Lessons the world can learn from India

In India, most lending is like a marriage between the borrower and the banker — until death do us part. In the West, thanks to securitization, it is a marriage of convenience, or even a one-night stand. Banks in the West can — and almost always do — reduce exposure to any single client by “passing the parcel” — because a predominant portion of debt is structured in form of tradable debt securities. This is good for a bank, but not good for the economy. This is where India has till now stood the test. Now I pray it does the same in future.

I have a wonderful instance which will definitely explain this. To teach fairness, our mothers asked one child to cut the apple, and the other sibling to choose the piece. This effectively eliminated fights about who got the bigger piece. Applying this principle to derivative offerings, one can force issuing bankers to not transfer till maturity the riskiest part of any securitized bond offering. This could enforce honesty about riskiness of the offer, and circumspection in their structuring.

Indians have always lived the life of a common man. Indians have internalized the benefits of thrift; the average US citizen has never postponed gratification, and is now learning the ills of wastefulness. Americans are being hit by several forces at once: fall in house prices, rising unwillingness of banks to extending “sub-prime” loans, their own free-spending habits, rise in oil and food prices, and increasing flight of jobs overseas. Any how we are not going to fall in that trap.