Sucheta Dalal :Make way for a mega bailout (12 August 2002)
Sucheta Dalal

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Make way for a mega bailout (12 August 2002)  

“You might say they’ve left Pluto and reached Mars. This sounds like very central change, and not tinkering at the margins, but it is still a long ways to Earth.”

— Nicholas Eberstadt, of the American Enterprise Institute, on the reintroduction of cash into the North Korean economy.

This is exactly what springs to mind when one reads reports about government having ‘indicated’ that it will ‘firmly support all ailing public finance institutions’ such as UTI,IDBI and IFCI through huge bailout packages. A rough calculation suggests that the price of such a bailout would be in the region of a whopping Rs 25,000 crore or so.

Even if one assumes the bailout will be in the form of repayable bonds that will buy the institutions some time to improve their finances, it is indeed a stupendous price to be paid for the large scale ‘loot’ and collusion that goes on in our financial institutions. Hopefully, when the cabinet clears such a large bailout, they will be conscious that it comes at a time when large parts of the country are reeling from a bad drought and struggling for basics such as food and water. If money is still to be showered on badly-run institutions then the government should at least ensure that it is the last time that these institutions can dump their problems on the national exchequer. Also, the payout has to be accompanied by comprehensive criminal action against all those who were responsible for losses at UTI and IFCI and a move to disgorge their ill-gotten wealth. It cannot be limited to the minor monetary penalties usually recommended by their internal vigilance departments.

When Parliament hardly functioned in the current session, our MPs still found time to give the Joint Parliamentary Committee (JPC) investigating Scam 2000 a fourth extension. This means that while the finance minister writes a cheque to commit hefty chunks of tax-payers money to failed institutions, the equally important task of nailing the guilty and punishing them will continue to await the pleasure and convenience of the JPC.

As of now, we scarcely know anything about how the mega-bailout will be structured. All we know is that the Group of Ministers (GoM) after a quick meeting have decided to stand by the liabilities of the three institutions instead of trying to pass them on to other profitable institutions. This decision itself marks a departure from the Finance Ministry’s recent attitude where it rejected all bailout requests until they were impossible to ignore. It then agreed to a part bailout which was invariably too little and too late. Since all three institutions are set up under separate acts of parliament and their borrowings carry an implicit government guarantee, it is difficult for government to distance itself from their financial mess.

The positive aspect of the GoM’s decision is that it at least indicates an intention to tackle the problems of these institutions comprehensively, instead of given them driblets of support without altering their structure or fixing their basic malady. Jaswant Singh’s description of the bad loans to industrialists as ‘loot’ leads us to hope that he is serious about staunching the perpetual flow of funds from the exchequer to unscrupulous officials and industrialists.

Newspaper reports suggest the government is finally set to repeal the UTI and IDBI Acts and make way for a comprehensive restructuring of both organisations. Hopefully this will end political interference in top appointments, which is at the root of most bad lending decisions.

We also need more accountability on the part of senior officials including all those who handle the project appraisal and disbursal portfolios. As for the specifics, each institution has already submitted a comprehensive future plan. IDBI wants to turn into a universal bank and is seeking a merger with a public sector bank. UTI too has submitted an ambitious and plausible plan with four new sponsors and a generous dole from government and includes the induction of a strategic partner in the second phase. The GoM needs to address the UTI problem most urgently. Unless government finalises the bailout package and hands it some money upfront, UTI will remain a bleeding sore on the face of the capital market. Unless UTI stops being a perpetual seller in the market, its own sales will depress the index and keep its Net Asset Values (NAV) down.

Finally, we have IFCI which is in dire need of frequent funds infusion to meet its obligations. The next one is a $100 million repayment coming up next week. This time too, the government is likely to clear a quick repayment by guaranteeing a loan from domestic banks to IFCI. This is for fear that a default may affect the credit ratings of other institutions as well. But IFCI as a development financial institution has no future and the government must stop throwing good taxpayers money after bad. Instead of nursing IFCI back to health, as the GoM reportedly plans to do, they should find a way to wind it up, sell its assets and at best convert it into an asset reconstruction company with a majority holding by a powerful strategic partner. The big bailout proposed by the GoM is a bold and potentially controversial move, so government must ensure that it does not merely set the stage for further ‘loot’ of taxpayer’s money

-- Sucheta Dalal