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Another Term Lending Institution goes Commercial - Merger of IDBI & IDBI Bank

IDBI has announced on 29th July 2004, it's decision to merge IDBI Bank Ltd with itself in the current fiscal, to form India's fifth-largest bank by value. The combined value of the two will be about $1.2 billion at current prices.

IDBI Bank, which started operations in 1995, reported a net profit of Rs 36.69 crore for the quarter ended June 30, 2004 and had deposits of more than Rs 10,000 crore.

Two entities would now work out the share swap ratio, complete the valuation and seek shareholders' and regulators' nod. The new entity would "reposition" itself as a bank that focuses on development financing , while offering retail banking facilities.

The acquisition will allow Industrial Development Bank to get cheap retail deposits, which term lenders are not allowed to accept in India.

In 2001, a similar merger between term lender ICICI Ltd. and ICICI Bank Ltd, created India's second-largest commercial bank, ICICI Bank. Another term lender, IFCI, is being taken over by public sector Punjab National Bank.

Most term lending institutions were set up in the 1950s and 1960s to provide long-term project finance. But competition from commercial banks and capital market development drove term lenders to fund riskier projects, with low returns and high NPAs. Raising long-term funds at high cost, also seriously affected the viability of term lending institutions.

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