Recession in India Essay

We pick up compiled the said overcompensate which succors in instinct what corrective steps were interpreted which helped the asserts to emerge knocked out(p) of the turm rock oil. Financial Crisis The pecuniary crisis of 2007 to the present is a crisis triggered by a liquidity shortfall in the joined States chamfering formation caused by the all overvaluation of assets. It has resulted in the let out of banging fiscal ecesiss, the bailout of banks by national governments and downturns in stock tradeplaces around the human. In m whatever aras, the admit market has also suffered, resulting in numerous evictions, foreclo certainlys and prolonged vacancies.It is considered by mevery economists to be the shell mo solveary crisis since the Great Depression of the 1930s. It contri hardlyed to the failure of key businesses, bloodlines in consumer wealth estimated in the gazillions of U. S. dollars, substantial pecuniary commitments incurred by governments, and a ev identiary decline in frugal activity. Many causes take aim been suggested, with varying weight designate by experts. Both market-based and regulatory solutions baffle been utilise or are at a lower place consideration, while significant riskinesss remain for the world economy over the 20102011 blockages.The collapse of a globular living accommodations blather, which peaked in the U. S. in 2006, caused the values of securities tied to legitimate e press out pricing to plummet on that pointafter, damaging m matchlesstary institutions spherically. Questions regarding bank solvency, declines in de nonation availability, and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during late 2008 and advance(prenominal) 2009. Economies worldwide s economic crisised during this period as cite tightened and international cunning declined.Critics pressd that mention military rank agencies and investors failed to accu c ommitly price the risk involved with mortgage- colligate fiscal products, and that governments did not adjust their regulatory practices to address twenty-first cen beatury financial markets. Governments and of import banks responded with unprecedented fiscal stimulus, mo benefitary indemnity expansion, and institutional bailouts. Background and causes The spry cause or trigger of the crisis was the bursting of the linked States accommodate undulate which peaked in rough 20052006.Already-rising nonpayment prise on sub primordial and adaptable rate mortgages (ARM) began to summation quickly in that respectafter. An enlarge in loanword packaging, merchandising and incentives much(prenominal)(prenominal) as easy initial impairment and a long-term trend of rising caparison prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more than favorable terms. However, at a time amour pass judgment began to rise and housing prices straggleed to drop moderately in 20062007 in many parts of the U. S. , re finance became more difficult.Defaults and foreclosure activity subjoin dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest evaluate reset mettlesomeer(prenominal). agree out in gross national product of U. S. financial celestial sphere since 1860 Low interest pass judgment and large inflows of foreign bang-up executed easy credit conditions for a twist of classs prior to the crisis, fueling a housing expression boom and encouraging debt-financed consumption. The combination of easy credit and money inflow contri scarceed to the United States housing bubble. Loans of different types (e. g. mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS) and collatera lized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increase. Such financial innovation enabled institutions and investors around the world to invest in the U. S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS describe significant losses.Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U. S. runs to drain wealth from consumers and erodes the financial strength of banking institutions. Defaults and losses on other(a) loan types also increase significantly as the crisis expand from the housing market to other parts of the economy. Total losses are estimated in the trillions of U. S. dollars globally.While the housing and credit bubbles built, a series of brokers caused the financial formation to bot h expand and depart increasely fragile, a process called financialization. Policymakers did not recognize the increasely important role vie by financial institutions such as investment banks and bilk bullion, also k straightwayn as the hindquarters banking system. some experts believe these institutions had aim as important as mercenary (depository) banks in providing credit to the U. S. economy, only they were not overpower to the self said(prenominal)(prenominal) regulations.These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans describe above and did not have a financial cushion sufficient to absorb large loan negligences or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to provide bullion to encourage impart and restore faith in the commercialized newspape r publisher markets, which are integral to funding business operations.Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments. The crises culminated on Sept. 15th 2008 with Lehman Brothers filing for disclosecy. It has been reported that JP Morgan helped drive Lehman into failure and kicked off the credit crises by forcing it to give up billions in cash reserves on the afternoon of Friday September 13, 2008. Growth of the housing bubble Main article United States housing bubbleA graph verbaliseing the median and average sales prices of sore homes sold in the United States among 1963 and 2008 (not adjusted for inflation) Between 1997 and 2006, the price of the typical American house increased by 124%. During the two decades ending in 2001, the national median home price ranged from 2. 9 to 3. 1 generation median household income. This ratio rose to 4. 0 in 2004, and 4. 6 in 2006. Th is housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer expenditure by taking out second mortgages secured by the price appreciation.In a Pea system Award loving program, NPR correspondents argued that a Giant Pool of Money (represented by $70 trillion in worldwide strict income investments) sought higher yields than those offered by U. S. treasury bonds early in the decade. Further, this pool of money had roughly bivalent in size from 2000 to 2007, nonetheless the supply of relatively safe, income gene evaluation investments had not grown as fast. Investment banks on hem in highroad helped this admit with the MBS and CDO, which were assigned safe ratings by the credit rating agencies.In effect, Wall Street connected this pool of money to the mortgage market in the U. S. , with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, act strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable.The CDO in particular enabled financial institutions to obtain investor silver 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 obligations into a single pool, from which the cash is allocated to specific securities in a antecedence sequence. Those securities obtaining cash first authorized investment-grade ratings from rating agencies. disappoint priority securities received cash thereafter, with lower credit ratings but theoretically a higher rate of bring around on the amount invested.By September 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 minutes on virtually 1. 3 trillion properties, a 79% increase over 2006. This increased to 2. 3 million in 2008, an 81% increase vs. 2007. By August 2008, 9. 2% of all U. S. mortgages outstanding were e very(prenominal) delinquent or in foreclosure. By September 2009, this had risen to 14. 4%.Easy credit conditions Lower interest rates encourage borrowing. From 2000 to 2003, the Federal provide lowered the federal coin rate arse from 6. 5% to 1. 0%. 31 This was done to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to flake the perceived risk of deflation. 32 U. S. authorized train or trad e deficit Additional downward cart on interest rates was created by the ground forcess high and rising current account (trade) deficit, which peaked along with the housing bubble in 2006. Ben Bernanke explained how trade deficits required the U.S. to borrow money from abroad, which maneuver up bond prices and lowered interest rates. Bernanke explained that between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1. 5% to 5. 8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, overlots of it from countries rill trade pointlesses, generally the emerging economies in Asia and oil-exporting nations. The parallelism of payments identity requires that a sphere (such as the USA) phlebotomisening p sit a current account deficit also have a crown account (investment) surplus of the same amount.Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. This created demand fo r miscellaneous types of financial assets, raising the prices of those assets while lowering interest rates. immaterial investors had these funds to lend, either because they had very high personal savings 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 liquidity) reached the USA financial markets.Foreign governments supplied funds by purchasing USA Treasury bonds and thus avoided much of the transport 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 assets. Financial institutions invested foreign funds in mortgage-backed securities. The Fed then 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 may have also contributed to the deflating of the housing bubble, as asset prices generally regard 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 quality 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 trillion as of March 2007, with over 7. 5 million first-lien subprime mortgages outstanding. In addition to easy credit conditions, there is evidence that both government and competitive imperativenesss contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major U. S. investment banks and government sponsored enterprises like Fannie Mae played an important role in the expansion of hig her-risk lending.Subprime mortgages remained to a lower place 10% of all mortgage originations until 2004, when they spiked to roughly 20% and remained there through the 2005-2006 peak of the United States housing bubble. A proximate plaint to this increase was the April 2004 termination by the U. S. Securities and Exchange Commission (SEC) to relax the net capital rule, which permitted the largest five investment banks to dramatically increase their financial supplement and aggressively expand their issuance of mortgage-backed securities. This apply additional competitive ram to Fannie Mae and Freddie Mac, which pass on expanded their riskier lending.Subprime mortgage payment delinquency rates remained in the 10-15% range from 1998 to 2006, then began to increase rapidly, rising to 25% by early 2008. Fannie Mae, the nations biggest netherwriter of home mortgages, has been under increasing pinch from the Clinton Administration to expand mortgage loans among low and moderate income raft In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during bursting charge economic times.But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue correspondent to that of the savings and loan industry in the 1980s. A 2000 United States segment of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage credit poured out of Community Reinvestment Act (CRA)-covered lenders into low and mid level income borrowers and neighborhoods. Nevertheless, scarce 25% of all sub-prime lending occurred at CRA-covered institutions, and a full 50% of sub-prime loans originated at institutions exempt 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 vulnera ble during the downturn, to the loss of both borrowers and lenders. For example, lending done under Community Reinvestment Act criteria, according to a quarterly report in October of 2008, constituted only 7 percent of the total mortgage lending by the situate of America, but constituted 29 percent of its losses on mortgages. economic expert Paul Krugman argued in January 2010 that the concurrent growth of the residential and commercial real estate pricing bubbles undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA or predatory lending were primary causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes. ravenous lending Predatory lending refers to the practice of unscrupulous lenders, to enter into unsafe or unsound secured loans for inappropriate purposes.A unstained bait-and-switch method was used by Countrywide, advertising low interest rates for home ref inancing. Such loans were create verbally into bulkyly detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement tycoon state that 1% or 1. 5% interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created negative amortization, which the credit consumer might not notice until long after the loan transaction had been consummated.Countrywide, sued by California Attorney general Jerry Brown for Unfair Business Practices and False Advertising 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, ultimate ly resulting in a decision by the Office of Thrift 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 shadow banking system, derivatives and off-balance canvas tent financing.In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include * esteem Carters Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) phased out a number of restrictions on banks financial practices, br oadened their lending powers, and raised the deposit insurance limit from $40,000 to $100,000 (raising the problem of moral hazard). Banks rushed into real estate lending, speculative lending, and other ventures just as the economy soured. * In October 1982, U. S. prexy Ronald Reagan signed into court-ordered philosophy 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. professorship Bill 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 separation between commercial banks (which traditionally 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 invest ment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities documentation 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 clear 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 despite the Long-Term Capital Management debacle in 1998, where a exceedingly-leveraged shadow 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-balance sheet into complex legal entities called structured investment vehicles, masking the weakness of the capital base of the firm or degree of leverage or risk taken. One news agency estimated that the twitch four U.S. banks will have to return between $500 billion and $1 trillion to their balance sheets during 2009. This increased indistinctty during the crisis regarding the financial cast of the major banks. Off-balance sheet entities were also used by Enron as part of the scandal that brought down that beau monde in 2001. * As early as 1997, Federal Reserve 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-regulation of the over-the-counter derivatives market when they enacted the good Futures Modernization Act of 2000. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate against 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 not ional value rose to $683 trillion by June 2008.Warren Buffett famously referred to derivatives as financial weapons of mass destruction in early 2003. change magnitude 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 extraction duple 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 percentage 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 leash quarter of 2008, it was 290%. * From 2004-07, the top five U. S. investment banks each significantly increased their financial leverage (see 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, confine 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 l everaged 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 New York Federal Reserve Bank 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 leveraging long-term, illiquid and notional assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He de scribed the significance 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 have 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 five 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 sparings, described the run on the shadow banking system as the core of what happened to cause the crisis. He referred to this lack of cont rols as vicious 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 Northern Rock, a UK bank The International Monetary Fund estimated that large U. S. and European banks preoccupied more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.These losses are judge 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 their losses, but British and eurozone banks only 40 percent. One of the first victims was Northern Rock, a fair-sized British bank. The highly leveraged genius of its business led the bank to request security from the Bank of England. This in turn led to investor solicitude and a bank run in mid-September 2007.Calls by Liberal Democrat Shadow Chancellor Vince seam to nationalise the institution were initially ignored in February 2008, however, the British government (having failed to find a clandestine sphere buyer) relented, and the bank was taken into unexclusive hands. Northern Rocks problems proved to be an early indication of the troubles that would in brief 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 major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, upperc ase Mutual, Wachovia, and AIG. Credit markets and the shadow banking system TED spread and components during 2008 During September 2008, the crisis hit its most critical stage.There was the same of a bank run on the money market mutual 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 corporations 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 indicator 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 Stabilization 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 exist 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 prisonbreak 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 credibly to vanish forever, having been an artefact of un incumbentively loose credit conditions. While traditional banks have raised their lending standards, it was the collapse of the shadow banking system that is the primary cause of the reduction in funds available for borrowing. Global effects A number of commentators have suggested that if the liquidity crisis continues, there could be an extended ceding back or worse. The continuing knowledge 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 prominent lineages w ho remain negative.The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would see a clear global nook, with recovery unlikely for at to the lowest degree two years. Three days later UBS economists announced that the theme of the end of the crisis had begun, with the world starting to make the necessary actions to fix the crisis capital shooter by governments get inion made systemically interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the worlds central banks were now cutting interest rates.UBS evince the United States requisite to implement systemic injection. UBS hike up 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 last two quarters, the United States would last three quarters, and th e 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 aspect downwards the forthcoming recession would be the worst since the Reagan recession of 1981 and 1982 with negative 2009 growth for the U. S. , Eurozone, UK very limited recovery in 2010 but not as bad 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 spending 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 200 9, 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 zero in 2009, and Kenya may achieve only 3-4% growth in 2009, down from 7% in 2007.According to the research by the Overseas victimisation Institute, reductions in growth can be attributed to falls in trade, commodity 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 exacting 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 out-of-pocket to the crisis. In April 2009, unemployment in the Arab world is said to be a time bomb.In whitethorn 2009, the United Nations reported a drop in foreign investment in Middle- due eastern economies due to a sluggish rise in demand for oil. In June 2009, the World Bank predicted a hoodlum 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 gross domestic help product the output of goods and services produced by delve and property located in the United 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 lowest level since the government began collecting the data in 1964. Effects of Recession on India There is, at least in some quart ers, dismay that India has been hit by the crisis. This dismay 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 drive for dismay is that Indias new-fangled growth has been driven predominantly by domestic consumption and domestic investment. External demand, as heedful by merchandize exports, accounts for less than 15 per cent of our GDP. The incertitude then is, even if there is a global downturn, why should India be affected when its dependence on orthogonal demand is so limited?The answer to the above frequently-asked questions lies in globalization. First, Indias integration into the world economy ov er the last decade has been unco rapid. Integration into the world implies more than just exports. Going by the common measure of globalization, Indias two-part trade (merchandize exports plus imports), as a pro contribution 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 somatic 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 liquidity and on the promise of Indias growth potential, foreign investors were willing to take risks and provide funds at a lower cost. lowest 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 depth 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 infection of the crisis has spread to India through all the channels the financial channel, the real channel, and impor tantly, 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 liquidity squeeze, Indian banks and corporates found their abroad 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 mutual 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 reversal of capital flows as part of the global deleveraging process. Simultaneously, cor porates were converting the funds raised locally into foreign capital 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 transmittance of the global cues to the domestic economy has been quite straight forward through the slump in demand for exports. The United States, European Union and the Middle East, which account for three quarters of Indias goods and services 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 advanced economies go into a recession.Beyond the financial and real channels of transmission system as above, th e 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 orderly manner. Nevertheless, the tightened global liquidity attitude 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 purport of the above explanation is to show how, despite not organism part of the financial sector problem, India has been affected by the crisis through the mischievous feedback loops between external shocks and domestic vulnerabilities by way of the financial, real and confidence channels. Effect on Banks The real effect of recession was only realised in February 2008 in Banking Industry. Before this there were lot of questions and queries regarding whether the U. S. recess ion will have any impact on India or Indian banking sector.In Feb 2008, the markets suddenly crashed the positive picture came in front. The effects which came across the banking sector are as follow * Credit twit and loan shapements. As soon as the impact of recession was realized by the banking sector, the Indian banking system came into the mode of consolidation. Each and every bank started studying their NPAs and the amount of lending they have done which is yet to be recovered. Bank concentrated more on retail loans and Credit Card payments. The first priority for bank was to recover such amount which was unpaid 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 brat 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 whic h were given amounting to about 5% of the entire due amount. * Call money market. In the initial stages of recession there was lot 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 requirements 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 head-to-head sector banks as well as human race 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. Th is was because of the reason that banks were in the mode of consolidation and did not want 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 universe 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 question that were raised whether the undercover 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 ICI CI Bank, the liquidity was ample and it was just a few percentage of exposure that has at peace(p) as bad debt but other private marked players like HDFC Bank and Kotak Mahindra Bank encashed on these opportunities and placed their canopies next to each and every branch and ATM of ICICI Bank. There was a lot of panic which was created within the investors and they wanted to super C their funds in a safer bank. Many of them shifted to nationalized banks and others were diverted to other private 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 tumultuous 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 hundred thousand 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 keeping 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 created portfolios in different nationalised banks because of which private sector banks faced decline in their interest fee as well as corpus and faced losses. After a while this myth was disjointed by RBI governor that the government only ensures Rs. lakh in totality 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 t o retail 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-scale Cap companies the banks were demanding additional securities in cash apart from normal tangible assets. Even for processing loans for investors who had slight 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 divisions of banks were shut down and the employees were shifted to other incisions were asked to leave.This even further increased the liquidity with ban ks. * Banks Investment Primary earning for any bank is through lending. Loans were not being refined 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 reverse 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 corrected 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 liberal 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 wer e 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 revenue 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 closed down and were not functional at all. more or less of the bank had outsourced the servicing 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 re tail bank became unpopular. * Nationalised Banks popularity During all these events the only player in banking who were waiting to come-on back the market shares were the nationalised bank. There was affluent 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 willingly 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 flock 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? settle in CRR and repo rates. RBI 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 decided to take the following further measures Repo Rate To reduce the repo rate under the liquidity adjustment facility (LAF) by 100 hind end 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 soil points from 5. 0 per cent to 4. 0 per cent with immediate effect. specie Reserve RatioTo 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 productive purposes at appropriate interest rates. The Reserve Bank on its part would continue to maintain a light 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 deflationary trends. The US has reduce 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 e conomic downturn. This impact has turned out to be deeper and wider than earlier anticipated. Concurrently, because of global developments pair with supply and demand management measures at home, inflation is on the decline.Reflecting these developments, the Reserve Bank has adjusted its policy stance from demand management to arresting the continence in growth. In particular, the aim of these measures was to augment domestic and forex liquidity and to ensure that credit 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 i n 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 packet 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 past few years of the United States being a prime example.That being said, government budgets tend to go from 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 tax 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 Deal of the 1930s is a prime example 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 satiny out of the government faster 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 be ing 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 moderated 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 input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. The index of industrial occupation has shown negative growth for two recent months and investment demand is decelerating. All these factors suggest that growth moderation may be steeper and more extended than earlier projected. There are also several(prenominal) 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 take part 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 farm 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 network of social safety-net programmes, including the flagship rural employment guarantee programme, which should protect the poor and the returning migrant workers from the perfect 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 necessary adjustments to balance their assets and liabilities. Despite the 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 again. The governments fiscal stimulus should be able to supplement these efforts from both supply and demand sides. What Industry experts think? Mentioned below is what the senior experts in banking think of how the banking sector survived the crisis. 1). Mr.Anil Kumar Gupta (Vice President) Wealth management division- North and east neighborhood ING VYSYA swear 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 rat e 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 banking 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 spir it, 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 growth potential.Meanwhile, the challenge for the government and the RBI is to manage the adjustment with as little pain as possible. Conclusion 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.