SUBPRIME CRISIS

WHAT IS SUBPRIME CRISIS?

SUBPRIME is practice of lending in the form of
mortgages for the purchase of residences.
Mortgage Loans issued to people who do not meet
usual criteria for borrowing at the lowest prevailing
market interest rate.
This subprime lending system caused for world’s
greatest ECONOMIC CRISIS.
Subprime is the cause of USA Economy melt down.
Subprime crisis caused big loss to the banks and
now it is affecting the other industries like
Automobile companies (GM, Ford, etc.)
DIFFERENCE BETWEEN SUBPRIME
AND PRIME CRISIS
A sub-prime loan-
Sub-prime mortgage loans (or housing loans or
junk loans) are very risky. But since profits are high
where the risk is high, a lot of lenders get into this
business to try and make a quick buck.
A Prime loan-
The prime home loan market refers to individuals
who have good credit ratings and to whom the banks
lend directly.
HOW SUBPRIME CRISIS STARTED?
Subprime Mortgage Loans are very risky.
Profits are high where the risk is high.
These loans are given to people who have inability to repay
the loan and they don’t have stable income.
For example, a person who is working on IT company earns
Rs.40000 per month and he doesn’t have any other income
or assets. When the bank gives him loan of some lakhs, the
EMI for the month would be Rs.20000-Rs.30000. If he lose
the job, there is no possibility for him to pay the EMI, he will
just surrender the house to bank and go away. This is the
one simple example how Subprime problem starts.
CAUSES
Biggest culprits:- The LENDERS
Partners in crime
Investment banks: worsen the situation
Fuel to the Fire: INVESTORS BEHAVIOR
Final Culprit; HEDGE FUNDS
Root cause of sub prime crisis:-
Post 2000 , US market witnessed an environment of
benign interest rate , this encouraged cheap
borrowing .

Scenario changed : series of policy rate hike by US

federal reserves.
Effect on India:-
Cut down of budget of back offices of US companies in
india.

started pulling FII’S from equity market of

india.

Sectors that were affected in current crisis.

GDP declined to 7.9% by Aug 2008.

 Learning from Sub Prime Crisis
for India
Sound banking practices:

Controlled Derivatives market:

Limited investment by Indian companies abroad:

 
Quality Inward Investment:
SUBPRIME CRISIS AND BANKING
INDUSTRY
Lehman Brothers
Washington Mutual Funds
American International Group (AIG)
Citi Bank