New Delhi, Aug. 21: Finance minister Jaswant Singh today warned legislators that he would not be able to guarantee the health of Industrial Development Bank of India, the ailing development financial institution, unless they passed a legislation in the monsoon session that would enable it to undertake both retail and term lending.
Under the statute, IDBI has to lend to companies over long tenures which is no longer viable because of asset mismatches, leading to a dramatic slump in the FI’s loan disbursals.
The Industrial Development Bank (Transfer of Undertaking and Repeal) Bill, 2002, was sent to the standing committee of the finance ministry last winter.
“If we do not pass it in this session and carry it forward to the winter session, a full year will pass ... In that case, I can give no guarantee about the health of IDBI,” he said during a discussion on the legislation in the Lok Sabha.
Last November, the government had introduced the modified IDBI bill since the old Act was not under the Banking Regulation Act which prevented the ailing term-lender from undertaking commercial banking activities.
The standing committee had recommended that the government should retain its 51 per cent equity as small and large investors have investments of around Rs 10,000 crore in IDBI bonds.
IDBI, the country’s largest financial institution into term lending, has lost public funds running to over Rs 16,000 crore by investing in ventures and debenture papers which either went bust or turned into bad debts otherwise.
“IDBI’s non-performing asset was worth over Rs 15,000 crore leading to a decline in its lending abilities,” Singh said.
The principle of borrowing short and lending long also led to a severe asset-liability mismatch which resulted in IDBI’s profits sliding southward since the last three years.