Not a great idea

With reference to “Back to term finance institutions” by T T Ram Mohan (April 18), the author has rightly said that long-term finance banks would mean turning the clock back. The country has moved much ahead during the two decades since their abolition. Banks have by now developed enough expertise in term finance and grant of project and working capital loans under the same roof is no more an enigma. And if there is some deficiency still the gap can be filled by imparting necessary training to a select set of banking personnel. But if the idea to recreate term lending bodies is to fill the gap in finance created by the inability of banks to lend on account of their being overladen by bad loans, the proposal is worse than the disease.

In this context it may be recalled that the history of term lending institutions has not been very inspiring either. The State Financial Corporations, the term lenders at the state level, are notorious for their non-performing loan portfolios. At the all-India level, the Industrial Development Bank of India (IDBI) created in 1964 as apex term lender did not initially have the problem of political interference as it was a wholly-owned subsidiary of the Reserve Bank of India (RBI). The RBI governor was its ex-officio chairman; it was insulated from the intervention of politicians, bureaucrats and interested groups. But 21 years later came Emergency. Politicians led by Sanjay Gandhi who were itching to get IDBI freed from RBI control succeeded and in February 1976 it was de-linked from RBI despite the latter’s strong resistance to the move and it came under the direct control of the Centre. The other development finance institutions were subordinated to it while control of state-level institutions was transferred to it from RBI. It thus virtually became a financial czar. But what happened to its chairmanship would indicate where the real power got vested in the process. Those who plead for revival of term lending institutions should ensure they do not become playthings of politicians in power in this manner.

R C Mody   New Delhi Letters can be mailed, faxed or e-mailed to: 

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