the post independence era, the government set up the Industrial Finance
Corporation of India in 1948 to finance development finance especially
in the industrial sector. Since then a number of Development Financial
Institutions (DFI) have been promoted by the government to cater to
the diversified and multi dimensional needs of economic growth. These
financial institutions (FIs) make available finance to those sectors
of the economy to which commercial banks provide only part of the
finance. These institutions handle the problem of long terms financing.
Broadly speaking these institutions are known as Development Banks.
are separate development institutions for agriculture, industry, investment
and small scale industry. In recent years, a number of public sector
mutual funds set up by banks and financial institutions have been
added to the institutional framework. However, development banks and
financial institutions of late have acquired disrepute because of
the misgivings on account of large bailouts given to prominent financial
institutions. There can be no disagreement that better management
of DFIs is required to minimize the level of Non-Performing Assets
(NPAs). Besides, the assistance they provide needs to undergo a change
periodically as economic development proceeds and financial sector
evolves. The argument, however, being put forward by some experts
that they have lost relevance is not tenable.
The government has recently taken some steps to tone up these DFIs.
Moreover, the upturn in the economy bids well as far as disbursements
and sanctions are concerned as well as their performance. The recent
economic slowdown took a toll on some leading financial institutions,
with the quantum of loans disbursed by Industrial Investment Bank
of India (IDBI), Industrial Finance Corporation of India Limited (IFCI)
and Industrial Investment Bank of India (IIBI) registering a steep
Operational performance of DFIs in general had come under strain in
recent years due to a combination of factors. The slackening of the
pace of investment compounded by depressed business sentiments and
sluggish capital market conditions led to decline in demand for assistance
for traditional industries and a smaller flow of applications for
fresh assistance. Paucity of equity capital led to delays in completion
of several projects. These factors led to a decline in the level of
annual sanctions and disbursements of DFIs. However, in the case of
Small Industries Development Bank of India (SIDBI) and Export Import
Bank of India (EXIM) disbursements have recorded good growth during
the last three years.
The advances of ICICI Bank as on March, 2003 registered an increase
of 11.72 percent over the previous year (2001-2002). The lending by
the Mumbai based Industrial Development Bank of India came down to
Rs.3,924 crores in 2002-2003 from Rs.11,151 crore in 2001-2002 and
Rs.17,474 crores in 2000-2001. In the case of Delhi based IFCI, the
disbursements were Rs.1,792.81 crore in 2002-2003. In the year 2001-2002
they were of the order of Rs.1,078.75 crores and Rs.2,144.65 crore
The EXIM banks lending improved to Rs.5,320.3 crore in 2002-2003
from Rs.3,452 crore in 2001-2002 and Rs.1,896.4 crore in 2000-2001.
This is largely accounted for by increase in exports.
SIDBIs lending was to the tune of Rs.6,789 crore in 2002-2003
from Rs.5,919 crore in 2001-2002 and Rs.6,441 crore in 2000-2001.
ICICI Banks lending was Rs.20,555 crore in 2001-2002 as compared
to Rs.31,665 crore in 2000-2001. ICICI Bank is a banking company incorporated
under the Banking Regulations Act, 1949. The erstwhile ICICI Limited,
a financial institution, has merged with ICICI Bank w.e.f. May 03,
2002, the appointed date for the merger being March 30, 2002. The
figures pertaining to erstwhile ICICI are provided only upto December
Kolkata based IIBIs lending fell to Rs.51.52 crore in 2002-2003
from Rs.283 crore in 2001-2002 and Rs.644.20 crore in 2000-2001. Government
sources cite several reasons for revival of disbursements in the current
fiscal by the DFIs. Macro economic initiatives in general and the
thrust on infrastructure are expected to improve the investment climate.
The government has also introduced several enabling measures for improving
the situation arising out of growing incidence of NPAs through strengthening
of Debt Recovery Tribunals, introduction of Corporate Debt, Restructuring
Mechanism, enactment of Securitisation and Reconstruction of Financial
assets and Enforcement of Security Interest Act, 2002 and the setting
up of Asset Reconstruction Companies (ARCs). ICICI having merged with
ICICI Bank would get advantage of lower cost of borrowing in the form
of savings and current deposits. As regards IDBI, a Bill has been
ntroduced to corporatise and vest it with the banking licence.
has also issued circulars to Financial Institutions and Banks to enter
into non-discretionary mechanism for recovery of NPAs in all sectors
through compromise settlements under One Time Settlement Scheme (OTS)
which is expected to clean up bad debt. Two events in recent times
signalled in some way, the end of an era. ICICI was merged with ICICI
Bank and Rs.2000 crore government support was extended to the largest
financial institution of the country, IDBI. While the first marked
the re-birth of ICICI as a new age private bank, the second was a
more open acknowledgement of the fact that stand-alone DFI is not
a viable business model.
is little doubt that some of the DFIs are now grappling for survival.
The problem with all the three FIs - IFCI, IDBI and IIBI - is mounting
non-performing assets which have eroded their capital.
Interestingly, there is no uniform solution since each FI s is unique.
IDBI is a statutory body and suffered the most political inteference
while IIBI, initially formed to restructure bad loans, subsequently
were converted into a DFI. However, the case of IFCI was similar to
that of ICICI, both the FIs were governed by the Companies Act with
the large portion of shares held by government owned institutions.
ICICI foresaw the inviability of the DFI model. Being in the private
sector, the institution had the flexibility to plan its transition
path towards becoming a bank. IIBIs concerns are similar to
IFCI - a large part of the borrowing is by way of private placement
with high net worth individuals or banks. The FI is unable to lend
due to inadequate capital and high NPAs. The environment in which
DFIs operate has undergone a sea change. DFIs are no longer the sole
providers of project finance. Already banks are offering all the products
and facilities that a DFI can offer. The average term loan portfolio
of public sector banks is close to 30 percent of their advances.
The Finance Ministry has ruled out a merger between IFCI and IDBI.
Sources in the banking circles say that merger of IDBI Bank and IIBI
Act is repealed and the FI is corporatised. The Union Cabinet has
already approved the conversion of IDBI into a universal bank which
will also continue development financing. It, however, took no decision
on the proposed merger of IDBI with IIBI.
In the case of IFCI, the government has written off loans worth over
Rs.1,500 crore to improve its financial condition. While the government
pins its hopes on economic revival and the steps it has taken to improve
their performance, it is important to examine the relevance of DFIs
in the present day context.
Despite substantial progress in the field of industrialisation, Indias
achievements are well below the level of developed countries and even
Asian countries. There is need for further development of the industrial
base. It is thus obvious that the objective with which DFIs were set
up is yet to be fully attained. The importance of the FIs in fact
has increased with the opening up of the economy and increasing competition
faced by Indian industries. Large initial capital is necessary to
start an industrial company.
A key factor that will determine the growth potential of the economy
is investment in infrastructure sector. According to a Construction
Industry Development (CIDC) report, nearly 4-9 billion dollars need
to invested in infrastructure projects over the next decade to attain
7 to 8 percent GDP growth. For reasons of lumpiness of investment,
long gestation periods and divergence of private and social marginal
returns, the government has a critical role to play in the infrastructure
sector. Removing the existence of infrastructure constraints, requires
large investments by Central and State Governments and private investors
in these sectors. Given their experience in financing, Greenfield
projects with long gestation periods, DFIs can play a major role in
financing such projects.
Corporates in India are able to generate only a minor portion (25
to 35 percent) of their total fund requirements (short and long term)
internally. The rest has to come from external sources. Major external
sources of debt finance are FIs, commercial banks, foreign financial
markets, loans from collaborators or JV partners and market borrowing
through commercial papers, fixed deposits and debentures. Although
foreign borrowings constitute an important source of corporate borrowings,
it is, however, the large companies that have access to this source.
This has declined during the 1990s, partly due to the exchange rates,
risks involved and as a result of the steady weakening of the rupee.
Over time, the importance of equity capital (excluding preference
capital) in financing project costs has surged, while that of internal
resources (retained earnings) has come down. Although the importance
of loan capital (from external sources) has come down, it still contributes
to more that 43 percent of the total funds required for financing
projects. The three major FIs (IFCI, IDBI and ICICI) have contributed
significantly in providing loan for financing projects, although their
share has come down during the 1990s, mostly because of the problems
faced by them in the post reform period. The share of banks has also
increased in the second half of the 1990s due to their entry in the
area of long term financing.
The relative contributions of other FIs (SIDCs, SFCs, UTI, LIC and
GIC) too have come down over the years. The rapid increase in the
share of loans from promoters, directors and their friends indicates
that the promoters are depending more on personal means to fund their
projects. While this may partly reflect the increasing stand taken
by banking and FIs to ensure that promoters bring in some matching
funds, at a macro level it reflects a virtual reversal of the process
of development wherein personal financing is increasingly substituted
for institutional and market sourced funds.
Given the high debt equity ratio in infrastructure, manufacturing
and other sectors like telecom, the role of DFIs in future development
of the country cannot be undermined. What is required is their early
restructuring and strict adherence to corporate governance norms.
author is Special Correspondent, UNI
Courtesy : KaleidoScope