It posted an even steeper 40.23 per cent fall in its net profit for the second quarter of 1999-2000. The decline was primarily due to the higher write-offs and interest costs and large cash balances which could not be gainfully deployed. This is also reflected in the modest 3.1 per cent jump in its sanctions of assistance under all its schemes during April-September period.

IDBI's efforts to hive off part of its sticky loans portfolio through the on-tap securitisation deal with GE Capital shows that the institution is committed to clean its balance sheet prior to asking the Government to dilute its stake. However, the effectiveness of this deal remains doubtful since GE Capital would not touch the NPAs unless offered at a huge 60 to 70 per cent discount bundled with some very good assets, and that too `with recourse.' In the process, IDBI may end up with retaining a substantial portion of its NPAs.

To compound the problem, IDBI may end up with surplus funds having no real avenues for deploying them. The deal can only make sense for IDBI if they use the funds to retire high cost liabilities of their own and bring down the cost of funds.However, with the `Principal Financial Group - IDBI Investment Management Company' tie-up, the IDBI management has realised the importance of looking at businesses other than term-lending for its future earnings. With this in mind, the FI had also decided to look for strategic partners in all current and prospective ventures whether asset management or retail finance, etc. It makes a lot of sense for the FI to look for a strategic partner given the competitive nature of these sectors and lack of expertise within IDBI and the inability to retain talent within. In the bargain, IDBI will again get a cool Rs 35-45 crore by divesting 50 per cent of its stake.

In all, raising cheaper resources is no longer a real problem with IDBI, its deployment is. The institution is now looking at significant disbursements in the telecom sector which could turn out to be the only silver lining.

What is surprising is that with a capital adequacy of 12.7 per cent as on March 31, 1999, as against the stipulated 9 per cent, IDBI went ahead with its maiden tier-II issue and also retained the Rs 600 crore excess subscription of its Flexibond-VI issue `in order to exploit the low interest rates prevailing in the market and anticipating business growth'. Resource raising makes sense if used to lower the aggregate cost of funds for IDBI, but with no avenues, the unutilised funds will prove doubly expensive.

Insurance bill
The latest news from Parliament indicates that the Insurance Regulatory and Development Authority (IRDA) bill, which will open up the sector to private sector participation has been passed after incorportating the amendments as wanted by the Congress. The amendments sought include strange suggestions such as a minimum threshold for investments in the `social sector'. Does this mean that the Government and Congress expect insurance companies to mobilise funds for building schools, sanitation facilities and fund village development. That is not what insurance companies do. And what returns can these companies hope to get out of these investments?

Another demand has been the mandatory introduction of crop insurance. But basically crop insurance is a safety net and it will be meaningless without linking it to farm productivity. The Congress thus seeks both input and output subsidies for the farm sector but no productivity objective.

The benefit of privatising the insurance sector is enormous. The reach of the public sector insurance companies is in the urban and semi-urban areas precisely where the private sector will compete. However, the difference is that the private sector companies will bring in new products and sell the insurance product not merely as a tax saving device rather as an alternative to traditional savings instruments. The potential for developing alternatives to savings bank and fixed deposits is tremendous, along with the development of the secondary debt market. The public sector companies have failed miserably in efficient mobilisation of savings as well as in the deployment of funds.

It is quite obvious that the basic premise for objecting to the bill by the Congress has no economic rationale but rather it is political. The passing of the bill has to be welcomed given that more or less completes the financial reforms process. But it is unlikely that the insurance companies will be very thrilled with the extra obligations on their operations.

Honda Siel
News reports suggest that the ministry of commerce has ruled out clearance to a proposal by Honda Siel to import and sell cars in the country. The FIPB, in the wake of the commerce ministry's stand, has also deferred the company's proposal by four weeks. While at the outset the decision by the commerce ministry appears to be in conjunction with the current policy framework, the decision also sends out some broader signals.

Readers might well recall that the Indian Government had sometime ago given their in principle approval to the allowance of free imports of second hand cars by 2002-2003. Incidentally, the allowance seems to have followed the world lead taken by New Zealand in abolishing tariff protection on imported vehicles by the year 2000.

Interestingly though, the Government of New Zealand plans to cut tariff progressively from 22.5 per cent to 15 per cent in a phased manner upto July 1, 2000, and then abolish the duty altogether. This phased approach by the New Zealand Government is laudable, unlike the decision of the Indian Government where a lot of jobs would be in the line not only in car assembly, but also in the auto component industry. More importantly, the implementation of the free import regime in a phased manner would also give the car makers time to review their Indian strategies and rework break-evens etc, in a competitive Indian market. Furthermore the ``naive'' move by the Government of India could well boomerang into a total unnecessary waste of employment opportunities and more importantly investment.

As if this were not enough, the planned production capacity increase by Indian auto manufacturers to a staggering 11.81 lakh units per annum by 2000, also hangs like a Damocles sword over their heads already. Especially since the current sales figures do not even justify the possibility of such increased offtakes by the year 2000.

Further, the imports would again be for the mid-size car segment, which, incidentally, is a crowded one-way street. What with almost 15 players vying for a mere 20 per cent of the total car market. In India, the dynamics are heavily skewed in favour of the small car segment, which currently accounts for nearly 70 per cent of sales.

Given this background and the fact that the domestic car market will not witness any exponential growth in the medium-term, the allowance of free car imports could well have been the final blow for the beleaguered lot of car makers. All of which points to the fact that the Indian Government could well have done a rethink on the same, an indicator towards which could well be the commerce ministry's disallowance of the Honda Siel proposal.

Emcee (with contributions from Paramvir Singh, Aaron Chaze and Percy Dubash)