Letters: Necessary, not sufficient

While the editorial, “Financing a recovery” (April 26) correctly raises the concerns involved in setting up of wholesale and long-term finance (WLTF) banks and rightly suggests the widening and deepening of bond markets for financing of infrastructure and other long gestation assets, the core issue that needs attention is that commercial banks (CB), including State Bank, have continuously failed in developing the capabilities and a culture of safe financing of the infra projects, leading to current almost insurmountable crisis of non-performing assets. One misses the expertise developed by previous term lending institutions in this context.

The promoters over years have taken advantage of inferior project appraisal skills of CBs by withholding back whatever little skin in the game they had after habitually inflating capital costs and continuously siphoning off funds when the going was good mainly due to poor monitoring/oversight by CBs.

The system of offering personal guarantees, not allowing dividend declaration under certain conditions, conversion of debt into equity and right to recompense in rehabilitated projects was simply given the go-by by the CBs, many of them lacking the historical perspective of the evolution of these well established practices. The policy and completion risks involved in long gestation projects were almost incomprehensible to CBs who for decades always boarded the projects last with working capital funds. Even sector/industry specific desks were not set up (one is not sure if this is a normal practice even today).

WLTF banks, certainly not ideal, but shall be much better alternative to CBs for future infra financing if past toxic assets are not transferred to these.

Private sector promoters must bear the commercial rates of interests whatever monetary authorities dictate. If it is okay for a micro loan borrower to pay 24 per cent per annum, any thing below should be alright for infra projects if it market driven. Thus concerns for subsiding these new entities as indicated can be taken care of.

More importantly, WLTF banks can help to save the commercial banks from future infra financings which they are not competent to handle. Authorities must keep in mind that CBs will keep on avoiding long-term financing on one pretext or another, thus slowing the economy down which the country can ill afford.

Y P Issar | Karnal

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