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Bail-out bane

A POINT SIDE-STEPPED by New Delhi in the process of bailing out the UTI, IFCI and Madhavpura Bank is the absence of any guarantee that the coming years will not see a repeat. In the last few years, the Budget was used to route the recap funds to hold up the balance-sheets of Dena Bank, Indian Bank and a few others and these same are again pleading for fresh infusions.

Two committees on rural credit recently argued in favour of writing off the losses of the co-operative credit system estimated variously by independent bodies at around Rs 6,000 crore. There is no clause binding the recipients of largesse from being indi scriminate in the future, implying that New Delhi and the RBI will always be on hand to avert any financial entity from closing shop. Is it also fair for banks to cut deposit rates and lend funds cheap to siblings to avert a financial crisis?

Ever-greening seems to have become something of a bad habit. Instead of quarantining the sick, the Finance Ministry and the RBI are roping in the healthy, thereby endangering the entire system. Officially there is no financial crisis, with money managers taking pride in the fact that the financial system is still holding despite the drowning of the UTI and others. For now, banks and investment entities such as LIC have surplus funds on hand as the pace of economic growth is not demanding. Low growth cou ld impact revenue inflows which, in turn, may find the government scrounging for funds to pay back debt leading to a domestic crisis. Like it or not, bankers and corporates are hoping for a good monsoon to get the economy going. The age-old logic of a go od crop enhancing rural purchasing power is being dusted out from the book-shelves even as that may not apply in these times. The latest report of the Expert Committee on Rural Credit submitted to Nabard admits that ``farming, as practised now, is not pr ofitable for most small farmers. Moreover, they cannot take recourse to supplementary non-farm activities, as they lack information and support including credit.'' Spelling out its concerns, the report finds that the rural credit institutions have not be en able to provide support to hi-tech, high-value farming; nor are the supportive systems such as research and marketing in place. Rural credit as of now is about touching targets set by the Finance Ministry and the RBI, and not building quality assets. Elsewhere, well-behaved corporates have virtually delinked themselves from the banking system by accessing cheaper money markets leaving the bankers to tend the weak accounts.

Admittedly, ten years-plus of financial sector reforms have little to show. In 1991, the economy pulled out of a financial crisis by opting for reforms. Now, that option does not engage the attention of New Delhi. Most, if not all, financial entities are government-owned, making the job of cross-funding quite easy. But a point is being reached where the public may lose confidence in government-run financial bodies. What then?