The state-owned Industrial Investment Bank of India Ltd (IIBI) is likely to be wound up in the current fiscal, making it the first all-India financial institution headed for closure.
IIBI has not been able to cope with changes in the financial sector where banks, accessing cheaper resources, have moved into segments traditonally dominated by financial institutions.
“The process (to close operations) should happen in four-five months,” said a finance ministry official, who did not wish to be identified.
IIBI’s assets would be sold to interested parties and the proceeds used to pay its creditors.
While this would end IIBI’s exposure to the financial sector, it will continue to exist as a legal entity until it receives necessary approvals to close shop.
IIBI had a balance sheet size of Rs2,154 crore at the end of March 2006, as per the latest data put out by the Reserve Bank of India (RBI). IIBI has been restricted from carrying out fresh business for a while on account of its bad financial health.
The staff of IIBI has been absorbed into other public sector financial institutions. It is currently led by A.C. Mahajan, chairman and managing director, Allahabad Bank, who holds concurrent charge of the financial institution.
The institution’s winding up has been in the pipeline for a while as it has depended on the government’s bail-outs to meet the dues of its creditors, and RBI had earlier suggested that it be wound-up.
Now, the government has set a time frame to finish the process.
“Quite a balancing act is required between what makes economic sense and what makes political sense. I see it as a positive move,” said Sanjay Aggarwal, national industry director, financial services, at financial services firm KPMG.
IIBI’s problems were two-fold: one, a high proportion of bad loans have hamstrung operations, and two, financial institutions engaged in long-term lending are losing their competitiveness when competing with banks sourcing cheaper funds.
IIBI’s net non-performing assets (bad loans) in 2004-05 were 32.9%, while the average for the entire banking industry were 2% in March 2006.
“Today it’s possible to sell a bad book. The biggest problem in the financial sector has been lack of exits in the past; now there will be more and more exits,” said M.S. Verma, former chairman of the State Bank of India and currently chairman of the International Asset Reconstruction Co. Pvt. Ltd.
Financial institutions such as IIBI have found themselves out of step with recent changes. IIBI, for instance, started out as the Industrial Reconstruction Corp. of India, set up in 1971 for the rehabilitation of sick industrial undertakings. At that time, the financial sector was fragmented, with financial institutions handling long-term finance and banks catering largely to working capital needs.
With boundaries in the financial sector gradually collapsing, financial institutions, such as IIBI, have found it tough to compete with banks that access cheaper funds such as demand deposits.
The cost at which institutions such as IIBI would have to raise funds also makes it tough for them to function in the current market environment, said Verma.
IIBI recorded a loss of Rs151.99 crore in 2004-05 and Rs20.51 crore in 2005-06.
During those two years, the government made grants to IIBI of Rs143 crore and Rs119.47 crore, respectively, to service its liabilities, despite which the institution recorded a loss.