“In India, we never had anything close to the subprime loan,” said Chanda Kochhar, the chief financial officer of India's largest private bank, ICICI Bank Ltd (A few days after I spoke to her, Kochhar was named the bank's new chief executive, in a move that had long been anticipated). “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12% and 13%, instead of 7% or 8%. All those exotic structures like CDO and securitizations are a very tiny part of our banking system. So a lot of the temptations didn't exist.”
And when I went to see Deepak Parekh, the chief executive of HDFC Bank Ltd, which was founded in 1977 as the country's first specialized mortgage bank, practically the first words out of his mouth were these: “We don't do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don't make those kinds of loans. Our nonperforming loans are less than 1%.”
Yet two years ago, the Indian real estate market—commercial and residential alike—was every bit as frothy as the American market. High-rises were being slapped up on spec. Housing developments were sprouting everywhere. And there was plenty of money flowing into India, mainly from private equity and hedge funds, to fuel the commercial real estate bubble in particular. Goldman Sachs Group Inc., Carlyle Group, Blackstone Group, Citibank—they were all here, throwing money at developers. So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks?
Part of the reason is cultural. Indians are simply not as comfortable with credit as Americans. “A lot of Indians, when you push them, will say that if you spend more than you earn you will get in trouble,” an Indian consultant told me. “Americans spent more than they earned.”
Parekh said, “Savings are important. Joint families exist. When one son moves out, the family helps them. So you don’t borrow so much from the bank.” Even mortgage loans tend to have down payments in India that are a third of the purchase price, a far cry from the United States, where 20% is the new norm. (Let’s not even think about what they used to be.)
But there was also another factor, perhaps the most important of all. India had a bank regulator who was the anti-Greenspan. His name was Dr. V.Y. Reddy, and he was the governor of the Reserve Bank of India (RBI). 70% of the banking system in India is nationalized, so a strong regulator is critical, since any banking scandal amounts to a national political scandal as well. And in the irascible Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time.
“He basically believed that if bankers were given the opportunity to sin, they would sin,” said one banker who asked not to be named because, well, there’s not much percentage in getting on the wrong side of RBI. For all the bankers’ talk about their higher lending standards, the truth is that Reddy made them even more stringent during the bubble.