We are always talking about the sub prime crisis which hit the US market and I am just wondering whether this will happen in India too.I always read from magazines that our indian banks are very safe as they lend only 80% of the house value.If the house value decreases 50% from the peak value and people(Who bought it in 2008 peak price) files for bankruptcy , what will happen to our banks?


Any Ideas?
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  • Is this option ruled out ?

    What do you guys think about this question? Is it irrelavant?
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  • Originally Posted by venkit
    What do you guys think about this question? Is it irrelavant?


    I haven't heard of any location in India where prices have crashed by 50% (however heard of 40% drop in mumbai suburbs).

    Banks have aggresively lent money particularly public sector banks and icici bank which have now become silent.

    However it is possible of all the below


      Builders becoming bankrupt as they can't pay back debt
      Individuals particularly IT types & NRIs losing jobs & becoming bankrupt as they can't pay back debt.
      Some banks which fail to recover loans from builders & individuals may also go down under water.


      However there is one fundamental difference between India & US.

      In US everyone is a big fish......now all these big fishes are failing at once taking down the country.

      In India there are some big fishes, and at the same time many upcoming small fishes (start up companies, small & medium industries, smaller builders, upcoming private banks).....This is the difference. So even as big fishes fall in India as well, small fishes will catch the opportunity and use this crises to grow. This is why India will not go down like US, even if big fishes like PSU Banks, so called reputed builders, IT/family businesses go down.

      However there is one fundamental difference between India & US.

      In US everyone is a big fish......now all these big fishes are failing at once taking down the country.

      In India there are some big fishes, and at the same time many upcoming small fishes (start up companies, small & medium industries, smaller builders, upcoming private banks).....This is the difference. So even as big fishes fall in India as well, small fishes will catch the opportunity and use this crises to grow. This is why India will not go down like US, even if big fishes like PSU Banks, so called reputed builders, IT/family businesses go down.

      However there is one fundamental difference between India & US.

      In US everyone is a big fish......now all these big fishes are failing at once taking down the country.

      In India there are some big fishes, and at the same time many upcoming small fishes (start up companies, small & medium industries, smaller builders, upcoming private banks).....This is the difference. So even as big fishes fall in India as well, small fishes will catch the opportunity and use this crises to grow. This is why India will not go down like US, even if big fishes like PSU Banks, so called reputed builders, IT/family businesses go down.

      However there is one fundamental difference between India & US.

      In US everyone is a big fish......now all these big fishes are failing at once taking down the country.

      In India there are some big fishes, and at the same time many upcoming small fishes (start up companies, small & medium industries, smaller builders, upcoming private banks).....This is the difference. So even as big fishes fall in India as well, small fishes will catch the opportunity and use this crises to grow. This is why India will not go down like US, even if big fishes like PSU Banks, so called reputed builders, IT/family businesses go down.

      However there is one fundamental difference between India & US.

      In US everyone is a big fish......now all these big fishes are failing at once taking down the country.

      In India there are some big fishes, and at the same time many upcoming small fishes (start up companies, small & medium industries, smaller builders, upcoming private banks).....This is the difference. So even as big fishes fall in India as well, small fishes will catch the opportunity and use this crises to grow. This is why India will not go down like US, even if big fishes like PSU Banks, so called reputed builders, IT/family businesses go down.

      However there is one fundamental difference between India & US.

      In US everyone is a big fish......now all these big fishes are failing at once taking down the country.

      In India there are some big fishes, and at the same time many upcoming small fishes (start up companies, small & medium industries, smaller builders, upcoming private banks).....This is the difference. So even as big fishes fall in India as well, small fishes will catch the opportunity and use this crises to grow. This is why India will not go down like US, even if big fishes like PSU Banks, so called reputed builders, IT/family businesses go down.
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  • Well said.
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  • Subprime invalid in India

    Originally Posted by venkit
    We are always talking about the sub prime crisis which hit the US market and I am just wondering whether this will happen in India too.I always read from magazines that our indian banks are very safe as they lend only 80% of the house value.If the house value decreases 50% from the peak value and people(Who bought it in 2008 peak price) files for bankruptcy , what will happen to our banks?


    Any Ideas?


    Subprime is invalid in India due to the following reasons:

    a) Banks don't bundle their loans and sell them as CDOs in the market. There are refinancing mechanisms but not CDOs.

    b) CDS on CDOs are impossible since CDOs doesn't exist

    c) There is no AIG (or Lehman) to sell CDS to "owners and non-owners" of CDOs, thinking they can keep on getting only the premiums and never need to pay for defaulted CDOs. Assumption: Home owners never default on their home loans.

    d) Hence the question of "subprime" in India is invalid. If whatever you imagined happens, its not called "subprime" its normal default on loans.
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  • There are many differences ...

    Let us define what Sub-prime means first!

    It meant lending money to people who were too poor to take on this debt and who did not have free cash flow to service this debt. o, from the time the ink was drying on the agreement, the property was at risk!!!

    Second was the "innovations" created by the crooks - while the regulators were looking the other way - like NegAm loans where, to make the home "affordable", all kinds of risky methods were adopted to lower the EMI, hiding the fact that these would reset at a later date to come back and hit the borrower very hard!!!

    Now, all these would have been fine if prices were perenially rising at double-digits every year. When that stopped and reversed, the whole thing cascaded into a "crisis". So much so that even multi-million $$$ homes of prime borrowers have now become sub-prime because these became jobless and lost the ability to service this debt.

    So, the crux of the issue is the ability to service the debt, whatever the circumstances.

    India has been saved much of this pain due to some important reasons:

    1. Regulators (especially RBI) have watched the market like hawks and have warned banks to cool off on loans when their loan portfolio went RE heavy. This is the most important reason.

    2. Bankers too have been traditionally cautious and lent with enough margins and safeguards.

    3. Most importantly, job losses have been fairly light and this has allowed serviceability to remain fairly good

    4. Indians traditional cautiousness has ensured most have not borrowed and flipped multiple homes (this had started to get serious but by then the crisis had luckily hit).

    5. If people got into trouble, our society has avenues to relieve pressure by family and friends coming to help (in my opinion this hardly happens in the West, where the concept of family itself is in tatters).

    In general, I believe that, even though many houses and flats wil come to market in distress (and we will therefore see 50%+ fall in prices even if it is for a small time duration), we have avoided the crisis that has engulfed the West!

    Nevertheless, this crisis will have quite a serious effect on our economy for quite some time to come, putting pressure on our asset prices. So, build your cash reserves, bide your time to get bargain prices and then go in for the purchase at prices you may not see again!!! :D

    cheers
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  • Thank You

    Thanks a lot for all your reply.
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  • Friends,

    subprime is lending loans to people who have poor repayment capability taking huge risks.Though, Indian banks have been lending lavishly, The inherent nature of Indian real estate and strong sentiments of people to hold on to the property and arranging funds from all their sources in case of crisis would insulate the banks to an extent.

    However, if the job scenario continues to remain poor and market sentiments and confidence remain low, its inevitable that devaluation of assets would happen forcing banks to ask people to repay the difference or pledge additional assets as collateral.

    Please be reminded, Unlike U.S. the loans lended in india are "recourse" in nature and one cannot just walk away giving back the house.In case of a default, the lender can seize and sell the funded asset as well as the borrower's un-pledged assets or properties.

    My opinion, if RE market crashes, The pain will be greater than what U.S. is going through.In India banks wouldnt fail, but the debtors will.
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  • All your posts are informative.Thanks

    Just would like add another point here. Unlike US, No banks/FIs in India has securitised the revenues of these mortgages in multiple levels & issued numerous financial instruments. Many failed banks/FIs has 'invented' mortgage backed securities & retaining majority of those units with their SBUs hoping to get greater profits. When there is a crisis at the core level ie on repaying the mortgages...there is a obvious risk for the very principal lent ... and just need to forget about the revenues & the Fin Instruments floated with premiums. The banks, investors entered on the engineered Instruments have lost heavily & some have shut their doors.

    But as stated by other contributors, If the job trends continues with the prevailing one ,there are possibilities that we will have greater crisis.
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  • In India sub prime crisis is possible technically. Even in India mortgage instruments exist but are not understood. You might want to search for a Hindu Sunday magazine article earlier this year. It explains it well.
    However I dont expect the sub prime crisis to happen in India in the next 10-15years.
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  • Thanks a lot for all of you for these information posts.
    I have also a question about 'sub prime crisis'
    This made me very clear.
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  • It is worth reviewing this.. Probably we will be in Crisis i don't know whether it will be a sub prime...
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  • Is bad loan menace at United Bank of India a cover-up after serious lapses? - The Economic Times

    Atleast in US they name crisis as sub-prime,etc.. In India we would not even now.. This is the best example.... Does anyone has confidence in how Indian Banks are run... with few exceptions
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  • Originally Posted by defu22
    Is bad loan menace at United Bank of India a cover-up after serious lapses? - The Economic Times

    Atleast in US they name crisis as sub-prime,etc.. In India we would not even now.. This is the best example.... Does anyone has confidence in how Indian Banks are run... with few exceptions


    I think it is the other way around - Most of the Indian banks are well run... with a few exceptions. I have attached herewith the capital adequacy ratios of our banks during 2008. Notice how healthy the main stream players were during the crisis year. The now infamous United Bank of India is listed in the worst quadrant possible.

    PS: defu paavam crisis-ku wait panni wait panni nonthu poyirukaar pola...seekiram yaravathu ithu sub-prime crisis nu per vachidunga pa...illati defu azhuthuruvaar pola irukku :D
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  • Originally Posted by AK001
    I think it is the other way around - Most of the Indian banks are well run... with a few exceptions.

    PS: defu paavam crisis-ku wait panni wait panni nonthu poyirukaar pola...seekiram yaravathu ithu sub-prime crisis nu per vachidunga pa...illati defu azhuthuruvaar pola irukku :D


    I agree.

    Indian banking rules are very consumer unfriendly and highly inflexible in favour of banks.

    The consumers have limited recourse.

    The Indian banks slugg Indian consumers and get away with it.

    Switching lenders, Top up, redraw, offset account etc or in its infancy or not available to consumers.

    Waiver of exit fee is one first step forward but plenty more needs to be done.


    Indian banks are safe & stable when it comes to consumer lending.

    What makes Indian banks vulnerable is commercial exposure (builders & business lending) that are underlined by corrupt practices.

    If an Indian bank fails - it will not be because of personal Consumer banking products but will be due to corporate deals induced by corruption.

    Corruption is rampant among senior PS Bank officials when it comes to corporate financing & lending.

    When it comes to private consumers, Indian banks have the upper hand and consumers are in the loosing side.
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