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Project report
On
Anchal Singla
CONTENTS
Introduction
Meaning
Definition
Types of global financial crisis
Causes of global financial crisis
Global financial crisis (2007-2008)
Background of crisis
Origin and development of crisis
Factors affecting Indian economy during the crisis
Research and methodology
Objectives of study
Method of data collection
Limitations of study
Meaning
Definitions
The term global financial crisis is applied broadly to a variety of situation in which
some financial asset suddenly loses a large part of their nominal value. in the 19th
and the early 20th centuries many financial crises were associated with banking
panics and many recessions coincided with these panics. other situation that are often
called financial crisis include stock market crashes, and the bursting of other
financial bubbles, currencies crisis, and sovereign default.
BANKING CRISIS
When a bank suffers a sudden rush of withdrawals by depositors, this is called bank
run. Since banks lend out most of the cash they receive in deposit, it is difficult for
them to quickly pay back all deposit if these are suddenly demanded, so a run renders
the bank insolvent, causing customers to lose their deposit, to the extent that they are
not covered by deposit insurance. Examples of bank run include the run on the bank
of US in 1931 and run of northern rock in 2007. These crises generally occurred
after period of risky lending’s.
CURRENCY CRISIS
When a country that maintains a fixed exchange, rate is suddenly forced to devalue
it currency due to accruing an unsustainable current account deficit, this is called
currency crisis or balance of payments crisis, when a country fails to pay back its
sovereign debt, this is called sovereign default
Some economists argue that many recession have been in large part by financial
crisis. One important example is a great depression, which was preceded in many
countries by bank runs and stock market crashes. The subprime mortgage crisis and
the bursting of other real estate bubble around the world also led the recession in the
USA and number of other countries in late 2008 and 2009.
CAUSES OF GLOBAL FINANCIAL CRISIS
This include forcing loan underwriters to repurchase loans which they know are
defective. Most of these malpractices have been associated with large companies.
POPULATION
CONTAGION
It refers to the idea that financial crisis may spread from one institution to other, as
when a bank run spread from a few banks to many others, or from one country to
another.
REGULATORY FAILURES
UNSCRUPLOUS LENDING PRACTICES
UNCERTAINITY AND HERD BEHAVIOUR
Financial crisis of some kind or the other occur virtually in every decade and in
various location around the world. Each financial crisis is unique, yet each bear some
resemblance to others. In general, crises have been generated by factors such as
excessive leverage of debt, credit booms, miscalculations of risk and deregulation
without sufficient market monitoring.
Sub-prime mortgage
The global economic crisis has originated in the sub- prime mortgage crisis in USA
in 2007. With easy availability of credit at low interest rates, real estate prices in US
had been rising rapidly since the late 1990s and investment in housing had assured
financial return. The boom in housing sector made both bank and home buyers
believe that the price of real estate would keep going on. Housing finance seemed a
very safe bet. Banks went out of their way to lend to sub-prime borrowers who had
no collateral assets. Low income individuals who took out risky sub-prime
mortgages were often unaware of the known risks inherent in such mortgages. While
on the one hand, they were ever keen to become house-owners, on the other, they
were offered easy loans without having any regard to the fact that they were not in a
position to refinance their mortgages in the event of the crisis. All this was fine as
long as housing prices were rising. But the housing bubble burst in 2007. Home
prices fell between 20 per cent and 35 per cent from their peak.
Securitization and repackaging of loan
An interesting aspect of the crisis emanated from the fact that the banks/ lenders or
the mortgage originators that sold sub-prime housing loans did not hold onto them.
They sold them to other banks and investors through a process called securitization
In the context of the boom in the housing sector, the lenders enticed the naive, with
poor credit histories, to borrow in the swelling sub-prime mortgage market. They
originated and sold poorly underwritten loans without demanding appropriate
documentation or performing adequate due diligence and passed the risks along to
investors and securitizes without accepting responsibility for subsequent defaults.
Excessive leverage
The final problem come from excessive leverage. Investors bought mortgage backed
securities by borrowing. Some wall street banks had borrowed 40 times more than
they were worth. The ever-increased leverage strength of investment banks
epitomized the deregulatory regime. Leverage is a double-edged sword. It is life
blood of business and economic growth when used wisely and moderately.
Misleading judgements of credit rating organizations
The role of credit rating organizations in creating an artificial sense of security
through complex procedure of grading had contributed to the financial mess.
DEFLATIONARY SPIRAL
FALLING
FALLING PRICES
DEMAND
BANKRUPTCIES
The above diagram shows that how falling prices lead to debt default which further
result in bankruptcies, which then became a reason for lay off and wage reduction,
which led to falling demand and thus deflationary spiral keep moving.
FACTORS AFFECTING INDIAN ECONOMY DURING THE CRISIS
The impact of the crisis on the Indian economy has been studied here forth and
the study is chiefly focused on 4 major factors which affect Indian economy as
a whole. These are: -
The main source of Indian prosperity had been FDI. foreign companies were
bringing truck-loads of dollars and euros to get a piece of pie of Indian prosperity.
India is in no position to ever return this money because it has used the same in
subsidizing the petroleum product and building low quality infrastructure. The
initial stage of crisis witnessed rising interest rates tend to have negative impact
on global liquidity.
Even though there are threats for Indian economy due to liquidity crunch, they
are all oriented for long terms. the Indian economy can rely on its piggy bank to
address its short-term liquidity demand as the government is taking measures to
channelize saving that are lying unused in physical asset into the more productive
financial sector.
the IT giants which had Lehman brothers and Merrill lynch as their clients are TCS,
WIPRO, SATYAM, AND INFOSYS TECHNOLOGIES. HCL escape the loss to a
great extent because neither Lehman brothers nor Merrill lynch was its client.
IMPACT ON FINANCIAL MARKETS
The out flow of foreign institutional investment from the equity market has been the
most immediate effect of crisis on India. FII have been the major seller in Indian
markets as they need to retrench asset in order to cover losses in their home
countries, thus being forced to seek haven of safety in an uncertain environment.
The pullout of $11.1 billion during crisis by FIIs triggered a collapse in stock price.
The SENSEX fell to less than 10,000 by October 17,2008. This also led to
depreciation of rupee. While this depreciation may be good for Indian exporters
which have been adversely affected by the slowdown in global markets. The
financial crisis has reinstated the notion that no country in this globalized world can
exist as an island, insulated from twists and turns of economy.
RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problems.
Research in common sense refers to a search for knowledge. Infact, research is a
scientific investigation. It can be defined as a scientific and systematic search for
gaining information and knowledge on a topic. Research is an academic activity and
as such the term should be used in technical sense. It is actually a journey of
discovery. The primary aim for research is discovery, interpretation and
development for system and methods for the advancement of human knowledge.
The study is both explanatory and descriptive in nature. Descriptive research design
has been used to examine the objectives. The exploratory part of the study is based
on literature available in the market on this particular issue in the form of books,
journal articles, research studies and websites. Data are obtained from the websites
of Reserve Bank of India etc.
Objectives of Study
The impact of global crisis on Indian economy is mainly through three distinct
reasons viz, the financial sector, exports and exchange rates. In this one main
reason is through the financial sector. It includes banking sectors, equity markets,
external borrowing and remittances.
The project report examines the following various objectives, which are as follow:
-
To examine the impact of the global financial crisis in India’s major sectors
To identify different reasons for global financial crisis.
To study the impact of crisis on FIIs flow and Indian economy.
Methods of Data Collection
The data for the study has been collected from the secondary sources. Secondary
data had been collected from various boots and websites. The study covers the
thought and writing of various author in the stream of industry, academics and
research. The books and websites have been referred in bibliography.
Limitations of Study
The current project discusses key issues of Indian economy that cropped up as the
global economy is swaying in its worst economic downturn. Though the major
factors have been discussed, yet there more issues which have not been detailed due
to time constraints. As the economies across the globe try to protect themselves from
the hazard of the crisis, they were trying to protect themselves from the hazards of
the crisis, they were trying to maintain domestic demand and protect their domestic
industry from foreign invasion, lest their own economy might destabilize.
The accuracy and reliability of data collected may vary slightly and opinion biasness
may exist
Income flow
70000
60000
50000
values in crores
40000
30000
20000
10000
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
years
The above table and graph shows that income flow was rising since
2001. But it starts declining during 2009-2010.
Table 2: - Foreign investment in India during (2001-2010)
Year Value in crores %change
foreign investment
1200000
1000000
800000
values in crorees
600000
400000
200000
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
years
The above graph and table shows that foreign investment which was
increasing since 2001, start declining during the crisis by 31.82%.
1400
values in '000 crores
1200
1000
800
600
400
200
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
years
export import
The above table and graph shows that export and import which was on
an increasing trend since 2001, experience no growth during the crisis.
2005-06 15052
2006-07 36606
2007-08 92164
2008-09 -20080
2009-10 9533
2010-11 7030 Source: Reserve
bank of India data,
www.rbi.org
80000
60000
values in US $ million
36606
40000
15052
20000
0
2005-06 2006-07 2007-08 2008-09
-20080
-20000
-40000
years
As the RBI data indicates the overall balance of bop has been improving since
2005-06. but it was shocking that during the year2008-09, the overall BOP
balance turned negative. It shows that global financial crisis severely hit the
flow of capital into the country
Table 5: - GDP GROWTHRATE OF INDIAN ECONOMY (2003-2011)
Year Growth rate
2003-04 8.5
2004-05 7.5
2005-06 9.5
2006-07 9.6
2007-08 9.3
2009-10 8.0
2010-11 8.6
Source: Reserve bank of India data, www.rbi.org
10
8
growth rate
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
year
Above table present the GDP rate. however, the crisis affected the internal as
well as the external sectors of the economy. that is the GDP growth rate
declined from 9.3% to 6.8%.
THE IMPACT OF CRISIS ON MAJOR SECTORS IN INDIA
Information technology
With the global financial system getting trapped in the quick sand, there is
uncertainty over the India’s software industry. The US banks have huge running
relation with Indian software companies. A rough estimate suggests at least a
minimum of 30,000 Indian jobs could be impacted immediately in the wake of
happening in US. Approximately 60% of indianite sector revenue are from US
financial corporations like Goldman sachs, Washington mutual, Lehman
brothers. the top 5 Indian plyers account for 46 %of the it industry revenues.
The revenues contribution from US clients is approximately 58%. About 30% of
the industry revenues are estimated to be from financial services. India’s
emergence as a globally competitive supplier of software and services have
attracted worldwide attention. the software and services sector not only
contributed significantly to the export earnings and GDP but also emerges as a
major source of employment creation in the country. Besides the information
technology sector has served as a fertile ground for the growth of new
entrepreneur ideas with innovative corporate practices and has been instrumental
in reversing the brain drain, raising India’s brand equity and attracting FDI
leading to pother associated benefit. Economists have noted that services in
general are cheaper in developing countries than in developed countries.
With the recent emergence of BPO delivered over the internet, the IT enabled
services are the major source of employment. The impact of crisis on IT sector
can be gauged from the fact that approximately 61%of Indian IT sector revenue
were from client in US. the US financial services and insurance sector was one
of the earliest adopter of trend of outsourcing along with India’s biggest
outsourcing firms. Large outsourcing chunk were created by the US BFSI
(banking, financial services, and insurance) which made the Indian IT player
learn from their experience. Price negotiations and increased commitment on the
services level raised the share of US financial services revenue as a percentage
of total revenue for the top 3 Indian player from25% to 38% between 1999 and
2008
Table 6: - Indian software services including IT and BPO (2003-2008)
Year Values in us billion $
2003-04 12.9
2004-05 17.7
2005-06 23.6
2006-07 31.3
2007-08 40.3
30
23.6
25
20 17.7
15 12.9
10
5
0
2003-04 2004-05 2005-06 2006-07 2007-08
year
The above table and graph shows that Indian IT and BPO sector
experience a constant growth since 2003, which even remain continue
during the crisis.
IMPACT ON INDIAN BANKING SECTOR
One of the feature of the crisis has been the lack of perceived contagion being felt
by the banking system in emerging economies especially in Asia. The Indian
banking system also has not experienced any contagion, similar to its peer in rest
of the Asia. the Indian system is not directly exposed to subprime mortgage asset.
Indian banks were well regulated and capitalized. However, a few Indian banks
have invested in collateralized debt obligations(CDOs) which had a few underlying
entities with subprime exposure.
80,000.00
70,000.00
NET INVESTMENTS
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
YEARS
The influence of FIIs has seen a rising trend in Indian equity market. The table
clearly reveals that net FIIs flow have been positive except for the year
2008.FIIs continued to be negative in 2009, but gain momentum in the end of
2009. The crisis faced by USA led to major companies to suffer heavy losses.
hence the impact is highly visible in falling interest of FIIs.
Table 8: - Trend of return of BSE during the period 2000-2009
Year Close(cr.)
2009 17,464.81
2008 9,647.31
2007 20,286.99
2006 13,786.91
2005 9,397.93
2004 6,602.69
2003 5,838.96
2002 3,377.28
2001 3,262.33
2000 3,972.12
SOURCE: - www.indiainfoline.com
20,000.00
15,000.00
close
10,000.00
5,000.00
0.00
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
year
The above table clearly shows that the gross sales exceeded the gross purchase
that of FIIs in the Indian equity market during the year 2008. This has a direct
on Sensex and it went down to 9,467 during 2008.
BAIL OUT PACAKAGES AND RBI INITIATIVES
Financial market in US and around the world are in state of dire emergency and they
require urgent and decisive action. Some key part of the credit market was on the
verge of a deadlock, resulting not just in collapse of major financial institutions but
also in credit disruption that has been severely weakening the long-term prospects
of non-financial companies.
Thera was a need of swift action to deal with the ‘toxic’ mortgage backed securities
that has been causing credit market to seize up. The federal govt. decision to support
the system have resulted in significant new commitments with the US govt. having
pledged more than $11.6 trillion on behalf of American tax payers over the past 20
months, far in excess of aggregate of several bailout packages announced in past.
The US treasury also added $200 billion to support its commitment for Fannie mac
and Freddie Mac, the country’s two largest mortgage finance companies. The
government of china had also announced a financial package of US $585 billion to
pump prime the economy by making huge public investment and by providing
subsidies to protect domestic economy.
As the contagion of crisis spread towards India, the government and the RBI
responded to the challenge in close coordination and consultation. The RBI policy
response was to keep the domestic money and the credit market functioning
normally and see that liquidity stress did not trigger solvency cascades.
Unconventional measures taken by RBI are: -
Indian banks were given Rupees Dollar swap facility to help them manage
their short-term fund requirements
An exclusive finance window was made available to support NBFCs
The lendable resources to apex institutions was expanded for refinancing.
CONCLUSION
India witnessed a mixed result with respect to its growth prospect in the wake of
global economic downturn, through the monetary, financial and real channels-all of
which are coming on the top of the already expected cyclical moderation in growth.
India’s household and corporate saving fuel the domestic economy at the time
when global liquidity crunch is aggravating the economic downturn in the other
parts of globe.
In brief, the impact of the crisis has been deeper than anticipated earlier although
less severe than in emerging market economies. the extent of impact on India should
have been far less keeping in view the fact that our financial sector has had no direct
exposure to toxic assets outsides and its off-balance sheet activities have been
limited. besides India’s merchandise export at less than 15% of GDP, are relatively
modest. Despite these positive factors, the crisis hit India has underscored the rising
trade in goods and services and financial integration with rest of the world.
So, overall the Indian economic outlook was moved. there is evidence of economic
activity slowdown. Real GDP growth has moderated in the first half of 2008-09.
industrial activity particularly in manufacturing and infrastructure sector is
decelerating. The services sector too which has been our prime growth engine for
last 5 years is slowing mainly in construction, transport and communications. The
financial crisis in the advanced economies and the slowdown in these economies
have some adverse impact in the IT sector.
BIBLIORGAPHY
Wikipedia.com
Contemporary issues in commerce -kalyani publications
www.rbi.org
www.indiainfoline.com