I received several comments (some by email and some on the Wordpress blog) in response to my post about the possibility of a home grown financial crunch in India. Let me respond to some of them.
- Several comments asserted that there is a lot of black money in Indian real estate and this protects the lenders. It is difficult to make a categorical statement about black money which is by definition not publicly disclosed. My impression is that the prevalence of black money in real estate has been declining over time. The young upwardly mobile professionals have been demanding and getting white money transactions that can be almost completely financed by banks. I believe that much of the banking system’s real estate exposure involves transactions with negligible black money or structures which achieved high LTVs even after accounting for the black money.
- One comment asserted that the decline in property prices in India is confined to big cities and that the rest of the market is unaffected. This was true in the United States several months ago and is still partly true today – California and Florida account for a lot of the problems. Gradually, in India too, the problems could spread nationwide as they did in the US.
- Another comment highlighted the fact that while property loans in the US are without recourse, this is not the case in India. Actually, only in a few states of the US is it true that mortgages are without recourse by law. However, elsewhere in the US and in other countries, mortgages are in practice without recourse because of the difficulty of collecting. As we all know, when an unsecured retail loan defaults, recovery is quite low. Normally, what happens is that the banks modify the mortgage terms to persuade the borrower to keep paying the loan. But if the borrower defaults, the bank is left with whatever it can get for the collateral.