The Industrial Finance Corporation of India is likely to be merged with the Punjab National Bank or the Bank of Baroda and a final decision is expected to be taken shortly.

Days after Finance Minister Jaswant Singh announced the government's intention to merge the ailing financial institution with a bank, the IFCI board met in New Delhi on Monday to consider various options.

Official sources said that the board had taken up the merger plan, but declined to give the name of the bank with whom the oldest financial institution of the country would be merged.

PNB and BoB's name figured among the prospective banks which can take over IFCI, but the possibility of a merger of IFCI with State Bank of India was ruled out.

"A bank which have assets common to that of IFCI is best suited for the merger. But the merger of IFCI with a bank is possible only after the balance sheet and manpower is restructured and tax sops are provided to the bank which takes over the good assets of IFCI," a board member said after the meeting.

The sources declined to reveal whether there would be share-swap or a cash deal but said the merger could be completed within April 2004.

The BoB chairman did not comment, while the PNB chief was out of town. IFCI chairman could not be contacted.

According to the plan, the acquirer bank would seek tax incentives for offsetting the losses of IFCI against the profits of the bank.

Moreover, the liabilities would have to be restructured and staff strength reduced through the ongoing voluntary retirement scheme.

In a bid to improve IFCI's financial health, the government had earlier announced a Rs 5,220 crore (Rs 52.20 billion) financial support over a period of 10 years for meeting principle and interest liabilities, of which Rs 2,096 crore (Rs 20.96 billion) has been already provided till now.

The government would service the borrowings of IFCI from ADB and KfW, sources said, adding liabilities of IFCI in respect of government guaranteed SLR bonds and retail borrowings of investors below Rs 100,000 would be taken over by the Centre.

The Centre would also bear the difference between the existing coupon rate and current G-Sec rate on SLR bonds held by PSUs and FIs till maturity.

Out of the total Rs 5,220 crore package, sources said a sum of Rs 523 crore (Rs 5.23 billion) has been released as loan during 2003-03 and another sum of Rs 1,573 crore (Rs 15.73 billion) as grant has been released during 2003-04 to IFCI.

After the initial tranche of assistance, IFCI reduced its losses to Rs 259.70 crore (Rs 2.597 billion) last fiscal from Rs 884.70 crore (Rs 8.847 billion) from in 2001-02 and 261.93 crore (Rs 2.619 billion) in 2000-01.

As part of reducing the losses further, the government has asked the ailing FI to reduce non-performing assets to 9.0 per cent by 2004-05 from the present 22 per cent by transferring the bad loans to its Asset Care Enterprise within the next three years.

The government has also asked IFCI to stop fresh borrowing and deposit mobilisation, while bringing down the staff strength by 5.0 per cent annually.