IDBI Wants Centres Help For Transition To Universal Bank

Mumbai, January 23: | Updated: Jan 24 2003, 05:30am hrs
The Industrial Development Bank of India (IDBI), which proposes to convert itself into a universal bank on a standalone basis, would need to raise resources to the extent of a staggering Rs 20,000 crore from the market to meet the requirements of Statutory Liquidity Ratio (SLR) and Cash Reserve Ration (CRR). Towards this end, IDBI has sought policy level and financial support from the Centre. Rs 17,000 crore is to be raised for SLR and Rs 3,000 crore for CRR requirement.

IDBI has also sought the Centres approval to hold 49 per cent share capital of IDBI Bank for the next two to three years and after watching its future growth, a final decision would be taken as to whether IDBI Bank be merged with IDBI Universal Bank or be sold off at a good price. It has made it clear that the brand name would be retained by IDBI.

IDBI has brought to the notice of the Centre that if it would not be converted into a bank it may have asset liability mismatches.

Therefore, it is necessary that IDBI is converted into a bank at the earliest which would also ensure security, continuity and growth for the existing employees, IDBI said in an internal note on Conversion to Universal Banking Issues and Options to be discussed at length at the meeting of the Parliamentary Standing Committee on Finance slated for January 27.

IDBI has called upon the Centre to reduce interest of 8 per cent on its high cost liabilities borrowed from banks and institutions. It has also requested that government should issue bonds of Rs 500 crore annually to banks and institutions to compensate them for the loss of interest of Rs 2,500 crore.

IDBI has stressed the need for its corporatisation by repealing the IDBI Act, exemption from SLR requirements under section 24 of Banking Regulation Act 1949 for a period of five years subject to phased build up of SLR over a period of three years beginning sixth year, exemption for a period of five years from full compliance with CRR and exemption for five years from the extant branch licensing policy of RBI under which banks are required to open at least 25 per cent of their total number of branches in semi-urban and rural areas.

It has also sought exemption from lending to priority sector for an initial period of five years, about additional 15 branch licences per metro and 10 per each mini metro as per need so as to quickly catch up on deposits and retail banking business and access to deposit insurance.

According to IDBIs internal note, it had come to these conclusions after considering three options: to transform into a universal bank through a merger with IDBI Bank/any other private sector bank, a merger with a large public sector bank with deposit size of Rs 40,000 crore or conversion into a universal bank by itself. It has also identified challenges, among them the low deposit base of IDBI Bank (about Rs 6,700 crore). Consequently, a merger with IDBI Bank does not reduce the need for concessions and support from the Centre during the transition period and merger with large public sector bank.

Conversion of IDBI into a universal bank by itself has the least organisational challenges, the institution feels. However, the given constraints including compliance with regulatory controls would have to be addressed to achieve a smooth transformation.

The Centre has already proposed repeal of IDBI Act and the undertaking vested of IDBI be vested in and transferred to a company to be incorporated under the Companies Act, 1956. The Bill in this regard, which has been referred to the Parliamentary Standing Committee on Finance, would come up for discussion at the meeting of January 27. Under the proposed Bill, IDBI would be converted into a universal bank on a standalone basis with existing shareholders and employees of IDBI becoming the shareholders and employees of the banking company, which would also take over all the assets and liabilities of IDBI.

IDBI would continue to perform the role and functions of a development finance institution and it would be a government-owned bank.