The finance ministry is firming up plans to merge the Industrial Investment Bank of India with the Industrial Development Bank of India once the IDBI Repeal Bill is cleared by Parliament.

The merger will result in an entity with an asset base of around Rs 70,000 crore (Rs 700 billion). The new entity will be permitted to undertake banking activities.

Officials said a merger between IDBI and IIBI makes more sense because the latter is a smaller organisation and the two institutions have common exposure in many cases. IIBI has an asset base of about Rs 7,000 crore (Rs 70 billion) compared to IDBI whose asset size stood at Rs 62,000 crore as on March 31, 2002.

A committee headed by finance secretary S Narayan has also been constituted to lay out the road map for two other development lending institutions, IDBI and IFCI. The government is awaiting the report of the Parliamentary standing committee on finance before taking a  decision on the mode for IDBI to foray into banking.

The ministry has, however, turned down a proposal to merge IDBI, IFCI Ltd and UTI-I -- which was formed to handle the Unit Trust of India's US-64 and all assured return schemes -- to engage in banking.

Senior government officials told Business Standard the proposal was rejected since neither UTI-I nor IFCI was in the best of health and the merged entity would only pose extra problems.

Further, the statutory liquidity requirement, cash reserve ratio and priority sector requirements for the merged entity to engage in banking activities was estimated at nearly Rs 50,000 crore (Rs 500 billion).

Officials also said a reverse merger of IDBI Bank with IDBI has not found favour with the ministry. They said the new generation private banks like IDBI Bank, HDFC Bank and UTI Bank were making steady progress and the government wanted them to flourish as stand-alone banks. The IDBI brass, in its interaction with the finance ministry, had also favoured a foray into banking on a stand-alone basis.

The reverse merger would demand resource generation of Rs 38,000 crore (Rs 380 billion) by IDBI to meet the statutory requirements with Rs 20,000 crore (Rs 200 billion) required to adhere to the priority sector lending requirement, IDBI has estimated.

On the issue of a merger of IDBI Bank and UTI Bank with IDBI, as suggested by some members of the Parliamentary standing committee, the finance ministry is against the option as it would dilute the  financial institution's role as a development bank for industry.