End Of An Era As ICICI Bank Shutters Project Finance Division
Once India’s premiere project finance institution, ICICI Bank has decided to discontinue that division.
ICICI Bank Ltd., one of India’s oldest development finance institutions which later converted into a universal bank, has decided to shut its dedicated project finance vertical, a person with direct knowledge of the matter said, requesting anonymity. Any project finance proposals will from hereon be assessed by the broader corporate lending division.
The decision, while coming at a time when demand for project finance is low, underscores the trouble Indian lenders have run into while financing large infrastructure projects in India. At ICICI Bank, the project finance group largely handled loan proposals for sectors like power, roads, ports and airports, manufacturing, mining, oil and gas.
The move followed the bank’s decision to bring down chunky loan exposures. The bank has also been seeing considerably lower demand for project finance currently, the person quoted above said.
The 30-40 employees who were working in this team have been relocated to other departments. The bank’s corporate finance team, which handles broader corporate loans, will be directly handling any loan proposals for infrastructure projects from here on. The bank will continue its policy of engaging with highly rated companies for any future project finance, the person quoted above added.
News agency Cogencis had first reported on Tuesday that the bank had decided to do away with the project finance division. ICICI Bank did not comment on an email query sent on Tuesday.
End Of ICICI’s Project Finance Era
While ICICI Bank’s decision may come as no surprise in the prevailing environment, it brings to a close a long chapter in the history of the financial institution.
“When we started the bank, project finance was the only business we were doing as ICICI was a development finance institution before that,” said N Vaghul, former chairman of ICICI Bank. “ We used to get funds from the government and extend them to companies in need,” Vaghul recalls.
Those days were different and so were the business dynamics. Not sure how the bank is viewing the realities of the market today.N Vaghul, Former Chairman, ICICI Bank
Given ICICI Bank’s legacy strengths in project finance, it continued to lead in that loan segment even after it converted to a universal bank.
ICICI Bank, together with State Bank of India, IDFC and IDBI Bank, were among the biggest infrastructure lenders till about 2013. However, economic growth and return assumptions made during the lending boom of the early 2000s proved to be faulty and lenders, including ICICI Bank, took a hit. Risks emerging from government policy and judicial decisions, such as in the coal-block allocation case, added to the pain.
Starting 2015, banks saw bad loans jump after the Reserve Bank of India conducted its asset quality review in October-December 2015. For ICICI Bank, gross non performing loans rose to over Rs 45,000 crore as of September 2019, as compared with Rs 15,242 crore in March 2015. A large chunk of these came from the infrastructure sector.
“ICICI, IDBI and IFCI were the three pillars of project finance in India. ICICI deciding that it will not do project finance at a large scale should send alarm bells to the nation,” said Abizer Diwanji, head of financial services at EY.
It is proof that the risk associated with project finance is way beyond what a lender can measure and prepare for. Globally as well, lenders take up the execution risk for a project they have funded and the rest of the risk is taken up by the system. In India unfortunately a banker can no longer predict how various approvals and costs will pan out for a project.Abizer Diwanji, Head of Financial Services, EY
Lowering Concentration Risk
The decision is also in line with the lender’s policy to bring down concentration risk — a strategy it initiated under former chief executive Chanda Kochhar starting 2016 after bad loans surged.
The bank’s new Chief Executive Officer Sandeep Bakshi took that strategy a step further. While addressing analysts after declaring the July-September quarter results, chief executive officer Bakshi said that while the bank will continue to grow its corporate finance portfolio, it would focus on “granularity, transaction banking and improvement in the credit rating profile”.
The bank has succeeded in reducing risk linked to large borrowers.
According to data available on the bank’s last investor presentation, loans to top 20 borrowers now constituted only 11.1 percent of ICICI Bank’s net advances as on September 2019, as compared with 13.3 percent in March 2016. Similarly, loans to top 10 groups came down to 13.3 percent from 18.5 percent during the same period.
The limits which the bank has set for its top borrowers are considerably lower than what the RBI prescribes for large corporate exposures.
While the decision to bring down large corporate loans and turn selective on project finance may work for the bank, it sends a worrying signal for the economy. Along with ICICI Bank, others like Axis Bank and the ertswhile IDFC too are now reluctant to take on risks associated with infrastructure finance.
Anil Singhvi, chairman, ICAN Advisors Pvt. Ltd. described ICICI Bank’s move as “sad and disappointing”.
“ICICI as an entity came into existence for project finance. For it to say that it wants to greatly slowdown its project finance business is something which is very disappointing. All lenders have gone through a prolonged period of pain, but everyone cannot just be funding cars and bicycles. Someone will have to fund India’s infrastructure,” Singhvi said.