Group 2: TYBBA A

Abhilasha Mohan Ram A003

Mayank Beria A025
MihirMandrekar A026
Monil Shah A027
Rohan Negi A035
ZoyaKazi A053
Meaning of Subprime :

 The word means subordinate to primary

 It is the loan given to people with a bad credit
rating who are not eligible for Prime loan ( normal
loans )
 Characterized by higher interest rates, poor
quality collateral, and less favorable terms in
order to compensate for higher credit risk
 Sub-prime lending may be utilized for sub-prime
mortgages, sub-prime car loans, sub-prime
credit cards etc.
Why are Subprime loans issued ?

 For banks to earn more money by tapping the

defaulting customers

 For young people who do not have enough money

for down payment

 For people having financial problems

 For people who are discriminated against

 The US subprime mortgage crisis was a set of events and conditions that led to a
financial crisis and subsequent recession that began in 2008

 Characterized by a rise in the inability to pay housing mortgages resulting in the

decline of securities backed by mortgages

 These mortgage-backed securities (MBS) initially offered attractive rates of return

 However, the lower credit quality ultimately caused massive defaults

 The money was sucked out of several banks, financial institutions and the
economy as a whole in September 2008

 Several European and developing countries had invested heavily in American

banks

 The subsequent loss of funds resulted in the Global Recession of 2008

 2000-2005 :
 Very low interest rates, property prices were on a
rising trend and the sub prime borrowers were able
to meet their obligations by selling the properties
or getting the properties refinanced

 This created what is called ‘The Housing Bubble’

 2005-2006 :

 The housing bubble burst during this time,

triggering the crisis
 There was a steep fall in housing prices
 The interest rates on subprime loans however were
high and were rising
 The subprime borrowers were not able to meet
their liabilities leading to meltdown of the US
subprime industry
 2006-2008 :

 More subprime borrowers failed to pay their debts

 Securities held by mortgages lost value globally
 Global investors also drastically reduced purchases
of mortgage-backed debt and other securities
 The global recession of 2008-2009 :

 Concerns about the soundness of U.S. credit and

financial markets led to tightening credit around
the world and slowing economic growth in the U.S.
and Europe
 The U.S. entered a deep recession, with nearly 9
million jobs lost during 2008 and 2009
 This recession was second to only ‘The Great
Depression of the 1920’s’ resulting in huge losses
 Owning a home is part of the 'American Dream'. It
allows people to take pride in a property and engage
in a community for the long term.
 However, homes are expensive and most people need
to borrow money to get one.
 The conditions were right for people to achieve that
dream. In the early 2000s, mortgage interest rates
were low, which allow you to borrow more money
with a lower monthly payment. In addition, home
prices increased dramatically, so buying a home
seemed like a sure bet.
 Lenders understood that homes make good collateral
so they were willing to participate.
 The mortgage crisis was triggered as this situation
built momentum.
  DOT COM COLLAPSE – 2000

 SEPTEMBER 11 TERRORIST ATTACK

  Low interest rates

 Increase in loan incentives

 Easy credit conditions

2001 2004
 1994 -5%
 1996 -9%
 1999 – 13%
 2006 – 20%
 The housing bubble began to burst in late
2005
 Since the end of 2005, default rates on
subprime mortgages have soared from 6.5%
to 17%, while foreclosure rates have jumped
from 2.5% to 9%.
 When house prices ceased rising in mid 2006
and then started falling, subprime mortgage
defaults began accelerating.
 Effects
 Sub prime borrowers
 Financial institutions
 Banks
 On December 1, 2008, the National Bureau of
Economic Research announced that the economy
had entered into a recession in December of
2007. Real GDP increased by only 0.4 percent for
the year 2008, and it decreased at annual rates of
5.4 percent in the 4th quarter of 2008 and 6.4
percent in the 1st quarter of 2009. The
unemployment rate increased from 4.9 percent in
December of 2007 to 9.5 percent in June of
2009.

 The total real estate equity in The United States

was valued at $13 trillion during the 2006 peak,
had fallen to $8.8 trillion by mid 2008.
 The people who contributed to the deadly chain
of events that sent the entire world economy into
recession.
 Continued
Reduction in Fed
Rates
 Sudden increase in
Money supply
 Rates remained low
till 2005
 High Liquidity
 Lowered to lending rates to increase loan off
take
 As the prime market was nearing saturation,
began lending to subprime borrowers
 Aggressively sold MBS, CDO
 Additional funds raised by securitization was
re-deployed in the same manner
 Non-traditional mortgages
 MBS ratings influenced using parental
linkages as well as rating shopping
 Buying property well beyond their means
 Buying for price arbitrage
 Non-traditional mortgages leveraged their
borrowing capacity further
 2yrs fixed rate, then floating rates: EMIs rose
exuberantly, house value fell
 Thus making foreclosure a viable option
 Accelerated downward spiral
 Increased use of Secondary mortgage market
 Lenders sold their mortgages in the
secondary market
 Pooled mortgages into securities like CDOs
and MBS
Investors:
 Investors were the ones willing to purchase
these CDOs at ridiculously low premiums over
Treasury bonds.
 These enticingly low rates are what ultimately
led to such huge demand for subprime loans.
 Fuelled volatility through credit arbitrage
 Credit Default Swaps
 Influenced banks to bring out more MBS &
CDOs as it was a good avenue to invest in
Denotes the real GDP Growth during 2009.
(Countries in brown represent those in recession)

Source: Wikipedia
Year Growth (US$ Bn)

2006-07 22.6
2007-08 29.0
2008-09 13.7
2009-10 -3.6
2010-11 29.5

 15 per cent of total export in 2006-07 was directed toward

USA.
 Official statistics released on the first day of the New Year,
showed that exports had dropped to $1.5 billion in
November 2008, (Sivaraman, 2008) from $12.7 billion a year
ago.
 Manufacturing sectors like leather, textile, gems and
jewellery got hit hard.
Year Growth Rate

2005-06 9.5

2006-07 9.6

2007-08 9.3

2008-09 6.8

2009-10 8.0

2010-11 8.6

Source:
http://planningcommission.nic.in/data/datatable/1705/final_1.
Month Open High Low Close

January 20325.27 21,206.77 15,332.42 17468.71

February 17820.67 18,895.34 16,457.74 17578.72

March 17227.56 17,227.56 14,677.24 15644.44

April 15771.72 17,480.74 15,297.96 17287.31

May 17560.15 17,735.70 16,196.02 16415.57

June 16591.46 16,632.72 13,405.54 13461.60

July 13480.02 15,130.09 12,514.02 14355.75

August 14064.26 15,579.78 14,002.43 14564.53

September 14412.99 15,107.01 12,153.55 12860.43

October 13006.72 13,203.86 7,697.39 9788.06

November 10209.37 10,945.41 8,316.39 9092.72

December 9162.94 10,188.54 8,467.43 9647.31

Source: http://www.bseindia.com/indices/indexarchivedata.aspx
 Against a net inflow of US$20.3 billion in FY2007–2008,
there was a net outflow of US$15 billion from Indian
markets during FY2008–2009 as foreign portfolio
investors sought safety and mobilized resources to
strengthen the balance sheet of their parent companies.
 With Indian stocks melting under the heat of a global
crisis, overseas investors pulled out three dollars in
2008 from every four pumped in the previous year.
 A major chunk of FII of over $3 billion had taken place
in October 2008 alone, which saw the Sensex going to
its lowest level in the last three years.
Year No. of Amt Issue Issue
IPOs Raised (in Succeede Failed
Rs. Cr) d
2007 108 33,946.2 104 04
2
2008 39 18,339.9 36 03
2
2009 22 19,306.5 21 01
8
2010 66 36,362.1 64 02
8

IPO Report - Year Vs. Money raised through IPOs

 FDI & ECBs
Year Inflow

FDI 2004-05 US$6Bn

2007-08 US$34.3Bn

ECBs 2004-05 US$9Bn

2007-08 US$30.3Bn

 only US$18 billion raised in FY2008–2009 as commercial credit from

the overseas market=41% less than the amount raised in the
previous year.
 ECB approvals declined from US$3 billion in September 2008 to less
than US$0.5 billion in February 2009.
 For the first time in last six years, FDI inflows witnessed a negative
growth of 2% in FY2008–2009.
 Dec 30th : 1USD =48INR

Jan 1st : 1USD =39INR Dec 1st : 1USD=50INR

 India’s Real estate market was very similar to
that of the U.S in 2008.
 Housing developments were sprouting up
everywhere.
 Plenty of money flowing into India, mainly
from private equity and hedge funds, to fuel
the commercial real estate bubble in
particular.
 Carlyle, Blackstone, Citibank — they were all
here, throwing money at developers
 70% of the banking system in India is
nationalized, so RBI’s role as a strong
regulator is critical.
 Indian banks were not levered like American
banks.
 Capital ratios here are 12% and 13%, instead
of 7% or 8% of the Americans.
Banks Capital Adequacy
Ratio during
2007-08
Federal Bank 22.5%
Oriental Bank of Commerce 12.1%
Barclays Bank 21.1%
Corporation bank 12.1%
Kotak Mahindra Bank 18.7%
Allahabad Bank 12.0%
Bank of India 12.0%
ICICI bank 14.0%
Citi Bank 12.0%
Axis Bank 13.7%
Indian Overseas Bank 12.0%
HFDC bank 13.6%
 Indian banks don’t do interest-only or
subprime loans.
 Never gave more money to a borrower
because the value of the house had gone up.
 Non performing loans are less than 1 %.
 Mortgage loans tend to have down payments
in India that are 1/3rd of the purchase price.
 Lets not talk about those prevailing in the
United states!
 He started sensing that real
estate, in particular, had
entered bubble territory before
the crisis.
 One of the first moves he
made was to ban the use of
bank loans for the purchase of
raw land.
 Only when the developer was
about to commence building
could the bank get involved —
and then only to make
construction loans.
 Reddy pushed interest rates up to more than
20 percent, which of course dampened the
housing frenzy.

 He made banks put aside extra capital for

every loan they made.

 In effect, Mr. Reddy was creating liquidity

even before there was a global liquidity crisis.
 India's trade theory is changing a lot as it is
turning out to be more of a manufacturing
export oriented country.
 The net trade of services done by India
accounts to about just 22% .
 The trade practices of India with US has
decreased .
 BUT on the other hand has relatively
increased with China reflecting out that the
risk of US recession has been deflected.
 However on a short term it will have its effect
on the IT companies and also on its revenues
in their future quarter results.
 The growth in the employment in the IT
sector in the year 2008 was 44 % up till
August 08 which will drop to about 28% net
growth for this financial year.
 For both commercial and residential real-
estate, the proportion of black to white
money may vary from 20 to 40 % depending
on various factors.

 However, the borrowing from banks is based

only on the white portion as it should be.

 Thus the value of the asset is substantially

higher than what is shown in the book due to
financing of the asset partly by black income.
 The presence of black
money or what one
may call the hidden
net worth of India has
tremendous
advantages in times of
asset based lending
and borrowing since
only a part of the price
of asset is seen, like
the tip of the iceberg.
 The other portion of
the asset finance by
the borrower from
black fund makes it
imperative for him to
protect his position by
meeting the
 The amounts in the form of black money are
large and mostly invested in real-estate and
gold, two major areas of passion for the
Indian middle-class. As long as a good
portion of our economy and asset financing is
by black income we need not worry about
sub-prime