Global finanacial crisis (mehul)

Simple tips for employees during recession times

GLOBAL FINANACIAL CRISIS & RESULTANT SLOW-DOWN IN INDIA

Prepared by : Mehul barot


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.

Recession


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 + NX1."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)

What is GDP? Gross Domestic Product


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

India’s GDP


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


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".

What does Sub prime meltdown mean?


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.

Sub prime loan


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.

How loan is given?


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 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


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.

Sub prime mortgage crisis

http://en.wikipedia.org/wiki/Financial_crisis


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

http://en.wikipedia.org/wiki/Adjustable-rate_mortgages


The Sub prime Crisis Implications for IndiaThere 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.


– 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.

What is Financial Crisis ?


“ In the past financial crisis have been

generated by combination of factor such as

overshooting of marketExcessive leveraging of debt and

credit booms,Miscalculation of risk,Rapid outflow of capital from of a

country

Why Financial Crisis Occurs ?

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.

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

In flight meals reducedLow or No income to spend and buy goods

They became careful dueto the fear of loss of job

Meals supplying companygot the hit

Catering company now,lays off people

Demand for other goodscome down

Started saving moneyinstead of spending

Demand for other goodscome down

Airline & Hotel Industries started “Cost Reduction” activities

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 & producersdrastically 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 conditiono 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(By Govt.)

Monetary Policies(By RBI)

Government influences the economy by changing howit (Government) spends and collects money

RBI manipulates the available supply of money in the country


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 :

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

1] Tax cuts for businesses or for individuals

More moneyavailable forspending

Demand picksup; Market can recover;

2] More spending by Govt. to create jobs

Individuals getsalary and spendmoney

3] Automatic fiscal policy; Unemployment Insurance

Some income tounemployed people to spend

Fiscal Policies


Govt_Monetary Policies

See the flow :

1] Reduce CRR for banks

More moneyavailable for bankto give loans

Demand picksup; Market can recover;

Government manipulates the available supply of money in the country

MonetaryPolicies

2] Lower the Repo & Reserve repo rates`

Individuals takemore loan


What about India in global market crises

Most of the developingeconomies like China,

India;

Currently, Slow Down

Stage; Not yet in Recession

Most of the developedeconomies like US,

Japan, Germany, etcCurrently,

in Recession

GDP GrowthRate Down; But,

Still expected to beAround 6% in India

GDP GrowthRate Negative;

TGC Prasad, Bangalore

Employee - What do I do during recession?


Wise Employer-Recession as Challengeo 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’.


Economy & Finance

Global finanacial crisis (mehul)