Time to rethink

The government's move to merge the Infrastructure Development Finance Corporation (IDFC) with the State Bank of India (SBI) is an ill-conceived one, and should be dropped without further ado.

Plenty of damage has already been caused to the institution by the government's whispering campaign on the merger. IDFC's top management has registered its protest by resigning en masse, and there can be little doubt about the unease further down the organisation, not to speak of the thoughts of the non-government shareholders who own nearly half of IDFC's share capital.

If a merger gets rammed through in these circumstances, it is not even clear what State Bank of India will get for all the pain, because IDFC's main value is the expertise it has built up in the field of infrastructure finance, and that expertise has just walked out of the front door in protest. After all, SBI is no babe in the financial wood, and if it wants to build sectoral expertise regarding infrastructure, it can do so without swallowing up an unhappy IDFC.

As for IDFC itself, it is more useful for the Indian economy as an independent player, since it adds variety and depth to the financial sector; as an in-house arm of SBI, it will be both less effective and less attractive.

The manner in which the issue has been handled by the government is regrettable. Clearly, IDFC's top management's views have been ignored. And so, it seems, have those of the other shareholders. If the government has a problem with the way IDFC has been functioning, it had several options before it, chief among them being to first thrash out the problem.

To take one instance, IDFC has been criticised for not sufficiently funding infrastructure, but instead investing its substantial capital in treasury operations. The IDFC management has defended itself by pointing out that its sanctions and disbursements have risen sharply in recent years, and most of the institution's income now comes from operations.

The essential point, however, is that in an area where we have the corpses of bodies like the government-controlled IFCI, IDFC has shown the way by building subject expertise in its chosen field, using this to play the catalyst role by making infrastructure projects bankable, and on top of this ensuring an enviable track record on its own funding decisions, as reflected in its very low ratio of non-performing assets while its portfolio has been expanding rapidly.

All this should have earned it the government's appreciation and the assurance of continued support. After all, it should be borne in mind that the answer to India's infrastructure problems do not come from the lack of funding so much as from the failure to cobble together bankable projects and from the shortage of institutions with long-term money which they want to deploy.

It is here that IDFC has been playing a role by being dedicated to finding solutions that facilitate infrastructure financing, as an investment bank for infrastructure. Its role is to conceive a project, make it bankable and take it to market. Towards that end, IDFC has done substantial work, including initiating public-private partnerships.