The parliamentary standing committee on finance has cleared the repeal of the IDBI Act and has recommended the corporatisation of the institution and its conversion into a bank.

It has also recommended a five-year tax holiday in addition to the sops proposed by the government.

The decision was taken at the meeting of the standing committee last week, government sources told Business Standard.

They added that the parliamentary panel was, however, of the opinion that IDBI's focus on development should be retained.

The sources said the committee endorsed the finance ministry's proposal for IDBI's conversion into a bank.

The standing committee's opinion puts an end to speculations on IDBI's reverse merger with IDBI Bank. The financial institution has promoted the bank and is its largest shareholder.

The government proposes to convert IDBI into a bank, though not a retail one. "This way, IDBI will focus on lending to the corporate sector instead of retail banking," a source said.

The government also proposes to merge the Industrial Investment Bank of India with IDBI and also transfer a large chunk of their sticky loans to asset reconstruction companies.

The government will try to push through the Industrial Development Bank (Transfer of Undertaking) Bill, 2002 - introduced in Parliament last December - during the monsoon session of Parliament.

A committee comprising the banking and insurance secretary in the finance ministry, a Reserve Bank of India deputy governor and officials from the department of economic affairs is expected to consider the recommendations, of the parliamentary committee whose report will be tabled in Parliament during the monsoon session.

"There are three or four scenarios that had been worked out. But if IDBI is converted into a bank on a standalone basis we will prefer that it does not focus on the retail sector. It will be a bank but not a universal bank in the true sense of the word," said an official.

While banking sector analysts were sceptical about the government's decision to let IDBI lend only to the sectors that it presently focuses on, officials said project finance was still essential for the development of economies like India.

They said that the conversion of IDBI Bank will help it mobilise short term funds which can be channelled for improving industrial infrastructure in the country.

A former chief of a financial institution said that the government's plan in its present form may not result in significantly higher resource mobilisation as investors would prefer to put their money with banks where they operate accounts.