Saturday, Nov 16, 2002
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By C. R. L. Narasimhan
The Government has announced plans to restructure IDBI by repealing the IDBI Act. The institution has been the leading development financial institution (DFI) and along with ICICI and IFCI formed the triumvirate on which the country's project finance edifice rested.All three played an useful role in funding industry through term loans primarily. In fact, in their hey days, roughly coinciding with two decades or more before the 1990s, no industrial project of any reasonable size could be financed without the active involvement of one or more of these DFIs. Commercial banks picked up only the balance of term funding while fully taking care of the working capital requirements. The scenario changed drastically in the liberalisation era beginning the 1990s. The DFIs long used to getting funds cheap from the Government had to reckon with the prospect of raising resources at the market determined rates. That hit the bigger IDBI more than the other two. Second, the big borrowers of these DFIs had to manage the sweeping changes in the economic environment, including opening up of trade. Some managed but many in the traditional industries such as iron and steel, cotton textiles buckled under. For the DFIs it was a double blow: with new constraints on raising resources in a cost-effective manner they had to reckon with non-performing assets. Both the issues were problematic in the extreme and many had concluded that the DFI model was becoming irrelevant. Certainly solutions had to be found quickly to tackle the twin problems that affected both their liabilities and assets. Naturally, each of the three — IDBI, ICICI and IFCI — struck out differently. ICICI , which has had a far lesser government control over it, has come out with a winning solution. Espousing universal banking more for its own survival and less because of the inherent attractiveness of that idea, ICICI succeeded in merging itself with a new bank promoted by it. IDBI, which like ICICI floated a new bank, could however not pursue the agenda of a reverse merger. The new IDBI Bank did not want to be burdened by its promoters' past. Nor was IDBI successful in its efforts to merge with a large public sector bank. It is in that context that there was an expectation that the Government would announce a package to revive/restructure the DFI. While more details will emerge at the time the Bill to repeal the IDBI Act is discussed in Parliament, the following are the key steps: (1) IDBI will convert itself into a company, with its majority stake continuing to remain in Government's hands. It is a status that it will be maintained for five years or as long as the Government keeps its control. That will be a transitory phase to equip the erstwhile DFI to become a bank. (2) The new entity will be akin to a standalone bank. It will not, nor will it seek a licence from the Reserve Bank of India. It is here that the biggest concession of the package is seen. Unlike other banks it will — for now at least — be exempt from following basic regulatory norms: (a) SLR 25 per cent of its liabilities (b) CRR at 4.75 per cent and a priority sector lending target (now 40 per cent of its lend able resources). The fact that IDBI with a balance sheet size of Rs. 60,000 crores, cannot, no matter what structure it adopts, fund those statutory requirements has been the main reason for the generous and unique exemption. (3) Another act of generosity is for the Government to guarantee — up to Rs. 2,500 crores — the borrowings of the restructured institution that will also be allowed to tap retail funds. The guarantee is for lowering the cost of funds. In turn IDBI is supposed to refinance its customers high-cost debt in its books. (4) Finally, although the details are not yet clear, the restructured entity will stick to project finance and not be allowed into retail. Notwithstanding the Government's generosity as well as ingenuity (it saves the cost that would be inevitable in an overt bailout package) the package suffers from certain deficiencies. One, as the Government is bypassing the existing time tested regulatory structure in the key areas of SLR, CRR and priority sector, there has been an allegation of bias in favour of IDBI. Naturally the restructured institution will have to work overtime to prove the efficacy of the package. Two, it is not that the new-look IDBI will not have constraints. Not being allowed a retail focus in lending may be an expensive ban. Other banks say that it is a high growth area. Besides, if it were to retain its niche strengths in project finance it may run into serious asset-liability mismatches. Retail depositors with banks do not place their savings for periods longer than three years. Three, the most serious lacuna relates to the methodology to tackle its huge NPAs (net in terms Rs. 6,500 crores as per last balance sheet). The expectation is that the bank will undertake quality lending to earn enough to blunt the pernicious effects of NPAs and hopefully contribute to their liquidation over time. None of these need materialise. The environment is extremely competitive. Top borrowers can pick and choose at sub-PLR rates (for commercial banks). If, on the other hand, the loans are given to borrowers a few notches below, the IDBI will have to manage its risks more prudently than at any time before Four, will the new IDBI manage the change? There will have to be a dramatic reorientation in all its facets — in human resources, branch banking as well as in knowledge skills and attitude. None of these are insurmountable in a general sense. But if the past record is any guide, even a new look IDBI will find them daunting.
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