By Priya Nigam
The weekend gone by witnessed the collapse of Bear Stearns in a shocking deal in which the 85-year-old US-based investment bank was bought for only one third its IPO price in 1985. The US Federal Reserve cut interest rates in a meek attempt to restore confidence in the financial markets. This led to widespread speculations of global funds pulling out their local share holdings. The panic-struck Sensex plummeted in the face of intensifying global fears. And the rupee plunged to a six-month low.
While we are still trying to digest this, Mr P Chidambaram claims that the impact of the US sub-prime mortgage crisis on India has been moderate. He noted that none of the state-run banks have any direct exposure to the sub-prime mortgage market.
So, what does the sub-prime crisis mean? Banks in the US had offered loans to a number of domestic "sub-prime" borrowers (or borrowers with low repaying power). Then the housing bubble burst and the US economy began to decelerate. The sub-prime borrowers started to default (not pay back their loans) and banks were forced to write-off such loans. The US sub-prime crisis has so far caused the world’s 45 biggest banks to declare losses of around $181 billion.
So, on one hand we have the Finance Minister saying that the impact of the US sub-prime crisis on India “is second order impact and a moderate impact.” On the other hand, we have ICICI Bank reeling under the sub-prime pressure. India's largest private bank is faced with a loss of Rs1,056 crores till January 2008. ICICI did not have exposure to the US sub-prime market. Its profits were hurt by depreciation in the value of securities it bought in the international markets. The sub-prime crisis led to a rise in global interest rates, which in turn caused a decline in the value of securities, leaving ICICI with the task of making up the difference from its profits. While ICICI’s loss may seem small compared to what US banks have aggregated, it is a huge amount for India.
What I must point out here is that these losses have not yet been “incurred,” since ICICI has not sold these securities. The bank did mention, however, that the investment losses resulting from the sub-prime crisis could eliminate approximately 9% of its profits this year.
AOL India News quoted analysts as saying that other Indian banks with exposure to credit derivatives include the country’s largest bank, the State Bank of India (SBI) - Rs4,000 crores, Bank of India - Rs1,200 crores and Bank of Baroda - Rs600 crores. Applying the same rate as ICICI’s 7.6% to the exposure of these government-run banks, we have a loss of Rs704 crores for SBI, Rs211 crores for Bank of India and Rs108 crores for Bank of Baroda.
Hope seems to be pinned on the US government’s latest measures to curb the economic slowdown. Are we behaving like Ostriches… burying our heads in the sand and believing there is no danger? Or will India get through this relatively unscathed?
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2 comments:
I think..we cant blame US economy for every happenings.
I couldn't agree with you more, Rajani. No one is "blaming" the US economy and certainly not for "everything." There are various things we need to improve. However, the US economy does have a global impact. We can not ignore that completely.
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