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Ratings of major Indian financial institutions/commercial Banks

Extract from Standard & Poor's Ratings- 27th October 2003


The affirmation of the foreign currency counterparty credit rating on Industrial Development Bank of India (IDBI) with a negative outlook reflects the much improved funding cost profile of the institution, which has benefited from the restructuring of its high-cost liabilities in fiscal 2002-2003, in terms of its interest cost and maturity profiles. As part of the restructuring assistance package, the government of India has allocated a total interest financial support scheme of Indian rupee (Re) 25 billion (US$521 million) over a five-year period, to cover the interest differential between the institution's existing cost of borrowings and the pre-determined interest of 8%. IDBI's overall cost of funds has been reduced by 1.47% at March 2003 from the previous fiscal period, through the repayment and prepayment (by exercising call options) of maturing high-cost borrowings.

Such interest cost savings will have a positive impact on the institution's net interest income margin, which is expected to improve. In addition, support will come from the gradual pick-up in loan growth as a result of strengthening industrial activity from better economic growth expected for the fiscal year ending March 2004.

Nevertheless, the ratings also recognize the still-weak quality of IDBI's loan book, which had witnessed an increase in absolute terms and in gross NPA ratios. With the continued weakness in the institution's loan portfolio, this is expected to constrain IDBI's net profitability, as a result of the high loan-loss provisions necessary for its NPAs. The ratings also acknowledge the current transitional stage of the institution, which is awaiting Parliamentary approval for the Transfer of Undertaking and Repeal Bill 2002 aimed at transforming IDBI into a universal commercial bank, from its present development financial institution status.

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