IFCI BLOG

Address by Mr Atul Kumar Rai, Chairman, Board of Governors, MDI (Gurgaon) on the Annual Convocation 2010

Fri, 23 Apr 2010 14:12:00 GMT

After the Crash : Lessons for Business

Tue, 03 Nov 2009 09:35:00 GMT

Address by Mr Atul Kumar Rai, CEO & MD, IFCI Ltd at the Hindustan Times Leadersip Summit held onOctober 30-31, 2009 at Taj Palaca Hotel, New Delhi

“Deepening of the Capital Markets and Financial Inclusion” Address delivered by Shri Atul Kumar Rai at a Conference organized by ICRIER on August 20,2009

Thu, 20 Aug 2009 09:19:00 GMT

“Deepening of the Capital Markets and Financial Inclusion” Address delivered by Shri Atul Kumar Rai at a Conference organized by ICRIER on August 20,2009.

Dr. Nitish Sengupta, Mr. Shrawan Nigam, Mr. Paul Joseph, Dr. L.C. Gupta, Mr. C.S. Mohapatra and Distinguished Audience

It is a unique privilege for me to be here today, though at the same time it is with some trepidation that I approach the task before me with two of my seniors being present here on the dais today whom I know to be very discerning if not demanding not only of others but even of their own selves to let pass lightly what may not come up to their standards.

To begin with one may admit that the first issue in exploring the subject of the deepening of the securities markets and financial inclusion that stares one in the face in the immediate context of the economic crisis plaguing at least the developed world is whether the relationship between markets and financial inclusion is not too counterintuitive. After all, there is a very strong opinion today against the markets. Governments have rushed in with unprecedented levels of aid and rescue effort precisely to overcome the vagaries that have resulted from the financial markets being left to their own devices. We are reminded constantly of the greed inherent in the markets, their inefficiencies, their lack of discipline and their herd behaviour to have been the cause of the financial crisis which then led to an all round economic recession. In the context of capital markets themselves, it is not surprising, therefore, that the Committee on Financial Inclusion headed by Dr. C. Rangarajan in its report in 2008, when the crisis had begun to loom large, could not have laid the same emphasis on the markets as a possible solution as the Committee headed by Dr. Raghuram Rajan did which also was focused on the same subject of financial inclusion but had finished its report well before it was possible to smell the crisis in the air. The short point is that the markets in general and financial markets in particular stand somewhat discredited in our immediate context today. Anyone who stands up to argue in favour of securities markets being facilitative or supportive, leave alone causative of financial inclusion can hardly expect to arouse much sympathy unless some effort is made to clear the blot that markets have suffered over the last couple of years.

The second aspect of financial inclusion, on the other hand appears much less non-problematic. The generic part in the phrase financial inclusion is of course inclusion of which financial inclusion is only a special instance. One needs to consider therefore as to what does inclusion signify in the context of economic growth. Inclusion is the latest in the series of metaphors by which one intends to reinstate the concern that benefits from economic growth need to be broad based across different income classes. There can be little objection to the egalitarianism behind inclusion. On the other hand, when one speaks of inclusion, a question which may legitimately arise is who is the one that includes. If it is economic growth that we have in mind as a process that needs to fulfil the criterion of financial inclusion then from Marx onwards, what is almost a constant theme is that the capitalist economy is inherently crisis prone. Schumpeter described capitalism as a process of creative destruction in which booms and busts are cyclical and the displacement from the cycles is offset by the accompanying benefits from innovation that these cycles make possible. The short point is that the capitalist economies, and one may as well call them economies in which markets dominate, are not only unmindful of the issue of equity but perhaps the dynamism that they reflect owes itself precisely to the rewards arising out of the inequitable distribution of rewards by the markets in favour of the innovative few as against the many.

Hence, growth in a market based capitalist setting by itself is not inclusive, and perhaps what is worse, can not be inclusive. Consequently, if inclusion needs to be incorporated into the process of economic growth then one way may be to insinuate an agency from outside which can in a manner of speaking act as an arbiter between different options at any point of time and then determine the preferred option which in the context of our discussion is the more inclusive option, of course with powers to police the infringements so as to ensure the least amount of deviation from the preferred option. Hopefully, we all recognize that this is a roundabout description of the state as a player in the market place. If this is the view taken by which inclusion is to be insinuated in the process of economic growth, what may invariably ensue is the displacement of the markets where choices are exercised by the decision making apparatus of the state. In this case, inclusion faces the potential of degenerating into at best another rhetorical attempt, only putatively in the interest of egalitarianism, but as a tool towards the consolidation of the hegemony of the state or considering that the state does not really enjoy the best performance appraisal reports in the economic sphere, an attempt at preventing further erosion of its acceptance. So, there is a sense in which inclusion as an emerging theology is capable of being aimed at undermining the markets and replacing them by statist endeavours of which the world around us, and I have a mind to break up the word us into US, is witnessing such profligacy as to render individual exemplification quite unnecessary. This view of financial inclusion batters the already beleaguered markets still further by setting up an unequal contest between the state and the markets where hopefully we all know who is the one with greater authority and which is the winning side across the world today.

One possible source of relief is that there is another sense in which financial inclusion is capable of being viewed not as one in which it is in conflict with the markets. This is the kind of dynamic view in evidence in the approach followed by Prof. C. K. Prahlad in his book “Fortune at the Bottom of the Pyramid” and subsequently, in the report of the committee under the chairmanship of Prof. Raghuram Rajan. This view concedes that economic growth in a market economy is not an output from a process which one or the other actor is fully and totally in charge of. Rather, economic growth is itself an outcome of actions pursued by a multiplicity of agents. However, the markets themselves have a limited reach owing to high transaction costs in accessing these markets. To give an example, the Committee on Financial Sector Reforms notes that while banking is the most preferred savings instrument, yet in the lowest income quartile, only 50% of those with cash savings have bank accounts. The answer as Prof. Prahlad notes is that the transaction costs of savings in formal institutions is as high as 10% for the rural poor. This is on account of small average size of transactions and the distance of the branches from the villages. This means that for the savings of the poor to flow into the so called financial markets where they can be intermediated and get allocated, what is required is action to bring down the transaction costs. Rangarajan Committee has made recommendations to launch a mission for financial inclusion and more specifically to set up two funds namely the Financial Inclusion Promotion and Development Fund and the Financial Inclusion Technology Fund under the aegis of NABARD, in which, going by the spirit of inclusion the market participants would perhaps not find themselves excluded.

One last comment on the capital markets which I may no mre than introduce as a part of this discussion. The equity markets in our country, notwithstanding the volatility which they have lately witnessed and a somewhat colourful legacy to boot, do manifest a much higher level of activity and interest as compared to the corporate debt markets unlike in the rest of the world. The obvious inference would be that in our situation these are different entities and need to be viewed differently from the perspective of regulation. In fact, in this context it may even be useful to make a distinction between market failure and lack of markets. Market failure is not quite the same thing as lack of the market itself. In this sense, corporate bond market does not exist in India and perhaps needs a completely different approach today so that the market as a mode of exchange comes to exist first before considering intervening in them to correct the instances of failure.

Thank you.

IFCI celebrates sixty one years of its nation building endeavour

Tue, 07 Jul 2009 13:17:00 GMT

IFCI celebrates sixty one years of its nation building endeavour today. On an occasion such as this, it is difficult to proceed without paying a tribute to what we owe to our legacy. From the perspective of ownership, IFCI was a strange entity even when it was born. Although, promoted by the Government through a legislation to step up investment in manufacturing and industrial projects, IFCI was never directly owned by the Government. Even the repeal of IFCI Act only expanded the ownership of IFCI to a wider base covering not only institutions, but also the general public. Today, nearly half of IFCI’s holding is with about a million shareholders. In the present day context, the ownership model of IFCI retains relevance as it combines the values of public welfare with that of private ownership. This is a legacy which we continue to be justifiably proud of. It is this legacy which we at IFCI wish to keep alive and extend further.

IFCI is a public financial institution and works in the regulatory environment set up by RBI, SEBI and the Department of Companies Affairs. In a long journey such as that of IFCI, it is these regulators who have exercised the necessary diligence if not in setting our milestones then at least in ensuring that we follow the straight and the narrow towards achieving those milestones.

A part of our legacy has been constituted by the eminent persons who have been at the helm of IFCI and the executives and employees who have given the best years of their life working for the betterment of this great institution. I stand today in all my humility to acknowledge the debt we owe them.

IFCI has had to go through the rough and tumble which is unavoidable in a long and for most part a lonely quest to create the foundation of much needed modern infrastructure and industry for the nation. The troubled patch beginning in the late 1990s when we for sometime were hobbled by the adversity of our financial situation is still too fresh to have been forgotten, and from which we all know that but for the timely support from the Government we would have found it difficult to recover or even survive. This makes us conscious of our larger public engagement and obligations which are perhaps the only means through which we can repay a part of what we have received from the Government.

It is a matter of some satisfaction, however, that today as we celebrate our Founder’s Day, we can say with pride that the sacrifices made by the Government, our present and former employees and other stakeholders have not been in vain. IFCI has not only recovered from the brink of collapse, but has done it so convincingly that it might be likened to hitting six sixes off a single over. We have averaged profits amounting to more than Rs. 750 crore per annum for the last three years on a balance sheet which is still struggling to reach Rs. 15,000crore mark. Our capital adequacy which was still (–)300 percent only two years ago is within reach of 20% which is about two times the regulatory norm. By recovering more than 2500crore in the last three years from NPAs, We have demonstrated ability in the resolution of our NPAs which are the envy of much larger and more established players. I have been told by a number of our foreign visitors that they haven’t seen an office and a caring and nurturing work environment like IFCI anywhere else. It is another matter that we have improved our income from the IFCI Tower by almost two times though in that process we might have earned a grudge or two as well. To cap it all, the year when the financial institutions across the world have been reeling under the impact of a deep and unprecedented crisis, has been the year IFCI has chosen to declare a dividend to our shareholders which we had not done for almost a decade. I extend our heartfelt gratitude to our Board of Directors under whose guidance it has been possible to cover such long distance in such a short time.

The question arises- where do we go from here? A flavour with our investors which refuses to go out of season is the induction of a strategic investor. We remain committed to the process but would like at the same time to top that flavour with the zing of our shall one say, by now well relished, competitive advantages. Our operations today are differentiated by a de-bureaucratized approach, an unmatched depth of understanding of corporate and project finance and our knack for targeting our efforts at achieving quick turnaround of our investor’s moneys. Alongside, we have insinuated ourselves strongly in the areas of NPA recovery and corporate advisory. Above all, the sixty year old IFCI franchise which had invariably suffered false starts has been deepened and extended by infusion of capital and talent into four separate subsidiaries namely IFCI Factors, IFCI Ventures, IFCI Financial Services and IFCI Infrastructure. All the subsidiaries show strong growth and signs of an early maturity which should give us the confidence to explore new areas like infrastructure financing on a similar model.

It is encouraging to see that our business plan founded on this understanding is working well, especially if we also take into account the challenges being thrown by the present day business environment. After more than a decade, we have begun the acquisition of fresh assets of which we have added about Rs. 3,000 crore in 2008-09. It is, however, more important by far from the perspective of our credibility in the market that we are in a position to raise fresh funds again after a similar gap of more than ten years. This means that the cycle of financial intermediation which is at the core of our operations stands restored and can begin to roll all over again. Keeping the growth of the economy, our target would be to expand our business by around 20% per annum to begin with, and this is the best number from which each of us here can take a cue as to where he should be one year from now.

A question which is being asked, often by the press, but also by others, is whether IFCI would like to avail of the option of converting into a bank. The question is perhaps a corollary of our strong performance, especially the level of regulatory capital and the fact of other development finance institutions having converted into banks. While the prospect of enjoying the privileges of being a bank is an attractive one, let us also appreciate that at this time when in the aftermath of the financial crisis, the banking architecture and regulation appear far from settled, if not having been thrown into a state of turmoil, and when we are still struggling to catch our breath after a breakneck sprint over the last two years, the question of staking a claim for the status of a bank in whatever form, is for all practical purposes still two to three years away, unless an opportunity knocks at our door too beseechingly to ignore.

And with what shall we realize our dreams. As I am given to saying on other occasions, and which I can not say very differently today, is that the dream of IFCI’s tomorrow resides not in our business plan and our strategy but in the very dreams that we have for our own selves. It is in and through us that the dream would work its way towards realization. The material that has to be worked upon is we ourselves. This, however, does not mean that there is a particular type of an IFCI employee, kind of a model, that we have to follow or conform with. In fact, at the cost of repetition, what is intended is just the opposite of each one enjoying our own difference and being engaged with it. When we brought the compartment walls within IFCI down, it was done with a view to create a space which brings this plurality together. It has also been our endeavour to do what we can as an organization, to let each one of us develop according to his or her own genius, if that is how one should put it. While there are limits on compensation, this is one area where the generosity of our great institution would be hard to beat. I wish we can all make the most of it. I am also proud to add this auditorium to the inventory of IFCI as a locus of more engaging, uplifting and enhancing, certainly more entertaining activities than this speech tonight and in times to come. Congratulations to all of you once again and Thank you.