Who is Responsible for the Downfall of IDBI Bank?

IDBI Bank – one of the public sector banks in India is being privatised. The government has announced plans to privatise the bank soon. Right now, the Government of India and LIC have maximum shareholding in the bank. The Central Government owns 45.48% and LIC holds 49.24%. Employees are protesting against this privatisation. There is a lot of hue and cry in the banking sector. The government is the owner of the bank and can do anything with the bank – privatise it, merger, decrease stake, etc. but the main point that no one is talking about is – Why IDBI Bank is being privatised and who is responsible for the downfall of IDBI Bank. In this article, we will talk about this only – Who is to Blame for the Collapse of IDBI Bank? Let’s get into history.

An institute that played a very important role in the creation of major financial institutions in India like SIDBI (Small Industries Development Bank of India), EXIM Bank, SEBI (Securities and Exchange Board of India), NSE (National Stock Exchange), and NSDL (National Securities Depository Limited), SHCIL, CARE, EXIM Bank, EDII is being privatised. Imagine RBI, SEBI, NABARD being privatised today. IDBI was also similarly important at the time of establishment but it’s value kept on decreasing year after year and it’s finally being privatised. We will try to understand the IDBI Bank Failure through timelines.

Great Depression 1930: The Great Depression was a severe global economic downturn which began in 1929 and lasted until about 1939. It was the longest and most severe economic depression experienced by the industrialized world, causing drastic declines in output and widespread unemployment. Several Banks failed and unemployment increased to its peak. Countries were suffering from severe economic crisis.

1 April 1935: The Reserve Bank of India (RBI) was formed on April 1, 1935, in Kolkata, based on the recommendations of the Hilton Young Commission. Earlier, Imperial Bank of India worked as the controller of the banking system, but after the RBI was formed, it took over the controller interest and Imperial Bank of India continued working as a commercial bank.

2 September 1945: World War II ended on 2 September 1945 and this world war had destroyed the global economy. It was the largest and deadliest war in history, with about 50 million deaths. Many countries, particularly in Europe and Asia, suffered widespread destruction of infrastructure, industries, and cities. Thus, all the countries in the world started focusing on reviving their economy.

15 August 1947: India achieved independence from British rule on August 15, 1947. Jawaharlal Nehru was elected as the Prime Minister of India. In 1947, India’s newly independent economy faced significant challenges, including widespread poverty, low agricultural productivity, limited industrialization, and a substantial reliance on imports, particularly for food. The country also grappled with inadequate infrastructure, significant regional disparities, and the fallout from the Partition, including the influx of refugees. Modern large-scale industry accounted for only 7% of the national income. So, the Government of India decided to undertake rapid industrialization.

1 July 1955: On 1 July 1955, the Imperial Bank was nationalized to form the State Bank of India. Imperial Bank of India was formed in 1921 by merging three banks: the Bank of Calcutta, the Bank of Bombay, and the Bank of Madras. SBI started the development of the Indian economy and is still the backbone of the Indian economy.

1950-2000: The third phase of the industrial revolution started in the 1950s. All the countries in the world were focusing on rapid industrialisation. To support industrialisation, countries needed to provide credit support to this sector. Various Banks and Development Financial institutions were established across the world to provide credit to industries. India also started focusing on Industries and felt the need to establish a bank that could cater especially to the needs of industries. Several industries in the field of steel manufacturing, locomotives, and infrastructure were established. These industries needed money to survive.

Development Financial Institutions are organisations that are created to provide finance and support to particular sectors such as industries, infrastructure, agriculture, etc.

1 July 1964: IDBI Bank was established on July 1, 1964. It was initially known as the Industrial Development Bank of India, and was established under the Industrial Development Bank of India Act, 1964, as a Development Financial Institution. It was established as a wholly owned subsidiary of Reserve Bank of India. The purpose was to help industries grow by providing financial support for big projects. But IDBI did much more than just giving loans for projects — it helped industries spread across different parts of India, especially in backward and less-developed areas. It also encouraged new entrepreneurs to start businesses and played a big role in developing India’s stock market, making it more active and vibrant.

IDBI’s primary role was to provide financial assistance for industrial growth. It offered funding for green-field projects. IDBI also provided financial support for the expansion, modernization, and diversification of existing industries. In addition, it offered both rupee and foreign currency loans, which helped businesses access the capital they needed to grow and innovate.

The Downfall of IDBI Bank: IDBI Bank did whatever it could to boost the economy of India. IDBI Bank provided credit to various large-scale industries in India. But things did not go smoothly. These big-sized loans turned into NPAs. The industries and corporations defaulted on the loans and did not pay back the loans. This led to the start of the downfall of IDBI Bank. The Bank was not able to recover loans from industries, and the government also did not help the Bank. Today also, big corporate companies default on their bank loans, and it takes years to recover money from them. The Vijay Mallya Scam and Nirav Modi Scam are live examples of this. But the question is – When the condition of IDBI Bank was deteriorating, then why the Government did not intervene and save the bank?

1976: In 1976, the ownership of IDBI was transferred from the Reserve Bank of India to the Union Government of India. This change marked a significant shift in the role of IDBI. It became the principal financial institution in India, tasked with coordinating the activities of various institutions involved in financing, promoting, and developing industries.

1990: With the financial reforms introduced by the Indian government in 1992, IDBI’s role also evolved. These reforms aimed to modernize the financial system and improve the functioning of financial institutions. As a result, IDBI started to provide indirect financial assistance in addition to its direct financing.

One of the major ways IDBI did this was by refinancing loans extended by State-level financial institutions and banks. This helped improve the liquidity and stability of smaller financial institutions. IDBI also provided rediscounting of bills of exchange, which are financial instruments used in trade. These bills arise from the sale of indigenous machinery on deferred payment terms, and IDBI’s rediscounting helped businesses manage their cash flows.

July 1995: In July 1995, IDBI went public with an initial public offering (IPO), allowing the general public to buy shares of the bank. As a result of this move, the government’s shareholding in IDBI reduced from 100% to 75%. This step was part of the broader trend of privatization and financial sector reforms in India during the 1990s.

1 October 2004: Due to an increase in NPA, the government started to think of what to do and how to get rid of NPA. So, an RBI committee was formed and it suggested to convert IDBI into a full-fledged bank. On October 1, 2004, IDBI changed from a Development Financial Institution into a full-fledged banking company. As a bank, it started offering all kinds of regular banking services like savings accounts, loans, and other financial products, while still continuing some of its original work in supporting industries.

September 2004: In September 2004, the Reserve Bank of India incorporated IDBI as a ‘scheduled bank’ under the RBI Act, 1934.

2005: The commercial banking arm, IDBI Bank, was merged into IDBI in 2005.

To grow its business even more, IDBI Ltd. merged with several of its own companies over time. These included – The erstwhile IDBI Bank, IDBI Home Finance Ltd. (which focused on home loans), IDBI Gilts (which dealt with government securities), The United Western Bank Ltd. After expanding its activities and services, IDBI Ltd. changed its name to IDBI Bank Ltd. to better reflect its new and broader role as a full-service bank.

2018: The merger was expected to streamline operations of the bank. However, IDBI continued to base its policy towards industrial sector like the erstwhile IDBI entity did. The retail business of the bank was limited to 13 percent of its total business. As of March 2018, the total Non Performing Assets (NPA) rose to ₹55,588 crore and were about 28 percent of its total loans.

2019: By 2019, IDBI Bank was facing serious financial problems, including very high Non-Performing Assets (NPAs) and low capital. To save the bank, the Government of India asked LIC (Life Insurance Corporation of India) to invest money and take over the management of the bank to improve its condition and follow the RBI’s rules. Companies have publicly defaulted on money lent by IDBI Bank. You can check Top 10 NPAs in IDBI Bank below.

The total NPA of top 10 companies is Rs.11,751.04 crore. This is NPA only by 10 companies. Imagine how much NPA Bank might have. IDBI Bank’s Q3 FY 2025 net profit was ₹1,908 crore. IDBI Bank’s net profit for the fiscal year 2023-24 (ended March 31, 2024) was ₹5,634 crore. Due to such huge NPA, Government has decided to privatize the bank as government is not able to get rid of NPA.

As a result, LIC bought 51% of IDBI Bank’s shares. Because of this, from 21 January 2019, RBI reclassified IDBI Bank as a Private Sector Bank, even though it was still under government control. Due to its weak financial position, IDBI Bank was put under the Prompt Corrective Action (PCA) framework by RBI, which restricts banks from lending freely and expanding operations. The bank came out of PCA on 10 March 2021 after improving its performance.

As of now, the Government of India still holds around 95% of IDBI Bank’s shares directly and indirectly, but very soon the bank will be privatised. A Bank that was once the backbone of the Indian Industry Sector will be privatised. Right now, IDBI Bank has 2,088 Retail Banking Branches and 3,144 ATMs as of 31 March 2025. The bank has helped India in improving its economy, but somewhere it fell prey to the NPA, and no one was there to help the Bank. Today also, a lot of experts say that IDBI Bank is being privatised due to huge NPA, but no one talks about the reasons for the NPA – How such a huge NPA was created in IDBI Bank, and why the Bank Management and the Government of India did not take strict measures for recovery. Had the loan recovery been done strictly, today the bank would have been in a better financial position. But why were strict measures for recovery not taken? This question will haunt IDBI Bank forever. So, hope now you know – Who is responsible for the downfall of IDBI Bank? The bank may be privatised, but its glory will remain forever.