

43

2.2

2.5

173

10.5

11.9

7

0.2

0.2

31

1.8

2.0

44

2.9

3.3

72

3.8

4.3

37

2.1

2.4

136

9.4

10.7

32

1.8

2.0

7

0.6

0.7

1

0.1

0.1

49

4.3

4.9

280

24.0

27.2

1,332

88.2

100.0

No. of AmountSubloans ($ million)

320

4.8

5.5

162

5.3

6.0

149

6.1

7.0

238

13.6

15.4

149

11.5

13.1

120

10.2

11.5

71

8.0

9.0

38

5.3

6.0

19

2.9

3.3

39

7.6

8.7

12

3.9

4.4

1

0.4

0.5

14

8.6

9.8

1,332

88.2

100.0

3.00.25.0

20.616.754.5

100.0

0.13.4

28.167.0

1 .4100.0

88,811.2

100.0

(iv)

4. Other Breakdown of Subloans

By Geographical Distribution

a) Northern a!b) North-Eastern bIc) Eastern cid) Central die) Western e/f) Southern fi

Total

By Maturity

a) Upto3 yearsb) Over 3 years to 5 yearsc) Over 5 years to 7 yearsd) Over 7 years to 10 yearse) Over 10 years to 12 years

Total

By Purpose

a) New Companiesb) Expansion

Total

No. of AmountSubloans (S million) %

37

2.6

7

0.2

85

4.4

301

18.2

272

14.7

630

48.0

1 332

88.2

1 0.1

37 3.0

322 24.8

951 59.1

21 1.31,332

1,162 78.4

170 9.8

1,332 88.2

By Size of Project Cost

a) Less than As 1 million

4

0.2

0.2b) As 1 million to As 5 million

830

47.0

53.3c) As 5 million to As 10 million

407

24.1

27.3d) As 10 million to Rs 20 million

58

8.8

9.9e) Rs 20 million to Rs 30 million

24

4.0

4.6

f) As 30 million to Rs 40 million

5

2.8

3.2g) Rs 40 million to As 50 million

4

1.4

1.6Total

1 ,332

88.2

100.0

By SFC

a) Karnataka State Financial Corporation (KSFC)

243

20.7

23.4b) Andhra Pradesh State Financial Corp. (APSFC)

184

16.0

18.2c) Uttar Pradesh Financial Corporation (UPFC)

261

15.6

17.7d) Gujarat State Financial Corporation (GSFC)

241

13.2

14.9e) Tamil Nadu Industrial Investment Corp. Ltd. (TIIC)

203

11.3

12.9f) Bihar State Financial Corporation (BSFC)

80

3.2

3.6g) Madhya Pradesh Financial Corporation (MPFC)

40

2.6

3.0h) Maharashtra State Financial Corporation (MSFC)

31

1.6

1 .8I) West Bengal Financial Corporation (WBFC)

5

1.2

1.4j) Haryana Financial Corporation (HFC)

17

1.1

1.2k) Delhi Financial Corporation (DFC)

12

1.0

1.1I) Aajasthan Financing Corporation (RFC)

8

0.5

0.6m) Assam Financial Corporation (AFC)

7

0.2

0.2Total

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.

0//0

0.50.41.70.02.32.64.9

29.76.22.71.11.42.53.60.89.75.9

21.8100.0

Specializationof Members

Sr. Dev. Bank SpecialistSr. Dev. Bank SpecialistSSI Specialist

Sr. Dev. Bank SpecialistSr. Dev. Bank SpecialistIndustrial EngineerSenior CounselSr. Programs Economis

Sr. Dev. Bank Specialist

Sr. Dev. Bank SpecialistInvestment OfficerYoung ProfessionalYoung ProfessionalEconomist

Investment OfficerSr. Clerk(Project Acim.)

Amount Approved(S mn. equivalent)

(v)

By Country of Origin of Procurement

a) Austriab) Belgiumc) Canadad) China, People's Republic ofe) Denmarkf) Franceg) Hong Kongh) Italyi) Japanj) Koreak) MalaysiaI) Netherlandsm) Singaporen) Switzerlando) Taipei, Chinap) United Statesq) United Kingdomr) Germany

Amount(U S$'OOO)

130.5101.5408.8

7.2543.3631.7

1,169.77,104.61 ,973.9

643.1265.5324.7599.0869.4201.5

2,319.91,423.05,224.9

23,942.2

D. Data on Bank MissionsNo. of No. of

Name of Each Mission Date Persons Man-days

1. Fact-Finding Mission 24 March - 9 April 198 3 51

2. Appraisal Mission

6-24 July 1987

5

81

3. Inception Mission 6-7 June 1988

1

2

4. Review-cum-Fact- 23 April - 8 May 1991

5

72Finding Mission(2nd Bank Loan to IDBI)

5. PCR Mission 13-27 September 199 2 30

E. Related_Loans

Loan No. Date of Agreement

To same DFI None

To other DFIs in same Country

ICICI I 778-IND

03 April 1986

100.0IFCI 975-IND

24 October 1 989

150.0ICICI 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 IndustrialDevelopment Bank of India (IDBI) for onlending to private sector small- and medium-scaleindustries (SMIs) through selected State Financial Corporations (SFCs). SFCs are state-levelinstitutions established under the State Financial Corporations Act, 1951 for financing andpromoting SMIs in their respective states. They are owned by the state governments (49 percent), 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 tomeet both foreign and local currency requirements of small-scale industries (SSIs) 1 . Bankfunding was to cover 65 per cent of the IDBI refinance of SFC subloans to SSIs, in order to limitthe 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 administeringthe Bank loan and monitoring SFC performance. The loan became effective in February 1988and was closed in February 1993.

2. The loan had two main objectives: (i) to augment IDBI's resources for financingthe establishment, modernization, and expansion of SMIs; and (ii) to help improve the creditdelivery system through measures aimed at institutional strengthening of the SFCs. The loanset performance targets to be met on a continuous basis by all participating SFCs, and assistedIDBI in drawing up an action program aimed at improving their performance. The lattercomprised, inter alia, the establishment of annual collection ratios in consultation with IDBI,institution of semiannual portfolio reviews for early identification o' problem accounts, setting upof a Default Review Committee to improve recovery performance, periodic review of key financialindicators, and improvement of training facilities. The performance targets for entry qualificationwere 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 forsubsequent years. Based on these targets, 8 out of 18 SFCs were initially selected to participatein the loan. Five SFCs were subsequently added, while 3 were disqualified due to failure to meetthe targets.

3. The Bank fielded a Project Completion Review (PCR) Mission from13 to 27September 1993. The Mission held discussions with IDBI and the newly established SmallIndustries Development Bank of India (SIDBI), and visited SFCs in five states (Karnataka, AndhraPradesh, Uttar Pradesh, Maharashtra, and the Union Territory of Delhi), accounting for over 60per 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 inIndia. Its principal tasks are to promote and finance industrial development, and to support andcoordinate 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 machineryof up to Rs 6 million (Rs 7.5 million in case of export-oriented units or ancillaries). Whilethere is no statutory definition of MSls, the latter usually have fixed assets of less than Rs50 million, and net worth of less than Rs 30 million.

Act, and is wholly Government-owned following transfer of ownership from the Reserve Bank ofIndia (RBI) in 1976. IDBI's principal activity is the extension of term loans for large-scaleindustrial projects. As part of project finance, 1DB! also provides loan guarantees andunderwriting services and directly subscribes to debt and equity securities. In addition to directassistance to industrial concerns, IDBI engages in bills finance, and provides resource supportto other financial institutions, such as leasing companies or SFCs. IDBI's refinance operationswith 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 andbroadening 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 loansfrom the National Industrial Credit fund of RBI, and Government-guaranteed statutory liquidityratio (SLR) bonds held by commercial banks for reserve purposes. The availability of RBI andsimilar public sector loans is, however, declining in line with budgetary constraints and changesin Government priorities; and the average SLIR is due to decline from 38.5 per cent to 25 percent under the Bank-supported Financial Sector Program 1 , while access of all developmentfinance institutions (DFIs) to such bonds is to be gradually phased out. In view of the drasticdecline in traditional sources of finance, 1DB! had to resort to large-scale commercial borrowingsover the last two years. It has successfully floated two public bond issues in FYi 993, raisedsubstantial amounts of certificates of deposit, and borrowed from institutional investors such asinsurance companies and mutual funds. While IDBI has, thus, been able to tap alternativesources of funds in order to maintain its growth momentum, the increased reliance oncommercial borrowings has significant implications for its operational strategy, notably the needto maintain a sound portfolio quality and strong capital and liquidity ratios, and the need to earnadequate 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 increasedcompetitive 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 lendingarrangement 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 sourceof 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 ofshort-term working capital finance. With further declines in the SLR, and the plannedrecapitalization and partial privatization of commercial banks, banks are likely to emerge in thelong run as formidable competitors for DF!s in the area of industrial finance. In response tothese challenges, 1DB! is diversifying its product mix by reducing the proportion of project-relatedterm 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 matchand to broaden the range of services offered; (ii) design of complete, specifically tailoredfinancing 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 servicessuch as credit rating, share registrars and transfer agents, and an automated national securitiesexchange.

7. India's 18 SFCs were established under the SFCs Act, 1951 1 to help fill animportant gap in the financing structure by providing term finance to SSI enterprises. SFCs arejointly owned by the respective state governments (49 per cent) and lDBl (49 per cent), with thebalance 2 per cent held by miscellaneous financial institutions. The primary function of SFCsis to extend term loans for SSI projects in their states. They can also provide guarantees fordeferred payments to machinery suppliers, and working capital finance. In line with theirdevelopmental mission, SFCs undertake a variety of promotional activities, such as providingseed capital to new entrepreneurs or new technologies, organizing entrepreneurshipdevelopment 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 intonew 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 theAct are currently under consideration to, inter alia, permit greater diversification.

8. SFCs currently face a significant challenge to their operations, as declining accessto traditional sources of finance, notably automatic refinance by IDBI and SIDBI and allocationsof SLR bonds, coupled with poor loan recovery pertormance, have led to a severe resourceshortfall. Unlike IDBI, most SFCs are unable to compensate for the decline in traditional sourcesof funds through commercial borrowings because of their poor portfolio quality and financialcondition. Several SFCs had to curtail sanctions and disbursements, and a number are unableto meet their debt repayment obligations towards 1DB!. More fundamentally, the justification androle of the SFCs in the emerging competitive financial sector environment needs to be carefullyreassessed, especially vis-a-vis banks who have access to a wide retail deposit base andincreasingly engage in term lending as a result of (i) the relaxation of restrictions on suchlending, (ii) the increasing share of term deposits in their resource mix, and (iii) the flattening ofthe yield curve. The comparative advantage of the SFCs, i.e., their project finance and appraisalskills (vis-a-vis banks), and their extensive local networks (vis-a-vis all-India DFls), needs to besharpened and translated into viable long-term business plans. In addition to the scope andmodalities of operations, the latter needs to define an appropriate resource mix, organizationalstructure and ownership pattern for the SFCs.

9. SIDBI was established in March 1990 as a wholly-owned subsidiary of 1DB! toserve as the apex agency for financing and promoting SSIs. The objective was to focus attentionand efforts on the specific needs of the SSI sector, and to devise programs and schemesspecifically 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 theshareholding and Board representation in SFCs, as well as general regulatory oversight, resultingin some duplication of authority. SIDBI's overall performance during its first three years ofoperation 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 1949under the Indian Companies Act.

4

FY1993, comprising about Rs 20 billion refinance, Rs 9 billion bills discounting andrediscounting, and Rs 7 billion term loans to other financial institutions and direct loans andequity support to industrial undertakings. SFCs account for 60 per cent of refinance, banks for33 per cent, and SIDCs for 7 per cent. SIDBI also continually strives to enhance the institutionalnetwork of support services available to the SSI sector, e.g., by promoting and supportingfactoring companies, SSI marketing organizations, infrastructure development, etc. SIDBI'sfinancial position is sound, with a return on equity of 16.7 per cent in FYi 993, and a debt/equityratio of 9.8, It is, however, facing similar challenges as other DFIs with regard to the availabilityand cost of funds, and has devoted considerable efforts to mobilizing alternative sources offunds 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 foreignbanks 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 mainrefinance lending rates, which allow a 3 per cent spread to the on-lending state level institutionsand 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 majorproportion of its portfolio, though it is attempting to increase the share of banks in refinance, andto 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 ofWorld Bank and bilateral projects, for a variety of purposes. The performance of IDBI underthese various projects was generally satisfactory. lDBl also engaged in substantial commercialborrowings 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 31March 1993, outstanding borrowings from OECF amounted to Rs 7.6 billion. A comprehensiveimpact study was carried out in 1992 to assess the utilization of a Rs 3.35 billion OECF creditline targeted at SSIs. Its findings were generally positive, with 91 .5 per cent of assisted unitscommissioned and operational, and significant socioeconomic benefits, including the creationof 250,000 jobs and Rs 3.2 billion incremental exports. The World Bank had provided two loansfor 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 formulatingthe Bank's SMI Project, notably by devising the action program and setting strict participationcriteria for SFCs.

D. Rationale for the Bank Loan

11. The project was to assist the growth of the SMI sector, which was consideredcritical to the Bank's operational strategy in India in view of its focus on industrialization, theimportance of the SMI sector in the industrial structure of the country, and its potential foremployment generation, export development, dispersal of industry to backward areas, andstrengthening of linkages with the agriculture sector. Therefore, the primary objective of the loanwas to augment the resources available for financing the establishment, modernization andexpansion of SMI enterprises. Typically, the availability of term finance for SMIs is limited indeveloping as well as many industrialized countries, and special government-directed lendingprograms 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 bejustified 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 smalland 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 Projectaimed at strengthening the capabilities and performance of the SFCs, both by creating incentivesto meet the performance targets set for their participation in the loan, and by drawing up actionprograms designed to address their organizational shortcomings. The main risks identified atappraisal were the generally higher credit risk of SMI projects, and the risk of slow loan utilizationin 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 bettermanaged SFCs.

II. IMPLEMENTATION

A. Lending Policies

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

13. The scope of operations of SFCs, lending criteria, and terms and conditions ofassistance are defined by the SFCs Act, 1951, and are further determined by guidelines issuedperiodically by lDBl and the Central Government and state governments. Some latitude isprovided to adapt to local circumstances, e.g., by allowing individual SFCs to set stricter projectfinancing norms than the minimum standards prescribed by IDBI. Many SFCs have adopted asomewhat less developmental and more commercially oriented lending approach over the lastfew years by (I) insisting on stricter project financing norms (i.e., lower debt/equity ratio, higherpromoters' contribution); (ii) focusing on established companies and/or promoters with proventrack records; (iii) conducting detailed market surveys to assess the demand-supply balance invarious subsectors and regions prior to sanctioning assistance; (iv) enhancing loansecurity/collateral requirements; and (v) generally according precedence to subloan supervisionand recovery over sanction and disbursement targets. Also, SFC managements increasinglydelegate 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 ofoutstanding bank credit, appear clearly excessive.

6

The average time taken for project appraisal is presently 2-3 months. The appraisal processcomprises a relatively thorough assessment of the technical, commercial, and economic viabilityof a project, with technical as well as financial staff included in the project team. Sanctioningauthority depends on the size of the loan, as does review of project viability by the refinancingagency. Despite the satisfactory organizational setup, SFCs remain vulnerable to politicalpressure to increase disbursements and/or favor specific borrowers. Also, despite continuoustraining efforts, the capacity to appraise projects in certain areas such as new technologies orexports remains somewhat limited.

B. Policy Environment

14. The policy environment for SSI finance has undergone a number of significantchanges 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 MSIloans to 14 per cent. Concurrently, subsidized rates for backward areas (previously 12.5 percent), and for modernization-rehabilitation investments (previously 1 1 .5 per cent), have beenabolished. 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 thecharging 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 beenreduced from 3.5 per cent at the time of appraisal, to 3 per cent. While this remains inconformity 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 50-70per cent (in terms of current demand).

15. A number of other key issues relating to the policy environment remain to beaddressed, notably: (I) the ownership and management of SFCs, which remain subject to stronggovernment control; (ii) the priority sector lending targets, which require commercial banks toallocate 40 per cent of credit to priority sectors (including SSls and agriculture); and (iii) thecontinued product reservation policy, which artificially restricts production of 836 items to SSIunits. However, some progress in the policy framework is noted in line with overall economicreform. Relaxation of the SSI reservation policy is currently under consideration, including botha pruning of the reserved items list and a removal of restrictions on large companies provided50 per cent of production is earmarked for export. As regards SSI finance, the availability ofchoice and competition have increased with the easing of restrictions on term lending bycommercial banks, more liberal regulations affecting the operations of leasing and venture capitalcompanies, 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 toincluding significant private sector participation in their shareholding. However, such plans arestill 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 provideequity as well as debt finance for industrial projects, usually in joint venture with privatesector partners. They also undertake promotional activities such as establishment ofindustrial estates.

':4

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

C. Characteristics of Subloans

16. Utilization of the Bank loan and performance of the subprojects financed areconsidered relatively satisfactory overall. A total of $88.2 million was disbursed for 1,332subprojects, against about 1,000 expected at appraisal. While the SSI portion was fully utilizedwithin two years of loan effectiveness, the MSI allocation remained partly unutilized. MSIsubloans originally carried a slightly higher interest rate (14 per cent per annum) than SSIsubloans (mostly 12.5 and 13.5 per cent). In 1991, IDBI requested the Bank to reallocate theunused 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 aminimum rate of 14 per cent. While SSI lending rates subsequently rose to 18 per cent, the 14per cent minimum hindered full utilization of the Bank loan. Repeated rupee devaluations alsocontributed to the shortfall in loan utilization, as sanctions in local currency terms becameinsufficient 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 theremaining $14.3 million or 16 per cent. Local cost financing represents an estimated 85 per centof 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. Asoriginally expected, subprojects cover a wide sectoral and geographical spread, though over 80per 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 relativedynamism of the SFCs in those states. About 80 per cent of subprojects are in the Rs 1-10million 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 SFCsubloans carried a 13.5 or 14 per cent interest rate, and had a maturity of 7-8 years and a graceperiod of 1-2 years. New projects accounted for close to 90 per cent of both number ofsubprojects and disbursements, probably reflecting the special low interest rates available formodernization investments and the effect of the product reservation policy, which makesestablishment of new units often more attractive than expansion of existing ones. Procurementwas 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 canto some extent be attributed to the small-scale and dispersed nature of the subprojects, it alsopoints to deficiencies in the management information systems of SFCs. Estimates were derivedfrom data collected from the five SFCs visited, findings of a 1991 Review Mission that covereda sample of 272 subprojects, and results of an OECF impact study for a line of credit targetedat SSI enterprises with similar characteristics (see para. 9 and Appendix 1). Performance dataare subject to interpretation to a certain extent, because of varying policies on grace periods andcontingency factors. Some SFCs tend to limit allowances for both in order to maintain pressureon borrowers to contain costs and accelerate repayments. This may result in a somewhatexaggerated 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 allteething problems have been overcome and loan principal is being repaid.

19. A review of the data available suggests that approximately 80 per cent ofsubprojects are performing relatively satisfactorily, while around 20 per cent were failures. Thefailures comprise subprojects that are either not operational or are experiencing seriousdifficulties, including inability to service Bank subloans from the SFCs. Among the 80 per centof 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 originalexpectations. A small number are still under implementation, but are proceeding according toschedule. The remaining one-quarter of subprojects (20 per cent of total) have faced somedifficulties, such as implementation delays of up to 12 months, cost overruns of up to 50 percent, technical start-up problems or slow market build-up. This category also includes somesubprojects that had to request rescheduling of their SFC loans. However, most have beenproperly implemented and are likely to remain viable in the long run.

20. Implementation delays occur relatively frequently, for a variety of reasonsincluding: (i) nontimely availability of finance, particularly promoters' contribution; (ii) late arrivalof imported equipment, caused, for instance, by slow customs clearance; (iii) delays in utilitiesconnections, notably electricity; and (iv) delay in obtaining various governmental approvals,notably state pollution control board clearances. Similarly, the incidence of cost overruns isrelatively high, linked mainly to implementation delays. Cost overruns were also due to therepeated currency devaluations during the loan implementation period. Operations ofimplemented units are affected by lack of working capital in some cases, despite RBI directivesaimed 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 singlewindow scheme (whereby long-term and working capital finance are provided through the sameinstitution). Also, capacity utilization is often relatively low, with nearly half of all units surveyedby the OECF study operating at less than 75 per cent of their capacity. This can partly beattributed to the recessionary conditions in a number of industries over the last two years, andthe increased competitive pressures as a result of liberalization.

21. At appraisal, the loan was expected to benefit about 1,000 SMIs, generate aminimum of 20,000 new jobs and result in additional investment of $240 million. It was alsoexpected to promote new entrepreneurs and help disperse industry to less developed areas.These expectations were largely fulfilled and, in some respects, exceeded. The actual numberof subprojects financed is 1,332, and the total volume of investment catalyzed is about $350million. About 15 per cent of subprojects are located in backward areas. While no firm dataare available, employment generation is likely to be above original estimates. Using an averageinvestment cost of Rs 77,000 per job as in the OECF study (which is far above the Rs 19,000average 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 indicatorsare presented in Table 1. IDBI's total sanctions reached Rs 95 billion in FYi 993, equivalent to

89450235,937228241

2,11919,745

189,756

9.62.7

11.90.31 .6

9

an average annual compound growth rate of 12.5 per cent since FY1987, close to the 14 percent as originally expected. Thus, by stepping up commercial borrowings, IDBI has successfullymaintained growth momentum despite the drastically curtailed access to Government-guaranteedloans, IDBI's financial condition remains sound. As of 31 March 1993, the debt! equity ratio was9.8 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 assetsconsidered standard as per the new RB! classification guidelines, 3.1 per cent substandard, 4.3per cent doubtful, and only 0.1 per cent loss assets. The overall collection ratio is over 90 percent, and over 85 per cent if refinance is excluded. However, IDBI's lending margins are underpressure with the higher proportion of commercial borrowings in its resource mix, and it is likelyto depend increasingly on fee income and capital gains to maintain profitability.

Table 1: IDBI - Key Financial Indicators

(Rs million)

Actual PeedbFiscaj Yaar a.1

19.86/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1991/92

ApprovalsTotal AssetsLoans, Investments and Discount PortblioNet Income after TaxEquityLong-Term Debt

Ratios:

46.619 54.737 46,733 81.501 68,274 75.900 94,594109,985 131,831 158,551 193.522 224,349 277,077 305,327100,159 103,316 118.825 140,682 169.711 200.537 216,654

1,439 1,800 1,620 2,610 3,517 4,741 4,8699,784 11.530 13,294 16.381 20.831 25,069 28,720

90,962 107,950 127,308 154,998 182,216 215,243 238.365

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

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 arenot satisfactory. While there are considerable differences between SFCs, reflecting differingorganizational capabilities as well as different industrial climates in their respective states, theoverall 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 thedeclining access to traditional sources of funds through commercial borrowings. This affects notonly the growth in their traditional lending operations, but also their ability to undertake new linesof business susceptible to boost profitability.

10

24. As per recommendations of a Government committee, SFC funding requirementsshould be met by the following resource mix:

SIDBI/IDBI RefinanceSLR BondsFresh EquityInternal Resources (net profit after tax anddividends + loan recoveries less repayments

55 per cent25 per cent10 per cent10 per cent

Total

100 per cent

However, the availability of all four of these funding sources is affected by varying and mutuallyreinforcing difficulties. SLR bond allocations have become insufficient as a result of competingclaims for a dwindling pool of such resources; fresh equity support by IDBI has not beenforthcoming over the last two years (nor has SIDBI taken up shares in SFCs); loan recoveriesare mostly inadequate to meet internal resource generation targets; and increasing pressure isapplied by IDBI and SIDBI to reduce the amount of refinance, as these institutions' access tocheap, 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 andfinancial condition. A number of SFCs have sought credit ratings, which are mandatory to gainaccess to public savings, but only Karnataka State Financial Corporation has so far been ableto secure an investment-grade rating. IDBI has recently issued guidelines for the classificationof SFC assets, provisioning, and capital adequacy norms. Though phased implementation overa four-year period was recommended, compliance with even this extended timetable appearsto pose difficulties for many SFCs. A high-level meeting was recently conducted in Delhi underthe auspices of the Ministry of Finance to review the provisioning guidelines and formulate actionplans for restructuring the weaker SFCs. Discussions with regard to future Government policiesfor 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 (seepara. 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 SFCsthat already displayed stronger and more progressive management at the time. Greater privatesector participation in the capital and management of SFCs would clearly be desirable toenhance efficiency. However, in addition to statutory limitations (private ownership of more than25 per cent would require an amendment to the SFCs Act), the poor financial condition and lowprofitability of many SFCs is likely to be a major obstacle to any privatization effort. In additionto full compliance with the new provisioning and capital adequacy guidelines, attracting privateinvestors to SFCs is likely to require greater operational autonomy, more commercially orientedlending guidelines, an increase in the basic spread from the current 3 per cent level, and greatercontribution 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 arepresented in Appendixes 2-7. While the performance and financial condition of IDBI are soundand 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 tothe shortage of resources, as well as the stricter project financing norms applied. Also, lowdemand for loans resulted from depressed market conditions and high interest rates during thelast two years, and contributed to slower operational growth. As regards the covenantedfinancial performance ratios, targets for SFC entry qualification were a minimum ROE of 5 percent, a minimum DSCR of 1.05, and a maximum arrears ratio of 30 per cent. Ratios wereexpected to improve in subsequent years, with the ROE reaching 6 per cent after the secondyear, the DSCR 1 .1, and the arrears ratio 20 per cent. With some minor exceptions, participatingSFCs were able to meet the target ratios during the loan implementation period. However, threeSFCs, those in Maharashtra, Bihar, and Assam, were disqualified because they failed to meetthe performance targets. Also, based on latest available data, only four SFCs would comply withall three target ratios to be achieved after two years of loan participation. Further, relatively sharpyear-on-year fluctuations are noted in several key ratios, probably pointing to somewhatinconsistent application of accounting standards. These are, however, expected to improve withthe new income recognition, asset classification, and provisioning guidelines issued by RBI andlDBl.

G. Covenants

27. The loan covenants were generally complied with, except for some latesubmission of reports, in particular financial statements of SFCs. Details of compliance areprovided in Appendix 8. While the annual review of the three covenanted performance ratios byIDBI provided a useful means to review and adapt the list of participating SFCs, several of themfailed to meet the target ratios subsequent to the loan sanctioning period, with significantshortfalls in some cases. This may partly be attributable to somewhat inconsistent applicationof accounting standards in deriving the relevant ratios.

H. The Bank's Performance

28. Though there was only one specific Review Mission, the Bank maintained closeand continuous contact with the Executing Agency through other visits to the country. The 1991Review Mission also carried out a very comprehensive and thorough assessment of projectimplementation 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 MSIfunds to the SSI sector, provided that subloans to SSls carry a minimum interest rate of 14 percent. As this was above normal SSI lending rates, the latter condition has impeded full utilizationof the Bank loan. Nevertheless, the position taken by the Bank at the time is considered fullyjustified, since sustainable SSL lending critically depends on market-related interest rates beingcharged, reflecting the risks and costs that are invariably associated with such lending.

12

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

Ill. EVALUATION

A. Loan Appraisal

31. Loan Appraisal was sound and thorough, including a comprehensive review of theindustrial sector, financial sector, and participating financial institutions. The policy frameworkwas also carefully analyzed, and its deficiencies identified at appraisal. However, the scope foraddressing 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 onindustrialization in India, and the gap in industrial finance, the Project was nevertheless justifiedin attempting to channel resources towards SMI projects, particularly if the credit delivery systemcould be strengthened at the same time.

32. Many SFCs suffered from serious institutional deficiencies at appraisal, e.g., withregard to such key aspects as the application of commercial principles in lending decisions, theadequacy 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 toset annual refinance allocations for each SFC irrespective of the SFC's eligibility for Bankfunding. In this context, even greater selectivity could have been applied in the choice ofparticipating SFCs. While the performance targets helped eliminate some of the least soundSFCs, the eligible SFCs still account for over 80 per cent of total SFC operations, and includeweaker alongside better managed institutions. Finally, the minimum spreads of 2 per cent onMSI loans and 3 per cent on SSI loans, which were judged adequate to cover the costs andrisks 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 theindustrial sector, including SMls, can be attributed to the ongoing reform process in India,particularly the industrial slowdown caused by Government expenditure cutbacks, and to theincrease in competition resulting from trade liberalization and internal deregulation. While theseevents may have been difficult to foresee at appraisal, stronger financial intermediaries mighthave selected subprojects better able to withstand more challenging conditions.

B. Implementation

34. The Bank relied extensively on IDBI to supervise SF0 performance and monitorloan implementation. This two-tier arrangement, with IDBI as the apex institution and the SFCsas line agencies, is considered appropriate, since supervision of SF0 operations is part of IDBI'sregular 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. TheBank also carried out a very thorough and comprehensive project review in 1991. The reviewcould have taken place a bit earlier, though, as the loan was substantially committed and utilizedat the time. Also, while the target performance ratios for SFCs provided a useful means toeliminate the least per-forming SFCs, and were easily verifiable by IDBI on an annual basis, theirsignificance was affected by weaknesses and inconsistencies in the accounting systems ofSFCs. 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 anddebt-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 operatingsatisfactorily, and another 20 per cent, while having experienced some difficulties, are likely toremain viable. However, about 20 per cent of the subprojects were clearly unsuccessful and arein default on Bank subloans from the SFCs. In contrast, the financial performance and conditionof most SFCs, including those participating in the loan, is generally unsatisfactory, with mostSFCs affected by poor loan recovery performance and consequent shortfall in resources, andsome experiencing severe financial difficulties. The generally better performance of Banksubloans can mainly be attributed to the selectivity in choice of participating SFCs, thepredominance of more modern and sophisticated firms under the MSI portion of the loan as aresult of the focus on imported equipment, and a certain tendency on the part of intermediariesto submit sounder subprojects for Bank refinance. In conclusion, the Project was relativelysuccessful in terms of achieving its primary objective, i.e., channeling resources towardsworthwhile 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 institutionaldeficiencies of the SFCs, the overall policy environment was, in final analysis, not conducive tosound 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), turnedout to be particularly ill-advised, as it created overwhelming political pressure to step updisbursements without adequate consideration to loan quality. Addressing these deficienciesin the policy and institutional framework would have required a combination of (i) stricter criteriafor participation of SFCs, to further restrict the number of eligible SFCs; (ii) additionality of Bankfinance to regular IDBI refinance for each SFC, to create stronger incentives for meeting theperformance targets; and (iii) dedicated technical assistance to the weaker SFCs, to improvetheir accounting standards, management information systems, and loan appraisal, supervisionand recovery procedures.

14

B. Recommendations

37. Based on a review of the performance and problems of the SFC sector, theMission 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 withthe new asset classification and provisioning guidelines, prior recapitalizationwhere needed, and adoption of a more commercially oriented operatingphilosophy.

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

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

(iv) In concordance with (iii), the Government should further liberalize the operatingenvironment for SFCs by allowing complete freedom for resource mobilization anddeployment, subject to general prudential guidelines as for all financialinstitutions.

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

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

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

15

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

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

(x) SFCs should make further efforts to coordinate with other state-level bodies, suchas State Electricity Boards and State Pollution Control Boards, to ensure thatessential government clearances and services are obtained in time for projectimplementation.

(xi) The institutional capabilities of SFCs need to be improved by continuing effortsat training and human resource development, and by setting salary scalessufficient to attract and retain high caliber staff. Managing Directors should beappointed for a minimum tenure of three years.

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

(i) If the policy environment in a particular country or subsector is not conducive tosound, viable DFI lending, the Bank should either include substantive policyconditionalities in the loan to address major shortcomings, or refrain from lending.In particular, the interest rate regime and the ownership and managementstructure of the participating financial institutions need to be satisfactory to ensureefficient use of Bank resources. Intermediaries that are not run on commerciallines, and are not viable in a free-market environment where they must competefor resources as well as customers, should be excluded from Bank loans.

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

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

(iv) Bank Review Missions should be fielded before the majority of loan funds arecommitted, i.e., normally within two years of loan effectiveness, to ensure that anysignificant shortcomings in the performance of the intermediaries, appraisal ofsubloans 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

As M

249355.8

1168.7

Percent90.0%

8.4%1.6%

100.0%

73.9%17.3%6.0%2.8%

100.0%

183266.6

Percent76.5%

41.5%35.0%76.5%

23.5%100.0%

Rs Million

526.4102.0

19.4%

AppendEx 1

17

IMPLEMENTATION STATUS AND OPERATIONAL PERFORMANCE OF SUBPROJECTS

1 Karnataka State Financial Corporation

No. of Subprojects Financed under Bank Loan

Amount of Bank Finance (Rs Million)Total Project Cost (Rs Million)

Subprojects: No.

Fully Implemented 224

Under Implementation:No Problems except Minor Delays 21

Serious Problems 4

Total 249

Operating Fully Satisfactorily 184

Minor Operational Problems 43

Major Operational Problems 15

Under Uquidation/Restructuring 7

Total 249

3. Utiar Pradesh Financial Corporation

No. of Subprojects Financed under Bank Loan

Amount of Bank Finance (As Million)

Subprojects: No.

Implemented 223

of which:Operating Satisfactorily 109

Irregular in Debt Servicing 114

Total 223

As of 31 March 1993:Bank Subloans Outstanding

Overd uesArrears Ratio

Per10C

2. Andhra Pradesh State Financial Corporation

No. of Subprojects Financed under Bank LoanAmount of Bank Finance (Rs Million)

Subprojects: No.

Implemented 140

of which:Opeiating Satisfactorily 76

Facing Difficulties 64

Subtotal 140

Under Implementation 43

Total 183

As of 31 March 1993:Amount Outstanding in Units

Assisted under Bank LoanAmount in Arrears

Arrears Ratio - Bank Assisted Units

4. Sample of Bank Subloans Reviewed in 1991

Implementation Status of Subpro;ects:

No.

Implemented 165

Under Construction 107

of Which:As Scheduled 79

Over6mo. Delay 18

Construction not yet Started 6

Abandoned by Sponsors 4

Total No. of Subprojects Surveyed 272

Operational Performance of Implemented Projects:No.

At Early Stage of Operation with no 210

Major ProblemsOperating Profitably 19

With Major Technical or Financial 11

ProblemsNot Operational 6

Total No, of Subprojects Surveyed 246

Pe

Pe

110,796 136,158

37,052 35,766

14,848 27.859

20,368 26.298

7,620 9.306

(8.468 (20.144

145,281 107,482

36,790 27,218

30.691 22,706

34,100 25,228

13,682 10,122

Appendix 2

18 Page 1 of 3

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)Foreign Currency LoansBills Discounted and RediscountedL.ess Current Portion

Leased AssetsTotal

Net Fixed Assets

Total Assets

LiABILiTIES AND EQUITY

PaebIesCurrent Portion of Long-Term Debt

Current Liabilities

79,330 94,812 109,732 132,139 160,402 190.200 213,496 179.275

4.226 6,183 7,430 8,959 12,386 18,569 21,720 18.239;

16,603 18,710 20,039 21.621 19,494 22.090 23.957 30.727!

(17,755) (20,622) (23,005) (26,365) (22,571) (30,322) (42.519) (35.000)

0 0 0 0 0 15 646. 470

82,404 99,083 114,196 136,354 169,711 200,552 217,300 193,711

450 482 514 654 676 719 995 -

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

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

2,637 4.892 8080 10.077 8.468 20.144 21.680 3.000!

Rupee BondsRBI LoansForeign Currency DebtDeposits and Market BorrowirsOther Term Debt

Less Current PortionLong-Term Debt

Paid-up CapitalFree ReservesEar - marked ReservesSpecial ReservesTotal Equity

Total Liabilities and Equity

47,649 58.284

29,378 32,111

6,127 9.101

6.318 10,350

4,127 2.996

(2,637) (4,892

90,962 107,950

4,750 4,950

4,288 5,706

746 874

67,050 79,695

37,474 42,223

15,377 21 .969

10,868 14,361

4,619 6,827

27,308 154,998 182,216

5.400 6,370 7,030

6,935 8,909 12,670

959 1,102 1,131

7.530 7,530 8,20014,810 16,442 9,1311,108 1,069 2,41411 -

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

Contingent Liabilities

RATIOSCurrent Ratio (x)Debt/Equity Ratio (x)

3.506 3.572

2.9 2.6

10.5 10.5

2,454 4,265

2.4 2.6

10.5 10.4

4,431 6,938

2.5 2.1

9.8 9.4

7.285 -

2.3 1.6

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

19 Page 2 of 3

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 LoansOther IncomeLease Rentals

Total Income

EXPENSES

Interest on borrowingsOther Financial ExpensesAdmiiistrativeDepreciationProsions

Total Expenses

NE INCOME

8,695 10,961 9,644 15,475 19,266 22,141 27.984 19.58

1,208 1,314 1,225 2,107 2,541 4,648 4,396 3.07

0 0 0 0 0 1 34 -

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

6,825 8,684 7,833 12,922 15,872 18.803 23.203 1640

78 92 103 171 213 125 202 13

205 239 205 321 380 45.4 556 36

21 28 30 41 41 41 147 9

1,335 1,432 1,078 1,517 1,784 2.623 3,437 3,46

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

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

1.6Administrative 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

Act ua I1987/88 1988/89 1989/90Fsc& Year a!

Appendix 2Page 3 of 3

CASH FLOW STATEM ENTS(In Rs million)

1991/92 1992/93

SOURCES

Profit Before Interest 8.265 10,484 9,453 15.532 18,962 20,707 27.811AcId Back: Non-Cash Charges

Depreciation 21 28 30 41 41 41 147Provisions 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

Loan Collections 15,544 18,482 16,020 24,414 17,728 22,564 30,322Sales of Investments 103 299 421 306 702 2.040 931

Available for Debt Service (A) 25,268 30,725 27,002 41,810 39,217 47,975 62.648

Increase in Share Capital 300 200 450 970 660 500 0Borrowing Draw down - LC 15,328 19,908 18,587 31,507 21.556 27,504 39137Borrowing Draw down - FC 2,049 3,493 5,504 5,353 6,606 4.346 3.255Decrease 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 19.993Loan Repayments 2,703 3,827 2.256 7,834 10,506 8,468 20.144

RequiredforDebt-Servjce (B) 9,528 12.511 10,089 20,756 25,568 26,189 40.137

Disbursements 32,318 40,119 33,591 50,706 44,308 57,586 64,853Capital Expenditure 121 60 62 181 - 1.685 3.101Sebi/ERAF Grants 0 0 75 0 0 0 0Dividend Payments o 442 488 479 696 926 930Increase in Uquid Assets 977 1,195 7,238 7.519 0 0 0

Total Applications 42,945 54,326 51,543 79,640 70,572 86.386 109,021

5,868

5,868

31,609971

38,448

90724,982

2,078

2,870

2,870

63,000

370175

RATIODebt-Service Coverage Ratio (WB) 2.7 2.5 2.7 2.0

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

1.5 1.8 1.6 2.7

32,200

37,150

16,850

3,250

89,4

37,500

9,724

11,344

3,630

62,198

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

Refinance Loans

Bills Discounted

Others

Total

16194 20,589 18416 37,691 41,177 49,717 70,644

18,105 21,128 17,229 26,275 8,712 6811 5.467

10,386 10,746 8,975 12,420 11,703 13,109 14,304

1,934 2,274 2113 5,115 6,682 6,263 4,179

46,619 54,737 46,733 81,501 68,274 75,900 94,594

DISBURSEMENTS

Direct Assistance

Refinance Loans

Bills Discounted

Others

Total

9,914 14,568 13,191 17,157 24,424 36,528 48,817

13,057 14,982 11,090 18,505 5,323 5,238 4,301

7,766 8,070 6,735 9,226 8,578 9,389 10,282

1,543 2,576 2,794 5,930 6,269 6,473 3,285

32.580 40,196 33,810 50,848 44,594 57,628 66,685

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

1,679

195

1,422

599

1,125

577

1,793

803

125

1,442

273

981

544

1,933

204

1,836

616

1,127

351

1,803

1,013

123

1,553

539

1,097

606

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

DFC

KSFC

MPFC

TlIc

BSFC

UPFC

MSFC

AFC

GSFC

HFC

RFC

WBFC

1,353

214

1,118

670

1,015

1,006

1,864

829

1,333

140

1,302

704

1,055

1,341

1,741

786

94

882

207

889

502

2,669

117

2,465

753

1,859

232

1,943

1,673

134

2,159

450

1,253

623

2,191

203

3,266

480

2,331

276

2,187

2,369

78

2,830

925

1,621

647

1,946

347

3,282

n.a.

n.a.

1,720

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

2,544

243

3,802

556

2,564

331

2,388

2,611

89

3,245

1,061

1,858

742

AFC-Assam Fjnancjaj Corporation; /PSFC-Mthya 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

Equity

Long Term Debt

Loan Portfolio

Arrears

Net Profit

Ratios:

Debt/Equity Ratio

Return on Average Equity (%)

Interest Spread (%)

Administrative Expenses!

Average Total Assets

Current Ratio

Debt Service Coverage

Arrears Ratio a!

7,315 785 6,330 3,601 6,165 5,879 8,798 5,555

689 6,398 1,843 5,049 2,

1,326 273 1,229 753 885 702 1,240 811

150 865 285 1,122

3,364 359 4,508 1,426 3,099 3,413 4,621 2,745

276 3,096 972 2,177 i,

6,783 695 7561 3,313 5497 5,031 7,987 4,946

621 5,924 1,762 4,467 2,

4,459 334 4410 2,441 4,438 3,126 4,800 1,911

456 3,877 612 3,141 1,1

0.3 0.8 0.7 0.3 0.6 (1.0) 0.1 1.1

(0.7) 0.3 0.8 0.6

4.7 1.6 5.4 3.5 5.0 3.9 5.9 5,3 3.3 6.2 5.0 3.3

3.1 8.4 7.3 3.4 5.6 (9.9) 1.1 11.3 (6.7) 3.1 7.9 5.8

1.6 6.5 3.5 (1.8) 2.5 1.2 1.1 4.9 2.1 3.6 3.8 4.3

0.8 1.2 2.6 1.0 2.0 1.1 1.3 2.3 1.4 2.0 3.0 2.8

1.26 1.54 3.37 2.08 1.83 0.27 3.56 1.27 1.78 5.30 0.75 2.55

1.18 1.90 1.20 0.90 1.20 0.80 1.07 1.50 0.78 1.26 1.41 1.40

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

DFC

KSFC

MPFC

TIIC

BSFC

UPFC

MSFC

AFC

GSFC

HFC

WBFC

1.1

2.0

1.1

1.1

1.1

1.2

1.1

1.2

6.9 7.8 6.0 7.9 5.3 3.1

6.6 7.1 7.8 9.9 8.5 8.4

11.1 6.8 8,8 7.5 5.6 7.3

11.9 12.9 13.4 12.2 (7.7) 3.4

6.7 5.5 - 5.1 6.6 5.6

7.8 5.1 0.5 - (11.1) (9.9)

8.2 6.0 6.2 4.2 2.2 1,1

5.7 4.0 - 4.7 3.1 11.3

- 6.8 7.6 9.1 (13.6) (6.7)

- 5,1 5.3 1.9 1.9 3.1

- - 6.2 7.0 9.1 7.9

- - 7.8 5.2 6.1 5.8

- - 5.7 5.2 6.0 2.6

1.1 1.2 1.3

1.4 1.5 1.8

1.3 1.5 1.5

1.3 1.2 1.1

1.1 1.0 1.2

1.2 1.0 -

1.1 1.1 1.1

1.1 - 1.3

1.2 1.9 -

1.3 1.3 -

- 1.3 -

- 1.1 -

1.2 1.18

1.7 1.9

1.4 1.2

0.8 0.9

1.2 1.2

0.6 0.8

1.0 1.1

1.1 1.5

0.7 0.8

1.2 1,3

1.4 1.4

1.2 1.4

1.0 0.9

11.7 12.7 15.0 16.4 37.2 36.1

4.2 5.6 5.1 7.9 9.9 6.0

17.6 18.9 17.6 18.0 17.0 17.3

10.9 15.5 21.0 35.0 27.4 34.6

23.2 23.5 21.4 20.8 27.1 18.5

30.2 20.6 24.3 - 31.1 46.6

19.2 22.3 20.9 17,6 17.6 19.6

28.8 30.6 - - 17.1 6.8

30.4 27.6 33.0 - 34.0 32.2

19.9 18.6 18.1 - 34.0 22.1

- 7.7 7.0 - 21.6 4.8

- 24.3 24.0 - 5.2 22.6

- 20.3 17.0 - 24.1 16.4

r'.)

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

Source Industrial Development Bank of Indiaci.

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.

DFC 57 51 80 70 67 66 77

KSFC 56 47 51 52 49 49 51

MPFC 43 35 25 27 24 24 30

TIIC 37 33 36 30 36 36 n.a.

BSFC 36 31 20 19 17 12 n.a.

UPFC 35 34 44 45 46 43 na.

MSFC 32 31 31 33 28 35 43

AFC 27 24 21 20 19 22 n.a.

GSFC 36 26 53 51 30 33 36

HFC 37 37 71 48 55 48 n.a.

RFC 33 37 37 39 40 43 37

WBFC 43 30 37 39 39 33 31

102 63 52 56 31 61 na.

99 40 80 84 76 81 86

78 63 63 63 67 68 74

71 50 38 46 32 38 49

81 50 56 63 39 46 na.

105 48 41 20 29 37 n.a.

83 57 57 63 65 57 n.a.

86 53 65 66 48 55 64

88 22 27 25 22 27 n.a.

67 65 70 71 47 43 34

121 102 77 74 85 70 n.a.

58 62 66 34 38 46 46

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

Reference toLoan Aqreemer

Remarks

Section 4.03

Complied with(a)— (c)

Section 4.04

Complied with(a)— (d)

Section 4.07 Complied with

Section 4.07 Complied with

Section 4.07

Schedule 3

Complied with

Complied with

Schedule 4

Complied withPara. 1

Schedule 4

Complied withPara. 2

Schedule 5

Complied withPara. 2

Schedule 5

Complied withPara. 15

Schedule 5

Complied withPara. 16

Schedule 5

Complied withPara. 18

26

Appendix 8

COMPLIANCE WITH COVENANTS

Covenants

1. Furnish all information that the Bank may reasonablyrequest including quarterly reports covering theexecution of the Project.

2. Submit annual accounts audited by independentprivate auditors acceptable to the Bank not laterthan four months after the close of the fiscal year.

3. Maintain a ratio of consolidated debt of the Borrowerand all its subsidiaries to the consolidated equity ofthe Borrower and all its subsidiaries not higher than 12:1.

4. Maintain a debt service coverage ratio ofnot less than 1.1:1

5. Maintain a return on equity of not less than 8 per cent.

6. Procurement procedures to adhere to theBank guidelines.

7. Borrower shall select as Participating State FinancialCorporations (SFCs) only those SFCs whoseperformance satisfies the participation/entry criteriaand continues to satisfy the performance targets.

8. Borrower shall not refinance any subloan inan amount exceeding Rs 6.0 million.

9. Participating SFCs shall maintain a minimuminterest spread of 3 per cent per annum for Small—Scale Industries; and 2 per cent per annum forMedium—Scale Industries, over and above theinterest rates payable to the Borrower.

10. Participating SFCs shall furnish to the Bank throughIndustrial Development Bank of India (IDBI) all reportsand information as the Bank may reasonably request.

11. Participating SFCs shall furnish to the Bankthrough IDBI such accounts and financialstatements and the audit thereof as theBank shall reasonably request.

12. Participating SFCs shall maintain a ratio of theconsolidated debt of the participating SF0 concernedand all its subsidiaries to the consolidated equityof the participating SFCs concerned and all itssubsidiaries not higherthan6:1.