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Centre clears IDBI's conversion to bank

Sarbajeet K. Sen
Richa Mishra

The new entity would be the only scheduled bank in the country that would be required to maintain its DFI characterestic.

New Delhi , June 30

THE Ministry of Finance on Wednesday issued a notification allowing Industrial Development Bank of India (IDBI) to convert itself into a full-fledged bank with effect from July 1, a move that would send strong signals on the continuity of financial sector reforms under the United Progressive Alliance (UPA) Government.

The notification allows the transferring and vesting of the undertaking of the IDBI that was earlier functioning as a development financial institution into a new company registered under the Companies Act. It also paves the way for the institution to formally seek the approval of the Reserve Bank of India to function under its regulatory framework for banks.

"We have issued the notification today (Wednesday). IDBI can now operate as a bank anytime on or after July 1," an official of the Ministry of Finance said. The official said that the new banking entity would not be required to apply for a fresh banking licence from the RBI. The Finance Ministry notification comes barely days after Law Ministry's clearance was obtained late last week.

The new entity would be the only scheduled bank in the country that would be required to maintain its development financial institution (DFI) characteristic by continuing to provide term finance to industry as it had been doing earlier.

On its part, IDBI had indicated to the Government that it would like to function as a full-fledged bank latest by October 1. However, the sharp date set to enable the institution to proceed with the formalities for the transition indicates that the present Government agrees with the move initiated by the National Democratic Alliance (NDA) Government.

With IDBI's financials progressively coming under strain due to high cost of funds and competition from banks in providing project finance, the NDA Government had laid the framework for the erstwhile Development Financial Institution (DFI) by repealing the IDBI Act, 1964, and passing a legislation allowing the transfer of its undertakings into a new company that would take up banking activity.

However, by converting itself into a bank IDBI would get a major relief by being able to access cheaper funds through retail deposits that it was barred from raising as a DFI. At the same time, IDBI would also have relief in meeting the mandatory statutory liquidity ratio (SLR) requirement. The RBI could also grant the bank some leeway in meeting the 40 per cent priority sector lending targets that other banks are mandated to extend.

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