Nowhere is it written that God exists, that we must be honest, that we must not lie; because the fact is that we are on a plane where there are only men. Dostoyevsky said, if God didn't exist, everything would be possible. That is the very starting point of existentialism.
Indeed, everything is permissible if God does not exist, and as a result man is forlorn, because neither within him nor without does he find anything to cling to.
These words by Jean-Paul Sartre may not be in currency in the corridors of the Industrial Finance Corporation of India and the Industrial Development Bank of India these days. But executives in both institutions would surely understand what Sartre is talking about. They are suffering from an acute existential dilemma.
Only, instead of God, they are pointing their fingers at the government and dreaming of a financial world without the government to cling to.
After lighting the funeral pyre for IFCI last week, the government on Tuesday announced the reincarnation of IDBI as the lead developmental finance institution! Only a few months earlier, Parliament passed the Bill to repeal the IDBI Act and paved a way for converting IDBI into a bank.
The reason for repositioning IDBI? The government wants to exploit its "expertise and experience in project appraisal, funding and coordination". What's more, Finance Minister Jaswant Singh has promised that the government would provide the "requisite support" to IDBI for this task.
The task is quite simple: making available "timely finance at reasonable rates". One can safely presume that the government plans to provide long-term cheap finance to IDBI to "support" project financing.
Ironically, both IFCI and IDBI lost their relevance after the government withdrew this "support" - the institutions cannot match market forces on their own. IFCI was allowed to die out and IDBI had to change its avatar because its "expertise and experience" have become dated; there is no role for it in today's Indian financial system. The third development finance institution -- ICICI -- has already changed itself into a bank.
So what made the government change its stance overnight? First, take a look at IFCI. Its accumulated loss in March 2003 was Rs 1,143.97 crore (Rs 11.44 billion). In fiscal year 2003, it posted a net loss of Rs 259.70 crore (Rs 2.6 billion). About 29 per cent of its loan assets, worth Rs 15,455 crore (Rs 154.55 billion), were sub-standard and doubtful and the net non-performing assets (NPAs) were Rs 4,559.68 crore (Rs 45.6 billion).
Over the last few years, IFCI's income from operations was less than the cost of borrowing. This essentially means that IFCI has been borrowing to meet its interest expenses. But that is not sustainable because its rating is non-investment grade.
IFCI crumbled under the burden of high borrowing costs and huge NPAs. Its cost of borrowing was much more than what it could earn on its assets. The problem could not be addressed even after restructuring a part of its debt.
So, IFCI started selling its assets. But the sale of assets and recovery of NPAs alone were not enough. The institution's capital-adequacy ratio in March 2003 was 0.47 per cent, against the stipulated 9 per cent. That meant it could not lend any more.
Over the years, panels have been set up to find solutions for IFCI's problems. The Dipankar Basu committee proposed an immediate infusion of Rs 400 crore (Rs 4 billion) by the government, through convertible 20-year bonds. It also recommended a fundamental restructuring of IFCI, moving away from project finance into short-term financing, fee-based services and corporate advisory services.
Subsequently, McKinsey proposed that IFCI should be divided into two companies, splitting its assets into good and bad. The company with good assets would focus on financing mid-size companies and initial public offering management, syndication, project finance, receivables financing, mergers and acquisitions and other fee-based activities. It also proposed that the bad assets should be taken care of by an asset reconstruction company.
The government is following McKinsey's recommendation by merging the "good" IFCI, which has a balance sheet worth about Rs 15,000 crore (Rs 150 billion), with Punjab National Bank and transferring the "bad" IFCI to an ARC. But no one knows how good the "good" IFCI is. Will it dent the asset quality of PNB post-merger? If that's the case, the shareholders of PNB will feel cheated.
The ideal solution could have been to liquidate IFCI and distribute its assets in various banks across the country. Instead of merging it with PNB, its assets could have been sold to State Bank, PNB, Bank of Baroda, Bank of India, Canara Bank and others. This would not have had an impact on the balance sheet of any one bank.
Of course, the government would have had to make budgetary provisions to take care of IFCI's liabilities that include funds parked in the institution by retail bond-holders and provident funds.
The merger of IFCI with PNB could mark the end of the existential dilemma for the oldest development finance organisation (and possibly trigger a fresh dilemma for PNB), but the Interim Budget announcement on IDBI will certainly make Samuel Beckett green with envy as even he could not have scripted a drama that was more absurd in its spirit.
IDBI has recently been allowed to function as a bank. Its interim chairman M Damodaran has taken the government mandate seriously and last week, he cut its minimum term lending rate (MTLR) by 225 basis points (one basis point is one-hundredth of a percentage point) - from 12.5 per cent to 10.25 per cent. The idea was to tell the world that IDBI is no longer a laggard and that it can match anybody in the lending arena.
Damodaran has also started de-briefing his colleagues to get out of the development bank cocoon and start commercial banking. IDBI, in the first place, reached this stage because of its lack of expertise in addressing changing market realities. Now it plans to recruit a skilled workforce, build the right technology platform, employ direct sales agents and establish a branch network.
Singh's announcement of repositioning IDBI as a lead development banking institution, which will work in close coordination with State Bank of India and Infrastructure Development Finance Corporation to lead long-term project financing, reiterates the suggestion of the Parliamentary standing committee on finance that scrutinised the IDBI Bill. The committee wanted IDBI to be converted into a bank but wanted it to stay away from the retail business.
The business model suggested by the committee as well as the finance minister is faulty. IDBI is being converted into a bank because the very model of a development financial institution has outlived its utility. If the government wants to support it by way of cheap financing, then why convert it into a bank at all? It could have been allowed to remain the same and exist on government largesse. There was no need to kill IFCI, either.
While only two panels looked into the health of IFCI, IDBI was treated by various doctors at different times. In 1997, former chairman S H Khan appointed Booz, Allen & Hamilton to chart out a recast course. Two years later, the next chairman, G P Gupta, appointed Mrityunjaya Athreya to take a close look at the institution.
After a gap of another two years, the Boston Consulting Group did yet another reality check. Last year, at least four consultants -- McKinsey, IBM, PricewaterhouseCoopers and Tata Consultancy Services -- made presentations to the IDBI board on its conversion into a bank.
Now, after the search for the new business model is over and IDBI is rearing to embrace its new role as a commercial bank, the government wants it to take a walk back into history and position itself as a leading DFI. Singh's interim Budget has not brought cheer for IDBI as its existential dilemma continues.
The finance minister can at least shorten the agony by making IDBI's interim chairman a regular CEO. Damodaran has been acting as interim head for over four months. It is time both he and the institution know how serious Singh is about his business.Powered by 
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