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| BW OPINION |
| A good idea destroyed |
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THE era of development
finance institutions (DFIs) may well be over. Banks
have lower costs, and with liberalisation, DFIs
no longer have access to cheap funds. Mergers are
inevitable in the financial sector, especially since
the foreign direct investment cap has been raised.
So, ICICI must merge with ICICI Bank, IDBI must
merge with IDBI Bank, IIBI must merge with the UBI
or Allahabad Bank, and IFCI must merge with Punjab
National Bank. By that token, IDFC must merge with
some bank or the other, and what better than the
SBI? After all, the SBI has infrastructure exposure
of more than Rs 23,000 crore. Another Rs 5,000 crore
will not matter.
The SBI was originally christened Imperial Bank.
What better channel to implement the government's
imperial ambitions? But IDFC isn't of immediate
post-Independence vintage. It was set up in 1997,
following the recommendations of the Rakesh Mohan
Expert Group on commercialisation of infrastructure
projects. Didn't Mohan appreciate the problems that
a non-banking financial institution would confront?
Or was former finance minister P. Chidambaram's
vision blinkered by the prospect of setting up a
financial institution in Chennai?
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| IDFC was
started with a sound idea. But
what messed up things was the
unwarranted government interference |
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IDFC's mandate was to finance infrastructure and
facilitate private capital flows into infrastructure
projects. The mandate presumes that the financial
system lacked the resources to finance such projects.
This isn't true. What is true is that there are
few bankable infrastructure projects. Private capital
was never desperate to finance infrastructure. Hence,
IDFC's poor disbursal ratio in infrastructure, the
excuse for its merger with the SBI, should have
been expected. It is another matter that inchoate
policies were responsible for shackling the demand
for funds in the core sectors.
Starting with power projects, IDFC moved to agriculture,
telecom, urban and transport infrastructure. Its
operations have been restructured into four areas:
investment banking, equity and derivatives, project
finance and public-private partnerships (including
education, tourism, health and hospitals).
There is nothing wrong with IDFC offering one-stop
financial services. Infrastructure Leasing &
Financial Services (IL&FS), with which there
was an abortive attempt to merge IDFC, behaves no
differently. Driven by commercial considerations,
it was natural to diversify into e-learning, mutual
funds and car leasing. The description of IL&FS
as a project developer and IDFC as a project financier
is at best an artifice. Both are financial institutions,
although they were set up with infrastructure as
the focus.
North Block, however, doesn't subscribe to this
view. Irrespective of what the other shareholders
thought, the government put pressure on IDFC to
increase core infrastructure funding - this shows
in its 2002-03 figures. Till March 2003, IDFC had
sanctioned Rs 12,460 crore to 104 projects in power,
roads, ports and telecom. But disbursals were only
Rs 4,500 crore. It turned out to be its undoing.
Sanctions increased by 150% and disbursals by 120%.
Such numbers are in line with North Block's priority
sector lending mindset - numbers are more important
than quality. So banks must be cajoled to invest
in IDFC's initial Rs 1,000-crore Infrastructure
Fund and in the mini-budget's Rs 50,000-crore Special
Infrastructure Fund. This is like forcing banks
to lend to agriculture or small-scale industry.
But the moot point is: who owns IDFC? The government
holds 20% of its equity, the RBI 15%, which it wants
to pass to SBI. HDFC, SBI, IDBI and UTI together
hold 25%, while FIIs like ADB and American International
Group hold 40%. So is IDFC a private or public outfit?
Private is possibly the de jure answer. But the
de facto answer is certainly public.
North Block wanted the merger with IL&FS. That
having failed, it wants a merger with the SBI. Whether
there will be a separate SBI subsidiary on infrastructure
is beside the point.
IDFC's senior management has resigned in what North
Block calls a confrontationist attitude. Technically,
resignations and the final decision are on hold
till the board meeting on 20 April. Again technically,
institutional investors have set up an internal
committee to work out a middle path that will be
presented to the board on this date. Experience
says the muddle path will steamroll the middle path.
IDFC was started with a sound idea. What messed
it up was unwarranted interference - by North Block
and elsewhere in the government or the political
system. The metamorphosed IDFC should be named Idiots
Destroy Financial Concepts. It is another matter
that in sectors like power and telecom, incoherent
state policy has shackled demand for funds. |
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