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SUB PRIME CRISIS & IT’S

IMPACT ON
INDIAN ECONOMY.

Project By.,

Anil M. Khare
Roll No. 17 XMBA-03
INDEX
• …
What is sub prime.?
• Sub prime crisis in detail.
• How it happened.?
• Sub Prime Impact on some of the Financial
Institutions.
• Sub Prime Impact on Indian Economy.
• Sub Prime Impact on IT Sector.
• Sub Prime Impact on Real Estate.
• Sub Prime Impact on Employment.
• Sub Prime Impact on Auto Industry.
• Sub Prime Impact on Banking Industry.
• Impact of a US recession on India.
What is sub prime.?
Sub Prime: Sub Prime as the word
defines, means subordinate to primary.
The word is used in the lending industry
to define a borrower who does not have a
good credit history and hence is not able
to qualify for best market rates vis-à-vis
the prime category borrower.
The term "subprime" reflects not the
lending rate but the borrower's credit
status.
Sub prime lending is also called as a …
• B-Paper,
• near-prime,
• second chance lending.
Types of Sub Prime Mortgages:
Sub Prime Mortgages can be classified in
3 categories:

3. Interest-only mortgages: which allow


borrowers to pay only interest for a period
of time, typically 5-10 years.
4. Pick a payment loans: for which borrowers
choose their monthly payment (full
payment, interest only, or a minimum
payment which may be lower than the
payment required to reduce the balance
Sub prime crisis in
• It all started in 2006 with US Market tumbling down due to
defaults by the sub prime borrowers.
• Increase in interest rates and simultaneously fall in property
prices, hit the market leading to sub prime mortgage crisis.
Between the years 2000-2005,
• low interest rates, high property prices.
• in 2005, the property prices started falling, interest rates
started touching the roof top, leaving no room for the sub
prime borrowers.
• In 1994, less than 5% of total mortgages were sub prime in
US. But within 2005, that figure went up to 20%.
• However, in 2005, the rates of interest began to increase.
Therefore, demand for home came down which also
brought down the property prices leading to start of sub
prime crisis.
How it happened?
A borrower “X” with poor credit history approaches a
lender/financial institution “B” for loan.
Seeing his poor records, the financial institution declines
the mortgage to him at prime lending rates.
However, “B” has an appetite to take risk by charging
higher interest rate from “X”. This is called sub prime rate
and sub prime mortgage market.
“X” agrees to avail loan at sub prime rate.
“B” further securitizes these loans i.e. it converts these
home loans into financial securities, which promise to pay a
certain interest. This is called investment in Mortgage
Backed Securities (MBS).
Banks begin lending to
people with BAD CREDIT
(ARM) – Adjustable Rate Mortgage
The Credit
Crisis
Banks promised that housing prices will
continue to rise.
Sub Prime Impact on some of
Write-Offs by Financial Institutions.
Unit: Billion Dollars
Sub prime’s impact on Indian

• The ongoing US subprime crisis may not have a direct


impact for the time being, but is likely to hit Indian markets
in various other ways.
• No hit for the HDFC Bank of the US subprime crisis.
• HDFC’s non performing loan is below 1%.
• The companies, including outsourcing units and IT enties
that heavily depend on their overseas clients for getting
their revenues, may get affected in days to come.
• The subprime crisis may lead to a slowdown in US economy
which leads to Unemployment or Cost cutting impact on
Indian units.
Sub prime’s impact on Several
• Sector.
IT sector & outsourcing: Limited impact
• Growth will happen but at 22-23 percent it will be lower than in
the last two-three years.
• IT-enabled services (ITES) such as business process outsourcing
(BPO) comprising voice and data, captives may get affected.
• In the next two-three quarters, clients in the financial sector
will be conservative, withhold spending on new projects and
delay expansion.

• Real Estate: Harsh impact 


• RBI had already increased the interest rates to contain inflation.
• RBI has already put restriction on Indian banks to finance real
estate companies in the country.
• Google has cut its expansion plan substantially in the NCR
region. Earlier, the global major has expressed intention to take
lease of 5 lakh sq feet of the office space. But now, it is learnt,
it has cut its requirement to only 3 lakh sq feet.
Sub prime’s impact on Several
• Sector.
German major SAP, which had shown interest to open its
operation in Gurgaon in the NCR region, has now postponed the
plan.
• Global consultancy firm- With the cancellation and
postponement of the expansion plan of companies, many of the
regions like NCR, Bangalore and Pune.
• The rentals in these areas are projected to fall by 25 to 30% in
the next 12 months.
• The worsening condition in the demand for office space will
affect the demand for the residential space also.
• HR Policies: India Inc looks for renewal
• Hewitt Associates (HR consultancy firm) study: A strong salary
increase of 14.8% in 2008. Average salary projections for the
coming year are lower by only a percentage point at 13.9%.
• 20% are resorting to a slowdown in hiring or a complete freeze.
• 57% are looking to balance the effect of inflation and lower HR
budgets by increasing productivity
• 31% are deploying their manpower towards better efficiency.
Sub prime’s impact on Several
Sector.
• Auto Industry: Minimal impact according to Ford and GM
• Ford and GM are not overly dependant on their American
parents for capex (capital expansion), and the BRIC operations
of both are profitable enough to cushion the American problem
• No loan crisis to affect Indian market; limited exposure to
Lehman crisis
• Banking Sector: Negative Impact
• According to one estimate, global majors like Citibank, Merrill
Lynch and Deutsche Bank, have lost over US$180 billion due to
the subprime crisis.
• ICICI bank’s loss: India's largest private bank is faced with a
loss of Rs10.56 billion till January 2008.
Impact of a US recession on India:
• A credit crisis in the United States might lead to a restructuring
of asset allocation at pension funds In specific sectors,
• IT Enabled Services sector may be hit since a majority of Indian
IT firms derive 75% or more of their revenues from the United
States.
• The tourism sector could be affected.
• A recession in the United States may see the loss of some jobs
in India.
Thank You..!

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