Sub Prime Crisis
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- Pages: 30
The Subprime & India
Presenters: Gaurav Surana
1
What is Sub Prime crisis • Sub prime, as the word suggests, is any thing that is not prime. In the sub prime crisis context it simply means lending money to sub prime borrowers i.e. lending to people with low or poor credit worthiness.
2
• What is a sub-prime loan? • Why loans were given? • What was the interest rate on sub-prime loans? • How did this turn into a crisis? • What has been the impact of the crisis? [ Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn).]
How is the rest of the world affected? • Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. • Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world. • The IMF had revised its forecast for global growth downwards – from 3.9 per cent to 3.7 per cent for 2008, and from 3.0 per cent to 2.2 per cent for 2009.
4
US Sub Prime Crisis (Securitization) §
Suppose 400 Students Of IBS take home loan worth Rs 1 crore each
§
They take loan (Cash) from HDFC Bank & keep home papers as collateral with bank
§
Bank transfer these papers to SPV to convert ILLLIQUID Assets into LIQUID Assets.
§
Bank enhances credit quality of assets by giving Guarantees, LC etc Credit Enhanced AAA, AA
14%
Home Loan Borrowers
Papers of Rs 400 cr
Cash Rs 400cr
MBS
Papers
S P V
HDFC Bank Cash
G Sec: 7.8 %
10 %
Investors Cash
(Banks, FI’s, Hedge fund, Insurance Cos)
5
Credit Enhanced AAA, AA
14 %
Home Loan Borrowers
Papers of Rs 400 cr
Papers
Cash
Cash Rs 400cr
Home Loan Borrowers
EMI
Cash Circulates in Economy Asset Bubble Bubble Burst Default
S P V
HDFC Bank
HDFC Bank
EMI
MB S
Cash
S P V
Coupan & Principal
G Sec: 7.8 %
10 %
Investors
(Banks, FI’s, Hedge fund, Insurance Cos)
Investors
Asset Prices Inflation Asset Price Falls
Borrower
(Loan Amt > Home Market value)
6
Effect on Indian industries • IT sector & outsourcing : limited impact • Real estate: harsh impact • HR policies: India Inc. looks for renewal • Auto industry: minimal impact as per Ford and GM • Business sector : negative impact 7
Effect on FDI & FII inflow… • FDI inflows:
Source: EXIM Bank 8
Sector wise FDI Inflow…
Amount in Rupees Crore & also in US$ Mn
Source: EXIM Bank
9
Foreign Investment Inflow…
Source: EXIM Bank
10
Market Meltdown • January 10: touched 21000 points • January 21: down by 1408.35 or 7.41% • Jan 22: market wide circuit was applied as market fell by more than 10% on a single day. • Feb 11 & 14: down by 833 and 817 resp. • March 3 & 17: down by 900.84 and 951.03 • June 27: down by 619.60 • July 3 & 15: down by 570.51 and 654.32 • Sept 15: down by 469.54 • Oct. 6, 10, 15: down by 724.62, 800.51 and 674.28 • Dec. 26: it was at 9328.92 Source: www.Capital market.com
11
12
Indian Financial services • The US sub-prime market crisis, which so far caused losses worth $181 billion to the world’s top 45 banks by the end of FY08, has started hitting Indian banks also.( www.economist.com) • India’s largest private sector bank ICICI Bank announced a loss of about Rs. 1056 Crores owing to the sub prime crisis of US in the FY08 results. • Punjab national Bank, Bank of India, State Bank of India, Bank of Baroda were major banks having an exposure to the instruments issued by Lehman and Merrill Lynch. • The broking firms are also finding low volumes of investors 13
Real estate… • RBI has put restriction on Indian banks to finance real estate. • Many global majors are either postponing or cutting the expansion plans a. Google has cut its expansion plan in NCR region b. German major SAP has postponed its operations in Gurgaon • Realty companies having direct exposure of sunked financial institutions are facing selling pressures.
14
Source: Dalal Street Journal 15
Infrastructure… •
Adverse impact on the infrastructure companies as it disturbs the financial atmosphere for the companies which are in the growth stage.
•
Lately, after having raised money through IPO’s many Indian infrastructure companies have gone in for QIP issues with the financial majors across the world.
•
Growth declined from 5.2% in June, 07 to 3.4% in June, 08
•
Going forward, if there is no change in the scenario, fund raising by infrastructure companies could become a problem.
•
Stocks that got affected: Reliance Infrastructure, Prajay Engg, Triveni Engg, Pratibha Inds, Unity Infra, BSEL Infra, Nagarjuna Construction, Sujana Tower, Madhucon Projects, Jyoti Structures, Action Construction. 16
IT and Outsourcing… • A limited impact in short & medium terms but poses a great challenge in long run.(NASSCOM) • Growth will be between 22-23% as compared to 31% of last year.(NASSCOM) • Mckinsey reports that software exports are set to touch US $60 Bn in 2008-2009 even if the growth is at 22-23%. (www.Mckinsey.com) • ITES such as BPO are also affected.(NASSCOM)
17
Auto industry… • Overall industry sales fell 4% as compared to last year’s growth of 13.5%.(Ref: www.economist.com) • 12% drop in sales of motorcycles and 44% drop in small category of electric two wheelers resulted in 8% drop in overall two wheelers.(Ref: www.economist.com) • Heavy discounts offered :- 8L in Honda Civic, 25% in Mercs,25% in BMW. (Ref: www.economist.com)
18
Impact on other sectors • Crude oil production: -ve growth of -4% in June, 08 • Finished Steel : Production declined 4.4% in June,08 • Cement: 6% in June, 07 to 3.8% in June, 08 19
HR policies… • Hewitt Associates(HR consultancy firm)study: average salary projections for the next year are lower at 13.9% unlike last year’s 14.8% • 20% are resorting to slowdown in hiring and complete freeze. • 57% are looking for lower HR budgets. • 31% are deploying manpower for better efficiency • 9% are looking for decrease in training budgets.
20
% age Of Exports To The USA
21
Exports (Amt in crores)
22
Source: RBI Bulletin
23
GDP
Updated till 15th Oct.
*: forecast by Institute of International Finance #: forecast by RBI
Source: EXIM Bank 24
Index Of Industrial Production…
Source : Ministry Of Statistics and Program Implementation GOI
25
Opportunities in India due to The US recession •
US recession may be a boon for Indian offshore software companies
•
The impact of recession is higher to small and medium sized (SMEs) enterprises in the US whose bottom lines get squeezed due to lack of spending by consumers
•
SMEs in the US are under severe pressure to increase profitability and business margins to survive. This will force them to outsource and even have M&A arrangements with Indian firms.
•
India is going to be a great beneficiary of this trend which will minimize the impact of the US recession on Indian industry
•
By March 2008, India had received SME outsourcing deals worth $7 billion from the US as against $6.2 billion in the previous year 26
Measures Taken by The RBI •Reduced CRR from 7.5 in Dec 2007 to 5.5. •SLR was reduced from 25% to 24%. •PLR has fallen slightly from 13.75%-14.00% to 12.50%13.25%. •Deposit Rates has increased from 8.00%-9.00% to 8.50%10.00%. •Repo rate decreased from 9% on Oct. 19 to 6.5%. On December 27 8.
Learning from Subprime crisis for India… • Sound Banking Practices; • Controlled Derivatives Market; • Prudent Investment by Indian Companies Abroad;& • Quality Inward Investment.
28
Challenges ahead… • Maintaining the credit flow • Reformation of financial sector regulation • Effective implementation of BASEL II framework • Banking development and financial inclusion in Eastern India.
Source : Speech by D.Subbarao on The Global Financial Turmoil and Challenges For India
29
"Although markets do tend toward rational positions in the long run, the market can stay irrational longer than you can stay solvent. - Keynes"
Thank you 30
Presenters: Gaurav Surana
1
What is Sub Prime crisis • Sub prime, as the word suggests, is any thing that is not prime. In the sub prime crisis context it simply means lending money to sub prime borrowers i.e. lending to people with low or poor credit worthiness.
2
• What is a sub-prime loan? • Why loans were given? • What was the interest rate on sub-prime loans? • How did this turn into a crisis? • What has been the impact of the crisis? [ Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn).]
How is the rest of the world affected? • Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. • Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world. • The IMF had revised its forecast for global growth downwards – from 3.9 per cent to 3.7 per cent for 2008, and from 3.0 per cent to 2.2 per cent for 2009.
4
US Sub Prime Crisis (Securitization) §
Suppose 400 Students Of IBS take home loan worth Rs 1 crore each
§
They take loan (Cash) from HDFC Bank & keep home papers as collateral with bank
§
Bank transfer these papers to SPV to convert ILLLIQUID Assets into LIQUID Assets.
§
Bank enhances credit quality of assets by giving Guarantees, LC etc Credit Enhanced AAA, AA
14%
Home Loan Borrowers
Papers of Rs 400 cr
Cash Rs 400cr
MBS
Papers
S P V
HDFC Bank Cash
G Sec: 7.8 %
10 %
Investors Cash
(Banks, FI’s, Hedge fund, Insurance Cos)
5
Credit Enhanced AAA, AA
14 %
Home Loan Borrowers
Papers of Rs 400 cr
Papers
Cash
Cash Rs 400cr
Home Loan Borrowers
EMI
Cash Circulates in Economy Asset Bubble Bubble Burst Default
S P V
HDFC Bank
HDFC Bank
EMI
MB S
Cash
S P V
Coupan & Principal
G Sec: 7.8 %
10 %
Investors
(Banks, FI’s, Hedge fund, Insurance Cos)
Investors
Asset Prices Inflation Asset Price Falls
Borrower
(Loan Amt > Home Market value)
6
Effect on Indian industries • IT sector & outsourcing : limited impact • Real estate: harsh impact • HR policies: India Inc. looks for renewal • Auto industry: minimal impact as per Ford and GM • Business sector : negative impact 7
Effect on FDI & FII inflow… • FDI inflows:
Source: EXIM Bank 8
Sector wise FDI Inflow…
Amount in Rupees Crore & also in US$ Mn
Source: EXIM Bank
9
Foreign Investment Inflow…
Source: EXIM Bank
10
Market Meltdown • January 10: touched 21000 points • January 21: down by 1408.35 or 7.41% • Jan 22: market wide circuit was applied as market fell by more than 10% on a single day. • Feb 11 & 14: down by 833 and 817 resp. • March 3 & 17: down by 900.84 and 951.03 • June 27: down by 619.60 • July 3 & 15: down by 570.51 and 654.32 • Sept 15: down by 469.54 • Oct. 6, 10, 15: down by 724.62, 800.51 and 674.28 • Dec. 26: it was at 9328.92 Source: www.Capital market.com
11
12
Indian Financial services • The US sub-prime market crisis, which so far caused losses worth $181 billion to the world’s top 45 banks by the end of FY08, has started hitting Indian banks also.( www.economist.com) • India’s largest private sector bank ICICI Bank announced a loss of about Rs. 1056 Crores owing to the sub prime crisis of US in the FY08 results. • Punjab national Bank, Bank of India, State Bank of India, Bank of Baroda were major banks having an exposure to the instruments issued by Lehman and Merrill Lynch. • The broking firms are also finding low volumes of investors 13
Real estate… • RBI has put restriction on Indian banks to finance real estate. • Many global majors are either postponing or cutting the expansion plans a. Google has cut its expansion plan in NCR region b. German major SAP has postponed its operations in Gurgaon • Realty companies having direct exposure of sunked financial institutions are facing selling pressures.
14
Source: Dalal Street Journal 15
Infrastructure… •
Adverse impact on the infrastructure companies as it disturbs the financial atmosphere for the companies which are in the growth stage.
•
Lately, after having raised money through IPO’s many Indian infrastructure companies have gone in for QIP issues with the financial majors across the world.
•
Growth declined from 5.2% in June, 07 to 3.4% in June, 08
•
Going forward, if there is no change in the scenario, fund raising by infrastructure companies could become a problem.
•
Stocks that got affected: Reliance Infrastructure, Prajay Engg, Triveni Engg, Pratibha Inds, Unity Infra, BSEL Infra, Nagarjuna Construction, Sujana Tower, Madhucon Projects, Jyoti Structures, Action Construction. 16
IT and Outsourcing… • A limited impact in short & medium terms but poses a great challenge in long run.(NASSCOM) • Growth will be between 22-23% as compared to 31% of last year.(NASSCOM) • Mckinsey reports that software exports are set to touch US $60 Bn in 2008-2009 even if the growth is at 22-23%. (www.Mckinsey.com) • ITES such as BPO are also affected.(NASSCOM)
17
Auto industry… • Overall industry sales fell 4% as compared to last year’s growth of 13.5%.(Ref: www.economist.com) • 12% drop in sales of motorcycles and 44% drop in small category of electric two wheelers resulted in 8% drop in overall two wheelers.(Ref: www.economist.com) • Heavy discounts offered :- 8L in Honda Civic, 25% in Mercs,25% in BMW. (Ref: www.economist.com)
18
Impact on other sectors • Crude oil production: -ve growth of -4% in June, 08 • Finished Steel : Production declined 4.4% in June,08 • Cement: 6% in June, 07 to 3.8% in June, 08 19
HR policies… • Hewitt Associates(HR consultancy firm)study: average salary projections for the next year are lower at 13.9% unlike last year’s 14.8% • 20% are resorting to slowdown in hiring and complete freeze. • 57% are looking for lower HR budgets. • 31% are deploying manpower for better efficiency • 9% are looking for decrease in training budgets.
20
% age Of Exports To The USA
21
Exports (Amt in crores)
22
Source: RBI Bulletin
23
GDP
Updated till 15th Oct.
*: forecast by Institute of International Finance #: forecast by RBI
Source: EXIM Bank 24
Index Of Industrial Production…
Source : Ministry Of Statistics and Program Implementation GOI
25
Opportunities in India due to The US recession •
US recession may be a boon for Indian offshore software companies
•
The impact of recession is higher to small and medium sized (SMEs) enterprises in the US whose bottom lines get squeezed due to lack of spending by consumers
•
SMEs in the US are under severe pressure to increase profitability and business margins to survive. This will force them to outsource and even have M&A arrangements with Indian firms.
•
India is going to be a great beneficiary of this trend which will minimize the impact of the US recession on Indian industry
•
By March 2008, India had received SME outsourcing deals worth $7 billion from the US as against $6.2 billion in the previous year 26
Measures Taken by The RBI •Reduced CRR from 7.5 in Dec 2007 to 5.5. •SLR was reduced from 25% to 24%. •PLR has fallen slightly from 13.75%-14.00% to 12.50%13.25%. •Deposit Rates has increased from 8.00%-9.00% to 8.50%10.00%. •Repo rate decreased from 9% on Oct. 19 to 6.5%. On December 27 8.
Learning from Subprime crisis for India… • Sound Banking Practices; • Controlled Derivatives Market; • Prudent Investment by Indian Companies Abroad;& • Quality Inward Investment.
28
Challenges ahead… • Maintaining the credit flow • Reformation of financial sector regulation • Effective implementation of BASEL II framework • Banking development and financial inclusion in Eastern India.
Source : Speech by D.Subbarao on The Global Financial Turmoil and Challenges For India
29
"Although markets do tend toward rational positions in the long run, the market can stay irrational longer than you can stay solvent. - Keynes"
Thank you 30
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