BOMBAY, 30 July — If banks are the heart of the corporate world, financial institutions are the arteries. What happens when these arteries start clogging up?

In case of a human being, an open heart surgery would solve the problem but what happens when it affects the corporate world, which in turn is the heart of any country’s economy. This will naturally, demand surgery, cutting away the bad from the good.

Indian financial institutions (FIs) are the life blood of the Indian corporate world. But now, it looks like this blood is getting bad.

According to a presentation made by the Reserve Bank of India (RBI) to the Joint Parliamentary Committee probing the stock market scam, corporate debentures and bonds worth Rs.11.00 billion have turned into non-performing assets (NPAs) for the financial institutions at the end of 2000-01.

Industrial Development Bank of India (IDBI) had the dubious distinction of having the maximum level of NPAs arising out of debentures, totaling Rs.9.72 billion. ICICI has been hit by Rs.1.89 billion at the net NPA level.

The RBI’s representation covers IDBI, ICICI and the IIBI. In the case of IDBI, non convertible debentures of about 137 companies have been marked as NPAs, while ICICI has marked debentures of about 45 companies as NPAs. ICICI has also reported inter corporate deposits of core healthcare and Mafatlal Industries to the tune of Rs.120 million as sticky assets. IIBI has registered

NPAs of Rs.730 million in the form of debentures, most of which are non-convertible in nature.

It is learnt that more than Rs.10.00 billion was advanced by IDBI to companies such as Global Telesystems (Rs.400 million), Himachal Futuristic Communications Ltd. (Rs.3570.9 million), SSI Ltd. (Rs.717.5 million), Satyam Computers (Rs.1,698 million), Zee Telefilms (Rs.500 million), Microwave Communication, an HFCL group company (Rs.200 million) and HFCL Infotech (Rs.3,000 million). All these loans were in the form of rupee loans. The RBI has documented that in the case of HFCL, the disbursed amount at Rs.3,570.9 million was higher than the sanctioned amount of Rs.2,531.5 million. IDBI’s errant clients includes bigwigs like Indian Seamless Steels and Alloys, Indo-Gulf Industries, Pasupati Spinning and Torrent Gujarat.

In fact, IDBI has written off some of these NPAs in case of 14 companies amounting to Rs.870 million. The debentures which have been written off include that of companies like Standard Motor, PAL Peugeot, JCT Fibres and MS Shoes, among others.

And ICICI’s laggards includes Modern Terry Towels, JK Synthetics, Prag Bosimi Synthetics, Jain Irrigation and Maradia Chemicals, among others.

ICICI had extended corporate loans of Rs.600 million to group companies of Zee Telefilms against a pledge of equity shares by the companies. It had also advanced loans of Rs. 2.00 billion to group companies of Ranbaxy Laboratories, again against shares pledged by Ranbaxy and these loans are still outstanding. It has also lent Rs.2.00 billion to HCL Technologies in 1999 against shares pledged but this amount has been repaid.

IFCI is also another errant institution. It had also made advances to the tune of Rs.860 million and most of these disbursements were via loans sanctioned in 1996 and 1998. The companies to which the loans were made include DSQ Industries, HFCL and HFCL Satellite Communications. Adding to their woes is the downgrade in their ratings for investment worthiness by rating agencies like ICRA and Moody’s Investor Services.

IDBI’s rating was downgraded last week. Moody’s issued a statement saying that, “the rating was put on review on concerns that a liquidity squeeze, which has led to a delay in payment of local currency obligations may spill over and lead to delays in the servicing of the institution’s foreign currency obligations.”

IFCI meanwhile announced this week that it is close to coming up with a solution for meeting its obligations on the $2.2 billion repayments on which it had recently defaulted. The delay in meeting the payment obligations, which fell due on July 15, has triggered off Moody’s Investor Service to announce that it has put IFCI’s ‘Ba2’ rating on review with a possible downgrade.

The rating agencies said that IFCI which exercised a call option for early repayment on Rs.4.20 billion high cost debt due in July alongwith other scheduled repayments of Rs. 7.18 billion has resulted in the liquidity strain.

The rating agency has downgraded IFCI’s debt twice in the recent past.

Borrowers had rolled over their payments and this forced IFCI to do the same with its own obligations unless fresh borrowings could be raised or the government decided to sanction IFCI’s plea for a Rs.400 million capital infusion.

Moody’s has stated that  IFCI’s liquidity will remain under stress and the institution could face difficulties in servicing other payment obligations during the current financial year. Another major problem plaguing the FIs is the rogue investor Ketan Parekh or KP as he is popularly known. It is learnt that IDBI and IFCI had extended loans to the tune of Rs.14. 00 billion-odd to companies known to be close to broker Ketan Parekh.

The cup of woes for the Indian financial institutions is more than overflowing and unless a few quick and harsh steps of smart surgery are taken, the institutions will bleed the economy to bad health.