Fis & #8217; Plan To Become Universal Banks Gains Momentum

Wiser after the Industrial Finance Corporation of India (IFCI) experience, the finance ministry is pushing for faster conversion of the development finance institutions (DFIs) into commercial banks although the Reserve Bank of India is in favour of treading the path with caution.

According to sources, IFCI as well as Industrial Development Bank of India (IDBI) and ICICI want to convert themselves into banks as they feel it will help them bring down the cost of funds.

Unlike banks, financial institutions cannot access demand deposits which is the cheapest source of funds.

However, the RBI does not seem to be very enthused about the finance ministry's move and wants the institutions to strictly adhere to all reserve requirements if they want to become banks.

This is to ensure a level-playing field between the existing banks and the institutions.

Banks are subjected to 7.5 per cent cash reserve ratio and 25 per cent statutory liquidity ratio requirements.

The institutions want the reserve requirement to be imposed only on fixed deposits and not bonds which account for a sizable portion of their liabilities. However, the RBI is unlikely to accept it.

The DFIs have jointly submitted a blue-print for the conversion path. Former banking secretary Devi Dayal, who retired on July 31, took the initiative in pushing the proposal.

But the apex bank is not in favour of a uniform conversion path for all the institutions and wants the DFIs to chart out the roadmaps independently.

IDBI has already made a series of presentations to the RBI as well as the finance ministry and made it clear that unless it is converted into a bank it will be difficult for the institution to survive.

It is in the process of charting out a roadmap. The entire exercise will be completed in the next three months, an IDBI source said.

ICICI, on the other hand, has already formalised the plan and the board of the institution is expected to pass a resolution on the proposed merger with the ICICI Bank during the second half of the financial year. An internal committee in ICICI is giving the final touches to the proposal.

IFCI also strongly feels that the only way of keeping afloat is by converting itself into a bank.