A Provident Move

In the short run, the issuers of securitised paper also stand to benefit from the provident funds' entry. The growth of the rated securitised paper, which provides an additional source of funding for the originator besides resulting in efficient use of capital and greater cycling of funds in the economy, has been stunted because of lack of long-term investors. This has kept other short-term investors away because of the lack of any exit routes. The entry of provident funds into rated instruments together with a parallel entry of well capitalised players like the National Housing Bank as an issuer of mortgage-backed securities, should see this segment boom.

 

In the long run it is the infrastructure projects which will gain. In developed countries, such contractual savings institutions are among the primary investors in such projects; their long-term liability profile makes infrastructure bonds of upto 20 years ideally matched assets. Besides, once a commercial infrastructure project is operational, the risks are minimal as toll roads, airports and train tracks provide stable revenues, uninterrupted by the business cycles that affect a majority of other industries. Indeed, the expert group on commercialisation of infrastructure projects set up as part of the Rakesh Mohan committee recommended that one of the main reforms necessary for funding infrastructure was to reduce the pre-emption of funds from the contractual savings institutions like provident funds.

Naturally, more freedom will mean that the persons who manage a corpus of about Rs 60,000 crore will have to acquire more skills in managing investments; skills that ensure higher returns without taking any high risks. Here the finance ministry's move to turn the job of managing this corpus to professional fund managers is welcome. The government, however, has to ensure that there are ways of closely monitoring the use of these funds in the hands of professional fund managers. The experience of the mutual fund industry in India has shown that professional fund managers are not entirely to be trusted in their exercising of objectivity. Besides, episodes like that of Robert Maxwell, where the late owner of the UK's Daily Mirror group used his employees' provident funds to prop up other businesses, show that more freedom in investment policies also leaves more scope for manipulation of these funds. These are dangers that the government has to safeguard against.