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FIs shy due to weak IDBI, financial restructuring

The sanctions and disbursements by the FIs were down by 51.4 per cent and 47.4 per cent respectively in the first nine months of this fiscal.

india Updated: Feb 27, 2003 18:16 IST

Losing ground, India's financial institutions are increasingly shying away from financing the projects for various reasons including the weak position of IDBI and IFCI, spread of universal banking and the financial restructuring of FIs.

The pre-Budget Survey, tabled in Parliament on Thursday, said, "FIs, which constitute an important source of funds for the commercial sector, have been fast losing grounds" highlighting that the sanctions and disbursements by the FIs were down by 51.4 per cent and 47.4 per cent respectively in the first nine months of this fiscal.

"The declining trend in sanctions and disbursements is mainly on account of reduction in number of project proposals seeking financial assistance, weak financial position of IDBI and IFCI, financial restructuring of asset portfolios of FIs and spread of universal banking," the Survey said.

The total loan sanctions made by FIs stood at Rs 13,217 crore till December 2002 as compared to Rs 27,174 crore in the corresponding period in the previous year.

The total disbursements by FIs fell to Rs 11,432 crore during April-December 2002-03 as against Rs 21,741 crore in the first nine months of the previous fiscal, it said.

"The situation has come about as a result of distinction between development and commercial banking getting blurred, high cost of funds and asset-liability mismatches," it said.

With merger of ICICI with ICICI Bank, the role of FIs had "subsided" further. ICICI alonehad accounted for over 49 per cent of sanctions and 45 per cent of disbursements of FIs, it said.

The Survey said the Government proposes to address the problems of IDBI and IFCI and bill to repeal the IDBI Act had been introduced in December 2002.

The bill seeks to corporatise IDBI for giving it the appropriate flexibility and leeway to structure itself into a viable and effective organisation.

The Narasimham Committee II had recommended that with the convergence of activities between banks and DFIs (development financial institutions), the DFIs should, over a period of time, convert themselves into banks paving the way for only two forms of subsidiaries -- banking companies and non-banking financial institutions.

RBI had advised FIs to chart a path for their evolution into universal banks and the merger of ICICI with ICICI Bank was approved by the banking regulator in April, 2002.

The other initiatives pursued by RBI for the financial institutions included a supervisory rating system 'CAMELS' model, audit, connected lending, loans against guarantees extended by banks and prudential norms.

"FIs have been advised to rotate the partners of the audit firms, if the same firm continued for over four years," the Survey said.

It said the loan extended by an FI against such guarantee of a bank would attract a risk weight of 20 per cent in the computation of Capital Risk-weighted Adequacy Ratio (CRAR).

The risk weight of 20 per cent would apply to only to that part of the loan, which is covered by bank's guarantee, and the remaining amount of loan, if any, would attract 100 per cent risk weight.

First Published: Feb 27, 2003 18:16 IST