Expert Speak India Matters
Published on Aug 02, 2018

In their new avatars, ICICI Bank and IDBI Bank command the size and scale to repeat that performance for household finance, while IFCI is teetering under the weight of sharp deterioration of asset quality and deviations from lending norms, according to the Comptroller and Auditor General.

70 Policies — Development Finance Institutions, 1948

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The following is a chapter from the book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion.

Find the book here.


The first financial institution and development bank to be created after Independence, Industrial Finance Corporation of India (now IFCI Ltd), was formed on 27 March 1948 by legislation <1> to fulfil the long-term finance needs of the country’s fledgling industry. Through a repeal <2> of the Act in 1993, IFCI became a company under the Companies Act. In 1955, seven years after IFCI was formed but could not singly deliver the financial requirements of the country, the government formed the Industrial Credit and Investment Corporation of India (ICICI) to provide medium-term and long-term project financing to Indian businesses, with the World Bank <3> and private investors as partners. Almost a decade later, in 1964, Parliament created yet another institution, the Industrial Development Bank of India (IDBI) in 1964 <4>. With the transformation of the economy since then, ICICI and IDBI have become successful banks. As the economic environment liberalised during the 1990s, ICICI began to change itself from an entity offering project finance to industry, to one serving consumers directly as a universal bank. Following the merger with ICICI Bank in 2002, it completed the journey from institutional finance to retail finance. Under the recommendations of the 1998 Narasimham Committee II, which stated that IDBI should be corporatised and converted into a company on the lines of IFCI and ICICI <5>, on 30 December 2003, the IDBI Act was repealed <6> and IDBI was deemed to be a banking company <7>. Effective 2 July 2004, the repeal corporatised IDBI and transformed it into a bank. In addition to these transformations, the role of development finance institutions in pre-liberalisation India was noteworthy. According to a December 2016 UNCTAD report <8>, their contribution to total capital formation has grown significantly over the years, with 70 percent of the total directed to the private sector in the form of loans as well as equity. In their new avatars, ICICI Bank and IDBI Bank command the size and scale to repeat that performance for household finance, while IFCI is teetering under the weight of sharp deterioration of asset quality and deviations from lending norms, according to the Comptroller and Auditor General. <9>


<1> The Industrial Finance Corporation Act, 1948, Indian Kanoon, 27 March 1948, accessed 28 December 2017.

<2> The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993, Ministry of Law and Justice, Government of India, 2 April 1993.

<3> International Bank for Reconstruction and Development, International Organization 9, no. 2, University of Wisconsin Press (May 1955): 272–274, accessed 28 December 2017.

<4> The Industrial Development Bank of India Act, 1964, The Indian Lawyer, 16 May 1964, accessed 28 December 2017.

<5> Committee on Banking Sector Reforms (Narasimham Committee II): Action taken on the recommendations,” Small Industries Development Bank of India, 30, accessed 28 December 2017.

<6> The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, Ministry of Law and Justice, Government of India, 30 December 2003.

<7> Ibid., Chapter II, Section 3(2)

<8> The Role of Development Banks in Promoting Growth and Sustainable Development in the South,” United Nations Publications, UNCTAD, December 2016, 23, accessed 28 December 2017.

<9> Report No. 16 of 2017, Report of the Comptroller and Auditor General of India on Credit Risk Management in IFCI Limited, Comptroller and Auditor General of India, 5 April 2017, accessed 28 December 2017.

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Author

Gautam Chikermane

Gautam Chikermane

Gautam Chikermane is Vice President at Observer Research Foundation, New Delhi. His areas of research are grand strategy, economics, and foreign policy. He speaks to ...

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Editor

Guillermina French

Guillermina French

Guillermina French Fundacin Ambiente y Recursos Naturales (FARN)

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