The effect of current downturn has been to reduce the rate of growth of disbursements, while increasing non-performing assets. This has led to balance sheet growth becoming all-important, in order to reduce the proportion of NPAs. But that growth could lead the company into hitherto uncharted waters.

ICICI's gross non-performing assets increased by Rs 1,267 crore during 1998-99, during a period when outstanding net loans and debentures went up Rs 8,209 crore.

ICICI's disbursements increased by 22 per cent in 1998-99, compared to a growth of 41 per cent in the previous year.

Net non-performing assets have increased from Rs 1,954 crore as on March 31, 1997 to Rs 3,623 crore two years later.

The rate of growth of NPAs was curtailed during the year, as shown by the fact that the net NPA ratio increased from 6.8 per cent as onMarch 31, 1997 to 7.6 per cent on March 31, 1998, and recorded only a 20 basis point increase to 7.8 per cent as at end-March 1999, no mean achievement considering the environment.

ICICI has changed its asset composition substantially during the last few years, moving away from relying solely on funding manufacturing projects, and increasing exposure to corporate finance and infrastructure.

The institution's links with corporates have been built up over decades, and the skills built up are used to structure new products, such as securitising receivables.

It is also logical to move with corporate customers to the short end of the market, particularly since the source of funds is short-term in nature. The importance given to infrastructure also leverages the institution's skills.

But the move towards funding retail assets is in a totally new direction, having little synergy with its strengths in corporate finance. The move appears to be a reaction to the current lack of opportunities in the corporatesector ( new projects in the traditional manufacturing sector constitute 5 per cent of incremental approvals).

Finance companies have burnt their fingers badly in the car finance market, and it remains to be seen whether ICICI can avoid their mistakes.

An alternative strategy could be to wait out the recession, instead of branching out into areas in which it has little expertise.

It is, after all, the return on assets which matters for the investor, and not balance sheet size per se. Return on average assets has declined from 3 per cent in 1997-98 to 2.8 per cent last fiscal.

The return on average shareholders' funds was more or less the same during both the years. ICICI can clean up its balance sheet and cut costs, just as the rest of the corporate world is doing.

The danger in this approach, however, is that NPAs as a proportion of assets will rise sharply, eroding the strength of the balance sheet. Which is why ICICI is trying to get into the high growth area of personal finance. But that toocould lead to higher NPAs. Perhaps, the middle path is for ICICI to be aggressive in wooing corporate business, short-term as well as fee-based.

Trouble is, the lower funding costs for banks, exacerbated by the recent CRR cuts, will affect the ability of the FIs to competitively price their loans.So far as the ICICI stock is concerned, the high dividend yield sets a floor for the price.