India, to end ‘lazy banking’, you must first get rid of Basel’s bank regulations which orders banks to be ‘lazy’.

Sir, I refer to James Crabtree’s report “Modi promises to end India’s ‘lazy banking’” January 5.

It states that Narendra Modi, India’s prime minister, speaking at a summit of India’s public sector financial institutions, “promised to end the country’s heritage of ‘lazy banking’, a term often used to criticize risk-averse lenders”.

Good for him! But does Modi know that would mean India has to abandon the Basel Committee’s whole approach to bank regulations? 

Basel II and III both have, as their principal pillar, credit-risk weighted capital requirements; which allow banks to earn higher risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky… and which therefore stimulates banks to be risk averse… and lazy.

I sure hope Jayant Sinha and Arvind Panagariya understand the need for India to abandon such regulatory foolishness, which they currently have accepted; and sufficient strength to convince the rest of India of it. If successful, I am sure many in developing and develop countries will be much grateful for them setting the example and leading the way.

During the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I presented a document titled “Are the Basel bank regulations good for development?”. I then argued “Absolutely not! Since then I have become convinced these regulations are even more dangerous than I thought. At that time I had not realized the full effect of these capital requirements had in the risk-adjusted returns on bank equity. 

Those Basel II regulations caused the financial crisis 2007-08; that by driving banks excessively into “safe” segments like AAA rated securities, housing finance and “infallible sovereigns” (Greece) against almost no capital, leverages over 50 to 1. 

And those regulations, Basel II and III, are currently impeding the recovery of many economies precisely because they have ordered banks to be lazy… and not lend to “risky” small businesses and entrepreneurs.

Friends, please never forget, risk-taking is the oxygen of development