On Financial Sector Reform in Emerging Markets : Enhancing Creditors' Rights and Securitizing Non-Performing Loans in the Indian Banking Sector - an Elephant's Tale

The Asian financial crisis brought to the forefront weaknesses in the banking sector of South-east Asia and the issue of banking reform. Although China and India were spared by the crisis, their banking sectors faced problems similar to those faced by the South-east Asian economies during the build-up to the Asian crisis. Decades of inefficient lending practices, poor monitoring, corruption, and a host of other factors had left the Indian banking sector saddled with huge folios of non-performing loans. Therefore, in order to clean up its banking system, the Indian government embarked upon major regulatory reform in the last decade including allowing banks and financial institutions to securitize their folios of non-performing loans. This comment argues that Indian policy response is not just a stop-gap solution to the problem of non-performing loans in the Indian banking sector. Although problems exist in the current Indian experiment, however, securitization of NPAs has been a positive development for the Indian banking sector. While it has helped strengthen the banking sector by clearing up funds for more lending, it has also provided an impetus to the development of a stronger fixed income market in India which has the potential to have considerably more depth than its regional counterparts. Such a market is important for a developing economy like India's so as to provide an alternative avenue of funding for industry