SUBPRIME CRISIS &

INDIA

Presented to – Mr. Satish K. Thukral By: KAMAL KANT SONI

Faculty – F. Management PG-08-36, INMANTEC, GHZ.
 Americans were rolling in the
dough.

2 FINANCIAL CRISIS & INDIA 04/19/09

Then They started practically
flushing their money down the toilet.

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Govt. spending,
Corporate
 NO PROBLEM

Banks begin lending to people with BAD CREDIT

(ARM) – Adjustable Rate Mortgage
 WHAT IS

SUBPRIME LANDING
RATE?

7 FINANCIAL CRISIS & INDIA 04/19/09

 Sub-prime Landing…
Sub-prime lending is to borrow
money to people with poor
credit histories.
Sub-prime lending rater are
higher as compared to PLR

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Banks promised that housing
prices will continue to rise.
Banks start selling
MORTGAGE BACKED SECURITIES*

*Investments of packaged home loans

These are fine if the housing market goes up...bad if it doesn't.
9/11 shocks US and
world economies
Fed drops
interest rate to

1
Investors buy
lots of
mortgaged
backed
securities
...with very high fees
Real estate soars 10 – 20%
from 2002 - 2006
Building up of the housing bubble
Home owners
spend like
celebs using
Home Equity
Loans
 BUT…….

17 FINANCIAL CRISIS & INDIA 04/19/09

 LIQUIDITY
OVER

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Starting 2006 housing bubble
busted
So this happened...

Credit Bubble Housing Bubble Credit Bubble

Fed increases
interest rate to

5.25
 Adjustable Rate Mortgages
increase with interest rates

Home
Owners
can't pay
their
mortgages
Home owners are forced out of their homes
When SUB-PRIME holders unable to repay
their loan, major banks who has shows losses in
their balance sheet, file for Bankruptancy or got
nationalized.

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In their BALANACE SHEET,

In left side (liability), NOTHING IS

RIGHT,
In right side (assets), NOTHING IS LEFT.

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So..What were
•During 2007, nearly 1.3 million U.S.
housing properties were subject to
foreclosure activity, up 79% from 2006.

•Major banks and other financial

institutions around the world have
reported losses of approximately
US$435 billion as of 17 July 2008.

•During the week of September 14, 2008

the crisis accelerated, developing into a
global financial crisis.resulting in the
bankrupcy of some of the world’s biggest
financial institutes..
The following week the Dow-Jones
index of the largest companies traded

market declined 22%, the worst week in the

index's
28 118-year history
FINANCIAL CRISIS & INDIA 04/19/09
Since 1 January, 2008, owners of stocks in U.S.
corporations have suffered about $8 trillion in
losses, as their holdings declined in value from $20
trillion to $12 trillion. Losses in other countries
have averaged about 40%.

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Some of the world
leading financial
institutes and
banks suffered
heavy losses and
some of them were
declared as
bankrupt the
estimate of losses
of some of the
finanial institutes
world wide is as
follows:
31 FINANCIAL CRISIS & INDIA 04/19/09
BEAR STERNS was acquired BY J P MORGAN in
March 2008 FOR 1.2$ BILLION.IT AQUIRED AT
PRICE OF JUST 10$ PER SHARE.

32 FINANCIAL CRISIS & INDIA 04/19/09

Source:
Unemployment
Rate
US
Government
digs deep to
bailout the
large financial
institutions

to the tune of...

$700B +
Neither presidential candidate really has a clue what to
do...

Lets hope this thing works!

Canada:
reduced interest rates and
increasing liquidity “Borrow indefinitely: Only in America”
Mexico:
falling Peso
and 2009 budget deficit estimated
dwindling U.S.: ??? to be close to $2 TRILLION,
economy still working out which is equal to 2.5% of GDP
financial bail-
Brazil: outs; more bank
Heavy credits, but failures to come
stabilizing and
recouping

Argentina:
Heavy job losses,
higher import tariffs
and weaker Peso

Credit Crisis: The Americas

Which implies,
national debt
can increase
beyond 70% of
GDP, the
highest since
the end of
World War II
39 FINANCIAL CRISIS & INDIA 04/19/09
 A DOMINO
EFFECT?
When America sneezes,
the rest of the world
catches a cold?
‘UNLIKELY’

Credit Crunch:
Is it only in the United States?
Europe - European banks have lost more money than
American banks due to investments in the U.S.
mortgage market.
Government stepping in to bail out banks from
‘going under’ in Denmark and U.K.
Threat of recession in Irish Republic and Spain
France, Germany, Italy and Portugal follow suit…
Iceland is all but officially bankrupt

Some are most affected.

Japan: Mizuho, second largest bank lost more than
$6 bn
Singapore: Temasek and GIC have become the
biggest shareholders of Merill Lynch and UBS
India: facing economic slowdown
China: sitting on surplus goods

Some are indirectly affected

Australia, Malaysia, New Zealand, Singapore, South
Korea and the Middle East have protected foreign
currency deposits.
Hence a promising economy…

Some are unaffected..

 Poland:
Part of Eurozone,but
has a stable banking Russia:
sector Fast growing
economy with large
Ireland: foreign reserves
First Eurozone country to
slide into recession
China: ???
France: Strained with economic
Sluggish economy heading surplus and counterfeit
for recession goods
Hungary:
-ve credit raing, heavy Singapore:
debts, huge current account Prosperous,
deficit government guarantee
India: for deposits till 2010
Economic slowdown
with high inflation
and poverty

BUT, the crisis is truly GLOBAL!

IMPACT ON CURRENCY

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Best Of A Bad Market

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Someone got lucky!

Alternate
investment
saw a surge
 Impact on Crude Oil

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 Global Market

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 World Markets
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 Credit Crunch

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A credit crunch is a sudden
reduction in the general availability
 Effect on INDIA

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 Mr. Smith in USA,
didn't paid his Loan

Mr. Sharma in India Lost

His Investments
Even after providing so many
home loans to their citizens the
American banks still having the
excess liquidity problem so
they decided to invest in
different stock markets of the
world, along with Indian stock
market
This Sudden Flow of
Money in Indian
Markets Resulted in
Rise of Market
On the other side, in India After
looking at Rise in Indian Stock Market
Due to credit crunch, American
bank started pulling back there
money from India…
•$16 Billion outflow from India in 2008
•Inflation at 12%
•$291 Billion – Indian FX reserves as of
03 Oct.
•IndianOil Corp costs to rise 70% to
$45 Billion
•Industrial growth plummets to 1.3% in
August
•Sensex down ~50% in 2008

63 FINANCIAL CRISIS & INDIA 04/19/09

IMPACT ON INDIAN BANKS

•ICICI Bank has the highest

exposure of $1.5 billion.

•SBI has an estimated

exposure of $1 billion.

•BoI of $300 million, and BoB

of $150 million.

•About 5-10 per cent of this

figure could be the losses that
these banks could incur.
In this way Mr. Smith didn’t paid
his loan & due to this, Sharma g
Financial Crisis is in America….

67 FINANCIAL CRISIS & INDIA 04/19/09

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 Steps taken by Indian Govt.
Reduced into CRR to 5.5%
Through cut into CRR, There is flow of 120+
thousand crore into Indian market
Plan to lift the Ban from PN (i.e. participatory notes)
Reduced the Prime Landing Rate by all Public sector
Banks
Reduced into ATF’s price (i.e. aircraft turbine fuel)
Planning for putting Ban on short selling.

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So think before you invest because…

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 After all, money doesn’t grow
on trees

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 What does the American Credit
The end of American economic
dominance and the birth of a
new world order..

So, who will be the next

superpower?
Clue: Asian money is actually
bailing out the western banks!
THANK YOU