The business world is slowing down and companies are filing for bankruptcies. Not just ordinary companies, but MNC, who had been in business for a long time and are pioneers. To name a few, Lehman Bros, AIG, Merrill Lynch, Indy Mac Bank (the largest mortgage lender in the US), Bear Stearns. The seriousness and impact of this situation can be felt with the following statement by the Judge who ruled the sale of the assets of Lehman Brothers:
‘…In effect the only true icon to fall n a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I’ve ever sat through. It can never be deemed precedent for future cases. It’s hard for me to imagine a similar emergency……’
ICICI Banks in India were badly affected, but that collapsed and worst hit, but not DIRECTLY (because personally I find some relation and that is the link to the real estate) related to this was Satyam. If satyam was Indias Enron, I wonder and would really love to know the Indian Cynthia Cooper!
US sub-prime crisis.
The US sub-prime crisis has its roots in the US housing market. In 2006, out of the total housing loan mortgage assets of banks, 20% comprised of those issued to sub-prime borrowers.
About sub-prime borrowers:
Sub prime borrowers are ‘high risk’ borrowers who are required to pay a higher rate of interest than the regular customers for taking loans. A higher interest rate is levied on this segment of customers due to their lower ability to repay loans, lower/unknown credit history or unhealthy past in honoring their financial commitments to banks or other institutions. The risk of a default is perceived to be higher while lending to such customers, hence they are charged a higher rate of interest due to the higher risk involved. Such lending is referred to as sub prime lending.
The sub-prime crisis:
The sub-prime mortgage crisis came to the surface earlier this year when there were huge defaults in home loans by the sub-prime borrowers and banks had to liquidate their mortgaged property. The US property prices crashed and banks got struck with a severe shortage of liquid funds. The impact of the crisis was as under:
· Citibank and Merrill Lynch suffered losses on account of both their direct and indirect exposure to this segment.
· BNP Paribas halted redemptions in two asset-backed funds.
· UBS reported losses of US $ 700 mn.
The situation became alarming and central bank had to step into control the situation. The Fed announced interest rate cuts to improve the liquidity condition in the system. Since the beginning of the crisis, the US Federal Reserve has cut the Fed Funds rate by 100 bps to 4.25 per cent and has also simultaneously cut the discount rate to 4.75 per cent. The Bank of England also recently cut key rates by 25 bps to 5.5 % amidst growth concerns.
What does this mean to India?
Though US housing market woes continued, Indian Financial Institutions by and large had limited exposure to the US sub-prime sector. Thus the direct impact of the sub-prime crisis on India would be limited to that extend.
While the global linkages between India and the rest of the world have increased substantially in the recent past, the fact remains that the economy is still a largely domestic demand driven one. The rise in the levels of forex reserves to US $ 273 bn together with the structural changes seen over the past few years, in terms of higher rate of domestic savings, also increased the shock absorbing capacity of the Indian economy and leads us to continue to believe in the intrinsic strength of the same. Also our mixed economy culture may be a blessing.
Even though India boosts to be an independent country and a rising star in the horizon of word business, most of the business still comes from the US. Therefore the recession in the US will definitely slow down the growth of the Indian economy. Besides India, most of the worlds including Europe, Asia, and Russia have been affected.
It is hurtening to see people loosing their jobs, as with it comes end of many dreams...
Is it the beginning of the end, end of a wonderful era or the beginning of a new beginning? Can we say that the word is at the risk of coming to a standstill and there is nothing we can do about it!!!
I was just wondering this, and the inspiring acceptance speech, from Barack Obama echoed my ears ‘YES WE CAN’, indeed another lesson from another winner!!
‘……..The world today is connected by our own science and imagination, …..let us ask ourselves-if our children should live to see the next century;….What progress will we have made? This is our chance to answer that call…………………..that out of many we are one; that while we breathe, we hope, and where we are met with cynicism, and doubt, and those who tell us that we cant, we will respond with that timeless creed that sums up the spirit of a people: ‘Yes we can’.