The Hindu Business Line : Understanding the IDFC imbroglio

IT WAS in 1997 that Infrastructure Development Finance Corporation (IDFC) was set up as a specialised financial intermediary to address the resource gap of the infrastructure sector. Its mandate was envisioned to lead private capital into commercially viable infrastructure projects. Besides, the institution was to play a strong advisory role to the Government and to the other participants.

IDFC's performance has, however, not been as spectacular as one would have wished. But, that apparently is more due to the scarcity of viable projects. Granted, IDFC has been cautious in its approach. It has been risk-averse, bitten by the experience of other finance institutions, which had ventured aggressively into financing infrastructural projects. But, while IDFC's imprint had been weak in respect of finance, it has been unmistakable in respect of its advisory services, such as advice rendered to the Naresh Chandra Committee on aviation. It has also played a principal role in other task forces that have brought forth the outline of infrastructural thinking on the part of Government. In particular, the Rakesh Mohan Committee was principally marked by the thinking initiated by IDFC. It has also devised a roadmap for power sector reforms. To its credit, it strongly resisted the pressure to join the financing for Dabhol Project — a caution richly vindicated by events.

The Press has been agog with excitement over the resignation of its Chief Executive, Mr Nasser Munjee, a many-splendoured finance professional, who had patiently built up the institution. The spark that ignited the crisis was apparently the reported attempt — since abandoned — to merge IDFC with SBI. The ostensible cause for the move was the alleged failure of IDFC to show progress. Its critics urged that it had been slow in disbursement and approval of projects. IDFC's defence was that caution was in order since other institutions in the field had gathered more NPAs as they disbursed more. It is a pity that a good institution got caught up in power-play of various kinds.

The Infrastructure Development Finance Corporation, as a dedicated entity devoted to infrastructure financing, was a well-intentioned institution. That it failed to meet the ambitious goals of its founder has to be traced more to the inherent difficulties of the infrastructure sector than to personal failings of its management. Critics have pointed out that the total balance-sheet size of IDFC is only Rs 400 crore at the latest reckoning. SBI with an infrastructure lending of more than Rs 20,000 crore has been far more aggressive. One question for consideration is whether an institution specifically dedicated to infrastructure financing is needed or not. The slow progress of infrastructure development has many causes, one of the most important being the lack of long-term finance at reasonable rates. The reason why South-East Asian countries made rapid progress in the 1970s and 1980s was because they were able to leverage their financial strength in respect of banks to invest in infrastructure. Indeed, they used the tools of "financial repression" — so to say, pre-empting the resources of banks to invest specified proportions in infrastructure at low rates of interest.

Be that as it may, the need for a specific dedicated vehicle for infrastructure funding had been felt for a long time. This was the reasoning behind the establishment of a Power Finance Corporation in the 1980s. Power projects were delayed because State governments and the private sector found it difficult to raise funds. When the proposal for a Power Finance Corporation was mooted by me in the 1980s as Power Secretary, I had to `package' it as primarily concentrating on financing repair and maintenance works of State electricity boards. There was reluctance to establish an institution specifically for power finance. The theory was that the IDBI itself could do the job. Fortunately, Power Finance Corporation finally took shape in the first year of Rajiv Gandhi regime when it was established as a dedicated source for funding power projects.

The Power Finance Corporation has grown over the years, developed domain expertise and knowledge and has become a tool for monitoring — and indeed initiating — power sector reforms in the country. Latest reports are that it has turned a reasonable profit. The pity is that the Power Finance Corporation is itself thinking of turning itself into a bank. Dedicated institutions in the infrastructure field should resist this temptation even as they resist merger into a bank.

A similar venture that had started in the 1980s was the Railway Finance Corporation. I recall an agitated Madhava Rao Sciendia coming to the Finance Minister, Mr V. P. Singh's room protesting the cuts in Plan allocation for his Ministry, which was then Railways. He was quick to grasp the suggestion for an alternative — the Indian Railway Finance Corporation (IRFC) — which was to lease wagons and other equipment to Railways and fund itself by raising resources from the market. This suggestion was made based on the practices in vogue for a long time in the US, where Railways raised finance from banks for leasing wagons and locomotives. It must be said to the credit of Madhava Rao Scindia that he acted expeditiously to set up the Indian Railways Finance Corporation in record time. IRFC raised tax-free bonds at the time and helped to bridge the resource gap, which the Railways had. As a result, it kept up the pace of investment over time in the Indian Railways.

It is inevitable that IDFC has to utilise such specialised vehicles as Power Finance Corporation and IRFC for funding infrastructure in the related areas. It cannot claim to have domain knowledge in every sector. It has a particularly difficult task ahead as it is reportedly the chosen vehicle together with the SBI, the ICICI and others to lead-manage the mega infrastructure funds of Rs 50,000 crore and odd announced by Mr Jaswant Singh in his mini-mega Budget this year. A specialised institution has to be put in charge of such large funds. The SBI, however competent in banking per se, cannot by itself handle such large infrastructural financing as its major objective. The SBI may only be part-manager of this new initiative. But, we need a lead-manager for Mr Jaswant Singh's proposal. Who else can take the place but the IDFC? Whatever be its alleged deficiencies, they can be corrected. We cannot afford to throw the baby out with the bath water.

In all this controversy, one hears arguments about the proposed IPO — to raise funds for IDFC. It is argued that IDFC can raise an IPO better if it is part of an organisation — albeit a subsidiary — with a larger balance-sheet. It is important in this context not to miss the woods for the trees. Let us recall that at a particular stage of India's development, there was considerable thought given to the formation of an India Development Bank on the lines of Asian Development Bank to handle the resource allocation function of the Planning Commission and the Finance Ministry.

The idea was that a professionally managed finance institution could appraise projects from various States and allocate funds based on consumer criteria. It could also draw funds from international sources. IDFC has, in particular, been able to enlist the collaboration of international financial sources. It would be a pity if because of being merged with the SBI, it loses these international sources of support.

That IDFC needs long-term resources at reasonable rates of interest is a different question. Whether this can be through an IPO — equity flotation and or through contribution from the fisc itself — is an important subject for separate consideration. Whether or not IDFC becomes a success depends on its access to such cheap long-term funds. This problem will not be solved through a merger with SBI, however attractive the proposal may sound from other aspects.

It must be admitted that the IDFC is intended to perform the same role in infrastructure financing as IDBI was in industrial financing. Mr Jaswant Singh has rightly stressed the need for a lead development finance institution in his budget speech.

"Since the restructured IDBI has the requisite expertise, also experience in project appraisal, funding and coordination, it has been decided to designate IDBI as the lead development finance institution. The Government will provide necessary support to IDBI for this task. IDBI's effort will be complemented by other premier institutions and banks, such as the IDFC and SBI".

As Mr Jaswant Singh says, IDFC is an important instrumentality in the country's onward march. It is critical that it should not be absorbed in the interstices of a commercial bank, however well-managed it is.

It should preserve its separate identity until it finishes its task of creating a world-class infrastructure for India. IDFC is a critical tool for development of India. The proposal has been aborted for the time being. It is hoped that IDFC will survive as a stand-alone magnificent instrument for modernisation of India — with the cooperation of SBI, but not within it.

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