Thursday, December 25, 2008

NY Times how YV Reddy saved Indian banks

The New York Times thinks that it former RBI governor, Y V Reddy, made the difference between the banking scenario in the US and that in India today:

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. 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. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Private sector bankers who were harshly critical of Reddy in those days now acknowledge his contribution:

Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. (Rana) Kapoor. “He saved us,” added Mr. (Deepak) Parekh. (First names in parantheses inserted by me )

3 comments:

Sumeet said...

It warms up my heart to see one of the outsiders extolling one of the Indians ...

Some people in India however say that the rise in interest rates was unwarranted ... as most inflation was imported ... this actually led to smothering of the industry which would have been better off otherwise ...

also, the loans that you had discussed about in the banks off balance sheet items in India? I guess they were leashed in time

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