ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

H T Parekh Finance ColumnSubscribe to H T Parekh Finance Column

From the Subprime to the Ridiculous

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.

Options to Consider in Public Debt Management

The decision to shift the management of public debt from the Reserve Bank of India to a specialised debt office under the ministry of finance offers an opportunity to explore ways in which the costs and risks to the government are minimised. This article explores if it is not worthwhile to denominate a small portion of sovereign debt in foreign currency.

Lessons for Mr Subbarao from the International Credit Crisis

The new governor of the Reserve Bank of India will have to navigate a path that brings international recognition of India's banking supervision and standards, but avoids the worse pitfalls of the "Basle Consensus", which places market prices at the heart of modern financial regulation. The RBI should follow an alternative model of banking regulation that will have three pillars. The first should be that the economic cycle must be put close to the centre of banking regulation, since this is the source of market and systemic failure. The second should be a focus on systemically important distinctions, such as maturity mismatches and leverage. And the third pillar would be to require banks to either self-insure or pay an insurance premium to taxpayers against the risk that the taxpayer will be required to bail them out.

India's Sub-prime Fears

Is India heading towards its own sub-prime crisis? There have been a number of developments that suggest such an eventuality is possible. Bank credit has been growing very rapidly in recent years, the retail exposure of banks in the form of personal loans has increased sharply, exposure to the "sensitive" sectors (especially by the new private banks) has exploded, and securitisation of loans (during which diligence can slacken) has also risen. If the economic environment takes a turn for the worse - as has already happened - then the danger of bank loans turning bad increases manifold.

Is It Time to Open Up to Foreign Banks?

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.

Resisting Rupee Appreciation?

In some quarters, the Reserve Bank of India has been accused of resisting rupee appreciation through active exchange rate interventions and thus worsening inflation. While liquidity explosion becomes the logical corollary of the RBI's exchange rate management, the latter does not seem to have a strict correspondence with the emergence of recent inflationary pressures. In the face of the dollar's weakness and perennial capital inflows, the RBI has accomplished a balancing act of stabilising the real effective exchange rate and not allowing the nominal exchange rate to move according to the dictates of speculative global finance.

Indian Currency Regime and Its Consequences

This article explains India's currency regime, highlights the implications of a pegged currency and then goes on to discuss the time variation in the flexibility of currency in the Indian context.

Impact of Microfinance: A Critical Survey

It is unclear whether microfinance contributes to a reduction in poverty or is the most efficient method to reduce poverty without additional measures in areas such as education, health and infrastructure. The entry of commercial banks into microfinance may increase the competition for traditional microfinance institutions and reduce lending to the core poor, even if it improves financial sustainability.

Financial and Real Assets in a Broad Perspective

A shift from real assets to financial assets in the portfolio of household savings can increase efficiency at the margin. This requires increased separation of ownership from management, a reduction in financial repression, a reduced dependence on self-employment, and a policy of providing infrastructure and more land for urban use.

Inflation Targeting

Stabilising inflation also promotes employment and output growth. Adopting inflation targeting does not strictly require preconditions such as an independent central bank or a well-developed financial system. In operational terms a country like India ought to target headline inflation.

Pension Issue and Challenges Facing India

The success in pension reform will depend on a greater degree of professionalism in the design and governance of provident and pension fund organisations such as the Employee Provident Fund Organisation, as well as requiring that all components of social security are reviewed to assess their suitability, scalability, and sustainability. Greater financial literacy so that pensions are not considered a welfare measure without due regard for financial and fiscal analysis is also essential.

Financial Inclusion: Issues and Challenges

Financial inclusion is important for improving the living conditions of poor farmers, rural non-farm enterprises and other vulnerable groups. Financial exclusion, in terms of lack of access to credit from formal institutions, is high for small and marginal farmers and some social groups. Apart from formal banking institutions, which should look at inclusion both as a business opportunity and social responsibility, the role of the self-help group movement and microfinance institutions is important to improve financial inclusion. This requires new regulatory procedures and depoliticisation of the financial system.


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