However, these solutions are tantamount to executing the messenger for bearing unwanted news. In actual fact, DBks had been placed in political environments, not of their choice or making, which imposed severe restrictions on their operations. Foremost among these have been pressures to direct credit to politically favoured projects. The conventional wisdom motivating these actions is that a handful ofpoliticians and bureaucrats are more adept at assessing the investment needs of the economy than a free, unfettered capital market. Politicians and bureaucrats favour financial institutions, such as DBks as it is easy to extract seigniorage, whereas free, independent-minded securities markets are impervious to their influences.

DBks have also been handicapped by the imposition of officially mandated interest rate controls. Thus, there are upper bounds or limits on the interest rates that these institutions may charge on their investments. Adverse selection characterises their investment portfolios. On the other hand, DBks may not have access to funds at concessionary rates, with adverse effects on their cost of capital. These controls impose undue pressures on both sides of their balance sheets, thus affecting the very viability of DBks.

Studies conducted by the World Bank on the performances of DBks share certain common themes. First, Dbks should be liberated from the arbitrary imposition of directedcredit. Second, officially mandated interest rate controls should be eliminated so that DBks can operate in a market-driven interest rate environment. Finally, DBks should be permitted to diversify their activities into other related areas, such as leasing, investment banking activities, and portfolio management.

One of the suggestions being floated is that universal banks (UBks) are in general superior substitutes for DBks. There are several points to consider if UBks are in the Germanic mould. In this form, UBks are suppliers of long- term, short-term, as well as equity capital to the corporate sector. UBk directors serve on the boards of several corporations leading to a close network bound together by interlocking directorships. This arrangement raises the serious issue of objective corporate governance by UBks. These institutions are no longer free to perform their function of `delegated monitoring' effectively. Analogous organisational structures (in spirit if not in form) are seen in the Keiretsus ofJapan and the Chaebols of Korea.

The financial institutions at the nucleus of these organisations have not prevented adverse selection resulting in excessive and inefficient corporate investments to which the current financial problems of these two nations have been attributed in part. If they have not been part of the solution, clearly these UBks have been implicitly part of the problem.

Financial institutions, such as DBks or UBks (it is immaterial what we call them), given their expertise in evaluating complex projects and their potential for tapping diverse sources of capital, have a place in the financial sector of growth-oriented developing nations. However, the following caveat needs to be emphasised. These institutions need to operate within the ambit of, and hence subject to the discipline imposed by, a capital market. There is no place for an exclusive niche which segments these institutions from the rest of the financial market place. Our financial institutions would intermediate in thesecapital markets to function as delegated monitors of debt capital and effective overseers of equity capital. Their arms' length relationship with their corporate clients should ensure the observance of prudent corporate governance.

An issue raised frequently in discussion fora is whether India can rely on securities markets for its resource needs. More so than in many other developing nations, India has the institutional infrastructure to develop its securities markets. The necessary conditions for productive securities markets are;