Development Banking in India
The concept of development banking in India emerged after the Second World War and the Great Depression of the 1930s. At the time of Independence in 1947, India required large-scale industrial and economic development. Commercial banks primarily focused on short-term lending and were not equipped to provide long-term finance for industrial projects. Therefore, the government adopted a strategy of creating specialized Development Financial Institutions (DFIs) to support long-term financing needs of industries, agriculture, housing, and small businesses. Institutions such as IDBI, NABARD, NHB, and SIDBI were established to provide long-term development finance and promote economic growth.
Formation of Industrial Development Bank of India (IDBI)
The Industrial Development Bank of India (IDBI) was established in 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India (RBI). The main objective of IDBI was to promote industrial development by providing long-term financial assistance to industries and coordinating the activities of various financial institutions engaged in industrial financing.
In 1976, the ownership of IDBI was transferred from the RBI to the Government of India. Thereafter, IDBI became the apex development financial institution of the country. It provided financial assistance in both Indian rupees and foreign currencies for new industrial projects, modernization, expansion, diversification, and technological upgradation of existing industries. The institution also supported industrial growth by refinancing loans granted by state-level financial institutions and commercial banks.
Contribution to India’s Financial Infrastructure
During the pre-liberalization period (1964–1991), IDBI played a crucial role in India’s industrialization and economic development. It was instrumental in establishing several important financial institutions that later became pillars of India’s financial system.
With support from IDBI, institutions such as the Securities and Exchange Board of India, National Stock Exchange of India, National Securities Depository Limited, Credit Analysis and Research Limited, Export-Import Bank of India, Small Industries Development Bank of India, Stock Holding Corporation of India Limited, and the Entrepreneurship Development Institute of India were established. These institutions significantly contributed to the development of India’s capital markets, industrial financing system, export promotion, and entrepreneurship ecosystem.
Transformation into a Commercial Bank
Following financial sector reforms introduced in the 1990s, the traditional model of development finance institutions began to face challenges. A committee appointed by the RBI recommended that IDBI diversify its activities and combine development financing with commercial banking operations. The objective was to create a universal banking model that could provide both development finance and regular banking services.
Under the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI was converted into a company known as IDBI Ltd. Subsequently, in September 2004, the RBI classified IDBI as a Scheduled Bank under the Reserve Bank of India Act, 1934.
A major milestone occurred in 2005 when IDBI merged with its banking subsidiary, IDBI Bank. This merger transformed IDBI from a development financial institution into a full-fledged commercial bank offering retail banking, corporate banking, treasury services, and other financial products.
Challenges and Rising NPAs
Although the merger was intended to improve operational efficiency, IDBI continued to maintain a strong focus on industrial lending. Over time, a significant portion of these loans turned into non-performing assets (NPAs). As a result, the bank faced severe financial stress. By March 2018, IDBI Bank’s gross NPAs had risen to around ₹55,588 crore, accounting for nearly 28 percent of its total loan portfolio, one of the highest levels among Indian banks at that time.
The deterioration in asset quality adversely affected the bank’s profitability, capital adequacy, and overall financial health. Consequently, the Reserve Bank of India placed IDBI Bank under the Prompt Corrective Action (PCA) framework, imposing restrictions on its operations and expansion.
LIC Takeover and Revival
To strengthen the bank’s financial position, the Government of India initiated a revival plan involving the Life Insurance Corporation of India. In June 2018, the Insurance Regulatory and Development Authority of India (IRDAI) granted approval to LIC to increase its stake in IDBI Bank up to 51 percent.
On 21 January 2019, LIC completed the acquisition of a 51 percent controlling stake in IDBI Bank through an investment of approximately ₹21,624 crore. Following this acquisition, LIC became the majority shareholder and obtained management control of the bank. Consequently, for regulatory purposes, the RBI classified IDBI Bank as a private sector bank, although substantial government ownership continued through both direct and indirect holdings.
The capital infusion by LIC significantly improved the bank’s financial condition. Through better risk management, recovery efforts, and reduction in bad loans, IDBI Bank gradually strengthened its balance sheet and operational performance. As a result of these improvements, the RBI removed IDBI Bank from the Prompt Corrective Action framework on 10 March 2021.
Present Position
Today, IDBI Bank functions as a universal commercial bank offering retail banking, corporate banking, MSME banking, digital banking, treasury operations, and financial services. From its origins as India’s premier development financial institution, it has evolved into one of the country’s major commercial banks. The bank continues to play an important role in India’s financial system while carrying forward its legacy of supporting industrial and economic development.