It was George Bernard Shaw who said “We are made wise not by the recollection of our past, but by the responsibility for our future”.
A child can ask a question that many wise men cannot answer. Similarly few could explain why great leaders err on the side of caution even as there seemed little to worry. They are even blamed for missing out on great opportunities. These worries epitomised the rudimentary yet sagely wisdom (that most realized only in hindsight, after he was gone) that underscored the era of Dr.Y.V.Reddy as the Governor of Reserve Bank of India (RBI), India’s central bank. Dr.Reddy during his tenure as the Guv was criticized for being too stringent with his policies that sucked out liquidity from the system even as the economy was growing at a scorching 9 percent plus. Yet when credit crisis struck global finance, India remained relatively secure thanks to his early braking mechanism.
NYT correspondent Joe Nocera captures many a banker’s opinion in his column “Talking Business – How India Avoided a Crisis”.
Dr.Reddy post his term is now being lauded by one and all for India’s relative resilience in the face of global liquidity crisis. The man deserves kudos for not letting Indian banks sin excessively. By seeing the real estate bubble early, he made regulations more stringent by increasing the CRR and risk weightage for realty loans. He banned bank loans for buying land and allowed them to lend only for financing construction costs. He never allowed securitizations and credit derivatives to gain prominence and setting up off-balance sheet vehicles that hide debt. Thus the Indian banks never could slice and dice debt and palm them off to unsuspecting buyers that fueled the mortgage crisis in the US. The banks were forced to hold on to the loans they made to customers until maturity. It meant banks made sure the loans got paid back since that was their only way to ensure liquidity.
When he saw huge foreign fund inflows into India, Reddy feared inflation and he duly pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.
India’s bankers were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! They felt Reddy was being too harsh, excessively paranoid and cutting things to the bone. For a while they felt if Indian bankers were missing out on something, but now they know they missed out only on the toxicity.
As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.” Joe Nocera rounds it off as he says “Instead, India was the smart one, and we were the stupid ones.”
Dr.Reddy has indeed acted responsibly for our future. No words to thank him. Perhaps he realized wisdom is never on the menu. But he ended up owning the restaurant !!!