IDBI to be converted into a bank

In a major reform to the financial sector, the government on Tuesday decided to corporatise the biggest financial institution of the country...

In a major reform to the financial sector, the government on Tuesday decided to corporatise the biggest financial institution of the country Industrial Development Bank of India (IDBI). The Government also decided to convert IDBI from a development financial institution into an universal bank.

As a first step to the process, the Cabinet decided to repeal the IDBI Act in the coming winter session of Parliament. This was announced by the Information and Broadcasting Minister Sushma Swaraj after a Cabinet Meeting chaired by Prime Minister Atal Behari Vajpayee.

The move would allow IDBI to access cheaper funds from the retail investors. This would bring down the borrowing cost of the funds for IDBI and also improve both its disbursement and profitability. This also implies that IDBI in the future would convert itself totally into an universal bank and is likely to merge with its own retail banking arm IDBI Bank.

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According to senior FI officials, the merger with IDBI Bank is likely to happen in the future as a natural fallout of IDBI’s conversion into an universal bank.

According to Sushma Swaraj, one of the main reasons for the declining health of IDBI was that its disbursements were going down. Further, it was also noticed that the cost of borrowing for the FI was as high as 11.5 per cent which, in turn, hiked the rates at which the FI was lending at the market. Hence, the disbursement of the FI was going down and hence its profitability, the minister added.

The Government also decided to make a provision of Rs 2,500 crore over a period of five years to meet the interest rate differential for the FI. Explaining this, the Minister added that IDBI has already made commitments and borrowed at high rates of interest.

To meet these obligations, IDBI can avail a provision of Rs 500 crore per annum over a period of five years. This means that the government would bridge some portion of the high interest cost for IDBI’s funds.