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Unit 8: Financial Institutions

of promoting industrial growth through financing of medium and long-term projects, in Notes
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.
Narasimham 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.
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

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