NATIONAL CONFERENCE ON

GLOBAL FINANCIAL CRISIS AND THE IMPACT ON INDIAN ECONOMY
On 21st 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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Amma’s Message There are two types of education: education for living and education for life. When we study in college, striving to become a doctor, a professional, a lawyer, or an engineer – this is education for a living. On the other hand, education for life requires understanding the essential principles of spirituality. This means gaining a deeper understanding of the world, our minds, our emotions, and ourselves. We all know that the real goal of education is not to create people who can understand only the language of machines. The main purpose of education should be to impart a culture of the heart – a culture based on spiritual values. Today’s world needs people who express goodness in their words and deeds. If such noble role models set the example for their fellow beings, the darkness prevailing in today’s society will be dispelled, and the light of peace and non – violence, will once again illumine this earth. Let us work together towards this goal.

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About the Conference
Economic well-being has been our aim and endeavour from the early days of civilization. But the overwhelming desire for money at any means has always paved the way to misery. The financial-tsunami that had struck the different economies around the globe is not an exception. The global financial crisis triggered by the sub-prime mortgage crisis is now prioritized for seeking solutions. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. Contributing to the pride of the nation’s spirit, India has shown exceptional strength in facing the crisis. But to what extent the crisis has affected India in general and the different sectors in particular need to be further assessed. An effective dissemination of knowledge in this regard is topically relevant. In the present context, the Department of Commerce and Management of Amrita School of Arts and Sciences, Kochi is organizing a One-day Conference on ‘Global Financial Crisis and the Impact on Indian Economy’.

Dr. U. Krishnakumar K.R. Shabu K.M. Vineeth

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About the Organiser
Amrita School of Arts and Sciences located in the sprawling and serene campus of Amrita Vishwa Vidyapeetham (A university u/s 3 of UGC Act) at Kochi has distinguished itself as a temple of learning in the emerging areas of Computer Science, Commerce and Management, Visual Media and Communications and Hospital Administration. The

department of Commerce and Management has been offering under-graduate and postgraduate programme relevant to the industry requirements in an exemplary manner since its inception. The alumni of the department are now serving in the various domains of The department is endowed with

management and administration in India and abroad.

learned and experienced faculty members and extremely good infrastructure.

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CONTENTS Sl. No.

Title of the Paper
Invited Paper On: THE GLOBAL FINANCIAL CRISIS - AN OVERVIEW SECTORAL IMPACT DUE TO GLOBAL FINANCIAL CRISIS - IMPACT IN BANKING SECTOR

Author (s)

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C.A. S. Jagdish, F.C.A.

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Dr. Dhanabhakyam B. Vinitha

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IMPACT OF GLOBAL FINANCIAL CRISIS IN INDIAN BANKING SECTOR A STUDY ON THE IMPACT OF GLOBAL CRISIS ON THE CHEQUE AND ELECTRONIC PAYMENT SYSTEMS OF INDIAN BANKING INDUSTRIES GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INDIAN BANKING WITH SPECIAL REFERENCE TO THE STOCK QUOTES OF ICICI BANK

P. Ganesan

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T.G. Manohar

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Dr. M.C. Dileepkumar K.R. Shabu K.M. Vineeth

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Abstracts of Student Papers: Guided By: K.M. Vineeth, Lecturer, Department of Commerce and Management

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THE GLOBAL FINANCIAL CRISIS - AN OVERVIEW
Invited Paper By: C. A. S. Jagdish, F. C. A.

Introduction
In the commercial world, the US economy has always set the pace for the world to follow. World economic growth has so far been a function of economic growth in the US . Therefore, whenever the US economy caught cold, the world economy sneezed and now when the US economy is in the throes of a severe viral fever, shivers and pains, the world economy is sinking on its knees.

The symptoms
So what is the fever like? A fever is always a symptom and some of the main symptoms in the US are….. Leading banks, financial institutions and investment banks becoming bankrupt. Home loan takers not paying up their dues instead surrendering their homes Citing reasons of inability to service their loans. Liquidity evaporating from the financial system. Fair asset values of financial institutions nose diving. Income statements of the financial institutions getting soaked in red. Business no longer able to access any finance from any sources. Aggregate demand, on which any economy depends for its growth, totally drying up. The unemployment level of labour going up to 7.20%, the highest in the last sixteen years. Loss of jobs moving up to 2.60 million in the year 2008 itself the highest since the year 1945 and More than anything else…..totals uncertainty about the future. The above has had a contagion effect. It has spread to all parts of the world including Europe, Asia and the other continents. The saddest part is that the prognosis is equally bad. The Year 2009 is going to be equally bad for the US and the world if not worse. We shall now see as to how all this happened.

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The Diagnosis:
The housing industry It all began with the US $ 23 trillion housing industry in the US. Real estate prices started moving up from the mid nineties peaking in the year 2006. During this period inflation rate was low and to augment further demand, the interest rates were systematically lowered by the Federal Reserve. Thus, it was an era of easy access to credit, low interest rates and surging real estate prices. Investors, real estate builders and speculators started raking in profits. The above situation prompted builders to build more . It also encouraged people who had one home to go for the second one just to pocket the benefit from surging real estate prices. The subprime loans. The advent of “The No Income No Jobs and Assets….NINJA loans” The idea that the real estate prices would only appreciate prompted the financial institutions to loosen their credit standards. They started encouraging people with no credit worthiness to borrow and buy homes. People who had no jobs and assets and thereby no incomes, were given home loans under the pretext that they would somehow or the other earn an income and repay their loans. For the financial institutions, the more the loans given, the better their bottom lines became under the accrual concept. And for the home loan takers the easier the availability of loan, the more merrier they became as repayment was always to be done “somehow”. And somehow meant that if they could not service the loans, they could surrender their homes and liquidate their liability. These loans were referred to as the subprime loans as the credit quality of the home loan borrowers were less than prime. The quantum of such subprime loans surged to US $ 625 billion in 2006 from US $ 190 billion in 2001. The era of easier credit, subprime loans, lower inflation levels and lower interest rates created a surging unsustainable demand for homes leading to a bubble in the real estate prices. And as is the hallmark of all bubbles, the participants in the market place realise it only after the bubble has burst! Simultaneously, another interesting but dangerous phenomenon was happening elsewhere. To understand that, one has to know about the mortgage market in the US. In the US, the mortgage industry comprises of two segments. The primary market - consisting of home loan borrowers and the lenders and The secondary market - Where these loans are sold as investments to market participants. In the secondary market there are again a set of four players:

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The Original Lenders

: namely the financial institutions like national and local banks, mortgage banks and government sponsored entities (GSEs).

The aggregators

: like Government Sponsored Entities (GSEs), large banks, investment banks and other financial institutions.

Investment firms

: Investment banks that innovate and sell exotic financial instruments and ordinary traders and brokers in securities.

Investors

: High net worth individuals, Sovereign entities, investment banks, hedge funds, GSEs and such others.

The operations in the secondary market went somewhat in the following manner. There were limits to which the original lenders could lend. This was because of the restrictions like capital adequacy norms which they were required to follow. The best way to wriggle out of this constrain was to sell these loans to another institution who was willing to buy. The advantage the original lender got was the loans in the balance sheet were soon converted to cash and then this cash could be used to give more loans and thereby earn more income. Selling these loans was also easy. This was because they were loans backed by mortgages. In simple terms they were secured loans. The original lenders collected the money from the borrowers and passed on them to the investors who had bought these Mortgage Backed Securities (MBS). And who were these investors? There were two major US Government Sponsored Entities in the US. They were Fannie May and Freddie Mac. The basic function entrusted to these entities was to develop a secondary market for Mortgage Backed Securities (MBS). They were able to borrow cheaply from the markets as they were implicitly backed by the US Government. These entities armed with relatively cheaper funds bought the loans from the primary lenders thereby imparting more liquidity into the home loan market. These GSEs then aggregated the loans bought

from the primary lenders and packaged them into MBS, guaranteed them and sold them to investors wanting a pie of the Secured Loan Market. This mechanism was assisted by the security dealers and brokers who were plenty in that market.

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There was tremendous appetite for these MBS as they were secured loans. Sovereign entities, high net worth individuals, financial institutions, and investment banks from world over bought them under the implicit assumption that they were guaranteed by the US Government as these were issued by the GSEs. This mechanism called securitisation enabled money to pour in from all parts of the world into the US home loan market. The Investment bankers and brokers who brokered deals for the GSEs also saw a great opportunity for them to make money. They became more adventurous and started aggregating the MBS at their level and selling them. They again started buying the loans directly from the original lenders and after aggregating them started selling them directly to the interested investors. There were takers for the later ones too. The interested parties were investors who wanted higher yields for their investments and were therefore willing to take greater risks. The investment banks after aggregating them sold them as exotic financial investment

products like Collateralised Mortgage Obligations ( CMOs) , Collateralised Debt Obligation ( 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 the US and actively traded in the secondary market of the US and also worldwide. Such was the 14

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 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 financial markets soon lost their credibility as they did not receive any cash inflows as such. As 15 more riskier by increasing the risk of

mentioned earlier most of the participants in the financial markets had their fingers in the CDOs, CMOs and CDS. Therefore, soon they were all saddled with assets which were doubtfull of recovery. These assets then had to be classified as bad debts. The financial statements of these institutions started bleeding red thereby wiping out their net worth. It was now the time of “distressed assets.”! The above entities, to be in business, had to raise cash. This they could not as cash was just not available. The financial institutions stopped lending amongst themselves also as each suspected the solvency of the other. The financial solvency of many a reputed financial institution was tested and many soon failed the test. They had no option but to file for bankruptcy protection. Very soon the bubble burst fully. The deeply leveraged investment bank Bearn Sterns was the first to go. It had to be rescued by the bank JP Morgan Chase under a deal brokered by The Federal Reserve. The next to follow was Lehman Brothers a 138 year old institution. There was none to rescue it. It filed for bankruptcy protection. After this the floodgates of failure opened. The US Government was forced to take over both Fredie Mac and Fannie Mae the GSEs, who had guaranteed or owned trillions of US $ worth mortgages. Another investment bank Merrill Lynch was taken over by Bank Of America and the US Government pumped in about US $ 85 Billion into AIG, The American insurance giant, to ensure that it is able to meet a part of its obligations. The contagion spread to the traditional banks also as these banks also had CDOs, CMOs and CDS in their balance sheets which were not worth the paper they were on. These banks had to write off these assets creating deep unpluggable holes in their Balance Sheets. One of the biggest traditional banks in US, Washington Mutual failed and again so did Wachovia Bank. The reason why these financial institutions failed was because they were unable to liquidate their liabilities on time as their cash in flows had dried up totally and they were unable to infuse fresh cash into their system as fresh capital was just not available. The most worrisome aspect of this crisis is that no one, world over, is able to judge how deep the malady is. Every day one hears of some bank or other financial institutions being in deep trouble somewhere in the world. The latest casualty being The Royal Bank of Scotland. The wise men in the financial sector are keeping their fingers crossed. The consequences faced by the US The US economy had slipped into a recession by December 2007.As the crisis erupted, liquidity vaporised from the US market. Banks and financial institutions had no more 16

money to lend. Their capital had vanished as they had to mark their investments to market. They could lend anymore only when they raised additional capital which they were unable to as capital had become scarce. Investor who had money had also become risk averse. They simply parked their money with US treasury bonds. All the other sectors were badly affected as banks had no money to lend them. Auto loans were no more available and hence car sales plummeted. The real estate sector had already collapsed. With no money capital expenditure plans of the corporates vanished. The conditions are very bad even as on date. It is reported that the US economy shrank at its fastest pace in the last 27 years in the fourth quarter of 2008. Government data reveals the US economy sinking deeper into recession as both consumers and
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expenditure. The US government released data on 30 January 2009 which showed that GDP had contracted by 3.80% to record a dismal growth of just 1.30% for the year 2008. The consequences faced by the world economy. As mentioned at the beginning, the whole free world is connected commercially to US in one way or the other. The dollar being the most accepted currency, nations, corporations, banks and high net worth individuals always parked their surpluses in the US Dollar. All the financial institutions in Europe and other parts of the World had some amount of exposure to the CDOs, CMOs and CDS. In fact, it was reported that even the London branch of ICICI Bank had an exposure to these instruments. The rumblings of the financial crisis in US started being felt in far away places like Belgium where a leading bank failed. To cap it all even a small country, Iceland failed. It was indeed worrying and painful to hear the chief economist of IMF, Mr Oliver Blanchard say unequivocally that “ We now expect the global economy to come to a virtual halt” Investor confidence has been totally shattered world over and is at its nadir. Investors have become risk averse. Therefore, capital has become scarce world over. People are selling their assets and converting it into cash. This cash is mostly in the form of Sovereign debt. This money is therefore not finding its way to the industry. Consumers and corporations have cut their spending. Demand for goods and services, the main trigger for economic growth has slowed down considerably. International trade has also nosedived. Commodity prices are also collapsing to lows which do not even enable recovery of cost. The crisis is so bad that Toyota Motor Corporation reported a business loss after a gap of 73 years. The Commercial world is slowly inching its way into the abyss of collapse.

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The Crisis……. Unpredicted 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 great depression of the 1930s, this time around there is a total concerted action taken 18

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 sponsored agencies, the banking system, the backbone of any economy has not been affected at all. Not 19

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 monetary tools available at its disposal. RBI hiked the CRR rates and also the Repo and Reverse Repo 20

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 loose steam by about 1.50%, Europe by 2.50% and Japan in Asia by about 2% in the year 2009. The 21

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 rational decisions. But when these decisions are aggregated they do not make a rational decision for 22

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 may weaken against major currencies. How weak it can get again depends on a host of factors. 23

Again in the US economy with so much money chasing available goods there is every reason that inflation may rear its head. How much will all this affect the world economy none can guess as on date. One thing is again sure. A reform of the world financial system is the need of the hour. All tainted financial products and concepts need to be discarded. Strategies have to be evolved to infuse liquidity, inject capital and dispose of impaired assets. All impractical ideologies will have to be thrown out of the windows. Only the pragmatic ones will have to be adopted. All players in the financial markets have to be regulated and the regulators themselves will have to be monitored to ensure that they discharge their functions as required of them. The financial entities should always be aware that they are dealing with “others money” .Everyone should be made accountable and punitive actions should be taken for dereliction of duty. All this of course involves a massive dose of cooperation at the international level. The role of the government as a regulator and a watch dog is now of paramount importance. This crisis has shown that there can be no totally free market economy. There can only be a market economy effectively monitored by the government. Now, whether all the concerted actions taken by all the concerned agencies will bear fruit or not, only the next financial crisis will tell!

Acknowledgements and references : 1. “The credit crisis of 2008: Causes consequences and implications for India” by Prof. V.G. Narayanan and Lisa Brem published in the Chartered Accountant, Volume 57, December 2008. 2. “Why no one saw it coming?” by Mr. B. Sambamurthy, in the Business Line dated 26-01-2009. 3. “Murphy’s law saluted” by Mr John Henley published in the Business line dated 07-01-2009. 4. Interview with the SBI Chairman Mr. O.P. Bhatt published in the Economic Times dated 06-01-2009. 5. “The Governor’s Dilemma” by Mr A. Sheshan published in the Business Line dated 24-01-2009. 6. “How long can it go?” by Mr. Mayur Shetty published in the Economic Times dated 07-01-2009. 7. “ How India avoided a crisis” by Mr. Joe Nocera published in the Business Line 24

dated 23-12-2008. 8. “ A hard rain’s a-gonna fall…” by Mythilli Bhusnurmath published in the Economic Times dated 27-01-2009. 9. ” Slump may be longer, deeper : RBI” an Economic Times bureau report dated 27-01-2009. 10. “After 71 years, Toyota to post losses” a report in the Economic Times dated 2312-2008. 11. “Stimulus for course correction” by Mr. S. Varadachary published in the Buiness Line dated 27-12-2008. 12. Various articles and comments in the web site www2.standardandpoor.com 13. Various articles and comments in the website www.jpmorganchase.com 14. Various articles and comments in the website www.onlinewsj.com

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SECTORAL IMPACT DUE TO GLOBAL FINANCIAL CRISIS IMPACT IN BANKING SECTOR
Dr. Dhanabhakyam Lecturer Department of commerce Bharathiar university Coimbatore-46. ABSTRACT The financial crisis in the US and the world has resulted in the bankruptcy of many big banks the world over. This has also resulted in the crashing of stock markets throughout the world. This has come about in spite of the bail-out package of the US Government and coordinated actions on the part of different Central Banks to ease out the global credit crunch. The impact of the global financial crisis on India is in many ways different from the effect it has had on the US and other western countries. In the US and Europe, the financial crisis has led to the failure of several large banks and financial institutions. This is on account of huge losses in the US sub prime business. However, in India, almost all our banks have been unaffected by the raging sub prime fire. As a result, there are no bank failures here. However, the Indian financial system and our economy are not completely isolated from the rest of the world. It cannot escape the turmoil entirely. This paper focuses on the various reasons for global financial crisis and its impact in Asia and also in Indian banking sector. And also it includes RBI responses to this crisis and various measures taken by RBI to improve banking sector in India INTRODUCTION The turmoil in the international financial markets of advanced economies, that started around mid - 2007, has exacerbated substantially since August 2008. The financial market crisis has led to the collapse of major financial institutions and is now beginning to impact the real economy in the advanced economies. As this crisis is unfolding, credit markets appear to be drying up in the developed world. We should see that with the substantive increase in financial globalization, how much these developments will affect India. B. Vinitha Ph. D. scholar Department of commerce Bharathiar university Coimbatore-46

Global financial crisis
To begin with, let’s accept the truth that we are going through the worst financial crisis witnessed by the world since the days of the Great Depression. The fall began with USA but later on it spread to all over the world. There are several factors responsible for this

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vicious global financial crisis. If the truth be told, the world economy is trapped in a predicament of its own making. Safe to term this financial problem as ’Economic Recession’, the first signs of it were visible some 17 months back. USA had a relatively smooth economy with added advantage of low inflation since the last two decades. That factor contributed to administration and regulators becoming complacent about regulatory norms. That was the first mistake. Soon enough, ever increasing greed of investment banks took over the basic sense of economics. Increasing profits on their balance sheets made them take hugely risky projects. Initially, this risk propensity approach paid rich dividends but with other problems like, mortgage bonds and housing issues surfacing, the bubble had to burst. With the biggest names of world economy; Lehman Brothers, Merrill Lynch, Bear Sterns, AIG, Freddie Mac, Fannie Mae, etc going bust, government and its policy makers had no option but to wake up and try to inject some sense in self-created financial web. But, it’s almost like a case of too late and too little. The point is no one is sure about the extent of damage and the exact time frame of economic revival. Governments are loosening their purse strings and many more steps are underway to help all those struggling behemoths. In hindsight, it’s quite similar to socialism. Interestingly, the path of socialism is being pursued by world’s most capitalist countries. Capitalism is not known for interfering in market forces and rescuing companies. Americans using all the possible models of economy including, socialism, capitalism and mixed economy. Tools being employed are liquidation, mergers and nationalizations of falling giants. Weaker banks are merged with strong banks (Washington Mutual to JPMorgan Chase, Wachovia with Wells Fargo); nationalizing mortgage companies (Fannie Mae and Freddie Mac); allowing few other majors to go kaput (Lehman Brothers and Indy Bank), ending the era of investment banks (Goldman Sachs and Morgan Stanley), releasing bailout package to purchase doomed assets from fragile banks with hope that it will enhance their capital are some other frantic steps undertaken by USA policy makers.

US Financial Crisis to indirectly impact Asian banks
The latest turmoil in the U.S. financial sector beginning with Lehman Brothers Holdings' bankruptcy filing and uncertainties about AIG's flexibility in meeting additional collateral needs could accelerate and exacerbate the economic impact on Asia. Standard & Poor's Ratings Services said today the direct exposures of rated banks in Asia ex-Japan to

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Lehman Brothers are not expected to be significant enough to materially damage their credit profiles. "A few Taiwan, Philippine, and Chinese banks appear to have more direct exposure to Lehman Brothers entities," said Standard & Poor's credit analyst Ritesh Maheshwari. "However, Asian banks' strengthened balance sheets, as a result of healthy profits over the vibrant economic environment during the past half a decade, can withstand the impact of likely losses from direct exposure, without rating downgrades." "We continue to believe that the risk to Asian banks is more from the impending economic slowdown and market turmoil than from direct exposure to the distressed U.S. financial institutions,". It is noted that Asian banks' exposure to structured finance products were similarly not material enough to do substantial damage.

Impact on the Indian Banking System
One of the key features of the current financial turmoil has been the lack of perceived contagion being felt by banking systems in EMEs, particularly in Asia. The Indian banking system also has not experienced any contagion, similar to its peers in the rest of Asia. A detailed study undertaken on the impact of the sub prime episode on the Indian banks had revealed that none of the Indian banks or the foreign banks, with whom the discussions had been held, had any direct exposure to the sub-prime markets in the USA or other markets. However, a few Indian banks had invested in the collateralized debt obligations (CDOs) / bonds which had a few underlying entities with sub-prime exposures. Thus, no direct impact on account of direct exposure to the sub-prime market was in evidence. However, a few of these banks did suffer some losses on account of the mark-to-market losses caused by the widening of the credit spreads arising from the sub-prime episode on term liquidity in the market, even though the overnight markets remained stable. Consequent upon filling of bankruptcy of by Lehman Brothers, all banks were advised to report the details of their exposures to Lehman Brothers and related entities both in India and abroad. Out of 77 reporting banks, 14 reported exposures to Lehman Brothers and its related entities either in India or abroad. An analysis of the information reported by these banks revealed that majority of the exposures reported by the banks pertained to subsidiaries of Lehman Bros Holdings Inc. which are not covered by the bankruptcy proceedings. Overall, these banks’ exposure especially to Lehman Brothers Holding Inc. which has filed for bankruptcy is not significant and banks are reported to have made adequate provisions.

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In the aftermath of the turmoil caused by bankruptcy, the Reserve Bank has announced a series of measures to facilitate orderly operation of financial markets and to ensure financial stability which predominantly includes extension of additional liquidity support to banks. 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 unreasonable when 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), 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 only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening. The question meanwhile is: Who else is frozen in the sudden glare of the headlights? The answer could be consumers, many of whom are already quite leveraged. More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent. And it is not just the impact of those caught on the margin who must be considered. The drop in real estate and stock prices robs a much larger body of consumers of the wealth effect, which could affect spending on a broader front. In short, the second round effects of the financial crisis will be felt straightaway in the credit-driven activities and sectors, but will spread beyond that in a perhaps slow wave that could take a year or more to die down.

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One danger meanwhile is of a dip in the employment market. There is already anecdotal evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs. More than the downsizing itself, which may not involve large numbers, what this implies is a significant drop in new hiring -- and that will change the complexion of the job market. At the heart of the problem lie questions of liquidity and confidence. What the RBI needs to do, as events unfold, is to neutralize the outflow of FII money by unwinding the market stabilization securities that it had used to sterilize the inflows when they happened. This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time. If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high. Meanwhile, there is an upside to be considered as well. The falling rupee (against the dollar, more than against other currencies) will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce. Overheated markets in general (stocks, real estate, employment-among others) will all have an element of sanity restored. And for importers, the oil price fall (and the general fall in commodity prices) will neutralise the impact of the dollar's decline against the rupee.

Indian Government sets up group to assess liquidity requirements
Indian Government has constituted a group to make a quick assessment of the requirements of liquidity and also advise the Government. The group will be headed by Shri Arun Ramanathan, Finance Secretary and Secretary (Financial services).It will consist of: (i) Representative of RBI

(ii) Shri T.S. Narayanaswamy, Chairman, IBA & CMD, Bank of India (iii) Shri U.K. Sinha, CMD, UTI (iv) Shri Y. M. Deosthalee, CFO, L&T & Director-in-charge, L&T Finance Limited (v) Shri R.M. Malla, CMD, SIDBI The group has been authorized to co-opt any more members, if necessary. Group has to begin work immediately, also visit Mumbai, and submit an interim report within a week. Finance Minister, Shri P. Chidambaram in a statement said that Government has identified that the main problem is liquidity, and we will respond swiftly and take steps to infuse more liquidity according to the needs of the situation. Reserve Bank of India was advised to take appropriate steps in this behalf. 30

RBI Response to the Crisis
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,

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unlike central banks in major advanced economies, the Reserve Bank did not have to invent new instruments or to dilute the collateral requirements to inject liquidity. LAF Repo operations are, however, limited by the excess SLR securities held by banks. While LAF and MSS have been able to bear a large part of the burden, some modulations in CRR and SLR have also been resorted, purely as temporary measures, to meet the liquidity mismatches. For instance, on September 16, 2008, in regard to SLR, the Reserve Bank permitted banks to use up to an additional 1 percent of their NDTL, for a temporary period, for drawing liquidity support under LAF from RBI. This has imparted a sense of confidence in the market in terms of availability of short-term liquidity. The CRR which had been gradually increased from 4.5 per cent in 2004 to 9 per cent by August 2008 was cut by 50 basis points on October 65 (to be effective October 11, 2008) – the first cut after a gap of over five years - on a review of the liquidity situation in the context of global and domestic developments. Thus, as the very recent experience shows, temporary changes in the prudential ratios such as CRR and SLR combined with flexible use of the MSS, could be considered as a vast pool of backup liquidity that is available for liquidity management as the situation may warrant for relieving market pressure at any given time. The recent innovation with respect to SLR for combating temporary systemic illiquidity is particularly noteworthy. The relative stability in domestic financial markets, despite extreme turmoil in the global financial markets, is reflective of prudent practices, strengthened reserves and the strong growth performance in recent years in an environment of flexibility in the conduct of policies. Active liquidity management is a key element of the current monetary policy stance. Liquidity modulation through a flexible use of a combination of instruments has, to a significant extent, cushioned the impact of the international financial turbulence on domestic financial markets by absorbing excessive market pressures and ensuring orderly conditions. In view of the evolving environment of heightened uncertainty, volatility in global markets and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead. The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants.

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Indian Banking sector challenged by domestic, not global, factors
CRISIL believes that the Indian banking system is relatively insulated from the factors leading to the turmoil in the global banking industry. Further, the recent tight liquidity in the Indian market is also qualitatively different from the global liquidity crunch, which was caused by a crisis of confidence in banks lending to each other. “While the main 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-tomarket 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. The problems of global banks arose mainly due to exposure to sub-prime mortgage lending and investments in complex collateralized debt obligations whose values have seen sharp erosion. Globally, banks have also been affected by the freeze in the inter-bank lending market due to confidence-related issues. On both counts, Indian banks have limited vulnerability. 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. The reasons for tight liquidity conditions in the Indian market in recent weeks are quite different from the factors driving the global liquidity crisis. Some reasons include large selling by Foreign Institutional Investors (FIIs) and subsequent Reserve Bank of India (RBI) interventions in the foreign currency market, continuing growth in advances, and earlier increases in cash reserve ratio (CRR) to contain inflation. RBI’s recent initiatives, including the reduction in CRR by 150 basis points, cancellation of two auctions of government securities, and confidence-building communication, have already begun easing liquidity pressures. The strong capitalization of Indian banks, with an average Tier I capital adequacy ratio of above 8 per cent, is a positive feature in their credit risk profile. Nevertheless, Indian banks do face challenges in the current Indian economic environment, marked by a slower

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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 government ownership 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 subprime 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 as warranted 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 banks maintain healthy capitalization; enjoy strong system support and benefits from government. 34

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 by the Indian banking sector during the meltdown seasons. This article help to find the banking sector 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 and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions 35

which had engaged in the securitization of mortgages such as Bear Stearns then fell prey. On July 11, 2008, the largest mortgage lender in the US collapsed. IndyMac Bank's assets were seized by federal regulators after the mortgage lender succumbed. Thereafter, US government saved mortgage lenders Fannie Mae and Freddie Mac, by placing the two companies into federal conservatorship on September 7, 2008. It then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of major FIs. Beginning with bankruptcy of Lehman Brothers on Sunday, September 14, 2008, the financial crisis entered an acute phase marked by failures of prominent American and European banks and efforts by the American and European governments to rescue distressed financial institutions. GLOBAL CRISIS IN INDIAN BANKING SECTOR On the date the financial crisis began with US, the CRISIL believes that the Indian banking system is relatively insulated from the factors leading to the turmoil in the global banking industry. Further, the recent tight liquidity in the Indian market is also qualitatively different from the global liquidity crunch, which was caused by a crisis of confidence in banks lending to each other. According the CEO of the CRISIL said “While the main 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. The problems of global banks arose mainly due to exposure to sub-prime mortgage lending and investments in complex collateralised debt obligations whose values have seen sharp erosion. Globally, banks have also been affected by the freeze in the inter-bank lending market due to confidence-related issues. On both counts, Indian banks have limited vulnerability. 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

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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. One of the major problems faced by Indian banks was the unusual tightening of liquidity in recent weeks caused in part by portfolio investment outflows by Foreign Institutional Investors (FIIs). For instance, portfolio investment outflows recorded net outflows of $7.3 billion during the current financial year upto October 10, 2008, in contrast to net inflows of $18.9 billion in the corresponding period of last year. RBI therefore took several measures since mid-September 2008 to assuage the liquidity stress: these included cumulative reduction of 250 basis point in CRR with effect from October 11; a special facility of RS. 20,000 crore to alleviate the liquidity pressures faced by mutual funds; and provision of Rs. 25,000 crore to banks as the first instalment of the Agricultural Debt Waiver and Debt Relief Scheme. The total liquidity support extended to banks thus worked out to a massive figure of Rs. 1,85,000 crore. The easing of the liquidity pressures is reflected in the fact that the call money rates which had touched a peak of 19.8 per cent on October 10, eased to normal levels subsequently. The most obvious victim of the global melt down was the stock market. In India the bull market phase from 2003 till early 2008 was unprecendented, the Sensex reaching the peak of 20,873 on January 8, 2008. Subsequently, sensex started sliding but the fall was precipitous in October 2008, partly reflecting the contagion impact of what was happening in New York or London markets and partly as a result of massive outflows of funds through FIIs, discussed above. The Sensex reached 8701 on October 24 – the lowest level during the last 35 months. Although the index rose somewhat subsequently it has remained below the 10,000 level. RBI acted again on November 1st, by reducing both CRR (Cash Reserve Ratio and SLRC statutory Liquidity Ratio) by 1 per cent each. In, effect this measure meant that banks’ usable resources were replenished by Rs. 80,000 crores. Dr. S.S.Tarapore, former Deputy Governor RBI, estimates that total liquidity pumped in by RBI through all these measures adds up to a staggering figure of Rs. 300,000 crore. Is there a surfeit of liquidity now? The underlying idea was to create an enabling environment for banks to reduce their lending rates. The private corporate sector was clamouring for a cheap landing rates structure and with a little nudging from Finance Minister, public sector banks, led by the State Bank of India decided to reduce their prime lending rates by 75 basis points with effect from November 10. One hopes that cheaper credit will spur corporate sector growth.

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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 on the pattern of the American paradigm. In a sense, RBI enforced its own version of the U.S.’ 38

Glass-Steagal Act of 1933, which insulates banks from capital market exposures. The RBI enforced strict capital adequacy requirements and if any financial institution or bank exceeded the specified limits of exposure to stock markets, it would have to provide more capital. This effectively insulated the banks and financial institutions from volatility of the bourses. Enforcement of the above instructions has paid good dividends. Erosion of capital of the banks and financial institutions has been reduced. These exposure limits, however, deserve to be reviewed from time to time. 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. There is another observation, which has to be kept in mind in judging the relative freedom of Indian banking system from the catastrophic mess in the U.S. This is based on the important fact that the Indian banking system is basically owned by the public sector. The State owns many of the banks and financial institutions in the country. There is greater confidence of depositors in a state-owned bank than in a privately-owned bank. This is evident from the fact that in the latest version of the rescue package in the U.S., the government has come forward to infuse capital into distressed banks and financial institutions. Maybe, we can congratulate ourselves that India had already done what Washington is now doing in the midst of the crisis and therefore escaped much of the confidence problems. 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. Striking the right balance between boldness and caution is where wisdom lies. A CONTINUING PROCESS It is, however, fair to point out that we should not be complacent in regard to the process of reform. Reform is a continuing process. The latest contribution to the process of reform is a report produced by Dr. Raghuram G. Rajan, former Counsellor of IMF and at present Professor at Chicago Business School. The report incorporates a number of useful suggestions. Although one may have differences of approach with certain aspects, the report

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deserves to be examined and implemented to the extent possible to keep the Indian financial system modern and efficient. In this connection, it is only appropriate to refer to the stabilising role of the Securities and Exchange Board of India (SEBI) in managing the difficult task of regulating our stock markets. Especially, attention has to be drawn to the role of Participatory Notes. In the present context in which private capital from abroad has been responsible for many problems in the Indian stock markets, SEBI must be congratulated for its cautious line on this subject, making appropriate relaxations as needed. While the RBI is to be congratulated for its cautious and nuanced stance in regard to its regulation, one can argue that its regulation can sometimes be a little bit oriented towards management of banks. Whether it is appropriate for the central bank of a country to decide on where the branch of a bank should be located is a matter for discussion. In a recent debate, Dr. Raghuram Rajan had pointed out that a well-known foreign bank, which had applied for opening its branch in a rural area, was refused permission, notwithstanding the fact that no Indian bank had asked for permission to open a branch in that area. It is perhaps time to put a stop to such management of minutiae by the central bank, which should have its hands full with other more pressing issues. While the RBI may legitimately pride itself on better regulation than the U.S. Federal Reserve, there are two topics on which it has to follow the example of U.S. Federal Reserve. One is concerning the distribution of profits of the central bank. The U.S. Federal Reserve had a profit of nearly $39 billion in 2006-07 out of which it had transferred $34 billion to the U.S. Treasury. This is in sharp contrast to the behavior of the RBI, which appropriates the bulk of its profits of nearly Rs.50,000-60,000 crore to the so-called contingency fund and transfers only Rs.10,000 crore to the Government. If the RBI could follow the example of the U.S. Fed in this matter, Mint Street can fix half the fiscal problems of the North Block. Another issue on which the Federal Reserve offers a good example to follow is regarding the measurement of inflation. U.S. Federal Reserve measures inflation on the basis of consumer price index and not on the basis of wholesale price index. This makes a substantial difference. In the U.S., in the last year the consumer price index increased only by 2 per cent, measured on the basis of what the Fed calls “headline inflation,” excluding fuel and food. Even if the consumer price index including fuel and food is considered in India, the RBI will come out with an inflation of 7 per cent as against the figure of 12 per cent, on the basis of wholesale price index. If we follow the consumer price index in measuring inflation, India can afford to have an interest rate of roughly 5 per cent lower than the one in force at 40

present. This can make a significant difference to the fiscal fortunes and the growth of the Indian economy. OPPORTUNITIES AND RECENT INITIATIVE BY THE RBI The Indian banking industry is currently termed as strong, having weathered the global economic slowdown and showing good numbers with strong support flowing in from the Reserve Bank of India (RBI) measures. Furthermore, a report "Opportunities in Indian Banking Sector", by market research company, RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per cent till 2011. Banking, financial services and insurance (BFSI), together account for 38 per cent of India's outsourcing industry (worth US$ 47.8 billion in 2007). According to a report by McKinsey and NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US by the year 2010. Outsourcing by the BFSI to India is expected to grow at an annual rate of 30–35 per cent. According to a study by Dun & Bradstreet (an international research body)—"India's Top Banks 2008"—there has been a significant growth in the banking infrastructure. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all ATMs. According to the RBI, Indian financial markets have generally remained orderly during 2008-09. In view of the tight liquidity conditions in the domestic money markets in September 2008, the Reserve Bank announced a series of measures beginning September 16, 2008. Thus, the average call rate which was at 10.52 per cent declined to 7.57 per cent in November 2008 under the impact of these measures. Measures aimed at expanding the rupee liquidity, included significant reduction in the cash reserve ratio (CRR), reduction of the statutory liquidity ratio (SLR), opening a special repo window under the liquidity adjustment facility (LAF) for banks for on-lending to the non-banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds (MFs), and extending a special refinance facility, which banks could access without any collateral. Banking capital (net) amounted to US$ 4.8 billion in April-September 2008 as compared with US$ 5.7 billion in April-September 2007. Among the components of banking

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capital, non-resident Indian (NRI) deposits witnessed a net inflow of US$ 1.1 billion in AprilSeptember 2008, a turnaround from net outflow of US$ 78 million in April-September 2007. The reserve money lying with the RBI as on November 21, 2008 as per the January 2009 bulletin, is a total amount of US$ 179.28 billion and RBI’s credit to the commercial sector stood at US$ 3.65 billion. Further, banks in India put up strong growth and profit numbers in the October-end-December 2008 period owing to high credit growth and easing of yield on government bonds. Top Indian banks have increased their earnings by almost 40 per cent year-on-year for the same period. According to latest Reserve Bank of India (RBI) data, bank credit grew by 24.6 per cent year-on-year as of December 19, 2008. The resulting credit growth was even better at 41 per cent during the April-end-December 2008 period. Deposits grew by 20.6 per cent as of December 19, 2008. The growth in advances reflects that the net interest income (NIM) too would indicate higher growth rate. RBI has taken a number of steps to lower the cost of credit in this quarter like cutting cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, repo and reverse repo rate. The CRR rate, which had been reduced in December 2008, to 5.50 per cent, repo rate to 6.50 and reverse repo rate to 5.00, were further reduced – CRR to 5 per cent, (its lending rate) repo rate to 5.5 per cent and reverse repo, at which it absorbs cash from the banking system, to 4 per cent in January 2009. Responding to these measures, banks have cut the prime lending rates (PLR). Further, according to several brokerage research teams, NIM may remain stable in the last quarter. For instance, a Motilal Oswal report on earnings preview reveals, "We expect margins to remain stable despite the PLR cut of 125-150 basis points (75 bps w.e.f January 1, 2009), as the banks have reaped the benefit of CRR cut (350 bps in December quarter) and have demonstrated their pricing power to corporate." According to brokerage Prabhudas Lilladher’s preview report, "among the banks, SBI, Bank of Baroda and Union Bank stand to gain the most on account of mark-to-market (MTM) reversals.” Banks however, have to face the challenge of rising non-performing assets (NPAs) owing to the slowdown in exports and industrial production. Also, RBI has taken steps like one-time restructuring of real estate loans and second-time restructuring of loans given to other sectors to counter the NPA scenario.

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Growth of Banks HDFC Bank and Axis Bank continue to remain as leaders of the private sector banks. Both the banks have maintained the advances growth and NIM. SBI, Punjab National Bank, Bank of India and Union Bank are expected to lead among PSU Banks. The State Bank of India is planning to open 1,000 new branches across the country to cover 100,000 villages in the coming FY 2009-10, according to the bank Chairman, Mr O P Bhatt. The bank had decided to rope in 300 new customers every year for each branch using initiatives. According to Mr Bhatt, the bank could get a record US$ 5.54 billion during December 2008, the highest amount collected by any bank in the country. Further, public sector banks (PSBs) on January 12, 2009 also decided to lower interest rates on bulk deposits and to offer a maximum rate of 7.5 per cent for one-year maturity. Earlier, on January 1, banks had lowered the interest rates on bulk deposits from 9.5 per cent to 8.5 per cent. According to the latest RBI data, growth in broad money (M3), year-on-year (y-o-y), was 19.6 per cent (US$ 151.04 billion) on January 2, 2009 lower than 22.6 per cent (US$ 141.82 billion) a year ago. Aggregate deposits of banks, year-on-year, expanded 20.2 per cent (US$ 133.08 billion) on January 2, 2009 as compared with 24.0 per cent (US$ 127.49 billion) a year ago. The growth in bank credit continued to remain high. Non-food credit by scheduled commercial banks (SCBs) was 23.9 per cent (US$ 102.78 billion), year-on-year, as on January 2, 2009 from 22.0 per cent (US$ 77.79 billion) a year ago. Scheduled commercial banks’ credit to the commercial sector expanded by 27.0 per cent (year-on-year) as on November 21, 2008, as compared with 23.1 per cent a year ago. Non-food credit of scheduled commercial banks expanded by 26.9 per cent, year-on-year, as on November 21, 2008, higher than 23.7 per cent a year ago. According to earlier RBI data, for the third quarter (September 26-December 27, 2008), total bank credit was up US$ 21.91 billion compared with a growth of US$ 22.91 billion in the same period a year ago. In the preceding quarter, credit had risen by US$ 26.50 billion. RBI data for deposits shows that for the Oct-end December 31, 2008 period, although deposit growth has slowed to US$ 25.99 billion against US$ 33.18 billion in the April-end to September, 2008 period, it was still stronger in the December 31 quarter period, 2008, as compared to the year-ago quarter when absolute growth was US$ 16.37 billion.

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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 AprilSeptember 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 9.0010.50 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 13.0014.75 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 in Orissa including the public sector State Bank of India (SBI) and the Small Industries 44

Development Bank of India (SIDBI) have adopted 48 clusters specially in sectors like engineering tools, foundry, handloom, food processing, weaving, rice mill, cashew processing, pharmaceuticals, bell metals and carpentry etc.

PSBs are now cashing in the auto loan segment after the exit of private players owing to the slowdown. Auto loans usually have three components - car loans, two-wheeler loans and commercial vehicle loans. PSBs are primarily focussing on car and twowheeler loans. Prevalent interest rates in the car loan segment now range between 11 per cent and 12.5 per cent per annum. For instance, according to the Union Bank of India Chairman and Managing Director, MV Nair, his bank had recently tied up with Maruti Suzuki India for financing the latter's product and it has a US$ 163.84 million auto loan portfolio.

The government has told public sector banks (PSBs) to extend credit to fund-starved Indian industry, especially exporters and small and medium sector enterprises to address their credit needs. SIDBI would be lending US$ 1.33 billion out of US$ 1.47 billion credit from RBI to public sector banks. This is being provided to the PSBs at 6.5 per cent (SIDBI is getting the credit at 5.5 per cent) under the condition that the banks will have to lend this credit to the medium and small-scale industry units at an interest rate of 10 per cent before March 31, 2010.

According to SBI Chairman, O P Bhatt, contribution of small and medium enterprises (SMEs) is nearly 40-50 per cent to GDP growth of the nation, and this sector also accounts for 50 per cent of the industrial output. "Banks could accrue a revenue of over US$ 5.73 billion by encouraging the SMEs," Bhatt said adding, "SME's sector is to grow fastest in the next five years, with 14 per cent growth in terms of revenue and 13 per cent in terms of profits." The bank in order to help units tide over the current downturn, had introduced products like “SME Care” specially in Jharkhand, which provides units to access 20 per cent additional funds over and above their existing overdraft limit. Already, according to an official, the MSME ministry has proposed to RBI that the sector be given a mandatory 15 per cent share of the total priority sector lending.

Policy news According to the latest RBI bulletin release,

On December 8, 2008, the repo rate and the reverse repo rate were reduced by 100 basis points each to 6.5 per cent and 5.0 per cent, respectively. In January 2009, the

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CRR has been further reduced to 5 per cent, repo rate to 5.5 per cent and reverse repo to 4 per cent.

Technological upgradation in working of rural regional banks (RRBs) is being implemented. As a first step, RRBs which have either 100 per cent computerisation or are being opened from September 2009, need to be CBS compliant.

To enhance credit flow to the MSE sector, SIDBI would be provided refinance worth US$ 1.43 billion. The facility, available up to end-March 2010, would be available at the prevailing repo rate under the liquidity adjustment facility (LAF) for a 90-day period, during which the amount can be flexibly drawn and repaid and can be rolled over at the end of the 90-day period.

As a follow-up to the announcement in November 2008, the policy on premature buyback of FCCBs by Indian companies was liberalised and applications for buyback would be considered under both automatic and approval routes and related compliance terms and conditions have been issued.

The banking industry is thereby now lending both strength and support in form of cash and policies majorly in putting back the economy into track. CONCLUSION Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (Arcil), this pilot project of the ministry would pave way for smoother functioning of the credit market in the country. The global financial system has undergone unprecedented turmoil in the last few months, and the situation has worsened considerably since Spring. But, as severe as circumstances are, the resolve and sense of urgency of country authorities to tackle the issues at hand and the sense of urgency to intensify international cooperation are encouraging developments. Concrete actions, however, are needed to tackle insufficient capital, falling asset valuations, and a dysfunctional funding market. Such a comprehensive approach, if consistent among countries, should be sufficient to restore confidence and the proper functioning of markets, and avert a more protracted downturn in the global economy.

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A STUDY ON THE IMPACT OF GLOBAL CRISIS ON THE CHEQUE AND ELECTRONIC PAYMENT SYSTEMS OF INDIAN BANKING INDUSTRIES Manohar T. G. Lecturer in Commerce and Management Amrita Vishwa Vidyapeetham (Amritapuri Campus) Introduction The global financial crisis is now the staple of front page news. Banks around the world, including those in India, are in the forefront of managing the challenge of resolving the crisis. Global Financial Outlook The sub-prime crisis started in the US housing mortgage sector has turned successively into a global banking crisis, global financial crisis and now a global economic crisis. Text book economics often cites housing as a prime example of a non-tradable good. It is paradoxical that a quintessentially non-tradable good as housing has triggered a crisis of global dimensions. This crisis is also the first of a kind in the sense that it is the first major financial crisis since the Great Depression that originated in the advanced economies and rapidly engulfed the whole world. Such is the depth and sweep of financial globalization. By far, the most frequently asked question today is whether the worst – in terms of the financial sector meltdown, and in particular, failure of financial institutions – is behind us. No one is really willing to take a definitive call on this, which is a sign of the increasing number of unknowns. Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined to the financial sector and that, at the most, there would only be a shallow recession in the advanced economies. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this ‘Great Recession’ of 2008/09 will be the worst global recession since the 1930s. The IMF made its customary forecast for global growth in the World Economic Outlook published in October 2008. By early November, 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. There are two inferences that follow from this. First, that the global situation has deteriorated rapidly, in a space of less than two months. Second, 2009 is going to be a more challenging year than 2008.

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Impact of the Crisis on India 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 payments system development and reform: protecting the rights of users of payment systems, enhancing 48

efficiency and competition, and ensuring a speedy but safe, secure and sound payments system. Electronic commerce and finance are growing rapidly. New payments mechanisms designed to aid electronic commerce have become routine. Indian banks are quickly upgrading their payment systems, largely driven by the need to modernize and meet regulatory requirements. For modernizing the payment and settlement systems in India, Reserve Bank of India (RBI) is strengthening the computerized cheque clearing and expanding the reach of Electronic Clearing Services (ECS) and Electronic Funds Transfer (EFT). Design of the Study A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money. Since the strategic decisions taken by RBI will affect the payment system. At the time of crisis the RBI took some stringent measures regarding the lending as well as payment matters. Here we are trying to study the policies taken by the RBI at the time of the global crisis, and how they have affected the payment (cheque clearing services and/or the retail electronics payment) system of Indian Banking Industries. Objectives 1. To gain an in-depth understanding on the various payment systems of the banks 2. To see whether there is any significant changes (increase / decrease) in the volume of payments under the different systems. Scope of the study The scope of the study extends to such aspects of the banking industries which have implication in the mode of payment to its customers in the light of the economic crisis. Methodology The study is descriptive in nature and based on secondary data. It describes the implementation of the payment system in Indian banking industries. For the analysis of data simple statistical tools such as percent, average, chi-square test etc are used. Conclusion Considering the fund transfer data available from the RBI sources and the major news paper, it has been seen that there is a declining tendency in the cheque payment system during the years 2003-04 to 2005-06. But in the year 2007-08 the month of February shows a slight increase in the cheque payment.

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Based on the analysis of the e-payment from 2003-04 to 2008-09 there is an increasing tendency in this mode of payment and there is a significant impact (decrease) on the cheque payment system. That means the public is adopting the e-system and reducing payments through paper systems. While considering the impact of the crisis on the volume of payment, it shows that there is a slow down in the e-payment as well as cheque payment system due to the global economic crisis.

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GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INDIAN BANKING WITH SPECIAL REFERENCE TO THE STOCK QUOTES OF ICICI BANK
Dr. M. C. Dileepkumar Reader P.G. Dept. of Commerce The Cochin College Kochi - 2 K.R. Shabu Sr. Lecturer Dept. of Commerce and Management ASAS Kochi ABSTRACT 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. K.M. Vineeth Lecturer Dept. of Commerce and Management ASAS Kochi

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 financial crisis halted global credit markets and required unprecedented government intervention. 51

Fannine Mae (FNM) and Freddie Mac (FRE) were both taken over by government. Lehman Brothers (150 years old) declared bankruptcy on September 14th after failing to find a buyer. Merrill lynch (MER) purchased by Bank of America, and American International Group (AIG) was saved by an $ 85billion capital injection by the Federal Reserve. These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone. The crisis has its roots in real estate and sub-prime lending practice in US. Commercial and residential properties saw their values increase precipitously in a real estate boom that begin in the 1990s and increased uninterrupted for nearly decade. Increasing in housing prices coincided with a period of government deregulation that not only allowed unqualified buyers to take out mortgages but also helped blend the lines between traditional investment banks and mortgage lenders. Real estate loans were spread throughout the financial system in the form CDOs and other complex derivatives in order to disperse risk. However, when home values failed to rise and home owners failed to keep up with their payments, banks were forced to acknowledge huge write downs and write offs on these products. These write downs found several institutions at the brink of insolvency with many being forced to raise capital or go bankruptcy.

Route of the Crisis: Sub-prime lending
The concept of sub-prime lending (providing loans to borrowers with low credit ratings or poor loan repayment histories) gained favor in the 1990s. For original lenders these sub-prime loans were very lucrative part of their investment portfolio as they were expected to yield a very high return in view of the increasing home prices. Since the interest charged on sub-prime loans was about higher than interest on prime loans lenders were confident that they would get a handsome return on their investment. In case a sub-prime borrower continued to pay his loan installment, the lender would get higher interest on the loans. And in case a sub-prime borrower could not pay his loan and defaulted, the lender would have the option to sell his home and recovered his loan amount. In both the situations the sub-prime loans were excellent investment options as long as the housing market was booming.

Structured Sub-prime Debt spread throughout the Financial System
Lenders transferred loans into special purpose investment vehicles and sold these securities to other banks and institutional investors like pension funds, portfolio investors etc. These securities were structured into debt securities and assigned credit ratings so that investors could evaluate their risk and rate of return for buying it. Because rating agencies

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(Standard & Poor, Fitch, and Moody) were independent to the banks, investors believed their classifications could be trusted to accurately assess pool level risks. The following chart highlights the sequence which led to the recent financial crisis in US financial market:

The housing market boom
1. Loan advanced by banks, via broker – dealers of mortgages, to borrowers in housing markets at sub – prime rates. Borrowers committed to regular installments to parties as above. 2. Mortgaged assets get repackaged by issuers of securities as collateralized debt obligations (CDOs) which are the asset based securities (ABSs or Mortgage backed securities) sold to investment banks 3. An investment bank has sold these asset based securities to other financial institutions. 4. Market prices of these financial assets determine the returns to the investor.

The approach to the crash
1. Drop in property prices, house-owners fail to service debt, announce foreclosure of the mortgage deal. 2. Issuers of ABS and investment banks face losses due to non-payment by borrowers, facing losses which are aggravated by sharp declines in ABS prices in the market. 3. Losses for other FIs who hold such assets as above.

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Impact of crisis on Banking sector
• Domestic liquidity surge • Exchange rate volatility and reduction in access to foreign currency funds • Inadequate credit availability and slowdown in demand • Decline in business and investor confidence and optimism DIAGRAMATIC REPRESENTATION OF HOW GLOBAL FINANACIAL CRISIS HAS AFFECTED THE FINANCIAL INSTITUTIONS AND HOW GOVERNMENT HAS RESPONDE TO IT AS SHOWN BELOW:

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The Fever in India 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. Once investments 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.

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The Tumble Down in ICICI Figures of Quotes ICICI Bank with Sensex

ICICI Bank Price Chart – 1 Year

Charts Sourced From: www.indiainfoline.com

The Story in ICICI
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 56

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 Report ICICI 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 Rs 10,350.62 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.

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Conclusion
What lessons can be learned from this crisis? First, no single factor caused it. Lenders, borrowers, and regulators are all at fault – lenders through poor risk management, borrowers through excessive borrowing and over-valuation of real estate, and regulators through lax enforcement of the financial sector. Second, given that this is the second speculative bubble to have formed and burst in the United States in the past 15 years, better financial risk management is required. However, better risk management is not easy. Until management mechanisms improve sufficiently to better quantify the new and little understood risks of this economy, households, businesses, and government must tread more carefully. Perhaps the present scenario will be sufficient to teach us a lesson. Regarding valuation of scripts, the role of expectations can’t be avoided. The efforts to regain investor confidence will definitely play a vital role in the green trading of the same in the stock market. Let’s hope for the correction factors to accommodate the real values of scripts traded.

Acknowledgement of References: • • • Articles from The Economic Times, Business Line Articles from www.indiainfoline.com Articles from www.thehidubusinessline.com

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Abstracts of Student Papers
Guided By: K.M. Vineeth Lecturer Department of Commerce and Management ASAS, Kochi

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IMPACT OF GLOBAL FINANCIAL CRISIS IN INDIAN BANKING SECTOR NEEMA MADHAV PRASAD B. Com. 4th Semester ABSTRACT Banking in India is the responsibility of the Reserve Bank of India (RBI). Currently India has 88 scheduled commercial banks - 27 of which are public sector banks (with government stake), 29 are private banks and 31 foreign banks. Citigroup (Bank Of America) is in deep trouble. But this has not affected the Indian banking system. There are no bank failures reported and all the more 3 private banks have reported impressive earnings growth. This is mainly because Indian banks do not have big exposures to Subprime Market and it is the real economy that is affected. According to the RBI Report Indian Banks show resilience and it will remain profitable and well capitalised. This is because there is growth in credit, spreads are high, volume growth is high and non-performing assets are at an all time low. The Indian Banks had faced stress mainly due to the foreign investments pulled out of the economy and due to the global fall in demand for Indian goods. To meet this situation various corrective measures are taken like reserve requirements, short term lending rates, cash reserve ratio and statutory liquidity ratios have been cut down. Two areas that should be cautioned are PSB and OSB. India was able to face the odds after the fall of Lehman due to the foresight of Yaga Venugopal Reddy and also due to the tight regulation of banks and external capital transactions. Even property prices have not risen mainly because the housing loans are only 10% of overall banking and due to the banks’ unique approach to the issue of bank ownership and regulation. To conclude with, Indian banking sector is not much affected by the global financial crisis which is evident by the high credit growth, stable net interest margins, and success stories of the 3 private sector banks.

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INDIA AND THE GLOBAL FINANCIAL CRISIS WITH REFERENCE TO BANKING SECTOR Revathy Jeevan B. Com. 4th Semester 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 raise money. 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.

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IMPACT OF GLOBAL ECONOMIC SLOWDOWN ON INDIAN BANKING SECTOR Sruthy Ramachandran B. Com. 4th Semester The million dollar question that people are trying to answer is the economic health of a country like India in the current global scenario. The economic slowdown is here to stay with GDP growth rates predicted at around 0.5 percent for large economies like the US & UK while countries like India & China would grow at around 7 percent. India, like most other emerging market economies, has so far, not been that seriously affected by the recent financial crisis in developed economies. The financial sector, especially banks, is subject to prudential regulations, both in regard to capital and liquidity. As the current global financial crisis has shown, liquidity risks can rise manifold during a crisis and can pose serious risks to macroeconomic and financial stability. The Reserve Bank had already put in place steps to mitigate liquidity risks like restrictions on the inter bank money market borrowings. The Reserve bank has also given very clear guidelines to banks on the implementation of the internationally accepted Basel framework which prescribes minimum Capital Adequacy to be at 9%. In addition RBI has put an upper limit on the lending to specific sectors like real estate. These can have detailed influences to the banking sector in the economy.

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IMPACT OF GLOBAL FINANCIAL CRISIS IN INDIAN ECONOMY RECESSIONARY TRENDS AYSHA MANAAL B.Com. 4th Semester ABSTRACT Before understanding recession, we need to understand the market economy; i.e 2 stages of market economy –growing market economy and declining market economies. Recession is the economy shrinking for 2 consecutive quarters (=6 months) with a decrease in the GDP. If GDP is growing, then market is growing due to increased demand. If the recession continues for next quarter (>6 months) then we go through “DEPRESSION” economy. Why recession happens? Either due to over production or low confidence level. Over production takes place due to pseudo demand. Low confidence level arises due to word of mouth or assignable causes as terrorist attacks, etc. one industry can hit other industries when the confidence level of millions of consumers and producers drastically come down. How to know recession? Indicators are people buying less stuff, decrease in factory production, unhealthy stock market, slump in personal income, growing unemployment, etc. How to come out of recession? Government doesn’t have direct control on producers and consumers behavior but they influence them with Government’s policies. Government has 2 plans : Fiscal policies(by Government) and monetary policies(by RBI) which would help in gradual recovery of market. Sometimes their policies to recover from recession can be counter-productive and it may further worsen the situation. If we advise our people to save money, then the multiplication effect is that the demand will not pick up and recession will continue. But I aint misguiding you, just think from a macro level; if everybody in the country stops spending, what will happen? Nation’s recession is controlled by the actions of everybody living I that country. Hoping this time recession vanishes soon so that India gets back to its stronger growth rate of 8% to 10% (though the experts say it will last till Q3 of 2009).

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IMPACT OF GLOBAL FINANCIAL CRISIS ON INDIAN ENTERTAINMENT INDUSTRY Aarthy K Rao B. Com. 4th Semester Abstract 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 businesswise. 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 good and bad times. 65

US FINANCIAL CRISIS SET TO IMPACT INDIA’S REAL ESTATE SECTOR Sruthy K.V. B. Com. 4th Semester The crisis in the US financial market has hit the Indian real estate sector hard. The sector was already reeling under tremendous pressure as RBI increased the interest rates to contain inflation, besides restricting the fund flow in it. In the present circumstances the real estate prices went for a sharp correction in the short to medium term. At the same time, the crisis in the global market has affected the demand for the real estate space in India. The development in US has affected the global economy, which has forced many of the global majors to either postpone or cut the expansion plan. Further dip in the demand for real estate is affecting the sector very badly. This will starve them of fund. The fund flows from all the possible ways are getting constrained. Funds from banks are already not available. Private equity source has also dried up. The most important aspects of this whole issue:– Dependence on foreign funding Demand-Supply Properties bought by investors Consolidation Positive for consumers? Funding available for right projects India's largest listed property developer- DLF is to sell assets and reduce operating costs due to the global slowdown in the real estate markets. DLF reported a 69% slump in quarterly profit and 59% fall in revenue. Property stocks have been battered in India over the past year, amid an economic slowdown and foreign fund outflows, as growth in Asia's thirdlargest economy has dipped. The global financial crisis has directly and indirectly impacted the Indian Economy. As a result, it has also adversely affected the real estate even though the industry has strengthened immensely during the past few years. The crisis- caused disposable – income decreases will result in falling consumer sentiment and confidence and the postponement of any purchasing decisions. Although the overall environment may be negative for many housing developers, those with good reputations, strong balance sheets and operating efficiencies may use the opportunity to gain market share.

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GLOBAL FINANCIAL CRISIS –THE ECONOMIC TSUNAMI: Impact on Real Estate Sreeranjini B.Com 4th Semester The financial market crisis has led to the collapse of major financial institutions and is now beginning to impact the real economy in the advanced economies. As this crisis is unfolding, credit markets appear to be drying up in the developed world. India, like most other emerging market economies, has so far, not been seriously affected by the recent financial turmoil in developed economies.The US, UK, France, Germany, Italy, Canada, Japan and a host of other developed nations have officially entered into recession. Most of them have announced so-called bailout packages also for taking the ship out of the economic tsunami or at least to mitigate the effects of this contagion on their people. Indian economy, though in stress, has been doing fairly good in view of prevailing situation. The growth rate is expected to be 6.5 to 7.5 per cent, if not more. The massacre in the real estate sector gets now obviously shown in the balance sheet of major property and real estate developers. Recent results of Investment Companies in real estate sector have indicated that the real estate industry has been severely hit. This has clearly delivered things worse for the sector which already faced a significant crack in cash and is an indication of the current recession haunting the real estate market. In accordance with recent economic crisis may players in the real estate sector has changed their marketing plans and business strategies. In fact investment in the real estate sector has remained moderate in the second quarter of the global economic slowdown, which has shown its shadow on the real estate markets around the world especially Asian markets which were deeply affected by the slowing economic growth. As per the real estate developers in India mortgage rates should be reduced to sustain the market. The global economic crisis and crisis in the financial sector in developed countries like USA and European countries put pressure on liquidity in India as well. Even though the economic crisis is a fact and it is going on residential real estate sector in India is still strong but the consumer is more willing to accept the assessment irrational. This time also real estate developers have the opinion that measures should be taken by government of India to add as refreshment for the real estate sector.

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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.

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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 unreasonable when 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.

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IMPACT OF GLOBAL FINANCIAL CRISIS ON IT SECTOR WITH REFERENCE TO WIPRO Devika Nair B. Com. 4th Semester 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 the existing 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 subassemblies. 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 mindboggling. Here we discus the impact this will have on the Indian IT services industry.

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Impact of Global Recession on Campus Recruitments With Reference to Engineering Colleges
Radhika Ram B. Com. 6th Semester

ABSTRACT The ongoing financial turmoil has hit all the sectors rather badly and this spells chaos for the fresh graduates, especially the engineers. And no one is safe, not even the so called elite institutions. From what I hear around only 50% of IITD and IITB was placed in their first phase of placements. Similar figures were associated with IITM also. As this article points out, there have also been cases where some companies have backed out at the last moment, that is, right after giving their pre placement talk. BITS Pilani also is fearing a rough patch in placements this season with a big drop in the number of recruiters. Students are considering PSUs such as BHEL, SAIL etc since there is job security and a hefty pay. And with the 6th pay commission in sight, the news gets only better. This is awesome for them because now they have a great chance at tapping into the potential of the top candidates who would have otherwise been engulfed by a private enterprise. A lot of students have also started hitting the books and are preparing for the civil services.

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IMPACT OF GLOBAL RECESSION ON STOCK MARKETS Surya Bhattathiri B. Com. 4th Semester 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 started developing 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.

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