More on financial crunch potential in India
September 30, 2008
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I received several comments (some by email and some on the
Wordpress blog) in response to my post about the possibility of a home grown financial crunch in India. Let me respond to some of them.
- Several comments asserted that there is a lot of black money in
Indian real estate and this protects the lenders. It is difficult to
make a categorical statement about black money which is by definition
not publicly disclosed. My impression is that the prevalence of black
money in real estate has been declining over time. The young upwardly
mobile professionals have been demanding and getting white money
transactions that can be almost completely financed by banks. I
believe that much of the banking system’s real estate exposure
involves transactions with negligible black money or structures which
achieved high LTVs even after accounting for the black money.
- One comment asserted that the decline in property prices in India
is confined to big cities and that the rest of the market is
unaffected. This was true in the United States several months ago and
is still partly true today – California and Florida account for
a lot of the problems. Gradually, in India too, the problems could
spread nationwide as they did in the US.
- Another comment highlighted the fact that while property loans in
the US are without recourse, this is not the case in India. Actually,
only in a few states of the US is it true that mortgages are without
recourse by law. However, elsewhere in the US and in other countries,
mortgages are in practice without recourse because of the difficulty
of collecting. As we all know, when an unsecured retail loan defaults,
recovery is quite low. Normally, what happens is that the banks modify
the mortgage terms to persuade the borrower to keep paying the loan. But if the borrower defaults, the bank is left with whatever it can get
for the collateral.