Industrial Development Bank of India (IDBI in its circular dated August 20, 1999 has reviewed the definition of `industrial concern' under section 2(c) of the SFCs Act and has approved the following activities under sub clause (xiii) of the above section to enable the SFCs to financial/undertake new industrial business activities:  
  

• financing of construction of commercial complexes, show rooms and sales out-lets independent of hotel business.
• financing of cost of establishment of departmental stores, shopping malls and tourist homes:
• It may be noted that the items/activities displayed or kept for sale in showrooms, sales out-lets, departmental stores, shopping malls will not be permitted for financing unless they are industrial equipments;
• Setting up of vocational training centres for imparting technical knowledge to the entrepreneurs for setting up and running the units efficiently and produce quality goods. Setting up of technical institutions such as schools, colleges etc., remain outside the purview of definition of industrial concern and hence are not permitted for financing by SFCs.

Financing of vehicles is permitted only when the vehicles form part of the orginal project cost of industrial concern. The acquisition of vehicles by industrial concerns after the scheme has been implemented or by professionals like doctors, lawyers, engineers, architects for their personal use for discharging their services would continued remain outside the purview of definition of industrial concern.  

It is hoped that grant of approvals/permission as above will enable the SFCs to improve their over all performance and profitability.  

Please bring the contents of this circular to the notice of your offices.  

Revision in Extent of Refinance  
   
Industrial Development Bank of India (IDBI) in its circular dated July 23, 1999 has revised upwards the extent of refinance from 65% to 80% per project. The revised refinance limit is applicable to all cases where refinance is sanctioned on or after July 13, 1999  

All the other provisions of the scheme remain unchanged.  

Refinance to SIDCs for Infrastructure projects  
   
IDBI vide its circular dated July 23, 1999 has enhanced the ceiling of the project cost for infrastructure projects. In terms of the aforesaid circular A and B category SIDCs have been allowed to .extend financial assistance to infrastructure projects involving project cost upto Rs.20 crore.  

National Equity Fund Scheme - Soft loan  
   
SIDBI in its Circular dated July 23, 1999 has advised all PLIs that they may charge interest @ 16.5% p.a. i.e. 3.5% over and above SIDBI's LTPLR (the present rate being 13% p.a.) on defaulted instalments and arrears of service charge of soft loan component of the NEF Scheme. The interest recovered on defaulted instalments of soft loan component of NEF Scheme is to be remitted to SIDBI. The PLIs have been allowed to retain the service charge @ 1 % p.a. and the interest thereon.  

Re-Payment/Pre-payment of Refinance-Soft Loan Scheme  

SIDBI in its circular dated June 28, 1999, has advised all PLIs that prepayment/repayment of term loans covered under the above schemes can only be allowed to the borrowers if prepayment/repayments of the soft loan component of the scheme is also made. As per the guidelines issued by SIDBI for these schemes, the repayment of term loan and soft loan components of the loan is to be made at the same time. As nodal agencies, the PLIs have been advised to insist that repayment of both the components of loans be made together. If the borrower still makes the repayments only under term loan, then PLIs have to adjust the amount proportinately towards both the components. The payments to SIDBI by PLIs are also to be made correspondingly.  

Refinance Scheme for Textile Industry under Technology Upgradation Fund - Relaxation  

SIDBI vide its circular dated July 23, 1999 has relaxed the ceiling on project cost for eligibility under the Refinance Scheme for Textile Industry under Technology Upgradation Fund (RTUF) for SSI units. The ceiling on project cost for coverage under the scheme would now be the same as for any other SSI unit viz. Rs.12 cr., Rs. 8 cr. and Rs. 5 cr. in respect of SFCs/SIDCs in categories `A', `B' and `C' respectively.  

Panel set up on regulation of FIs  
   
RBI has set up a committee to look into the regulation and inspection of developmental financial institutions. The committee will try to differentiate banks and financial institutions for the purpose of regulation and supervision. The five member committee is headed by a chartered accountant, Shri Y.H. Malegam of S.B. Billimoria and Company and comprises four others viz. Shri R.H. Patil, Managing Director, National Stock Exchange (NSE), Shri P.V. Narasimham, Chairman and Managing Director Industrial Finance Corporation of India (IFCI), Chief General Manager, Financial Institutions Division RBI, Shri K.C. Bandhopadhyay and a former senior economist of Asian Development Bank. Shri Desai.  

The committee will review the RBI guidelines for the FIs and suggest changes. It will examine off-site supervision of institutions and the reporting procedures being followed in respect of them.  

Since the operations of banking sector differ from that of financial institutions, a need to frame new norms for regulating institutions was felt. For instance, the lending and deposits pattern, the branch network, credit appraisal system and reporting structure differ between banks and institutions. The asset profile of banks is short term and that of institutions long term, and this requires a different approach for regulation.  

The need to set up such committee came in the wake of the fact that currently the financial institutions are not completely regulated by the RBI, according to RBI sources.  

RBI blames fund diversion by project promoters for rising NPAs  

The RBI finds that diversion of funds by promoters for expansion, modernisation and setting up of new projects is one of the factors that has contributed to the rise in banks' non-performing assets (NPAs). RBI attributes government policies, import duty changes, deregulation and weak credit appraisal skills, among other factors responsible for the rise in NPAs in the banking sector.  

In a status report prepared by the department of banking supervision (DBS) - released on June 29-RBI has said that the gross NPAs of the public sector banks were rising along with the net NPAS. While the gross NPAs amounted to Rs. 45,653 crore in 1997-98 up by 4.7 per cent over the previous year, the net NPAs were Rs. 21,232 crore up by 4.6 per cent.  

First local area bank (LAB) in AP  

The RBI is to award its first ever licence to a Local Area Bank (LAB) in Andhra Pradesh for commencing banking operations. The award of the licence to the Coastal Local Area Bank (CLAB) heralds the entry of private sector into the country's rural banking sector.   

LABs are banks which would operate in a limited circle, concentrating only on two or three adjoining districts.  

According to RBI requirements, a LAB must have a minimum capital of Rs.5 crore. The rules for priority lending are the same as those for other banks.  

RBI allows use of IRS and FRA  
   
The RBI has ushered in rupee derivative trading into the country; it has formally allowed banks and corporates to hedge against interest rate risks through the use of interest rate swaps (IRS) and forward rate agreements (FRA)   

According to the guidelines notified by the RBI on July 7 there will be no restriction on the tenure and size of the IRS and FRA entered into by banks.   

The IRS will allow corporates to hedge their interest rate risks and also provide an opportunity to swap their old high cost loans with cheaper ones. However, the RBI has warned that while dealing with corporates, the participants should ensure that they are undertaking FRAs/IRS only for hedging their own balance sheet exposures and not for speculative purposes.  

RBI to withdraw nominees from pvt. banks  
   
The RBI has begun withdrawing its nominees from boards of well-managed old private banks.  

This is in keeping with the recommendations of the Narasimham panel on financial sector reforms, which said that having its nominees on banks' boards was in conflict with RBI's regulatory rote.  

As part of its supervisory role to ensure better governance by bank management, the RBI has introduced internal rating of banks . 

Time limit for availment of refinance under LoC  
   
IDBI in its circular dated April 07, 1999 has reviewed its LoC scheme and has advised all SFCs/SIDCs that applications for each disbursement of refinance under the scheme would be required to be made within three months from the date of each disbursement of loan by the Corporation within the overall period of twenty four months stipulated earlier. The request for disbursement of refinance within three months would be required to be submitted in respect of cases where the loans are sanctioned by the corporations on or after April 07. The period of 24 months would continue to be reckoned rom the date of sanction of individual loan by the Corporation. All other terms and conditions of the scheme remain unchanged.  

IDBI prepares blueprint for new millennium - no reference to state level institutions IDBI has shaped `Vision 2005' strategy to propel its growth in the new millennium and map its metamorphosis from a purely term-tending body into an integrated financial powerhouse.  

The master plan, charting IDBI's phased future course during the long term and the near-term was finalised, based on reports submitted by five internal working groups.  

The long-term plan envisages the IDBI entering a variety of new business like commercial and investment banking, cross border debt and equity investment international loan syndication, insurance advisory services, venture capital, securitisation and mortgage finance. To diversify into some of these sectors necessary amendments of the IDBI Act or issue of notifications permitted under the Act, would be required.  

On the asset side IDBI could enter new areas like restructure financing, EPC (engineering, procurement and construction) financing and receivable financing. IDBI has also decided to resume funding non-banking finance companies (NBFCs). Restructure financing involves funding of mergers and acquisitions (M&A) as well as supplementary funding in the case of restructuring of projects and corporate groups. EPC financing involves meeting the fund requirements of large engineering contractors in big infrastructure projects. Similar credit for contracts executed abroad would also be extended which could be both by way of debt and equity.  

Regulatory fine tuning is also needed where high stamp duty is an encumbering factor in securitisation business.  

(There are however obviously no proposels in the game plan directed to IDBI's role vis-a-vis SFCs/SIDCs and other state level institutions.)  

IDBI moves towards universal banking   
   
IDBI has hired management consultant Mritunjay Atherya to draw up a roadmap for the institution's move towards universal banking.  

There is a growing realisation, it is reported that IDBI can no longer survive as a mere term lending institution. It has already identified short term lending and non fund based business as other thrust areas. There is however, a need still of a comprehensive study as to the path along which the institution should move.  

Four directors of IDBI viz Sarva Shri Dipankar Basu, Besant Raj, Tarun Das and S. K. Gupta will be interacting with the consultants, on its behalf.  

IDBI to enter short term market  
   
IDBI is planning to enter the short term market. To source such funds at the lowest rates it plans to issue floating rate bonds linked to call money rates.  

The funds would be raised for a tenure of three years with quarterly/semi annual call and put options after one year of holding.  

The issue will be priced at a floating rate of 175-200 basis points above the Mumbai Inter- Bank Offer Rate (MIBOR).  

This borrowing is part of IDBI's new overall borrowing strategy to have matching liabilities and assets in various time buckets. In the current year, IDBI has already raised three-to-six month funds through term money bonds, fixed deposit and certificate of deposits.  

IDBI will also be offering assets in similar tenures to match the maturities and earn some spreads as well. In this connection it has already started giving short term loans to good corporates.  

IDBI lowers exposure to steel, textile and cement  
   
IDBI has brought down its exposure to the recession hit steel,textile and cement sectors in fiscal 1999. In a strategic shift, the IDBI has raised its exposure to sectors like petrochemicals, refineries and oil exploration, electronics, electricity generation, drugs and pharmaceuticals.  

It has cut down its exposure to six segments out of ten, to which it had high exposures. Steel and cement apart, other segments to which exposure has been reduced are paper and paper products, man-made fibre, food products, and basic industrial chemicals. The exposure to sugar industry has been retained at 2.3 per cent.  

S.H. Khan against Fl-bank merger  
   
Shri S. H. Khan (ex-Chairman of IDBI), who heads the working group on Universal Banking, did not favour financial institutions merging with public sector banks. The experience so far in mergers between public sector banks has not been good, he felt. There should not be any merger, according to him, between a financial institution and a bank until there are reforms in labour laws.  

Financial institutions, excluding state level institutions, were capable of conducting universal banking business on their own and would not need to merge with a bank. He said the report of his working group had recommended enabling universal banking, which did not mean that each institution should start providing every service under the umbrella of universal banking.  

No more loans to steel industry : ICICI  
   
Industrial Credit and Investment Corporation of India (ICICI) will not lend any further to the steel industry despite the prediction of a good growth by the sector in the next three or four years, its Chief Shri K. V. Kamath said in Calcutta on 7th August.  

IIBI net profit up 10%  
   
The net profit of the Industrial Investment Bank of India (IIBI) for 1998-99 has increased by 10 per cent to Rs. 87. 80 crore from Rs. 80.01 crore in 1997-98. The total income has increased to Rs. 440.71 crore from Rs. 327.14 crore.  

However, IIBI's non-performing assets (NPAs) to loans ratio increased by 1.3 percentage points to 14 percent. In. absolute terms, net NPA increased by 56 per cent to around Rs. 470 crore from Rs. 302 crore over the previous year. IIBI provided Rs. 14.69 crore on account of its NP Ain 1998-99 as against Rs. 6.07 crore in the previous fiscal.  

According to IIBI's Chairman & Mg. Director, "extreme competitive market conditions caused a strain on financial institutions. "Besides, many of the clients had defaulted in repayments owing to severe liquidity crunch.  

SIDBI sees 7.5-8.5% growth for SSIs  
   
SIDBI predicted a growth rate of 7.5 per cent to 8.5 per cent for the small scale industries (SSI) sector in real terms in the current fiscal outperforming the manufacturing sector. Production of SSIs in absolute terms at current prices could be in the vicinity of Rs. 6,040 to Rs. 6,100 billion in 1999-2000. The manufacturing sector is expected to record a real growth of 6.5 to 7.0 per cent during the same period. "Growth of overall exports and that of the SSI sector during 1999-2000 are likely to be in the range of 4.5 to 5 per cent and 8.3 to 8.8 per cent respectively with SSI sector consistently showing a better performance compared with the overall industry sector growth. In value terms, small scale sector exports could reach $ 13.41-13.47 billion figure.  

SIDBI to operate credit guarantee scheme mechanism to help SSIs  
   
SIDBI has been appointed as the operating agency for the new credit guarantee mechanism being worked out by the Kapur Committee. The guarantee mechanism is aimed at providing   comfort to banks and financial institutions in respect of their lending to the small sector.  

SIDBI, NCAER prepare study on SSI status  
   
SIDBI in collaboration with the National Council for Applied Economic Research has conducted a study on the status of the small scale industry in the liberalised economy. SIDBI is also working on a publication on "Technology for SSI's current status and emerging needs" slated for release In December 1999. Industrial experts have been consulted for providing inputs for the study.  

Both the reports are part of the financial institution's efforts to help the Indian small sector prepare itself to face the new challenges. The challenges according to SIDBI Managing Director Dr. Sailendra Narain, were also emerging in the context of growing internationalisation of world economy under the WTO regime, intensified competition, both domestic and external, need to produce goods of international quality, stringent environmental norms and non tariff barriers imposed by trading partners.  

Exim Bank to fund R & D patent registrations  
   
Export Import Bank of India has decided recently to fund applied research (as against basic research or contract research activities) and development and patents registration activities of Indian corporates. The examples of applied research activities given by it are : setting up of pilot plants or plant and machinery for a research wing of a corporate house. There would be no upper limit to this funding activity.