• APRIL 23, 2003

Delay and dismay

The government had earmarked Rs 200 bn to bail out UTI, IDBI and IFCI a while ago. However, the finance ministry is still debating the format for the restructuring and in any case, even if they do agree upon a format they will be bound till the parliament approves the same. Meanwhile, IFCI's debt rating has been downgraded to junk status and shareholders are ruing the day they chose to invest in the company.

What has led to the present condition of the financial institution? Are these problems new or is it inherent in the system? The problems seem inherent and the present situation seems to be the culmination of years of accretion. Various political parties in the successive governments have interfered in the functioning of these institutions. The bureaucratic red tape, connections between them and the big business houses are all too common. Lack of transparency in the investments is the hallmark of these institutions. Thus, investment in unfit firms leads to poor financial performance.

Management through a bureaucratic structure has led to a rigid mindset, robbing it of the necessary flexibility. This system has been in existence since the sixties and rarely has been tampered with. The necessary reinvention and reengineering/restructuring were not done to stay in tune with the changing time. Lack of autonomy from the government and sheltered past have not made it accountable to anyone except its masters.

The institutions are not at all market driven. It is obvious that excessive government intervention prevents them from integrating themselves with the market. Lack of competition has led to inefficient and complacent functioning. The interest of the investor was given the backseat, with the interest being more aligned towards the bureaucrats and politicians.

Is the solution to all these problems a bail out? What is clear to the government and all its financial institutions is that a bail out is a self-defeating purpose. Unless the financial institutions are allowed to function and compete freely in the market, the bailout may be of no use. Also the institutions that are involved in the bailout become less healthy in the process, not to talk about the impact of the bailout on the health of the government's fiscal deficit. The best example of this is the bailout of IFCI. The government had mandated the SBI, IDBI, LIC and GIC to infuse about Rs 6 bn in to IFCI when IDBI itself is in trouble. This is a sure way of inviting trouble repeatedly.

So, what is the way out? A welcome change will be providing FIs with greater autonomy and exposing them to the domestic and international competition. In this way, they will learn to come out of the sheltered protective environment. This could happen when the government reduces its stake and allows in private holdings. The best available professional managers can be hired providing the best compensation packages. External experts can be inducted at senior levels. Greater transparency in operations and deployment of funds would encourage the investors to invest in these institutions.

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