All of us are already well verse with current financial scenario which has unfolded before us. Free economy is under serious distress in Uncle Sam’s country and in the entire world. Sub-prime is the terror word nowadays. Each and every company, financial analyst, trader, banker, investor and even Pakistan are accusing Ninjas (No Income No Assets) of USA who were granted loans but they never bothered paying back for their recent downfall from grace. This crisis has bankrupted biggest names in B-world and severed many dreams of career switches.
These rumblings have impacted India as well. Markets are slumped to their lowest lows because they are emotionally attached to global cues. ICICI is rumoured to go bust. DLFs and Unitechs of world are on free fall. Even Infy has deducted my salary component even though dollar is up. Our esteemed PM says "we are not immune to global problems but our banking system is well capitalized and insulated from sub-prime crisis"
I dont know much about health of our financial system but I have no doubt that what happened in US can not happen in India. We will not see any sub-prime crisis in Indian real estate market. We will not see our banking system crash. Reading this, you might tend to feel proud that our banks are based on strong foundations and they would have been following the principle of banking and leveraging very religiously. Well, I think its partly true but the main reason why sub-prime crisis can not happen in India is corruption. Yes, you read it right. India has always been Utopian country in all corruption indices but its due to corruption that we will remain immune to sub-prime.
Before I explain how, lets have a quick primer to understand what the hell is this sub-prime crisis [people who know can move next para]. In a bid to increase their profits and to help beggars realise their "home sweet home" dream , US banks started disbursing home loans to people who didnt have enough income and हैसियत to pay back that loan. This was done on assumption that property value will always rise and banks can always takeover the property in case of default to recover their loan amount. It was come all, take all scene. Banks were doing it for higher interest rates. Loads of scums (having poor credit history) started availing these loans to buy homes which couldnt even dream of. This bubble started ballooning and so did the commissions of bankers but as Prem Chopra once said famously "नंगा नहायेगा क्या और निचोडेगा क्या?" people started defaulting on loans. Some of them defaulted at their first instalment itself. Suddenly market was flooded with these flats and obviously prices came down. With prices, bank's recovery amount came down. Now banks were forced to write-off these bad debts. This issue had an "action-reaction" effect on entire banking sector and world started facing another recession. [There are many other related factors but lets leave those just now]
As you know sub-prime is related to property. In US, when somebody buys any property, they get it registered with govt. after paying registration amount on cost of flat. Say if flat is of 1 Million, they will declare that to govt and will pay fee on full amount and loan will also be disbursed on registration amount.
In India, if a house costs 1 Million, we will get it registered for only 5 Lakh to govt to save on registration fee (which is 8% on registration amount) Bank will still disburse loan on registration amount. Buyer will give seller 5 Lakh in cash, black money as they call it because neither buyer nor seller have declared this to govt or IT deptt and they intend to keep it black. Property will be in bank's name only and in case buyer defaults, bank will auction the property to recover their money. Now, picture this, property's actual value is 10 Lakh. Bank need to recover 5 lakh. In worst case scenario, property value will come down by 50%, bank will still recover its entire amount + EMIs already paid. So bank will never have to write-off a loan as bad debt and our banking system will never crash due to sub-prime crisis.
As Gurdaas Mann once said, "Maade bande ch vi koi gun changa hovega, jyon hunda gunkari vadkhu lahsoon di gandi da". There's always a good aspect of worst. So, corruption is our insulation from sub-prime rather than strong banking practices (we all know how we are sold banking and insurance products).
So, dont worry. Invest, trade, speculate and live life to fullest till 2012.
Tuesday 14 October 2008
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2 comments:
I agree... land prices are not governed by individual’s or a big investment company’s demand but by bhu-mafia’s game plan.
This is like a start of the fall of Investment banking, you deposit money in bank and bank invest in the companies whoes shares are spread across the nation with people who may not necessarily know or understand anything about the company whoes share they hold aiming for quick money, and the many other non business factors that govern the outcome. Companies should have the liberty to control any stock trading, they should be able to freeze any trading when they wish to, this will create a cautious investment procedures. And anyone who have any problem need not invest lest they have any interest in the companies operations! What Lehman bankruptcy managed to create was panic which is till causing shockwaves throught the world just because of the emotional approach of market.
Almost like voting power, where majority go and vote without knowing much about what is going on in New Delhi!
Few other aspects are that, in here short time credits are high - each and every purchases are made on credit cards and there is facility to transfer balance if you buy different cards. And there are bankrupt banks in India as well. In kerala there were many banks(Fedral bank, Lord krishna bank etc) that gave loans to the Gulf returnees and they ultimately ran out of money and got aquired by Centurian Bank. A very famous bank of kerala, Nedungadi bank sank when they invested the money in some shares during the Ketan Mehta era and they got aquired by PNB.
We have a very stable model of economy, govt budgets are still whole targeted on Agriculture.
I am not very keen on things I might be saying, still for the sake of it.
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