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RBI torpedoes SIDBI plan to become bank

Sarbajeet K. Sen

The RBI is of the view that since we are a financial institution, we would have to adopt some other method to take up activities such as working capital finance: SIDBI CMD, Mr V.K. Chopra

New Delhi , Aug. 22

THE Reserve Bank of India has waved the red flag to the Small Industries Development Bank of India (SIDBI) forcing it to bring to a halt its plans to convert into a full-fledged commercial bank.

The central bank has said that since it is currently categorised as a financial institution, an amendment to the SIDBI Act would be required to enable it to function as a commercial bank.

"The RBI is of the view that since we are a financial institution we would have to adopt some other method to take up activities such as working capital finance. Legislative changes would be required if we want to convert into a bank," Mr V.K. Chopra, Chairman and Managing Director, SIDBI, told Business Line.

The proposal to convert into a bank had earlier been cleared by the SIDBI board as well as the Ministry of Finance and Ministry of Small-Scale Industries.

The SIDBI management and the Government were of the view that the institution's memorandum of association allows it to expand its mandate by merely taking the consent of Government. However, the RBI has clearly disagreed with the view.

Mr Chopra said that at a later date he might look at the options of seeking legislative amendments to the SIDBI Act, 1989 to enter the family of commercial banks. For the time being, however, SIDBI would retain its existing character. "SIDBI would remain a separate organisation as of now."

He said that since the communication from RBI had reached recently, the SIDBI board has not been able to deliberate on any alternative route to enable it to function as a one-stop shop providing all financial services required by its clients.

"We will have go in for expansion to increase our reach but we would not come into direct competition to banks."

He said that the need for converting into a bank was felt because SIDBI is allowed to extend composite loans to its clients only up to Rs 50 lakh.

"Whenever clients need assistance of more than Rs 50 lakh they move over to commercial banks. We wanted freedom to take care of all financing needs of our customers under one roof," Mr Chopra said.

SIDBI, which came into existence in 1990, is the principal body of Government for catering to the financing requirements of the small-scale sector.

Besides direct lending to the SSI sector, SIDBI's mandate includes providing refinance to State financial corporations (SFCs) and commercial banks for their lending to SSI sector. It also acts as the Government's principal co-ordinating agency for new initiatives in the SSI sector.

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