And yet, the financial figures put out by the FIs have been consistently reassuring. They have shown good profits and good growth in earnings. ICICI's dividend yield at Rs 5.50 per share works out to a tax-free 13.75 per cent at the current price. So why is it that FI share prices have remained stuck in a quagmire?

Financial institutions are a proxy for the economy as a whole. Their exposure to corporates across the board and the current poor health of most companies will sooner or later find a reflection in the balance sheets of financial institutions also. Yet, it is noticed that the shares of the State Bank of India, for example, whicharguably has exposure to the entire spectrum of Indian industry, attract a considerably higher price-earnings multiple. Why the discrepancy? Several reasons come to mind. First, it does not require too much analytical ability to understand that the potential for asset-liability mismatches is immense for financial institutions. With long-term funding from the government ended, the institutions have had to fund their long-term assets out of short-term liabilities. Banks, on the other hand, with their lending concentrated at the short-end of the maturity spectrum, are perceived by the market as not facing such mismatches, in spite of the fact that working-capital loans in practice are invariably rolled over. Second, with commercial banks now venturing into long-term funding, the expectation is that the lower cost of funds of banks will enable them to take business away from the FIs. And third, a very large part of bank assets are invested in T-bills and government securities, which have zero risk. In contrast,FIs have very little exposure to government securities.

But while these factors do weigh down the FI stocks, the most important reason for the low discounting given to bank and particularly to FI scrips is the fact that market participants are very skeptical about the figures for non-performing assets put out by these institutions. It has been somewhat of a mystery, for example, how FIs have reported ever-increasing disbursements while there has been hardly any new investment. This anomaly has led to speculation that FIs are merely throwing good money after bad, by funding projects which have had cost overruns.

How serious is the problem? The market has reason for concern. For instance, sub-standard assets amount to 69.5 per cent of ICICI's net worth, based on existing criteria for calculating such assets. If these criteria were to be tightened, as is being proposed, the ratio of tainted assets to net worth would be much higher. For an FI which is more exposed to the smaller companies, such as IFCI, thehit to its portfolio will be harder.

Transparency may increase the alarm in the market, if the extent of bad loans is in fact more than what the market expects. Share prices of FIs may in that event be hammered down even further. But that is not an argument against disclosure. Knowing the extent of the problem is the first step towards its solution. In any case, since FIs have not been exposed to either the real-estate market or to the vagaries of the equity market, the bad- loan problem will not be anywhere as severe as in several other Asian countries. And while full disclosure may mean a one-time hit in share prices, it will galvanise the institutions to take steps to become more efficient. The result will probably be a sincere effort to lower the cost of intermediation. The government will also be forced to come up with policy changes to remove some of the disadvantages of FIs, such as improving their access to long-term funds. In the final analysis, the health of banks as well as financial institutionsis intimately bound up with the health of the corporate sector. When a large part of that sector is uncompetitive, it is unrealistic to expect financial stocks to do well. But FIs are ideally placed to act as catalysts in the process of corporate restructuring. With the kind of access to corporate and industry information that they have, the FIs should be in a position to influence mergers or actively seek and fund acquisitions for corporates. Any increase in corporate viability as a consequence of such restructuring will not only help corporates, but will also improve the health of the portfolios of banks and FIs.