Mistake of closing down financial institution

1. Discussion on financial
institution closing down in India
By -Abhishek PS Chauhan
Amity University, Mumbai
MBA, 3rd semester

2. Long term finance
1. Presently, it’s not easy for companies to get long-term
financing because of the underdeveloped corporate bond
market and possible asset liability mismatch in the
banking system.
2. The banking system is also saddled with non-performing
assets (NPAs), and a large portion is concentrated in the
infrastructure sector.
3. The financial sector has also not been able to meet the
scale or sophistication of the needs of large corporates, as
well as public infrastructure, and does not penetrate
deeply enough to meet the needs of small- and medium-
sized enterprises in many parts of the country.

3. Developed Financial Institution
• IFCI - Granting long-term loans. Guaranteeing rupee loans
floated in open markets by industries. Providing guarantees
for industries.
• ICICI - To provide long term or medium term loans or equity.
Guaranteeing loans from other private sources. Providing
consultancy services to industry.
• IDBI - It provides refinance against loans granted to industries.
It subscribed to the share capital and bond issues of other
DFIs. It also acted as the coordinator of DFIs at all India level.
• SIDBI - To provide assistance to small scale units. Initiating
steps for technological up gradation and modernization of
SSIs. Expanding the marketing channel for the Small Scale
Industries product. Promotion of employment creating SSIs.

4. Shuting down of financial Institution
Shut down two of three term finance institutions we had in
the early 2000s, ICICI and IDBI, getting both converted
into banks. IFCI changed into an NBFC later. Now, in a
discussion paper, the RBI moots the idea of creating
term finance institutions.We then had three development
financial institutions (DFIs) that focused on term finance,
namely, IFCI, ICICI and IDBI. Commercial banks
confined themselves mainly to providing working capital.
The main reason for seprating the two roles,first most of
the time bank funds are short term, so this exposes
banks to interest rate and liquidity risks. Second,
providing project finance requires appraisal skills of a
different sort from those required for providing working
capital. So the assets easily liquidated and these are not
project finance you have to depend on cash flow, so this
makes the evaluation of risk far more challenging.

5. Facing Problem
In 1990, the three DFIs accounted for nearly a third of gross fixed
capital formation in manufacturing. Most of the loans were made to
manufacturing. Lending to infrastructure. That time financial sector
reforms in the mid-1990s meant that concessional funding was out
and banks were allowed to venture into long term funding. DFIs
were then looking under the impact of bad loans in the past. The
idea of working capital and long-term finance should happen under
one roof took hold. And after this Narasimham committee on
financial sector reforms (April 1998) and the S H Khan Working
Group (May 1998) both recommended that the roles of DFIs and
banks be combine. RBI not convienced with this decision and RBI
published in January 1999 a drastic change in DFIs respective roles.
That may have serious implications for financing requirements of
funds of crucial sectors of the economy. RBI has to chose fall in line
with Narasimham committee The RBI advised the three DFIs to
convert themselves into banks or non-banking financial companies
(NBFCs). ICICI and IDBI opted to merge with their banking
subsidiaries. IFCI muddled along and eventually became an NBFC.