A meeting scheduled last week was to decide on the future of the Industrial Finance Corporation of India (IFCI), one of the three national-level development finance institutions. | |
| Structural changes in the industrial and financial policy regimes have made it apparent that pure-breed financial institutions do not have a future. |
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| IFCI's two siblings, ICICI and IDBI, have now reinvented themselves as universal banks. IFCI has been left out of the party because its burden of non-performing assets was relatively large than that of the other two. |
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| Generating the resources needed to provision against them to the extent that a bank needs to do was simply out of the question. The previous government had decided that the best way out for IFCI was to merge it with a relatively healthy commercial bank; Punjab National Bank was, at one time, deemed to be the appropriate choice. |
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| Before this could go through, the UPA government took office. It perhaps felt that the development finance model was not entirely obsolete and could be revived with some restructuring. |
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| It thought that IDBI was the best recipient for IFCI's assets. But since it's far from clear that IDBI is eager to take over IFCI's assets, the latter's future remains uncertain. It has become a hot potato being tossed between two different perceptions of an ideal financial system. |
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| There is, however, a third option, which is by far the most sensible. IFCI must be wound up. The justification for this drastic course of action comes from two factors. |
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| One, the lending model which IFCI and its fellow institutions followed before they became banks was based on the fact that an industrial licence issued by the government of India was a ticket to prosperity. Since the government licensed only so much capacity as could be expected to be sold, anybody who borrowed from these institutions to finance capital investments effectively ran no business risk at all. When licensing ended and a whole host of projects had to be evaluated, the model simply could not pick out the one most likely to succeed. Of course, inadequate risk appraisal was compounded by malfeasance, but the essential obsolescence of the model in a delicensed environment was undeniable. |
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| Without a fundamental restructuring like the ones its compatriots have been through, there is no justification for keeping IFCI afloat, or even saddling an otherwise healthy and viable one with its portfolio of bad debts. |
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| The second reason to wind up IFCI is that its portfolio has actually improved because of the fairly persistent industrial recovery in recent quarters. |
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| Now is the time to unload these assets through an asset reconstruction company or any suitable mechanism and realise maximum value for the shareholder. |
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| Some of the assets will probably be picked up by the same banks that governments have been attempting to merge IFCI with. But this time they may do so out of choice, not compulsion. |
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| The others will be picked up by people who believe that they can extract better value from them, maybe even the owners and promoters. The only hindrance is the staff, but given the positive experience of banks with voluntary retirement, this can surely be resolved at a reasonable price. More meetings to decide on IFCI's future are unnecessary. Bold decisions are. |
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