Wrong medicine

The Union government seems to be completely at sea about its plans for the financial sector. The most recent proposal is to merge the Infrastructure Development and Finance Company (IDFC) with the State Bank of India, and a reverse merger of the Industrial Development Bank of India with its subsidiary, IDBI Bank, with Industrial Investment Bank of India (IIBI) also being merged with this entity.

The ostensible reason for this flurry of activity is apparently to strengthen lending to infrastructure. It will be recalled that the Finance Minister had in his interim Budget speech, emphasised that IDBI would continue to perform its role in infrastructure finance.

If so, it's unclear how that objective will be helped by a merger with IDBI Bank, which is a hard-core retail financing institution.

But perhaps the objective is to lower IDBI's cost of funds by merging it with the bank. If so, where is the need to subsidise IDBI by providing it budgetary support, on the lines of the Long-Term Operations funds earlier provided by the Reserve Bank?

IDFC has often been criticised for not doing enough for the infrastructure sector, but it is debatable whether it was ever meant to function as just another development finance institution.

If its objective was to act as a catalyst for infrastructural growth through public-private partnerships, and through developing innovative financial structures, then it has done substantial work.

It is unclear how a merger with SBI will help "" surely if a merger is necessary, it should be with IDBI, given the government's intention to keep IDBI as the preferred lender to infrastructure. And if SBI needs IDFC's expertise, surely it can recruit the specialists needed.

Furthermore, while the government is rightly in favour of cleaning up the balance sheets of the term lending institutions and banks by spinning off bad debts to asset reconstruction companies, there seems to be tremendous resistance towards booking losses, making the whole exercise a cosmetic one.

Contrast the position taken by the Chinese authorities, which have successfully offloaded billions of dollars of bad loans to foreign investors.

Given these contradictions, it's obvious that the government has no blueprint for the financial sector, and the plans being considered are haphazard, piecemeal and entirely ad hoc.

Clearly, IDBI's future is of tremendous importance to the corporate sector, given its position as the chief lender and shareholder in India Inc, and it is hard to escape from the impression that the government's vacillating position reflects the shifting strength of competing lobbies.

The finance ministry needs to realise that there is no shortage of funding for the infrastructure sector. The problem lies in the viability of some of the infrastructure projects, the obvious example being power projects.

If a project is found viable, there is no reason why, in these days of excess liquidity, a bank will not lend to it. This is all the more so when securitisation and selling down of loans is slowly becoming an integral part of the market.

There is no need for a specialised agency for infrastructure lending. It follows, therefore, that the development finance institutions should be immediately converted into full-fledged banks.

And as far as mergers are concerned, the government should invite bids by parties interested, at a price they are willing to pay. Any other approach will amount to arm-twisting.