Banking on vision

Few will quarrel with the government8217;s decision to retain the development financing character of the Industrial Development Bank of Ind...

Few will quarrel with the government8217;s decision to retain the development financing character of the Industrial Development Bank of India, even as IDBI converts into a bank. Development financial institutions have played a vital and strategic role in industrial development in many industrial and industrialising economies.

There is a need for long-term finance so that funds are made available for long gestation projects. It is to fulfill this need that several long-term financial institutions were set up after Independence. If most of them slipped into the red and had to be bailed out by the exchequer, this was in large part due to political interference in the functioning of such institutions.

In trying to deal with this problem some have gone so far as to recommend the termination of the development financing aspect of the work of such institutions, converting them into banks focussed on short-term lending. The two are very different tasks and cannot and should not be performed by the same institution. Given the stage of industrial development at which the Indian economy is still at, and given the need to foster domestic enterprise and promote first generation entrepreneurship, there is a need for a development financing institution. Hence, the case for retaining the traditional role of IDBI is compelling.

However, there is a strong case for the transparent and efficient functioning of such an institution. Even if it is taken for granted that all projects funded by it may not be success stories, most of them should be and the institution should remain financially viable. Political interference and cronyism militate against such autonomous functioning of such institutions.

Even as the developmental character of such institutions is retained, professionalism in their functioning should be strengthened. An important first step is to choose the right leadership. There has been far too much political interference in the past in the appointment of the chairman and managing director of these institutions. The merits of the proposal to separate the chairman8217;s job from that of the managing director is not clear. It may allow the government to select a professionally competent MD, while appointing a politically acceptable chairman.

But this arrangement can work only if the MD is allowed to run the institution in a professional manner, with minimal interference from the chairman. Here the finance minister can play a constructive role by choosing the right person for the job.