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Minaketan Dash1
Sasikanta Tripathy2
ABSTRACT
Credit Crisis began in August 2007, when interbank lending markets in the US, UK and Europe
began to seize up. These markets had rarely received much public attention, and it was not
immediately obvious why this should have happened. Also the word subprime crisis itself refers to
all subprime reasons which led this crisis. The result is called as liquidity crunch crisis. As all
country are affected by this crisis Indian financial market has also suffered a lot. This paper has
given a birds’ eye view about that Credit Crisis which has led to a major and profound expansion as
well as alteration in the Indian financial system and its risks and uncertainties. It may well come to
be seen as a defining characteristic of early 21st Century market systems as all country are adopting
some new policy towards their economy to compete with other in the globalised era. In this paper
the authors demystified about the post performance of secondary market after the change in
financial system by taking Mutual fund in particular and Insurance products, Stocks return in
general. Also in this paper the authors to be highlight about the causes and consequences of the
changes in financial system and risks as well as opportunity for future. At last it is concluded by
highlighting, how this change in financial system will lead towards the upliftment of secondary
market as well as the economic development of the country by avoiding this liquidity crunch crisis
as remedies.
Key words - Financial system, credit crunch, mutual fund, NAV, secondary market, economic
development.
1
MBA (2008-10), DRIEMS Business School, Cuttack- 754022, Email: dashminaketan2@gmail.com
Mob: +919777122126
2
Lecturer- Finance & Accounting, DRIEMS Business School, Cuttack- 754022,
Email:sk.tripathy@sify.com, Mob: +919337026846
1.0 Introduction: The celebrations will be colorless for the people who had invested their
hard earn money in Indian stock market. The market that was making new highs in the
year 2006 is making new lows on every other day. It is very difficult time for the retail
investor, institutional player and marginal player. As the Asian and US markets fell to 3-
5 per cent and dollar sank to record low against euro and Swiss, Franc, Indian stock
market could not escape from the blow. When U.S. house price began to decline in
2006-07, refinancing became more difficult and as adjustable-rate mortgages began
to reset at higher rates, mortgage delinquencies soared. Securities backed with sub
prime mortgages, widely held by financial firms, lost most of their value. The result
has been a large decline in the capital of many banks and USA government
sponsored enterprises, tightening credit around the world. The crisis began with the
bursting of the United States housing bubble which peaked in approximately 2005–2006.
High default rates on "sub prime" and adjustable rate mortgages (ARM) began to
increase quickly thereafter. This effect has spread in all country like a wildfire partially
or fully. The US sub-prime mortgage crisis has impacted India in a moderate way. Our
assessment is that impact on India is second order impact and a moderate impact. The
Government would take every possible step to contain inflation to safe the country as
much as possible. In this globalised world individual nations have a limited influence on
their economies. The speed with which we bid goodbye to the global slowdown will
depend on the rate of change of global aggregate demand and to fulfill this objective
the secondary market is playing a pivotal role for the country where the each type of
securities are one unity of player.
3.0 METHODOLOGY
This paper enlightens the impact of credit crisis on secondary market like mutual fund and
insurance sector particularly and other sector partially by taking the performance of secondary
market in to consideration and this crisis leads to the change in Indian financial system by following
some new policy as opportunity. This study is an descriptive study.
• The data are collected here from secondary sources like magazine, newspaper, journal,
articles and websites.
By the autumn of 2008 the lack of trust in the financial sector was sufficiently great to almost
completely seize up credit flows and threaten the stability of the world financial system. The
financial system was in effect broken, and by October 2008 a coordinated action by large numbers
of central banks and countries was needed to stabilize it. This involved giving widespread promises
of state protection to depositors, large injections of capital to banks, vast liquidity supplies to
gummed-up financial market and increasing guarantees for all sorts of short term bond issues. Most
recently the Crisis moved into the realm of sovereign default, as countries such Hungary and
Ukraine struggle to refinance foreign currency loans, bringing in international agencies such as the
IMF and the World Bank to provide assistance. At the same time the Credit Crisis has spawned an
international economic downturn, and in some cases recession, the depth and severity of which
cannot at the moment be estimated. No doubt we can say not only one sector is affected by this
crisis but also all commodity market, equity market and insurance sector also.
Stock markets crashed world over as a result of the financial crisis. The share prices quoted in most
of the stock exchanges are now less than half of what were a few months back. The stock markets
has fallen around 60% from its peak level in January, 2008. Since the foreign institutional investors,
who hold 35% ($ 71 billion) of Indian stocks, are still in a flight mood, there is scope for the market
to fall some more. There are some key differences between the Indian and other markets which have
declined. In the US and Europe, there is a problem in the real sector. There the economies are
slowing, the financial sector is in a mess because of bad loans and the financial sector crisis has
passed on to the stock markets. In India, it is the other way round. Still Indian economy is the
second fastest growing and the bank balance sheets are sound, but the stock markets have collapsed
because of the flight of foreign funds. Crude oil price fell substantially during the last few weeks
due to fears of a decline in global fuel demand. The Organization of Petrolium Exporting Countries
(OPEC) has cut its 2009 demand forecast because of worsening conditions in financial markets.
Gold price rose due to its appeal as a haven asset. Almost all other metals like silver, copper etc.
declined on worries over economy. The price of wheat, pepper, rubber etc. also fell due to demand
worries. Commodity stocks declined substantially and still remain under pressure. The global
recession will reduce the volume of trade between different countries of the world. It may also
affect the profitability of companies and some professionals and employees will loose their jobs.
Already there are indications that the IT companies and Airways are planning to trim the number of
employees. Consumer and Investment demand will also decline, as the world economy slide into
recession.
5.0 IMPACT ON MUTUAL FUND
As we know before two or three years mutual fund investment has coming as an emerging trend of
investment in secondary market but due to this crisis it is also affected. The number of AMCs has
come to bottom in the year of 2008-09, also the NAVs is also decreasing. In APRIL 2008 Average
assets under management of the 35 mutual fund houses in the country cross the Rs. 6 lakh crore
mark. In MAY 30 three real estate companies default on payments of about Rs. 500-600 crore to
three mutual funds. The funds accept new debt paper with higher interest rates. In JUNE 30 large
investors begin to withdraw money from liquid and short-term debt funds to pay advance tax. In
SEPTEMBER 30 redemptions in the month total to about Rs. 46,000 crore Inflows completely dry
up, pushing several debt funds to the brink. AMFI chief A.P. Kurian meets SEBI officials. Says
MFs need liquidity support. In OCTOBER 30 the average Assets managed by the mutual fund
industry falls below the Rs. 5 lakh crore mark and end at Rs. 4.31 lakh crore. In NOVEMBER 21
AMFI Circulates recommendations of the core committee on debt schemes headed by Nilesh Shah
of Prudential ICICI. In DECEMBER SEBI bans premature withdrawals in close-ended schemes;
mandates investment in matching tenure.
Sector funds: • ICICI Pru FMCG Fund (G) • ICICI Pru FMCG Fund (G)
down 0.87% up 2.30%
• Franklin FMCG Fund (G) • Sahara Banking and
down 0.92% Financial Services Fund (G)
• Reliance Pharma Fund (G) up 2.17%
• Religare Banking Fund -
down 1.32%
Regular Plan (G) up 1.99%
From this data we can analyze about the performance of some mutual fund scheme after crisis.
Though all scheme are not performing well but still some fund which are positively related to the
changing financial system are performing well, like balanced fund and tax saving fund are most
performer in the post crisis market. Here also some data regarding the NAVs are given as
calculated on 30 July 2009 which we can compare with the NAVs of 2006 to 07,than we can
conclude that the current NAVs are more than the previous.
Highest rated funds
Percentage Return
NAV
Fund Nav Date
3 Months 1 Year 3 Year
Stock markets crashed world over as a result of the financial crisis. The share prices quoted in most
of the stock exchanges are now less than half of what were a few months back. The stock markets
has fallen around 60% from its peak level in January, 2008. Since the foreign institutional investors,
who hold 35% ($ 71 billion) of Indian stocks, are still in a flight mood, there is scope for the market
to fall some more. There are some key differences between the Indian and other markets which have
declined. In the US and Europe, there is a problem in the real sector. There the economies are
slowing, the financial sector is in a mess because of bad loans and the financial sector crisis has
passed on to the stock markets. In India, it is the other way round. Still Indian economy is the
second fastest growing and the bank balance sheets are sound, but the stock markets have collapsed
because of the flight of foreign funds. Crude oil price fell substantially during the last few weeks
due to fears of a decline in global fuel demand. The Organization of Petrolium Exporting Countries
(OPEC) has cut its 2009 demand forecast because of worsening conditions in financial markets.
Gold price rose due to its appeal as a haven asset. Almost all other metals like silver, copper etc.
declined on worries over economy. The price of wheat, pepper, rubber etc. also fell due to demand
worries. Commodity stocks declined substantially and still remain under pressure. The global
recession will reduce the volume of trade between different countries of the world. It may also
affect the profitability of companies and some professionals and employees will loose their jobs.
Already there are indications that the IT companies and Airways are planning to trim the number of
employees. Consumer and Investment demand will also decline, as the world economy slide into
recession.
Although this crisis is an threat for Indian economy still there are so many opportunity for further
development. Because so many changes are occurring in the present scenario which are discussed
bellow.
As the market regulator SEBI has done some changes regarding the rules and regulation of
secondary market which are given bellow
Relevant extract of the SEBI circular released on June 30, 2009 (SEBI/IMD/CIR No. 4/168230/09)
is as follows:
'In order to empower the investors in deciding the commission paid to distributors in accordance
with the level of service received, to bring about more transparency in payment of commissions and
to incentivize long term investment, it has been decided that:
The scheme application forms shall carry a suitable disclosure to the effect that the upfront
commission to distributors will be paid by the investor directly to the distributor, based on his
assessment of various factors including the service rendered by the distributor of the exit load or
CDSC charged to the investor, a maximum of 1% of the redemption proceeds shall be maintained in
a separate account which can be used by the AMC to pay commissions to the distributor and to take
care of other marketing and selling expenses. Any balance shall be credited to the scheme
immediately.
The distributors should disclose all the commissions (in the form of trail commission or any other
mode) payable to them for the different competing schemes of various mutual funds from amongst
which the scheme is being recommended to the investor
This circular shall be applicable for : Investments in mutual fund schemes (including additional
purchases and switch-in to a scheme from other schemes) with effect from August 1, 2009
Redemptions from mutual fund schemes (including switch-out from other schemes) with effect
from August 1, 2009New mutual fund schemes launched on and after August 1, 2009; and
Systematic Investment Plans (SIPs) registered on or after August 1, 2009'.
The new system will help retail investors whose IPO application money is often blocked
for weeks even when they are not allotted shares.
After the crisis government has been taking so many steps to move towards recovery like change in
inflation rate. Now a day’s even if it is negative for last 13 weeks that is (-0.12), which is the
headache in every department. But still in spite of this fall in (WPI) the prices of consumer goods
are so high. This is one type of change in financial system.
The guide lines is not only limited for domestic investor but also for foreign investor as foreign
capital is playing a pivotal role for current recovery. The SEBI must also be congratulated for
having played a calibrated role in managing the flow of money from abroad. The promoters are now
allowed to increase their holding in their companies up to 75% through creeping acquisition route.
Earlier restrictions prohibited them from acquiring more than 55% of the company’s equity.
Abundant caution exercised by RBI and going slow on opening up new complex financial products
also helped insulate our banks from a major financial crisis. The investment amount has also
increased for both FDI and FIIs, specially in case of insurance sector 26% is allowed. FDI up to
100% is allowed subject to the condition that such companies would divest 26% of their equity in
favor of Indian public in 5 years, if these companies are listed in other parts of the world.
While it is uncertain how prolonged and deep the recession will be, it can be said with certainty that
demand, and subsequently growth, will return. It is therefore imperative that, when this happens,
policymakers have a recovery plan in place. This plan should act to foster growth in the short-term
and lay the foundations for economic stability in the long-term. There is currently a high level of
activity amongst the business support community with a key focus on ensuring businesses survive
the downturn. A challenging and critical focus on the basics, or fundamentals of businesses, is
likely to give local companies the best chance of survival over the next year. After the overall study
here the author has suggested that though this crisis is a challenge for India still at the same time
there are so many opportunity to get benefit which we can say as change in Indian financial system
like different changes has occurred .The changes of this system will put its effect on coming future.
The growth of the public sector and the narrow reliance on financial services for growth needs to
change, with manufacturers and exporters having particular attention paid to them. After watching
so many positive points we Indians can ourselves that we are quite in a safer place in comparison to
many developed countries economy. To conclude lets hope for a stronger India by rectifying all its
economic weaknesses after this so called financial crunch.
BIBLIOGRAPHY
Journal/Magazine/News Paper:
1.Srusti management review, vol -2,issue- 1,January – June 2009, page27 to 36.
Articles:
1. Colin Lawson, Finance Department, November 24th – 25th 2008. “THE IMPACT OF THE
CREDIT CRUNCH AND WORLD ECONOMIC SLOWDOWN ON RISK AND UNCERTAINTY
IN PUBLIC FINANCE”.
2. “NAVS ADVANCE SHARPLY AS MARKETS END STRONG” , Published on Fri, Aug 21,
2009 at 23:32 .
3. THE POSITIVE IMPACTS OF FINANCIAL CRISIS ON INDIAN ECONOMY, Aug 10th, 2009.
Websites:
1. www.yahooanswer.com
2. www.wikipedia.com
3. www.rediffmail.com
4. www.abalert.com
5. www.google.com
6. www.jri.org