Although warning signals regarding an impending global financial crisis were visible for some time, few anticipated the speed with which it has unraveled and the swiftness with which the contagion is spreading across continents to engulf developed and developing countries alike. Governments, central banks, regulators, bankers themselves and some canny investors like Warren Buffet have completed transactions which would have seemed unimaginable and, for some of them, completely at variance with their own long-held convictions.  Investment banks that propped up Wall Street have disappeared; major capitalist countries are pledging huge sums of taxpayer money to directly manage home mortgages using expert advisors, strengthen regulators and extend equity support to banks.      

The initial reaction in India has had a very narrow focus. The advanced quantitative financial tools meant to spread risks blamed for triggering the crisis are barely used by Indian financial institutions, which are still tied to traditional deposit and loan-based transactions. Home loans are themselves not refinanced such that debt servicing liabilities end up exceeding the repayment capacities of borrowers, nor can such liabilities be packaged and farmed out by banks as in the case of subprime mortgages in the US. The danger initially perceived for India from the global financial crisis was, therefore, only to institutions like ICICI with some small exposure to US financial tools or those with business links to failed institutions like AIG or Merrill Lynch. It was believed, therefore, that the crisis could be managed by strengthening these institutions’ risk coverage under regulators’ watchful eyes.   

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