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US credit crisis:Subprime explained:Can this happen in India


US credit crisis:Subprime explained:Can this happen in India

Last updated: January 29 2013
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  • US credit crisis:Subprime explained:Can this happen in India

    Hi All,

    Check this 10 minutes video
    The Crisis of Credit Visualized - HD - YouTube

    Clearly tells what is credit nd subprime crisis.

    I wonder whether such a thing can happen in India. Untill now i think Indian banks have not started giving Subprime loans to such an extent that the there will be more defaulters for paying EMIs and hence more homes will be held with banks to sell. That will create a more supply and less demand leading to a crash in RE prices.

    There is still the demand for houses in India so this crisis may not happen.
    But the problem can very well happen to those who have bought a home and cannot pay the EMIs later on.

    For a person who bought a 50 lac flat 2-3 yrs back which now costs 1 crore the problem will not be that much as for him EMI will be less and he might afford it easily considering today's costs.

    But if any end user now buys a same home for 1 crore with 80 lac loan. He might be at stress for EMi and could lead into default if any crisis happens.

    So those who have invested earlier will not have much problems as the prices were low when they were bought. And even if he sells below market price lest say at 80 lacs, he made 30 lacs. Also there will be buyers at low prices.

    On other side, a comparable flat at new launch are at higher rates at 1 crore (for example) and hence when price will further grow there will be no takers and hence might end up in distress selling. He might have to sell at 80 lacs that is below his purchase price and the interest part that he has paid for 2-3 yrs. This will further deteriorate the economic condition.

    Any views.
    Last edited January 27 2013, 02:23 PM.
  • #2


    Re : US credit crisis:Subprime explained:Can this happen in India

    In India (Specially oin NCR)
    1. demant is more than supply.
    2. Genarally the indian culture = Expenditure is less than income.
    3. People thing a lot about EMI (How to pay).
    4. Bank generally don't take the property back even no EMI for a year (Due to legal part).
    5. Bank replan the loan / EMI onec a person is dfaulter for 12-18 EMI due to job loose and got another job.
    6. We have seen the Indian RE situation during last US slump.
    7. Real Estate will never be looser in long run

    Your Post is Valid and contains valuable info -- We should not ignore the valid points in that


    • #3


      Re : US credit crisis:Subprime explained:Can this happen in India

      Thats what i was thinking after looking into the video that in India still the scenario is not that bad that people spend way out of their salaries and incomes.

      Still people save a lot of money. Such a country wide default may not happen in india atleast for a long time to come.


      • #4


        Re : US credit crisis:Subprime explained:Can this happen in India

        Gaurav, thanks for sharing this and presenting your view points. I had seen this video some 2-3 years back.

        You have brought some important points which is more highlighting the consideration from investor/buyer to take calculated risk and closely study the demand supply equation of the market. At very high level some of these reports are available by research institutes.

        As per my view, responsibility should also go for bank to study the credit worthiness individual credit profiles of investor/buyer. In many cases banks are still hard seller. Any un-secured loan could aggravate such situations. Important to study the changes in US banks lending behaviour after subprime crises. Its much tighter.


        • #5


          Re : US credit crisis:Subprime explained:Can this happen in India

          In India things are different as compared to US.

          1. Saving is essential part of the middle class whereas in US consumption is the king and saving is not required.
          2. Savings to GDP ratio is highest among top 10 economies in world whereas in US people live their entire lives on credit.
          3. Banks finance only 80% or in certain cases 70% of the value of the property of circle value (sometimes market value) which means there is a buffer of 20% to 30% always in the risk taken by bank.
          4. Getting a loan is not easy task as individual's salary, loan paying capability, credit rating, project viability, market pricing etc all are considered by bank whereas in US during subprime crisis, banks offered money in lieu of properties to those who couldn't pay back. No detailed checks were done.
          5. Loans are normally for 15-20 years period sometimes it could be 25 years but only for working people whereas in US, loans are much larger tenure and due to this the risk of the bank increases for a longer duration.
          6. inflation is high in India which means that RE is bound to provide inflation % returns (may be few points here and there) whereas US has very little inflation.
          7. In India demand supply for housing units in big metros is in favor of demand due to migration from rural areas to metro cities whereas almost whole US is urbanised and every state has got big cities therefore lesser demand.


          • #6


            Re : US credit crisis:Subprime explained:Can this happen in India


            Thanks for posting this video. First time, I saw this. Good learning. :-)

            In my opinion, I think India in general is far off from such a crisis in a large scale. I am sure there are defaulters, however the size is not yet of scale. I do not think that this will happen at least for a long time.

            However, thinking further, what will happen if, let us say there is a drop in property prices..........
            will the defaults kick in immediately ?
            how will the defaulting impact the banks ?
            can the banks stay afloat (specifically private banks ??)
            will that lead to a 'home loan crunch' ?


            • #7


              Re : US credit crisis:Subprime explained:Can this happen in India

              Good thread :

              Verdict Pls to buy or HOLD


              • #8


                Re : US credit crisis:Subprime explained:Can this happen in India

                To Buy


                • #9


                  Re : US credit crisis:Subprime explained:Can this happen in India

                  Originally posted by amitestate View Post
                  To Buy
                  To Buy & Hold !!! :-)


                  • #10


                    Re : US credit crisis:Subprime explained:Can this happen in India

                    Of a sample of over 3,500 companies (with aggregate USD 330 bn debt in FY11-12), earnings of 28% of such loans were insufficient to meet interest liabilities (much less principle) in the fourth quarter of FY12. Moreover, 50% of these corporates had earning lesser than its interest cost for more than 4 quarters in the last 7 quarters.
                    Obviously high interest rates are not the sole cause of this stress. And as press reports suggest, this has only worsened in FY 12-13.

                    Restructured loans in FY12 are estimated to be at a high of 7-11% of total loans. With many of stressed corporates yet to be recognized as one, such levels can rise to over 20% shortly.
                    This is frightening to say the least and can have profound impact on the financial sector, rupee and the Indian economy.

                    Over last five years, Indian banks have witnessed strong (20% CAGR) loan growth. However, this has increasingly been driven by select ten corporate groups; (evidence of crony capitalism?). While the aggregate debt of these ten groups has jumped 5 times in the past five years and now equates to 13% of bank loans and 98% of the banking system's net worth.
                    Therefore, surprisingly now in terms of the concentration risk, Indian banks rank higher than most of their global peers.

                    Economic slowdown has in turn resulted in significant stress to specific sectors (power & metals).
                    Consequently, financials of these groups are also stretched with four of the above-mentioned ten having earnings insufficient to payout interest for their borrowings.

                    Over past three years, bank loans, the reports points out to power sector having grown approximately three times and now aggregate in excess of USD 60 bn. With our thrust on power sector, bank exposure to this sector is now significantly high at 10% of total loans.
                    However with weak physical reforms carried out by the Government, stress on these loans comes from poor off-take, erratic fuel supply and sundry developer risk.

                    If the Plant Load Factor of these new plants falls anywhere below 65% of its rated capacity it would be inadequate to meet its debt servicing needs. The 54 GW of capacity planned to come up in the next 24 months could be the tipping point for these risks to come to a fore as none of it is supported by appropriate sale agreement.
                    All these are surely bound to have significant impact on the asset quality with our banks.

                    In denial mode

                    While petroleum import is understandable in India, with billions of tons of coal reserves, importing coal (obviously out of a flawed coal mine allocation policy) is sheer madness.

                    Yet the government is in denial mode. So is our media. Interestingly, the stock market that boasts of several "analysts" is at a high. As is their wont intelligentsia is playing a perfect cheerleader to this hara-kiri.

                    The government assumes that it can cure psychology of domestic entrepreneurs by announcing "reforms" - one that intriguingly makes India dependent. While surely foreign capital (as is technology) is welcome, let us not forget that foreign capital can at best supplement not replace domestic capital, entrepreneurs and their initiatives.

                    If the experience of the past two-decades of reforms is any indication, approximately ninety-eight - yes ninety-eight - percent of the total investments made in India has come from domestic savings with the balance two coming from abroad as foreign capital. What is forgotten in the melee is that given the state of global economy, where is the mythical foreign capital?

                    Given this paradigm, naturally, foreign capital is loath to enter India. If foreign capital has to enter India, there must be a steady assured flow of the same in foreseeable future. For that to happen, Indians must invest in India. And for that to happen, India requires different set of "Reforms."

                    We have come to a stage where reforms need no longer directed at an international audience. It can neither be elitist, nor can it be exclusive. It has to be physical. It has to be inclusive. Unfortunately, a government headed by an economist Prime Minister is economical about this fundamental aspect of economics.

                    Surely, we are in a catch-22 situation. We need foreign capital to fund our imports, not fund investments. Nevertheless this makes foreign capital wield a disproportionate influence on the domestic economy. Obviously to get even this foreign capital, we are forced to sell our family silver? Even for sloganeering, time has run out. Hasn't it?

                    PS: Given this scenario, the Rupee runs the risk of depreciating sharply and abruptly. Should that happen, the 1991 economic crisis would look, like a walk in a park.


                    Have any questions or thoughts about this?