Sub Prime Crisis & Its Impact On Indian Economy

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 IT sector & outsourcing: Limited impact Sector.

• • 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.

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Sub prime’s impact on Several German major SAP, which had shown interest to open its Sector.

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.

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