The housing finance racket unearthed by the Central Bureau of Investigation as also the ‘excesses' committed by the ‘for profit' microfinance institutions (MFIs) in recent months are a part of ‘ swadeshi vulnerabilities' for which the regulatory framework needs to be tweaked, former Reserve Bank of India Governor Y. V. Reddy said.
Referring to the various scams and excesses in the financial sector, in an exclusive interview with The Hindu before the launch of his second book titled ‘Global crisis, recession and uneven recovery' here on Thursday, Dr. Reddy said: “In a way, I would say these [the housing finance racket and MFIs] are all symptomatic of what I call ‘ swadeshi vulnerabilities'. These are our own vulnerabilities and have to be studied in greater detail and the regulatory framework will have to be tweaked to take care of that”.
Dr. Reddy, as RBI Governor from 2003 to 2008 — a time of multiple challenges for the Indian economy — had stayed the course of financial pragmatism in times of relentless deregulation to ensure that India largely escaped the fate that befell the worst affected of the world's economies, owing to the global financial crisis.
Minor impact
Recalling a chapter in his book on current issues with regard to the financial sector, he said that it was more than a year ago that he had said that though the Indian financial sector had weathered the crisis with minor impact, it did not mean there were no vulnerabilities. “I specifically tried to identify some vulnerabilities and I said these should be studied in depth. Among the vulnerabilities I identified at that time, was “for profit” MFIs and subsequently they did go into excesses. But fortunately, the size of the MFIs' exposure, somewhat similar to the U.S. subprime mortgage crisis that you mentioned, was not too big to have systemic implications,” he said.
The second area, he referred to, was the bond market. “We talk rather loosely of the size of the corporate debt market in India and the scam that you mention is, in a way, related to these. The bond market, more than 80-90 per cent, is private placement and it is done by few players. It is virtually fixed, it is nothing like a continuous trading and there is nothing to match up for price discovery…highly oligopolistic. And therefore, I felt it was a vulnerable area. So in a way, I am not totally surprised by the developments in the MFI industry, nor by the developments what we have today [housing finance scam].”
The third area, Dr. Reddy said, was the realty sector, that is housing “which is non-transparent, somewhat illiquid, the legal titles are somewhat difficult or questionable and therefore any large-scale financing of housing will have to also take into account the property rights, capacity for foreclosure”.
He argued that if the realty markets are not developed, then the financial sector should not have too much exposure to such markets. “All this [scams] happens because the corporate debt market is not transparent enough, it's not traded.
If it is trade, there will be competition. Frauds occur owing to the nature of the markets and the nature of the regulations which have some loopholes.
It is in a sense due to greed, but also due to the weaknesses in the arrangements relating to functioning in the market and regulations,” he said.
