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    What Indian banks can learn from the US financial crisis of 2008

    What Indian banks can learn from the US financial crisis of 2008

    What Indian banks can learn from the US financial crisis of 2008
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    By Sanjiv Das   IST (Updated)


    Indian bankers should realise that growing quickly isn’t as important as growing responsibly and robustly.

    This much is clear: Non-performing loans (NPLs) are putting stress on India’s financial system. Over the last three years, it has lost some $24.8 billion because of NPLs as 416 large borrowers have defaulted on what they owed. Many of us who work in global banking have seen events like this unfold before. As the former CEO of CitiMortgage, I had a ringside view of the financial crisis. Our company played a modest role in helping the US financial system find more solid footing.
    The 2008 crisis originated in the United States, yet its consequences were felt across the world. But the US recession lasted about eighteen months, whereas Europe’s downturn lingered longer. And now the US is enjoying its largest economic expansion in history, arguably because of prudential policy and governance decisions that were made in the throes of the recession. Here are three best practices that Indian bankers can take from what we learned during the crisis.
    First, quickly disclose NPLs. They say sunlight is the best disinfectant, and this is also true for dealing with these failing assets. During and after the 2008 crisis, the executive team at CitiMortgage made sure to quickly identify NPLs. We then shared our findings with relevant stakeholders such as counterparties and regulators as quickly and responsibly as possible. NPLs don’t just go away. They linger and harm the entire balance sheet, threatening the health of an entire institution. It is wise for Indian bankers not to let the problem fester on the balance sheet by mismarking them, which is a surefire recipe for disaster. Instead, bankers can mark to market these assets and sell them to private institutions who specialise in acquiring and cleaning these instruments.
    Importance of private capital
    Second, private capital can play a meaningful and helpful role. During the great financial crisis, US policymakers encouraged private organisations to work ensemble to solve the underlying problems. What is more, several private equity (PE) firms acquired “bad assets” that they restructured and reformed. “PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis,” concluded the authors of a Harvard Business Review study. India’s policymakers and bank executives alike may want to consider welcoming private equity firms that can play a similar role. Many well-resourced PE firms aspire to diversify their portfolios and grow in India. “Instead of slowing down, PE can go on the intelligent offense,” writes BCG. In this way, PE firms can provide countercyclical capital before the situation worsens for India’s financial system.
    Third, value the banks that demonstrate responsible business practices. For the better part of three decades, India’s leaders have been mesmerised by growth. But expansion at all costs is foolhardy. This is the time for Indian banking executives to reflect on their priorities and embrace the concept of responsible lending. At CitiMortgage, we developed alternative ways to evaluate creditworthiness. We identified potential borrowers who not only had the capacity to replay but also intention. The best bankers put their clients first and take their fiduciary responsibility seriously. They understand what is most important is not how quickly they can sell a loan but how swiftly their customers can pay it off. The great financial crisis drew a line in the sand between responsible institutions and those that operated with less than appropriate standards. It’s nigh upon time that Indian bankers realise that growing quickly isn’t as important as growing responsibly and robustly.
    Let’s hope that India emulates the US approach and its financial system can rebound and become the incredible engine of prosperity that we know it all can be.
    Sanjiv Das is the CEO of Caliber Home Loans. Previously, he was the CEO of CitiMortgage from 2008 to 2013.
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