Industrial Finance Corporation of India

Overview of development banking in India

Development Banking emerged after the Second World War and the Great Depression in the 1930s. The demand for reconstruction funds for the affected nations compelled in setting up of national institutions for reconstruction. At the time of Independence in 1947, India had a fairly developed banking system. The adoption of bank dominated financial development strategy was aimed at meeting the sectoral credit needs, particularly of agriculture and industry. Towards this end, the Reserve Bank concentrated on regulating and developing mechanisms for institution building. The commercial banking network was expanded to cater to the requirements of general banking and for meeting the short-term working capital requirements of industry and agriculture. Specialized Development Financial Institutions such as the IDBI, NABARD, NHB and SIDBI were set up to meet the long-term financing requirements of industry and agriculture.

Formation of Industrial Development Bank of India

The Industrial Development Bank of India was established in 1964 under an Act of Parliament as a wholly-owned subsidiary of the Reserve Bank of India. In 1976, the ownership of IDBI was transferred to the Union government and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in India. IDBI provided financial assistance, both in rupee and foreign currencies, for green-field projects and also for expansion, modernization, and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI also provided indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of the sale of indigenous machinery on deferred payment terms.

After the public issue of IDBI in July 1995, the government shareholding in the bank came down from 100% to 75%.

IDBI played a pioneering role, particularly in the pre-reform era , in catalyzing broad-based industrial development in India in keeping with its Government-ordained 'development banking' charter. Some of the institutions built with the support of IDBI are the Securities and Exchange Board of India , National Stock Exchange of India , the National Securities Depository Limited , the Stock Holding Corporation of India Limited , the Credit Analysis & Research Ltd, the Exim Bank , the Small Industries Development Bank of India and the Entrepreneurship Development Institute of India.

Conversion of IDBI into a commercial bank

A committee formed by RBI recommended the development financial institution to diversify its activity and harmonize the role of development financing and banking activities by getting away from the conventional distinction between commercial banking and developmental banking. To keep up with reforms in financial sector, IDBI reshaped its role from a development finance institution to a commercial institution. With the Industrial Development Bank Act, 2003, IDBI attained the status of a limited company viz., IDBI Ltd.Subsequently, in September 2004, the Reserve Bank of India incorporated IDBI as a 'scheduled bank' under the RBI Act, 1934. Consequently, IDBI formally entered the portals of banking business as IDBI Ltd. from 1 October 2004. The commercial banking arm, IDBI Bank, was merged into IDBI in 2005.

Direct government intervention

The merger was expected to streamline operations of the bank. However, IDBI continued to base its policy towards industrial sector like the erstwhile IDBI entity did. This resulted in the retail business of the bank to be limited to 13 percent of its total business. As of March 2018, the total Non Performing Assets rose to ?55,588 crore and were about 28 percent of its total loans. This was the highest among Indian banks. The Union government intervened, with Life Insurance Corporation bailing out the bank with an infusion of ?9,300 crores.On 29 June 2018, LIC got a technical go-ahead from the Insurance Regulatory and Development Authority of India to increase stake in IDBI Bank up to 51%. LIC completed the acquisition of 51% controlling stake on 21 January 2019, with a total investment of ?21,624 crores.