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Responsibility must include powers and discretion

P. R. Brahmananda

THE travails of the public financial sector are slowly coming to surface. The UTI case is the beginning of the exposure of the public to the long-accumulating ills of the operations of the Indian public financial sector system. On the outside face, it ap pears that their ability to provide assured and high returns on their asset holdings to the holders of their liabilities is getting impaired slowly and steadily.

The UTI, for instance, was brought into being in order to help a large portion of the middle-classes who could not have borne the transaction costs of investments and redemptions of their small financial resources. The UTI was a mobiliser of their funds and was expected to carefully invest these funds in a manner to yield steady, but relatively higher returns than what bank deposits would have yielded.

At the same time, it was believed that by distributing a portion of their assets through the UTI on select equity and debt instruments through the stock market, the small investors could be enabled to reap some more gains than otherwise. But the proporti on of the portfolio of the UTI assets on stock market instruments, subject to fluctuations in stock values and in yields had to be relatively low.

Government securities were deemed to be the ideal fields for investments of the UTI assets. The authorities thought the market for government securities could be, thus, widened and indirectly made to encompass individuals. However, investments in private shares and debentures were not ruled out.

Over the years, the above objective, laudable in itself, got mixed up with the authorities' desire to use the UTI as an instrument to encourage private equity investments and to boost the stock market values. This goal brought Krishnamachari, and the the n chief government officials to considerable embarrassment.

It was the desire to help alleged investments in Uttar Pradesh through the medium of Mr Mundhra that ultimately landed the then leading financial institutions into a crisis. The objective was laudable but the then Finance Minister thought the stock value s could be made to go up by using judiciously the funds of LIC. A booming stock market that opened possibilities for equity investments in backward areas such as Uttar Pradesh was, probably, the proximate goal sought after.

Currently, we are learning about private placements in private equity ventures. The concept of private placement has a measure of opaqueness about it. Apart from this, when the authorities seek to influence market values, they directly or indirectly indu lge in policy measures that may conflict with other social objectives. It is well-known that persistence in low

interest rates with frequent announcements of rate reductions tends to temporarily move up sagging stock and share values.

Lay politicians may think a booming stock market for such reasons is a healthy sign. But, economists are worried that such policies and stances tend to create artificial ups and downs in the stock market which often open up possibilities for rigging and making money through such artificial fluctuations. There is also a concern that the opening of the stock market to foreign financial investors is not an unmixed blessing.

The flows are so large in relation to the traded stocks that effects on the market values become too high, both in terms of upward and downward movements. This may lead to a situation where more equity and debt instruments pass on to the ownership of for eign entities. The latter may not be the goal of the authorities, but clearly, such effects may not be avoided.

Further, there is some feeling that a portion of the foreign funds which flow in and out are primarily domestically based, and such inflows and outflows may involve large gains to the parties concerned.

Why should organisations such as the UTI be used as

instruments directly or indirectly for moving stock market values in a direction and at a pace which is not natural? It is well-known that such efforts invariably fail, and the underlying drift cannot be changed, except in the short periods.

To what extent are the operations of the Indian public

financial sector governed by transparent and clear motives? Let us say even of maximisation of returns on asset portfolios. To what extent is the above goal tampered or disturbed by direct and indirect interventions through announcements by the authoriti es concerned? Is there real autonomy for the top executives in these organisations?

Public sector banks have been, over a long period, subjected to tampering in their asset dispositions through direct and indirect political interventions. The accumulation of non-performing assets is the result of the process, though overtly, social bank ing was the goal. The RBI has tried to rectify the situation and to heal the wounds inflicted on the banking sector. Now that the banking sector is getting somewhat immunised from the recurrence of past types of interferences and goals are being transpar ently placed, the public financial sectors, the DFIs -- including the UTI -- are getting into more of a crisis. But, whereas in regard to banks, the RBI could perform some damage limitation and healing exercises, there is no such organisation for the oth er financial sectors which are in the public sphere.

There is, therefore, a vacuum. This cannot be filled by SEBI which can only monitor future asset dispositions and that too, for the UTI, if it comes under its control. What is needed is an RBI-type organisation, specifically created to look into the prob lems of restoration to financial health of such large institutions as IFCI, IDBI, and the UTI.

Why not appoint a committee like the Narasimham Committee to look into the travails of these sectors? Probably, the RBI may be directed to create a separate wing with suitable office machinery and executives to look into the specific problems of the abov e units.

Neither the CBI nor the joint Parliamentary Committees

can by themselves provide an enduring solution to the problem. Ad hoc approaches are of no avail. They will again create future problems and would lack co-ordination.

Politics has been sought to be taken out of the banks. It must be now taken out of all financial organisations. These

have huge resources and it is not good that they should accumulate non-performing assets or non-appropriate return yielding assets. In most of them, the public have a stake also through contributions to their deposits. The general public has invested in them through the governments and their agencies.

The Finance Minister has effectively stated that by

his removal, the problems of these organisations cannot be solved. There is, probably, a great element of truth in this observation. Probably, and this is a hunch which many people have, that corresponding to the height of his position, he does not enjoy the power to manage all the responsibilities according to his own lights of what he thinks is public interest.

One hopes that the Prime Minister and the powers surrounding him will give the Finance Minister full powers as well as responsibilities. Dr Manmohan Singh as Finance Minister could achieve so much primarily because the then Prime Minister gave him full a uthority and trust. There is a lesson in this even for the current and equally distinguished Prime Minister.

There is another alternative. Dr Manmohan Singh once

stated regarding the RBI's autonomy, that autonomy is not given, but has to be taken.