Description
KeyWords: Recession, Subprime, Mortgage Backed Securities (MBO), TARP, Leather Industry, Textile Industry, Financial Services, IT Industry, Real Estate, Monetary and Fiscal measures
US Financial crisis causes, consequences, remedies and its Impact on India
What is a Recession ?
Defined in economics as the reduction of a country’s Gross Domestic Product (GDP) for at least two continuous quarters ? Also defined as a 1.5% rise in unemployment within 12 months ? US based NBER defines recession as “ a significant decline in the economic activity spread across the country, lasting more than a few months, visible in the fall in real GDP growth, real personal income, employment, industrial production and wholesale retail sales”
?
What causes a Recession ?
?
?
? ? ?
Growth is contingent on the delicate balance between money supply, interest rates and inflation Recession is primarily attributed to the actions taken to control the money supply in the system Increase in money supply keeps interest rates low but leads to high inflation High inflation leads to less spending and more savings Leads to a fall in demand; businesses cut production and cut costs
Contd…
Decrease in GDP and increase in unemployment, which leads to fall in incomes ? Consumption follows a downward spiral; business confidence is weakened ? Weakened business confidence leads to lower investment and freeze on lending; initiates a vicious cycle ? Other factors that can contribute to recession are external shocks like oil price spikes and wars
?
Origins of the US Recession
Asian countries like China, eager to avoid another crisis like that of 1997-98, build huge forex reserves by undervaluing their exchange rates and creating large current account surpluses ? These excess forex reserves flowed into the US gilts; helped finance the US trade deficit ? Dollars also flowed from the rich OPEC countries ? The US Federal Reserve led by Alan Greenspan, in late 2001, initiated a series of interest rate cuts to boost spending and growth ? Federal fund rate gradually brought down to 1% by 2004
?
Contd…
? ?
? ?
?
The flood of dollars drove down the long term interest rates Americans borrowed cheaply to invest in real estate, stocks and commodities; this drove up the asset prices Consumer spending reached an all time high; this led to a huge spurt in demand Provided a huge stimulus to the global economy; it grew at its fastest rate during 2003-07 Huge US demand sucked in large imports from Asia and oil from the OPEC countries
Contd…
?
? ?
?
?
Asian manufacturers pulled huge quantities of commodities and raw materials from the African and Latin American countries; adding to their growth The global economy boomed as never before Saving rate in America, which historically was 6%, effectively became zero, with people spending more than they earned This spending spree, supported by low interest rates, created bubbles in housing, stock and commodity markets The housing bubble burst in 2006, known as the subprime crisis; initiated the current recession
Subprime crisis
? ?
?
? ?
Has its origins in large scale subprime loans disbursed by the financial institutions A subprime loan is a B-paper loan where the asset and the borrower does not fulfill the mandatory criteria for borrowing This segment is characterized by a FICO score of 620 or less; has a poor credit history, low or no income, low future earning potential, having a low or no collateral and a high probability of default The banks cover up these risks by charging high interest rates The US housing boom started in 1990’s – home prices increased by 124% between 1997-2004
Contd…
During this time credit was cheap; brokers pushed housing loans and made good fees ? Loans were disbursed in large numbers to the borrowers who cannot afford them ? Dollar value of the subprime mortgages more than tripled from US $200 billion in 2001 to $650 billion by 2005 ? The lenders presumed that they can gain more with high interest rate charged, and if the borrower defaulted they can sell the asset to recover the loan and perhaps more, as the house prices can only go up ? Increased consumer spending was financed by borrowing against homes – US$ 950 billion worth of consumption was financed in 2007
?
Contd…
Subprime loans were securitized into MBS (Mortgage backed securities) and CDO (Collateralized debt obligations) ? Low regulation in the US financial markets permitted “creative” financial engineering, which produced complicated loan products ? Were further packaged into more complex securities, sold and resold in the secondary mortgage markets ? In the end, the real value and ownership of the assets was unknown
?
Contd…
And then…
Between 2004-06 interest rates in US rose from 1% to 5.35% - defaults began ? Large scale foreclosures resulted; which led to a fall in the house prices ? With the fall in the value of underlying assets, the MBS and CDO fell in value – eroding the net worth and financial health of the banks and the financial institutions ? MBS and CDO related losses till July
?
Contd…
Contd…
? ?
Raised liquidity and solvency concerns A story of greed at all levels – starting from home owners who bought assets they couldn’t afford, to the home loan brokers who underwrote them to make a quick profit, to the banks and financial institutions who bought these loans and bundled them into CDOs, to the credit rating agencies who rated them as high grade assets for a fee and the investors in the secondary markets who purchased the CDOs to make a quick profit
Anatomy of the Subprime crisis
Contd…
Consequences of the crisis in
US
Credit crunch – liquidity with the banks and financial institutions has dried up, hurting investment ? Home prices in US dropped by 20-30%, further eroding the values of MBS and CDO held by the financial institutions ? Stock market crashes – US equity markets have crashed by nearly 50%, equity markets globally have followed a similar trend ? US unemployment rate hit a high of 7.6% in February 2009, with 3.6 million jobs lost
?
Contd…
GDP growth rate in US fell from 4.8% in 2007 to 3.3% in 2008, with a negative growth rate of 5.8% in Q4 2008 ? With a fall in demand in US and other major economies, global crude fell from a high of US$ 147 to $40 per barrel ? Prices of other commodities like steel and copper also fell sharply ? Bankruptcies and forced mergers of
?
Contd…
Global consequences
? ? ?
?
?
European banks were major buyers of US MBS and CDOs As the value of these securities fell, major European banks faced liquidity crisis Major lenders started posting record losses, weakening the business confidence Home prices started falling in UK To prevent a slump in demand, Bank of England and European Central Bank initiated a series of rate cuts
Contd…
? ? ? ? ? ?
Unemployment rose to 6.3% by February, 2009 in UK GDP contracted by 1.8% during Q4 2008 Unemployment rose to 7.4% in Germany by February, 2009 GDP contracted by 2% during Q4 2008 Russian GDP grows by only 1.1% during Q4 2008 Unemployment rose to 8.1% by January, 2009
Contd…
?
?
?
? ?
Japanese financial institutions suffer huge losses on their investments in US MBS and CDOs; fuels a liquidity crisis GDP contracted by a sharp 4.6% during Q4 2008 Unemployment rose to 4.4% by December, 2008 Japanese exports fall by 45% during January, 2009 Bank of Japan cuts interest rates to maintain liquidity; sets a near zero target of 0.3%
Contd…
?
?
? ?
?
Recession has hit export oriented economies like China hard with millions of jobs lost Chinese exports fall by 2.8% during December 2008 due to weak demand in US and European markets Unemployment rate of 4.2% by December 2008 GDP growth fell to 6.8% during Q4 2008; overall GDP growth of 9% in 2008 as compared to 13% in 2007 Has kept the domestic currency undervalued to maintain its export competitiveness
Contd…
World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II ? According to the International Labour Organization as many as 51 million jobs worldwide could be lost this year
?
Remedies for Global Financial crisis till date….
The transformation of U.S.A
?
Then…
Now
US Economy in Fire Fighting Mode
After filing of Chapter 11 by Lehman Brothers on September 15, US Government gave bailout of US $85 billion to AIG one of the world’s largest insurer. ? US government in turn gets 80% stake in AIG.
?
US Economy in Fire Fighting Mode (Contd…)
World’s largest bank failure Washington Mutual having Assets worth US$307 Billion sold to JP Morgan Chase. ? Mortgage lenders Fannie Mae and Freddie Mac - which account for nearly half of the outstanding mortgages in the US - are rescued by the US government in one of the largest bailouts in US history. ? Merrill Lynch Sold out to Bank of America for US$ 50 Billion.
?
US Economy in Fire Fighting Mode (Contd…)
All this attempts were not planned, they were just an attempt to stop the collapse of the US as well as global economy. ? An thing short could have caused a cascade effect which would have left the global economy in tatters.
?
Bailing out the greed of few….
US government comes up with TARP( Troubled Asset Relief Program) worth US$ 700 Billion to buy and insure “Toxic Assets”. ? The package was initially rejected but finally accepted by House of representatives on October3, 2008. ? US Fed cuts rate to 1.5%.
?
Bailing out the greed of few….
The US government unveils a $250bn plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. ? By October 30th US Fed has cut rates to the level of 1%.
?
Bailing out the greed of few….
The US government announces a $20bn rescue plan for troubled banking giant Citigroup after its shares plunge by more than 60% in a week. ? The US recession is officially declared by the National Bureau of Economic Research, a leading panel including economists from Stanford, Harvard and MIT.
?
But was the bailout sufficient??
Lets Bailout once again!!
US President Barack Obama signs his $787bn (£548bn) economic stimulus plan into law. ? A special package of US$ 17.4 Billion for big 3 US Carmakers. ? US$ 200 Billion for Small and Medium Enterprises. ? Special stress tests to be applied to all banks having assets above US$ 100 billion.
?
When US Economy sneezes…
The UK government announces details of a rescue package for the banking system worth at least £50bn ($88bn). ? Lloyds TSB announces it is to take over Britain's biggest mortgage lender HBOS in a £12bn deal. ? The Icelandic government takes control of the country's third-largest bank, Glitnir, after the company faces short-term funding problems.
?
When US Economy sneezes…
The Bank of England cuts interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery in the UK. ? UK Govt. gives a bailout package of US$ 54 Billion to some of the largest banks like RBS(Royal Bank of Scotland) Lloyds TSB, and nationalizes them.
?
When US Economy sneezes…
?
?
?
China sets out a two-year $586bn economic stimulus package to help boost the economy by investing in infrastructure and social projects. German Chancellor Angela Merkel unveils an economic stimulus package worth 50bn euros. The European Commission unveils an economic recovery plan worth 200bn Euros which aims at saving millions of European jobs.
Is this end of American style Capitalism?
Most of the “premier” Financial institutions in the world are nationalized or bankrupt. ? AIG, BofA, Bear Sterns, Northern Rock are nationalized Citigroup is on its way as government has already acquired 30% of Citi. ? More than US$ 3 Trillion is pumped in global economy will it work??...
?
While the miser is merely a capitalist gone mad, the capitalist is a rational miser -Karl Marx
Impact on India
Impact on India
?
Indian economy is a relatively a decoupled economy in comparison of Japan and some European nations.
?
India has been spared from the panic that followed by the collapse of banking institutions
However it is not possible to insulate Indian economy completely
.
?
How???
?
Eg: Citibank had money in form of FII’s, due to crisis started pulling back money from India, financial crisis, corporates unable to repay loans, impact on India banking system, liquidity crunch, confidence of people reduced, deposits reduced
The good, the bad and the ugly
Effect on India
Stock Market
•Market
fall by more than 50 %. •BSE Plunged by 53% in 2008. •FII outflow in 2008 was $13.8 bn(Rs65,499 crore ) •Highest since foreign investors started buying Indian equities. •It leads to decrease in Forex Reserves
Stock Market Contd…
Forex Reserve depletion lead to Rupee depreciation as compare to dollar. ? Rupee fall by around 25 % ? Rupee traded at 51.32 per US dollar on 27/02/2009. ? It also lead to problem of liquidity crunch
?
Exports
Leather Industry
India’s leather export in 2008 estimated $ 3.7 bn. • India is second largest manufacturer of leather footwear. • India accounts for 14 % of total world’s production • US and EU account for more than 75 % of these exports. • Demand of fashion goods in Europe and America fell drastically
•
Leather Industry contd…
Around 25 to 30 % fall in export volume during July to December. ? Resulted in job losses.
?
Textile industry
Textile industry shares close to 14% of the industrial output . ? It accounts for 10% of the export market share. ? It is also the largest employing sector. ? Sector industry has been effected at times when many players went for upgrading infrastructure and capacity.
?
Effect on Textile industry contd..
Export estimation which was expected to be $26.55 bn is revised to $20 bn. ? Sector is also facing problem from other countries like Vietnam, Bangladesh etc. ? High MSP of cotton is also adding problems. ? Profitability of companies has fallen by huge margins. ? Apparel section has been affected most.
?
Gems
More than 13 lakh workers and their families are dependent on diamond, gems and jewellery industry in only Surat, Gujarat ? The diamond industry depends on the strong financial condition of banking in India ? Swept jobs of 200,000 diamond workers in India poverty
?
Indian Financial Services
Losses worth $181 billion to the world’s top 45 banks by the end of FY08 ? ICICI Bank : loss of about Rs. 1056 crores ? PNB, BOI, SBI, BOB: having an exposure to the instruments issued by Lehman and Merrill Lynch
?
Financial Services Chakra
Real Estate
? ?
?
?
Difficult to raise further funds Lehman Brothers was very bullish on Indian Reality Sector and had an investment in excess of US$ 700 mn RBI’s directive not to remit investments made by US financial houses in India without permission is also a step in positive direction and would restrict flight of capital. However, stocks of companies in which sunk financial institutions have a direct exposure (as FII investments especially Lehman) would see selling pressure.
IT sector & outsourcing
•
Nasscom: The global financial meltdown following the collapse of US investment banks will have limited impact on the Indian IT sector in the short and medium terms, but poses a challenge in the long term Growth will happen but at 22-23 percent it will be lower than in the last two-three years when the booming IT industry posted a CGPA (cumulative growth per annum) of 31 percent
•
Contd…
•
Clients in the financial sector will be conservative, withhold spending on new projects and delay expansion; will try to leverage the vendors' expertise to rationalise operational costs. India’s outsourcing industry could be cut to size coupled with lower revenue, job loss and poor salary hikes.
•
Remedies action
Monetary Measures
•
To combat liquidity crunch first remedy action was taken by RBI. •CRR was slashes by 400 basis points to 5 %. • It infuse Rs 388000 crore in to the system. • SLR was also cut by 100 basis points to 24 % in November last year. •It injected Rs 40000 crore in to the system.
Monetary measures contd…
Repo Rates and Reverse Repo Rates were also slashed to infuse liquidity in to the system. ? Banks were asked to slash lending rates. ? SBI and other banks did reduced rates to make liquidity available for people. ? Home loan and auto loan rates were reduced to increase demand in both of these key sectors.
?
Monetary Measures Contd…
RBI Provided Rs 70 bn to SIDBI for refinancing employment intensive micro and small enterprises. ? Similar refinancing of Rs 40 bn to National Housing Bank. ? FCCB Buyback norms were eased ? ECB norms were eased ? Interest ease for exporters.
?
Fiscal Measures
• •
•
•
•
Fiscal measures were taken in three stimulus In first package Government cut Cenvat rates by 4 % across board. After first stimulus II came and many measures were taken. Liberalized overseas borrowings. Freed overseas borrowing norms from interest rate caps that were fixed to the London Interbank Offered Rate (Libor).
Fiscal Measures contd…
IIFCL was designated to refinance loans to infrastructure companies. ? Issuing of tax free bonds through IIFCL to boost infrastructure sector. ? State government borrowing norms were revised by 50 basis points of their GSDP. ? Measure for exporters like DEPB rates restored.
?
Fiscal Measures contd…
? ? ? ? ? ?
Exemption on CVD on structural materials and cement. Exemption of custom duties on various non ferrous metals. Then came fiscal stimulus III Further cut on excise and service tax by 2%. State borrowing was revised to 3.5 % of GSDP. Excise duty cut extended beyond march 2009.
Measures for FDI and FIIs
FDI norms were changed by cabinet committee. ? Cap on FDI were eased in many sectors. ? Helped industries to raise funds and improve efficiency. ? Ban on P-notes removed with some provisions.
?
Latest Measures
• •
•
• •
Around Rs 8436 crore issued to NHAI for road development. Rs. 7300 crore issued to develop roads in naxilite area. Package of Rs. 375 crore for leather and textile industry. Export obligation period extended to 36 months. DEPB issuing norms eased.
Latest Measures contd..
Simplified service tax refunding rules. ? EOU exempted from excise duty on fuel.
?
THANK YOU!!
doc_604588911.ppt
KeyWords: Recession, Subprime, Mortgage Backed Securities (MBO), TARP, Leather Industry, Textile Industry, Financial Services, IT Industry, Real Estate, Monetary and Fiscal measures
US Financial crisis causes, consequences, remedies and its Impact on India
What is a Recession ?
Defined in economics as the reduction of a country’s Gross Domestic Product (GDP) for at least two continuous quarters ? Also defined as a 1.5% rise in unemployment within 12 months ? US based NBER defines recession as “ a significant decline in the economic activity spread across the country, lasting more than a few months, visible in the fall in real GDP growth, real personal income, employment, industrial production and wholesale retail sales”
?
What causes a Recession ?
?
?
? ? ?
Growth is contingent on the delicate balance between money supply, interest rates and inflation Recession is primarily attributed to the actions taken to control the money supply in the system Increase in money supply keeps interest rates low but leads to high inflation High inflation leads to less spending and more savings Leads to a fall in demand; businesses cut production and cut costs
Contd…
Decrease in GDP and increase in unemployment, which leads to fall in incomes ? Consumption follows a downward spiral; business confidence is weakened ? Weakened business confidence leads to lower investment and freeze on lending; initiates a vicious cycle ? Other factors that can contribute to recession are external shocks like oil price spikes and wars
?
Origins of the US Recession
Asian countries like China, eager to avoid another crisis like that of 1997-98, build huge forex reserves by undervaluing their exchange rates and creating large current account surpluses ? These excess forex reserves flowed into the US gilts; helped finance the US trade deficit ? Dollars also flowed from the rich OPEC countries ? The US Federal Reserve led by Alan Greenspan, in late 2001, initiated a series of interest rate cuts to boost spending and growth ? Federal fund rate gradually brought down to 1% by 2004
?
Contd…
? ?
? ?
?
The flood of dollars drove down the long term interest rates Americans borrowed cheaply to invest in real estate, stocks and commodities; this drove up the asset prices Consumer spending reached an all time high; this led to a huge spurt in demand Provided a huge stimulus to the global economy; it grew at its fastest rate during 2003-07 Huge US demand sucked in large imports from Asia and oil from the OPEC countries
Contd…
?
? ?
?
?
Asian manufacturers pulled huge quantities of commodities and raw materials from the African and Latin American countries; adding to their growth The global economy boomed as never before Saving rate in America, which historically was 6%, effectively became zero, with people spending more than they earned This spending spree, supported by low interest rates, created bubbles in housing, stock and commodity markets The housing bubble burst in 2006, known as the subprime crisis; initiated the current recession
Subprime crisis
? ?
?
? ?
Has its origins in large scale subprime loans disbursed by the financial institutions A subprime loan is a B-paper loan where the asset and the borrower does not fulfill the mandatory criteria for borrowing This segment is characterized by a FICO score of 620 or less; has a poor credit history, low or no income, low future earning potential, having a low or no collateral and a high probability of default The banks cover up these risks by charging high interest rates The US housing boom started in 1990’s – home prices increased by 124% between 1997-2004
Contd…
During this time credit was cheap; brokers pushed housing loans and made good fees ? Loans were disbursed in large numbers to the borrowers who cannot afford them ? Dollar value of the subprime mortgages more than tripled from US $200 billion in 2001 to $650 billion by 2005 ? The lenders presumed that they can gain more with high interest rate charged, and if the borrower defaulted they can sell the asset to recover the loan and perhaps more, as the house prices can only go up ? Increased consumer spending was financed by borrowing against homes – US$ 950 billion worth of consumption was financed in 2007
?
Contd…
Subprime loans were securitized into MBS (Mortgage backed securities) and CDO (Collateralized debt obligations) ? Low regulation in the US financial markets permitted “creative” financial engineering, which produced complicated loan products ? Were further packaged into more complex securities, sold and resold in the secondary mortgage markets ? In the end, the real value and ownership of the assets was unknown
?
Contd…
And then…
Between 2004-06 interest rates in US rose from 1% to 5.35% - defaults began ? Large scale foreclosures resulted; which led to a fall in the house prices ? With the fall in the value of underlying assets, the MBS and CDO fell in value – eroding the net worth and financial health of the banks and the financial institutions ? MBS and CDO related losses till July
?
Contd…
Contd…
? ?
Raised liquidity and solvency concerns A story of greed at all levels – starting from home owners who bought assets they couldn’t afford, to the home loan brokers who underwrote them to make a quick profit, to the banks and financial institutions who bought these loans and bundled them into CDOs, to the credit rating agencies who rated them as high grade assets for a fee and the investors in the secondary markets who purchased the CDOs to make a quick profit
Anatomy of the Subprime crisis
Contd…
Consequences of the crisis in
US
Credit crunch – liquidity with the banks and financial institutions has dried up, hurting investment ? Home prices in US dropped by 20-30%, further eroding the values of MBS and CDO held by the financial institutions ? Stock market crashes – US equity markets have crashed by nearly 50%, equity markets globally have followed a similar trend ? US unemployment rate hit a high of 7.6% in February 2009, with 3.6 million jobs lost
?
Contd…
GDP growth rate in US fell from 4.8% in 2007 to 3.3% in 2008, with a negative growth rate of 5.8% in Q4 2008 ? With a fall in demand in US and other major economies, global crude fell from a high of US$ 147 to $40 per barrel ? Prices of other commodities like steel and copper also fell sharply ? Bankruptcies and forced mergers of
?
Contd…
Global consequences
? ? ?
?
?
European banks were major buyers of US MBS and CDOs As the value of these securities fell, major European banks faced liquidity crisis Major lenders started posting record losses, weakening the business confidence Home prices started falling in UK To prevent a slump in demand, Bank of England and European Central Bank initiated a series of rate cuts
Contd…
? ? ? ? ? ?
Unemployment rose to 6.3% by February, 2009 in UK GDP contracted by 1.8% during Q4 2008 Unemployment rose to 7.4% in Germany by February, 2009 GDP contracted by 2% during Q4 2008 Russian GDP grows by only 1.1% during Q4 2008 Unemployment rose to 8.1% by January, 2009
Contd…
?
?
?
? ?
Japanese financial institutions suffer huge losses on their investments in US MBS and CDOs; fuels a liquidity crisis GDP contracted by a sharp 4.6% during Q4 2008 Unemployment rose to 4.4% by December, 2008 Japanese exports fall by 45% during January, 2009 Bank of Japan cuts interest rates to maintain liquidity; sets a near zero target of 0.3%
Contd…
?
?
? ?
?
Recession has hit export oriented economies like China hard with millions of jobs lost Chinese exports fall by 2.8% during December 2008 due to weak demand in US and European markets Unemployment rate of 4.2% by December 2008 GDP growth fell to 6.8% during Q4 2008; overall GDP growth of 9% in 2008 as compared to 13% in 2007 Has kept the domestic currency undervalued to maintain its export competitiveness
Contd…
World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II ? According to the International Labour Organization as many as 51 million jobs worldwide could be lost this year
?
Remedies for Global Financial crisis till date….
The transformation of U.S.A
?
Then…
Now
US Economy in Fire Fighting Mode
After filing of Chapter 11 by Lehman Brothers on September 15, US Government gave bailout of US $85 billion to AIG one of the world’s largest insurer. ? US government in turn gets 80% stake in AIG.
?
US Economy in Fire Fighting Mode (Contd…)
World’s largest bank failure Washington Mutual having Assets worth US$307 Billion sold to JP Morgan Chase. ? Mortgage lenders Fannie Mae and Freddie Mac - which account for nearly half of the outstanding mortgages in the US - are rescued by the US government in one of the largest bailouts in US history. ? Merrill Lynch Sold out to Bank of America for US$ 50 Billion.
?
US Economy in Fire Fighting Mode (Contd…)
All this attempts were not planned, they were just an attempt to stop the collapse of the US as well as global economy. ? An thing short could have caused a cascade effect which would have left the global economy in tatters.
?
Bailing out the greed of few….
US government comes up with TARP( Troubled Asset Relief Program) worth US$ 700 Billion to buy and insure “Toxic Assets”. ? The package was initially rejected but finally accepted by House of representatives on October3, 2008. ? US Fed cuts rate to 1.5%.
?
Bailing out the greed of few….
The US government unveils a $250bn plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. ? By October 30th US Fed has cut rates to the level of 1%.
?
Bailing out the greed of few….
The US government announces a $20bn rescue plan for troubled banking giant Citigroup after its shares plunge by more than 60% in a week. ? The US recession is officially declared by the National Bureau of Economic Research, a leading panel including economists from Stanford, Harvard and MIT.
?
But was the bailout sufficient??
Lets Bailout once again!!
US President Barack Obama signs his $787bn (£548bn) economic stimulus plan into law. ? A special package of US$ 17.4 Billion for big 3 US Carmakers. ? US$ 200 Billion for Small and Medium Enterprises. ? Special stress tests to be applied to all banks having assets above US$ 100 billion.
?
When US Economy sneezes…
The UK government announces details of a rescue package for the banking system worth at least £50bn ($88bn). ? Lloyds TSB announces it is to take over Britain's biggest mortgage lender HBOS in a £12bn deal. ? The Icelandic government takes control of the country's third-largest bank, Glitnir, after the company faces short-term funding problems.
?
When US Economy sneezes…
The Bank of England cuts interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery in the UK. ? UK Govt. gives a bailout package of US$ 54 Billion to some of the largest banks like RBS(Royal Bank of Scotland) Lloyds TSB, and nationalizes them.
?
When US Economy sneezes…
?
?
?
China sets out a two-year $586bn economic stimulus package to help boost the economy by investing in infrastructure and social projects. German Chancellor Angela Merkel unveils an economic stimulus package worth 50bn euros. The European Commission unveils an economic recovery plan worth 200bn Euros which aims at saving millions of European jobs.
Is this end of American style Capitalism?
Most of the “premier” Financial institutions in the world are nationalized or bankrupt. ? AIG, BofA, Bear Sterns, Northern Rock are nationalized Citigroup is on its way as government has already acquired 30% of Citi. ? More than US$ 3 Trillion is pumped in global economy will it work??...
?
While the miser is merely a capitalist gone mad, the capitalist is a rational miser -Karl Marx
Impact on India
Impact on India
?
Indian economy is a relatively a decoupled economy in comparison of Japan and some European nations.
?
India has been spared from the panic that followed by the collapse of banking institutions
However it is not possible to insulate Indian economy completely
.
?
How???
?
Eg: Citibank had money in form of FII’s, due to crisis started pulling back money from India, financial crisis, corporates unable to repay loans, impact on India banking system, liquidity crunch, confidence of people reduced, deposits reduced
The good, the bad and the ugly
Effect on India
Stock Market
•Market
fall by more than 50 %. •BSE Plunged by 53% in 2008. •FII outflow in 2008 was $13.8 bn(Rs65,499 crore ) •Highest since foreign investors started buying Indian equities. •It leads to decrease in Forex Reserves
Stock Market Contd…
Forex Reserve depletion lead to Rupee depreciation as compare to dollar. ? Rupee fall by around 25 % ? Rupee traded at 51.32 per US dollar on 27/02/2009. ? It also lead to problem of liquidity crunch
?
Exports
Leather Industry
India’s leather export in 2008 estimated $ 3.7 bn. • India is second largest manufacturer of leather footwear. • India accounts for 14 % of total world’s production • US and EU account for more than 75 % of these exports. • Demand of fashion goods in Europe and America fell drastically
•
Leather Industry contd…
Around 25 to 30 % fall in export volume during July to December. ? Resulted in job losses.
?
Textile industry
Textile industry shares close to 14% of the industrial output . ? It accounts for 10% of the export market share. ? It is also the largest employing sector. ? Sector industry has been effected at times when many players went for upgrading infrastructure and capacity.
?
Effect on Textile industry contd..
Export estimation which was expected to be $26.55 bn is revised to $20 bn. ? Sector is also facing problem from other countries like Vietnam, Bangladesh etc. ? High MSP of cotton is also adding problems. ? Profitability of companies has fallen by huge margins. ? Apparel section has been affected most.
?
Gems
More than 13 lakh workers and their families are dependent on diamond, gems and jewellery industry in only Surat, Gujarat ? The diamond industry depends on the strong financial condition of banking in India ? Swept jobs of 200,000 diamond workers in India poverty
?
Indian Financial Services
Losses worth $181 billion to the world’s top 45 banks by the end of FY08 ? ICICI Bank : loss of about Rs. 1056 crores ? PNB, BOI, SBI, BOB: having an exposure to the instruments issued by Lehman and Merrill Lynch
?
Financial Services Chakra
Real Estate
? ?
?
?
Difficult to raise further funds Lehman Brothers was very bullish on Indian Reality Sector and had an investment in excess of US$ 700 mn RBI’s directive not to remit investments made by US financial houses in India without permission is also a step in positive direction and would restrict flight of capital. However, stocks of companies in which sunk financial institutions have a direct exposure (as FII investments especially Lehman) would see selling pressure.
IT sector & outsourcing
•
Nasscom: The global financial meltdown following the collapse of US investment banks will have limited impact on the Indian IT sector in the short and medium terms, but poses a challenge in the long term Growth will happen but at 22-23 percent it will be lower than in the last two-three years when the booming IT industry posted a CGPA (cumulative growth per annum) of 31 percent
•
Contd…
•
Clients in the financial sector will be conservative, withhold spending on new projects and delay expansion; will try to leverage the vendors' expertise to rationalise operational costs. India’s outsourcing industry could be cut to size coupled with lower revenue, job loss and poor salary hikes.
•
Remedies action
Monetary Measures
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To combat liquidity crunch first remedy action was taken by RBI. •CRR was slashes by 400 basis points to 5 %. • It infuse Rs 388000 crore in to the system. • SLR was also cut by 100 basis points to 24 % in November last year. •It injected Rs 40000 crore in to the system.
Monetary measures contd…
Repo Rates and Reverse Repo Rates were also slashed to infuse liquidity in to the system. ? Banks were asked to slash lending rates. ? SBI and other banks did reduced rates to make liquidity available for people. ? Home loan and auto loan rates were reduced to increase demand in both of these key sectors.
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Monetary Measures Contd…
RBI Provided Rs 70 bn to SIDBI for refinancing employment intensive micro and small enterprises. ? Similar refinancing of Rs 40 bn to National Housing Bank. ? FCCB Buyback norms were eased ? ECB norms were eased ? Interest ease for exporters.
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Fiscal Measures
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Fiscal measures were taken in three stimulus In first package Government cut Cenvat rates by 4 % across board. After first stimulus II came and many measures were taken. Liberalized overseas borrowings. Freed overseas borrowing norms from interest rate caps that were fixed to the London Interbank Offered Rate (Libor).
Fiscal Measures contd…
IIFCL was designated to refinance loans to infrastructure companies. ? Issuing of tax free bonds through IIFCL to boost infrastructure sector. ? State government borrowing norms were revised by 50 basis points of their GSDP. ? Measure for exporters like DEPB rates restored.
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Fiscal Measures contd…
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Exemption on CVD on structural materials and cement. Exemption of custom duties on various non ferrous metals. Then came fiscal stimulus III Further cut on excise and service tax by 2%. State borrowing was revised to 3.5 % of GSDP. Excise duty cut extended beyond march 2009.
Measures for FDI and FIIs
FDI norms were changed by cabinet committee. ? Cap on FDI were eased in many sectors. ? Helped industries to raise funds and improve efficiency. ? Ban on P-notes removed with some provisions.
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Latest Measures
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Around Rs 8436 crore issued to NHAI for road development. Rs. 7300 crore issued to develop roads in naxilite area. Package of Rs. 375 crore for leather and textile industry. Export obligation period extended to 36 months. DEPB issuing norms eased.
Latest Measures contd..
Simplified service tax refunding rules. ? EOU exempted from excise duty on fuel.
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doc_604588911.ppt