October 13, 2008 For Private Circulation only 2
And as a result a time came in 2005 when almost anyone in the US could buy ahome without income proof, other assets, credit history or sometimes even without aproper job. Such loans were called NINA which stands for "No Income No Assets".To make things even worse, interest rates began to rise during 2004-2006. Manypeople had taken variable rate home loans that started getting reset to higher rates,which in turn meant higher EMIs that borrowers had not planned for. This led up to achain of defaults making home prices going further down. Then in 2007 it came tothe fore what we now know it as sub-prime crisis.
What is in store?
This hydra headed monster called sub-prime crisis has engulfed many financialgiants that ruled the financial world for many decades and are a thing of past now.Only time will tell how the US bailouts plan of $700 billion to buy a pile of badmortgage debt in an attempt to rescue the nation's credit markets will be effective. Insubprime crisis, several firms have lost over $501 billion and there is speculation thatworst is yet to come to the fore.
(A list of such write downs is enclosed somewhere in the report)
. Banks and financial institutions are facing liquidity crunch across theglobe particularly in the US and Europe. Respective governments are fighting toothand nail and are pumping billions of cash into the banking system to stave off anyliquidity crisis.We expect that the dust will settle in two three quarters. But this mortgage mess willcertainly teach us many lessons. First and foremost, it must result into tighter andtransparent regulations. No doubt, government interventions will increase butsometimes it’s good for the markets if it is aimed at bringing stability and normalcy tothe equities and safety of the interests of hapless investors. Right now equities arereacting sharply while panic and fear ruling the game. There are wild rumours andspeculations. Foreign investors have turned risk averse now and are trying to cashout to make up for their losses incurred in developed markets resulting in exodus ofmonies out of the emerging markets.
How it will impact us?
Emerging economies including India cannot remain insulated from sinking USeconomies is now a fact difficult to swallow. Rising unemployment, declining factoryorders and economic slowdown which are the pre cursor of the impending USrecession is a matter of great concerns for India. Though India’s growth engines areset to ignite and we are still the second fastest growing economies at 7.5-8%. But weneed foreign funds to sustain such growth. As of now FIIs are in panic mode andtrying to take out their monies from the emerging markets. But we are of the viewthat the sense will prevail and they will return to us. It’s a just a matter of time.The nefarious subprime crisis is going to further impact sectors like BFSI, real estate,infrastructure and IT. Sectors that are likely to be impacted mildly are Powerequipment & services, auto, retail, logistics, hospitality & tourism. The least impactedsectors however would be pharma, fertilizers energy, FMCG and media. And thereare positive developments too such as receding crude price, levelling off inflation etc.RBI has cut CRR by 150 bps to release Rs 80,000 crore in the banking system.There may be more such rate cuts in the offing. Sebi has eased PN rules to attractFIIs while it has allowed foreign companies to buy Indian stocks. There will be moresuch congenial measures to rev up the markets sentiments in time to come.
Post this financial crisis and bail outmeasures, we should expect more tightand transparent policies. We may seeincreased intervention fromgovernments. Further, it will take sometime to return to normalcy.
Current global liquidity crunch hasforced Reserve Bank to cut CRR by 150bps. Some more such cuts areexpected. FIIs exodus will continue inshort term till normalcy returns to themarkets. Further, the sectors that willbe impacted hard by this mess areBFSI, real estate, infrastructure and IT.