This paper reviews about the recent subprime crisis and dubai crisis, primarily causes of downturn and its impact on Indian Banking system, recovering fast from the inpact of global slowdown. The global remification of the financial crunch in Dubai, caused by plung in real estate prices have been assesed at different levels and its impact on different sectors of Indian economy have been elucidated. Analysis of two sharply divergent views one which believes that the crisis is going to turn in to sovereign default problem and will have adverse impact on Indian Banking system.
This paper also focus on large scale job losses expected to take place in Dubai. The effects on indian Banks having exposures to the Dubai economic s have been studied extensively and elaborated in the paper. Immidiate response on Indian and other global stock markets has been explained in the light of Sub prime crisis and Dubai crisis.
Effect of US subprime mortgage crisis on the banking sector has been immense. This is evident from the fact that banks as well as stock markets were affected in every nook and corner of the world. The European Central Bank or the ECB came to the rescue of many. The amount injected by the ECB to rescue the other banking institutions was €95 billion. The rate of interest was 4%. This was the first rescue operation, the second and the third followed with a cash assistance of €61 billion as well as €47.67 billion respectively. The approach taken by the authorities of other Central Banks were also varied. Central Bank of Japan's contributions to the financial markets comprised injection of 600 billion yen or €3.6 billion.
INTRODUCTION
SUB PRIME CRISIS:
The subprime mortgage crisis refers to an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage properties and foreclosures in United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system.
Other effects of the crisis include rise in rates of interest. As a result of this, lending business got stalled. The signals started from the money market. In the money markets there is liquidity and the banks carry out several transactions to keep the system functioning. If the functioning of the money markets gets distorted, the whole system gets upset.
DUBAI CRISIS
Dubai debt crisis sounds new alarm for tightening risk management. Lehman brothers led to a financial crisis on the global scale. The latest Dubai crisis once again highlighted the urgency of crisis.
Dubai was fallout of global real estate bubble with global financial markets plunging after Dubai world, the government investment company burdened with $59 billion liabilities, requested for deferment of debt to its creditors for six months, on 26th November, 2009. The Dubai government's total debt is estimated at $80 billion. Indian stock market also plunged with heavy selling witnessed in banking, infrastructure and really stocks. Dubai's world activities from dominent part of the countries economy and the inability of the government to undertake the servicing of its largest enterprise points to economic problems in the country.
Dubai plays a crucial role in the economy of the United Arab Emirates (UAE), a
confederation of seven emirates. Moreover the Emirate has fast emerged as the services hub of the region. The services sector of Dubai contributes about 60% of the services sector of UAE by value and nearly a fourth of the total GDP of the confederation. Within Dubai, services contribute 74% of the GDP. The most prominent service-oriented sectors are real estate and construction (23% of Dubai's GDP), trade and entreport (31%), financial services (11%), and other services include retail (9%).
OBJECTIVES
To study the impact of Subprime crisis on banking sector
To study the impact of Dubai crisis on banking sector
To know about the financial position of Indian banks
PROBLEMS
The various problems faced by Indian banks due to crisis:-
Rise in rate of interest
Lack of liquidity, which reduced transactional volumes by 55 % in 2008
Increasing the rates of domestic properties
Improper functioning of money market
Functions of Indian banking system gets distorted
Initial fall in the stock value of Indian banks
REVIEW OF LITERATURE
ARTICLE 1
In India, our property market has also overheated-The Economist recently called Mumbai highly overpriced. But the big question is-will prices fall, and if they do, what will be the impact on the economy? Till now, despite the significant slowdown in bank lending to real estate, builders are being able to hold out on account of profits made in the past. People believe that speculator demand has now cooled off and the market is primarily genuine. Sales have slowed down, but prices have not yet fallen. Informed opinion on property in India is always rare, but people suggest the property market will reflect how interest rates.
ARTICLE 2
The US has been a major investor in Indian markets. The slowdown could mean decreased inflow of foreign funds in India, which has been responsible for the booming stock market. This could lead to a sharp correction in the market.
Many leading companies, particularly IT, BPO and exports, have flourished on the back of a robust US economy. They have contributed a lion's share to India's foreign exchange reserves. Any slowdown could mean a reduction in profitability in these sectors, which in turn can lead to companies closing down and unemployment. This could lead to a slowdown in the Indian economy as well.
Many experts think this is not the end of subprime crisis and they are not sure of its impact on the Indian economy.
ARTICLE 3
Sub-prime lending had spread from inner-city areas right across America by 2005. By then, one in five mortgages were sub-prime, and they were particularly popular among recent immigrants trying to buy a home for the first time in the "hot" housing markets of Southern California, Arizona, Nevada, and the suburbs of Washington, DC and New York City.
House prices were high, and it was difficult to become an owner-occupier without moving to the very edge of the metropolitan area.
But these mortgages had a much higher rate of repossession than conventional mortgages because they were adjustable rate mortgages (ARMs).
ARTICLE 4
According to various authors, as banks around the world tightened access to money, on concern that borrowers' collateral was impaired by exposure to subprime loans, some of the highest-profile upsets were reported in the $1.7 trillion hedge fund industry. As these secretive and unregulated funds scrambled to raise cash and dump tradable assets.
The crunch, which is still working its way out of the world's financial system, raised big questions about the viability of some hedge fund strategies in the absence of easy money, which had encouraged fund managers to take on increasing levels of leverage and risk.
RESEARCH METHODOLOGY
Research Design
The methodology that will be used to prepare the report is ANALYTICAL STUDY. Considering the limited research on effect of crisis on Banking system, the present research study has been aimed at reviewing the performance of all Banks.
Data Collection
The method of data collection is secondary type.
IMPACT OF CRISIS ON BANKING SYSTEM
After years of record value creation and over-performance, bank stocks have been hit hard. For the moment, it seems like the rally has ended-at least for banks. Bank stocks have lost almost all their value creation since the start of the year. The banking sector, for the first time in years, is the worst performing industry sector.
The banks have been hit especially hard by the crisis. The subprime portfolios of many of their hedge funds have had to be capitalised. The collateralised debt obligations (purchases of tranches of subprime deck certified by rating agencies as investment grade) with high leverage find no buyers in the market place. What is worse is that no one really knows how big the hole is and who really has been left holding the can.
There will be serious implications for the banking sector as well. The sub prime has meant that the Indian banks have to follow stricter norms while disbursing loans to the people. These tighter norms could prove to be counter cyclical. The argument is this†people will be asked to provide collateral for the loans given to them. Anybody who is unable to furnish the collateral will be denied a loan. This policy will exclude a majority of the population from institutional sources of credit, thereby affecting growth negatively.
There is a risk of the financial contagion spreading to the entire world. Firms like Bear Sterns, Lehman Brothers, Meryl Lynch who once inspired confidence amongst the investor class have now gone bust. Other giants like Citi Bank, Morgan Stanley, and AIG have been shaken from their very foundations. Freddie Mac and Fannie Mae are under the conservatorship of the US government. The risk is, thus, the domino effect. If one more big financial institution fails there will be a collapse of the entire financial system of the USA.
The various banks on which subprime crisis and dubai crisis has shown its impact
After the new broke out about Sub prime crisis and Dubai crisis, investors react megetively to the banks having exposure in banks, for instance Bank of Baroda having highest exposure among all Indian banks in Dubai
BANKS EXPOSURES COMMENT
Bank of Baroda $ 9 billion Sizeable, payments due from 2011
ICICI $ 6-7 billion Primarily to Indian companies
SBI $ 4 billion No major inpact given its low exposure
AXIS $ 3.5 billion Primarily to Indian companies
Bank of Baroda had an exposure of around $ 200 million to Dubai world. But the amount is due for repayment after 2011. Bank of Baroda has only 7-8 percent of total loan book in the entire gulf region, which amounts to Rs. 1000 crores.
Another important Bank State Bank of India had only $ 50 million exposure to Dubai world and since the exposure is very low there is no reason to panic.
Effect on Indian banks
Bank of Baroda: - bank of Baroda has some real estate exposure to Dubai- accounting to around 5 % of its loan book
State bank of India: - the bank has an exposure of Rs. 1443 crore or 0.2 % of total assets in UAE,which the bank claims as insignificant.
THE US BAILOUT PACKAGE
The proposed $700bn rescue package will be released in stages, starting with $250bn followed by an additional $100bn upon the president's request, if necessary. The remaining $350bn will need further approval by congress.
The government will own shares in participating companies, allowing taxpayers to benefit should the firms become profitable in the future, except small firms with less than $500m in assets, or where the government buys less than $100m of soured investments.
The government will be among the last to suffer a loss in case a firm collapses. A new congressional panel with wide powers will oversee the implementation of the rescue package, with regular progress reports from the treasury secretary.
The following table details how the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months.
-- Amounts (Billions)---
Limit Current
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Total $11,623.63 $3,800.18
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Federal Reserve Total $7,565.63 $1,478.88
Primary Credit Discount $110.74 $65.14
Secondary Credit $0.19 $0.00
Primary dealer and others $147.00 $25.27
ABCP Liquidity $152.11 $12.72
AIG Credit $60.00 $37.36
Net Portfolio CP Funding $1,800.00 $248.67
Maiden Lane (Bear Stearn $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.82
Maiden Lane III (AIG) $30.00 $24.34
Term Securities Lending $250.00 $115.28
Term Auction Facility $900.00 $447.56
Securities lending overnight $10.00 $5.59
Public-Private Investment Fund $1,000.00 $0.00
Term Asset-Backed Loan Facility $1,000.00 $0.00
Currency Swaps/Other Assets $606.00 $417.86
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $33.58
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
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FDIC Total $1,551.50 $400.30
FDIC Liquidity Guarantees $1,400.00 $261.30
GE $139.00 $139.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
ANALYSIS
It seems that the direct effects of sub prime on the Indian markets are pretty limited. We have to look only at the collateral dimension, if there is any. Collateral damage can come in two forms; one is through a generalized slowdown in the global economy, more specifically in the US.
The US will slow down significantly and the US investor is at risk. That is something, which is a serious problem. If you look at market behavior, over the last 10-15 years, whenever the Fed cut rates, it has normally been good for markets, provided that the US does not go into a recession. But at present the situation is quite adverse. The wiping of biggest investment banks in US has led to risk of employment for numerous employees of these companies in US & in other nations in which India also comprises. The employees of these firms are being converted into sales executives by domestic AMC's at half of their net salary.
The Impact of US subprime crisis on India and China may not be very large according to economists. It is being anticipated that the developing countries might be spared for a year or two and neither of the countries would be affected either by economic recession in the USA or the prevailing US subprime crisis. This notion was put forward by the leading economist of the World Bank.
Further, it is being fathomed that even if there is an impact of US subprime crisis on India and China, it will not be taking place earlier than two years. However, it will be wrongly said if the developing nations like India and China would be entirely untouched by the ripple effect. The prevailing economic condition in these countries are so strong that it may not feel the upheaval as it would have felt had the economy of these countries been sluggish.
CONCLUSION
The real picture of the crisis will only emerge when Dubai resumes business after the long holiday on occasion of Eid-ul-Azha. The situation is very fluid and time is difficult for Dubai. On one side sovereignty of Dubai is at stake and other there are chances of severe default in payment. What route the existing ruler choose, time will tell. In any of the scenario the Dubai dream run if not over is facing the glitches.
