was a sputter in the engine and the car stalled. I fiddled
with the carburetor and the engine started. It was a happy
ride once again till there was burning smell. I checked
and found a leak of engine oil, which was dripping on the
hot pipe running to the exhaust. I used the old technique
of sealing the leak temporarily with a cake of soap and
topped the engine oil from the small reserve I had. The
journey continues but the signals are no good at all. The
maintenance has been poor; the previous owners used it rough
and there was the classic case "information asymmetry",
in all ways. None of the owners followed the manuals for
We have been running the car as long as it ran with oil,
water and gas. Now the signals mean that there could be
a breakdown anytime, anywhere unless I get it to the garage
fast and get it overhauled catching up with the manual for
maintenance. The "crisis" induced in the US-64 of the UTI
has blown over for now. Happily, there is no "run" on the
redemptions, which is a bit of an anti-climax to the heat
generated. It was like the frightening noise near the chassis,
which I realized, was only a stone thrown up by the front
wheel as it passed over gravel. The extended coverage of
the JPC (joint Parliamentary Committee) is a good solution
under the circumstances even if it reflects the price of
democracy in terms of time, resource and the potential nature
of outcome. It is like sending the car for three estimates
in search of a least cost repair. Time is a great healer
of emotions but it doesn't heal the car - so I need a good
The horn honked without prompt. Bad sign. The wiring is
very important. If there is a loose contact, it could lead
to a short circuit and the car could burn. It is concealed
but yet critical like the invisible wiring in the financial
world, which transcends ideological silos and connects apples
and oranges perfectly - as the male and female jacks in
the electrical junctions.
Like the sputtering in my car, the UTI problem hints at
a more serious weakness historically nurtured in the financial
system. We have had continued signals throughout the 90s
but several institutions in the system were like the "pool
car" - everyone was busy running it hoping that it would
stop when someone else is behind the wheel and that he will
be obliged to take it the garage. All know of the maintenance
procedures but have been flouting them - as a common property,
the pool car is not the driver's accountability.
It is reported that even as the Government is bailing out
the IFCI and trying to manage the transition in IDBI, there
are speculations about "ever-greening" of loans by a few
other important financial institutions. The signals affirm
the feeling that the financial system is not robust and
that all these weaknesses can have a multiplier effect.
The problems promise to keep company and recur.
In the context of the Asian crisis, we must learn that some
times it is a short fuse that can make a few problems catch
up a wild fire and bring down the economy. If the structure
is weak, the gas is leaking and it is a dry and hot day,
a small spark can burn the car down. The ability of the
managers of the financial system should not be tested on
the success gained in controlling damages and localizing
the fallout temporarily. It is merely the first response
to a stalling engine. Some one can say it was a proactive
solution to a further delay.
But most proactive solutions are reactive ones in disguise.
As Peter Senge had said, true proactiveness arises from
thinking on how we contribute to our own problems! The managers
of the financial system will have to address the foundations,
which are shaky due to patchwork of decades of quick fixing
It is evident that today's problem have arisen from yesterday's
solutions. The earlier solutions have actually been seemingly
long lasting but were actually fixing the leak with the
soap bar. As the Law of the Fifth Discipline says, a seemingly
easy solution actually leads us back in!
Another law of the Fifth Discipline is also relevant - that
of the compensating feedback (the harder we push, the harder
the system pushes back), which is reflected in the implicit
moral hazard. A temporary reprieve by the State to bailout
the UTIs or the IFCIs will only result in further indulgence,
profligacy and eventually a long queue of requests for bailouts
and guarantees. The paradox of low leverage interventions,
as Peter Senge mentioned, is that they seem to work in short
term. Yet they bounce back after a time gap with a problem
which is worse than the seeming solution.
The lasting solution is in making the financial system robust
in a short time - within and without. There is reason to
fear that we may have reached a volatile situation that
only requires a short fuse. We need a thorough scan on the
critical parameters and necessary retrofit of the system
with a set of reforms in laws, structures, and systems.
Any neglect in this could be disastrous in several ways.
It would be like being grounded in mire halfway through
an exciting journey.
Is there a better solution to address the potential crises
in the financial market? The answer probably is in applying
the international principles of Corporate Governance as
a check for robustness. We do not need Schumacher to test-drive
the car and say what is wrong. The manual will do. For the
financial system it would be good to test vis-à-vis The
Narasimham Committees Reports, The Report of the RBIs Advisory
Group on Corporate Governance, the IMF principles regarding
transparency in financial sector, OECD principles and the
report of the Commonwealth Secretariat.
These tests would probably revolve around:
(a) Government ownership and independence of institutions
like the UTI - including the aspects of bailouts, subsidies,
directed lending/investments, transparency in reporting,
(b) Mechanisms to ensure enforcement of law, including recovery
systems - this being the weakest link of all, as there is
little disincentive for flouting law and commit fraud,
(c) Quality of financial disclosures, accounting and reporting
(d) Quality of the structures, systems and processes at
the Board level, including the process of appointments,
induction of independent directors, ensuring accountability/fiduciary
(e) Institutional and procedural arrangements for prudential
and regulatory supervision.
If these tests are not carried out and repair done fast
for a longer journey, there is a grim prospect of repetitions
in quicker succession. That would erode the confidence of
all investing public. Do we have the motivation to act well
and fast? Obviously there is no prospect of a positive motivation.
There is, of course, the negative motivation of a potential
breakdown of the car and the financial system. Like the
Asian Crisis which indeed needed a short fuse to set the
fire? Hopefully, this specter of collective doom atleast
will energise all concerned.
But, will the check and a quick over-haul help ward of all
potential crises and keep all the investors' happy ever
after? Obviously not. It is possible that after all the
effort, the car is run over by a 16-wheeled cargo carrier.
As the Economist magazine recently pointed out in the case
of Asian Economies - after all the care to treat influenza,
no one can promise that they would not catch chicken pox!
But that doesn't mean that we don't get treated for influenza
in the first place.