sushil term paper

8/6/2019 Sushil Term Paper

1/27

Topic :

Subprime crisis and its impact on a banking sector

of India

Submitted by: Submitted to

Name - Sushil Kumar Prajapati Mr. Ajay Chandel

Course - MBA

Roll No. - RR1001A10

Reg.No. - 11010380


2/27

ACKNOWLEDGEMENT:

First and foremost, I thank my teacher who has assigned me this

term paper to bring out my creative capabilities. I express my gratitude

to my parents for being a continuous source of encouragement and for

all their financial aid given to me. I would like to acknowledge the

assistance provided to me by the library staff of Lovely Professional

University.

My heart full gratitude to my teacher, friends and internet services

for helping me to complete my work


3/27

CONTENT:

1.Introduction

Subprime crisis

Subprime Crisis and the Impact on India

Effect of US Subprime Mortgage Crisis on the Banking Sector:

Subprime crisis impact on Indian economy

Articles

2.Objective

3.Research methodology

4.Conclusion

5.Reference


4/27

Subprime crisis, the turmoil on mortgage markets has claimed several

causalities. Banks have transferred risks to special entities SIVs and SPVs. This

practice has given the impression that the credit risk has been transferred from

banks to investors. In traditional banking loans were kept in on banks balance

sheets. Now the complete process of originates and distribute model involves

borrowers, originators, arrangers, credit risk agencies and investors. This process

means credit market imperfections. The banks have less incentive to monitor the

quality of borrowers and the quality on original loans.

As a result of originate and distribute model of subprime loans there is a

capital shortage on financial markets. Market participant do not rely on each other.

Banks have lost money on mortgage-backed securities on two ways; Prices went

down on the trading books and defaults went up in the banking books. It is

estimated that the total write-downs on subprime asset backed securities will reach

285 billion US Dollars. In the case of the subprime crisis, the situation is based on

an accumulation of several risks; market risks, credit risks and also strategic risks.

So the crisis poses real challenges for financial markets regulation process.


5/27

In the case of the subprime crisis, the situation is based on a collection of

several risks: market risks, credit risks and also strategic risks. Originate and

distribute strategy has generated a situation, where banks have lost money on

mortgage backed securities in two different ways, prices went down on the trading

books and defaults went up in the banking books.

Subprime crisis, the turmoil on mortgage markets has claimed several

causalities. Banks have transferred risks to special entities SIVs and SPVs. This

practice has given the impression that the credit risk has been transferred from

banks to investors. In traditional banking loans were kept in on banks balance

sheets. Now the complete process of originates and distribute model involves

borrowers, originators, arrangers, credit risk agencies and investors. This process

means credit market imperfections. The banks have less incentive to monitor the

quality of borrowers and the quality on original loans. As a result of originate and

distribute model of subprime loans there is a capital shortage on financial markets.

Market participant do not rely on each other. Banks have lost money on mortgage

backed securities on two ways, Prices went down on the trading books and defaults

went up in the banking books. It is estimated that the total write downs on

subprime asset backed securities will reach 285 billion US Dollars. In the case of


6/27

the subprime crisis, the situation is based on an accumulation of several risks;

market risks, credit risks and also strategic risks. So the crisis poses real challenges

for financial markets regulation process.

Subprime crisis:

The main tasks of financial institutions are there allocation of resources,

division of risks and sustaining the general payment system. (1994, 19-20) From

an operational point of view, it is possible to divide the functions into three key

elements: payment system, loans and deposits. Payment system refers to a service

provided for the customer, where a cash transaction can be deposited to a bank.

This task is shifting from manual, over the counter transactions to electronic and

internet-based formats. Modern banking is facing various new challenges, such as

continuous need for creating innovations and improving operations in the banking

industry. A bank is defined generally as a financial intermediary. There is also

another way of thinking the concept. One example is Prosper, an online

community for lending and borrowing money without the intervention of banks.

Prosper is an online auction platform. It generates revenue by collecting one-time

fees on funded loans from borrowers and assessing loan service fees to lenders.

Still the traditional banking is operating on the 6 traditional ways. A financial

intermediary participates to the payment system and finances customer entities in


7/27

financial deficit using the funds of customer entities in financial surplus. At the

macroeconomic level, banks finance each other through interbank operations.

Among the financial intermediaries, the specificity of banks is to issue money,

broadly defined as demand deposits and short-term deposits. Taking deposits is

therefore the main task of a bank. Customers are accustomed to rely on banks and

this is the main reason for giving money to a bank depository account. If a

customer needs a loan, the primary commodity is naturally the money, in other

words capital. You can see also the secondary advantage: saving time. The loan,

given by a financial institution, makes it possible for the customer to purchase

items of significant value or invest the capital, whenever the need arises. From the

bank point of view, credit always involves handling risks. In the market economy,

the banks are competing with loans and credit risk.


8/27

Subprime Crisis and the Impact on India:

As interest rates started falling due to excess liquidity, house prices rose

rapidly, creating a pool of wealth in the hands of Americans, which they unlocked

by contracting mortgage loans. It benefited them in two ways they got huge

liquidity at inflated housing prices and interest rates that were practically lowest in

the last twenty years. This became a virtuous cycle, which resulted in very high

consumer spending, obviously fuelling global growth.

As interest rates started rising in the US due to inflation concerns, this

virtuous cycle came to a standstill and the demand for houses started tapering. This

resulted in lower prices for houses and many were unable to cover the mortgage


9/27

loans. It has now hit the entirebanking industry in the US and the virtuous cycle is

becoming a vicious cycle.

Perhaps a similar story will unfold in the next couple of months for these

lenders who have lent big money into the subprime markets. One or more banks

will fold, just like Enron did, resulting in a huge crisis of confidence. It would be

naive to wish away this major problem inflicting the global markets and to

presume that the Indian market is decoupled. If the global super-tanker US, which

has a 25 per cent share of global GDP, slows down it will definitely have an impact

on the Indian economy.

Only time can decide which policy becomes successful. More importantly,

no one can predict a change of plans in the Oval office.

The Impact of US subprime crisis on India may not be very large according toeconomists. It is being anticipated that the developing countries might be spared

for a year or two and neither of the countries would be affected either by

economic recession in the USA or the prevailing US subprime crisis. This notion

was put forward by the leading economist of the World Bank.
http://theviewspaper.net/bigpage/banking-sector-in-india/http://theviewspaper.net/bigpage/banking-sector-in-india/


10/27

Effect of US Subprime Mortgage Crisis on the

Banking Sector:

Effect of US subprime mortgage crisis on the banking sector has been

immense. This is evident from the fact that banks as well as stock markets were

affected in every nook and corner of the world. The European Central Bank or the

ECB came to the rescue of many. The amount injected by the ECB to rescue the

other banking institutions was 95 billion. The rate of interest was 4%. This was

the first rescue operation, the second and the third followed with a cash assistance

of 61 billion as well as 47.67 billion respectively. The approach taken by the

authorities of other Central Banks were also varied. Central Bank of Japan's

contributions to the financial markets comprised injection of 600 billion yen or

3.6 billion.

The price of stocks fell in Frankfurt, Tokyo and New York. In fact, the

financial assistance, which the ECB had shelled out, exceeded the amount it

shelled out after terrorist attacks on the World Trade Center on 11th September.

Effect of US subprime mortgage crisis on the banking sector did not spare IKB Deutsche

Industry bank in Germany (Europe). The bank had to be bailed out by a payment of USD11.1

billion. It has investments in the United States mortgage market.


11/27


12/27

causes of global stress are less relevant here, Indian banks do face increased

challenges due to domestic factors. The banking sector faces profitability

pressures due to higher funding costs, mark-to-market requirements on

investment portfolios, and asset quality pressures due to a slowing economy.

CRISIL views the strong capitalization of Indian banks as a positive feature in

the current environment.

Indian banks global exposure is relatively small, with international

assets at about 6 per cent of the total assets. Even banks with international

operations have less than 11 per cent of their total assets outside India. The

reported investment exposure of Indian banks to distressed international

financial institutions of about USD1 billion is also very small. The mark-to-

market losses on this investment portfolio, will, therefore, have only a limited

financial impact. Indian banks dependence on international funding is also low.

Subprime crisis impact on Indian economy:

The Impact of US subprime crisis on India may not be very large according

to economists. It is being anticipated that the developing countries might be spared

for a year or two and neither of the countries would be affected either by economic

recession in the USA or the prevailing US subprime crisis. This notion was put

forward by the leading economist of the World Bank.


13/27

Further, it is being fathomed that even if there is an impact of US subprime

crisis on India, it will not be taking place earlier than two years. However, it will

be wrongly said if the developing nations like India would be entirely untouched

by the ripple effect. The prevailing economic condition in these countries are so

strong that it may not feel the upheaval as it would have felt had the economy of

these countries been sluggish.

During the East Asian crisis, the Indian economy was in the regime of

limited convertibility (current account and capital account) thanks to the careful

and gradual move towards globalization decreed by the RBI and GOI, which

worked as a blessing in disguise and we were not particularly affected. Things

have changed since and owing to various international obligations and the

understanding that capital is important for the overall growth of the economy, the

RBI and GOI have liberalized a lot on both the current and capital accounts.

Integration of the Indian economy into the world economy has brought about many

disadvantages too.

The question is how to continue as an integral part of the world and also

remain unaffected by the crisis happening in other parts of the world? This


14/27

question may not be so pertinent to a developed economy but for an emerging

economy like ours, if we are affected to a great extent by a crisis arising in another

part of the world, this will imply one step forward and two steps backward.

The present crisis in US may not have such an impact on the world economy

because it is confined to one sector of the economy, viz., mortgage and housing but

one cannot deny that housing is a sector with large-scale implications. Then what

do we learn from this housing crisis?

1. Sound banking practices: The root cause of the subprime mortgage

(even prime mortgage loans are in trouble in US; e.g., trouble in Countrywide,

Americas biggest home loan lender) crisis is the unsound credit practices that

emerged in the US market. Fake certification, which helps an ineligible person to

raise a home loan, cannot be ruled out in India. Housing loan frauds are not

uncommon in the cities of India and the aggressiveness with which housing loans

are being sold by banks and financial companies in violation of sound credit

practices cannot be ignored. Personal loans and overdue credit cards are the other

sectors which the regulators and bankers should handle carefully because they have

the potential to plunge the Indian banking sector into a crisis.

2. Controlled Derivatives market: Derivatives are financial instruments,

which can spread the default risk attaching to loans. All the same, indiscriminate


15/27

use of such derivatives can lead to havoc as in US. Derivatives lead to such a chain

reaction that it will be nearly impossible to quantify the risk of exposure to bad

loans and advances subsequently. RBI and GOI should prohibit indiscriminate use

of such derivatives if they intend to introduce such products in India.

3. Limited investment by Indian companies abroad: Prudent

investment abroad should be the order of the day. Reckless investment in the

derivatives market abroad by banks and financial institutions has to be controlled.

In the recent crisis, BNP Paribas of France and Macquarie Bank of Australia have

been affected because of such overseas investments. The exposure of Indian banks

to the subprime crisis of US is minimal.

4. Quality Inward Investment: FDI should be given priority over FIIs as

history has shown that flight of capital in case of FDI is low compared to that in

respect of FIIs. Due to their stable nature, FDI can help in the growth of the

countrys infrastructure.


16/27

Articles:

Abstract:

Indian economy would be less adversely affected by the global

economic crisis

Link - http://cje.oxfordjournals.org/content/33/4/725.full

By:Jayati Ghosh

The view that the Indian economy would be less adversely affected by the

global economic crisis because of limited integration and other inherent strengths

has proved to be wrong. The economic boom in India that preceded the current

downturn was dependent upon greater global integration in three ways: greater

reliance on exports particularly of services; increased dependence on capital

inflows, especially of the short-term variety; and the role these played in

underpinning a domestic credit-fuelled consumption and investment boom. These

in turn made the growth process more vulnerable to internally and externally

generated crises, as is now becoming clear.
http://cje.oxfordjournals.org/content/33/4/725.fullhttp://cje.oxfordjournals.org/search?author1=Jayati+Ghosh&sortspec=date&submit=Submithttp://cje.oxfordjournals.org/content/33/4/725.fullhttp://cje.oxfordjournals.org/search?author1=Jayati+Ghosh&sortspec=date&submit=Submit


17/27


18/27

aligned incentives and oversight. It is possible to extend mortgage lending

down market without repeating the mistakes of the subprime boom and bust.

Abstract:Link - http://ssrn.com/abstract=1124961

The Subprime Mortgage Crisis and the Social Capital Response

By: Raymond H. Brescia

This article explores the extent to which social capital theory can respond

to the crisis in the subprime mortgage markets. Building on the groundbreaking

theories of Robert Putnam in his book BOWLING ALONE: THE COLLAPSE

AND REVIVAL OF AMERICAN COMMUNITY, this article seeks to explore the

role of trust and social capital in micro-economic transactions, specifically those

involving homeownership in general and the subprime mortgage crisis in

particular. The article posits that asymmetries of information, the lack of fiduciary

obligations between the mortgage broker and the subprime borrower, the

incentives built into the subprime mortgage market as a result of mortgage

securitization that promote abusive lending practices, deregulation that led to the

influx of subprime mortgage products into communities of color, the limits of anti-

discrimination laws to address this influx adequately, and restrictions on

refinancing built into securitization agreements have all led to the current crisis. In


19/27


20/27

Abstract:

Understanding the Subprime Mortgage Crisis

http://rfs.oxfordjournals.org/content/early/2009/05/04/rfs.hhp03

3

By: James W. Kolari

Using loan-level data, we analyze the quality of subprime mortgage loans by

adjusting their performance for differences in borrower characteristics, loan

characteristics, and macroeconomic conditions. We find that the quality of loans

deteriorated for six consecutive years before the crisis and that securitizes were, to

some extent, aware of it. We provide evidence that the rise and fall of the subprime

mortgage market follows a classic lending boom-bust scenario, in which

unsustainable growth leads to the collapse of the market. Problems could have

been detected long before the crisis, but they were masked by high house price

appreciation between 2003 and 2005.


21/27

Objectives

To find out the reason of subprime crisis.

To know the affect of subprime crisis on banking sector.

To know that how the Subprime crisis rising.

Affect of subprime crisis on Indian economy and financial

institutions.

To know that how the subprime crisis affect the Banking sector.


22/27


23/27

A researcher looks forward to see what industry may do when it can go

longer do what it is doing. He further says that research is done in mans minds

are not in laboratories may be necessary.

Data collocation method:

There are two types of data collocation method-

1. Primary

2. Secondary

Primary data-

Primary data are those which are collected a fresh and for the first time, and thus

happen to be original in character.

Method of Primary data collection:

1. Observation method

2. Interview method

3. Questionnaire method

4. Schedule method

Secondary Data:


24/27

Secondary data means data that are already available, they refer to the data

which have already been collected and analyzed by someone else. In this case

he is certainly not conformed to the problems that are usually associated with

the collection of originals data. Secondary data may either be published data or

unpublished data.

My data collection in primary source was questionnaire and schedule. In

secondary source of data collection I have use internet, magazine, books, and

Indian journal of marketing.

Researcher must be very careful in using secondary data. He must make a

minute scrutiny because it is just possible that the secondary data may be

unsuitable or may be inadequate in the context of the problem which the

researcher wants to study.

Source of Secondary data:

The secondary source of data collection is the Books, Internet, News paper,

etc. These are the secondary source of data collocation.

Research methodology:

We use the research methodology to find out the hidden truth and research the

problems. I have chosen secondary data for this term paper.


25/27

Secondary Data:

Secondary data was collected through various publications of books and journals,

websites.

CONCLUSION:

The subprime crisis arised from the USA and then this affects the

whole countries of the world. One of the country is India which

had bad affect of this. And then in India various sectors were

affected by this crisis private sector and public sector also.

Many banks were affecting by this crisis and they were insolvent.

In the case of Insolvency the banks were cant be able to payment

to the creditors.


26/27

The mail function of the bank is to provide loan and get profit by

this but in the rotation the banks are insolvent and cant be able to

return money.

The subprime crisis had bad affect to the banking sector of the

India and it is also harmful for the Indian economy.

REFERENCE:

http://proquest.umi.com/pqdweb?nocfc=1

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://www.prospect.org/cs/articles?

article=did_liberals_cause_the_subprime_crisis


27/27

http://www.businessinsider.com/10-myths-about-the-subprime-crisis-2009-7

http://www.economywatch.com/us-subprime/effects-banking-sector.html

http://www.financialexpress.com/news/varying-impact-of-the-subprime-

crisis/215871/

http://www.economywatch.com/us-subprime/impact-india-china.html

sushil term paper

Documents