Desi Subprime

“Subprime” will arguably be the most googled word of the year 2008. Any sane human being having access to internet or lesser still to any newspaper must have surely come across this word. Many might have ignored it and other might have even created some sorts of notion about it in their minds. Without going into technicalities of it, one can safely assume that it ranks fairly high on the list of causes of the financial meltdown. Doling out loans to relatively less worthy customer with proven track record of defaults in repayment doesn’t seem to indicate any sorts of prudence from the financial bigwigs. Their only leverage of a probable appreciation in value of mortgaged realty went bust and the giants came down under its own weight. And the tightly coupled economies that we are in the globe, the tremors would be felt across every latitude and longitude.

Although each passing day sees a new financial institution claiming bankruptcy while other proposing lay-offs as a cost-cutting measure, the incident per se is passé. Right, the chips are down but no point in wailing over it. The need of the hour is for us to put the chips back in a way that such crisis doesn’t strike us a second time.

Frankly, looking at the current market conditions and the prevailing lending scenario that has been in existent in India, it doesn’t seem to be much different from the ‘Subprime’ lines. Rewind a few months, and the nasty calls from the ICICIs and the HDFCs offering loans without any surety aren’t something unheard off. These banks have been ready to disburse loans virtually at the tilt of the hat. As in case of subprime, many of these beneficiaries have been known defaulters. It won't be surprising if you find a Tom, Dick or Harry zooming past you in a sedan entirely hypothecated to a bank… worse still the gas driving it too would be on credit… courtesy the lending institutions.

The response of any financial turmoil by the central bank in India could be simply described as one right from the text-books. The easing and freezing of liquidity by altering the CRR, Repo Rate has been a prescribed one, but the irony that it isn’t as linear. The economy is booming but that doesn’t mean that there shouldn’t exist any tabs on it. On face value it might look like that we are hampering the growth; but these prohibitions are required for sustained all inclusive growth of our emerging economy. An apt analogy that I find here is that of a kite. What keeps a kite flying high is that string attached to it the other end of which is in our hand. Snap the string and the result is evident.

Bottom-line is that there is an urgent need to get the acts together, be it the RBI, the SEBI or the Planning commission. All of them have to don their thinking caps as well their action caps to prevent the Indian economy going the US of A way. Lest it won’t be long that the subprime devil will come knocking our doors.