Chapter V

Financial Institutions

5.1 The role of financial institutions has been 5.3 The financial institutions in India can
under discussion in recent years. Although be broadly classified into three categories, viz.,
setting up of the development finance All-India Financial Institutions (AIFIs), State level
institutions (DFIs) was an important feature in institutions and other institutions (Chart V.1).
the overall development of the financial system; On the basis of functions and activities, the AIFIs
with the emergence of the capital market as an have four segments; (i)all-India development
important source of finance in the late 1980s banks, (ii) specialised financial institutions,
and early 1990s, and the renewed role of banks (iii) investment institutions and (iv) refinance
in term-financing, DFIs have been increasingly institutions. The State level institutions comprise
exposed to greater competition. Liberalisation of State Financial Corporations (SFCs) and State
the financial sector, with its associated processes Industrial Development Corporations (SIDCs).
of decontrol, deregulation and globalisation, has Other financial institutions include Export
led to increased competition for financial Credit Guarantee Corporation of India (ECGC)
intermediaries across different segments. The Ltd. and Deposit Insurance and Credit
competitive pressures have come into the Guarantee Corporation (DICGC). Out of 17 AIFIs,
business domain of FIs on account of the entry the Reserve Bank regulates and supervises only
of new players. Moreover, with the initiation of nine. Out of these nine, six FIs, viz., Industrial
financial sector reforms in the early 1990s, Development Bank of India (IDBI), Industrial
access of FIs to assured sources of long- Finance Corporation of India (IFCI) Ltd.,
duration/concessional funds from the Industrial Investment Bank of India (IIBI) Ltd.,
Government, particularly ‘SLR bonds’ that were Tourism Finance Corporation of India (TFCI)
subscribed to by banks and insurance Ltd., Infrastructure Development Finance
companies, has been gradually phased out. FIs Company (IDFC) Ltd. and EXIM Bank are ‘Term
at present are overwhelmingly dependent on Lending Institutions’, while the remaining three
market borrowings - wholesale and retail, FIs, viz., National Bank for Agriculture and Rural
domestic and foreign - for their resource Development (NABARD), National Housing Bank
mobilisation. As a consequence, DFIs are (NHB) and Small Industries Development Bank
required to raise funds from the capital market. of India (SIDBI) are termed as ‘Refinance
With the removal of administrative controls on Institutions’ for regulatory and supervisory
the interest rate structure, it has become purposes.
increasingly difficult for DFIs to raise long-term
funds. This in turn has affected their ability to
offer competitive rates to their borrowers. 2. Policy Initiatives for Financial
Institutions
5.2 Apart from the competitive pressure for
raising resources, the role of DFIs as an exclusive 5.4 The Reserve Bank regulates and
source of development finance has diminished as supervises nine AIFIs 1 under Section 5 of the
other intermediaries especially banks have also Reserve Bank of India Act, 1934. The FIs are
entered into long-term and high risk project currently on the transition path as recommended
financing. Therefore, FIs are increasingly facing by the Narasimham Committee II, by making
competition not only in terms of raising resources endeavours, to convert themselves either into a
but also in the deployment of funds. In short, bank or NBFC. The focus of the policy initiatives
the change in the operating environment coupled by the Reserve Bank and the Government has
with the legacy of high non-performing assets has been on financial as well as organisational
led to serious financial stress on the term lending restructuring to facilitate their transition into
financial institutions. universal banks. As a corollary, the Reserve

1
IFCI Limited, IDBI, EXIM Bank, IIBI Limited, TFCI Limited, IDFC Limited, NABARD, NHB and SIDBI.
 Financial Institutions

Chart V.1: Organisational Structure of Financial Institutions

All Financial Institutions

All-India State Level Other

Financial Institutions Institutions
Institutions

All India Specialised Investment Refinance

Development Financial Institutions Institutions
Banks UTI (1964), NABARD (1982),
Institutions
IDBI (1964), LIC (1956), NHB (1980)
EXIM Bank
SIDBI (1990)#, GIC &
(1982),
IIBI* (1997), subsidiaries
IVCF** (formerly
IFCI (1948) (1972)
RCTC) (1988),
IDFC (1997)
ICICI Venture
(formerly TDICI)
(1988), SFCs SIDCs ECGC DICGC
TFCI (1989), (18) (28) (1957) (1962)

* The erstwhile Industrial Reconstruction Bank of India (IRBI), established in 1985 under the IRBI Act, 1984, was
renamed as Industrial Investment Bank of India Ltd. (IIBI) with effect from March 27, 1997.
** IVCF-IFCI Venture Capital Funds Ltd.
# SIDBI is termed as the ‘Refinancing institution’, for regulatory and supervisory purpose.
Notes: 1. Figures in brackets under respective institutions indicate the year of incorporation.
2. Figures in the brackets under SFCs/SIDCs indicate the number of institutions in that category.
3. IDBI became IDBI Ltd. on October 1, 2004.

Bank has been harmonising its various policy Regulatory Initiatives

measures for banks and FIs in such a manner
Asset Classification and Provisioning Norms:
that FIs, on becoming banks, are in a position
Refinement
to fully integrate themselves into the banking
system. The Reserve Bank initiated various 5.6 FIs were advised that with effect from end-
regulatory and supervisory initiatives including March 2006, an asset should be classified as a
facilitating organisational restructuring of the non-performing asset (NPA) if the interest and/
FIs during 2003-04. Policy initiatives for select or instalment of principal remain overdue for
AIFIs laid emphasis on asset classification and more than 90 days. As regards the additional
provisioning, disclosures, consolidated provision arising as on March 31, 2006 on
accounting and supervision, infrastructure account of the modification in the norms, FIs
financing and measures to facilitate market would have the option to phase out the required
developments. provisioning over a period of three years
beginning from the year ending March 31, 2006,
5.5 To examine the supervisory and subject to at least one fourth of the additional
regulatory issues relating to term lending and required provision being made in each year.
refinancing institutions and improve the flow of
resources to them, the Reserve Bank announced Prudential Norms for Classification of Doubtful
the setting up of a Working Group on Assets of FIs
Development Financial Institutions which 5.7 With a view to moving closer to
submitted its Report in May 2004 (Box V.1). international best practices and ensuring

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Report on Trend and Progress of Banking in India, 2003-04

Box V.1: Report of the Working Group on Development Financial Institutions

In order to address the regulatory and supervisory issues development finance and which institutions can
and enhance the flow of credit, the Reserve Bank of India in continue as DFIs. The rest of the DFIs should be
its mid-term Review of monetary and credit policy 2003-04 converted either to a bank or a regular NBFC as
announced the setting up a Working Group on Development recommended by the Narasimham Committee II.
Financial Institutions (Chairman: N. Sadasivan)2. The broad l The Group identified that the main problems of SFCs were
objectives of the Working Group were to review the the centralised decision making, lack of corporate culture,
experience and prospects of DFIs for transformation into high transaction cost and poor appraisal skills. The SFCs,
banks and to assess the financial position and recommend according to the Group have lost their relevance. The Group
a regulatory framework for the existing financial is uncertain regarding the revival of financially sick SFCs
institutions. and recommended phasing out of SFCs.
The Working Group observed that in the pre-reform period, l Since long-term project finance is a risky proposition
DFIs faced little competition in the area of long-term finance for any financial intermediary whose portfolio is almost
as funds were available to them at cheaper rates from exclusively comprised of project financing, the DFIs
multilateral and bilateral agencies duly guaranteed by the should consciously scale down the proportion of project
Government. The reforms in the financial sector have financing by resorting to diversified products, before
changed the operational environment for the DFIs. Along transformation into banks. Highly illiquid asset profile
with the changed operating environment for banks in a may be risky from the systemic point of view.
globalised scenario, the regulatory framework for FIs has l DFIs seeking transformation should restructure
undergone a significant change. While on the supply side, themselves like a company with a large and diversified
the access of DFIs to low-cost funds has been withdrawn, share holding. DFIs, converted into banks, could be
on the demand front, they have to compete with banks for accorded certain exemptions/relaxations for a period
long-term lending. Out of nine select all India financial of three to five years after conversion.
institutions being regulated and supervised by the Reserve l The Group also emphasised on the need for ongoing
Bank at present, three institutions, viz., NABARD, NHB monitoring of the business and strategic plan till the
and SIDBI extend indirect financial assistance by way of DFIs are fully integrated into the banking system.
refinance. The financial health of these three institutions
is sound as their exposures are to other financial l The regulatory framework needs further strengthening
intermediaries, which in certain cases are also supported and should be so designed so as to ensure financial
by State Government guarantees. Of the remaining six soundness of DFIs and overall systemic stability.
institutions, two niche players, viz., EXIM Bank and IDFC l The Group recommended that risk weightage for certain
Ltd. are also healthy. The remaining four institutions that categories of investments such as bonds of public
have been operating as providers of direct assistance, are financial institutions should be raised from the present
all in poor financial health. The major recommendations level of 20 per cent to 100 per cent as such investments
by the Group are: involve substantial credit risk.
l DFIs, viz., NABARD, NHB, EXIM Bank and SIDBI work
l The role of DFIs as exclusive providers of development as instruments of public policy and the Reserve Bank
finance has diminished during the 1990s with the may continue to regulate the financial and other related
emergence of a well-diversified banking system aspects of these institutions.
operating efficiently and acquiring skills in extending
long-term finance. The banks should be permitted to On the basis of recommendations of the Working Group
raise long-term finance through development bonds to and the feedback received thereon, the Reserve Bank in
enable them to extend high-risk project finance. its mid-term Review of annual policy Statement 2004-05
proposed: i) the Reserve Bank would continue to supervise
l As a result of the exposure of DFIs to certain sectors NABARD, SIDBI, NHB and EXIM Bank, ii) the Reserve Bank
with cyclical downturn, DFIs have accumulated large would supervise DFIs accepting public deposits while DFIs
NPAs. To overcome this, Government should undertake and large NBFCs not accepting public deposit but having
a social cost-benefit analysis, on the basis of which asset size of Rs.500 crore and above would be subjected to
Government should decide which sectors need limited off-site supervision.

convergence of the norms applicable to the FIs permitted to phase out the consequent additional
with those of banks, the Reserve Bank in its mid- provisioning over a four-year period.
term Review of annual policy Statement for the
year 2004-05 proposed that in respect of FIs, Slippage of Non-performing Assets – Preventive
an asset would be classified as doubtful, if it Measures
remained in the sub-standard category for 12 5.8 In pursuance of the directions of the Board
months with effect from March 31, 2005. FIs are for Financial Supervision (BFS), the Reserve Bank

2
Also see Box VI.2 of the Report.

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 Financial Institutions

had constituted an in-house Group to identify and of Rs.10 lakh. If the intermediaries registered
recommend the measures that could be instituted with SEBI associate themselves with the
by the banks to prevent the slippage of the issuance of private placement of unlisted debt
accounts from the ‘sub-standard’ category to the securities, they will be held accountable for
‘doubtful’ category. Based on the such issues. They will also be required to
recommendations of the Group, the Reserve Bank furnish periodical reports to SEBI in such
issued guidelines to banks and the same format as may be decided by SEBI.
guidelines were extended to FIs. Accordingly, FIs
were advised to place these guidelines before their 5.11 S E B I h a s a l s o d i r e c t e d t h e s t o c k
Boards and take appropriate action for exchanges to make necessary amendments to
implementing the recommended measures, to the the listing agreement, bye-laws, rules and
extent considered necessary, in keeping with the regulations for the immediate implementation,
spirit of the guidelines. The introduction of a as may be applicable and also disseminate its
‘Special Mention’ category for asset classification guidelines on the website for easy access to the
is for internal control and follow-up purposes only investors and to the listed companies/member
and this, however, would not constitute an brokers/clearing members of the Exchange.
additional category under the extant asset
5.12 The investment by FIs in debt instruments
classification norms of the Reserve Bank.
issued by corporate entities - in primary as well
as secondary market - increased substantially in
Revised Guidelines for Compromise Settlement of the recent past. The Reserve Bank, therefore,
Chronic NPAs up to 10 crore issued draft guidelines in November 2003 which
sought to address the risks arising from
5.9 Under the revised guidelines for One Time investment in non-Government debt securities,
Settlement (OTS) of chronic NPAs up to Rs.10 particularly through private placement. On receipt
crore, the last date for receipt of applications from of the feedback from the FIs, the final guidelines
borrowers was extended up to July 31, 2004 from on the subject were issued in January 2004. These
the close of business on September 30, 2003 and guidelines mainly covered various aspects relating
the date of completion of processing of to coverage, effective date and transition time,
applications was also extended up to October 31, regulatory requirements, internal assessment
2004 from December 31, 2003 in consultation systems, prudential limits, the role of Board of
with the Government of India. Directors, reporting requirements, disclosures,
and trading and settlement in debt securities.
Guidelines on Investment by the FIs in Debt These guidelines apply to the FIs’ investment in
Securities debt instruments, both in the primary market
(public issue as also private placement) as well
5.10 FIs have been investing in the debt as the secondary market, issued by companies,
securities issued by companies on private banks, FIs and State and Central Government
placement basis from time to time. In order to sponsored institutions, Special Purpose Vehicles
provide greater transparency to such issuances (SPVs), Central or State Public Sector
and to protect the interest of investors in such Undertakings, with or without Government
securities, Securities and Exchange Board of guarantee; units of debt-oriented schemes of
India (SEBI) guidelines state that any listed Mutual Funds, i.e., the schemes where the major
company assuring debt securities on a private part of the corpus is invested in debt securities;
placement basis shall be required to comply and capital gains bonds and the bonds eligible
with certain conditions relating to full for priority sector status. The guidelines, however,
disclosures (initial and continuing), Listing do not apply to Government securities and the
agreement with the exchanges, credit rating of units of Gilt Funds; securities which are in the
not less than investment grade, appointment nature of advance under the extant prudential
of a debenture trustee, issuance and trading of norms of the Reserve Bank; units of the equity
the debt securities in demat form, trading in oriented schemes of Mutual Funds; units of the
stock exchanges and between Qualified ‘Balanced Funds’, venture capital funds and the
Institutional Investors (QIIs) and High Networth money market mutual funds; Commercial Paper
Individuals (HNIs), and standard denomination (CP); and Certificates of Deposit (CDs) (Box V.2).

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Report on Trend and Progress of Banking in India, 2003-04

Box V.2: Guidelines on Investments in non-Government Debt Securities

The Reserve Bank issued guidelines to FIs on investments securities. FIs should not solely depend on the ratings of
in non-Government debt securities both in the primary external rating agencies but strengthen their internal rating
(public issue and private placements) and secondary systems including building up of a system of regular (quarterly
mar k et w ith a vie w t o a ddre s s ris ks a ris in g f r om or half-yearly) tracking of the financial position of the issuer.
investments in non-Government debt securities especially
FIs are permitted to invest in the unlisted debt securities to
through private placements. The guidelines have been in force
the limit of not exceeding 10 per cent of their total investment
since April 1, 2004.
in debt securities, which fall within the ambit of these
Considering the time required by the issuers of debt securities guidelines, as on March 31 (June 30 in case of NHB) of the
to get their existing unlisted debt issues listed on the stock previous year. However, investment in Security Receipts (SRs)
exchanges, the following transition time is being provided: issued by Securitisation/Reconstruction Companies
a) Investment in units of mutual fund schemes where the registered with the Reserve Bank in terms of the provisions
entire corpus is invested in non-Government debt of Securitisation and Reconstruction of Financial Assets and
securities would be outside the purview of the above Enforcement of Security Interest (SARFAESI) Act, 2002, Asset
guidelines till December 31, 2004; thereafter, such Backed Securities (ABS) and Mortgage Backed Securities
investments would also be subject to the guidelines. (MBS) which are rated at or above the minimum investment
grade will not be reckoned as ‘unlisted debt securities’ for
b) Investment in units of such schemes of mutual fund as the purpose of monitoring compliance. FIs, with exposure to
have an exposure to unlisted debt securities of less than investments in debt securities in excess of the above
10 per cent of the corpus of the scheme would be treated prudential limit as on March 31, 2003 (June 30, 2003 in
on par with listed securities for the purpose of the case of NHB), should not make any fresh investment in such
prudential limits prescribed under these guidelines from securities till the prudential limit is complied with.
January 1, 2005. Hence, till December 31, 2004,
investments in such units would attract prudential limits. The Boards of FIs would have to put in place a monitoring
system to ensure that the prudential limits prescribed under
c) Investments in existing unlisted securities, issued on or
these guidelines are scrupulously complied with, including
before November 30, 2003, were permitted up to March
the system for addressing the breaches, if any, due to rating
31, 2004. In case, the issuers have applied to the stock
migration. Boards of the FIs are expected to review, twice a
exchange(s) for listing of such unlisted securities and the
year, total turnover (investment and divestment) during the
security is rated as minimum investment grade,
reporting period; compliance with the Reserve Bank-
investment in such unlisted securities can be permitted
mandated prudential limits as also those prescribed by the
till December 31, 2004.
Board for such investments; rating migration of the issuers/
d) Regarding unlisted securities issued after November 30, securities held in the books of the FIs and consequent
2003, investments are permitted up to December 31, diminution in the portfolio quality; and extent of non-
2004, subject to a ceiling of 10 per cent of the incremental performing investments in the fixed income category.
investments in the categories covered under these
guidelines over the corresponding figure of outstanding In order to help in the creation of a central database on private
investments as on November 30, 2003. placement of debt, the investing FIs are expected to file a
copy of all offer documents with the Credit Information
e) With effect from January 1, 2005 only those FIs would be
Bureau (India) Ltd. (CIBIL). When the FIs themselves raise
eligible to make fresh investments (up to the prescribed
debt through private placement, they need to file a copy of
prudential limits) in the unlisted securities whose
the offer document with CIBIL. Any default relating to
investments in such securities are within the prudential
payment of interest / repayment of instalment in respect of
limits prescribed.
any privately placed debt needs to be reported to CIBIL by
Investment by FIs are permitted only in rated debt securities the investing FIs along with a copy of the offer document.
with a minimum investment grade rating from an external The FIs should also report to the Reserve Bank such
rating agency, operating in India, as identified by the IBA/ particulars in respect of their investments in unlisted
FIMMDA. FIs cannot invest in debt securities of original securities as may be prescribed by the Reserve Bank from
maturity of less than one-year other than CPs and CDs, which time to time.
are covered under the Reserve Bank guidelines. The FIs need The FIs need to disclose the details of the issuer composition
to undertake usual due diligence in respect of investments of investments made through private placement and the non-
in debt securities including the securities which do not attract performing investments in the ‘Notes on Accounts’ of the
these guidelines. The FIs should ensure that all fresh balance sheet, with effect from the year ending March 31,
investments in debt securities are made only in listed debt 2004 (June 30, 2004 in case of NHB) in the prescribed format.
securities of companies, which comply with the requirements
of the relevant SEBI guidelines. The unlisted debt securities As per the SEBI guidelines, all trades, with the exception of
in which the FIs are allowed to invest up to the limits specified the spot transactions, in a listed debt security, would have
should be rated and issuer company should follow disclosure to be executed only on the trading platform of a stock
requirements as prescribed by the SEBI for listed companies. exchange. In addition to complying with the SEBI guidelines,
the FIs would have to ensure that all spot transactions in
The FIs should follow the same standards as for their credit listed and unlisted debt securities are reported on the NDS
appraisal before investing in debt securities, irrespective of and settled through the Clearing Corporation of India Limited
the fact that the proposed investments may be in rated (CCIL) from the date to be notified by the Reserve Bank.

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 Financial Institutions

Guidelines Relating to Issuance of Commercial publication of the CFS as per the Accounting
Paper (CP) Standard (AS) 21 of the Institute of Chartered
Accountants of India (ICAI) is mandatory for the
5.13 In order to provide further flexibility to
listed FIs in terms of the Listing agreement and
both issuers and investors in the CP market, it
has been decided that non-bank entities the guidelines have made such publication
including corporates may provide unconditional mandatory even by the non-listed FIs since April
and irrevocable guarantee for credit 1, 2003.
enhancement of the CP issue subject to (i) the
issuer fulfilling the eligibility criteria prescribed Asset Liability Management (ALM) - Guidelines
for issuance of CP; (ii) the guarantor having a
credit rating at least one notch higher than the 5.16 T h e A L M g u i d e l i n e s h a v e b e e n i n
issuer by an approved credit rating agency; and operation since April 2000, and with the
(iii) the offer document for CP disclosing the net stabilisation of the ALM system, the FIs have
worth of the guarantor company, the names of been advised to submit data to the Reserve Bank
the companies to which the guarantor has issued regarding the liquidity and interest rate gaps as
similar guarantees, the extent of the guarantees a part of the extant off-site surveillance system
offered by the guarantor company, and the at quarterly intervals, with effect from the
conditions under which the guarantee will be quarter ended June 30, 2003.
invoked. Further banks are permitted to invest
in CPs guaranteed by non-bank entities provided On-site Inspection and Off-site Surveillance
their exposure remains within the regulatory
System
ceiling as prescribed by the Reserve Bank for
unsecured exposures. 5.17 The Reserve Bank continued to undertake
on-site inspection of nine FIs under section 45N of
Risk Weight for Exposure to Public Financial the Reserve Bank of India Act, 1934. The
Institutions (PFIs) inspections are conducted annually. During the
year 2003-04, the supervisory process for all nine
5.14 Since December 1998, FIs were advised FIs with reference to their position as on March
that their investments in the bonds/ 31, 2003, (except NHB) was initiated and completed
debentures of certain PFIs would attract a including submission of memoranda to the BFS.
uniform risk weight of 20 per cent. In pursuance
of the annual policy Statement 2004-05, it has 5.18 Keeping in view the regulatory changes that
been decided that exposures to all PFIs will have taken place since the introduction of
attract a risk weight of 100 per cent with effect Prudential Supervisory Reporting System (PSRS)
from April 1, 2005. in July 1999, and also based on the suggestions
received from the FIs, the FID-OSMOS was
modified with effect from September 2003. The FIs
3. Supervision and Audit
now submit the off-site returns using the modified
Consolidated Accounting and Consolidated software module provided to them for this purpose.
Supervision The review of the performance of the FIs based on
the off-site returns submitted by them is presented
5.15 In the light of comments received on the
to the BFS on a quarterly basis.
draft guidelines and on the basis of a review, a
set of final guidelines were issued on
consolidated accounting and consolidated 4. Other Policy Developments
supervision. The guidelines which came into
Trading of Government of India Securities on
force on April 1, 2003 (July 1, 2003 in case of
Stock Exchanges
NHB), comprise three components in the
supervisory framework, viz., (i) Consolidated 5.19 To encourage wider participation of all
Financial Statements (CFS); (ii) Consolidated classes of investors in the secondary market for
Prudential Returns (CPR); and (iii) application Government securities, the trading in
of prudential regulations like capital adequacy, Government of India dated securities at the stock
large exposures and liquidity gaps on group-wide exchanges through a nation-wide, anonymous,
basis in addition to the solo prudential norms order-driven, screen-based system was
applicable to the parent FIs/subsidiaries. The introduced on January 16, 2003. However,

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Report on Trend and Progress of Banking in India, 2003-04

participation in this segment was negligible on during 2001-02 and 2002-03 was reversed
account of availability of alternative investment during 2003-04, aided by substantial
avenues with better returns like small savings improvements recorded by investment
instruments and savings bonds and with more institutions and to an extent, by specialised FIs
tax efficient features, like units of mutual funds. (Table V.1 and Chart V.2). Bulk of the total
Participation of wholesale entities was also sanctions and disbursements was made by Life
adversely affected by lack of liquidity on the Insurance Corporation of India (LIC) which were
exchanges. As announced in the annual policy Rs.21,974 crore and Rs.15,782 crore,
Statement 2004-05, a Working Group on Screen respectively, in 2003-04 as compared with
Based Trading in Government Securities Rs.4,333 crore and Rs.6,206 crore in the 2002-03.
(Chairman: Dr.R.H. Patil) was formed to study The disbursement by the LIC was higher than the
and recommend methods to improve liquidity on combined disbursements of IDBI, IFCI, IDFC, IIBI
the Government securities trading platform of and SIDBI. This possibly reflects its strategic
stock exchanges, in particular to improve market shift from merely investing in bonds of public
access for retail and mid-segment investors. As and private sector corporates into active
liquidity on the exchange based trading platform lending. In percentage terms, LIC accounted for
improves, it will provide the market participants 46 per cent of the total sanctions and 49 per
with another efficient trading platform. The cent of the total disbursements by AIFIs during
Report of the Group has been placed in the 2003-04. Another noteworthy development is
public domain for wider dissemination. the steep increase in sanctions and
disbursements by the IDBI to the infrastructure
5. Review of Operations sector by 288.2 per cent and 45.2 per cent
respectively, during 2003-04, accounting for
Financial Assistance: Sanctions and Disbursements.
43.9 per cent and 34.0 per cent of its total
5.20 The declining trend observed in financial sanctions and disbursements respectively,
assistance sanctioned and disbursed by AIFIs during this period.

Table V.1: Financial Assistance by Financial Institutions

(Year: April-March)
(Amount in Rs. crore)

Institution Percentage variation

2002-03 2003-04 during 2003-04
S D S D S D

1 2 3 4 5 6 7

A. All-India Development Banks

(IDBI, IFCI, SIDBI, IIBI, IDFC) 22,272 17,225 23,407 14,057 5.1 -18.4
B. Specialised Financial Institutions
(IVCF, ICICI Venture, TFCI) 475 490 484 441 1.8 -10.1
C. Investment Institutions (LIC, GIC#, UTI) 5,965 7,902 23,705 17,402 297.4 120.2
D. Total Assistance by
All-India FIs (A+B+C) 28,713 25,618 47,597 31,900 65.8 24.5

S Sanctions. D Disbursements.
# Data include GIC and its subsidiaries.
Notes : 1. Data are provisional for all institutions.
2. For IFCI, treasury operations, conversion of loans into equity/preference shares/debentures as well as differential
interest on account of NPV loss consequent upon restructuring of loan accounts are not reflected in data on sanctions
and disbursements, effective April 1, 2003.
3. With the repeal of UTI Act, UTI has discontinued submission of data on sanctions and disbursements since November
2002. Hence, data of UTI for 2002-03 is for seven months only, i.e., from April 2002 to October 2002.
Source : Respective FIs, IDBI for GIC and its former subsidiaries and SIDCs, and SIDBI for SFCs.

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 Financial Institutions

Chart V.2: Trends in Financial Assistance by AIFIs

Table V.2: Resource Flow from All-India
Development Banks to Corporate Sector
( Amount in Rs. crore)
Item 2002-03 2003-04
1 2 3
Sanctions 22,272 23,407
Disbursements 17,225 14,057
Rs. Crore

Credit (1+2+3+4) -6,021 -2,845

1. Investments in stocks / shares /
bonds / debentures of industrial
concerns / commercial concerns -766 -151
2. Loans and advances to industrial/
commercial concerns* -3,804 -2,525
3. Bills of Exchange and Promissory
Notes / discounted and re-discounted -1,546 -191
4. Others (Non-Funded Assistance) 95 22
* Loans and Advances to Overseas Industrial Concerns
Sanctions Sanctions (excluding ICICI) under the Lines of Credit/Buyers’ Credit Programmes
Disbursements Disbursements (excluding ICICI) have been excluded.

5.21 The financial assistance consists of project has become a major growth area while the share
finance and non-project finance. While term loans, of traditional economy sectors has gone down.
underwriting and direct subscription, and deferred At the same time, FIs like IDBI have entered into
payment guarantees constitute project finance, funding of working capital and the short-term
non-project finance comprises equipment finance, requirement of their existing borrowers.
corporate loans, equipment leasing, investment/ Although sanctions and disbursements to
direct subscription to shares and debentures/ corporate sector by the all-India development
bonds. There has been a significant increase in banks recorded improvement, the net flow of
resources from them to the corporate sector
project finance, particularly loans (rupee and
continued to be negative during 2003-04 possibly
foreign currency loans) from investment
due to the emergence of other alternative sources
institutions, particularly LIC, during 2003-04
of project finance and on account of higher
(Appendix Table V.1). Further, there was a redemption by the corporate sector.
discernible moderation in the contraction of flow
of credit to commercial sector from all-India 5.23 One encouraging development in 2003-04
development banks during 2003-04 (Table V.2). is a substantial increase in sanctions and
Strengthening of industrial growth on account disbursements to infrastructure sector by IDFC.
of a boost to a spectrum of manufacturing IDFC has broadened its areas of coverage. From
industries reflecting an improvement in domestic an initial focus on power, roads, ports and
and external demand conditions and reduction telecommunications; other sectors, such as,
in excise duties on a host of intermediate inputs energy, information technology, integrated
transportation, urban infrastructure, health
may have contributed to an increase in project
care, food & agri-business infrastructure,
finance sanctioned and disbursed by the FIs.
education infrastructure and tourism are being
5.22 The change in the operating environment increasingly catered to. Sanctions by IDFC
has also necessitated realignment of FIs’ asset increased by 148.5 per cent to Rs.5,727 crore
portfolio. As the margins have become thin, it in 2003-04 from Rs.2,304 crore in 2002-03 and
has become necessary to provide a wider range disbursement increased by 184.7 per cent to
of products and services with value-added Rs.2,704 crore in 2003-04 from Rs.950 crore in
features. While project financing continues to 2002-03. The infrastructure sectors that
be the main product for major FIs, various witnessed substantial growth in disbursements
innovative products have been developed to suit from the IDFC were energy (308 per cent),
the clients’ varied requirements. In view of the telecommunication (172 per cent), transportation
large investment requirements of the (81 per cent) and urban infrastructure (2,260
infrastructure segment, infrastructure funding per cent) (Appendix Table V.2).

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Assets and Liability Structure of FIs Sources and Uses of Funds

5.24 The balance sheet of select FIs, as a group, 5.26 The total sources and deployment of funds
showed a growth of 7.3 per cent during 2003-04 of FIs increased substantially by 26.6 per cent
over the previous year (Table V.3). Broad trends during 2003-04 as against a decline of 2.1 per cent
in liabilities remained more or less the same. during 2002-03. Both internal and external funds
Bonds/debentures continued to be the largest registered a rise during the year under review.
component due to their in-built flexibility and their Reflecting the substantial improvement in the
tradability. The share of deposits witnessed a industrial climate, fresh deployments registered
decline as FIs, anticipating reversal of trends in an increase in its share in the total. Repayment
the interest rates, reduced their deposit liabilities of past borrowings also rose perceptibly on
in the shorter end of the maturity spectrum. account of substitution of earlier high cost debt
Borrowings, however, remained at the same level. with the cheaper debt in view of the falling interest
rates. Other deployments recorded a fall due, inter
5.25 On the assets side, there was a
alia, to a decrease in interest payments (Table V.4
compositional shift away from loans and advances
and Appendix Table V.3).
towards investments and holding of more liquid
assets. Loans and advances, the biggest 5.27 The share of fresh deployments is more or
component, registered a decline in its share partly less equal to that of internal funds, whereas the
on account of a decline in disbursements, despite combined share of repayments of past borrowings
an increase in sanctions due to increased and other deployments equaled that of external
provisioning and higher pre/repayments by and other sources of funds. This highlights the
borrowers. The share of investments, on the other fact that while the internal funds are being used
hand, rose significantly partly due to the strong for the purpose of fresh deployments, including
and broad-based rally in the capital markets in fresh investment, external and other sources of
2003-04, reflecting the increase in equity prices funds are being utilised for repayments of past
and a rise in market capitalisation. debt (Appendix Table V.3).

Table V.3: Composition of Liabilities and Assets of Financial Institutions

(Amount in Rs. crore)

Item Outstanding as at the end-March Distribution (per cent)

2002-03 2003-04 2002-03 2003-04

1 2 3 4 5

Liabilities 1,83,714 1,97,064 100.0 100.0

Capital 6,784 6,784 3.7 3.4
Reserves 18,221 20,151 9.9 10.2
Bonds and Debentures 89,640 97,512 48.8 49.5
Deposits 20,144 20,699 11.0 10.5
Borrowings 21,862 23,722 11.9 12.0
Other Liabilities 27,062 28,196 14.7 14.3
Assets 1,83,714 1,97,064 100.0 100.0
Cash 8,027 15,308 4.4 7.8
Investments 21,726 32,047 11.8 16.3
Loans and Advances 1,36,819 1,33,061 74.5 67.5
Bills Discounted/Rediscounted 1,605 1,218 0.9 0.6
Fixed Assets 2,975 1,816 1.6 0.9
Other Assets 12,562 13,614 6.8 6.9

Note: 1. Data include IDBI, IFCI, TFCI, IDFC, IIBI, Exim Bank, NABARD, NHB and SIDBI.
2. Data are provisional.
Source: Balance Sheets of respective FIs.

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Table V.4: Pattern of Sources and Deployment of Funds of Financial Institutions*

(Amount in Rs. crore)

Sources/Deployment of Funds 2002-03 2003-04

Amount Share Amount Share
(per cent) (per cent)
1 2 3 4 5
Sources of Funds 95,562 100.0 1,20,936 100.0
Internal 49,048 51.3 75,537 62.5
External 32,280 33.8 41,706 34.5
Others 14,234 14.9 3,694 3.0
Deployment of Funds 95,562 100.0 1,20,936 100.0
Fresh Deployments 52,028 54.4 73,173 60.5
Repayment of Past Borrowings 17,478 18.3 26,237 21.7
Other Deployments 26,056 27.3 21,525 17.8
of which: Interest Payments 10,733 11.2 10,326 8.5

* IDBI, IFCI, IIBI, IDFC, TFCI, NABARD, NHB, SIDBI and Exim Bank.
Source: Respective FIs.

Financial Assets of All-India Financial Institutions Table V.5: Financial Assets* of All-India
5.28 Greater acceleration in the accretion to Financial Institutions and Banks
financial assets of the AIFIs during 2003-04 (As at end-March)
(Amount in Rs. crore)
could be attributed to the substantial recovery
registered in the overall economic activity. Variation
during
However, growth in financial assets of AIFIs was 2003 2004 2003-04
substantially lower than that of scheduled 1 2 3 4
commercial banks. The financial assets of IFCI
A. All-India Financial 1,80,740 1,95,247 14,507
and IIBI recorded an absolute decrease over the Institutions (8.0)
previous year on account of the continued B. Scheduled Commercial 14,01,682 16,39,595 2,37,913
losses. Maximum (absolute) increase in financial Banks# (17.0)
assets was observed in the case of NABARD, C. Total (A+B) 15,82,422 18,34,842 2,52,420
followed by IDBI, EXIM Bank, IDFC and NHB (16.0)
[Table V.5, Appendix Table V.4(A) and Appendix Memo:
FIs’ assets as percentage
Table V.4(B)]. of total assets 11.4 10.6
SCBs’ assets as percentage
Financial Performance of Financial Institutions of total assets 88.6 89.4
5.29 AIFIs as a group continued to post poor * Include investment, loans and advances, money market assets,
performance during the year ended March 2004. deposits, cash in hand and balances with banks and other
The spread (net interest income) and the assets excluding fixed assets.
# As per returns under Section 42 of the Reserve Bank of India
operating profits declined marginally both in Act, 1934 and include cash in hand and balances with the
absolute terms and also as a ratio to the total banking system, investments, bank credit and dues from
assets. However, in line with the trend witnessed banks. Hence, it does not include non-SLR investments, foreign
by banks and other segments of the financial currency assets and bank reserves.
Note : Figures in brackets are precentage changes.
sector, non-interest income registered sharp
increase. The IFCI and IIBI continued to incur
operating losses indicating that these FIs are 5.30 The IFCI which recorded an improvement
earning less than what they have to pay to their in return on assets and net profit per employee
lenders. Barring these two institutions, all other during 2002-03, suffered deterioration during the
institutions registered positive operating and net year under review (Appendix Table V.5), mainly
profits. A sharp fall in the provisions for tax attributable to their restructuring package. In line
boosted net profits, in spite of a decline in the with the recommendations of McKinsey & Co, IFCI
operating profits (Table V.6). is moving towards segregating its non-performing

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Table V.6: Financial Performance of Select All India Financial Institutions@

(Amount in Rs. crore)

Item 2002-03 2003-04 Variation during 2003-04

Amount Percentage
1 2 3 4 5
1. Income (a+b) 15,763 14,783 -981 -6.6
a) Interest Income 13,169 11,314 -1,855 -16.4
b) Non-interest Income 2,595 3,469 874 25.2
2. Expenditure (a+b) 13,182 12,241 -941 -7.7
a) Interest expenditure 11,825 10,918 -907 -8.3
b) Other Expenses 1,358 1,323 -34 -2.6
Of which : Wage Bill 391 502 111 22.0
c) Provisions for Taxation 960 730 -230 -31.5
3. Profit
Operating Profit (PBT) 2,581 2,542 -40 -1.6
Net Profit (PAT) 1,621 1,811 190 10.5
4. Financial Ratios*
Operating Profit (PBT) 1.4 1.3
Net Profit (PAT) 0.9 0.9
Income 8.7 7.5
Interest Income 7.2 5.7
Other Income 1.4 1.8
Expenditure 7.2 6.2
Interest Expenditure 6.5 5.5
Other Operating Expenses 0.7 0.7
Wage Bill 0.2 0.3
Provisions 0.5 0.4
Spread (Net Interest Income) 0.7 0.2

@ Includes IDBI, IFCI, TFCI, IDFC, IIBI, Exim Bank, NABARD, NHB and SIDBI.
* as percentage of Total Assets.
Notes: 1. Operating Profit refers to profit before Provisions for Taxation/Tax (PBT).
2. Net Profit refers to profits after Tax Provisions (PAT).
3. IDBI data are provisional.
Source: Annual Accounts of respective FIs.

assets with the ultimate objective of hiving these IDBI scrip may be attributed to the restructuring
off to an asset reconstruction company and proposal by the Government (Chart V.3).
focusing on further strengthening the quality of
the existing portfolio. Prime Lending Rate (PLR)
5.32 In line with the general softening trend of
Performance of FIs’ Scrips/Stocks
interest rates during 2003-04, the long-term PLR
5.31 Out of the nine FIs under the Reserve of IDBI declined during the year under review.
Bank’s regulatory domain, two FIs (viz., IDBI and Moreover, the short-term PLR was merged with
IFCI) are listed on the BSE and NSE. The the medium-term PLR. IDBI has also recently
performance of stocks of IDBI and IFCI reveals initiated a series of pro-active measures to garner
that both the stocks passed through a lackluster new business as well as retain and win back well-
phase during 2002-03. During 2003-04, both the performing clients to improve the quality of its
stocks performed well from April 2003 to asset portfolio. As part of this endeavour, the IDBI
January 2004 in line with the rally witnessed in has brought down its PLR. Further, IDBI is
the BSE Sensex. However, some corrections were offering a graded reduction in rupee interest rates,
witnessed in case of both the scrips after based on credit rating, to existing borrowers in
January 2004. During the current year (from its portfolio with a view to broadly aligning their
May 2004 to August 2004), the IDBI scrip interest rates with the prevalent interest rate
outperformed the BSE Sensex while the IFCI regime. In the case of IFCI, there was no change
scrip witnessed a downtrend. The uptrend in the in the PLR structure (Table V.7).

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 Financial Institutions

Chart V.3: Performance of Scrips of

Table V.7: Lending Rate Structure of
IFCI and IDBI at BSE Major Financial Institutions
(Per cent per annum)
Effective from PLR IDBI IFCI
1 2 3 4

Mar-2002 Long-term PLR 11.5 12.5

IFCI and IDBI (Rs.)

Medium-term PLR 12.5 —

BSE Sensex
Short-term PLR 12.0 12.5
Jul-2002 Long-term PLR 10.7 12.5
Medium-term PLR 12.5 —
Short-term PLR 12.0 12.5
Mar-2003 Long-term PLR 10.2 12.5
Medium-term PLR 12.5 —
Short-term PLR 12.0 12.5
Jul-2003 Long-term PLR 9.6 12.5
Medium-term PLR 12.5 —
Jun-02

Jun-03
May-02

Jun-04
Mar-02

Oct-02
Dec-02
Feb-03

Oct-03
Aug-02

Dec-03
Feb-04
Apr-03

Aug-03

Apr-04

Aug-04

Short-term PLR 12.0 12.5

Mar-2004 Long-term PLR 8.9 12.5
Medium-term PLR 10.3 —
Month-end Short-term PLR* — 12.5

IFCI IDBI BSE Sensex * Merged with medium term PLR in the case of IDBI.

Capital Adequacy in assets and liabilities, resulting in erosion of

IFCI’s capital. Similarly, in the case of IIBI, rising
5.33 The performance of the select FIs in NPAs and provisioning thereof, coupled with the
respect of the maintenance of a minimum capital problem of declining profitability, were some of
to risk weighted assets ratio (CRAR) is presented the factors behind the negative CRAR.
in Table V.8. It is seen that except IFCI and IIBI,
all the other FIs had a CRAR much above the Non-Performing Assets
stipulated norm of 9 per cent as at the end-
March 2004. In the case of IFCI, high NPAs - 5.34 The net NPAs of AIFIs continued to
arising out of large-scale slippage from standard increase during 2003-04 on account of time and
assets to the NPAs category, thereby negating cost overruns in projects, slippages in the
the effect of additional provisioning led to the standard assets, increase in legal expenses
squeezing of cash flow. This in turn resulted in relating to NPAs, impairment of major assets of
restructuring of liabilities. Further, their the assisted units, contraction of credit portfolio,
continued losses, inter alia, led to mismatches etc. (Table V.9 and Appendix Table V.6).

Table V.8: Capital Adequacy Ratio* of Select Financial Institutions

(As at end-March)
(Per cent)

Institution 1998 1999 2000 2001 2002 2003 2004

1 2 3 4 5 6 7 8

IDBI 13.7 12.7 14.5 15.8 17.9 18.7 18.3

IFCI 11.6 8.4 8.8 6.2 3.1 0.95 -17.0
IIBI 12.8 11.7 9.7 13.9 9.2 -11.0 -20.1
IDFC N.A. 235.5 119.7 85.5 56.7 51.3 36.9
Exim Bank 30.5 23.6 24.4 23.8 33.1 26.9 23.5
TFCI 16.4 15.4 16.2 18.6 18.5 19.8 22.8
SIDBI 30.3 26.9 27.8 28.1 45.0 44.0 51.6
NABARD 52.5 53.3 44.4 38.5 36.9 39.1 39.4
NHB 16.7 17.3 16.5 16.8 22.1 22.3 31.9
* Net of provisioning and write offs.
Source: Respective balance sheets of FIs.

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Table V.9: Net Non-Performing Assets*

(As at end-March)
(Amount in Rs. crore)

Net NPAs Net NPAs / Net Loans

(per cent)
Institution 2003 2004 2003 2004
1 2 3 4 5

Term Lending Institutions 12,818 13,632

IDBI 7,157 8,693 15.8 21.1
IFCI 4,559 3,865 29.5 32.3
IIBI 915 800 34.7 38.0
IDFC 3 0 0.1 0.0
EXIM Bank 184 129 2.3 1.3
TFCI 153 145 20.4 21.1
Refinance Institutions 473 227
SIDBI 472 226 3.8 2.4
NABARD 1 1 0.0 0.0
NHB 0 0 0.0 0.0

Source: Off-site Returns submitted by FIs.

Management of NPAs deteriorating financial position were not

permitted to raise fresh borrowings from the
5.35 During 2003-04, NPAs of the nine FIs
market. Since IFCI has been reinvesting the
grew at a lower rate than the previous year. FIs
amounts arising out of its treasury operations
have been making concerted efforts to effectively
and financial restructuring package with banks,
address the problem of NPAs through various
FIs and provident funds; it has been able to
ways including recourse to compromise and
effectively reduce its cost of borrowings. As a
negotiated settlements, rescheduling/
consequence, IFCI witnessed a decline in its
restructuring of loans, recovery under the
outstanding borrowings at the end-March 2004
SARFAESI Act, 2002; implementing OTS schemes;
as compared to end-March 2003. IIBI and TFCI
establishing Asset Reconstruction Companies
also have been able to reduce their outstanding
(ARCs) and recovery through Debt Recovery
borrowings. The total outstanding borrowings of
Tribunals (DRTs). Up to March 31, 2004, 653
all the FIs, however, increased to Rs.1,05,677
cases were considered involving an amount of
crore as at the end of March 2004 as against
Rs.9,448 crore, of which an amount of Rs.844
Rs.90,060 crore as at the end of March 2003
crore was recovered under various schemes.
which is around 53.6 per cent of the total asset
base of FIs (Table V.10 and Appendix Table V.7).
Mobilisation of Resources by way of Bonds/
5.37 Of the total resources raised by the FIs,
Debentures by Select AIFIs
private placements continued to be the major mode
5.36 During the year 2003-04, total resources of mobilising the resources which involved less
mobilised by way of issue of rupee bonds/ transaction costs and also less time in terms of
debentures (including private placement and raising resources. Resource mobilisation by IDBI
public issue) by select AIFIs aggregated Rs.23,419 both from public issues and private placement
crore as against Rs.14,144 crore during the market increased during 2003-04 as compared
previous year ended March 2003 (Table V.10). with the previous year. However, IDBI’s reliance
Taking advantage of the lower interest rates as on the private placement market for funds
in the previous year, FIs such as IDBI, NABARD, requirements increased substantially as compared
SIDBI, NHB and IDFC have raised substantial with the public issues during 2003-04 (Table V.11).
amounts during the current year. However, IFCI IFCI relied solely on the private placement market
and IIBI (since September 18, 2003) due to their for raising resources.

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Table V.10: Resources Raised by Way of Rupee Bonds/Debentures*

by Select All-India Financial Institutions
(Amount in Rs. crore)

Institution Resources raised Outstandings (end-March)

2002-03 2003-04 2002-03 2003-04
1 2 3 4 5

IDBI 5,009 10,477 41,798 46,967

IFCI 267 – 20,203 17,564
IIBI 44 176 2,566 2,281
EXIM Bank 2,505 2,025 5,424 11,920
NABARD 2,988 5,334 8,702 11,883
NHB 1,877 2,526 4,675 6,958
SIDBI 961 1,429 4,692 5,428
TFCI 93 102 600 426
IDFC 400 1,350 1,400 2,250
Total 14,144 23,419 90,060 1,05,677

* Includes only rupee resources and does not include foreign currency borrowings.
Data are provisional.
– indicates nil.
Source: Respective FIs.

5.38 The weighted average interest rate of limits) for 2003-04 from Rs.6,467 crore (25.4
resources raised by the FIs eased during 2003-04 per cent of limits) for 2002-03 (Table V.13).
while the weighted average maturity of the During 2003-04, term deposits were the most
instruments issued was elongated for most FIs preferred instruments followed by commercial
(Table V.12 and Appendix Table V.8). papers (CPs), inter-corporate deposits (ICDs),
certificates of deposit (CDs) and term money.
Money Market Operations of Financial
Institutions Reserve Bank’s Assistance to FIs
5.39 The average amount of resources raised 5.40 The practice of advancing loans by the
by the FIs by way of money market instruments Reserve Bank of India to industrial and
declined to Rs.6,035 crore (25.6 per cent of agricultural financial institutions from the Long

Table V.11: Resources Raised through Public Issues/Private Placement/Bonds/Debentures

by Major Development Finance Institutions
(Amount in Rs.crore)

Type of Issuance IDBI IFCI Total

2002-03 2003-04 2002-03 2003-04 2002-03 2003-04
1 2 3 4 5 6 7

Public Issue 2,216 2,930 0.0 0.0 2,216 2,930

(42.4) (29.7) (0.0) (0.0) (35.8) (28.9)

Private Placement 3,008 6,942 965 267 3,973 7,209

(57.6) (70.3) (100.0) (100.0) (64.2) (71.1)

Total 5,224 9,872 965 267 6,189 10,139

(100.0) (100.0) (100.0) (100.0) (100.0) (100.0)

Note: Figures in brackets indicate percentage share in total resource mobilisation.

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Report on Trend and Progress of Banking in India, 2003-04

Table V.12: Weighted Average Cost/Maturity of Resources Raised by way of Rupee Bonds/
Debentures by Select All-India Financial Institutions

Institution Weighted Average Cost Weighted Average Maturity

(Per cent) (Years)

2002-03 2003-04 2002-03 2003-04

1 2 3 4 5
IDBI 8.5 6.5 4.3 5.1
IIBI 9.6 8.7 8.7 18.0
IFCI 9.6 8.2 2.2 3.2
TFCI 8.5 8.6 10.0 10.0
EXIM Bank 8.9 5.9 6.1 6.7
IDFC 7.6 5.6 5.6 5.9
SIDBI 6.5 4.9 2.3 2.8
NABARD 6.1 5.4 5.4 5.4
NHB 6.4 5.4 4.0 3.2
Note: Data are provisional.
Source: Respective FIs.

Term Operations (LTO) funds before transferring repaid Rs.125 crore to the Reserve Bank during
the surplus profit of the Reserve Bank to the May 2004.
Government of India was discontinued
5.42 The Reserve Bank sanctioned ad hoc
subsequent to an announcement made in the
borrowing limits for 12 months (July to June)
Union Budget for 1992-93. Accordingly, from the
aggregating Rs.180 crore to SFCs during
year 1992-93, the Reserve Bank has been
2003-04 at Bank Rate. These limits have been
making only token contributions to these funds
extended by a maximum period of six months.
(Table V.14).
These short-term financial accommodations
were backed by the pledge of ad hoc bonds issued
5.41 During 2003-04 (July-June), no long-
by the SFCs and guaranteed by the respective
term assistance was sanctioned by the Reserve
State Governments/Union Territories. However,
Bank to any financial institution. While there
as at end-June 2004, there was no outstanding
were no outstanding long-term borrowings with
medium/short term credit to SFCs.
any institution under the NIC (LTO) funds as
at end-June 2004, the outstanding credit to 5.43 Major FIs, viz., IDBI, IFCI, SIDBI are
NHB under the NHC (LTO) Fund stood at Rs.50 engaged in venture capital funding activities to
crore as at end-June 2004. Out of total Rs.175 promote entrepreneurship and support them
crore, outstanding as at end June 2003, NHB during critical phases of venture. FIs also

Table V.13: Money Market Operations of Table V.14: Reserve Bank’s Assistance to
Select All-India Financial Institutions Financial Institutions
(Amount in Rs. crore)
(Amount in Rs. crore)
Instrument 2002-03 2003-04
Type of Assistance June 30, June 30,
1 2 3 (outstanding) 2003 2004
Term Deposits 1,548 2,206
1 2 3
Term Money 373 245
Long Term Credit
Inter-corporate Deposits 3,078 1,329 [NHC(LTO) Fund]
Certificates of Deposit 504 408 NHB 175 50
Commercial Paper 964 1,847 Medium / Short Term Credit
Total 6,467 6,035 SFCs 17 –
Percentage of limits 25.6 25.4 Total 192 50

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 Financial Institutions

encourage commercial applications of indigenous simultaneously help in diversifying its client/

technologies or adaptation of imported asset base by offering various retail liability
technologies, development of innovative products products. Towards this end, the IDBI (Transfer
and services, holding substantial potential for of Undertaking and Repeal) Act 2003 was
growth and bankable ventures but involving enacted in December 2003 which became
higher risk including those in the information effective since July 2, 2004. The Act provides
technology (IT) Sector. Similarly, FIs have been for repeal of IDBI Act, corporatisation of IDBI (with
assigned to provide need based assistance for majority Government holding) and transformation
technological development. Government of India into a commercial bank. On July 29, 2004, the
introduced the Technology Upgradation Fund proposal to merge IDBI and IDBI Bank was
Scheme (TUFS) for textile and jute industries in accorded in-principle approval. IDBI became IDBI
April 1999, which is in operation up to March Ltd. on October 1, 2004 and being a ‘scheduled
2007. The Scheme is intended to provide bank’ under the Reserve Bank of India Act, 1934,
induction of state-of-the-art or near state-of-the IDBI Ltd. can formally enter the portals of
art technology in textile industry. IDBI and SIDBI banking business over and above the business
are nodal agencies for assistance under TUFS currently being transacted.
for textile industry (non-SSI) and textile industry
5.46 In this connection, the Government of
(SSI), respectively while IFCI is the nodal agency
India has already approved the IDBI’s proposal
for the jute industry.
to set up a Stressed Asset Stabilisation Fund
(SASF) wherein stressed assets of IDBI worth
6. Restructuring of Financial Rs.9,000 crore would be transferred by IDBI to
Institutions SASF against transfer of equivalent amount of
Transformation into Universal Banking 20 year bonds issued by the Government of India
in favour of SASF on cash/budget neutral basis.
5.44 With the blurring of functions between Apart from significantly improving the quality
banks and FIs, the business model of a bank is of IDBI’s portfolio, the measure may facilitate
being increasingly accepted for FIs also. recovery from the earmarked NPAs over an
Accordingly, there is a move to restructure FIs elongated time-frame.
like IDBI and IFCI. The merger of the ICICI with
ICICI Bank on March 30, 2002 was the beginning 5.47 The Board of Directors of IFCI has
of the conversion of DFIs into universal banks approved, in principle, its merger which is
as a solution to their problems. Universal banks expected to facilitate progress towards universal
would engage not only in traditional banking, banking. IFCI has also continued to give renewed
but also investment banking and other financial thrust on expanding the advisory service
activities. Since the merger of ICICI with ICICI business during the year. It may be mentioned
Bank, similar moves are underway to transform that the Government of India has already decided
the other principal DFIs in the country, viz., IFCI to take over certain liabilities of IFCI and
and IIBI. In the Union Budget 2004-05, it was correspondingly, the Reserve Bank has provided
indicated that IFCI will be restructured through certain regulatory, relaxations for restructured
transfer of its impaired assets to an asset liabilities of IFCI.
reconstruction company and by effecting merger 5.48 Given the need to achieve global scales of
with a large public sector bank. production, funding of expansion and
5.45 I n v i e w o f t h e c h a n g i n g o p e r a t i n g diversification programmes of the existing
environment following initiation of reforms since corporates have also been identified as a key
the early 1990s, Government of India decided business objective. As competition has created
to transform IDBI into a commercial bank pressure on margins and disintermediation has
without eschewing its traditional development altered the scope of term lending, FIs have accorded
finance obligations. The migration to the new priority to fee-based activities like merchant
business model of commercial banking, with its banking and corporate advisory services.
access to low-cost current/savings bank 5.49 The SARFAESI Act enacted in 2002 has
deposits, would not only enable it to overcome provided an enabling legal/regulatory
most of the limitations of the current business environment for dealing with NPAs by term-
model of development finance but also lending institutions. Under the Act, FIs can now

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Report on Trend and Progress of Banking in India, 2003-04

attach assets of defaulting borrowers without comprising IDBI and select FIs and banks, is
having the requirement of approaching the court expected to stimulate their business volumes.
for recovery of NPAs. Given the problem of NPAs
faced by FIs, the role of Securitisation Corporate Debt Restructuring Mechanism
Companies/Asset Management Companies/
Asset Reconstruction Companies which buy the 5.51 Corporate Debt Restructuring (CDR)
assets of banks and FIs with substantial system was developed in India based on the
amount of NPAs, becomes important (Box V.3 international experience. Detailed guidelines were
and Box V.4). issued for implementation by banks and FIs in
2001. The objective of the framework has been to
ensure timely and transparent mechanism for
7. Other Developments
restructuring the corporate debt of viable entities,
5.50 The Union Budget 2004-05, presented on outside the purview of Board for Industrial and
July 8, 2004, has spelt out a number of positive Financial Reconstruction (BIFR), Debt Recovery
measures for financial sector participants. The Tribunals (DRTRs) and other legal proceedings.
focused pursuit of infrastructure development The CDR system effectively became operational
through pooled investment of Rs.40,000 crore from March 2002 with the execution of Inter
by the proposed Inter-Institutional Group (IIG), Creditor Agreement (ICA) on February 25, 2002

Box V.3: Functioning of Asset Management Companies: International Experience

Asset management companies/asset reconstruction of NPLs from banks and other financial institutions, and
companies (AMCs/ARCs) have been set up in various instituted informal mechanisms for corporate debt
countries to solve the problem of bad loans. AMCs take restructuring. Nearly seven years since the onset of the
over non-performing assets (NPAs) of banks at discounted crisis, some of these ‘crisis-created’ institutions have
rate and manage and dispose of such assets. already ceased operations. Likewise over the next
two years, a couple of the AMCs will reach the end of their
The word ‘asset reconstruction company’ is a typical
mandates. Major factors facilitating the successful
Indian word - the global equivalent of which is asset
functioning of an AMC are strong political will, supportive
management companies and owes its origin to
legal structure, efficient market environment, adequate
Narasimham Committee I which envisaged the setting up
governance, realistic asset pricing and speedy disposal of
of a central Asset Reconstruction Fund. The money
acquired assets.
contributed by the Central Government to ARF was sought
to be used by banks to clean up their balance sheets by In Thailand, the Government set up the Thai Asset
writing-off the non-performing loans. This idea of ARF Management Corporation (TAMC) which buys bad loans
did not work as Government opted to recapitalise weak of state banks. TAMC has restructured debts worth Bt
public sector banks to manage their own NPAs. 753.33 billion in its first three years of operation which
Narasimham Committee II recommendations submitted represent 96.7 per cent of its total distressed assets. China
in 1998, however, reiterated its proposal in the form of initially had four financial asset management companies
ARCs. The Union Budget 1998-99, thus encouraged a few (AMCs) to take over a total of 1.4 trillion Yuan (US $168
banks with high NPAs to set up ARCs on an experimental billion) of non-performing loans. Till June 2004, these
basis and subsequently set up a task force in July 1998 four AMCs disposed of NPAs with 45.7 per cent assets-
to study possible modalities and prepare an operating plan disposal ratio and 20.7 per cent as cash-recovery ratio.
for establishing ARCs in India. To provide the necessary In addition to this, six licenses have been issued further
legal backing for ARCs, the Government passed the to other companies allowing them to be involved in asset
Securitisation and Reconstruction of Financial Assets and management. In Taiwan, AMCs promoted by international
Enforcement of Security Interest (SARFAESI) Act, 2002. investors participate in the auctions and submit bids to
Similarly, a way out of the current dilemma, faced by the acquire NPAs after carrying out negotiations with financial
financial institutions in respect of shortage of resources, institutions directly.
is to resort to ARCs as an asset reconstruction device to
sell off the NPAs of the FIs. References:

Similar entities had already been successful in Malaysia, Fung, B.; George, J.; Hol, S and Ma, G (2004), ‘Public Asset
Korea and several other countries in the world. AMCs used Management Companies in East Asia: A Comparative Study’,
broadly two approaches: i) restructuring of the debt/ BIS Occasional Paper No. 3, February.
borrowing and ii) the outright sale of the loan/underlying Asian Development Outlook, Asian Development Bank,
assets. The experience of AMCs suggests that a prompt April 2004.
disposal of assets enables them to achieve their objective.
The Nation, Thailand, September 2, 2004.
In the aftermath of the East Asian financial crisis,
Indonesia, Korea, Malaysia, and Thailand each established Statistics Data, China Banking Regulatory Commission,
a centralized AMC to purchase, restructure, and dispose July 2004.

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 Financial Institutions

Box V.4: Regulatory Environment for ARCs in India

In India, the enactment of SARFAESI Act, 2002 enabled worth Rs.9,631 crore from the banks and financial
lending agencies (banks and financial institutions) to institutions at a price of 2,089 crore. IDBI has transferred
foreclose and sell underlying assets without court 11 cases with aggregate principal outstanding of Rs.239
intervention. The existing framework envisages non- crore to ARCIL. Up to March 31, 2004, IFCI’s Board of
Government supported multiple ARCs/securitisation Directors had approved the offer made by ARCIL to acquire
companies, which may be set up by the lenders, NPA 4 NPA accounts with an aggregate net outstanding of
investors or corporates. The SARFAESI Act permits an ARC Rs.173 crore at a discounted value of Rs.83 crore. As on
to commence operations with a minimum net-owned funds March 31, 2004, ARCIL had given further proposals for
of Rs. two crore. Directions require an ARC to maintain a acquiring 16 more NPAs (principal amount outstanding in
capital adequacy ratio of 15 per cent of its risk-weighted IFCI’s portfolio of Rs.334 crore, for which offers received
assets. However, financial assets held in trusts shall not amounted to Rs.146 crore) which were under consideration.
be subject to capital adequacy requirements. An ARC may IIBI and SIDBI have also been exploring the option of selling
issue bonds and debentures for meeting its funding needs their NPAs to ARCs.
but cannot mobilise deposits. ARCs can acquire financial One of the important issues in respect of ARCs in India is
assets by way of simple agreement from the banks/FIs that of difference in stamp duty rates on the assignment
subject to some terms and conditions or by an issuance of of financial assets across the States which, in turn, impacts
bonds and debentures to the originating banks/FIs. All the transaction costs. Another issue is the appropriate
the rights of the lender vest in the ARC after acquiring the number of securitisation companies/AMCs required in the
assets and become party to all the contracts/deeds/ present environment since too many companies can lead
agreement etc. ARCs are also allowed to function as a to the problems relating to debt aggregation and impede
manager of collateral assets taken over by the lenders under the process of asset reconstruction. To prevent entry of
security enforcement rights available to them as a recovery non-serious players and orderly functioning of ARCs, the
agent for any bank/institution. Since the date of registration process needs to emphasise upon ARCs
acquisitions of assets, ARCs are given a resolution time promoted by reputed parties with adequate financial
frame of maximum five years. As per the Act, to discharge backing. The functioning of ARCs also depends on the
its function of asset reconstruction, an ARC can undertake willingness of lender banks and financial institutions to
i) enforcement of security interest, ii) takeover or change transfer NPAs to the ARCs. In the case of India, security
the management of the borrower, iii) undertake sale or lease enforcement seems to be a key resolution strategy for
of the borrowers’ business and iv) enter into settlements securitisation companies and ARCs because majority of
and reschedule the debt. However, as per the SARFAESI, the NPAs belong to doubtful and bad debts category.
for enforcement of security interest, at least 75 per cent of Therefore, to dispose of these assets and improve recovery
the secured creditors need to agree to exercise this right. levels, market trading of such acquired assets is essential.
For speedier resolution of NPAs, financial assets due from a In order to ensure a sound capital base and a stake in the
single debtor to various banks/ FIs may be considered for management of the NPAs acquired, the requirement of
acquisition. Similarly, financial assets having linkages to the owned fund for commencement of business has been
same collateral may be considered for acquisition to ensure stipulated as not less than 15 per cent of the assets
relatively faster and easy realisation. As per the guidelines, acquired or Rs.100 crore, whichever is less. A Report by
the valuation process should be uniform for assets of same Asian Development Bank (February 2004) 3 suggested
profile and a standard valuation method should be adopted further policy changes required for the proper functioning
to ensure that the valuation of the financial assets is done in of ARCs. The major recommendations were: i) amending
a scientific and objective manner. Valuation may be done SARFAESI Act to enable a single party to control an ARC,
internally and or by engaging an independent agency, subject to safeguards to be regulated by the Reserve Bank
depending upon the value of the assets involved. The acquired against ‘warehousing’ of NPAs, ii) allowing single party
assets may be sold by inviting quotations from persons dealing including foreign entities to subscribe to entire 100 per
in such assets, by inviting tenders from the public, by holding cent of security receipts of a scheme, iii) ensuring and
public auctions or by private treaty. While there is no clarifying that asset managers are permitted to undertake
restriction on ARCs to acquire assets which are considered all activities for asset reconstruction under SARFAESI Act.
to be unrevivable, as per the guidelines to banks, ARCs will
normally not takeover such assets and will act as an agent References:
for recovery on a fee basis for these assets.
Technical Assistance (TA) No. 3943-IND, Developing the
Three ARCs, viz., Asset Reconstruction Company (India) Enabling Environment for and Structuring Asset
Ltd. (ARCIL), Asset Care Enterprise (ACE) Ltd. and ASERC Reconstruction Companies in India, Final Report, Volume
(India) Ltd. have been registered. ACE Ltd. and ASERC Ltd. I, February 2004 available at the website of Ministry of
are yet to start their operations. ARCIL has bought assets Finance, Government of India.

3
The Asian Development Bank, in consultation with Ministry of Finance, appointed PricewaterhouseCoopers and two
law firms Amarchand & Mangaldas and Blake Dawson Waldron Lawyers to carry out an engagement for ‘Developing the
Enabling Environment for and Structuring Asset Reconstruction Companies in India’.

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Report on Trend and Progress of Banking in India, 2003-04

by 49 FIs which includes public sector banks (34) applications received, CDR cell has referred all
and private sector banks (15). Over a period, the the cases to the Empowered Group within the
membership increased from 49 to 65 members, stipulated time of 30 days. The Empowered
after Asset Reconstruction Company of India Ltd. Group approved final schemes in respect of 94
(ARCIL) and Assets Care Enterprise (ACE) joined cases in which aggregate assistance by financial
the CDR System. system amounted to Rs.64,017 crore, 30 cases
were rejected/closed and remaining 11 cases
5.52 With a view to making the operations of the
with aggregate outstanding assistance of
CDR mechanism more efficient and in order to
Rs.2,677 crore are under various stages of
further simplify the mechanism, a High Level
consideration.
Group (Chairman: Shri Vepa Kamesam) consisting
of Bankers and others was set up, pursuant to the
announcement by the Finance Minister in the Mutual Funds
Union Budget 2002-03. Based on the 5.55 The Resource mobilisation by mutual
recommendations made by Group and in funds increased more than nine-fold during
consultation with the Government of India, the 2003-04 mainly due to a large increase in
Reserve Bank has since revised the scheme of resource mobilisation by the private sector
corporate debt restructuring. The revised mutual funds and a net inflow in UTI in contrast
guidelines were issued in February 2003 in to a net outflow during the corresponding period
supersession of the earlier guidelines. of the previous year (Table V.15 and Appendix
5.53 T h e m a i n f e a t u r e s o f t h e r e v i s e d Table V.9). Bulk of the resources mobilised by
guidelines are the introduction of two types of the mutual funds is by way of money market
restructuring under the CDR System. Accounts schemes (52.5 per cent) and debt instruments
which are classified as ‘Standard’ and ‘Sub- (27.3 per cent) while mobilisation in equity
standard’ would be restructured under the first oriented schemes accounts for just over 15.4 per
category (Category-I) whereas accounts classified cent (Table V.16). In the secondary market,
as ‘doubtful’ would be restructured under second although traditionally, mutual funds were seen
category (Category-II). CDR will have a three- to be net sellers in equity and net buyers in debt,
tier structure consisting of CDR Standing Forum there has been a reversal of the trend in 2003-04
and its Core Group (the policy-making body), with the mutual funds turning out to be net
CDR Empowered Group (the functional group buyers of equities and debt to the tune of
deciding on the restructuring of cases referred Table V.15: Resource Mobilisation by
to CDR mechanism) and the CDR Cell (the Mutual Funds
secretariat to the CDR system). Other notable (Amount in Rs. crore)
changes in the scheme relate to broadening of Mutual Fund 2002-03 2003-04
eligibility criteria to include suit-filed cases 1 2 3
provided the proposal to restructure is supported
I. Public Sector 1,895 3,762
by 75 per cent of the lenders by value; eligibility
II. Unit Trust of India -9,434 1,050*
of large erstwhile BIFR cases to be decided by
III. Private Sector 12,122 42,873
CDR Core Group, composition and enhancement
Total (I+II+III) 4,583 47,684
of the scope of the Core Group, additional
functions to CDR Empowered Group, flexibility * Data for 2003-04 relate to UTI Mutual Fund for the
in sanction of additional assistance as part of period February 1, 2003 to March 31, 2004, being the
restructuring package, availability of exit option first year of operation after the bifurcation of erstwhile
UTI into UTI Mutual Fund and Specialised
out of the package, restructuring of ‘Doubtful Undertaking of the Unit Trust of India.
Assets’ cases under category–II scheme, Notes: 1. Data are provisional and compiled on the basis
discretion to join CDR System on a case-by-case of information received from respective mutual
basis to institutions like UTI, LIC, GIC, and Funds.
foreign lenders who have financed from outside 2. For UTI, the figures are net sales (with
premium), including re-investment sales, and
the country. for other mutual funds, figures represent net
sales under all schemes.
5.54 As on June 30, 2004, the CDR Standing
3. Data exclude amounts mobilised by off-shore
Forum has met six times, Core Group 14 times, funds and through roll-over schemes.
and Empowered Group 53 times. Of the 135

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 Financial Institutions

Table V.16: Net Resource Mobilisation by Mutual Funds : By Types of Schemes

(Amount in Rs. crore)

Type of Scheme 2000-01 2001-02 2002-03* 2003-04

1 2 3 4 5

Money Market Schemes 2,564 3,291 5,005 24,576

(28.1) (45.9) (119.3) (52.5)
Government Securities -312 1,563 -691 2,232
-(3.4) (21.8) -(16.5) (4.8)
Debt Instruments 4,839 8,210 1,467 12,795
(53.0) (114.4) (35.0) (27.3)
Equity Oriented Schemes -745 -534 43 7,219
-(8.2) -(7.4) (1.0) (15.4)
Others 2,782 -5,355 -1,628 -13
(30.5) -(74.6) -(38.8) (0.0)
Total 9,128 7,175 4,196 46,809

* Since the bifurcation of UTI into UTI Mutual Fund (registered with SEBI as UTI II ) and Specialised Undertaking of the
Unit Trust of India (UTI-I), data for UTI-I are only up to January 2003.
Notes : 1. Net resource mobilisation is arrived at after netting out the repurchases/redemption from the gross resource
mobilisation.
2. Figures in parentheses pertain to the share of the particular scheme in the total net resource mobilisation.
Source: Securities and Exchange Board of India.

Rs.1,308 crore and Rs.22,701 crore, respectively. limits prescribed by SEBI (Mutual Fund)
The debt oriented schemes accounted for the Regulations, 1996 to all debt securities,
largest share of assets under management of the stipulating the minimum number of investors
mutual funds (45 per cent) followed by money in each mutual fund, permitting mutual funds
market schemes (30 per cent) and equity oriented in the securities market only upon quoting the
schemes (18 per cent). During the year 2003-04, unique client code, mandatory completion of the
the Net Asset Value (NAV) of both equity and debt certification process by all existing personnel of
oriented schemes of all the mutual funds mutual funds/AMCs. Guidelines were issued for
witnessed significant improvement as expected the participation of mutual funds in derivatives
on account of bullish trends in the prices of trading, making it mandatory for investors in
equity as well as debt securities. mutual fund schemes to mention their bank
account numbers in their applications/requests
Policy Developments relating to Mutual Fund for redemptions, adopting a uniform cut-off time
5.56 Several measures were undertaken for applying NAVs both for subscriptions and
during 2003-04 to further improve the redemptions of mutual funds, and permitting
operations and governance of the mutual funds. mutual funds to invest in foreign securities up
These include, inter alia, applicability of investment to 10 per cent of their net assets, etc.

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