Articles by T T Ram Mohan

The Reserve Bank of India's discussion paper on entry of new banks in the private sector lists a number of issues in the next round of licensing of such banks. If the new private banks are to focus on inclusion, then a number of possible candidates - including industrial houses - would possibly be ruled out. Deep pockets, sound governance and an appetite for financial inclusion are not terribly common and these requirements cannot be relaxed merely in order to have more players.

There have been a number of commissions and committees on the financial crisis over the past year, which have largely covered the same ground in their analysis and recommendations for reform of the financial sector. The Warwick Commission on International Financial Reform, constituted by the University of Warwick in the United Kingdom, however, strikes out on a different path. It raises a number of issues in a way that many other reports have not. And it also differs sharply in some of the recommendations it makes. This article highlights four themes that figure in the report: macro-prudential regulation, rightsizing the financial sector, regulatory capture and home country versus host country regulation.

The effects of the global financial crisis have been more severe than initially forecast. The turning point was the decision in September 2008 to let Lehman Brothers fail, an event that had a series of ruinous cascading effects. Given the depth of the crisis in the United States and Europe, it was only to be expected that India too would be affected. But India's well-regulated banking system and adequate policy responses should ensure that the fallout, at least on the banking sector, will be contained.

It is somewhat misleading to label the present crisis a "subprime crisis". This suggests that when banks make subprime loans, that is, practise financial inclusion, they are apt to get into trouble. Some commentators have even gone so far as to warn against political pressure for financial inclusion in India. It is not exposure to subprime loans that is a problem; it is the loss on subprime related securities that explains the sheer magnitude of the present crisis. The evolution of the crisis shows that the world did not fully absorb all the lessons from the collapse of the hedge fund, Long-Term Capital Management in 1998. When do episodes of financial stress have a measurable impact on the real economy? Over the past 30 years, 60% of the financial stress episodes that led to downturns were banking-related events.

What are the benefits and costs to India of an enlarged foreign bank presence? Going by the three important criteria of access to financial services, efficiency and provision of credit, it is unlikely that foreign banks can do more than what the Indian banking system can provide. Add to that the risks posed by larger operations by foreign banks and there is a case for revisiting the 2005 road map of the Reserve Bank of India which indicated that these banks may be able to expand their presence after 2009.