Term Lending Institutions or Universal Banks?

There has been and continues to be a failure for a long term market for funds to develop in India. In this context, Dr. Rangarajan’s suggestion (The key agenda must be to accelerate growth, The Hindu, 29^th May 2019) to revive the setting up of separate long-term financial institutions, partly funded by government, on the face of it, seems a plausible solution.

However, considering that financial intermediaries are highly leveraged entities who function on thin operating margins and are able to attain viability through economies of scope, whereby they offer numerous varied services, pure term lending institutions would be incomplete organisations and may find it very difficult to continue as viable going concerns without continuous budgetary support.

Furthermore, the limited interactions they would have with their clients as pure term lending organisations would preclude accumulation of vital information on their clients’ intention and  ability to service debt. Again, term lending institutions with a portfolio of debt exposure would find it difficult to build remunerative viable asset portfolio since on one hand they would be exposed to the down-side risk on their exposures virtually without limit, their upside benefits from pure debt exposures would be limited.

Addressing all such inconsistencies in their organisation design would convert the term-lending institution into a universal bank!

The need of the hour is to salvage the project appraisal and management skills of the DFIs which have been accumulated at much cost and effort over the decades and is unfortunately left to decay. This can only be done if these skills are recognized and given due importance.