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Friday, April 8, 2011

Slice of history: How IDBI came to be in 1960s

In the early 60s, when India was still battling to tackle the current account deficit and the negative industrial growth, the Reserve Bank of India decided to carve out a subsidiary that would finance the industrial development in the country. With this idea was born the Industrial and Development Bank of India (IDBI) in the year 1964. IDBI as a financial entity exceeded the expectations of not only industries but also RBI.

IDBI within a decade fulfilled the role of a development finance company and expanded its base not only in the funding of large industrial or public sector undertakings, or PSU projects, but also short-term maintenance loans. In fact, according to the RBI history, the IDBI Act was amended in order to accommodate the scope of industrial concerns. Some of the criteria that were included in industrial finance were repair, testing or servicing of machinery, vehicles, tractors, etc.

IDBI through this amendment was able to extend refinance facilities to state finance corporations (SFCs) and banks that provided assistance for setting up of industrial estates. According to narratives published in one of the issues of the Reserve Bank's history, the Big Daddy, aka RBI, was not too happy with the growing clout of IDBI. RBI had expressed its displeasure over the working of SFCs. It wanted to make SFCs financially viable and efficient.

The issue was raised when IDBI was negotiating its second line of credit from multi-lateral agency the International Development Agency (IDA). RBI was not comfortable with this free-hand borrowing of IDBI. In one of the conferences of SFCs, the then RBI governor Jagannathan said "the World Bank's conditionality attached to lines of credit and measures of financial discipline stipulated by the World Bank were the ones that banks should be attaining in own interest. But by the late 60s, it was clear that RBI was losing its grip on the baby it had created.

IDBI's de-linking with the central bank was proposed by the 'Administrative Reforms Committee'. In 1976, IDBI was de-linked from RBI and was declared an autonomous development bank. In 2004, IDBI converted itself into a full-fledged commercial bank.

Source: EconomicTimes


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