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FROM PURELY A technical standpoint, the Centre's proposal to confer, through legislative action, a banking licence on the Industrial Development Bank of India (IDBI) is perfectly valid. After all, the Reserve Bank of India is a creation of the legislature albeit of the pre-Independence India, and as such whatever the RBI can do, Parliament is well entitled to do so. But from a broader perspective of the conduct of monetary policy, the licence proposal is retrograde. It is never a good policy to have dual authority for something as vital to the economy as commercial banking. The country has had a particularly bad experience of dual authority in the securities market, with the Unit Trust of India consistently resisting regulatory oversight by the Securities and Exchange Board of India citing its status as a special creation of Parliament, in the run up to the crises on US 64 and assured returns schemes under its Monthly Income Plans. Equally, the problem confronting the cooperative banking sector, where the dual control of the State governments and the RBI has stymied much of the latter's regulatory initiatives in specific problem banks, is a pointer to the dangers ahead.

The decision to take the Parliamentary route for conferring the `bank' status to the IDBI appears to have been prompted by the recommendation of the Standing Committee on Finance of Parliament. But therein lies the seeds of trouble for the institution. It is all very well for the MPs to say that the IDBI's term lending character should not be compromised. But in the absence of viable sources of long-term capital, as in the pre-liberalisation era, the emphasis on term lending within the framework of conventional banking is an invitation for serious asset-liability mismatch. True, the Government has in the same breath also spoken of leaving the scope of term lending to the commercial judgment of the bank management. But that is only going to make matters worse. The management would be exposed to all manner of insidious pressure to bankroll pet projects of politicians in the name of doing justice to its developmental role while simultaneously sustaining the fiction of the autonomous character of the IDBI. Once again politics has won the day.

The Government does not want to be seen as being indifferent to the concerns of Parliamentarians, but at the same time the role envisaged is clearly incompatible with the essential characteristics of a commercial bank. Hence, the compromise that attempts to of bridge the impossible divide of development banking with the resources of a commercial bank. This is unfortunate. It is difficult enough for the IDBI to overcome its current ills, which are due to a combination of politically directed lending and poor commercial judgement. Imposing the kind of riders that the Government is now contemplating is not making things any easier for the institution to turn things around.

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