Ten years on, why the country is unlikely to revisit the Lehman crisis

A stringent retail lending mechanism, a scathed but smarter MF sector and insolvency laws that could foster a healthier India Inc may see the country steer clear of a 2008-like economic mess

On September 15, 2008, fear ruled the street. The collapse of Lehman Brothers had left the financial system tottering. In the 25 years I have spent in the banking industry, I had never seen any other international event having such a huge impact on India. Talks of job losses were rife, and many jobs were actually lost. The Reserve Bank of India rushed in to calm the markets. Easy liquidity became the order of the day to ensure availability of adequate funds to the system.

And that was just the beginning. No one will forget the panic redemptions in liquid funds and fixed maturity plans, leading to losses that the schemes had to incur to repay investors. Banks and other lenders became extremely risk-averse, and despite the improved liquidity, refused to lend either to corporates or individuals. Real estate was the hardest hit, with lenders putting pressure on developers to drop prices and sell inventory.

A few months down the line, the State Bank of India under Om Prakash Bhatt came out with the (in)famous teaser rate home loan schemes to boost demand. There were some great offers from the developers. But after a couple of not-so-good quarters, things returned to normal. The government had loosened its purse strings and the RBI had also cut policy rates almost by half. Credit growth soon picked up.

Several corporate loans were renegotiated and restructured at that time, laying the foundation for the current non-performing assets crisis. But more on that later.  

The retail changeover

The good thing that happened was that retail loans underwent a complete metamorphosis. The credit bureaus had already received legal backing in 2005 but were still struggling to make an impact. Many lenders were dragging their feet in sharing the data or did not share quality data feeds about their retail borrowers with the credit bureaus. The RBI ensured that the lenders followed the law that required them to share data with credit bureaus. Soon, retail borrowers realised that their access to credit would be cut off from all lenders, even if they defaulted with one. The resultant credit discipline ensured that unsecured lending to retail borrowers became a sunrise industry, with a scramble to lend to individuals and small businesses. Of course, there are many factors responsible for the boom in unsecured retail lending, but the major boost can be traced back to the immediate aftermath of the 2008 crisis and the resultant emphasis on systemic solutions. At least for retail lending, it seems to have worked wonders.

What is interesting is that default rates on unsecured lending to retail borrowers have dropped to low single-digit percentages for most lenders, and for most, the business is a profitable line of activity now. Home loans are available today from commercial lenders for small-time businesses or even people employed by them. This was unthinkable just a few years ago. While many factors are responsible for this rise in financial inclusion, one significant factor is the emphasis on credit reporting, and the resultant credit discipline it instilled among retail borrowers.

A smarter MF industry 

The mutual fund industry learnt its lessons reasonably well as fund houses weathered the taper tantrums of July 2013. The current spate of corporate NPAs has hardly impacted the mutual fund industry, which seems to have learnt its lesson well there too. The amount of NPAs in relation to the size of the industry is minuscule. I am keeping my fingers crossed here, as I had always maintained that the mutual fund industry cannot forever remain immune to the corporate NPA mess, but I hope I am proven wrong. The Lehman crisis can be said to be among one of the major shocks that the debt mutual fund industry bore and came out stronger.

India Inc: painful medicine for a healthier tomorrow

This brings me to the corporate NPA mess for which the foundation was laid during those days in 2009-10 when corporate restructuring was the order of the day. In the name of not upsetting the apple cart, these schemes allowed both lenders and borrowers to delay the day of reckoning and increased the size of the mess. With the insolvency laws in place now, we are in the midst of a painful change that will lead to a healthier tomorrow. We seem to have finally bitten the bullet on this one.

They say it is a shame to waste to a good crisis. As far as the retail lending and mutual fund industry are concerned, we can safely say that the lessons learnt from the Lehman Brothers crisis did not go waste. In the case of the banking industry, which as flushed with cash then, and interestingly insulated from the crisis, things have turned bad. History need not repeat itself, always.

(The author is a Sebi-registered investment advisor)