The Industrial Development Bank is the latest in the series of specialised institutions set up to finance and develop industry — institutions which have, by and large, failed to make a significant impact. Together with the Unit Trust, much hope now seems to be pinned on the IDBI.

But misgivings arise that the already over-worked Board of the Reserve Bank and its Governor may not be able to give this institution all the care and time it will need.

Doubts have also been expressed about the need for yet another institution when there already are so many primary lending agencies and, besides, an active, though young, refinancing body.

Was the alternative of strengthening these institutions not workable?

It is true that their performance in the past has not been exactly promising. If that was the con­sideration which weighed with the Government, then why not face realities and end the independent existence of these institutions ?

FIRST the Industr ia l Finance Corporation of India , under a

Central Ac t of 1948; then the State Financial Corporations Act , 1951, under which fourteen State Financial Corporations were set up, the last one in 1960 in Gujarat ; in 1954 the National Industrial Development Corpora t ion whol ly state-owned; in 1955 the Nat ional Small Industries Corporation, also whol ly State-own­ed. The first gate-crasher from the private sector was the Industr ia l Credit and Investment Corporation of India in 1955 w i th active foreign collaboration and financial assist­ance. Then followed a l u l l for three years. In 1958 was set up the Re­finance Corporation for Industry, part State-owned, and a beginning was made wi th the State Smal l In­dustries Corporations — small-sized replicas of the National Small I n ­dustries Corporation. State industr ia l Development Corporations, modelled after a fashion on the National Industr ial Development Corporation, began to he set up in I960. There are besides, the F i l m Finance Cor­poration, the State Minera l Develop­ment Corporations and the Rehabili­tation Industries Corporation. A n d now, the Industr ia l Development Bank of India , to be set up under a statute - the coping stone?

According to the B i l l introduced in the Lok Sabha on February 28. the Indus t r ia l Development Bank of I n d i a is to be a fu l l subsidiary of the Reserve Bank of India which w i l l ho ld its entire equity, and the Central Board of Directors of the Reserve Bank shall consti­tute the Board of the l D R I. It is to start w i th an issued capital of Rs 10 crores. These resources w i l l be augmented by loans from the Central Government, including one

of Rs 10 crores, interest free, and repayable in fifteen annual instal­ments commencing after 15 years of the date of receipt of the loan ; sale of bonds and debentures with or without Government guarantee; borrowings from the Reserve Bank inc lud ing term borrowings from the National Industr ial Credit (Long-Term Operations) Fund to be set up under the Reserve Bank Act (this Fund was first recommended by the W o r k i n g Group on State Financial Corporations which submitted its Report to the Reserve Bank recently, to support term lending insti tu­t i ons ) ; and accepting deposits of not less than one year's matur i ty . It is also being authorised to borrow in foreign markets, w i th Government approval and, where necessary, guarantee. W i t h the large authorised capital of Rs 50 crores — subscrip­tions to which by the Reserve Bank would not be impeded by considera­tions of dividend as in the rase of other financial institutions, and sup­plemented by such other resour­ces as detailed in the B i l l , the I D B I would not certainly be short of funds.

The provision of the Rs 10-crore 30 years interest-free loan is parti-cuiarly noteworthy. It was denied to the I F C as also the S F Cs and other Corporations. An exception was made in the case of the I C I C I, and recently, the Agr icu l tu ra l Refi-'narue Corporation. In the case of the IC1CI. it was imperative if the assistance of the I B R D was to be fo r thcoming and it ensured an ade­quate profit-earning capacity in the early years when business had to be developed from scratch, and no tax concession was available, unlike in many other countries. In the case of the Agr icu l tu ra l Refin­

ance Corporation too this faci l i ty was 'needed to meet the guaranteed dividend on shares which were also held by non-government bodies. But in the present case when the entire equity — for which there is no pro­vision for a pre-determined rate of guaranteed dividend — is held by the Reserve Bank, and there is com­plete immuni ty of the incomes, pro­fits and gains of the I D B 1 (and of the Development Assistance Fund proposed in the B i l l ) f rom the pay­ment of income tax, super tax, super profits tax, etc, the raison d'etre of the interest-free loan is 'not very clear. Instead of this indirect subsidy, why not guarantee a straight sub­sidy of work ing losses? Govern­ment might feel nervous about annual ly vot ing the subsidy. Then surely. Parliament should not be lul led by an arrangement of the k i n d proposed? It should be able to debate the workings of a body l ike this when its annual accounts are placed before i t . Al ternat ively could not government contribute the same amount to the equity of the I D B I and relieve management of the need to repay the contr ibut ion?

The functions of the I D B I include both those of a p r imary lending in-sti tution for industrial concerns and those of an apex body for other p r i ­mary lending institutions. To take up the latter first, the IDB1 can refinance term advances of three to 25 years" matur i ty made to indust­r i a l concerns by the I F C, S F Cs ( i n c l u d i n g the Madras Industr ial Investment Corporation) and other financial institutions which Govern­ment may not i fy ; it can s imi la r ly refinance term loans of three m ten years' maturi ty made by scheduled banks arid State Cooperative Banks; it can refinance export credits of up

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Industrial Development Bank

March 14, 1964 T H E E C O N O M I C W E E K L Y

to ten years' maturity granted by either o! the two previous categories of institutions; it ran subscribe to the shares and bonds of the I F C, S F Cs, etc, and can accept, discount or rediscount bills of exchange and promissory notes.

There is a second group of func­tions. The I D B I has been em­powered to finance industrial con­cerns on its own and purchase or underwrite their shares and deben­tures; it can stand guarantee for deferred payments due from indust­rial concerns, as also for loans raised by them which are floated in the open market or from scheduled and State Cooperative Ranks and the group of specialised term-lending bodies. Lastly, 'it can guarantee the obligations of such banks and other lending bodies on account of their underwriting of share and debenture issues of industrial concerns.

Development Assistance Fund

This two-fold division of the func­tions of the I D B I has more than a mere idle classificatory inter­est. The authors of the Bill have dug this dichotomy into the finan­cial structure of the 1 D B I pretty deep. Chapter V of the Bill en­joins the I D B I to set up a spe­cial fund — the Development Assis­tance Fund (D A F ) — w h e n re­quired by Central Government. The second group of the 1 D B I's func­tions distinguished above would be financed with the resources of the D A F which would consist, prima­rily, of all amounts received for purposes of this fund by way of loans, gifts, grants, donations, etc. from Government and other sources. To the D A F would also be credited repayments, etc, of loans and other facilities granted from it. income from investments made from it. and income as interest, etc, on the appli­cation of the resources to the speci­fied group of functions.

It is provided, however, that these primary assistance functions can be undertaken only with prior approval of Government, and only when the I D B I is satisfied that banks or other financial institutions are not likely to extend such assistance in the ordinary course of their busi-ness, and Government in turn are

satisfied that such assistance to in­dustrial concerns is necessary in the interests of the industrial develop­ment of the country. But it is also additionally provided that if such assistance is sought to be given by the I D B I from its general resour­ces and not out of the D A F, Gov­ernment's prior approval is not ne­cessary —- this is perhaps more like an emergency exit, a permissive provision which would rarely be used. Perhaps the only justification for this separate fund is to insulate —for accounting purposes — the special role of the I D B I as the primary lender in defined sectors of the economy, financed from funds earmarked for the purpose by Gov­ernment on concessional terms. It has little functional significance beyond, perhaps, demarcating refi­nancing from primary lending and the less risky from the more risky and time-weighted investments. As the fund, is proposed in the Bil l , the profits and losses made by it would not reflect on the earnings of the I D B I out of its general fund,

The Bil l also provides that, if considered necessary, the I D B I would absorb the Refinance Cor­poration for industry. The K C I is subsisting on PL480 funds, and it was actually the sensitiveness of IS authorities to giving these funds to any enterprise in the State sector which compelled the Indian Govern­ment to devise the R C I which was acceptable to the U S. Its absorp­tion into the IDBI would have to wait therefore for an appropriate change in U S attitudes, unless of course the Rs 20-odd crores of PI--180 funds in it could be repatriated.

Why a New Agency ?

In some ways the I D B I is per­haps more favourably placed to as­sist industry than other extant insti­tutions. The Bill , for example, lays down no criteria regarding the secu­rity which must be obtained by it either for refinancing or for primary lending, which should enable the Board to accommodate special cases deserving support: also there does not seem in the immediate future a scarcity of resources of the I D B I. and there is no maximum statutory limit on its borrowings. But misgi­vings have been expressed that the already overworked Board of the

Reserve Bank and its Governor, having an array of formidable deve­lopmental and normal central bank­ing functions to guide, may not be able to give this institution all the care and time it will need, despite assistance from expert officials.

Doubts may also arise of the need for yet another institution when already there are so many pri­mary lending agnicies and a fairly vigorous, though new. refinancing body — the Refinance Corporation for Industry. Was the alternative of strengthening these institutions not workable ? We have not been told. May be, it was deduced from their experience in the last decade that they would have to depend largely on funds from Government if their operations had to be carried on at rates deemed reasonable. If that be so, why not then face realities and end the independent existence of these other institutions ? Thus the suggestion has been made more than once that the I F C should absorb the anaemic State Financial Corpo­rations.

The Real Failure

There, must then be something wrong with the general economic and monetary policy of the country. The I D B I would depend heavily o/i the Government (one cannot visu­alise an over-enthusiastic public eager to subscribe to 25-year bonds) for its funds. Where does the pri­vate investor come in — when shares and debentures, etc. are unloaded ? What is the inflationary implication of this mode of financing ? We keep coming back to the one cen­tral issue - how to ensure that the savings that the community is making, and will increasingly make in the next few years, will be chan­nelled, with the minimum of leakage into the unwanted byways of the economy, to productive purposes as envisaged in a total planned effort? As long as such leakages are allow-ed in the glaring light of the law, and the bulk of the resultant in­comes and capital gains are outside the tax net. efforts such as the pre­sent one will masquerade as the need of the hour and yield but little.

— absit omen

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March 14, 1964 T H E E C O N O M I C W E E K L Y

to ten years' ma tu r i t y granted by ei ther of the two previous categories of ins t i tu t ions ; it can subscribe to the shares and bonds of the I F C, S F Cs, etc, and can accept, discount Or rediscount b i l l s of exchange and promissory notes.

There is a second group of func­

tions. The I D B I has been em­

powered to finance indust r ia l con­

cerns on its own and purchase or

underwr i te their shares and deben­

tures; it can stand guarantee for

deferred payments due f rom indust­

r ia l concerns, as also for loans raised

by them which are floated in the

open market or f rom scheduled and

State Cooperative Banks and the

group of specialised term- lending

bodies. Last ly , it can guarantee the

obl igat ions of such batiks and other

lending bodies on account of their

underwr i t i ng of share and debenture

issues of indust r ia l concerns.

Development Assistance Fund

Th is two-fold d iv is ion of the func­

t ions of the I D B I has more than

a mere idle classif icatory inter­

est. The authors of the H i l l have

dug this d ichotomy into the f inan­

cial structure of the I D B I pretty

deep. Chapter V of the B i l l en­

joins the I D B I to set up a spe­

cial fund the Development Assis­

tance Fund ( D A F) when re­

qu i red by Central (Government. The

second group of the I D B I's func­

tions d ist inguished above would be

financed wi th the resources of the

D A F wh ich would consist, p r ima­

r i l y , of al l amounts received for

purposes of this fund by way of

loans, gi f ts, grants, donat ions, etc.

f rom Government and other sources.

To the D A F would also be credited

repayments, etc. of loans and other

fac i l i t ies granted f rom it. income

f rom investments made f r o m it. and

income as interest, etc, on the app l i ­

cat ion of the resources to the speci­

f ied group of funct ions.

It is p rov ided , however, that these

p r ima ry assistance funct ions can be

undertaken only w i th pr io r approva l

of Government, and on ly when the

I D B I is satisfied that banks or

other f inancial inst i tut ions are not

l ikely to extend such assistance in

the o rd ina ry course of their busi­

ness, and (Government in tu rn are

satisf ied that such assistance to i n ­

dust r ia l concerns is necessary in the

interests of the indust r ia l develop­

ment of the count ry . But i t is also

add i t i ona l l y prov ided that i f such

assistance is sought to be given by

the I D B I f r o m its general resour­

ces and not out of the D A F, (Gov­

ernment 's p r i o r approval is not ne­

cessary •— this is perhaps more l ike

an emergency exi t , a permissive

provis ion wh ich wou ld rare ly be

used. Perhaps the on ly just i f icat ion

for this separate fund is to insulate

— f o r account ing purposes — the

special ro le of. the I D B I as the

p r i m a r y lender in defined sectors of

the economy, f inanced f rom funds

earmarked for the purpose by (Gov­

ernment on concessional terms, It

has l i t t le funct ional signif icance -

beyond, perhaps, demarcat ing ref i ­

nancing f r om pr imary lending and

the less r isky f rom the more r isky

and t ime-weighted investments. As

the fund is proposed in the B i l l , the

prof i ts and losses made by it wou ld

not reflect on the earnings of the

I D B I out of its general f und .

The B i l l also provides that, i f considered necessary, the J D B I wou ld absorb the Refinance Cor­porat ion fo r .Industry. The R C I is subsist ing on PL-480 funds, and it was ac tua l l y the sensitiveness of US authori t ies to g iv ing these funds to any enterprise in the State sector wh ich compel led the Ind ian (Govern­ment to devise the R C I wh ich was acceptable to the US. Its absorp­t ion into the 1DB1 would have to wait therefore for an appropr iate change in U S att i tudes, unless of course the Bs 20-odd crores of PL-480 funds in it cou ld be repatr iated.

Why a New Agency ?

In some ways the I D B I is per­

haps more favourab ly placed to as-

sist industry than other extant insti­

tut ions. The B i l l , for example, lays

down no cr i ter ia regarding the seen-

r i t y which must be obtained by it

ei ther for ref inancing or for p r imary

lending, which should enable the

Board to accommodate special cases

deserving suppor t : also there does

'not seem in the immediate future a

scarci ty of resources of the I D B I.

and there is no max imum statutory

l im i t on its borrowings. But misg i ­

vings have been 'expressed that the

a l ready overworked Board of the

Reserve Bank and its Governor,

having an array of f o rm idab le deve­

lopmenta l and normal central bank­

ing functions to guide, may riot be

able to give this inst i tut ion a l l the

care and t ime it w i l l need, despite

assistance f rom expert officials.

Doubts may also arise of the need

for yet another ins t i tu t ion when

already there are so many p r i ­

mary lending agencies and a fa i r ly

vigorous, though new, ref inancing

body — the Refinance Corporat ion

for Indus t ry . Was the al ternat ive of

strengthening these inst i tut ions not

workable ? We have not been to ld .

M a y be, it was deduced f r o m their

experience in the last decade that

they wou ld have to depend largely

on funds f rom (Government i f their

operations had to be carr ied on at

rates deemed reasonable, lf that be

so. why not. then face real i t ies and

end the independent existence of

these other inst i tut ions ? Thus the

suggestion has been made more than

once that the I F C should absorb

the anaemic State F inancia l Corpo­

rations.

The Real Failure

There must then be something

wrong w i th the general economic

and monetary pol icy of the country .

The I D B I would depend heavi ly

on the (Government lone cannot visu­

alise an over-enthusiastic pub l ic

eager to subscribe to 25-year bonds)

for its funds. Where does the p r i ­

vate investor come in when shares

and debentures, etc are unloaded ?

What is the in f la t ionary imp l i ca t ion

ol this mode of f inancing ? We

keep coming back to the one cen­

t ra l issue how to ensure that the

savings that the communi ty is

making, and w i l l increasingly make

in the next few years, w i l l be chan­

nelled, w i th the m i n i m u m of leakage

into the unwanted byways of the

economy, to product ive purposes as

envisaged in a totaI p lanned effort ?

As long as such leakages are a l low­

ed in the g l a r i n g l ight of the law,

and the bulk of the resultant in­

comes and capital gains are outside

the tax net. efforts such as the pre­

sent one w i l l masquerade as the

need of the hour and yield but l i t t le .

— absit omen

521

March 14, 1964 THE ECONOMIC WEEKLY

522