New Delhi, Nov. 12: The government today cleared the way for Industrial Development Bank of India (IDBI), the country’s first development financial institution formed in the mid-fifties, to metamorphose into a commercial bank.
The Cabinet today decided to repeal the IDBI Act which will enable the financial institution to corporatise and acquire a banking licence.
As a development financial institution, IDBI provided long-term loans to companies. But over the past few years, the principle of borrowing short-term funds and lending long led to severe asset-liability mismatches that cut the ground under the financial institution which has been eager to enter retail banking.
Information and broadcasting minister Sushma Swaraj told reporters after the meeting that though the corporatisation of the financial institution would enable it to raise low-cost deposits from retail investors, it would continue to focus on long-term lending.
“The government has decided to make a provisioning of Rs 2,500 crore which will provide a cushioning effect to the institution,” Swaraj said. The provisioning is being made to cover the gap between the interest rates on its borrowings and lendings.
The financial institution had earlier appealed to the government to provide bailout funds amounting to Rs 5,000 crore which was turned down.
Last month, at a meeting between finance secretary S. Narayan and IDBI officials, it was decided that IDBI would be allowed to seek a licence to enable it to enter retail banking where the business prospects and margins are a lot better than in term-lending.
During the year ended March 31, IDBI clocked a lower profit of Rs 424 crore as against Rs 691 crore in the previous year. IDBI’s financial problems arose when its investments running into over a thousand crore of rupees in non-convertible debentures of a horde of known and unknown companies like Asil Industries, Atash Industries, Hamco Mining, and Jhaveri Polymers went sour.