New York Times: How India Avoided the Crisis

By: TraderMark Sunday, December 28, 2008 10:08 PM

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And there was plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Goldman Sachs, Carlyle, Blackstone, Citibank — they were all here, throwing money at developers. (notice wherever they go, damage follows?)

So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks? 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 earned.”

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. (Let’s not even think about what they used to be.)

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. V. Y. Reddy, and he was the governor of the Reserve Bank of India. Seventy percent of the banking system in India is nationalized, so a strong regulator is critical, since any banking scandal amounts to a national political scandal as well. And in the irascible Mr. Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time.

“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named because, well, there’s not much percentage in getting on the wrong side of the Reserve Bank of India. For all the bankers’ talk about their higher lending standards, the truth is that Mr. Reddy made them even more stringent during the bubble.

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. (I am being serious here - if you were not following it; contrast this to Sir Hank Paulson who about 15 months ago proposed a solution for the US banks problems - that is, create a super off balance sheet vehicle dubbed the Super SIV. That is how they could solve the problems. Create a fake bank, put the problem loans there, and ta-da - problem solved. Do you see how backwards we look to the rest of the world? Enron was helped by off balance sheet accounting. What did we do afterwards? We promoted this procedure in our banks! Even worse - the federal government does the same thing - the 2 wars are off balance sheet accounting. They are not part of our annual deficit. This is cultural - it is very deep and frankly, pathetic. If you have bad information - garbage in, garbage out. We hide information - and make decisions off incomplete info. That's our national "innovation" of late)

As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations.

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