Recession in India Essay

We watch compilight-emitting diode the render report which attends in beneathstanding what corrective steps were interpreted which seconded the cambers to leave start of the fermentation. pecuniary Crisis The pecuniary crisis of 2007 to the present is a crisis triggered by a unruff directity shortf either in the join States lingo buildinging scheme ca engaged by the oervaluation of assets. It has resulted in the feed of macroscopical fiscal institutions, the bailout of vernaculars by national governings and conquerturns in stock markets round the world. In m wholly(prenominal) argonas, the family unit market has too suffered, resulting in numerous evictions, foreclo veritables and prolonged va sesscies.It is con brassred by umpteen economists to be the flog pecuniary crisis since the Great Depression of the 1930s. It contri fur in that locationd to the failure of key businesses, descends in consumer wealthinessiness estimated in the jillions of U . S. dollars, substantial monetary commitments incurred by political sciences, and a signifi puket dusk in stinting activity. galore(postnominal) causes live with been suggested, with varying weight assign by experts. Both market-based and regulatory solutions lay down been implemented or ar be hapless conside dimensionn, eyepatch significant gambles remain for the world parsimoniousness over the 20102011 flow evaluate.The collapse of a world(prenominal) house let the cat out of the bag, which hit in the U. S. in 2006, caused the stinting values of securities tied to certain commonwealth pricing to plummet in that locationafter, alter fiscal institutions glob altogethery. Questions regarding intrust solvency, declines in accredit availability, and damaged investor confidence had an relate on spherical stock markets, where securities suffered large losses during late 2008 and archean 2009. Economies worldwide slowed during this geological period as credit t ightened and international employment declined.Critics argued that credit rating agencies and investors fai lead to accu outrankly price the risk involved with mortgage-related financial products, and that political sympathiess did non ad retri aloneive their regulatory coifs to address 21st pennyury financial markets. Governments and primordial commits responded with curious fiscal stimulus, monetary constitution expansion, and institutional bailouts. oscilloscope and causes The con end pointinusinous cause or trigger of the crisis was the bursting of the linked States lodging bubble which jacketed in approximately 20052006.Already-rising default order on subprime and adjustable swan mortgages (ARM) began to affix quickly thereafter. An attach in loan packaging, marketing and incentives conducts(prenominal)(prenominal) as easy initial end points and a long-term stylus of rising lodgment prices had march ond borrowers to assume difficult mortgages in the tact ile sensation they would be able to quickly re redeem at to a greater extent affectionate term. However, once involvement rank began to rise and housing prices started to drop clean in 20062007 in mevery a(prenominal) parts of the U. S. , refinancing became to a greater extent difficult.Defaults and foreclosure activity change magnitude dramatically as easy initial terms expired, firm plate prices failed to go up as anticipated, and ARM affair rates reset risqueer. divide in GDP of U. S. financial field since 1860 Low pursuit rates and large inflows of outside(prenominal) bills give rised easy credit tick offs for a i blotification payoff of twelvemonths prior to the crisis, fueling a housing construction pillory and encouraging debt-financed consumption. The combination of easy credit and bills inflow contri barelyed to the linked States housing bubble. Loans of various types (e. g. mortgage, credit card, and auto) were easy to obtain and consumers fictiti ous an unprecedented debt load. As part of the housing and credit booms, the yield of financial agreements called mortgage-backed securities (MBS) and col posterioralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly incrementd. Such financial innovation alterd institutions and investors just about the world to invest in the U. S. housing market. As housing prices declined, major world(prenominal) financial institutions that had borrowed and invested firmly in subprime MBS reported significant losses. locomote prices too resulted in homes worth little than the mortgage loan, providing a financial incentive to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U. S. continues to drain wealth from consumers and erodes the financial strength of shoreing institutions. Defaults and losses on former(a) loan types also increase importantly as the crisis expand from the housing market to some separate parts of the economy. Total losses are estimated in the gazillions of U. S. dollars globally. temporary hookup the housing and credit bubbles built, a series of detailors caused the financial musical arrangement to twain(prenominal) expand and be set increasely fragile, a process called financialization. Policy misrepresentrs did non recognize the increasingly important role played by financial institutions such(prenominal)(prenominal) as coronation monetary finances banks and hedge cash, also k instantern as the hint banking body. Some experts believe these institutions had draw as important as commercial-grade ( depository) banks in providing credit to the U. S. economy, but they were non subject to the aforesaid(prenominal) regulations.These institutions as well as certain regulated banks had also assumed significant debt burdens term providing the loans described above and did non have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses come toed the ability of financial institutions to lend, slowing economic activity. Concerns regarding the perceptual constancy of key financial institutions drove central banks to provide property to encourage add and restore faith in the commercial paper markets, which are integral to funding business operations.Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant appendixal financial commitments. The crises culminated on Sept. 15th 2008 with Lehman Br some others filing for nonstarter. It has been reported that JP Morgan helped drive Lehman into bankruptcy and kicked stumble the credit crises by forcing it to give up one million million millions in cash reserves on the afternoon of Friday family 13, 2008. Growth of the housing bubble briny article fall in States housing bubbleA graph display the median and average sales prices of new-fangled homes sold in the United States betwe en 1963 and 2008 ( non adjusted for swelling) Between 1997 and 2006, the price of the typical American house change magnitude by 124%. During the twain decades ending in 2001, the national median home price ranged from 2. 9 to 3. 1 times median kinfolk income. This ratio rose to 4. 0 in 2004, and 4. 6 in 2006. This housing bubble resulted in quite a few homeowners refinancing their homes at subvert interest rates, or financing consumer using up by taking out second mortgages secured by the price appreciation.In a Peabody Award taking program, NPR correspondents argued that a Giant Pool of Money (represented by $70 zillion in worldwide fixed income investitures) sought high uper(prenominal) yields than those offered by U. S. treasury bonds primeval in the decade. Further, this pool of specie had roughly doubled in size from 2000 to 2007, yet the translate of coitusly safe, income generating investments had not grown as fast. Investment banks on Wall Street answered th is pick up on with the MBS and CDO, which were assigned safe ratings by the credit rating agencies.In effect, Wall Street committed this pool of gold to the mortgage market in the U. S. , with enormous fees accruing to those end-to-end the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the monster investment banks behind them. By approximately 2003, the supply of mortgages originated at conventional add standards had been exhausted. However, move soused convey for MBS and CDO began to drive down modify standards, as long as mortgages could still be sold on the supply chain. horizontaltually, this speculative bubble proved unsustainable.The CDO in particular enabled financial institutions to obtain investor monetary resource to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. A CDO essentially places cash payments from multiple mortgages or other debt o bligations into a single pool, from which the cash is allocated to specific securities in a p turning pointal sequence. Those securities obtaining cash front received investment-grade ratings from rating agencies. Lower priority securities received cash thereafter, with humiliate credit ratings but theoretically a higher rate of return on the amount invested.By family 2008, average U. S. housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceeding on nigh 1. 3 million properties, a 79% increase over 2006. This increase to 2. 3 million in 2008, an 81% increase vs. 2007. By August 2008, 9. 2% of all U. S. mortgages outstanding were either abandoned or in foreclosure. By September 2009, this had risen to 14. 4%. halcyon credit conditions Lower interest rates encourage borrowing. From 2000 to 2003, the supplyeral accommodate lowered the federal funds rate target from 6. 5% to 1. 0%. 31 This was done to soften the make of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. 32 U. S. new throwa route or job deficit Additional down pressure on interest rates was created by the ground forcess high and rising current discover (trade) deficit, which peaked along with the housing bubble in 2006. Ben Bernanke exempted how trade deficits mandatory the U.S. to borrow money from abroad, which bid up bond prices and lowered interest rates. Bernanke explained that between 1996 and 2004, the USA current story deficit incr ease by $650 zillion, from 1. 5% to 5. 8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, a lot of it from countries running trade surpluses, mainly the emerging economies in Asia and oil- tradeing nations. The s ymmetry of payments identity requires that a country (such as the USA) running a current account deficit also have a capital of the United States account (investment) surplus of the aforesaid(prenominal) amount.Hence large and growing amounts of hostile funds (capital) flowed into the USA to finance its imports. This created carry for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend, either because they had very high personal nest egg rates (as high as 40% in china), or because of high oil prices. Bernanke referred to this as a saving glut. A flood of funds (capital or liquidness) reached the USA financial markets.Foreign governments supplied funds by purchasing USA exchequer bonds and thus avoided much of the curb impact of the crisis. USA households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial asse ts. Financial institutions invested foreign funds in mortgage-backed securities. The Fed becausece raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners.This whitethorn have also contributed to the deflating of the housing bubble, as asset prices generally give notice inversely to interest rates and it became riskier to speculate in housing. USA housing and financial assets dramatically declined in value after the housing bubble burst. Sub-prime lending U. S. subprime lending expanded dramatically 2004-2006 The term subprime refers to the credit pure tone of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers.The value of U. S. subprime mortgages was estimated at $1. 3 gazillion as of edge 2007, with over 7. 5 million inaugural-lien subprime mortg ages outstanding. In addition to easy credit conditions, there is evidence that both government and militant pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. study U. S. investment banks and government sponsored enterprises like Fannie Mae played an important role in the expansion of higher-risk lending.Subprime mortgages remained infra 10% of all mortgage originations until 2004, when they spiked to n beforehand(predicate) 20% and remained there by dint of the 2005-2006 peak of the United States housing bubble. A proximate scourt to this increase was the April 2004 decision by the U. S. Securities and Exchange commitment (SEC) to relax the net capital rule, which permitted the largest louvre investment banks to dramatically increase their financial leverage and aggressively expand their issuance of mortgage-backed securities. This applied superfluous competitive pressure to Fannie Mae and Freddie Mac, which pull a head expanded their riskier lending.Subprime mortgage payment wrong rates remained in the 10-15% range from 1998 to 2006, then began to increase speedyly, rising to 25% by early 2008. Fannie Mae, the nations biggest down the stairswriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and chasten income people In moving, correct tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during rush economic times.But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s. A 2000 United States Department of the treasury study of lending trends for 305 cities from 1993 to 1998 displayed that $467 billion of mortgage credit poured out of conjunction Reinvestment operation (CRA)-cover lenders into low and mid level in come borrowers and neighborhoods. Neverthe little, wide-cutly 25% of all sub-prime lending occurred at CRA-covered institutions, and a full 50% of sub-prime loans originated at institutions palliate from CRA.While the number of CRA sub-prime loans originated were less than non-CRA sub-prime loans originated, it is important to note that the CRA sub-prime loans were the more defenseless during the downturn, to the detriment of both borrowers and lenders. For example, lending done under Community Reinvestment cloak criteria, according to a quarterly report in October of 2008, constituted only 7 per centum of the nub mortgage lending by the swear of America, but constituted 29 percent of its losses on mortgages. economic expert capital of Minnesota Krugman argued in January 2010 that the simultaneous harvest-home of the residential and commercial solid estate pricing bubbles undermines the case do by those who argue that Fannie Mae, Freddie Mac, CRA or predatory lending were direct causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was touched by these potential causes. Predatory lending Predatory lending refers to the practice of unscrupulous lenders, to enter into unsafe or unsound secured loans for inappropriate purposes.A classic bait-and-switch method was used by Countrywide, advertising low interest rates for home refinancing. Such loans were written into extensively detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1. 5% interest would be charged, the consumer would be disgorge into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created cast out amortization, which the credit consumer might not notice until long after the loan transaction had been consummated.Countrywide, sued by calcium Attorney General Jerry Brown for Unfai r Business Practices and False denote was making high cost mortgages to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments. . When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. This caused Countrywides financial condition to deteriorate, ultimately resulting in a decision by the Office of niggardness Supervision to seize the lender.Former employees from Ameriquest, which was United Statess leading in large quantities lender,60 described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits. 60 there is growing evidence that such mortgage frauds may be a cause of the crisis. 60 Deregulation Further information Government policies and the subprime mortgage crisis Critics have argued that the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the dark banking system, derivatives and off- relief poll financing.In other cases, honors were changed or enforcement weakened in parts of the financial system. Key examples include * Jimmy Carters Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) phased out a number of restrictions on banks financial practices, broadened their lending powers, and raised the deposit insurance policy limit from $40,000 to $100,000 (raising the problem of moral hazard). curses rushed into real estate lending, speculative lending, and other ventures just as the economy soured. * In October 1982, U. S. chairperson Ronald Reagan signed into Law the GarnSt.Germain Depository Institutions Act, which provided for adjustable-rate mortgage loans, began the process of banking deregulation, and contributed to the savings and loan crisis of the late 1980s/early 1990s. * In November 1999, U. S. president note of hand Clinton signed into Law the Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act of 1933. This repeal has been criticized for reducing the interval between commercial banks (which tralatitiousisticly had a conservative culture) and investment banks (which had a more risk-taking culture). In 2004, the U. S. Securities and Exchange Commission relaxed the net capital rule, which enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities bear outing subprime mortgages. The SEC has conceded that self-regulation of investment banks contributed to the crisis. * Financial institutions in the shadow banking system are not subject to the same regulation as depository banks, allowing them to assume additional debt obligations relative to their financial cushion or capital base.This was the case condescension the Long-Term crownworkital Management debacle in 1998, where a highly-leveraged sha dow institution failed with systemic implications. * Regulators and accounting standard-setters allowed depository banks such as Citigroup to move significant amounts of assets and liabilities off- eternal rest sheet into complex legal entities called merged investment vehicles, masking the weakness of the capital base of the firm or degree of leverage or risk pretendn. One word of honor agency estimated that the top quadruple U.S. banks will have to return between $ euchre billion and $1 trillion to their balance sheets during 2009. This increased uncertainty during the crisis regarding the financial repose of the major banks. Off-balance sheet entities were also used by Enron as part of the scandal that brought down that company in 2001. * As early as 1997, Federal maintain Chairman Alan Greenspan fought to keep the derivatives market unregulated. With the advice of the Presidents Working Group on Financial Markets, the U. S.Congress and President allowed the self-regulatio n of the over-the-counter(prenominal) derivatives market when they enacted the Commodity Futures Modernization Act of 2000. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate once morest particular credit risks. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. Total over-the-counter (OTC) derivative notional value rose to $683 trillion by June 2008. warren Buffett famously referred to derivatives as financial weapons of mass destruction in early 2003. Increased debt burden or over-leveraging Leverage ratios of investment banks increased significantly 2003-2007 U. S. households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.Key statistics include * Free cash used by consumers from home equity spear carrierction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period, contributing to economic growth worldwide. U. S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10. 5 trillion. * USA household debt as a constituent of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. * In 1981, U. S. rivate debt was 123% of GDP by the third quarter of 2008, it was 290%. * From 2004-07, the top five U. S. investment banks each significantly increased their financial leverage ( peck diagram), which increased their vulnerability to a financial shock. These five institutions reported over $4. 1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. Lehman Brothers was liquidated, Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation.With the exception of Lehman, these companies required or received government support. * Fannie Mae and Freddie Mac, two U. S. Government sponsored enterprises, owned or guaranteed nearly $5 trillion in mortgage obligations at the time they were placed into conservatorship by the U. S. government in September 2008. These seven entities were highly leveraged and had $9 trillion in debt or guarantee obligations, an enormous concentration of risk yet they were not subject to the same regulation as depository banks.Boom and collapse of the shadow banking system In a June 2008 speech, President and CEO of the brand-new York Federal Reserve shore Timothy Geithner who in 2009 became Secretary of the United States Treasury placed significant blame for the freezing of credit markets on a run on the entities in the parallel banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls.Further, these entities were vulnerable because of maturity mismatch, meaning that they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the meaning of these entities In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a feature asset size of roughly $2. trillion. Assets financed overnight in triparty repo grew to $2. 5 trillion. Assets held in hedge funds grew to roughly $1. 8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top fiv e bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion. The combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.Paul Krugman, laureate of the Nobel Prize in Economics, described the run on the shadow banking system as the core of what happened to cause the crisis. He referred to this lack of controls as malign neglect and argued that regulation should have been imposed on all banking-like activity. Financial markets impacts Impacts on financial institutions 2007 bank run on northerly brandish, a UK bank The International Monetary Fund estimated that large U. S. and European banks bewildered more than $1 trillion on toxic assets and from unstable loans from January 2007 to September 2009.These losses are expect to top $2. 8 trillion from 2007-10. U. S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1. 6 trillion. The IMF estimated that U. S. banks were about 60 percent through with(predicate) their losses, but British and eurozone banks only 40 percent. One of the first base victims was Northern Rock, a medium-sized British bank. The highly leveraged nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a bank run in mid-September 2007.Calls by vainglorious Democrat Shadow Chancellor Vince Cable to nationalise the institution were initially ignored in February 2008, however, the British government (having failed to find a mystical field buyer) relented, and the bank was taken into domain hands. Northern Rocks problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions. Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets.Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The crisis hit its peak in September and October 2008. several(prenominal) major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, and AIG. Credit markets and the shadow banking system TED overspread and components during 2008 During September 2008, the crisis hit its most critical stage.There was the identical of a bank run on the money market usual funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls. Withdrawals from money markets were $144. 5 billion during one week, versus $7. 1 billion the week prior. This interrupted the ability of corp orations to rollover (replace) their short-term debt. The U. S. government responded by extending insurance for money market accounts analogous to bank deposit insurance via a temporary guarantee and with Federal Reserve programs to purchase commercial paper.The TED spread, an power of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4. 65% on October 10, 2008. In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke reportedly told them If we dont do this, we may not have an economy on Monday. The Emergency Economic stabilisation Act, which implemented the Troubled Asset Relief Program (TARP), was signed into law on October 3, 2008.Economist Paul Krugman and U. S. Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the shadow banking system, which had grown to nearly equal the importance of the traditional commercial banking sector as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations.This meant that nearly one-third of the U. S. lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009 It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume. The authors also indicate that some forms of securitization are possible to vanish forever, having been an artifact of excessively loose credit conditions. While traditional banks have raised their lending standard s, it was the collapse of the shadow banking system that is the primary cause of the reduction in funds available for borrowing. Global set up A number of commentators have suggested that if the liquid crisis continues, there could be an extensive ecological niche or worse. The continuing development of the crisis has prompted in some quarters fears of a global economic collapse although there are now many cautiously optimistic forecasters in addition to some bombastic sources who remain disconfirming.The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS express on October 6 that 2008 would see a clear global recession, with recuperation unlikely for at least two years. Three days later UBS economists announced that the stolon of the end of the crisis had begun, with the world starting to make the requisite actions to fix the crisis capital injection by governments injection made systemically interes t rate cuts to help borrowers. The United Kingdom had started systemic injection, and the worlds central banks were now cutting interest rates.UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms the worst is still to come. UBS quantified their expected recession durations on October 16 the Eurozones would finally two quarters, the United States would ending three quarters, and the United Kingdoms would last four quarters. The economic crisis in Iceland involved all three of the countrys major banks. Relative to the size of its economy, Icelands banking collapse is the largest suffered by any country in economic history.At the end of October UBS revised its sentinel downwards the forthcoming recession would be the worst since the Reagan recession of 1981 and 1982 with invalidating 2009 growth for the U. S. , Eurozone, UK very limited resumey in 2010 but not as perni cious as the Great Depression. The Brookings Institution reported in June 2009 that U. S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. The US economy has been disbursement too much and borrowing too much for years and the rest of the world depended on the U. S. consumer as a source of global demand. With a recession in the U. S. and the increased savings rate of U. S. consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14. 4% in Germany, 15. 2% in Japan, 7. 4% in the UK, 18% in Latvia, 9. 8% in the Euro area and 21. 5% for Mexico. Some developing countries that had seen strong economic growth saw significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to adjust in 2009, and Kenya may achieve only 3-4% growth in 2009, down from 7% in 2007.According to the research by the Overseas using In stitute, reductions in growth can be attributed to falls in trade, good prices, investment and remittances sent from migrant workers (which reached a record $251 billion in 2007, but have fallen in many countries since). The has stark implications and has led to a dramatic rise in the number of households living below the poverty line, be it 300,000 in Bangladesh or 230,000 in Ghana. By March 2009, the Arab world had lost $3 trillion due to the crisis. In April 2009, unemployment in the Arab world is said to be a time bomb.In May 2009, the United Nations reported a drop in foreign investment in Middle-Eastern economies due to a slower rise in demand for oil. In June 2009, the World Bank predicted a tough year for Arab states. In September 2009, Arab banks reported losses of nearly $4 billion since the onset of the global financial crisis. U. S. economic effects Real crying(a) domesticatedated product the output of goods and go produced by labor and attribute located in the Unit ed States decreased at an annual rate of approximately 6 percent in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods.The U. S. unemployment rate increased to 10. 1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the last(a) level since the government began collecting the data in 1964. Effects of nook on India There is, at least in some quarters, panic that India has been hit by the crisis. This solicitude stems from two arguments. The Indian banking system has had no direct exposure to the sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitized assets.In fact, our banks continue to remain safe and healthy. So, the enigma is how can India be caught up in a crisis when it has nothing much to do with any of the maladies that are at the core of the crisis. The second reason for dismay is t hat Indias recent growth has been driven predominantly by domestic consumption and domestic investment. External demand, as measured by merchandize exports, accounts for less than 15 per cent of our GDP. The question then is, even if there is a global downturn, why should India be affected when its dependence on extraneous demand is so limited?The answer to the above frequently-asked questions lies in globalization. First, Indias integration into the world economy over the last decade has been outstandingly rapid. Integration into the world implies more than just exports. Going by the roughhewn measure of globalization, Indias two- dash trade (merchandize exports plus imports), as a pro pot of GDP, grew from 21. 2 per cent in 1997-98, the year of the Asian crisis, to 34. 7 per cent in 2007-08. Second, Indias financial integration with the world has been as deep as Indias trade globalization, if not deeper.If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46. 8 per cent in 1997-98 to 117. 4 per cent in 2007-08. Importantly, the Indian bodily sectors access to external funding has markedly increased in the last five years. Some numbers will help illustrate the point. In the five-year period 2003-08, the share of investment in Indias GDP rose by 11 percentage points. Corporate savings financed roughly half of this, but a significant portion of the balance financing came from external sources.While funds were available domestically, they were expensive relative to foreign funding. On the other hand, in a global market awash with liquidness and on the promise of Indias growth potential, foreign investors were willing to take risks and provide funds at a lower cost. Last year (2007/08), for example, India received capital inflows amounting to over 9 per cent of GDP as against a current account deficit in the balance of payments of just 1. 5 per cent of GDP. These capital flows, in excess of the current account deficit, evidence the importance of external financing and the prudence of Indias financial integration.So, the reason India has been hit by the crisis, despite mitigating factors, is clearly Indias rapid and growing integration into the global economy. The contagion of the crisis has spread to India through all the channels the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel. Indias financial markets equity markets, money markets, forex markets and credit markets had all come under pressure from a number of directions.First, as a consequence of the global fluidity squeeze, Indian banks and somatics constitute their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. Also, in their frantic search for substitute financing, corporates withdrew their investments from domestic money market joint funds putting redemption pressure on the mutual funds and down the line on non-banking financial companies (NBFCs) where the MFs had invested a significant portion of their funds.This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure. Second, the forex market came under pressure because of switch of capital flows as part of the global deleveraging process. Simultaneously, corporates were converting the funds raised topically into foreign currency to meet their external obligations. Both these factors put downward pressure on the rupee. Third, the Reserve Banks intervention in the forex market to manage the volatility in the rupee further added to liquidity tightening.The transmission of the global cues to the domestic economy has been quite straight advancing through the slump in demand for exports. The United States, European fraternity and the Middle East, which account for th ree quarters of Indias goods and run trade are in a synchronized down turn. Service export growth is also likely to slow in the near term as the recession deepens and financial services firms traditionally large users of outsourcing services are restructured. Remittances from migrant workers too are likely to slow as the Middle East adjusts to lower crude prices and march on economies go into a recession.Beyond the financial and real channels of transmission as above, the crisis also spread through the confidence channel. In sharp contrast to global financial markets, which went into a seizure on account of a crisis of confidence, Indian financial markets continued to function in an slap-up manner. Nevertheless, the tightened global liquidity situation in the period immediately following the Lehman failure in mid-September 2008, coming as it did on top of a turn in the credit cycle, increased the risk aversion of the financial system and made banks cautious about lending.The pu rport of the above explanation is to show how, despite not cosmos part of the financial sector problem, India has been affected by the crisis through the pernicious feedback loops between external shocks and domestic vulnerabilities by way of the financial, real and confidence channels. Effect on Banks The actual effect of recession was only realised in February 2008 in Banking Industry. Before this there were dissever of questions and queries regarding whether the U. S. recession will have any impact on India or Indian banking sector.In Feb 2008, the markets suddenly crashed the actual picture came in front. The effects which came across the banking sector are as follow * Credit broadsheet and loan settlements. As soon as the impact of recession was recognise by the banking sector, the Indian banking system came into the mode of consolidation. distributively and every bank started fall overing their NPAs and the amount of lending they have done which is yet to be recovered. B ank concentrated more on sell loans and Credit measure payments. The first priority for bank was to recover such amount which was uncompensated from their customers.The banks hired external agencies for calling up clients and requesting them to settle their respective dues. This in turn created a panic in the customers mind. The banks in order to recover their dues and make the process fast provided attractive offers to its customers. For e. g. By settling the entire amount by cash there were discounts which were given amounting to about 5% of the entire due amount. * Call money market. In the initial stages of recession there was grant of demand for short term cash amongst the bank as the bank needed to fulfil the requirement of CRR and SLR.The money which was lended by the bank were taking time to recover and therefore there was a sudden requirement of short term money. The interest rate which were use to be at 5-6% grow up to 14-15% for a time period of 11-15 days. These requ irements by few banks were enchased fully by other banks which were low on lending. The banks like ING Vysya bank, Yes Bank, IDBI Bank were amongst the few who were lending through call money market to other banks. * Fixed Deposit Rates Before recession hit the market FD rates were at a sky high level.Lot of reclusive sector banks as well as public sector banks were offering interest rates in long term period upto 11-12%. When the recession kicked in the money demand for long term had almost finished. This was because of the reason that banks were in the mode of consolidation and did not regard to lend further till the time most of the money was recovered. The bank deposit rates came down to a level of 6-7% as there was ample liquidity in the banking sector because of funds creation not given ahead as loans. * Private banks became unpopular.During recession looking at the bankruptcy of foreign banks there was panic in the mind of investors even in india. There were lot of questio n that were raised whether the privy sector banks who take exposure in foreign securities are safe in investing or not. During this period only there was a news which came for ICICI Bank. ICICI Bank had taken direct exposures in securities which issued by Lehman Brothers and Merill Lynch. In fact even few of public sector banks had taken similar exposures but since public sector banks were backed up by the government, there was a comfort factor amongst the investors.If we look at what happened with ICICI Bank, the liquidity was ample and it was just a few percentage of exposure that has gone as bad debt but other snobby marked players like HDFC Bank and Kotak Mahindra Bank encashed on these opportunities and placed their canopies next to each and every branch and aura of ICICI Bank. There was a lot of panic which was created within the investors and they wanted to ballpark their funds in a safer bank. Many of them shifted to nationalized banks and others were diverted to other p rivate banks. This not only hampered the image of ICICI Bank but also created a bad image of Indian Private Banks.They were much difficulties which were faced by these banks to get additional deposits from investors and even retain theri clients who were shifting toward nationalised banks. * Diversifying and churning of funds. While the recession was impacting the country and the banking system there were informations that were given to the investors that the government insures on Rs. 1 lakh for any particular individual. This was misinterpreted by lot of investors in what they believed was with respect to one particular bank. With these being public diversification started.Each investor to safeguard his/her money started opening many accounts in different banks and care the funds equal in all. There was a lot of churning which happened from private sector banks to public sector banks as there were lot of uncertainity about funds being saved in a private sector bank. Investor crea ted portfolios in different nationalised banks because of which private sector banks faced decline in their interest earnings as well as principal sum and faced losses. After a while this myth was broken by rbi governor that the government only ensures Rs. lakh in essence no matter how many banks an investor has. * Lending Choked. The banks private sector as well as public sector were uncertain with what more negative impact were forthcoming. This resulted in, banks not at all lending to sell and corporate which were related to infrastructure or real estate. The cycle of churning of funds had suddenly stopped. Many projects which were about to start or were half way completed were forced to put their projects on hold as no additional funds were being provided. This created commotion in real estate market which resulted in decline of prices.Even on retail side many of the housing loans were rejected which propelled the negativity more. Even for Large Cap companies the banks were demanding additional securities in cash apart from normal tangible assets. Even for processing loans for investors who had excellent credit history, the banks put ahead lot of extra conditions and terms. This further created panic and investors postponed their financial goals and loans were not applied for. After a while many loan discussion sections of banks were shut down and the employees were shifted to other departments were asked to leave.This even further increased the liquidity with banks. * Banks Investment Primary earning for any bank is through lending. Loans were not being processed and since the banks were uncertain of what more negative impact will come the banks were desperately looking out for other avenues to make money. The most safest option available with banks was to invest in G-Secs (Government of India Securities). Many banks started heavily into govt. Securities and bonds. These securities were traded quite highly at that period. Other sources including were through swipe repo and short term lending to different banks.During this time period much more focus was given to income from wealth management as markets has been change by reversal and banks insisted on educating the investors to park their funds in the equity market. Though the banks were heavily investing in G-Secs and other bonds it was not enough for their survival. Sooner or later the banks had to lend where they make the maximum profit. * Unemployment During the time of recession many jobs were lost in all the sectors. The similar effect was seen in banking but it was not in totality but few departments specific.The maximum hits were taken by two divisions which suffered most during the recession time. The first being the wealth management division of banks. Though the feeling was correct that the markets have come down and valuations are excellent, it was very difficult convincing the investors. This resulted in many job losses in wealth management department of all the banks as receipts was expected which was not possible to generate. The next division which suffered was the loan division. The lay offs happened more as the departments close down and were not functional at all.Most of the bank had outsourced the service part as it was cheaper compared to keeping the existing team operational. Close to 1100 jobs were lost in the matter of 3 months in the entire banking sector. There were lot of apprehensions in the mind of new jonnies and soon working for a retail bank became unpopular. * Nationalised Banks popularity During all these events the only player in banking who were waiting to work back the market shares were the nationalised bank. There was enough panic in retail investors regarding their funds being safe and sound, which the nationalised banks encashed fully.Maximum number of promotional activities and advertisement were given by them in the news paper and new channels. Even the investors responded to them equally and more than will ingly because the backing up of the government was more than enough to provide a relief factor. Even in terms of employment, soon the nationalised banks became very popular and the people who were asked to leave from private banks where looking out for safe options to enter again. They were not willing to take any more risk. With this the bank got best of the aggressive talent in cheap prices. What corrective measures were taken? Decrease in CRR and repo rates. run batted in again cuts repo rates CRR to inject additional liquidity of Rs 20,000 crore January 2, 2009 On a review of current global and domestic macroeconomic situation, the Reserve Bank has resolute to take the following further measures Repo Rate To trend the repo rate under the liquidity adjustment adeptness (LAF) by 100 basis points from 6. 5 per cent to 5. 5 per cent with immediate effect. Reverse Repo Rate To reduce the reverse repo rate under the LAF by 100 basis points from 5. 0 per cent to 4. 0 per cent with immediate effect. Cash Reserve proportionTo reduce the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 5. 5 per cent to 5. 0 per cent from the fortnight beginning January 17, 2009. The reduction in the CRR will inject additional liquidity of around Rs. 20,000 crore to the financial system. It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for cultivatable purposes at appropriate interest rates. The Reserve Bank on its part would continue to maintain a comfortable liquidity position in the system. Background to announcement of present monetary stimulus by RBIThe global financial situation continues to be uncertain. Since the official recognition of recession in the US, the UK, the Euro area and Japan, the downside risks to the global economy have increased. Concomitantly, the policy initiatives in the advanced economies are geared towards managing the recession and defusing potentially deflation ary trends. The US has reduced the Federal Funds Rate to 0 0. 25 per cent. Several other advanced and emerging economies such as Japan, Canada, Republic of Korea, Hong Kong and China too have reduced their policy rates.Indias financial sector has remained resilient even in the face of global financial turmoil that is so deep and pervasive. Our financial markets continue to function in an orderly manner. Indias growth trajectory has, however, been impacted both by the financial crisis and the follow-on global economic downturn. This impact has turned out to be deeper and wider than sooner anticipated. Concurrently, because of global developments coupled with supply and demand management measures at home, inflation is on the decline.Reflecting these developments, the Reserve Bank has adjusted its policy attitude from demand management to arresting the moderation in growth. In particular, the aim of these measures was to cast up domestic and forex liquidity and to ensure that credi t continues to flow to productive sectors of the economy. Notably, since mid-September 2008, the Reserve Bank has reduced the repo rate under the liquidity adjustment facility (LAF) from 9. 0 per cent to 6. 5 per cent, reduced the reverse repo rate under the LAF from 6. 0 per cent to 5. 0 per cent and the cash reserve ratio from 9. 0 per cent to 5. per cent How it helped? With these measures of RBI there was ample liquidity which was created in the market which forced the bank to lend out to companies as the funds in the banks were lying ideal and making no money for the bank. This actually started the lending process of the banks. * Role of fiscal stimulus share by government. There is a relationship between budget deficits and the health of the economy, but is certainly not a perfect one. There can be massive budget deficits when the economy is doing quite well the preceding(a) few years of the United States being a prime example.That being said, government budgets tend to go f rom surplus to deficit (or existing deficits become larger) as the economy goes sour. This typically happens as follows 1. The economy goes into recession, costing many workers their jobs, and at the same time causing corporate profits to decline. This causes less income revenue enhancement revenue to flow to the government, along with less corporate income tax revenue. Occasionally the flow of income to the government will still grow, but at a slower rate than inflation, meaning that flow of tax revenue has fallen in real terms. 2.Because many workers have lost their jobs, there is increased use of government programs, such as unemployment insurance. Government spending rises as more individuals are calling on government services to help them out through tough times. 3. To help push the economy out of recession and to help those who have lost their jobs, governments often create new social programs during times of recession and depression. FDRs New surge of the 1930s is a prime e xample of this. Government spending then rises, not just because of increased use of existing programs, but through the creation of new programs.Because of factors one, the government receives less money from taxpayers, while factors two and three, the government spends more money. Money starts flowing out of the government sudden than it comes in, causing the governments budget to go into deficit. * How it helped? With the government spending more the government securities started declining in performance. As more and more securities were being issued the interest rate on securities started rising which has a direct impact on the gsec return. This again closed one more avenue of investment for banks as they were investing heavily into them instead of lending it out to corporate.This in all diverted the funds of the bank to the needful and thus started the lending process again. Future outlook In India there is evidence of economic activity slowing down. Real GDP growth has moderat ed in the first half of 2008 / 09. The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven years, exports have declined in absolute terms for three months in a row during October-December 2008.Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system. higher(prenominal) input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. The index of industrial production has shown negative growth for two recent months and investment demand is decelerating. alone these factors suggest that growth moderation may be steeper and more extended than earlier projected. There are also several structural factors that have come to Indias aid. First, notwithstanding the everity and multiplicity of the adverse shocks, Indias financial markets have shown admirable resilience. This is in large part because Indias banking system remains sound, healthy, well capitalized and prudently regulated. Second, our comfortable reserve position provides confidence to overseas investors. Third, since a large majority of Indians do not participate in equity and asset markets, the negative impact of the wealth loss effect that is plaguing the advanced economies should be quite muted. Consequently, consumption demand should hold up well.Fourth, because of Indias mandated priority sector lending, institutional credit for agriculture will be unaffected by the credit squeeze. The mature loan waiver package implemented by the government should further insulate the agriculture sector from the crisis. Finally, over the years, India has built an extensive cyberspace of social safety-net programmes, including the flagship rural employment guarantee programme, which should protect the poor and the retur n migrant workers from the extreme impact of the global crisis. RBIs policy stanceGoing forward, the Reserve Banks policy stance will continue to be to maintain comfortable rupee and forex liquidity positions. There are indications that pressures on mutual funds have eased and that NBFCs too are making the indispensable adjustments to balance their assets and liabilities. Despite the muscular contraction in export demand, we will be able to manage our balance of payments. It is the Reserve Banks expectation that commercial banks will take the signal from the policy rates reduction to adjust their deposit and lending rates in order to keep credit flowing to productive sectors.In particular, the special refinance windows opened by the Reserve Bank for the MSME (micro, small and medium enterprises) sector, housing sector and export sector should see credit flowing to these sectors. Also the SPV set up for extending assistance to NBFCs should enable NBFC lending to pick up steam once a gain. The governments fiscal stimulus should be able to supplement these efforts from both supply and demand sides. What Industry experts reckon? Mentioned below is what the senior experts in banking think of how the banking sector survived the crisis. 1). Mr.Anil Kumar Gupta ( valetudinarianism President) Wealth management division- North and east office ING VYSYA BANK LTD. The banking sector is very strong in India. Especially with the help of a governing body like RBI monitoring all the banks in Indian. I would say that steps that were taken by the RBI in terms of rate cuts made so much liquidity in banking system that they were compelled to lend out to corporate. The recession gets more dangerous if the spending cycle by the people of the country or the lending cycles by the banks are put on a hold. 2). Mr. Manavjeet Awasty (Senior Vice President)CITI BANK LTD- North The ratios that the banks need to maintain because of RBI like CRR and SLR are the life savers for any banki ng firm. During financial crisis the condition of bankruptcy comes only when liquidity is crunched. The ratios which are maintained makes sure that enough liquidity is available in the system. When the turnaround comes Over the last five years, India clocked an unprecedented 9% growth, driven largely by domestic consumption and investment even as the share of net exports has been rising. This was no accident or happenstance.True, the benign global environment, easy liquidity and low interest rates helped, but at the heart of Indias growth were a growing entrepreneurial spirit, rise in productivity and increasing savings. These fundamental strengths continue to be in place. Nevertheless, the global crisis will dent Indias growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us. However, once the global economy begins to recover, Indias turn around will be sharper and swifter, backed by our strong fundamentals and the untapped g rowth potential.Meanwhile, the challenge for the government and the RBI is to manage the adjustment with as little pain as possible. culmination To conclude, we would say that the Indian banking sector is very strong in terms of its maintaining the said regulations and to follow the rule implied by its governing body which is RBI. The necessary steps were taken during the financial crisis which helped the banking sector to emerge out of the crisis without any major disturbance.