Reading Timothy Geithner's book, one realizes how difficult it is to solve a financial crisis. Mind you treasury and Fed had to arm twist some banks to agree to certain solutions. One key diff is almost everyone in the US was neck deep in crisis, so they had to cooperate(1/n)

That's not the case in India. Besides imagine the whining if we force a hdfc and kotak to accept a solution imposed on the industry at large (2/n)

The problem may be with real estate. But the solution has to be through the financing channel. You essentially need to bailout nbfcs and directly infuse capital in them. (3/n)

But even that's not easy as most promoters won't want to lose control. Except the frauds and those you ideally won't want to bail out. An AQR or stress test is one way to force reluctant good promoters to accept capital though . But it might reveal a deep hole (4/n)

Complicating matters is that only two nbfc/hfcs have really defaulted so far. Somehow even few of the vulnerable and dubious have somehow managed to survive and continue to remain as zombies. Atleast if we have more defaults, pain will be over and done with (5/n)

The other solution is to force banks to basically lend freely even wantonly to the sector. This is kinda what chiddu did in the aftermath of 2008. But that was not an India specific crisis plus there's a crucial difference in market structure between then and now (6/n)

Essentially public sector banks were a huge part of the banking system then. Today even if public sector banks fund nbfcs big time, most of it will just go to repay other creditors of nbfcs like pvt banks and bond markets, because latter have lent much more (7/n)

What the govt can be blamed for is not reacting quickly enough. Basically if psbs had flooded the nbfcs with money immediately after the crisis stuck, then confidence wouldn't have gone low and other lenders would have come back sooner. (8/n)

Ofcourse that's a huge moral hazard problem and would have maybe just postponed the issue but it was the best of the bad solutions in the environment (9/n)

Ultimately nbfc crisis is about regulatory failure in my view. Everyone from rockstar to urjit should answer how they let things go to this point when they knew real estate sector was in mess, how they turned a blind eye as entities with dubious Corp governance built huge b sheet

Some heads should roll at rbi and tough qns should be put to likes of rockstar. However we like to blame govt for everything. Ofcourse govt&finmin was also sleeping but primarily crisis and resultant gdp shocks is due to regulatory failure. RBI must answer and introspect (n/n)