CBM Project: Subprime Crisis in US and lessons to be learnt for Indian Banks

Submitted By: Group 2, Section A |Aditi Roy PGP26260 |Ajay Maurya PGP26193|Esha Mehta PGP26278 |Loveleen PGP26285 |Vineet Jain PGP26316 |Vineet Singh PGP26318 |

Background & Scope of Work

Subprime crisis started in mid 2007 when US banks started lending money to people with low credit worthiness. The condition worsened with the securitization of the home loans i.e. converting the home loans into securities which guaranteed a certain rate of interest on them. The securities which had risky debt behind them were sold to the institutional investors. With a slowdown in US economy, high interest rates, rising inflation, the subprime home owners defaulted on their loans further reducing the value of the securities the big institutions were selling. To make up for the losses, the securities were sold in other markets across globe leading to a systematic failure. Many lessons can be learned from the recent subprime crisis. Those lessons have not been systematically addressed, especially with respect to the Indian Banking. This may be because everyone has been busy with fighting the fire. India although was quite isolated from the US mortgage market, still had to face shaky impacts through the financial channel, real channel and the confidence channel. The Indian Banks had little exposure to the US market couple with the sound and conservative pillars on which they lie, were able to save themselves from any catastrophe. But they were also swept in the booming economy spirit and went into a reckless lending mode. There may be a possibility of a financial bubble bursting in the Indian Retail Lending market if enough care is not taken. It is only prudent for Indian Banks to take a wise look at the recent crisis and incorporate the lessons for survival in the future. Objectives To determine the key underlying factors responsible for the US Subprime Crisis To understand the impact of the crisis on the Indian Banking system and economy To study the response of the Indian Banking system to the crisis and understand the reasons behind their limited exposure to the crisis To incorporate the key lessons to be learnt from the US Subprime crisis To identify the key areas of risk in the Indian Banking space and the methods used to measure the same. To prepare a list of recommendations for the Indian Banking system to avoid such a crisis in future

Research Questions & Methodology What went wrong in the US banking system? What role was played by CDOs and other innovative financial instruments in the financial crisis? Determining the impact of the subprime crisis on the Indian banking system? Analysis of key performance indicators of major banks. Fiscal and monetary policies of RBI: How can the Indian financial sector completely avoid such crisis? Analysis of key economic indicators for India during the crisis : Inflation, GDP, Interest Rates, FDI, FII, Credit Growth, Stock market , Mortgage Market, Industrial Growth To measure the key sources and amount of exposure on Indian banks to US sub-prime crisis. To understand the effectiveness of current credit models, rating agencies in assessing the credit worthiness of a borrower. How to increase the efficiency of the Indian Banking system? How to deal with derivatives and exotic financial products/services being offered by financial institutions? How much of exposure should banks be allowed to have to these products?

References News articles retrieved from Business Standard, ET, The Hindu, Livemint, FE, WSJ, Reuters etc. Research reports from CRISIL, IMF, Datamonitor, RBI, World Bank, Federal Bank Reserve etc