1 NATIONAL CONFERENCE ON GLOBAL FINANCIAL CRISIS AND THE IMPACT ON INDIAN ECONOMY On 21 st February 2009 Organized By: Department of Commerce and Management Amrita School of Arts and Sciences, Kochi CONFERENCE PROCEEDINGS Compiled By: K.M. Vineeth Lecturer Department of Commerce and Management
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( CDOs) etc. The basic difference between these instruments being varying degrees of risk
levels associated with these products.
At this juncture, the credit rating agencies came to the help of these investment banks.
Using computer simulated financial tools they assessed the risk these instruments carried and
issued ratings for these instruments. The highest was a AAA rating. When the CDOs and
CMOs carried a rating from the renowned rating agencies, they became more credible.
At every stage all the participating financial entities involved made small profits. But
the profits surged as the mortgage market grew into trillions of US dollars. It is reported that
in the year 2005 alone about US $ 507 billion of subprime mortgages were securitised.
The investment banks went one step ahead. These financial products were guaranteed
by them and also insured by them. They guaranteed to the investors that they would buy them
back if the investor could not find a buyer for them. Insurance companies played their part by
offering new products to the investors of these securities to protect them against various types
of payment defaults. These instruments issued by the Insurance companies like AIG were
called as Credit Default Swaps(CDS). Vide these instruments the insurance companies
guaranteed that they would pay the buyer of the investment products if any of the covered
entities defaulted. These products of the insurance companies also became popular and it is
believed that about US $ 75 trillion worth of CDS were written. When AIG fell it had alone
written about US $ 450 billion CDS contracts. Of course all this was at a fee.
In this process US $ trillions worth of Mortgage Backed Securities were issued in theUS and actively traded in the secondary market of the US and also worldwide. Such was the
fashion in those days amidst the investing community that if an investment entity did not have
MBS in its balance sheet, then it was considered as though that entity had missed the best bus
in the wonderland of investments!
The Phenomenon of High Gearing
Another interesting phenomenon, but devastating in the long run, also took place. The
Banks, GSEs, investment banks found out that, more the loans given, the more merrier they
could be, earning higher income and cash flows. So they borrowed recklessly throwing all
prudential norms to the wind. As it is, the investment banks had very little capital of their
own as they were not under the control and supervision of the Federal Reserve. All these
entities became highly leveraged making them more riskier by increasing the risk of
insolvency.
Every entity involved in these transactions were income happy. And then all hell
broke loose!
The defaults begin
“All things, good and bad will pass” so goes the adage. The commodity prices,
following a cycle slowly began to rise. It began with the price of oil and then spread to all
other commodities. This very soon started eating into the disposal income of the people.
People who had two homes started defaulting on their second homes. The sub prime loanees
started defaulting as they found that they could not service the loans with the fall in their
disposal incomes. The defaults lead to foreclosure of the loans. The financial institutions took
over the houses and set about to dispose them. But to their dismay they found that the
property market was full of houses and properties being offered for sale by other similar
financial entities. They also found that there were no takers for the assets as the people who
had money soon expected the asset prices to fall further. The investors had suddenly become
risk averse. The property market was flooded with ”distressed assets” or “toxic assets”.
The problem commenced in the year 2007 itself. One of the biggest subprime lenders
in the US , The New Century Financial Corporation a US $ 56 billion company filed for
bankruptcy protection in April 2007. It is reported that over 100 prime and sub prime lenders
also collapsed in the year 2007.
The problem now started to seep into the mainframe economy. When the original
lenders did not get money they were unable to pass on the same to the aggregators who had
issued the MBS. These instruments soon started loosing credibility and value. The CDOs,
CMOs and the CDS, the exotic instruments innovated by the participants of the financialmarkets soon lost their credibility as they did not receive any cash inflows as such. As
It was reported that after seeing a spate of failures of banks and financial institutions,
the Queen of England was flabbergasted and asked something on the lines of “ why did
anyone not see it coming?” a very pertinent question but the answer to it borders on the
absurd and is also a bit complex.
The financial world is full of self proclaimed wizards, gurus, pundits and likewise
others. None had ever even hinted about the likely occurrence of such a crisis. And for this
one should have a small idea about the Black Swan theory. The Black Swan is the metaphor
for the occurrence of the rarest of the rare huge impact event. In the olden times it was
generally believed that swans were only white in colour. This belief was dispelled when
black swans were traced in Australia. None of the financial wizards ever believed that the
products financially engineered by them could ever fail until they actually failed! This
argument borders on the absurd but then it is exactly what has happened.
Another very important reason for not being able to predict the crisis is the fact that
the modern world has not developed tools to measure uncertainty. This is because it abhors
uncertainty. All the tools it has developed, namely mathematical models are all ones for
measuring risk. And unfortunately uncertainty and its effects have become a part and parcel of
our daily life. And developing tools for measuring uncertainty is as complex as counting the
grains of sand on a sea shore.
The remedies adopted for the malady
Since it all began with the liquidity crisis the main theme of the remedy strategy was
to infuse liquidity into the market. And that is what the US Government did. The Bush
Government came up with a US $ 700 Billion bail out package called the Emergency
Economic Stabilisation Act. It enabled the US government to lend to the private companies,
give them access to capital by getting ownership rights of those entities in return in some way.
The help to the financial institutions was to be on a case by case basis. The Obama
Government is also finalising a US $ 850 billion plan to help the economy tide over the
difficulties.
In Europe and also elsewhere the central banks have been pumping money into the
system in varying amounts.
But are the actions taken yielding the desired results? Not yet. Maybe it will take time
before matters are set right.
But unlike the actions taken to surmount the problems arising out of the greatdepression of the 1930s, this time around there is a total concerted action taken
simultaneously by all the concerned parties at the international level. This will definitely bear
fruits in the days to come.
The people who are to be blamed for this fiasco.
Nearly every participant in the financial market has to take their share of the blame.
The Federal Reserve was totally responsible for not monitoring the sub prime lenders and the
innovation of exotic financial products and their trading. The Fed also totally failed in its
duty of overseeing whether the financial entities stuck to the various laid down lending and
borrowing norms.
The financial entities themselves are to take the major blame for what happened. In
their greed to earn more they totally forgot the basic tenets of financial management. When
they tweaked the prudential norms of lending and borrowings they were required to abide
by, little did they realise that they were digging their own grave. Loans are to disbursed based
on the income earning capacity of the borrowers and not based on any assumptions that they
would somehow pay at a future date.
The US congress and the US Government were also to blame as they nudged the
financial entities to lend to the not so credit worthy by relaxing norms. The Auditors were
equally to blame as they did not put their foot down and force the entities to make sufficient
provisions for bad debts and also account for the impairment of assets in their balance sheets.
The Credit rating agencies seems to have used flawed financial tools to measure risks. Or is
that they also tweaked the standard norms to give better ratings as they were paid for the
same? Ratings, it may be noted become meaningless when rating agencies take money for
ratings from the issuer of instruments. Again is it higher the fees, higher the ratings?
Insurance companies did not fully comprehend the depth of risk they were taking when they
wrote CDS. They were indeed not fully aware of the nuances of the real estate market and
were caught napping when the real estate market and the original lenders and the investment
banks sank to their knees.
Actually it was rampant greed and ill conceived financial engineering that brought
down all the financial entities to their knees.
Impact on India.
The Indian economy is an emerging economy. It is slowly and steadily integrating
with the global economy. Therefore, the aftermath of the financial crisis has affected India
also.
Thanks to the systemic controls and its monitoring by the RBI and other sponsoredagencies, the banking system, the backbone of any economy has not been affected at all. Not
even a single bank has failed till date. Only two to three new generation banks had taken an
exposure to the exotic financial products of the west. These banks are also sufficiently
capitalised to take care of probable non performing assets.
How did the Indian banking system avoid a hit?
This is one phenomenon the Indians have to be proud of!
The main reason was the RBI. The RBI leadership, witnessing the euphoria that was
happening in the financial markets abroad and believing in Murphy’s law which states that “
if anything can go wrong, it will” took a contrarian approach. In India too the real estate
prices were on a song. Two years back the RBI reckoned that the prices were entering
bubble territory. So it brought about restrictions on the advances that were given to the real
estate sector. The loans were made expensive, banks were made to create more provisions,
loans were not allowed to buy land, so on and so forth. Brakes were thus, put on the asset
price spiral. When the exotic financial products were becoming very popular abroad, The
RBI banned the use of such products. The RBI did not allow any sort of off balance sheet
financing. Of course , the RBI was aided by the fact that there was no developed secondary
market for trading in private debt. The result of such a move was that the original lenders
were holding the original loans in their books and were thus motivated to recover the loans on
time to ensure that there is sufficient liquidity. There were no abnormal increase in non
performing assets and they were able to continue to lend.
Secondly, Indians by nature are not very comfortable with loans. When they take a
loan there is invariably an overwhelming desire to liquidate the loan as early as possible.
Indians do not, by and large spend beyond their means. They are totally aware that it will
make them debt dependent. The Americans are not. They tend to live on loans. The
consequence of this is that in an asset purchase, in India, the borrower contributes a minimum
of one third the price of the asset, whereas in the US it ranges from one tenth to one fifth.
The loan amount is always less in the case of an Indian.
The entry of the crisis into India
To begin with, the crisis entered India through the Indian stock markets. The FIIs
operating in India were forced to liquidate their holding in India to retire their debts abroad.
This lead to heavy selling of securities in the stock markets. The FIIs then sold rupees and
bought US $ and remitted the same abroad. This led to heavy money supply in the Indian
economy. Led by an increase in commodity prices, inflation had already reared its head. The
RBI had no option but to sterilise the excess money supply by utilising the various monetarytools available at its disposal. RBI hiked the CRR rates and also the Repo and Reverse Repo
rates. The RBI also borrowed heavily from the market all with a view to reduce excess
liquidity in the system. It was reported that the FIIs took away US $ 13 billion from the
Indian market in the year 2008.
The impact of the above was :
The stock market collapsed because of the heavy selling and investors found that the
value of most of their investments had evaporated into thin air. This led to total loss of
confidence at the investor’s level making them risk averse.
The exchange rate deteriorated because of the heavy buying of the dollar and selling
of the rupee by the FIIs. Measures taken by RBI sucked the money supply available in the
economy drastically. Banks found lending difficult as sufficient money supply was not there.
They hiked deposit rates to garner more funds. Therefore the cost of funds went up. Money
supply to the industry and individuals became scarce. Industry had no choice but to take
whatever is available at the prevailing rates. Their bottom lines started getting affected. Non
availability of sufficient credit to industry and individuals led to fall in aggregate demand.
The real estate prices in India, which had also gone up substantially over the last
couple of years, started moving south. As auto loans became scarce and also expensive,
demand for two and four wheelers got hammered. The same thing has now befallen the white
goods industry.
The industries with substantial exposure to the export market have been hit below the
belt. The textile, diamond, sea foods, software and such other industries which are totally
dependent on exports are badly hit. Orders have/are drying up and recoveries are not in time.
They are hit as worldwide demand for goods and services have slackened drastically.
Fortunately the overall growth of the Indian economy has not been drastically hit as
growth in India has so far been mainly based on domestic demand and not the export market.
The prognosis
In its latest update of the world economy, the IMF has stated that the world economy
will grow at just 0.50 % in 2009, the slowest since the Second World War. The reason for the
same being that despite concerted efforts made by central banks and the governments
worldwide, the world financial system is still in a mess. The Actions initiated by
governments worldwide have failed to dispel uncertainty. This has prompted both business
and individuals to postpone expenditure. And this in turn has reduced aggregate demand on
which economic development depends. Both world output and trade are nose diving. The
crisis is so severe that no country will be spared. It is reported that the US economy will loosesteam by about 1.50%, Europe by 2.50% and Japan in Asia by about 2% in the year 2009. The
emerging markets would fare better. The IMF projects China to grow by 6.75% and India by
5%.
How long will the recession last?
Though pertinent, it’s a very inconvenient question because its difficult to answer the
same. Financial crises are long and protracted. They do have lasting effects on asset prices,
output, employment, equity markets and government debt. It is said that unemployment
moves north and housing prices move south for about five to six years. Similarly the equity
markets too slump to their knees for another three to four years. Again Government debt tends
to explode. This is because of the fact that tax collections nosedive amidst falling output and
income. Again fiscal measures taken to override the slump also contributes to the downturn of
tax collections. All this is of course based on the recessions experienced before.
The RBI in its survey of the Indian economy in December 2008 raised the prospects
of further economic slowdown. It mentioned that the global crisis may be actually more
deeper and more protracted and that the emerging economies are likely to face more impacts
in the near future. In June 2008, The RBI had predicted that the GDP growth for 08-09 would
be about 7.90%. In June 2008 it was scaled down to 7.70% and in December 2008 the RBI
brought it down to 6.80%. The one advantage that the economy has is that inflation is on its
southern journey. And the silver lining is that a a set of positive economic factors are likely to
increase aggregate demand. These factors are higher basic exemption limits for Individuals
with respect to Income Tax, drop in Income Tax rates, sixth pay commission awards, debt
waiver for farmers and again the pre-election expenditure that is expected to take place soon.
The role of expectations
A recession, economists say, is self feeding. And more so when it is a demand led one.
A producer sees demand plunging. He expects it to continue. Therefore he cuts production
and holds in abeyance his investment plans for capacity expansion. The consumer sees job
cuts. Expects it to continue and fears that he may also soon loose his job. He now curtails
spending and starts saving for the rainy day. The cut in consumer spending further justifies
the producer’s behaviour. He again cuts his production and investment plans leading to job
losses. This again fuels the consumer’s savings behaviour and the race continues pushing
the economy to the edge of the valley of collapse.
During a recessionary period, contrary to normal prudent practices, thrift and savings
of the people of a nation are totally unwarranted and out of place. What is really required is
spending. Man is a rational animal. At his individual level he always tends to take rationaldecisions. But when these decisions are aggregated they do not make a rational decision for
the nation as a whole. The producer and the consumer would never see eye to eye. The
perceptions of both are diametrically opposite.
Consider what has transpired in the US. Even after infusion of billions of US dollars,
the economy is not responding. If liquidity was the only problem then matters would have
sorted out by now. Back home also the story is the same. Despite repeated use of monetary
tools by RBI, even now demand is plummeting. In an interview, The Chairman of State Bank
of India was reported to have remarked that “ banks are now willing to lend but no one is
borrowing”
This is basically because of the pessimistic expectations of the people. The people
expect that asset prices will fall further. Therefore they would prefer to buy when prices have
gone down further. They become risk averse. Uncertainty makes them scared of the future.
So they cut spending and save. Even when interest rates fall people do not borrow. They
expect the rates to drop further. The only solution to come out of a demand led recession is to
generate sustained demand. This can only be done by putting money into the hands of the
consumers in an affordable manner thereby kick starting demand leading to employment and
thereby dispelling all pessimistic expectations from the minds of the people. It is here that
governments should step in and increase public expenditure in an effective manner.
Government expenditure on infrastructure would generate employment opportunities for the
people. This would put more money in the hands of the people leading to increase in
aggregate demand. All actions undertaken by the government should be confident building
measures bringing about a sense of security about the future in the minds of the people. This,
then, is the only solution to break the vicious circle of low income, low demand, low output,
low investments created by a demand led recession.
The Summing up
As is the adage, “ everything, both good and bad will pass”, the financial crisis will
no doubt eventually come to an end. But when and how is the question. One thing is certain
and that is a lot of damage and pain would have been caused to a lot of people all over the
world. As news trickle in day after day from all parts of the world one realises that more bad
news is in the offing. The concerted measures taken by the central banks of different countries
and also the governments will sooner or later bear fruit but then these actions will definitely
have their own ramifications which cannot be estimated today by any method. To cite an
instance, trillions of US dollars are being pumped into the US economy today. This implies
tremendous amount of supply of US dollars. This creates a situation where the dollar mayweaken against major currencies. How weak it can get again depends on a host of factors.
The financial crisis in advanced economies on the back of sub-prime turmoil has been
accompanied by near drying up of trust amongst major financial market and sector players, in
view of mounting losses and elevated uncertainty about further possible losses and erosion of capital. The lack of trust amongst the major players has led to near freezing of the
uncollateralized inter-bank money market, reflected in large spreads over policy rates. In
response to these developments, central banks in major advanced economies have taken a
number of coordinated steps to increase short-term liquidity.
Central banks in some cases have substantially loosened the collateral requirements to
provide the necessary short-term liquidity. In contrast to the extreme volatility leading to
freezing of money markets in major advanced economies, money markets in India have been,
by and large, functioning in an orderly fashion, albeit with some pressures. Large swings in
capital flows – as has been experienced between 2007-08 and 2008-09 so far – in response to
the global financial market turmoil have made the conduct of monetary policy and liquidity
management more complicated in the recent months. However, the Reserve Bank has been
effectively able to manage domestic liquidity and monetary conditions consistent with its
monetary policy stance.
This has been enabled by the appropriate use of a range of instruments available for
liquidity management with the Reserve Bank such as the Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR) stipulations and open market operations (OMO) including the
Market Stabilization Scheme (MSS) and the Liquidity Adjustment Facility (LAF).
Furthermore, money market liquidity is also impacted by our operations in the foreign
exchange market, which, in turn, reflect the evolving capital flows. While in 2007 and the
previous years, large capital flows and their absorption by the Reserve Bank led to excessive
liquidity, which was absorbed through sterilization operations involving LAF, MSS and CRR.
During 2008, in view of some reversal in capital flows, market sale of foreign exchange by
the Reserve Bank has led to withdrawal of liquidity from the banking system. The daily LAF
Repo operations have emerged as the primary tool for meeting the liquidity gap in the market.
In view of the reversal of capital flows, fresh MSS issuances have been scaled down and there
has also been some unwinding of the outstanding MSS balances. The MSS operates
symmetrically and has the flexibility to smoothen liquidity in the banking system both during
episodes of capital inflows and outflows. The existing set of monetary instruments has, thus,
provided adequate flexibility to manage the evolving situation. In view of this flexibility,
gross domestic product growth, depressed capital market conditions, and relatively high
interest rate regime. The profitability of Indian banks is expected to remain under pressure
due to increased cost of borrowing, declining interest spreads, and lower fee income due to
slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-market
provisions on investment portfolios and considerably lower profit on sale of investments, as
compared with previous years. Moreover, those Indian banks considering accessing the
capital markets for shoring up capital adequacy may be forced to curtail growth plans, if
capital markets remain depressed.
CRISIL Ratings, “While these challenges will play out over the medium term,
CRISIL expects the majority of Indian banks’ ratings to remain unaffected, as they continue
to maintain healthy capitalization, enjoy strong system support and benefits of governmentownership in the case of public sector banks.”
Indian banking system is stable and sound
1. The fundamentals of the Indian economy have been strong and continue to be strong
2. The Indian banking system is sound, well capitalized and well regulated.
3. Our Forex and money markets have been functioning in an orderly manner.
4. As per information with RBI, Indian banks do not have any direct exposure to sub-
prime mortgages. The banking sector, through its overseas branches, has some
exposure to distressed financial instruments and troubled financial institutions. But
this exposure is part of the normal course of their business and is quite small relative
to the size of their overall business.
5. What we are witnessing today in the Indian markets is an indirect, knock-on effect of
the global financial situation. This is only a reflection of the uncertainty and anxiety
in the global financial markets.
6.
The Reserve Bank of India has taken action to inject liquidity into the system aswarranted by the situation. We are monitoring the situation on a continuous basis, and
stand ready to take appropriate effective and swift action.
Conclusion
In the short Indian banking system is stable and sound .It has no direct effect of
global financial crisis. But there is only reflection on the uncertainty and anxiety in the global
financial markets. Recent time’s Indian banking system faced tight liquidity problems only;
these are quite different from the factors driving the global liquidity crisis. Indian banksmaintain healthy capitalization; enjoy strong system support and benefits from government.
IMPACT OF GLOBAL FINANCIAL CRISIS IN INDIAN BANKING SECTOR
ABSTRACT
P. Ganesan, Ph. D. Research Scholar, Department of Commerce,Bharathiar University, Coimbatore – 641046
The U.S. financial crisis has had its reverberations on both developed and developing
world. It is not possible to insulate Indian economy completely from what is happening in the
financial systems of the world. Effectively speaking, however, the Indian banks and financial
institutions have not experienced the kinds of losses and write-downs that even venerable
banks and financial institutions in the Western world have faced.
By and large, India has been spared the panic that followed the collapse of banking
institutions, such as Fortis in Europe, and Merrill Lynch, Lehman Brothers and Washington
Mutual in the U.S.The relative freedom from the contagion spreading from the global tsunami
on the Indian financial system owes much to the wise and judicious policies of our central
bank and the Government of India.
The RBI must be congratulated for imposing Basel-II norms impartially and in a
flexible manner. They have kept it in line with the Indian financial system. Observation of
these limits, however difficult it may be in practice, will definitely help the Indian financial
system to escape the kind of trouble, which is afflicting the financial system in other
countries.
Credit is also due to the Government of India and the RBI for having avoided the
temptation of total capital convertibility. Had we embarked on total capital convertibility, we
would have been exposed to much greater contagion from the current mess than we have been
so far. The lesson is that in economic reforms, we have to proceed with caution
Finally the author trying to find out the problems and impacts that are faced bythe Indian banking sector during the meltdown seasons. This article help to find the bankingsector difficulties in global financial meltdown season.
INTRODUCTION
The "Global Financial Crisis" of 2008, also called as global financial meltdown, global
financial turmoil mainly resulted from the subprime mortgage crisis of 2007. Subprime
lending crisis, which began in the United States has become a financial contagion and has led
to a restriction on the availability of credit in world financial markets. Hundreds of thousands
of borrowers have been forced to default and several major subprime lenders have filed for
bankruptcy.
Initially the companies affected were those directly involved in home construction andmortgage lending such as Northern Rock and Countrywide Financial. Financial institutions
India has thus coped with the global financial crisis reasonably well. For instance, RBI
has revised its GDP forecast for 2008-09 only marginally down from 8 per cent to some 7.5
per cent. There are two other factors which would help India sustain such a high growth in a
world threatened by recession. First externally, crude oil prices have shown a dramatic decline
from $ 145 per barrel on July 3, 2008 to around $60 today. Secondly, domestically, inflation
is decelerating: inflation which had reached 12:76 per cent in August, has now declined below
11 per cent. As Governor Dr. Subbarao has emphasized: “Quite evidently, the upward shift in
our growth trajectory has been possible because of higher pace of investment. Investment as a
share of GDP, increased from 25 per cent in 2002-03 to 38 per cent in 2007-08. Of this 13
percentage point’s increase, as much as 10 percentage points was financed domestically
through higher household, public sector and corporate savings”. Interestingly enough inward
foreign direct investment (FDI) has continued to remain buoyant during the current year. Thus
India’s growth story is still intact and credible
GLOBAL FINANCIAL CRISIS REFLECTION IN INDIAN BANKING SECTOR
India has been spared the panic that followed the collapse of banking institutions, such
as Fortis in Europe, and Merrill Lynch, Lehman Brothers and Washington Mutual in the U.S.
The relative freedom from the contagion spreading from the global tsunami on the Indian
financial system owes much to the wise and judicious policies of our central bank and the
Government of India.
Discussions on this subject have proceeded on two lines. One is to point out that the
Indian banks have taken less risks than their peers abroad. The less risk you take, the more
will be safer you are. This, however, begs the question, “Why did the Indian banks take less
risks?”. The answer lies in the wise regulations and meticulous supervision by the RBI. At a
time when total deregulation was the order of the day in the 90s, Dr. Manmohan Singh as the
Finance Minister authorized a path-breaking study of the Indian financial system by an
experienced central banker, M. Narasimham. He had the wisdom to foresee that the financial
system had to be placed on a well-regulated basis.
Mr. Narasimham’s classic reports gave the policy framework for the Government of
India and the RBI to formulate the structure of India’s banks and financial institutions. Mr.
Narasimham’s model was based on adequate capitalisation, good provisioning norms and
well-structured supervision. Government of India and RBI accepted these recommendations
and proceeded to implement them.
What was, indeed, important was that the model did not allow investment banking onthe pattern of the American paradigm. In a sense, RBI enforced its own version of the U.S.’
Net banking capital amounted to US$ 4.8 billion in April-September 2008 as
compared with US$ 5.7 billion in April-September 2007. Accounting for a part of banking
capital, non-resident Indian (NRI) deposits showed a net inflow of US $ 1.1 billion in April-
September 2008, increasing from net outflow of US$ 78 million in April-September 2007.
Lending by banks also rose more than 76 per cent to Rs 2,80,000 crore (US$ 57.26 billion)
during April-November 2008-09 from the same period a year ago, according to data available
with the Reserve Bank of India (RBI).
The Reserve Bank of India on January 21, 2009 fixed the Reference rate for the US
currency at Rs 48.93 per dollar and the single European unit at Rs 63.70 per euro from Rs
49.12 per dollar and Rs 63.61 per euro, respectively
Government initiatives
• During 2008-09 (as per data up to November 18, 2008), as per RBI guidelines,
scheduled commercial banks (SCBs) increased their deposit rates for various
maturities by 50-175 basis points. The interest rates range offered by public sector
banks (PSBs) on deposits of maturity of one year to three years increased to 9.00-
10.50 per cent in November 2008 from 8.25-9.25 per cent in March 2008. On the
lending side, the benchmark prime lending rates (BPLRs) of PSBs increased to 13.00-
14.75 per cent by November 2008 from 12.25-13.50 per cent in March 2008. Private
sector banks and foreign banks also increased their BPLR to 13.00-17.75 per cent and
10.00-17.00 per cent from 13.00-16.50 per cent and 10.00-15.50 per cent, respectively,
during the same period. Accordingly, the weighted average BPLR of public sector
banks, private sector banks and foreign banks increased to 13.99 per cent, 16.42 per
cent and 14.73 per cent, respectively.
• The number of automated teller machines (ATMs) has risen and the usage of ATMs
has gone up substantially during the last few years. Use of other banks’ ATMs would
also not attract any fee except when used for cash withdrawal for which the maximum
charge levied was brought down to US$ .409 per withdrawal by March 31, 2008.
Further, all cash withdrawals from all ATMs would be free with effect from April 1,
2009.
Bank initiatives
• Since December 2008, the government has announced series of measures to augment
flow of credits to around US$ 2,66,274 to SMEs. To improve the flow of credit to
industrial clusters and facilitate their overall development, 15 banks operating inOrissa including the public sector State Bank of India (SBI) and the Small Industries
We are certainly more integrated into the world economy today than ten years ago, the
time of the Asian crisis. Integration into the world implies more than just exports. Going by
the common measure of globalization, India’s two- way trade (merchandise exports plus
imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian
crisis, to 34.7 per cent in 2007-08. If we take an expanded measure of globalization, that is,
the ratio of total external transactions (gross current account flows plus gross capital flows) to
GDP, this ratio has increased from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.
These numbers are clear evidence of India’s increasing integration into the world economy
over the last 10 years. These numbers prove that India’s growth in trade over the ten year
period has been impressive, compared to its own previous record. But it should be borne in
mind that China, the other Asian ‘tiger’ economies and the NAFTA region have grown much
faster in this period; consequently India’s share of world trade might just have remained
stable or grown marginally during this period.
The Indian banking system is not directly exposed to the sub-prime mortgage assets. It
has very limited indirect exposure to the US mortgage market, or to the failed institutions or
stressed assets. Indian banks, both in the public sector and in the private sector, are financially
sound, well capitalized and well regulated. The average capital to risk-weighted assets ratio
(CRAR) for the Indian banking system, as at end- March 2008, was 12.6 per cent, as against
the regulatory minimum of nine per cent and the Basel norm of eight per cent. Even so, India
is experiencing the knock-on effects of the global crisis, through the monetary, financial and
real channels – all of which are coming on top of the already expected cyclical moderation in
growth.
Payment system in India
The primary goal of any national payment system is to ensure a smooth circulation of
money in its economy. It is recognized world wide that an efficient and secure payment
system is an enabler of economic activity. It provides the conduit essential for effecting
payments and transmission of monetary policy. Payment systems have encountered many
challenges and are constantly adapting to the rapidly changing payments landscape. More
recently, the proliferation of electronic payment mechanisms, the consequent increase in the
number of players in the financial arena and the payment crises in quite a few countries and
regions in the 1990s have focused attention on public policy issues related to the organization
and operation of payment systems. Three main areas of public policy have guided paymentssystem development and reform: protecting the rights of users of payment systems, enhancing
The aim of this paper is to understand the meaning of sub-prime taking it further to
sub-prime crisis and its impact on Indian banking sector and government measures to
stimulate this sector. Further it assesses the impact of the said setbacks on the stock prices of
ICICI Bank Ltd.
Introduction
The financial system is one of the most important inventions of modern society. Its
primary task is to move scarce loan able funds from those who save to those who borrow to
buy goods and services and to make investments in new equipment and facilities so that the
global economy can grow and increase the standard of living enjoyed by the citizens. Without
the financial system and the funds it supplies, each of us would lead a much less enjoyable
existence.
Financial markets are a part of the changing business paradigms, across the globe. In
fact, the financial markets are the first to unleash the creativity and imagination and lead the
revolution. Today, globalization of competencies, thinking and perspectives has been the part
of Strategic Action Plan of all the major players in the financial markets, globally. The cut
throat competition across the market operators and the pressure to perform by the stakeholders
has resulted in competition being powerful than ever before.
Objectives of the study• To understand the banking sector importance in the economic development
• To understand the Implications of the Crisis
• To understand the strategies taken to overcome the crisis.
Financial Crisis: Origin and Impact
In 2008, a series of banks and insurance companies’ failures triggered. A financialcrisis halted global credit markets and required unprecedented government intervention.
The first Indian Organization to be affected by this Crisis is ICICI Bank Ltd. ICICI
Bank's profit took a hit of more than Rs 1,050 crores ($264 million) in the year 2007-08. This
is an indirect effect. ICICI lost money due to depreciation in the value of securities it bought
in the international markets. Due to a rise in global interest rates after the subprime loan crisis,
the value of these securities fell, forcing the bank to provide for the difference from its profits.
The loss, however, is notional since the bank has not actually sold these securities.
Public Sector Banks, viz State Bank Of India, Bank Of India, Bank Of Baroda, Canara Bank,
Punjab National Bank etc do not have major exposure to credit derivatives market due to their
limited overseas operations.
However, the impact of the global crisis on Indian Stock Market is on a negative side. Onceinvestments in the US turned bad, more money had to be invested in the US to maintain the
fixed proportion of the investments by institutional investors. In order to invest more money
in the US, money came in from emerging markets like India, where their investments have
been doing well. These big institutional investors, to make good of their losses on the
subprime market, have been selling their investments in India and other emerging markets.
Since the amount of selling in the market far overweighs the amount of buying, Indian stock
prices have been falling. Taking it forward to the job market, Multinational Corporate have
adopted a wait and watch policy and have softened their hiring plans both in India and abroad.
However, major hit is again on the existing employees of ICICI Bank Ltd. The bank has
publicly announced reduction in its bonus percentages with no increments and promotions.
Further it has decided to scale down its headcount by 4000-5000 employees.
The perceived failure of banks to manage risk has led to a massive sell-off of their stocks,
further draining them of liquidity, and leading many to the brink of insolvency. Even as
Central Banks inject cash into the global economy (by providing large short-term loans to
financial institutions), interbank lending has come to a grinding halt because banks are fearful
of dispensing capital to unstable counterparties or over-extending themselves while
experiencing losses at their own firms. Their reluctance to lend, even amongst each other,
freezes the credit markets, making it difficult for corporations and individuals to use debt to
finance purchases of everything from equipment to auto loans.
International rating agency Fitch has said that declining asset quality, especially in
overseas operations, of ICICI has increased pressure on bank’s individual rating. This was
first such warning from any rating agency to ICICI, the second largest bank in India.(November 2008). The rating agency has for now reaffirmed the individual rating of ‘C’ for
the bank. ICICI’s support rating has also been maintained at ‘2’ by Fitch. However, the
agency believed that there was strong downward pressure on ratings and if situation worsens,
ICICI could face lower ratings.
After having faced a series of alleged rumours affecting bank’s stock heavily, ICICI
does not afford any downgrade in rating at this stage, which will give more substance to
investor’s apprehensions regarding bank’s weakening portfolio. The Straight downfall and
rumours of further collapse in the portfolio of advances, had really struck the stock which was
amidst the most wanted in the banking sector. The Corporate Promotional Campaigning with
SRK (Sharukh Khan) came on the media to rebuild the corporate image and trust in the
minds of the customers as well as investors.
Still, Profits to ReportICICI Bank has reported a 3.41% rise in the net profit to Rs 1,272.15 crore for the
December 2008 quarter as against Rs 1,230.21 crore for the December 2007 quarter. The bank’s total income moved up from Rs 10,338.36 crore for the December 2007 quarter to Rs10,350.62 crore for the December 2008 quarter.
ICICI Bank is yelling to trade green on the BSE now. The stock had witnessed high
selling pressure in the End November due to concerns about the banking sector amid global
financial crises and economic slowdown. However, investors were seen inclined to the stock today looking at its attractive valuation. Though the stock is undervalued at this point, it is
expected to provide good return from a long term perspective.
GOVERNMENT OF INDIA AND RBI MEASURES
• 20 Oct 2008 (RBI) slashed its key lending rate by 100 basis points to 7.5 percent.
• 1Nov, 2008, CRR cut by 350 basis points to 5.5 per cent,. This measure will release
additional liquidity into the system of the order of Rs 48,000 crore.
• Nov. 1, 2008, To reduce the repo rate or its main short-term lending rate by 50 basis
points to 7.5 percent. Again both repo cut made a liquidity of 40000crore Rs. into
system.
• Increased interest rates on Non-Resident deposit schemes by 50 basis points, or 0.5
per cent
• As a temporary measure, banks permitted to avail of additional liquidity support under
the LAF to the extent of up to 1 per cent of their NDTL.
The financial crisis in the US, the worst since the Great Depression of 1929, is
threatening to reach perilous proportions. The collapse of the big five financial giants on Wall
Street - Fannie Mae, Freddie Mac, AIG, Lehman Brothers and Merrill Lynch followed by
two of the largest banks - Washington Mutual (WaMu) and Wachovia - has sent shock
waves through global financial markets.
The Global Financial Crisis that struck US has had its effect on almost all the nations
world wide including India like a chain reaction. This economic crisis affected our banking
sector and capital sector. Nine of the country’s largest commercial banks including State Bank
Of India ,ICICI bank, and HDFC bank have exposure to the tune of $420million(Rs. 2,000
crore) in the US financial giants which collapsed recently. The US giants include the Lehman
Brothers which fell, Merrill Lynch which was sold out and AIG which is trying to raisemoney. The government feels banks other than SBI would suffer a loss of Rs.600 crore due
top the ongoing crisis. According to preliminary estimates, SBI alone has exposure of $170
million in Freddie Mac and Fannie Mae.
So it is clear that if such a financial crisis has to lift off from the nation the
government would have to spend more money in the coming moths so as to stabilize the
situation .Secondly, the government of India including the PM, Dr. Manmohan Singh have to
stop pretending like there is absolutely no problem and that everything is under control. They
are giving a wrong idea to the public just to prevent a nation wide panic and likewise an
upsurge. Instead of wasting time in portraying a wrong image it would be useful if they make
the public aware of the situation so that even the public can try and contribute.
A recession is decrease of less than 10% in a country’s GDP. The decrease must last
for more than one consecutive quarter of a year. A significant decline in economic activity
spread across the country, lasting more than a few months, normally visible in GDP growth,
real personal income, employment, industrial production, and wholesale-retail sales.
Many predicted that the Entertainment Industry is recession proof. The main line
entertainment fields like Film, Video Gaming, and Live Entertainment like concerts, parties
etc are on focus. Even if recession has not hit these fields to a great extend unlike other
industries, there are still a smaller line of problems.
Film industry is the one which is facing the most of problems. Up to 90% films have been put on hold. Production and actor salary costs had illogically shot through with no
commensurate returns for distributors. Distributors have been severely hit by the recession.
Video gaming industry is also not far behind. Many expect Sony to announce its first
financial loss in 14 years. As sales figures of last year continue to leak in and until the big
three announce their quarterly earnings, the year of 2008 reminds us of the bleak reality that
games are not immune to a bad economy.
Putting light on live entertainment in which concerts or live performances play a big
role. The key is getting the people in the house and this is something the consumers still want.
Their appetite for live concerts may have slightly diminished. The results of which may lead
to lower ticket prices, finding stronger acts to book, looking at alternative music genres, or
securing more sponsors. But due to the recession, no sponsors are coming forward to fund
events. The show that has been planned way in advance might get cancelled due to the lack of
major sponsors. When it comes to parties, be it in Weddings, Discoetheques, only the richer
seems to be doing fine.
Analysts continue to implicate an overall positive overview for the coming year of
2009, despite the condition of the economy. The Indian entertainment industry will continue
to grow in healthy double digits and by 2012 and will touch the Rs.1 trillion mark business-
wise.
It is time for consolidation and redrawing of overseas and domestic business strategies
to cut costs in view of the global economic slowdown. With so much of liquidity being
infused into the economy, investments will get channeled into good projects. There is going to
be more transparency and only serious players will be able to survive in the long run. India is
still a growth story and to a certain extent the slowdown is more psychological than real.
Entertainment provides an escape from the challenges of everyday life. It provides a
way of releasing tension and anxiety. Entertainment is recession-proof. It does well both in
IMPACT OF GLOBAL FINANCIAL CRISIS ON INDIAN IT SECTOR
Veena Satheesh
B. Com. 4th
Sem. (B)
ABSTRACT
The world is now going through the worst economic crisis since the great depression.
Credit is contracting output. Is falling, unemployment is increasing and most asset values are
falling. It is likely not to be a long need to learn from the ongoing global financial crisis. The
heart of the crisis lies in the recklessness of the banking system that started giving loans to
sub-prime borrowers in the belief that the US would allow people with even dodgy credit backgrounds to repay the loans that they were talking to buy or build homes this couples with
the US governments altruism to encourage leaders to lend sub-prime borrowers, compounded
the damage. It was not the lack of regulation that led to this cataclysm but sheer recklessness
on part of the key players in financial sector.
Indian to a great extend today, as far less integrated with the global financial markets
and is fortunate in its leadership at the property level. The fallout of the persisting global
financial crisis is timely. Firstly acknowledge realistically that the domestic economy, through
not fully exposed to the turmoil abroad, will still face an indirect impact on Indian economy
that will slowdown economic growth. Here there have not been any serious concerns over the
stability and solvency of banks and financial institutions. The prime ministers assurance on
the safety of bank deposits is welcome.
Amid the global economic crisis turmoil, Indian IT companies are treading a though
time. After the great depression in 1997 it has been quite a realer waster ride for the world
economy with financial services dominating the headlines all over the world .the impact
affects the IT sectors in many ways .the companies writing down losses, companies merging
acquiring and going bust .the last saga include laymen Merrill and AIG has unnerved the
financial world and creating a serious concern among the business partners specially the
Indian IT players. For the first time in the last five years the biggest 17 companies will grow
lesser than the industry, growing by the cost estimate put out led by NASSCOM(National
Association of Software Service and Companies)has now ordered slow down due to recession
in US. The impact of the same with reference to Infosys of India is taken up here.
IMPACT OF GLOBAL FINANCIAL CRISIS ON REAL ESTATE MARKET
Vrinda Rajeev
B. Com. 6th Semester
The global financial crisis of 2008–2009 is an ongoing major financial crisis. It
became prominently visible in September 2008 with the failure, merger, or conservator
ship of several large United States-based financial firms. The underlying causes leading to
the crisis had been reported in business journals for many months before September, with
commentary about the financial stability of leading U.S. and European investment banks,insurance firms and mortgage banks consequent to the sub prime mortgage crisis.
The key question confronting the economy now is the backwash effect of the
American (or global) financial crisis. Central banks in several countries, including India,
have moved quickly to improve liquidity, and the finance minister has warned that there
could be some impact on credit availability. That implies more expensive credit (even
public sector banks are said to be raising money at 11.5 per cent, so that lending rates have
to head for 16 per cent and higher -- which, when one thinks about it, is not unreasonablewhen inflation is running at 12 per cent).
For those looking to raise capital, the alternative of funding through fresh equity is not
cheap either, since stock valuations have suffered in the wake of the FII pull-out. In short,
capital has suddenly become more expensive than a few months ago and, in many cases, it
may not be available at all.
The big risk is a possible repeat of what happened in 1996: Projects that are halfway to
completion, or companies that are stuck with cash flow issues on businesses that are yet to
reach break even, will run out of cash. If the big casualty then was steel projects (recall
Mesco, Usha and all the others), one of the casualties this time could be real estate, where
building projects are half-done all over the country and some developers who touted their
'land banks' find now that these may not be bankable.
The recession in the US market and the global meltdown termed as Global recession
have engulfed complete world economy with a varying degree of recessional impact. World
over the impact has diversified and its impact can be observed from the very fact of falling
Stock market, recession in jobs availability and companies following downsizing in theexisting available staff and cutting down of the perks and salary corrections.
When we look at globalization, specific industries in emerging economies typically go
through three waves of evolution. The electronics industry, first in Japan, then in South-East
Asia and now in China, are good examples of this. In the first wave, companies in emerging
economies typically act as component suppliers to developed countries that manufacture the
complete product. In the second wave, the local industry gains enough expertise to provide
cost-effective contract manufacturing services – of either the entire product or major sub-
assemblies. The third wave is when a set of firms start marketing these products under their
own brand – initially within their own countries, and then going international.
The subprime crisis and the subsequent meltdown has been the subject of much
discussion in the recent past. The magnitude of the crisis, the impact it has had on what we
thought were rock-solid institutions and the ripple effect across the globe have been mind-
boggling. Here we discus the impact this will have on the Indian IT services industry.
The economy and the stock market are closely related. The stock markets reflect the
buoyancy of the economy. In the US, a recession is yet to be declared by the Bureau of
Economic Analysis, but investors are a worried lot. The Indian stock markets also crashed due
to a slowdown in the US economy. The Sensex crashed by nearly 13 per cent in just two
trading sessions in January. The markets bounced back after the US Fed cut interest rates.
However, stock prices are now at a low ebb in India with little cheer coming to investors.
The whole of Asia would be hit by a recession as it depends on the US economy. Even
though domestic demand and diversification of trade in the Asian region will partly counter
any drop in the US demand, one simply can't escape a downturn in the world's largest
economy. The US economy accounts for 30 per cent of the world's GDP.
Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In the globalised
world, complete decoupling is impossible. But India may remain relatively less affected by
adverse global events." In fact, many small and medium companies have already starteddeveloping trade ties with China and European countries to ward off big losses.
Manish Sonthalia, head, equity, Motilal Oswal Securities, says if the US economy
contracts much more than anticipated, the whole world's GDP growth-which is estimated at
3.7 per cent by the IMF-will contract, and India would be no exception.