IMPACT OF SUBPRIME CRISES ON INDIAN BANKING SECTOR By Dr. SANJAY SRIVASTAVA Director, Ansal Technical Campus, Lucknow. 2015 International E - Publication www.isca.me , www.isca.co.in International E - Publication 427, Palhar Nagar, RAPTC, VIP-Road, Indore-452005 (MP) INDIA Phone: +91-731-2616100, Mobile: +91-80570-83382 E-mail: [email protected] , Website: www.isca.me , www.isca.co.in © Copyright Reserved 2015 All rights reserved. No part of this publication may be reproduced, stored, in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, reordering or otherwise, without the prior permission of the publisher. ISBN: 978-93-84648-99-2 PREFACE The banking industry in India seems to be impervious to the global slowdown in the economy. This slowdown originated from United States in the last quarter of 2008. The astonishing fact came to surface that banks in India were least affected by the financial turbulence emanating from the West and seemed to be well supported by strong fundamental base. The Indian banking industry emerged well placed as compared to it’s western counterparts which are vying for government bailout and stimulus package. This research work characterized the study of insulation of Indian Banks to global financial crisis and means to augment the growth rate. Although , United States is the fastest growing country with highest stability , however currency exchange has suddenly started devaluating even in the home country as well as in the international market. This has initiated the economic crisis in the world market. Though the surface causes of it were known but it was required to explore in depth the causes of this decline. It was imperative to ascertain as to why Indian economy as a whole did not get much impact of it and at the same time find out new methods to be exercised in terms of regulation of Indian financial system so that Indian economy keeps growing with much faster rate. At the top are concerns of a direct impact on financial institutions in India. The Reserve Bank of India has clarified that the exposure of Indian banks and institution to the crisis is marginal. State bank of India, ICICI Bank, Bank of Baroda and Bank of India are set to bookmark market losses on their foreign offices to credit derivatives. The estimated total of these losses is around US$ 3 billion for the four banks put together and the provisioning made by these banks so far has been quite small. Given the size of the banks and their balance sheets, even if these figures were accurate, there would be little impact on the overall performance of the banks. In short the direct fallout effect of the collapse of the Subprime mortgages to institutions in India is likely to be quite insignificant. Public sector banks have been very proactive in there restructuring initiatives, be it in technology implementation or pruning their loss assets. While the likes of SBI have already made attempts towards consolidation, others are keen to take that direction. Incremental provisioning made for asset slippages have safe guarded the banks from witnessing a sudden impact on their bottom lines. Retail lending (especially mortgage financing) that formed a significant portion of the portfolios for most banks in the last two years lost some weightage on the banks portfolios due to the inherent risk. However, on the liabilities side, with better penetration in the semi urban and rural areas, the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds. Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based product, banks also restored to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central banks, adjustment of monetary policy coupled with close banking culture has turned the tables in favor of Indian banking industry. Thus this research has been carried out to ascertain the reason behind the sustainability of the Indian banking sector in global financial turmoil. Further a rigorous comparison between the Indian nationalized banks and the private multinational banks has been done. The rate of growth of Indian banking sector has been analyzed along with means to augment it. In order to sustain the growth of Indian banking in future certain methods have been suggested. It is an exploratory research and the basic aim of research is to gain familiarity with the Indian banking sector and to achieve new insight. So the study has tried to understand the feasibility of regulations imposed by RBI. Research work has been based on secondary data which was collected from text books, journals, newspapers, articles and web material. Summary reports of Indian Govt. and World bank were referred to. The data collection was carried out by means of Interview method and Questionnaire. This was done on the basis of personal interviews information in research work. The work embodied in the book entitled STRUCTURAL AND BIOLOGICAL ASPECTS OF TRANSITION METAL COMPLEXES OF SUBSTITUTED OXAZOLE AND THIAZOLE was carried out by Dr. SANJAY SRIVASTAVA for the Ph.D. in COMMERCE from DEPARTMENT OF COMMERCE, UNIVERSITY OF LUCKNOW, LUCKNOW (INDIA) under the esteemed supervision of PROF ARVIND KUMAR in the year 2012. *** iii ACKNOWLEDGEMENT The preparation and presentation of a research work is always a testing time for the researcher. During the course of research, I came across many problems. Like many others, it was not an easy task for me to complete the work without experience of facing constraints of time, resources and others. However, with the active help, proper guidance and support of my supervisor Dr. Arvind Kumar and my closed ones, this work could be accomplished. No mission of academic excellence can be achieved without the active help and guidance from the supervisor. I am obliged and highly indebted to my supervisor Dr. Arvind Kumar, Professor and Head, Department of Commerce, University of Lucknow, for the wholehearted cooperation and support he has extended for the achievement of my mission. Under the unique approach for his guidance, I have acquired the requisite knowledge in accomplishing the mission. In spite of his hectic schedule, he always had time for many discussions that were needed. Without his moral and intellectual support, this work could not have been completed. I, also take this opportunity to acknowledge my profound gratitude to every person who made this thesis possible for submission. I am grateful for the blessings of Almighty, my parents & my family who made me what I am today. I am extremely grateful to Prof. A. Chatterjee, Dean, Faculty of Commerce, Lucknow University, Lucknow who very kindly allowed me to peruse my studies in the department and has always been available to encourage me in my pursuit. I shall fail in my duties if I do not acknowledge the unstinting blessing, support, cooperation and guidance that I have received from all faculty members of the Department of Commerce, University of Lucknow, Lucknow. I owe a special thanks to Mrs. Rekha Agarwal, Librarian, Central Library, BBDGEI, Lucknow for her wholehearted support and cooperation in obtaining access to valuable materials. I am also thankful to Mr. Girish Srivastava for lending hand in completing my research work. I thank all those persons whose names could not be included in the acknowledgement. Mr. Mohit Chaudhary deserves special thanks for typing out the manuscript of this thesis. Last but not least, I remember Late. Babu Banarasi Das Gupta, Ex Chief Minister, Govt. of Uttar Pradesh and a Great Freedom Fighter for his vision. ”To provide an open opportunity to the young generation for evolving their core competencies and to build their career as world class professional with broad based foundation, in-depth knowledge & versatile personality to meet the challenge of Global Economy”. (Sanjay Srivastava) iv CONTENT Nomenclature Page No. 1. Chapter -1 Introduction 11 2. Chapter -2 Causes & effects of subprime mortgage crisis 27 3. Chapter -3 Historical Evaluation of Indian Banking System 38 4. Chapter -4 Performance of Indian banking sector’s in the post - 79 liberalization period with new approaches 5. Chapter -5 Banking Sector Impact of Sub Prime Crisis on 99 during 2005-08 6. Chapter -6 Findings, Conclusion, Suggestions 107 7. Bibliography v SUMMARY Chapter-1 begins with defining the subprime used in the lending industry to define a borrower who does not have a good credit history and hence is not able to qualify for best market rates vis-à-vis the prime category borrower. The term "subprime" reflects not the lending rate but the borrower's credit status. Potential sub- prime borrowers may comprise of financially troubled people, meaning thereby that the sub-prime lenders take a higher degree of risk. Hence to offset the risk to an extent the lenders increase the interest rates. Sub-prime lending may be utilized for sub-prime mortgages, sub-prime car loans, sub-prime credit cards etc. Subprime mortgages totaled $600 billion in 2006, accounting for about one-fifth of the US home loan market. The subprime mortgage crisis is a commonly used term to describe the international financial crisis that was initiated by problems in the U.S. mortgage market in early 2007. It all started in 2006 with US Market tumbling down due to defaults by the subprime borrowers. The doubled edged sword, increase in interest rates and simultaneously fall in property prices, hit the market leading to subprime mortgage crisis. Between the years 2000-2005, along with very low interest rates, property prices were also on a rising trend and the subprime borrowers were able to meet their obligations as they were building equity by selling the properties or getting the properties refinanced.