Centre not keen on converting FIs into universal banks now

New Delhi, Oct 14: The finance ministry has decided to go slow for the time being on proposals to convert financial institutions into universal banks.

Financial institutions, like IDBI and ICICI Ltd, have worked out a road map for conversion into universal banks. IFCI, which was earlier also keen to become a universal bank, has decided to drop the proposal after the recommendations in this regard by the Basu committee. It now wants to enter into strategic alliance with commercial banks and is also scouting for a international investment banker to whom it will give equity.

Top finance ministry sources said the ministry has not yet taken a clear decision on whether to go ahead with their proposals. The officials are of the view that the conversion could mean hampering their primiary function of lending to large infrastructure projects as term lending institutions.

Universal banks perform all functions of term lending institutions and commercial banks. Thus, apart from long-term lending, they also extend short term loans.

There are concerns in the ministry that with gross non-performing assets (NPAs) of banks touching an astronomical level of Rs 60,000 crore, the entry of term lending institutions could mean larger NPAs.
This means that they will be incurring long-term liability against short-term deposits. Simply put, this means they would be borrowing for a three to five-year period like banks and lending for long periods. The gestation period for infrastructure projects is particularly long.
This thinking is different from the earlier approach which suggested that FIs be converted into universal banks as the government could not frequently bail them out. The financial health of these institutions is far from satisfactory.

However, with the slowdown in the economy, the government has come to the conclusion that pump priming in infrastructure could set in a chain reaction through a multiplier effect for revival of the economy. The focus on completing mega private sector projects, particularly in the infrastructure sector, implies that the government does not want these institutions to dilute their basic function at this juncture.

The government, however, will review the decision on universal banking if its concerns on funding mega projects are addressed.
The finance ministry is also concerned that after conversion the profitability of FIs may go down.

Sources said even top authorities of the central bank are apprehensive of the move to convert FIs into universal banks.
There are several regulatory issues that need to be resolved for purposes of conversion, such as RBI’s requirements of capping the promoter’s equity at 40 per cent and new merger norms.

— UNI