Dear All,
The term sub-prime actually means “something that is not prime” or “something that is of a lower grade”. Technically speaking, subprime (loans) refers to loans made to people who may face repayment difficulties in future. As nations become economically advanced, financial institutions maintain records relating to the borrowing, earning and lending history of individual borrowers. Such information is popularly known as Credit information. In India Credit Information Bureau of India (CIBIL) is the body that maintains credit profile of the Indian citizens. Therefore, borrowers categorized under sub-prime category have credit histories that include limited debt experience, no possession of property assets that could be used as security, a history of late or sometimes missed payments, failures to pay debts completely etc.
The Subprime crisis started in the USA in 2007 when the property prices started declining steeply as a result of rise in interest rates. It caused difficulties in refinancing of the loans backed by the security of these properties. As a result, the borrowers who were already under subprime category faced difficulties in repayment leading to mortgage delinquencies and foreclosures. Global investors also drastically reduced purchases of mortgage-backed debt and other securities. In addition to causing increased delinquencies and foreclosures in subprime mortgages the crisis caused a decline in the capacity and willingness of the private financial system to support lending, tightening credit around the world and slowing economic growth in the USA and Europe. Since easy loans for property acquisitions were available in the USA, significant amounts of foreign money flowed into the USA from fast-growing economies in Asia and oil-producing countries and consumers assumed an unprecedented debt load. As housing prices declined, major global financial institutions that had borrowed and invested heavily in Mortgage Backed Securities reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy.
India also witnessed the effect of the global meltdown in early 2008 and continued till end of 2009 or early 2010. The securities markets crashed and Banks experienced liquidity crisis. However, the institutions could sail through the difficult times which was mainly attributed to the strong regulatory / supervisory role played by the RBI in the provisioning requirements.
For more information refer
Regards,
CA Rahul Joglekar
Partner
Gokhale & Sathe
Chartered Accountants
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