Sub Prime Mortgage

"Indian share markets are falling due to subprime loans default in US". If you have read business section of your newspaper in the month of august subprime market/mortgage/lending was a sort of cliche. So we ll start with understanding the term.



Subprime lending is giving loan to borrowers with poor credit history. Financial institution complacent with booming economy started making loans to borrowers which have defaulted in the past, expecting a better return if borrowers are able to return the amount. Since borrowers take risk to loan people with poor credit history they therefore charge them with higher interest rate as compared to the one prevailing in market.



The idea was justified as the economy was growing, but however starting December 2006 and and till Aug 07 there were more than 2 dozen sub prime lenders filing bankruptcy due to steep rise in subprime defaulters. Bust of housing bubble in US, where people with poor credit history were given 100% loan, led to the crisis.The worry spread and there was panic at Wall Street as well, US share markets recorded sharp drops.



Indian Stock markets very much inspired by global cues saw bears overpowering the bulls.

People were still not clear whether subprime default at US should affect us but the panic spread. As Swaminathan S. Anklesaria Aiyar in his Sunday Article rightly said with all risks now being converted to tradable assets the crisis had to have obvious affect worldwide. With German, Australian banks had immediate effect and Bank Of China too disclosed that it had some stakes in mortgage market. Though indian banks have not shown much exposure to it but there are good enough reasons to be cautious.



References:

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

http://www.swaminomics.org/