Subject : INDIAN BANKING SYSTEM

Subject Course Semester Topic

Topic : IDBI

CLASS NOTES Indian Banking System BBA Banking and insurance Second IDBI

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) Industrial Development Bank of India was set up to accelerate the development of the country. A number of financial institutions came into existence after independence and were catering to a variety of needs of the industry. There was a lack of co-ordination among different institutions and it lead to over lapping and duplication in their efforts. At the same time some gigantic projects of national importance were not getting required financial assistance. It was in response to this need that the Industrial Development Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary of Reserve Bank of India. The bank was to act as an apex institution coordinating functions of all the financial institutions into a single integrated movement of development banking and supplementing their resources for industrial financing and as an agency for providing financial support to all worthwhile projects of national importance whose access to existing institutional sources is limited. The ownership of IDBI was transferred to Central Government on February 16 1976. It is now working as state owned autonomous corporation. Besides acting as a reservoir on which other financial institutions can draw, IDBI provides direct financial assistance to industrial units bridge the gap between supply and demand of medium and long term finance. The IDBI Act was amended, in 1994, to permit public ownership upto 49 per cent. In 1995, it raised more than Rs. 20 billion through its first initial public offer (IPO) of equity. It reduced the stake of the government to 72.14 percent. Further, in June 2000, a part of the equity shareholding of the government was converted into preference share capital which was redeemed in March 2001, resulting into further reduction of government stake to 58.47 percent.

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Subject : INDIAN BANKING SYSTEM

Topic : IDBI

Financial Resources of IDBI (i) Share Capital. IDBI was formed with an authorized capital of Rs. 50 Crores which was raised a number of times. In October, 1994, Government of India’s amended certain provisions of IDBI Act under which its authorized capital has been increased to Rs. 2000 crore which can further be increased to Rs. 5000 crore. A part of equity capital (Rs. 253 crore) has been converted into preference capital. IDBI has been permitted to issue equity capital to public with a stipulation that at no time Government holding will be less than 51 per cent. As on March 31, 2003 the paid up capital of IDBI stood at Rs. 652.8 crores and reserve funds at Rs. 6325.3 crore (ii)

Borrowings.

The bank is authorized to raise its resources through borrowings from Government of India, Reserve Bank of India and other financial institutions. On March 31,2003, the bank has borrowings of Rs. 41798.0 crore by way of bonds and debentures, deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from the Government of India and other sources.

Functions of IDBI The main functions of IDBI are as follows : 1. To co – ordinate the activities of other institutions providing term finance to industry and to act as an apex institution. 2. To provide refinance to financial institutions granting medium and long term loans to industry. 3. To provide refinance to scheduled banks or co – operative banks. 4. To provide refinance for export credit granted by banks and financial institutions. 5. To provide technical and administrative assistance for promotion, management or growth of industry. 6. To undertake market surveys and techno – economic studies for the development of industry. 7. To grant direct loans and advances to industrial concerns. IDBI is empowered to finance all types of industrial concerns engaged or proposed to be engaged in the manufacture, preservation or processing of goods, mining, hotel, industry, fishing, shipping transport, generation or distribution of power, etc. The bank can also assist concerns engaged in the setting up of industrial estates or research and development of any process or product or in

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Subject : INDIAN BANKING SYSTEM

Topic : IDBI

providing technical knowledge for the promotion of industries. Until recently, IDBI also functioned as Export Bank of the country. 8. To render financial assistance to industrial concerns, IDBI operates various schemes of assistance , e.g., Direct Assistance Scheme, Soft Loans Scheme, Technical Development Fund Scheme, Refinance Industrial Loans Scheme. Bill Red – discounting Scheme, Seed Capital Assistance Scheme, Overseas Investment Finance Scheme, Development Assistance Fund, etc.

OPERATION OF IDBI Since its inception in 1964, IDBI has extended its operations to various areas of industrial sector. It provides direct as well as indirect financial assistance for increasing the pace of industrial development. Aggregate assistance sanctioned by March, 2003 amounted to Rs. 223932.1 crore and disbursements amounted to Rs. 168166.5 crores. The operations are discussed under two categories i.e. Direct and Indirect Assistance.

1. Direct Assistance Direct financial assistance includes project finance assistance, soft loan assistance, assistance under technical development fund scheme and rehabilitation assistance for sick units. Various schemes under direct assistance are discussed as follows : (i) Project Finance Assistance. Under project finance scheme, the IDBI extends direct assistance to industrial concerns in the form of :  Project loans  Subscription to and/or underwriting of issues of shares and debentures.  Guarantee for loans and deferred payments. Financial assistance under this scheme is granted for setting up new projects as well as for expansion, modernization or renovation of existing units. IDBI normally extends assistance to public limited companies in the private, public, joint sector and co – operative sectors. Bank’s assistance is sought for projects involving large capital outlay or sophisticated technology. Bank gives preference to units set up by new entrepreneurs or projects located in backward areas. The repayment period is settled by looking at the capacity of the enterprise. Normally, repayment is spread over a period of 8 – 10 years with a grace period of 2 – 3 years. These loans are usually secured by a first legal mortgage of the immovable properties of the borrowing concern and floating charge on its other assets, subject to a first charge on raw materials, stocks, etc. for working capital borrowings.

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Subject : INDIAN BANKING SYSTEM

(ii)

Topic : IDBI

Soft Loan Scheme.

IDBI introduced in 1976 the soft loan scheme to provide financial assistance to productive units in selected industries viz., cement, cotton, textiles, jute, sugar and certain engineering industries to modernize, replace and renovate their plant and equipment so as to achieve higher and more economic levels of production. This scheme is implemented by IDBI with financial participation by IFCI and ICICI. The basic criteria for assistance under the scheme is the weakness or non-viability of industrial concerns arising out of mechanical obsolescence. Industrial concerns which are not in a position to bear the normal lending rate of interest of the Financial institutions are provided concessional assistance to the full extent of the loan. In other cases the limit of concessional assistance is 66 per cent of the loan. Assistance under this scheme is based on the requirements of individual cases. As such, no minimum or maximum limit of loan has been prescribed. The repayment of loan extends upto 15 years with a moratorium period of 3 – 5 years. The loans under this scheme are secured as a first charge on fixed assets. The bank may insist on personal or other guarantees also. (iii)

Technical Development Fund Scheme.

The Government of India, introduced the Technical Development Fund (TDF) Scheme in March, 1976for issue of import licenses for import of small value balancing equipment, technical know how, foreign consultancy services and drawings and designs by industrial units to enable them to achieve fuller capacity utilization, technological up gradation and higher exports. Some industrial units found it difficult to take advantage of the import license issued under this scheme for want of rupee resources. In January, 1977, IDBI introduced a scheme for providing matching rupee loans to industrial units to enable them to utilize import licences issued under TDF scheme. The scheme which was started for six specified industries now covers all industries as also import of any other input needed by the industrial units for improving export capabilities. This scheme of the bank has notbeen successful as only one – fourth of the units sought this assistance. Rehabilitation Assistance to Sick Units The problem of growing industries sickness in India, it is a cause of worry. It adversely affects production, employment, generation of income and utilization of productive resources. With a view to combat sickness, IDBI has devised the Refinance Scheme for Industrial Rehabilitation. The units which have been assisted by State Financial Corporation or State Industrial Development Corporations and are classified as sick are eligible under this scheme. There should be a possibility of the unit being revived in a reasonable time. The bank provides for capital expenditure required for restarting the units on viable level. The need for margin money for additional term – loan and working capital, working capital term loan, payment of

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Subject : INDIAN BANKING SYSTEM

Topic : IDBI

statutory liabilities, cash losses during rehabilitation period etc. are met by the bank. The bank has also be trying to bring merger of sick units with healthy units. 2. Indirect Assistance IDBI cannot provide direct financial assistance to various industrial units situated in different parts of the country. It has adopted a strategy under which it extends financial assistance directly to large and complicated industrial units involving large capital outlays and sophisticated technology. It helps small scale industries indirectly through providing assistance to other financial institutions which, in turn, help these industries. The indirect help of IDBI takes the form of refinancing of industrial loans, rediscounting of bills, seed capital assistance and financial support to other institutions by way of subscribing to their shares, debentures, bonds etc. (i)

Refinance of Industrial Loans.

IDBI provides refinance facility against term loans granted by the eligible credit institutions to industrial concerns for setting up of industrial projects as also for their expansion, modernization and diversification. IDBI provides refinance to commercial banks, regional rural banks, state co operative banks, state financial co operations, state industrial development corporations or other institutions extending term loan assistance to industrial units. Industrial units seeking term loan approach the eligible financial institutions which, after sanctioning the loans, approach the IDBI for refinance facility. The appraisal of loan application is done by the primary institutions by keeping in view the guidelines issued by central government and the IDBI. The bank relies in the appraisal done by the primary lending institutions who have to bear the primary responsibility for the loans granted by them. IDBI sanctioned a sum of Rs. 20712.3 crores upto March 2003 under refinance of industrial loans. (ii)

Rediscounting of Bills.

IDBI introduced another indirect financing scheme in 1965, whereby rediscounting facility of machinery bills was introduced. This scheme was to help indigenous machinery manufacturers and their purchasers . the purchaser of machinery accepts bills of exchange or promissory notes of the seller and undertakes to make the payment in installments. The seller gets the bill discounted with his banker who in turn rediscounts these bills with IDBI. The buyer is enabled to acquire the machinery on deferred payment term without going through the usual procedures involved in obtaining a project loan. The usual deferred period is 5 years but in deserving cases it can be extended upto 7 years. The scheme has been extended for expansion and diversification of existing units also. The re discounting facility has been made available to imported machinery also where bills will be required to be drawn by local agents of foreign firms.

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Subject : INDIAN BANKING SYSTEM

(iii)

Topic : IDBI

Seed Capital Assistance.

With a view to help first generation entrepreneurs who have the skills but lack financial resources, IDBI started seed capital assistance scheme in September, 1976. Under the first scheme, State Financial Corporations provide seed capital assistance to projects in small scale sector from their special class of share capital contributed by IDBI and the state government. The maximum amount of assistance under this scheme is to meet the gap in the equity contribution which is 20 per cent of the cost of the project of Rs. 2 lakhs whichever is less. Under the second scheme which is operated through State Industrial Development Corporations seed capital assistance is given to medium sized projects costing upto Rs. 1 crore. The assistance is available to meet the gap in promoters’ contribution as well as in equity where no public issue of shares is envisaged. The assistance is interest free with a service charge of Rs. 1 per cent annum and a moratorium of 5 years is available for repayment of loans.

ROLE OF IDBI IDBI has been playing a significant role in broad – basing industrial sector in the country. IDBI not only provides long term loans to industry instead render number of services to achieve Government of India’s various socio economic objectives. It has contributed a lot in achieving balanced industrial growth through : (i) (ii) (iii) (iv) (v)

Development of specified backward areas; Modernization of specific industries; Employment generations; Identification of and encouragement to new entrepreneurs; and Providing support services for creating a deep and vibrant domestic capital market.

IDBI setup the Small Industries Development Bank of India, in the year 1990, as a wholly owned subsidiary to work as a principal institution for the promotion, financing and development of industries in the small scale sector. However, IDBI reduced its shareholding in SIDBI to 49 per cent in 2001. IDBI has also played a significant role in the development of capital market. It has participated in the setting up of the following institutions. (a) (b) (c) (d) (e)

Securities Exchange Board of India (SEBI) National Stock Exchange (NSE) Stock Holding Corporations of India (SHCIL) Credit Analysis and Research Limited (CARE) Investor Services of India Limited (ISIL)

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Subject : INDIAN BANKING SYSTEM

Topic : IDBI

(f) National Securities Depositories Ltd. (NSDL) (g) Clearing Corporations of India Ltd. (CCIL) In 1993, IDBI set up IDBI Capital Market Services Ltd. (ICMS) as a wholly owned stock broking company. In 1994, it set up the IDBI Bank Ltd., and in 1999 set up the IDBI Investment Management Company Ltd. Further to undertake IT – related activities, IDBI Intech Ltd. was set up in March 2000. In 2001, IDBI set up the Trustee ship Services Ltd. To provide technology driven information and professional services to the issuers and subscribers of debentures. In April 2001, IDBI appointed Boston Consulting Group (BCG) as consultant to draw a road map for its conversion into a universal bank.

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