2012

Development Financial Institutions

Universal Banking
SY.BBI- 4TH Semister

Universal Banking 2/11/2012

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INDEX Introduction DFIs in India Operating environment Review of current financial position DFIs and Risk 2008 Global financial Crises Genesis of IFCI Conclusion 2

9 10 16 17 18 28

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Introduction
A typical structure of financial system in any economy consists of financial institutions, financial markets, financial Instruments and Financial Services. The functional, geographic and sectoral scope of activity or the type of ownership are some of the criteria which are often used to classify the large number and variety of financial institutions which exist in the economy. In its broadest sense the term financial institution would include banking institutions and non-banking financial institutions. The banking institutions may have quite a few things in common with the non-banking ones. However, the distinction between the two has been highlighted by Sayers, by characterizing the former as creators of credit, and the latter as mere purveyors of credit2. This distinction arises from the fact that banks, which are part of payment system, can create deposits and credit but the non-banking institutions, which are not part of payment system, can lend only out of the resources put at their disposal by the savers.

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Development Finance Institutions

An efficient and robust financial system acts as a powerful engine of economic development by mobilising resources and allocating the same to their productive uses. It reduces the transaction cost of the economy through provision of an efficient payment mechanism, helps in pooling of risks and making available longterm capital through maturity transformation. By making funds available for entrepreneurial activity and through its impact on economic efficiency and growth, a wellfunctioning financial sector also helps alleviate poverty both directly and indirectly. In a developing country, however, financial sectors are usually incomplete in as much as they lack a full range of markets and institutions that meet all the financing needs of the economy. For example, there is generally a lack of availability of long-term finance for infrastructure and industry, finance for agriculture and small and medium enterprises (SME) development and financial products for certain sections of the people. The role of development finance is to identify the gaps in institutions and markets in a countrys financial sector and act as a gap-filler. The principal motivation for developmental finance is, therefore, to make up for the failure of financial markets and institutions to provide certain kinds of finance to certain kinds of economic agents.

The failure may arise because the expected return to the provider of finance is lower than the market-related return (notwithstanding the higher social return) or the credit risk involved cannot be covered by high risk premium as economic activity to be financed becomes unviable at such risk-based price. Development finance

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is, thus, targeted at economic activities or agents, which are rationed out of market. The vehicle for extending development finance is called development financial institution (DFI) or development bank. A DFI is defined as "an institution promoted or assisted by Government mainly to provide development finance to one or more sectors or sub-sectors of the economy. The institution distinguishes itself by a judicious balance as between commercial norms of operation, as adopted by any private financial institution, and developmental obligations; it emphasizes the "project approach" - meaning the viability of the project to be financed against the "collateral approach"; apart from provision of long-term loans, equity capital, guarantees and underwriting functions, a development bank normally is also expected to upgrade the managerial and the other operational pre-requisites of the assisted projects. Its insurance against default is the integrity, competence and resourcefulness of the management, the commercial and technical viability of the project and above all the speed of implementation and efficiency of operations of the assisted projects. Its relationship with its clients is of a continuing nature and of being a "partner" in the project than that of a mere "financier " (Scharf and Shetty,1972) Thus, the basic emphasis of a DFI is on long-term finance and on assistance for activities or sectors of the economy where the risks may be higher than that the ordinary financial system is willing to bear. DFIs may also play a large role in stimulating equity and debt markets by (i) selling their own stocks and bonds; (ii) helping the assisted enterprises float or place their securities and (iii) selling from their own portfolio of investments.

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DFIs in India
The Group notes that there is no specific use of the term DFI in either the RBI Act, 1934 or the Companies Act, 1956 or various statutes establishing DFIs. While the RBI Act defines the term Financial Institution (FI), the Companies Act has 1 Bhole, L.M, Financial Institutions and Markets: Structure, Growth and Innovation 2nd Edition, Tata McGraw Publishing Company Ltd, New Delhi, 1992. 2 Sayers, R.S., Modern Banking, Oxford University Press, Oxford, 1964 3. Scharf and Shetty [1972, Dictionary of Development Banking, Elsevier Publishing Company, New York). categorised certain institutions as Public Financial Institutions (PFIs). While the various FIs including PFIs vary from each other in terms of their business specifications, some of them perform the role of DFIs in the broadest sense of the term as described above.

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Emergence of Financial Institutions in India

As mentioned earlier, DFIs are created in developing countries to resolve market failures, especially in regard to financing of long-term investments. The DFIs played a very significant role in rapid industrialisation of the ContinentalEurope. Many of the DFIs were sponsored by national governments and international agencies. The first governmentsponsored DFI was created in Netherlands in 1822. In France, significant developments in long-term financing took placeafter establishment of DFIs such as Credit Foncier and Credit Mobiliser, over the period 1848-1852. In Asia, establishment of Japan Development Bank and other term-lending institution fostered rapid industrialisation of Japan. The success of these institutions, provided strong impetus for creation of DFIs in India after independence, in the context of the felt need for raising the investment rate. RBI was entrusted with the task of developing an appropriate financial architecture through institution building so as to mobilise and direct resources to preferred sectors as per the plan priorities. While the reach of the banking system was expanded to mobilise resources and extend working capital finance on an everincreasing scale, to different sectors of the economy, the DFIs were established mainly to cater to the demand for long-term finance by the industrial sector. The first DFI established in India in 1948 was Industrial Finance Corporation of India (IFCI) followed by setting up of State Financial Corporations (SFCs) at the State level after passing of the SFCs Act, 1951.

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Financial Institutions set up between 1948 and 1974

Besides IFCI and SFCs, in the early phase of planned economic development in India, a number of other financial institutions were set up, which included the following. ICICI Ltd.4 was set up in 1955, LIC in 1956, Refinance Corporation for Industries Ltd. in 1958 (later taken over by IDBI), Agriculture Refinance Corporation (precursor of ARDC and NABARD) in 1963, UTI and IDBI in 1964, Rural Electrification Corporation Ltd. and HUDCO Ltd. in 1969-70, Industrial Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) in 1971 and GIC in 1972. It may be noted here that although the powers to regulate financial institutions had been made available to RBI in 1964 under the newly inserted Chapter IIIB of RBI Act, the definition of term financial institution was made precise and comprehensive by amendment to the RBI Act Section 45-I (c) in 19745. DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions. Another important change that took place in 1974 was the insertion of Section 4A to the Companies Act, 1956 whereunder certain existing institutions were categorized as Public Financial Institutions (PFI) and the powers of Central Government to notify any other institution as PFI were laid down. In exercise of these powers GOI has been notifying from time to time certain institutions as PFIs. As on date, under the Section 4A, six specified institutions are regarded as PFI and it has been provided that the Securitization Company or Reconstruction Company which has obtained a certificate of registration under sub-section (4) of Section 3 the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 shall also be regarded as a PFI.

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Besides these institutions, GOI has been notifying, from time to time, certain other FIs as PFIs and as on date additional 46 institutions have been so notified. Thus, in all 52 institutions have been categorised as PFIs. The FIs set up after 1974 have been as follows. NABARD was set up in 1981, EXIM Bank (functions carved out of IDBI) in 1982, SCICI Ltd. in 1986 (set up by ICICI Ltd. in 1986 and later merged into ICICI Ltd. in 1997), PFC Ltd. and IRFC Ltd. In 1986, IREDA Ltd. in 1987, RCTC Ltd. and TDICI Ltd. (later known as IFCI Venture Capital Funds Ltd. and ICICI Venture Funds Management Ltd.) in 1988, NHB in 1988, TFCI Ltd. (set up by IFCI) in 1989, SIDBI (functions carved out of IDBI) in 1989, NEDFi Ltd. in 1995 and IDFC Ltd. in 1997. As may be observed from the foregoing, over the years, a wide variety of DFIs have come into existence and they perform the developmental role in their respective sectors. Apart from the fact that they cater to the financial needs of different sectors, there are some significant differences among them. While most of them extend direct finance, some extend indirect finance and are mainly refinancing institutions viz., SIDBI, NABARD and NHB which also have a regulatory / supervisory role. DFIs can be broadly categorised as all-India or state / regional level institutions depending on their geographical coverage of operation. Functionally, all-India institutions can be classified as (i) termlending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending long-term finance to different industrial sectors, (ii) refinancing institutions (NABARD, SIDBI, NHB) extending refinance to banking as well as non-banking intermediaries for finance to agriculture, SSIs and housing sectors, (iii) sector-specific / specialised institutions (EXIM Bank, TFCI Ltd., REC Ltd., HUDCO Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.), and (iv) investment institutions (LIC, UTI, GIC, IFCI Venture Capital Funds Ltd., ICICI Venture Funds Management Co Ltd.). State / regional level institutions are a distinct group and comprise various SFCs, SIDCs and NEDFi Ltd. A brief description of evolution of and objective behind setting up of various financial institutions is furnished in Annexure I.

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Operating environment of DFIs: before and after Financial Sector Reforms

Historically, low-cost funds were made available to DFIs to ensure that the spread on their lending operations did not come under pressure. DFIs had access to soft window of Long Term Operation (LTO) funds from RBI at concessional rates. They also had access to cheap funds from multilateral and bilateral agencies duly guaranteed by the Government. They were also allowed to issue bonds, which qualified for SLR investment by banks. For deployment of funds, they faced little competition as the banking system mainly concentrated on working capital finance. With initiation of financial sector reforms, the operating environment for DFIs changed substantially. The supply of low-cost funds was withdrawn forcing DFIs to raise resources at market-related rates. On the other hand, they had to face competition in the areas of termfinance from banks offering lower rates. The change in operating environment coupled with high accumulation of nonperforming assets due to a combination of factors caused serious financial stress to the term-lending institutions.

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Review of current financial position of various FIs

Financial position of DFIs regulated by RBI

It is observed that nine select all India financial institutions are being regulated and supervised by RBI at present. Out of these, three institutions viz., NABARD, NHB and SIDBI extend indirect financial assistance by way of refinance. The financial health of these three institutions is sound as their exposure is to other financial intermediaries, which in certain cases is also supported by State Government guarantees. Of the remaining six institutions, two niche players viz. EXIM Bank and IDFC Ltd. are also quite healthy. The former operates in the area of international trade financing and the latter is a new generation FI with a mandate of leading private capital into the infrastructure sector, rather than itself being a direct lender. The remaining four institutions that have been operating as providers of direct assistance, are all in poor financial health. It was observed that while the total financial assets and capital and reserves of the refinancing institutions had increased during the year ended March 31, 2003, the same of term lending institutions had decreased. In terms of some select indicators the financial position of the nine FIs as on March 31, 2003 is summarised below:

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CRAR The prescribed minimum CRAR for the FIs was 9%. The CRAR of two FIs, viz., IFCI Ltd. and IIBI Ltd. was below the prescribed minimum at (-) 0.95% and (-) 11.04% respectively. Remaining 7 FIs were maintaining CRAR above 15% - with EXIM Bank, IDFC Ltd., NHB, NABARD and SIDBI having it above 25%. Net NPAs Net NPAs of 5 FIs viz., EXIM, IDFC Ltd., NABARD, NHB and SIDBI were below 5%. Net NPAs of IDBI were 14.20% and the rest of the FIs viz., IFCI Ltd., IIBI Ltd. and TFCI Ltd. had the same above 20% at 29.50%, 34.72% and 20.47%, respectively. Return on Average Assets The Return on Average Assets was negative for both IFCI Ltd. and IIBI Ltd.; it was between 0% to 1% for IDBI and NHB; between 1% to 2% in case of SIDBI and TFCI Ltd.; between 2% to 3% in case of EXIM Bank and above 3% in case of NABARD and IDFC Ltd.

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Financial position of DFIs not regulated by RBI

In regard to the DFIs not regulated by RBI it is observed from the information available in the public domain that, as on March 31, 2003, the position is as follows. The institutions like PFC Ltd., REC Ltd., and IRFC Ltd. are making profits. Same is the case with LIC and GIC (and its erstwhile subsidiaries that have since been delinked), and UTI. However, UTI had to undergo a massive restructuring in 2001-02 as it faced severe liquidity problems. While IREDA Ltd. and NEDFi Ltd. are somewhat profitable, the two venture capital companies seem to be too small to be systemically significant. HUDCO Ltd., being a housing finance company is within the regulatory and supervisory domain of National Housing Bank, and it had declared profits. The financial position of state level institutions in general, and of SFCs in particular, is very poor.

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Subsidies
The term subsidy is used here in its broadest terms (an explicit or implicit transfer from the public sector (here: the state backing the DFI) to the private sector). These transfers result in different conditions available in DFI operations than would be normal practice in the commercial financial sector. Transfers can be aimed at private sector beneficiaries directly (e.g. in the form of interest rate subsidies) or indirectly through its effects on the conditions under which DFIs are allowed to operate (e.g. lower costs of capital because public shareholders do not require commercial rates of return on their investments). This definition includes a broad spectrum of issues, and goes beyond technical assistance grants in infrastructure to the raison detre of DFIs because without some transfer of finance or guarantees, DFIs would not be able to invest in infrastructure as they do at present. There are three main forms of subsidies in the operations of DFIs in practice: 1. High level of liquidity; 2. An ability to access technical assistance funds; and 3. Subsidies passed on directly to beneficiaries.

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High level of liquidity

DFIs' levels of liquidity are higher than in commercial banks, because of large levels of paid-in stock, additional callable capital, exemptions on dividends and corporation tax (for example, IFC, EBRD, CDC Group ,DEG, Proparco and EIB are all exempt from paying tax on profits), the cost of borrowing at sub LIBOR due to their institutional AAA credit rating, an implicit state guarantee and income from trading in borrowings. DFIs' mandate requires such liquidity in order to invest in developing countries. High growth in many developing countries allows DFIs can obtain strong returns on equity investments and in the period leading up to the crisis they enjoyed high levels of income. The IFC's total capital (capital stock plus designated and undesignated retained earnings) are almost equal to their total commitments of loans, equity and debt securities, and their institutions capital adequacy ratio has risen from 45% in 2002/3 to 57% for 2006/7. Another DFI's, the FMO, capital adequacy has increased from 38.4% in 2000 to 50.5% in 2005, while the CDCs rate of return is stronger than emerging markets stock market indices.

An Ability to access technical assistance funds

DFIs also provide a substantial amount of technical assistance (TA), and a survey by researchers at the Overseas Development Institute found that DFIs spend over US$ 200 million on TA to both the private and public sectors to help develop private investment projects. Services are either other paid for with a fee (on a cost sharing basis) or in the form of a grant, funded by the DFIs retained earnings. TA funds are sometimes tailor made for specific projects and clients, while others for cater for a broader, upstream, investment climate or financial reform programmes.

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Subsidies passed on directly to beneficiaries

The subsidy directly passed on to the client is usually in the form of a risk guarantee and/or a longer repayment period. DFIs can often provide loans for between 10 to 15 years, far longer than a commercial bank's loan of usually 35 years. In the case of the EIB, loans can last up to 25 years. Other benefits provided directly to beneficiaries include: longer grace periods; subordinated debt or other forms of quasi-equity finance characterized by higher risk; equity investments in frontier markets and sectors; and the higher risks that accompany the syndication of loans. Yet these loans are not understood to damage the competitiveness of the commercial banks, as the lending policies of DFIs reflect their mandate that debt should be priced at a mark-up which reflects genuine country and project risk, and includes administration costs and fees at market rates. Despite differences amongst DFIs at project level, this mandate tends to be properly applied in practice.

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DFIs and Risk

DFIs' mandate requires them to invest in areas commercial banks do not, towards poorer countries and sectors and as hence they face higher risks. DFIs must help markets grow and seek to improve the investment climate, in order to demonstrate that enterprises can develop in economically challenging markets, thus contributing to sustainable development. However, since private capital must also be involved and their continued investment in future projects ensured, a commercial return must be achieved. Yet DFIs seek to resolve these two conflicting factor through an 'optimum' level of risk by balancing the cost of managing elevated levels of risk (e.g. loss provisions on loans, guarantees and equity impairment revaluations etc.), with the need to maintain liquidity sufficient to ensure strong institutional credit ratings, a low cost of borrowing, and generate a surplus to support technical assistance and grants. Experience might suggest DFIs have operated at an optimum, for instance, during the Asian financial crisis of the late 1990s, portfolios were riskier, loan losses higher and returns lower than they are at present, but it did not adversely affect their institutional credit ratings due to state backing. The EBRD argued it was able to weather the impact of a major shock 3.5 times the size of the global financial crisis triggered by the Asian financial crisis, using only accumulated reserves. However, it does appear that DFIs were lowering their expose to risk during the period leading up to the 2008 global financial crisis, capital adequacy ratios were increasing, bad loan reserves decreasing and portfolio shares in Africa were unstable. The IFC's loan loss reserves fell from 21.9% of the total loan portfolio in 2002 to 8.3% in 2006, and EBRDs from 12% in 1999 to 2% currently. The share of sub-Saharan Africa in IFCs portfolio was only 10.7% in both 2001 and 2007. Policies seeking to buck this trend involved changing staff remuneration policies. For example, the IFC introduced a remuneration process that links salary awards not only to volume but also to the development impact of past investments. This could lead to greater financial risk, but greater development effectiveness.

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2008 Global Financial Crisis

DFIs, however, cannot take on more risk without paying heed to accessibility of credit in the wider international financial markets. However, DFIs are less directly affected by the 2008 global financial crisis, because of their mainly fixed rate loans and high levels of liquidity. DFIs could thus play an important role in being the lender who is not only the first to enter a market, but also the last to leave. This may reduce the problems caused by herding behavior of private capital flows.

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GENESIS OF IFCI
At the time of independence in 1947, India's capital market was relatively under-developed. Although there was significant demand for new capital, there was a dearth of providers. Merchant bankers and underwriting firms were almost non-existent and commercial banks were not equipped to provide long-term industrial finance in any significant manner. It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution in the country to cater to the long-term finance needs of the industrial sector. The newly-established DFI was provided access to low-cost funds through the central bank's Statutory Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to corporate borrowers at concessional rates.

LIBERALIZATION - CONVERSION INTO COMPANY IN 1993

By the early 1990s, it was recognized that there was need for greater flexibility to respond to the changing financial system. It was also felt that IFCI should directly access the capital markets for its funds needs. It is with this objective that the constitution of IFCI was changed in 1993 from a statutory corporation to a company under the Indian Companies Act, 1956. Subsequently, the name of the company was also changed to "IFCI Limited" with effect from October 1999.

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NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

NABARD, an apex development bank, was set up on the recommendations of CRAFICARD Committee on July 12, 1982 under NABARD Act 1981 with a capital of Rs.100crore contributed by Central Govt. and RBI, with its main office in Mumbai, by merging the Agriculture Credit Deptt and Rural Planning and Credit Cell of RBI and took over the entire functions of Agriculture Refinance and Development Corporation (ARDC). NABARD is managed by Board of Directors consisting of Chairman, Managing Director other directors. NABARD raises funds through National Rural Credit - Long Term operations, National Rural Credit-Establishment fund, through bonds and debentures guaranteed by Central Govt., borrowing from RBI, Central Govt. or any other organization approved by Central Govt. and funds from external sources. It credit functions include providing credit to agriculture, small and village and cottage industries through banks by way of refinance facilities to commercial banks, RRBs, Coop Banks, Land Development Banks and other Financial Institutions like KVIC. Its developmental functions are co-ordination of various institutions, acting as agent of Govt. and RBI, providing training and research facilities. The regulatory functions include inspection of RRBs and Coop Banks, receipt of returns and making of recommendations for opening new branches.

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EXPORT IMPORT BANK OF INDIA

It is apex institution for co-ordinating the working of institutions in India engaged in financing exports and import of goods and services. With initial authorized capital of Rs. 200 crore (increased to Rs.500 and then to Rs.2000crore) Exim Bank was established on Jan 01, 1982 (and started functioning wef March 01, 1982) under Export Import Bank of India Act 1982, which took over the export finance activities of IDBI. It raises funds by way of bonds and debentures, borrowing from RBI or other institutions, raising foreign deposits. It undertakes following kind of functions: -direct finance to exporter of goods. -direct finance to software exports and consultancy services. -finance for overseas joint ventures and turnkey construction project -finance for import and export of machinery and equipment on lease basis -finance for deferred payment facility -issue of guarantees -multi-currency financing facility to project exporters. -export bills re-discounting -refinance to commercial banks in India -guaranteeing the obligations.

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SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

SIDBI was established under SIDBI Act 1988 and commenced its operations wef April 02, 1990 with head quarters in Lucknow and branches all over the country, as a subsidiary of IDBI. It took over the IDBI business relating to small scale industries including National Equity Scheme and Small Inds Development fund. The objective of establishment of SIDBI, in particular, is to strengthen and broad-base the existing institutional arrangement to meet the requirement of SSI and tiny industries. Its functions include: -administration of SIDF and NEF for development and equity support to small and tiny industry. -providing working capital through single window scheme -providing refinance support to banks/development finance institutions. -undertaking direct financing of SSI units. -coordination of functions of various institutions engaged in finance to SSI and tiny units.

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NATIONAL HOUSING BANK (NHB)

NHB, the apex bank for Housing, was established on July 09, 1988 under NHB Act 1987, as a wholly owned subsidiary of RBI with head quarters in New Delhi. The bank was set up with the main purpose of setting up of an institution to operate as a principal agency to promote housing finance institutions and to provide financial and other support to these institutions. NHB can raise sources by issue of bonds and debentures, borrowing from RBI under short term loans and long term operations, borrowing from Central govt and other approved institutions. Its functions are: -promotion and development of housing finance institutions. -refinance to banks and other housing finance institutions for credit facilities granted by them for housing. -inspection of books of accounts of housing finance institutions -technical, administrative and advisory assistance to housing finance institutions. -providing underwriting and guarantee facilities to housing finance institutions. -arranging financing and resources for institutions engaged in housing facilities. -advising Central and other govt. in the matter of housing and housing finance. -collection and publication of information and data relating to housing finance. -maintaining control over corporate housing finance institutions.

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INDUSTRIAL INVESTMENT BANK OF INDIA (formerly IRBI)

IIBI was initially set up as Industrial Reconstruction Corporation Limited during 1971 when it was renamed Indl Reconstruction bank of India wef Mar 20, 1985 under IRBI Act 1984 to take over the function of IRC. During 1997 the bank was converted to a joint stock company by naming it Industrial Investment Bank of India. Its earlier functions were to provide finance for industrial rehabilitation and revival of sick industrial units by way of rationalization, expansion, diversification and modernization and also to co-ordinate the work of other institutions for this purpose. agricultural and rural requirements.

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INDUSTRIAL FINANCE CORPORATION OF INDIA Ltd (IFCI)

IFCI was established under IFCI Act 1948 during July 1948 as Indias first development bank. The main objective for which IFCI was established, are to make medium and long term credit available to the industrial undertakings and to assist them in creation of industrial facilities. Its functions include: -direct financial support (by way of rupee term loans as well as foreign currency loans) to industrial units for undertaking new projects, expansion, modernisation, diversification etc. -subscription and underwriting of public issues of shares and debentures. -guaranteeing of foreign currency loans and also deferred payment guarantees. -merchant banking, leasing and equipment finance During 1994, IFCI was converted into a joint-stock company and came out with a public issue of shares. It is managed by a Board of Directors. It floated institutions such as TFCI, ICRA etc.

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INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

ICICI was set up during 1955 as a private company with a view to provide support to industry in India by way of rupee and foreign currency loans, particularly the private international investment and World Bank funds to assist the industry in the country in private sector. It functions include: -assistance to industrial undertakings for new projects, expansion, modernisation, diversification etc. in the shape of rupee loans or foreign currency loans. -subscription and underwriting of capital issues -guaranteeing the payment for credits. -merchant banking, equipment leasing and project counselling. It floated a number of institutions successfully which include credit rating agency CRISIL, ICICI Banking Corporation, SCICI (since merged with it) a Mutual Fund etc. During Sept 1998 it changed its name to ICICI Ltd. Of late, it has started providing working capital support to industrial undertakings.

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INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

IDBI is the apex institution in the area of long term industrial finance. It was established under the IDBI Act 1964 as a wholly owned subsidiary of RBI and started functioning on July 01, 1964. Under Public Financial Institutions Laws (Amendment) Act 1976, it was delinked from RBI. IDBI is engaged in direct financing of the industrial activities as well as in re-finance and re-discounting of bills against finance made available by commercial banks under their various schemes. The objectives of this institution are to create a principal institution for long term finance, to coordinate the institutions working in this field for planned development of industrial sector, to provide technical and administrative support to the industries and to conduct research and development activities for the benefit of industrial sector. It raises funds by way of market borrowing by way of bonds and deposits, borrowing from Govt. and RBI, borrowing abroad in foreign currency and lines of credit. Its functions include: -direct loans (rupee as well as foreign currency) to industrial undertakings as defined in the Act to finance their new projects, expansion, modernization etc. -soft loans for various purposes including modernization and under equipment finance scheme

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-underwriting and direct subscription to shares/debentures of the industrial companies. -sanction of foreign currency loans for import of equipment or capital goods. -short term working capital loans to the corporates for meeting their working capital requirements. -refinance to banks and other institutions against loans granted by them. Of late, with the reforms in the financial sector, IDBI has taken steps to re-shape its role from a development finance institution to a commercial institution. It has floated its own bank IDBI Bank as also a Mutual Fund. During the financial year 1999-2000 IDBIs total sanctions were Rs.28308 cr (19.2% increase), the total assets were Rs.72169cr, net worth at Rs.9025cr, capital adequacy ratio of 14.5%, DER 6.8:1 and PBT Rs.1027cr (1301cr previous years). To meet emerging challanges, it has been introducing new products, setting up Mergers &AcquistionsDivn, increasing fee based business such as corporate advisory services, credit syndication, debenture-trushtee ship etc., setting up of IT sector subsidiaryIDBI Intech Ltd, venture capital fund, joint ventures and transfer of not less than 51% of IDBIs share capital in SIDBI to PSBs as a result of SIDBI (Amendment) Act 2000 effective from 27.03.2000.

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GROUP NAMES
1. Tanima Bansal-06
2. Ginelle Gomes-16 3. Surbhi Gupta-17 4. Shivakshi Malik-29 5. Bhagyashree More-36 6. Shweta Tewani-53

ACKNOWLEDGEMENT

1. Google 2. Wikipedia 3. Relevant sources