In a setback for the Industrial Development Bank of India's debt restructuring plans, the Centre and the Reserve Bank of India recently turned down a proposal to treat reinvestment of around Rs 4,500 crore (Rs 45 billion) IDBI bonds by banks and insurance companies as SLR (statutory liquidity ratio) investments.

A large number of banks and insurance companies, while agreeing to lower interest rates in 2002 on bonds issued by IDBI, had sought that the reinvestments be treated as SLR bonds.  The move was proposed as a cushion against any change of decision in future.

The debt, on which the government is compensating banks and insurance companies for the interest differential, is due to mature in tranches till 2012.

Institutional sources said IDBI had sought that the investments be notified as SLR investments for the investing banks, but the finance ministry's budget and capital market divisions were against the proposal.

The move comes despite Finance Minister Jaswant Singh's announcement in the interim Budget that the Centre will provide loans at concessional rates for development financing even after IDBI's conversion into a bank. Last December, Parliament cleared an enabling legislation to help in IDBI's conversion.

The Life Insurance Corporation of India, Unit Trust of India and over 15 banks including, Bank of Baroda, Allahabad Bank, Central Bank, United Bank of India, Andhra Bank, Canara Bank, Corporation Bank and Union Bank, have reinvested in IDBI's and IFCI's bonds at a lower interest rate following the government's intervention in 2000.

In the case of IDBI, the government is to chip in with an interest differential of nearly Rs 2,500 crore (Rs 25 billion) and has already released Rs 1,500 crore (Rs 15 billion) during the last two financial years.

Sources said IDBI had proposed the move on behalf of banks that were reinvesting.

With the government refusing permission to treat the reinvestments as SLR investments, some banks may opt out of the debt restructuring plan.