Saturday, December 20, 2008


The New York Times has a pretty interesting article on how, compared to the US, Indian markets and banks bore only a fraction of the damage from the global financial crisis. The NYT journalist interviews many key players, including the head of the Yes Bank Rana Kapoor. Kapoor cites many reasons why Indians averted the crisis much better than the Americans. Early regulation was one of the traditional measures, RBI head Reddy essentially being the anti-Greenspan is cited as the other one. Sometimes it's only a question of applying the brakes early or late. The US is being forced to apply the brakes late, when much damage has been done. Regulation is not always bad it seems. Here's what Chandra Kochhar, the CTO of ICICI had to say:
“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.”
But what really struck me was a paragraph that talked about how traditional Indian psychology was partly responsible for averting the crisis. The argument is that Indians compared to Americans have traditionally not been fans of credit and credit cards. This relative aversion to credit stopped them from trying to live far beyond their means:
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. Deepak Parekh (HDFC CEO) 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.)
I can personally vouch for this mentality, as I am sure (and I hope) many from my background and generation will. My father has always taught me to view credit cards with suspicion. Even after coming to the US, every few months he asks me to make sure I am not being tempted to to use my cards too much. Perhaps some may have despised such brakes that their parents try to apply on them, but I personally welcome his admonition as a way for me to watch my spending. Whenever it's possible I consistently use my debit card and avoid using my credit cards. Perhaps this mentality will make it harder for me to become a victim of such crises. My father does not use credit cards almost at all. I use them a little when it's necessary. But I am not sure about the next generation who are more likely to accept credit cards as a right and obvious and basic need, and not as a luxury or emergency measure.

However, I thought about this a little more and realised that this is not really a brand new Indian idea at all, is it? It's traditional all right. In fact it's the epitome of "traditional". Then I remembered where I have consistently seen it; it has been enumerated in this source, most famously by this historical figure. In one instance he says:
But discipline is not for him
Who no due measure keeps
In eating or in fasting, or
Too much or too little sleeps.

Due measure kept in food and sport
And needful works, due measure
In sleep and waking, Arjun, sets
An end to all displeasure
This is Canto 6, Verses 16 &17 from Arthur Ryder's 1929 translation.

Moderation has been the key to much of our philosophy and way of life. Perhaps it's time to remember some old, forgotten verses.

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Blogger Kunal said...

Is it really a good thing that we absolutely do not have subprime loans in India at all? I mean, obviously India avoided a US-style crisis because of the lack, but a society that had not invented money might boast the same. While measures like curtailing securitisation have been proven effective with hindsight, I find it disconcerting that bankers can boast of not lending to poor people, and be applauded for such conduct.

12:20 AM  
Blogger Ashutosh said...

There should of course be certain schemes for everyone to be able to borrow money, even the poorest of the poor. Schemes such as Grameen Bank seem to have implemented such schemes very effectively.

In the end, I usually only say; if you are going to engage in risky ventures, then don't complain about their consequences! I should not keep on blaming the credit system if I heap money on my cards and something untoward happens to the bank.

9:21 AM  
Blogger Rhucha said...

I think even in US it's expensive to be poor because you will not get credit card or for that matter even a bank account if you earn lower than a certain income range. After working in a Credit card company , I have gotten more watchful of my credit habit. I have seen people falling prey to extravagant spending. It is important to know that credit card is still a loan which you have to repay some day. And the ROI on these loans does not come cheap. But I also think its a great opportunity to get though things when you don't have enough cash. I feel the most important aspect is being aware of what you spend on and how you going to repay. Being conservative always helps and especially in these such gloomy times, only conservative spenders seem to be doing ok.

12:41 PM  
Blogger Ashutosh said...

Rhucha I fully agree!

9:11 AM  

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