MICROCAPITAL STORY: India's IDBI Bank Ltd. Increases Credit to MFIs While Orissa State Government Calls for Banks and MFIs to Meet Lending Targets

India’s state-owned Industrial Development Bank of India Limited (IDBI) has announced measures to increase the amount of credit to the microfinance industry. According to the Trading Market, the IDBI has reduced the interest rates for microenterprises, increased working capital limits, reduced the margin payment and provided softer loan terms for micro, small and medium sized enterprises (MSMEs). Loans for microenterprises have been reduced by 100 basis points from interest rates on November 30, 2008. It is also planning to grant need-based “ad hoc” working capital demand loans to MSMEs repayable in one year, as well as providing “adequate” increases in working capital limits to MSMEs.

This announcement comes less than one week after the IDBI, along with other banks operating in Orissa, the eleventh largest state in India by population, were encouraged to fulfil their MSME loan targets set for the current fiscal year, as there is considered to be a large scope for increasing lending in this sector. The request was issued at the 116^th State Level Bankers’ Committee (SLBC) on January 2, 2009 where banks were called upon to ensure that the loans disbursed by MFIs carried a reasonable rate of interest. The Finance Minister of Orissa, Prafulla Chandra Ghada expressed concern that the credit-deposit ratio in September 2008 of 69.12 percent was very low compared to the national average and had actually decreased from the year before. IDBI was highlighted, along with other banks, as needing to address this issue. At the same meeting Kasa Sudhaker, regional director of the Reserve Bank of India commented that large areas of Orissa remain excluded from the banking sector and that banks should attempt to open branches in these areas. Credit disbursed to MSMEs in Orissa was reported as 11.8 percent of the net bank credit in September 2008. MicroCapital has recently reported on other initiatives for the expansion of microfinance operations in India including Madura Microfinance and a recent policy forum.

The IDBI was created in 1964 as a wholly-owned subsidiary of the Reserve Bank of India to “catalyze the development of a diversified and efficient industrial structure” and in 1976 ownership was transferred to the Government of India, while the current government shareholding is 53 percent. In 2004 it was converted into a banking company (as the Industrial Development Bank of India Limited) and in 2005 merged its banking subsidiary (IDBI Bank Ltd.) with itself. As of August 2007, the IDBI was comprised of 453 branches throughout 256 centres nationwide. The minimum loan for microenterprises is Rs. 25 thousand (USD 512) and the maximum is Rs 5 million (USD 102 thousand). The IDBI’s lends a range of Rs. 5 million (USD 102 thousand) to Rs. 1 billion (USD 20.5 million) to MFIs which have either been in existence for a minimum of five years or have a successfully demonstrated track record for the last three years. As of June 2008 total assets for IDBI stood at Rs 1.3 trillion (USD 26.6 billion) and its annualized return on assets was reported as 0.5 percent.