Bailouts are no answer

Financial institutional reform is

Either the finance minister is completely out of touch or the financial institutions are lying. Yashwant Sinha has told the media that no FI other than IFCI — not even the Industrial Development Bank of India — has sought a bailout package. Yet, on the same day that The Financial Express carried Sinha’s claim, we also front-paged a report that details three options being considered by the government in response to IDBI’s bailout demand, variously estimated at Rs 3,000 to Rs 5,500 crore. That is not all. This demand follows the decision to provide a Rs 1,800 crore bailout package to Indian Bank and United Commercial Bank. Further, the G P Gupta committee recommendation to provide Rs 3,600 crore to recapitalise the State Finance Corporation has been pending for nearly a year. Even the Unit Trust of India is not entirely out of the woods — the recent stock market rally is not nearly enough for anybody to assert that UTI will not seek help from the exchequer. So, what is the point to Mr Sinha’s claims?

The problem of bankrupt FIs is not about to disappear by denying it. Mr Sinha probably believes that doing so will help block discussion on the reasons for their bankruptcy, arising from a combination of political interference, rampant corruption and complete lack of accountability. By avoiding a discussion until a bailout is inevitable, the government ensures that it is not forced to make any changes that would halt the politicians’ ability to dictate lending. In fact, behest lending and political appointments at FIs continue unchecked even as their bailout proposals are negotiated. Clearly, this cannot go on for much longer. Although, one agrees that these institutions are generally too big to be allowed to fail, the government cannot be allowed to squander taxpayers’ money on endless bailouts either. The money spent on bailing out mismanaged FIs and safeguarding their depositors and investors is invariably at the cost of other social welfare schemes which benefit the entire population. The government will have to draw up a programme to shrink and merge some of these institutions, distance itself by privatising them and giving them more autonomy, grant them the freedom to deal firmly with defaulters, and also tighten financial supervision. Otherwise, bankruptcies in the financial sector could snowball into a political problem that bailouts will not resolve.