Today the world is facing heat due to sub-prime crisis. All the developed countries and developing countries have caught recessionary fever. Even the powerful economy of china has also felt D' factor (downturn in the economic activities). The epicenter of the crisis is U.S.A. It is all about the story of a rich father (U.S.A) who has made poor debt in the form of Sub-prime lending. The father's mistake of excessive debt (levered finance) has resulted into a catastrophe. The Indian scenario is that outsourcing business has dried up, finance from overseas market has become difficult due to liquidity crunch at global level and in addition to that banking sector has also adopted policy of preference base lending program. Indian automobile industry has also been affected because of lowering of domestic consumer demand. Moreover, there are various challenges that have come up as new peculiarities of present financial system, which is going through a paradigm shift.
This paper depicts the entire process of credit crisis in the form of story of a rich father (U.S.A) who has made poor debt (Sub-Prime Lending) its effects from Indian perspective and several issues that must be taken into consideration by the government of India at the time of framing macro-economic policies.
[...] Second Stage - Securitization & Housing Bubble: Some economists claim that government policy actually encouraged the development of sub-prime lending through legislation like Community Reinvestment Act through which banks are forced to lend otherwise uncreditworthy consumers. The banks started giving loans to sub-prime borrowers (having poor track record in loan repayment and lacking financial soundness) in various forms like ‘piggyback', ‘interest only' and ‘no-doc' loans. Due to access to loans, borrowers started to purchase houses, which have resulted into price hike by 124% between 1997 and 2006 in the housing market. [...]
[...] Third Stage - When Bubble Bust: Overall homeownership rate increased from 64% in 1994 (since 1980) to a peak in 2004 with an all time high of There was normal situation till the interest rates were low and the housing market was in boom. However, later on when Fed Rate revised to in June 2006 from the level of in 2004. As a result the Adjustable Rate Mortgage (ARM) was also revised, and sub-prime borrowers started defaulting the payments due to inability to repay loan obligation. [...]
[...] Barack Obama will largely affecting the Indian business firm. He is of the firm view that outsourcing business must be restricted. Further, he intends to end tax breaks for companies that send jobs overseas. He is interested in Patriot Employer Act that reward companies that create jobs with good benefits for American Workers. The major issue that has come out is Full Capital Account Convertibility (FCAC). Capital account convertibility (CAC) or a floating exchange rate means the freedom to convert local financial assets into foreign financial assets and vice versa at market-determined rates of exchange. [...]
[...] Foreign Investment & Overseas Finance: Indian Inc is largely dependent on overseas finance due to interest rate arbitrage and liquidity. Between 2004 and 2008, India Inc raised Rs crore through ADR/GDRs; Rs crore through Foreign Currency Convertible Bonds (FCCBs); Rs crore through Initial Public Offerings (IPOs); Rs through crore through Follow on Public Offer (FPOs); Rs crore through Qualified Institutional Placement (QIPs); and Rs crore through private placements. The companies who have raised finance through Foreign Currency Convertible Bonds (FCCB) are facing severe problems. [...]
[...] The BFSI sector accounts for 20-50% of revenues for Indian IT services vendors, has led to increased losses to the companies and resulted in grater uncertainty. Nasscom President Som Mittal said had factored in the downstream impact of the sub-prime crisis. But we are yet to get an assessment of the current changes in the U.S banking system. Almost 70% of the IT spend by the BFSI segment is discretionary, and India has become part of the delivery chain. So, new projects might be impacted.” Table No “BFSI Share Crash” Companies BFSI Share Key BFSI Clients Suisse, JP Morgan, Metlife Washington Mutual, UBS Lynch America, Citigroup, Deusche Bank, Fortis, JP Morgan, Merrill Lynch As a percentage of total revenues. [...]
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