Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

More on financial crunch potential in India

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.


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