The US financial crisis is spreading globally..Now Britain is preparing a package for a big bail out to provide stability in the financial system. The Japanese market, Ireland, Iceland, asian markets, all emerging countries BRIc are keeping their hands crossed watching the developments cautiously and closely...
Why this happened?
Below are may be reasons,
Greedy investment banking companies...
Unregulated US Financial Market..
Lethargic response and monitoring by the Federal Reserve...
High handed economical behaviour of united states againcst major countries...
More importantly the un-necessary IRAG war.
The widely accepted reason for the crisis is subprime mortgauge losses.. There are 2 kinds of customers - credit worthy and risky customers(customers who has bad credit history). Buying a home is always considered as a necessity across the globe. More importantly investing in land has not let anyone down.,..keeping this in mind and demand for home loans, the banks in US started giving loans to customers for the period of 15 to 20 years...
so far so good..
The best brains in the financial industry, the investment banking companies which is highly unregulated in US financial market started looking at this avenue to generate revenue without any effort. IBc started buying their loan instruments from banks and started selling the loan into smaller pieces and sold it to potential clients across the globe. In return of this the potential investors (like japanese pension finds, international banks etc) gave fatty commision to the IBc. The banks also shared their profits with the investment companies which they got as the EMI from the customer every month. The IBc will then distribute the money to the investors of the loan instrument. To convince and sell this instrument to investors, the IBcs roped in major insurance providers like AIG to provide insurance to the credit swaps.
What is the advantage for the banks to sell this instruments??
The bank when it offers a loan to a customer it locks its money for a longer duration.If the customer buys a 50 lakh property, if bank provides loan for him for 40 -50 lakhs the money is locked to one customer by bank for the period of 20 years.The customer may repay the loan in eMI's with interest. When it sells the loan to IBc's it gets it money immdly. The only thing is it has to share the profit wiht the buyer.
What went wrong??
Banks offlate went agressive in offering loans to the customers especially to the sub prime customers...without checking the credibility of the people which led to major default numbers. As the EMI's went pending it couldnt pay its credit to the IBc'. As more number of defaults went high the insurance companies couldnt manage claims. It ate their treasury. Investors across the globe saw ther investments went for a toss. To offset this loss, they started to pull out all their strategic investments across the globe which resulted in markets crash across economies.
What is in store for India?
When FII's start pulling out their investments in various companies and stock markets, the market will crash. Thats already happening. As the FII's inflow gets reduced there will be major demand for credit for industries to perform, as a result the companies will post poor earnings which inturn affect the growth rate of the economy.
Lesson for india
The Reserve bank of india should monitor the indian financial system continuosly and regulate the banking system not to indulge in credit swaps to keep the sentiment of the growth rate positive.
Cheers..
No comments:
Post a Comment