The Industrial Development Bank of India Limited commonly known by its acronym IDBI is

one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI
categorised IDBI as an "other public sector bank". It was established in 1964 by an Act of
Parliament to provide credit and other facilities for the development of the fledgling Indian
industry. It is currently the tenth largest development bank in the world in terms of reach with
975 ATMs, 568 branches and 352 centers.[1] Some of the institutions built by IDBI are the
National Stock Exchange of India (NSE), the National Securities Depository Services Ltd
(NSDL), the Stock Holding Corporation of India (SHCIL), and IDBI BANK, which today is
owned by the Indian Government, though for a brief period it was a private scheduled bank.

RECENT DEVELOPMENT

To meet emerging challenges and to keep up with reforms in financial sector, IDBI has taken
steps to reshape its role from a development finance institution to a commercial institution. With
the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained
the status of a limited company viz. "Industrial Development Bank of India Limited" (IDBIL).
Subsequently, the Reserve Bank of India (RBI) issued the requisite notification on September 30,
2004 incorporating IDBI as a 'scheduled bank' under the RBI Act, 1934. Consequently, IDBI,
formally entered the portals of banking business as IDBIL from October 1, 2004.

The commercial banking arm, IDBI BANK, was merged into IDBI. Although IDBI Bank is
owned by the Government of India, there is a popular misconception that IDBI bank is a private
entity.

In March 2008, IDBI Bank entered into a joint venture with Federal Bank and Fortis Insurance
International to form IDBI Fortis Life Insurance, of which IDBI Bank owns 48 percent. The
company ended the year with over 300 Cr in premiums as on 31st March 2009.

Overview of development banking in India

The concept of development banking rose only after Second World War, after the Great
Depression in 1930s. The demand for reconstruction funds for the affected nations compelled in
setting up a worldwide institution for reconstruction. As a result the IBRD was set up in 1945 as
a worldwide institution for development and reconstruction. This concept has been widened all
over the world and resulted in setting up of large number of banks around the world which
coordinating the developmental activities of different nations with different objectives among the
world. The Narashimam committee had recommended to give up its direct financing functions
and to perform only the promotional and refinancing role. However, the S.H.Khan committee,
appointed by the RBI, recommended its transformation into a universal bank.

The course of development of financial institutions and markets during the post-Independence
period was largely guided by the process of planned development pursued in India with emphasis
on mobilisation of savings and channeling investment to meet Plan priorities. At the time of
Independence in 1947, India had a fairly well-developed banking system. The adoption of bank
dominated financial development strategy was aimed at meeting the sectoral credit needs,
particularly of agriculture and industry. Towards this end, the Reserve Bank concentrated on
regulating and developing mechanisms for institution building. The commercial banking network
was expanded to cater to the requirements of general banking and for meeting the short-term
working capital requirements of industry and agriculture. Specialised development financial
institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership
of the Reserve Bank were set up to meet the long-term financing requirements of industry and
agriculture. To facilitate the growth of these institutions, a mechanism to provide concessional
finance to these institutions was also put in place by the Reserve Bank.

The first development bank In India incorporated immediately after independence in 1948 under
the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to
medium and large-scale. Then after in regular intervals the government started new and different
development financial institutions to attain the different objectives and helpful to five-year plans.

The early history of Indian banking and finance was marked by strong governmental regulation
and control. The roots of the national system were in the State Bank of India Act of 1955, which
nationalized the former Imperial Bank of India and its seven associate banks. In the early days,
this national system operated alongside of a large private banking system. Banks were limited in
their operational flexibility by the government’s desire to maintain employment in the banking
system and were often drawn into troublesome loans in order to further the government’s social
goals.

The financial institutions in India were set up under the strong control of both central and state
Governments, and the Government utilized these institutions for the achievements in planning
and development of the nation as a whole. The all India financial institutions can be classified
under four heads according to their economic importance that are:

 All-India Development Banks

 Specialized Financial Institutions
 Investment Institutions
 State-level institutions
 Other institutions
Industrial Development Bank of India (IDBI)
The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act
of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976,
the ownership of IDBI was transferred to the Government of India and it was made the principal
financial institution for coordinating the activities of institutions engaged in financing, promoting
and developing industry in the country. Although Government shareholding in the Bank came
down below 100% following IDBI’s public issue in July 1995, the former continues to be the
major shareholder (current shareholding: 52.3%). During the four decades of its existence, IDBI
has been instrumental not only in establishing a well-developed, diversified and efficient
industrial and institutional structure but also adding a qualitative dimension to the process of
industrial development in the country. IDBI has played a pioneering role in fulfilling its mission
of promoting industrial growth through financing of medium and long-term projects, in
consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of
products and services, covering almost the entire spectrum of industrial activities, including
manufacturing and services. IDBI provides financial assistance, both in rupee and foreign
currencies, for green-field projects as also for expansion, modernisation and diversification
purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI
evolved an array of fund and fee-based services with a view to providing an integrated solution
to meet the entire demand of financial and corporate advisory requirements of its clients. IDBI
also provides indirect financial assistance by way of refinancing of loans extended by State-level
financial institutions and banks and by way of rediscounting of bills of exchange arising out of
sale of indigenous machinery on deferred payment terms.

IDBI has played a pioneering role, particularly in the pre-reform era (1964-91),in catalyzing
broad based industrial development in the country in keeping with its Government-ordained
‘development banking’ charter. In pursuance of this mandate, IDBI’s activities transcended the
confines of pure long-term lending to industry and encompassed, among others, balanced
industrial growth through development of backward areas, modernisation of specific industries,
employment generation, entrepreneurship development along with support services for creating a
deep and vibrant domestic capital market, including development of apposite institutional
framework.

Narasimam committee recommends that IDBI should give up its direct financing functions and
concentrate only in promotional and refinancing role. But this recommendation was rejected by
the government. Latter RBI constituted a committee under the chairmanship of S.H.Khan to
examine the concept of development financing in the changed global challenges. This committee
is the first to recommend the concept of universal banking. The committee wanted to the
development financial institution to diversify its activity. It recommended to harmonise the role
of development financing and banking activities by getting away from the conventional
distinction between commercial banking and developmental banking.

In September 2003, IDBI diversified its business domain further by acquiring the entire
shareholding of Tata Finance Limited in Tata Home finance Ltd., signaling IDBI’s foray into the
retail finance sector. The fully-owned housing finance subsidiary has since been renamed ‘IDBI
Home finance Limited’. In view of the signal changes in the operating environment, following
initiation of reforms since the early nineties, Government of India has decided to transform IDBI
into a commercial bank without eschewing its secular development finance obligations. The
migration to the new business model of commercial banking, with its gateway to low-cost
current, savings bank deposits, would help overcome most of the limitations of the current
business model of development finance while simultaneously enabling it to diversify its client/
asset base. Towards this end, the IDB (Transfer of Undertaking and Repeal) Act 2003 was
passed by Parliament in December 2003. The Act provides for repeal of IDBI Act,
corporatisation of IDBI (with majority Government holding; current share: 58.47%) and
transformation into a commercial bank. The provisions of the Act have come into force from
July 2, 2004 in terms of a Government Notification to this effect. The Notification facilitated
formation, incorporation and registration of Industrial Development Bank of India Ltd. as a
company under the Companies Act, 1956 and a deemed Banking Company under the Banking
Regulation Act 1949 and helped in obtaining requisite regulatory and statutory clearances,
including those from RBI. IDBI would commence banking business in accordance with the
provisions of the new Act in addition to the business being transacted under IDBI Act, 1964 from
October 1, 2004, the ‘Appointed Date’ notified by the Central Government. IDBI has firmed up
the infrastructure, technology platform and reorientation of its human capital to achieve a smooth
transition.

IDBI Bank, with which the parent IDBI was merged, was a vibrant new generation Bank. The
Pvt Bank was the fastest growing banking company in India. The bank was pioneer in adapting
to policy of first mover in tier 2 cities. The Bank also had the least NPA and the highest
productivity per employee in the banking industry.

On July 29, 2004, the Board of Directors of IDBI and IDBI Bank accorded in principle approval
to the merger of IDBI Bank with the Industrial Development Bank of India Ltd. to be formed
incorporated under the Companies Act, 1956 pursuant to the IDB (Transfer of Undertaking and
Repeal) Act, 2003 (53 of 2003), subject to the approval of shareholders and other regulatory and
statutory approvals. A mutually gainful proposition with positive implications for all
stakeholders and clients, the merger process is expected to be completed during the current
financial year ending March 31, 2005.

The immediate fall out of the merger of IDBI and idbi bank was the exit of employees of idbi
bank. The cultures in the two organizations have taken its toll. The IDBI BANK now is in a
growing fold. With its retail banking arm expanding further after the merger of United western
Bank.

IDBI would continue to provide the extant products and services as part of its development
finance role even after its conversion into a banking company. In addition, the new entity would
also provide an array of wholesale and retail banking products, designed to suit the specific
needs cash flow requirements of corporates and individuals. In particular, IDBI would leverage
the strong corporate relationships built up over the years to offer customised and total financial
solutions for all corporate business needs, single-window appraisal for term loans and working
capital finance, strategic advisory and “hand-holding” support at the implementation phase of
projects, among others.
IDBI’s transformation into a commercial bank would provide a gateway to low-cost deposits like
Current and Savings Bank Deposits. This would have a positive impact on the Bank’s overall
cost of funds and facilitate lending at more competitive rates to its clients. The new entity would
offer various retail products, leveraging upon its existing relationship with retail investors under
its existing Suvidha Flexi-bond schemes. In the emerging scenario, the new IDBI hopes to
realize its mission of positioning itself as a one stop super-shop and most preferred brand for
providing total financial and banking solutions to corporates and individuals, capitalising on its
intimate knowledge of the Indian industry and client requirements and large retail base on the
liability side.

IDBI upholds the highest standards of corporate governance in its operations. The responsibility
for maintaining these high standards of governance lies with its Board of Directors. Two
Committees of the Board viz. the Executive Committee and the Audit Committee are adequately
empowered to monitor implementation of good corporate governance practices and making
necessary disclosures within the framework of legal provisions and banking conventions
Industrial Investment Bank of India Ltd.
The industrial investment bank of India is one of oldest banks in India. The Industrial
Reconstruction Corporation of India Ltd., set up in 1971 for rehabilitation of sick industrial
companies, was reconstituted as Industrial Reconstruction Bank of India in 1985 under the IRBI
Act, 1984. With a view to converting the institution into a full-fledged development financial
institution, IRBI was incorporated under the Companies Act, 1956, as Industrial Investment Bank
of India Ltd. (IIBI) in March 1997. IIBI offers a wide range of products and services, including
term loan assistance for project finance, short duration non-project asset-backed financing,
working capital/ other short-term loans to companies, equity subscription, asset credit, equipment
finance as also investments in capital market and money market instruments.

In view of certain structural and financial problems adversely impacting its long-term viability,
IIBI submitted a financial restructuring proposal to the Government of India on July 25, 2003.
IIBI has since received certain directives from the Government of India, which, inter alias,
include restricting fresh lending to existing clients approved cases rated corporates, restrictions
on fresh borrowings, an action plan to reduce the overhead expenditure, disposal of fixed assets
and a time-bound plan for asset recovery/reconstruction. The Government of India has also given
its approval for the merger of IIBI with IDBI and the latter has already started the due diligence
process.

Acquisition of United Western Bank

In 2006, IDBI Bank acquired United Western Bank in a rescue. Annasaheb Chirmule, who
worked for the cause of Swadeshi movement, founded Satara Swadeshi Commercial Bank in
1907, and some three decades later founded United Western Bank. The bank was incorporated in
1936, and commenced operations the next year, with its head office in Satara, in Maharashtra
State. It became a Scheduled Bank in 1951. In 1956 it merged with Union Bank of Kolhapur,
and in 1961 with Satara Swadeshi Commercial Bank. At the time of the merger with IDBI,
United Western had some 230 branches spread over 47 districts in 9 states, controlled by five
Zonal Offices at Mumbai, Pune, Kolhapur, Jalgaon and Nagpur.
Balance sheet
Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00
Sources of funds
Owner's fund
Equity share capital 214.24 140.08 140.00 140.00 140.00
Share application money 1.29 1.86 - - -
Preference share capital - - - - -
Reserves & surplus 402.73 212.35 160.89 128.12 119.56
Loan funds
Secured loans - - - - -
Unsecured loans 10,048.16 6,032.30 5,234.49 3,526.19 3,448.17
Total 10,666.42 6,386.59 5,535.39 3,794.31 3,707.74
Uses of funds
Fixed assets
Gross block 260.48 241.30 207.17 150.87 111.26
Less : revaluation reserve - - - - -
Less : accumulated depreciation 111.25 83.45 57.59 35.39 16.88
Net block 149.23 157.85 149.58 115.47 94.37
Capital work-in-progress 2.49 6.65 8.64 8.04 -
Investments 3,914.02 2,410.88 2,417.81 2,466.66 2,123.92
Net current assets
Current assets, loans & advances 398.23 325.74 247.30 212.39 109.25
Less : current liabilities & provisions 851.25 500.64 334.34 350.54 228.04
Total net current assets -453.02 -174.90 -87.04 -138.15 -118.79
Miscellaneous expenses not written - - - - -
Total 3,612.72 2,400.49 2,488.99 2,452.02 2,099.50
Notes:
Book value of unquoted investments - - - - -
Market value of quoted investments - - - - -
Contingent liabilities 17,186.21 12,981.00 11,646.25 8,532.17 3,966.90
Number of equity sharesoutstanding (Lacs) 2142.39 1400.77 1400.00 1400.00 1400.00
 Profit loss account
Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01 Mar ' 00
Income
Operating income 905.39 749.07 616.12 595.44 474.96
Expenses
Material consumed - - - - -
Manufacturing expenses - - - - -
Personnel expenses 67.80 55.10 39.73 22.63 14.08
Selling expenses 5.84 7.59 2.20 3.54 2.62
Adminstrative expenses 173.15 134.50 78.05 57.58 37.68
Expenses capitalised - - - - -
Cost of sales 246.80 197.19 119.98 83.75 54.38
Operating profit 232.11 135.34 130.42 80.83 87.97
Other recurring income 36.51 17.57 16.48 6.78 4.57
Adjusted PBDIT 268.62 152.92 146.91 87.61 92.54
Financial expenses 426.48 416.53 365.72 430.86 332.61
Depreciation 28.42 26.94 23.03 18.81 8.29
Other write offs - - - - -
Adjusted PBT 240.20 125.98 123.87 68.80 84.25
Tax charges 76.32 40.16 - - -
Adjusted PAT 132.51 71.49 53.17 19.54 61.60
Non recurring items -0.06 -0.39 -0.75 -0.19 -0.61
Other non cash adjustments - - -5.65 - -
Reported net profit 132.45 71.10 46.77 19.36 60.99
Earnigs before appropriation 209.26 132.04 109.44 79.03 95.13
Equity dividend 30.23 19.75 14.00 10.80 16.80
Preference dividend - - - - -
Dividend tax - - - - 1.85
Retained earnings 179.03 112.29 95.44 68.23 76.48
 Cash flow
Mar ' 04 Mar ' 03 Mar ' 02 Mar ' 01
Profit before tax 208.55 111.04 70.68 23.22
Net cashflow-operating activity 180.99 -14.99 390.03 -149.08
Net cash used in investing activity -15.58 -32.35 -53.87 -48.14
Netcash used in fin. activity 271.50 31.19 -10.80 6.51
Net inc/dec in cash and equivlnt 436.91 -16.15 325.35 -190.70
Cash and equivalnt begin of year 702.40 718.55 393.20 583.90
Cash and equivalnt end of year 1,139.31 702.40 718.55 393.20

Dividend
Year Month Dividend (%)
2004 Apr 13
2003 Apr 13
2002 Apr 10
2001 May 7
2000 Apr 12
1999 May 9

Share holding
Share holding pattern as on : 31/12/2004 30/09/2004 30/06/2004
Face value 10.00 10.00 10.00
No. Of % No. Of % No. Of %
Shares Holding Shares Holding Shares Holding
Promoter's holding
Indian Promoters 149999497 69.17 149999497 69.23 149999497 69.39
Sub total 149999497 69.17 149999497 69.23 149999497 69.39
Non promoter's holding
Institutional investors
Mutual Funds and UTI 1213381 0.56 1294213 0.60 592438 0.27
Banks Fin. Inst. and
20253570 9.34 21112742 9.74 22976013 10.63
Insurance
FII's 76000 0.04 75000 0.03 331000 0.15
 No. Of % No. Of % No. Of %
Shares Holding Shares Holding Shares Holding
Sub total 21542951 9.93 22481955 10.38 23899451 11.06
Other investors
Private Corporate Bodies 6529634 3.01 5313114 2.45 4005289 1.85
NRI's/OCB's/Foreign Others 1284984 0.59 1070865 0.49 1067545 0.49
Others 853540 0.39 599778 0.28 137447 0.06
Sub total 8668158 4.00 6983757 3.22 5210281 2.41
General public 36654661 16.90 37200060 17.17 37053106 17.14
Grand total 216865267 100.00 216665269 100.00 216162335 100.00

IDBI and the future of development finance

By C. R. L. Narasimhan

Far from becoming irrelevant, development finance ought to be an integral part of a vibrant
financial sector

In his interim budget speech, the Union Finance Minister reaffirmed the Government's
commitment to make the IDBI the leading development finance institution, a position it had
held until the early 1990s. The rejuvenated IDBI will work closely with major financial
institutions and banks such as the Infrastructure Development Finance Corporation of India
and State Bank of India. The restructuring route proposed for IDBI — a merger with a
leading public sector bank — was the same route that was suggested for the older
development finance institution (DFI), the IFCI. Barely days before the budget
announcement concerning the DFIs, the restructuring of Industrial Finance Corporation of
India moved decisively. Its merger with Punjab National Bank was approved by the two
boards. The Bill to covert IDBI into a banking committee has been introduced in Parliament
in 2002. In August 2003 following the suggestions of the Standing Committee on Finance it
was decided to emphasise the development banking character of the IDBI even as it
converts into a commercial bank.

What are the implications from the Finance Minister's reaffirmation? Not just one institution,
but also the entire concept of development finance is being given a fresh lease of life. There
is no alternative to development finance at this juncture, said the Finance Minister. That
seems to be a belated recognition at the policy level. In the Nineties, all the three DFIs —
ICICI was the third — were heading towards turbulent times and the business of
development finance was mistakenly considered irrelevant. That view ignored the critical
role these institutions played in funding projects and therefore in the industrialisation of the
country.

There were two reasons as to why the development finance model could not be persisted
within its original form. The first was the erroneous belief that the DFI model could as well
be performed by other institutions and banks, more closely attuned to the financial markets
than the DFIs. At the start of the reform phase there were exaggerated expectations from
the financial market: even project funding could be raised through the capital market,
ignoring the fact that even today there is no vibrant long-term debt market.

In fact the unique characteristics of development finance, funding long — any other model
could never capture gestation projects. Commercial banks, for instance, are typically
providers of working capital, which is by definition short-term in nature. Besides, there is
the question of acquiring expertise over several types of industries. Knowledge and skills in
appraising and evaluating, say a refinery or large chemical plants, are different from those
applicable to a spinning unit.

The second limitation of the DFIs' approach arose from the composition of their balance
sheets. DFIs did not have access to retail funds for a long time and when they did it was
through expensive bond issues having tenure over a long period. Many of these bond issues
committed to pay high rates of interest to the bondholders without providing for an exit
route. Long used to getting money at concessional rates from the Government, the DFIs
were forced to raise money from the market, which being more expensive increased their
overall cost of funds. Their other balance sheet problem arose from the assets side. Being
the only sizable providers of term finance at a time when licensing norms determined the
size and shape of the project, they became complacent in certain cases. All three of them
were saddled with a high level of non-performing assets because of their exposure to
certain seasonal industries. Cleaning up their balance sheets was always a high-priority
item, more important perhaps than any organisational restructuring.

The suggestion that by converting themselves into banks (through a merger) and
concentrating on other activities they could earn their way out of trouble has been
appealing. ICICI did just that. Today it has emerged as a formidable bank but
overwhelmingly into retail lending. Development banking in its traditional sense has been
given a go by. Obviously, there is a felt need for project finance and term loans. The
Finance Minister's budget statement only gives the clues but a detailed roadmap, when
drawn up will be more revealing. Not just for IDBI but for development finance, as an
integral part of the financial sector in the reform era