Industrial Development Bank of India was set up to accelerate the development of the country. A number of financial institutions came into existence after independence and were catering to a variety of needs of the industry. There was a lack of co-ordinating different institutions and it led to overlapping and duplication in their efforts. At the same time some gigantic projects of national importance were not getting required financial assistance. It was in response to this need that the Industrial Development Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary of Reserve Bank of India. The bank was to act as an apex institution co-coordinating functions of all the financial institutions into a single integrated movement of development banking and supplementing their resources for industrial financing and as an agency for providing financial support to all worthwhile projects of national importance whose access to existing institutional sources is limited.
The ownership of IDBI was transferred to Central Government on February 16, 1976. It is now working as state owned autonomous corporation. IDBI provides direct financial assistance to industrial units to bridge the gap between supply and demand of medium and long term finance.
The IDBI Act was amended, in 1994, to permit public ownership upto 49 percent. In 1995, it raised more than Rs. 20 billion through its first initial public offer (IPO) of equity. It reduced the stake of the government to 72.14 percent. Further, in June 2000, a pan of the equity shareholding of the government was convened into preference share capital which was redeemed in March 2001, resulting into further reduction of government stake to 58.47 percent.
Financial Resources of IDBI
- Share Capital: IDBI was formed with an authorized capital of Rs. 50 crores which was raised a number of times. In October, 1994, Government of India’s amended certain provisions of IDBI Act under which its authorised capital has been increased to Rs. 2000 crore which can further be increased to Rs. 5000 crore. A pan of equity capital (Rs. 253 crore) has been convened into preference capital. IDBI has been permitted to issue equity capital to public with a stipulation that at no time Government holding will be less than 51 per cent. As on March 31,2003 the paid up capital of IDBI stood at Rs. 652.8 crores and reserve funds at Rs. 6325.3 crore.
- Borrowings: The bank is authorised to raise its resources through borrowings from Government of India, Reserve Bank of India and other fmancia1 institutions. On March 31, 2003, the bank had borrowings of Rs. 41798.0 crore by way of bonds and debentures, deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from Government of India and other sources.
Management of IDBI
The management of IDBI is vested in a Board of Directors consisting of 22 persons including a full-time Chairman-cum-Managing Director appointed by the Central Government. The other members of the Board comprise of a representative of the RBI, a representative each of the all-India financial institutions, two officials of the Central Government, three representative search of he public sector banks and SFCs and five representatives having special knowledge and experience of industry; The Board has constituted an Executive Committee consisting of ten directors. Ad-hoc committees of Advisers are also constituted to advise it on specific projects.
Recently, Government of India has sought to repeal the IDBI Act, 1964 by introducing The Industrial Development Bank (Transfer of Undertaking and Repeal) Bill 2002 is Lok Sabha. The Bill is aimed at convening IDBI into a company under the Companies Act as also enabling it to undertake banking business.
Functions of IDBI
The main functions of IDBI are as follows:
1) To co-ordinate the activities of other institutions providing term finance to industry and to act as an apex institution.
2) To provide refinance to financial institutions granting medium and long-term loans to industry.
3) To provide refinance to scheduled banks or co-operative banks.
4) To provide refinance for export credit granted by banks and financial institutions
5) To provide technical and administrative assistance for promotion management or growth of industry.
6) To undertake market surveys and techno-economic studies for the development of industry.
7) To grant direct loans and advances to industrial concerns. IDBI is empowered to finance all types of industrial concerns engaged or proposed to be engaged in the manufacture, preservation or processing of goods, mining, hotel, industry, fishing, shipping transport, generation or distribution of power, etc. The bank can also assist concerns engaged in the setting up of industrial estates or research and development of any process or product or in providing technical knowledge for the promotion of industries.
8) To render financial assistance to industrial concerns. IDBI operates various schemes of assistance. e.g., Direct Assistance Scheme, Soft Loans Scheme, Technical Development Fund Scheme, Refinance Industrial Loans Scheme, Bill Re-discounting Scheme, Seed Capital Assistance Scheme, Overseas Investment Finance Scheme, Development Assistance Fund, etc.
Operations of IDBI
Since its inception in 1964, IDBI has extended its operations to various areas of industrial sector. It provides direct as well as indirect financial assistance for increasing the pace of industrial development. The major operations of IDBI are;
1. Direct Assistance
Direct financial assistance includes project finance assistal1ce, soft-loan assitace, assistance under technical development fund scheme and rehabilitation assistance for sick units. Various schemes under direct assistance are discussed as follows:-
a) Project Finance Assistance: - Under project finance scheme. the IDBI extends direct assistance to industrial concerns in the form of :
- Project loans
- Subscription to and/or underwriting of issues of shares and debentures.
- Guarantee for loans and deferred payments.
Financial assistance under this scheme is granted for setting up new projects as well as for expansion and Modernization renovation of existing units. IDBI normally extends assistance to public limited companies in the private, public, joint sector and co-operative sectors. Bank’s assistance is sought for projects involving large capital outlay or sophisticated technology. Bank gives preference to units set up by new entrepreneurs or projects located in backward areas. The repayment period is settled by looking at the capacity of the enterprise. Normally, repayment is spread over a period of 8-10 years with a grace period of 2-3 years. These loans are usually secured by a first legal mortgage of the immovable properties of the borrowing concern and floating charge on its other assets, subject to a first charge on raw materials, stocks, etc. for working capital borrowings.
The bank does not hold shares & debentures, taken over under legal obligation for underwriting or taken over directly, for a longer period. As a matter of policy, the bank places major emphasis on the long-term economic viability of the projects rather than on the immediate sale ability of their products. In the case of assistance in the form of guarantees of loans and deferred payments, the bank charges a guarantee commission of 1 per cent in normal cases.
There has been a constant increase in direct assistance. Upto March, 2003 cumulative assistance in the form of direct loans to industrial concerns and .subscriptions came to Rs. 102601.8 crore. Most of this assistance was in priority sector industries such as basic industrial chemicals, cement, fertilizers, Iron and steel, electricity, fertilizer, sugar, textiles, paper and industrial machinery.
IDBI introduced special schemes for industrialization of backward areas. In a scheme introduced in 1969 it offered concessional rates of interest, longer grace periods for repayments, etc. These concessions were available to small and medium units having project cost upto Rs. 3 crores. In collaboration With IFCI and ICICI, the bank is also giving concessional rupee assistance upto Rs. 2 crores and underwriting assistance up to Rs.1crore. The assistance to backward areas has also been increasing.
To achieve balanced regional growth and accelerate industrial development IDBI initiated promotion and development activities. In co-operation with other institutions the bank conducted industrial potential surveys in a number of states.
b) Soft Loan Scheme
IDBI introduced in 1976 the soft loan scheme to provide financial assistance to product units in selected industries viz., cement, cotton, textiles. jute, sugar and certain engineering industries to modernize. Financial replace and renovate their plant and equipment so as to achieve higher and more economic levels of production. This scheme is implemented by IDBI with .financial participation by IFCI and ICICI. The basic criteria for assistance under the scheme are the weakness or non-viability of industrial concerns arising out of mechanical obsolescence. Industrial concerns which are not in a position 10 bear the normal lending rate of interest of the financial institutions are provided on accessional assistance to the full extent of the loan. In other cases the limit of concessional assistance is 66 per cent of the loan.
c) Technical Development Fund Scheme
The Government of India introduced the Technical Development Fund (TDF) Scheme in March. 1976 for issue of import licenses for import of small value balancing equipment, technical know how, foreign consultancy services and drawings and designs by industrial units to enable them to achieve fuller capacity utilization, technological up gradation and higher exports. Some industrial units found it difficult to take advantage of the import license issued under this scheme for want of rupee resources. In January, 1977, IDBI introduced a scheme for providing matching rupee loans to industrial units to enable them to utilize import licenses issued under TDF scheme. The scheme which was started for six specified industries now covers all industries as also import of any other input needed by the industrial units for improving export capabilities. This scheme of the bank has not been successful as only one-fourth of the units sought this assistance.
Rehabilitation Assistance to Sick Units
The problem of growing industrial sickness in India is a cause of worry. It adversely affects production, employment, generation of income and utilization of productive resources. With a view to combat sickness, IDBI has devised the Refinance Scheme for Industrial Rehabilitation. The units which have been assisted by State Financial Corporation or State Industrial Development Corporations and are classified as sick are eligible under this scheme. There should be a possibility of the unit being revived in a reasonable time. The bank provides for capital expenditure required for restarting the unit on viable level. The need for margin money for additional term-loan and working
Capital, working capital term loan, payment of statutory liabilities, cash losses during rehabilitation period etc. are met by the bank. The bank has also been trying to bring merger of sick units with healthy units.
2. Indirect Assistance
IDBI cannot provide direct financial assistance to various industrial units situated in different parts of tile country. It has adopted a strategy under which it extends financial assistance directly to large and complicated industrial units involving large capital outlays and sophisticated technology. It helps small scale in industries indirectly through providing assistance to other financial institutions which, in turn, help these industries. The indirect help of IDBI takes the form of refinancing of industrial loans, rediscounting of bills, seed capital assistance and financial support to 6ther institutions by way of subscribing to their shares, debentures, bonds etc.
a) Refinance of Industrial Loans
IDBI provides refinance facility against term loans granted by the eligible credit institutions to industrial concerns for setting up of industrial projects as also for their expansion, modernization and diversification. IDBI provides refinance to commercial banks, regional rural banks, state, co-operative banks, state financial corporations, state industrial development corporations or other institutions extending term loan assistance to industrial units. Industrial units seeking term loan approach the eligible financial institutions which, after sanctioning the loans, approach the IDBI for refinance facility. The appraisal of loan application is done by primary institution by keeping in view the guidelines issued by central government and the IDBI. The bank relies in the appraisal done by the primary lending institutions that have to bear primary responsibility for the loans granted by them. IDBI sanctioned a sum of Rs. 20712.3 crores upto March 2003 under refinance of industrial loans. Since 1967, IDBI has been extending indirect financial help to small scale sector principally through its schemes of refinance of industrial loans and bills discounting.
b) Rediscounting of Bills
IDBI introduced another indirect financing scheme in 1965, whereby rediscounting facility of machinery bills was, introduced. This scheme was to help indigenous machinery manufacturers and their purchases. The purchaser of machinery accepts bills of exchange or promissory notes of the seller and undertakes to take the payment in installments. The seller gets the bills discounted with his banker who in turn rediscounts these bills with min. The buyer is enabled to acquire the machinery on deferred payment terms without going through the usual procedures involved in obtaining a project loan. The usual deferred period is 5 years but in deserving cases it can be extended upto 7 years. The scheme has been extended for expansion and diversification of existing units also. The rediscounting facility has been made available to imported machinery also where bills will be required to be drawn by local agents of foreign firms.
c) Seed Capital Assistance:-
With a view to help first generation entrepreneurs who have the skills but lack financial resources, IDBI started seed capital assistance scheme in September, 1976. Under the first scheme, Financial Corporations provide seed capital assistance to projects in small scale sector from their special class of share capital contributed by IDBI and the state government. The maximum amount of assistance under this scheme is to meet the gap in the equity contribution which is 20 per cent of the cost of the project.