Global finanacial crisis (mehul)

GLOBAL FINANACIAL CRISIS & RESULTANT
SLOW-DOWN IN INDIA

Prepared by : Mehul barot
Simple tips for employees during recession times

Recession
 What is Recession?
In economics, the term recession generally describes the reduction
of a country's Gross Domestic Product (GDP) for at least two
quarters.


What is GDP?  Gross Domestic Product
Definition : The monetary value of all the finished goods and
services produced within a country's borders in a specific time
period, GDP is usually calculated on an annual basis. It
includes all of private and public consumption, government
outlays, investments and exports less imports that occur
within a defined territory.

GDP = C + G + I + NX
1. "C" is equal to all private consumption, or consumer spending, in
a nation's economy.
2. "G" is the sum of government spending.
3. "I" is the sum of all the country's businesses spending on capital.
4. "NX" is the nation's total net exports, calculated as total exports
minus total imports. (NX = Exports - Imports)


India’s GDP
In 2008-Q3 India’s GDP slump down to 5.3%


Recession and Depression

There is a joke that economists quote to explain the
Difference between “Recession & Depression”

RECESSION
= WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRESSION
= WHEN YOU LOSE YOUR JOB


What does Sub prime meltdown mean?
 A financial crisis that arose in the mortgage
market after a sharp increase in mortgage
foreclosures, mainly sub prime, collapsed numerous
mortgage lenders and hedge funds.
The meltdown spilled over into the global credit
market as risk premiums increased rapidly and
capital liquidity was reduced. The sharp increase in
foreclosures and the problems in the sub prime
mortgage market were largely blamed on loose
lending practices, low interest rates, a housing
bubble and excessive risk taking by lenders and
investors.
It is also known as the "sub prime collapse" or "sub
prime crisis".

Sub prime loan
o A sub prime loan is a loan given to borrowers that are
considered more risky, or less likely to be able to
make their loan payments, in relation to high quality
borrowers because of problems with their credit
history.


How loan is given?
o When one go to get a loan one need to get a credit
check, and what results from this credit check is
something that is known as FICO score. A FICO score
is a number which represents how credit worthy one
is considered which is based on factors such as the
amount of money that one earn, the record of paying
back past debts, and how much debt one is currently
holding. The higher the score the better one’s credit
is considered, and is the more likely to get a loan.
o Buyers with a FICO score below 620 (generally
considered sub-prime) where in most cases
considered too risky to lend to and therefore could
not get a loan.

o After the fed lowered interest rates to historical lows
however there was so much money (also referred to
as liquidity) available that financial institutions
started offering loans to buyers with FICO score’s
below 620. Because these borrowers were considered
less likely to be able to pay the loan back than
borrowers with higher credit scores, these sub prime
borrowers were charged a higher interest rate.
o initially went very well for the financial institutions
that made these loans because in the years that
followed interest rates stayed low, the economy
continued to grow, and the real estate market
continued to expand

o Relatively few of these sub prime borrowers were
defaulting on their loans, the financial institutions
which held these loans were enjoying the additional
profits earned by charging these borrowers a higher
interest rate, without many problems.
o After the initial success and profitability for those
offering sub prime mortgages the practice expanded
dramatically and the terms which borrowers were
given in order to allow them to obtain loans became
all the more creative.


o 1. When interest rates are low in general it causes
the economy to expand because businesses and
individuals can borrow money easily which causes
them to spend more freely and thus increases the
growth of the economy.

2. What drives interest rates lower is the fact that
there is an increase in the supply of money, meaning
that there is more money to go around.

o


Sub prime mortgage crisis

 The subprime mortgage crisis is an ongoing
financial crisis triggered by a dramatic rise in
mortgage foreclosures in the United States, with
major adverse consequences for banks and financial
markets around the globe. The crisis, which has its
roots in the closing years of the 20th century,
became apparent in 2007 and has exposed pervasive
weaknesses in financial industry regulation and the
global financial system.


o Approximately 80% of U.S. mortgages issued in recent
years to subprime borrowers were
adjustable-rate mortgages. When U.S. house prices
began to decline in 2006-07, refinancing became
more difficult and as adjustable-rate mortgages
began to reset at higher rates, mortgage
delinquencies soared. The result has been a large
decline in the capital of many banks


The Sub prime Crisis Implications for India
There are direct and indirect implications not only for the
United States but for the entire world. Let us briefly the
effects of this crisis on the Indian economy.
Firstly, the sub prime crisis has led to near loss of confidence
in the American Stock Markets. Many big investment banks
have been brought down to their knees and many others are
finding it extremely difficult to stay on their feet. In order to
consolidate their respective balance sheets in the United
States, these banks are unwinding positions in developing
markets hence causing down swing in these markets. A simple
case in point was the intra day 1400 points fall on the BSE in
January 2008 that was brought about by Citi Bank unwinding
its position in many front line stocks in India.


•The sub prime that was brought upon by the
American financial system upon itself is spreading
its tentacles around the world. People who were
not even remotely connected with the sub prime
crisis are being adversely affected.


•Secondly, the near recession situation in the USA
has led to a loss of demand for Indian exports
hence loss of export earnings for India.However,
on account of the sub prime crisis, all their
sources of credit have dried up, and they are
being forced to cut down on their expenditures.
Thus demand for imports is falling, which implies
loss of revenues for countries like India. Not only
is there a loss in the goods sector, but the IT
sector is also feeling the pinch. Software
development for many US firms takes place in
India but as the American firms are facing an
economic slowdown, they are demanding less IT
products, leading to a fall in the growth rate of
the Indian IT sector.


Thirdly, investment banks and other financial
institutions are on a job slashing spree to cut
costs. This means that many jobs in India are at
stake because these institutions have their BPO’s
in India. So the first jobs to go will be the low end
Indian BPO jobs leading to increased
unemployment in India.
Fourthly, there will be serious implications for the
banking sector as well. The sub prime has meant
that the Indian banks have to follow stricter
norms while disbursing loans to the people. The
argument is this, people will be asked to provide
collateral for the loans given to them. Anybody
who is unable to furnish the collateral will be
denied a loan.

This policy will exclude a majority of the
population from institutional sources of credit,
thereby affecting growth negatively.


Fifthly, there is a risk of the financial contagion
spreading to the entire world. Firms like Bear
Sterns, Lehman Brothers, Meryl Lynch who once
inspired confidence amongst the investor class
have now gone bust. Other giants like Citi Bank,
Morgan Stanley, and AIG have been shaken from
their very foundations.
If one more big financial institution fails there
will be a collapse of the entire financial system of
the USA.


What is Financial Crisis ?
– The term financial crisis is applied
broadly to a variety of situation in
which some financial institution or
assets suddenly lose a large part or
their value.


Why Financial Crisis Occurs ?
“ In the past financial crisis have been

generated by combination of factor such
as
overshooting of market
Excessive leveraging of debt and credit
booms,
Miscalculation of risk,
Rapid outflow of capital from of a country

Causes of Recessions

1. Currency crises  Frequent change in international currency rate.

2. Energy crisis  Usually refers to the shortage of oil and additionally to
electricity or other natural resources of energy.

3. War  Ruins the country property.Refers and relate to economy.

4. Under consumption  Insufficient consumer demand relative to the
amount produced

5. Overproduction  Excess of production over consumption.

6. Financial crisis  Some financial institutions or assets suddenly lose a
large part of their value.

Airline & Hotel Industries started
“Cost Reduction” activities

iii] Salary reduction to
i] Reduce No. of flights ii] Lay off people
“Not laid off people”

Low or No income to They became careful due
In flight meals reduced
spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money
got the hit come down instead of spending

Catering company now, Demand for other goods
lays off people come down

So, you can see how the hit on Airline and Hotel
industries can affect “Un-related” industries
in the end;

One industry can hit many other industries when the
confidence level of millions of consumers & producers
drastically comes down;

Effects of Recessions

1. Credit crunches Banks may suddenly stop or slow lending activity.

2. Bankruptcies Bankruptcy typically involve concealment of assets,
concealment or destruction of documents, conflicts of interest, fraud
claims and false statements or declarations.

3. Deflation Persistent decrease in the general price level of goods and
services.

4. Foreclosures Legal and professional proceeding in which a lien holder,
usually a lender, obtains a court order of redemption.

5. Unemployment when a person is available to work and currently seeking
work, but the person is without work.

Current Markets condition
o We all know that markets have slumped.

o We read about job-loses in news papers.

o People talk about atleast 24 months of recession.

o Early entrants are not getting jobs.

o Companies are closing.

o Sales are not picking up.

o Suddenly cash has evaporated from the market.

o Profitability is seriously hit.

How to come out of Recession?

It is unhealthy for any nation to be in Recession;
So, Government will take certain countermeasures to
eliminate or reduce the effect of recession for
turnaround;

Important Point : Today, it is a market Economy,
*Producers can produce and can sell at their prices and
Consumers;can decide to buy or not…

Here both Producers and consumers are free to
act without forced action.


Government Plans against the Recession?
Hence, Government does not have direct control on
Producers’ & the Consumers’ behavior; But, they can
influence millions of Producers &Consumers with
Government’s policies;
Government has 2 plans

Fiscal Policies Monetary Policies
(By Govt.) (By RBI)

Government influences the RBI manipulates
economy by changing how the available supply of
it (Government) spends money in the country
and collects money

Govt control through RBI
Repo Rate: Repo rate is the rate at which the banks can borrow
money from a central bank of the country in order to avoid
shortage of funds. It is also a financial & economic tool in the
hands of government to control the availability of money
supply in the market by altering the repo rate from time to
time.Current repo rate is 4.7 %.

Reverse Repo Rate :Reverse Repo rate is the rate at which
Reserve Bank of India (RBI) borrows money from banks. Banks
are always happy to lend money to RBI since their money are
in safe hands with a good interest. Current rate is 3.25 %.

CRR :Cash Reserve Ratio is the amount of money that the banks
have to necessarily keep with the RBI.The RBI pays the interest
on the amount kept with it. Current CRR rate is 5.0 %.

Govt_Fiscal Policies
See the flow :

Fiscal Government influences the economy by changing
Policies how Government spends and collects money

1] Tax cuts for More money
businesses or available for
for individuals spending

2] More spending Individuals get Demand picks
by Govt. to salary and spend up; Market
create jobs money can recover;
3] Automatic
Some income to
fiscal policy;
unemployed
Unemployment
people to spend
Insurance

Govt_Monetary Policies
See the flow :

Monetary Government manipulates the available supply
Policies of money in the country

More money
1] Reduce CRR
available for bank
for banks
to give loans
Demand picks
up; Market
2] Lower the
Individuals take
can recover;
Repo & Reserve
more loan
repo rates`

What about India in global market crises

Most of the developing Currently, GDP Growth
economies like China, Slow Down Rate Down; But,
India; Stage; Not yet Still expected to be
in Recession Around 6% in India

Most of the developed
economies like US, Currently, GDP Growth
Japan, Germany, etc in Recession Rate Negative;


Employee - What do I do during recession?

TGC Prasad, Bangalore

Wise Employer-Recession as Challenge
o Rather than earning the profit some wise employer treat this recession
as a challenge and to keep employees moral up and maintain the
relation with industrial harmony.
o Took this time to set the good belief and confidence among the all
employees within the recession.
o Encourage their employees for enhanced training programs,to increase
their domain knowledge as per the company’s future work policies,and
prepare the skill sets required after the recession time.
o Offers professional and personnel development programs which will
helps an every individual throughout their lifetime.
o Reviews their company policies and re-structure and makes the
positive changes with the help of expert’s opinion.
o Instead of deployment,thinking to retain the talent and experience
with the committed options.
o Implement the energy cost saving policies.
o Hunting for new customers by offering low cost and better quality
service.
o Take the advantages of Govt. policies during the recession time.

Don’t worry
What goes down will always go up, Markets will
rebound – these tips will prepare you to be a
winner !!

HOPING THIS TIME RECESSION VANISHES SOON SO THAT
INDIA GETS BACK TO ITS STRONGER
GDP GROWTH RATE OF 8% TO 10% .
(AS PER THE EXPERSTS OPINIONS
IT WILL LAST TILL Q3 of 2009)..
You can be updated yourself with the current economic condition through
‘Business TV-channels,News,News papers’.

Global finanacial crisis (mehul)

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Semelhante a Global finanacial crisis (mehul)

Semelhante a Global finanacial crisis (mehul) (20)

Último

Último (20)

Global finanacial crisis (mehul)