Today, global financial crisis
is a topic that is most
widely discussed. The magnitude of the impact has been
certainly severe. The crisis has not been confined to a single
nation but every country of the world experienced its brunt. This has
far reaching implications on economic growth, financial stability,
and public confidence in the financial system. Symptoms of the
crisis were identified way back in the year 2001. It has now
entrenched itself very well and quite likely, we have to live with the crisis
for some more time. It is certainly not easy to come out of the same
unscathed. Though much is written about the global financial
crisis, there is a felt need to document all the developments at one
place in a proper sequence.
In the year 2000, there was a slowdown in the US housing
sector. As part of the revival of the country's economy, it was
rightly attempted to develop the infrastructure sector in a big way
for which huge investment was called for. This, in turn, was expected
to create more income and thereby promote further demand for
products and services. In this context, housing sector, as a part of
infrastructure sector, was considered on priority basis. Hence, for
the revival of this sector, the US Federal Reserve Bank reduced
the rate of interest drastically in 2001. This, in turn, boosted the
Housing Mortgaged Loan Market, much beyond anybody's
imagination. Everyone wanted to own a house. Hence, banks decided
to encash on this business opportunity by stepping up credit
flow into this sector. Prior to the slow down, i.e., in the year 2000,
banks were conservative in lending housing finance. Such
finance was lent to prime borrowers who fulfilled three criterions: (i)
Whose rating was good, (ii) Who were ready to offer collaterals and (iii)
If the title deeds of the mortgaged properties were clear. Banks were known
for observing due diligence in lending. And, lending decisions were
guided primarily by the rating of borrowers given by the professional
and independent rating agencies and, the sufficient arrangements
were in place to cover credit risk. Hence, Non-Performing Loans
(NPLs) were negligible, with net NPL as a percentage of total credit was
less than 0.5. |
