The Hindu : Business : IDFC at the crossroads

Online edition of India's National Newspaper
Monday, Apr 05, 2004

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Business

IDFC at the crossroads

For an institution that was supposed to "to lead private capital to commercially viable infrastructure projects" in India, the achievements are not so encouraging.

THE MOVE to vest Infrastructure Development Finance Company (IDFC), a dedicated infrastructure finance company, with State Bank of India might have been shelved but the larger questions raised in the wake of the controversial move remain. In many ways, not only the future of one institution but of the provision of infrastructure finance itself is at stake.

On December 13, 1997, IDFC was inaugurated in Chennai with an initial equity capital of Rs. 1,000 crores and a subordinated debt of Rs. 650 crores from the Central Government and the Reserve Bank of India, constituting a total capital base of Rs. 1,650 crores. Now, all of a sudden its very existence of IDFC as an independent, autonomous institution is in question. Its top man, Nasser Munjee, along with six other key officials, resigned in protest against the Government's move. Even while efforts were on to find a solution to the crisis — a board meeting has been fixed for April 20 — Mr. Munjee's resignation has been accepted by IDFC 's Chairman, Deepak Parekh. The April 20 meeting was, inter alia, expected to discuss the resignation issue. All the other key personnel of IDFC who had resigned have been asked to stay on.

Sizable Govt. stake

IDFC was formed to meet the perceived inadequacy of the mechanisms then in place for infrastructure financing. Further, while setting up this institution, the Government also wanted to switch over from the role of a promoter of projects to that of a prudent regulator. Although, on paper, IDFC is said to be a private initiative, it is promoted mainly by the Government and government-owned financial institutions. While the Government and government-owned institutions have invested Rs. 600 crores as equity, other foreign financial institutions including the Asian Development Bank, International Finance Corporation, Government of Singapore Investment Corporation and Commonwealth Development Corporation have invested Rs. 400 crores in it. Many have cited IDFC's lacklustre performance as the reason for the Government's decision to bring it under the control of SBI or some other government owned institution. From its latest annual report (of 2002-03) it is seen that its gross approvals are at Rs. 12,460 crores and sanctions at Rs. 4,174 crores. These numbers have to be seen in the light of the very large expectations raised from the new institution. However, Mr. Parekh in the annual report has said, "These are significant numbers for an institution in its first five years of operations". An even bigger question: how far has IDFC gone in fulfilling its mission?

Lacklustre record

For an institution that was supposed to "to lead private capital to commercially viable infrastructure projects" in India, the achievements are not so encouraging. Now a few comparisons between 1997 and 2002. ICICI, then a development finance institution, sanctioned an aggregate amount of Rs. 1,90,000 crores and disbursed Rs. 1,20,000 crores. (From 2002-03, ICICI merged with ICICI Bank). In the case of IDBI, from April 1997 to March 2003, sanctions totalled Rs. 1,00,810 crores and disbursements Rs. 79,454 crores. On a cumulative basis, by September 2003, IDFC's sanctions were at Rs. 15,277 crores and disbursements a modest Rs. 5,243 crores.

IDFC has also not been successful in ushering in (along with others) a long-term domestic debt market as envisaged at the time of inception. "The development of domestic debt markets is essential not only for monetary policy in general by creating market determined yield curves across the maturity spectrum but for the financing of long gestation infrastructure projects....only the development of a vibrant and deep domestic debt market, characterised by diverse participants across market segments and instruments, would provide the magnitude of resources required for instrastructure......IDFC's resource strategy would clearly be linked to the development of the long term debt market, Mr. Parekh wrote in its first annual report.

Government equally to blame

The Government too failed to carve out a strategic plan for a contemporary institution like IDFC. At its inception, key positions in IDFC were filled by officials of the Industrial Development Bank of India, who brought with them a work culture that befits a DFI. Whatever vision Mr. Munjee had for private financing of infrastructure was possibly cramped by the organisation's culture.

A protege of Mr. Parekh, he came to IDFC from Housing Development Finance Corporation (HDFC) where Mr. Munjee played many key roles and is remembered by others for his warmth and vision. What went wrong with IDFC in the six years since its inception remains a mystery. Many feel that this marks the failure, not of IDFC, but of the Government, which was unclear about what it wanted from IDFC. The contribution of a developmental financial institution would have to be viewed differently from that of a commercial bank. When P. Chidambaram conceived the idea of an institution like IDFC in 1997, it filled a vacuum in the market.

Earlier, under the five-year plans, the Government had done most of the investment. And by no stretch of imagination can the Government abandon its pivotal role in infrastructure areas. It would also be interesting to ask what the future role of IDFC will be, whether it is merged with the SBI or any other government controlled organisation. The big questions are whether IDFC will be able to push forward — with a much greater vigour perhaps — its catalytic role and whether it will be able to influence the policy and the regulatory environment under its new hat, which is too bureaucratic to permit such a role.

Interestingly even in its relatively autonomous state, IFDC has faced certain constraints. Mr. Munjee identified these in an article entitled. "IDFC's catalytic role", which he wrote for The Hindu Survey of Indian Industry 2004. IDFC is exclusively focused on infrastructure sectors. Hence, unlike other players in infrastructure financing which have options to lend to diverse sectors, the scope for the company to diversify its risks is limited. This constraint becomes more acute in times of shortage of bankable infrastructure projects. According to him, the tradeoff between unfettered expansion of loan portfolio and maintaining asset quality is often not well understood.

Given the relatively small size of its balance sheet, and the lumpiness of infrastructure projects, the company is much more vulnerable to deterioration in asset quality than other lending institutions. Will IDFC be able to generate private funding for infrastructure under the still fuzzy reorganised structure proposed for it? The answers are not clear. No project finance company can survive without cheap funds and concessions. Now, a performance appraisal has been done by its owner, the Government. However, diluting the pivotal role of IDFC and bureaucratic meddling by the Finance Ministry in developmental finance institutions will contribute to the further deterioration in the professional functioning of such institutions.

In its latest annual report, Mr. Parekh quoted the German playwright Bertolt Brecht: "It may be a mistake to mix different wines, but old and new wisdom mix admirably. Market observers can only hope that this adage holds true for IDFC in its new avatar".

Oommen A. Ninan

in Mumbai

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