Avoiding a Financial Collapse, Indian-Style

by Dave

One of the most outrageous example of lax U.S. lending practices was someone making $14,000 a year approved for a $720,000 mortgage with no down payment!

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

Part of the reason is cultural. Indians are simply not as
comfortable with credit as Americans.
“A lot of Indians, when you push
them, will say that if you spend more than you earn you will get in
trouble,” an Indian consultant told me. “Americans spent more than they

Mr. Parekh said, “Savings are important. Joint families
exist. When one son moves out, the family helps them. So you don’t
borrow so much from the bank.” Even mortgage loans tend to have down
payments in India that are a third of the purchase price, a far cry
from the United States, where 20 percent is the new norm.

But there was also another factor, perhaps the most important of all.
India had a bank regulator who was the anti-Greenspan. His name was Dr. Y.V. Reddy, and he was the governor of the Reserve Bank of India. Unlike Alan Greenspan,
who didn’t believe it was his job to even point out bubbles, much less
try to deflate them, Mr. Reddy saw his job as making sure Indian banks
did not get too caught up in the bubble mentality.

About two years ago, he started sensing that real estate, in
particular, had entered bubble territory. One of the first moves he
made was to ban the use of bank loans for the purchase of raw land,
which was skyrocketing. Only when the developer was about to commence
building could the bank get involved — and then only to make
construction loans. (Guess who wound up financing the land purchases?
United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence
in the world’s financial system, the Reserve Bank of India sharply
curtailed their use in the country. When Mr. Reddy saw American banks
setting up off-balance-sheet vehicles to hide debt, he essentially
banned them in India.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to
more than 20 percent, which of course dampened the housing frenzy.