Reviving IFCI

India's economic turnaround has several interesting elements to it. One of the most amazing is IFCI, one of the three long-term financial institutions that we had until the nineties. IFCI was sunk by non-performing assets in the second half of the nineties. It has been comatose since, with no incremental loans being sanctioned until recently. It seemed only a matter of time before it was formally wound up.

Yet, today IFCI's stock trades at Rs 48! Some of the company's NPAs have come alive with the Indian economy's strong performance over the past few years. Two of the company's investments, NSE and ICRA, have turned out to be extremely profitable. IFCI reported a profit of Rs 898 crore (mainly through one-off items such as sale of investment) against a loss of Rs 74 crore in the previous year.

The government is now looking at ways to keep IFCI alive. Two options being considered are:

• Conversion into a bank
• Turning IFCI into a foucused project lending bank

Neither sounds attractive to me. It's a little late in the day for IFCI to venture into banking on its own. Creating a network of branches will take time and resources. Focusing on projects may not be viable when you are competing with banks that are also into project lending- banks would have a tremendous cost advantage. Infrastructure finance is the most promising area in projects but we already have two specialised agencies for that, IDFC and IIFL.

IFCI needs strong financial backing and it needs a huge infusion of skills. Selling a strategic stake to a foreign bank is the best option. The foreign investor could tide along until 2009 when banking is due to be opened up further. It can then raise its stakes and venture into banking. It says something for the attractiveness of India's financial sector that players such as Citibank and Lehman are willing to expand or get in by buying a stake in a battered operation!