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Sub-prime mortgage has recently been doing the rounds at smoke breaks and tea time conversations. Each individual seems to have their own perception of what subprime mortgage is. Let us come to terms with it through this article.

What exactly is sub-prime mortgage?
It is basically money lent by a lender or bank to an individual who needs to pay up loan instalments he has defaulted to another bank. Such a person with a bad credit history known as a sub-prime borrower gets a reprieve through the services of these banks or lenders who see a huge market for sub-prime mortgage.

A peek into US subprime mortgage history
When the housing boom between 2001 and 2005, happenned in the United States due to the low interest rates among other factors, property prices saw a phenomenal hike. Hence, many of the ecomically weaker borrowers who had defaulted instalments saw a dramatic rise in their property value.

The lenders and banks targeted this section of the market sensing the market potential of this rise in property value. They lent money for these individuals to pay back their loans. The picture was rosy for these lenders until the bubble burst and the property market crashed. Many of these sub-prime mortgage lenders had to declare bankruptcy.

US Vs. India sub-prime mortgage scenario
The borrower market in India is more non-prime than sub-prime. Lenders in the unorganized money lending sector and small local banks available in the nooks and corners cater to the large population of economically weaker sections who have a long standing relationship with them.

To give better clarity consider the case of the local shopkeeper who borrows in the morning and pays back in the evening. He is more comfortable with the daily lending arrangement. The local vendor may borrow 90Rs. in the morning and pay back 100Rs. Even though he pays back with a lending interest of 4000 per cent per annum it works out better from a practical viewpoint than take a loan from a bank which charges an interest rate of 40 -50% on a long term loan. The former arrangement serves his purpose better.

Why banks cannot penetrate the non-prime market?
The unorganized lending market which lends to individuals for an emergency may charge exorbitant time based interest rates on relatively small amounts of borrowed money. The borrowers may pay back the amounts at the first available opportunity to ensure continuous cash flow and to cut down interest. On the other hand the lenders could use muscle power to get back the money.

Banks like the ICICI are finding it difficult to penetrate this non-prime market and the number of defaulters are on the increase hence forcing the bank to remove the loan options for this sector. The recovery agents can only push the borrowers so much and anything more can bring in criticisim for the bank’s reputation.

In India, a borrower, once a defaulter is considered always a defaulter. Banks are generally skeptical to lend to borrowers with a poor credit history and even with security it can still be difficult. Hence indiscriminate lending and continous defaulting seems a distant possibility in India, which alone can cause a sub-prime mortgage crisis.


2341 Responses to “The US Sub-prime mortgage crisis and impact on India”  

  1. 1 Adarsh

    I have been surfing information on sub-prime mortgage crisis. I found your article very lucid and simple to understand. Thanks.

  2. 2 P.K.Venkatachalam

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  3. 3 karan nangla

    i am a law student in second year…can u please explain me in more lucid way?

  4. 4 Rohan

    It is good article to have a basic knowledge of Sub prime Mortagage. it would eb helpful to provide links to have a deeper understanding.

  5. 5 Nimish Adani

    @P K Venkatachalam,

    What exactly would you like to know? Please be more specific.

    @Karan,

    We have tried to be as lucid as possible. If you’d like a more lucid explanation, then I’d suggest that you do a bit of Googling on the terms that you are not able to understand. :-)

  6. 6 prateek

    well, very gud article,i lyk da way evrythins explained…a small query, i heard last week dat our govt has given a waver of Rs 60,000cr 2 farmers endin all dere debts in budget-08,so wont it lead india 2 dis crisis???….banks ll giv money 2 dem widout lukin in2 dere credit history!!…

  7. 7 Priyankar

    But where is the part which explains the impact of US sub - prime crisis in India??

  8. 8 Nimish Adani

    @Prateek,

    It’s impossible to answer your question without a flavour of politics. Yes, any waiver or subsidy will affect the budget available to the Government for other measures. But that does not imply that banks will give them money blindly. At least the non-state-owned banks are smart enough to take the Government’s waivers into account before reaching out to this segment.

    @Priyankar,

    The last paragraph is where you need to look. :-) We have not attempted a detailed analysis but tried to explain it from a lay perspective. Maybe you could look up other online business publications for a more detailed analysis of the impact of the sub-prime mortgage crisis on India.

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    The unorganized lending market which lends to individuals for an emergency may charge exorbitant time based interest rates on relatively small amounts of borrowed money. The borrowers may pay back the amounts at the first available opportunity to ensure continuous cash flow and to cut down interest. On the other hand the lenders could use muscle power to get back the money.

    Banks like the ICICI are finding it difficult to penetrate this non-prime market and the number of defaulters are on the increase hence forcing the bank to remove the loan options for this sector. The recovery agents can only push the borrowers so much and anything more can bring in criticisim for the bank’s reputation.

    In India, a borrower, once a defaulter is considered always a defaulter. Banks are generally skeptical to lend to borrowers with a poor credit history and even with security it can still be difficult. Hence indiscriminate lending and continous defaulting seems a distant possibility in India, which alone can cause a sub-prime mortgage crisis.

  12. 12 Chiranjeevi

    Chiranjeevi, the actor, has finally arrived on the political scene of Andhra Pradesh by launching his party Praja Rajyam or people’s rule.

    The actor tried to strike a chord with the gathering at the temple town of Tirupati in true cinematic style with social justice and rooting out corruption on the top of the party’s agenda.

    He may have played the scene many times with panache on the silver screen, but it is real life and the question that would trouble him is whether the sea of humanity that came for his show would actually translate into votes.

    However, the actor on his part left no stone unturned in wooing the people who matter the most, the masses.

    The actor who bid adieu to his film career revoked his humble past to counter criticisms that he would hardly know the needs of the common man since he belongs to the glamorous field.

    The newly born formation is likely to alter political equations in the state that goes to polls as early as March 2009.

    While the Congress has welcomed the development, it has repudiated claims that the move could create a dent in the party’s following. TRS, refusing to be drawn into a controversy, is keeping a watch on the proceedings.

    The TDP, on the other hand, is of the view that Chiranjeevi’s party would dethrone the Congress.

    The Left has welcomed the development saying it will benefit the party as the votes will get divided.

    Mammoth rally, great crowd and sea of supporters, all the ingredients that can send alarm bells ringing in rival political camps, is a new political upheaval on the cards or just another filmy stuff? Will this NTR make a splash?

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  14. 14 chinaman

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  15. 15 deepa

    can u tell whether the effect of us crisis will be for a long term in indian real estate sector

  16. 16 Hey

    Can u tell me when will my home loan finish which was taken in 2004 december for rs 525000 @ 8% pa for 10 yrs. Now interest rate is 13.5% . I was paying an emi of rs 6305/. From Jan 2009, I am ready to pay an EMI of Rs 10000/- Pl tell me by when my loan will finish.

  17. 17 Cybercorrespondent

    A look into Barack Obama’s past might shed some light on the crisis
    Barack Obama joined Trinity United Church of Christ more than 20 years ago and considered the church pastor, Rev. Jeremiah Wright as his mentor. Rev. Wright married Obama and his wife Michelle, baptized their two daughters and is credited by Obama for the title of his book, “The Audacity of Hope.” In his sermons, Rev. Wright repeated denunciations of the U.S and blurted out statements like “The government gives them the drugs, builds bigger prisons, passes a three-strike law and then wants us to sing “God Bless America.” No, no, no, God damn America, that’s in the Bible for killing innocent people,” he said in a 2003 sermon. “God damn America for treating our citizens as less than human. God damn America for as long as she acts like she is God and she is supreme.”
    Looking at Obama’s ties to Rev. Wright, and his connections to a terrorist bomber, William Ayers, both men who would like nothing more than to destroy this country causes many people to second guess Obama’s intentions for change. If you have not heard about William Ayers, you can read about him in the U.S. News, Michael Barone’s column-Obama Needs to Explain His Ties to William Ayers. “In my U.S. News column, I make a brief reference to the unrepentant Weather Underground terrorist bomber William Ayers and his connections to Barack Obama. They were closer than Obama implied when George Stephanopoulos asked him about Ayers in the April 16 debate—the last debate Obama allowed during the primary season. To get an idea of how close they were, check out Tom Maguire’s Just One Minute blog and Steve Diamond’s Global Labor and Politics. The Obama-Ayers relationship is also mentioned in David Freddoso’s The Case Against Barack Obama: The Unlikely Rise and Unexamined Agenda of the Media’s Favorite Candidate.”

    Lets examine Obama’s connection with an accused political fixer Antoin “Tony” Rezko. The following is on explanation by Brian Ross and Rhonda Schwartz from ABC News. “In sharp contrast to his tough talk about ethics reform in government, Sen. Barack Obama, D-Ill., approached a well-known Illinois political fixer under active federal investigation, Antoin “Tony” Rezko, for “advice” as he sought to find a way to buy a house shortly after being elected to the United States Senate. Rezko had been widely reported to be under investigation by the U.S. attorney and the FBI at the time Obama contacted him and has since been indicted on corruption charges by a federal grand jury in a case that prosecutors say involves bribes, kickbacks and “efforts to illegally obtain millions of dollars.”
    Because Barack Obama was a dependable ally of subsidized developers in the Legislature, his friend and fund-raiser Rezko depended on him to get things done such as cosponsoring a bill in 2001 allowing developers to pocket half of the proceeds from selling state tax credits to others. Obama admitted that his decision to involve Rezko was “a bone-headed mistake.” What he failed to mention is that he has a closet full of bone-headed mistakes such as Peter Wallsten pointed out in the Los Angeles Times on
    January 24, 2008.
    “Barack Obama angered fellow Democrats in the Illinois Senate when he voted to strip millions of dollars from a child welfare office on Chicago’s West Side. But Obama had a ready explanation: He goofed.

    “I was not aware that I had voted no,” he said that day in June 2002, asking that the record be changed to reflect that he “intended to vote yes.”
    That was not the only misfire for the former civil rights attorney first elected to the state Senate in 1996. During his eight years in state office, Obama cast more than 4,000 votes. Of those, according to transcripts of the proceedings in Springfield, he hit the wrong button at least six times.”

    Now comes the big question, what exactly does a community organizer do?
    One thing Barack Obama did as a community organizer was pressure banks to make bad loans. In Barack Obama’s youthful community organizing days he joined a group called ACORN. Using the Community Reinvestment Act which was designed to encourage banks to make loans to high-risk borrowers, ACORN started abusing the law by forcing banks to make hundreds of millions of dollars in ’subprime’ loans to minorities with bad or no credit. Using charges of racism and threats to use CRA to block business expansions have enabled ACORN to extract hundreds of millions of dollars in loans and contributions from America’s financial institutions.
    Other things that ACORN did as community organizers were agitate for higher minimum wages, attempt to thwart school reform, try to unionize welfare recipients who are obliged to work in exchange for benefits and organize voter registration drives. In 2006 for example, their voter registration drive in Washington produced 1,800 new voters of which 1,794 names submitted were fake. The secretary of state called it the “worst case of election fraud in our state’s history.”
    If you like to know more, watch these two videos.
    http://www.youtube.com/watch?v=nRmB93McZeI
    http://www.youtube.com/watch?v=_MGT_cSi7Rs

    Cybercorrespondent
    http://cybercorrespondent.blogspot.com

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  19. 19 Cybercorrespondent

    Thursday morning I turned on the news and heard that ACORN is under investigation for voter fraud in a number of states. Since I learned not to trust what the media tells us, I decided to have a look what the bloggers had to say. On a sight called A Look Into Barack Obama’s Past - Obamamania - Zimbio website I found the following comment that made me think.
    A concerned citizen
    Oct-6-08 7:48pm [Edit]
    Those two videos paint a very clear picture. As the terrorists have promised, they will destroy this country from with in. …..

    http://www.youtube.com/watch?v=puN9X1mVgRA ……..

    http://www.youtube.com/watch?v=vjvBEKrGkDI …….

    Back to my point. By allowing the voter fraud to go on, makes this great country look like a third world dictatorship. We are supposed to send an example to the rest of the world how honest elections are held and not allow the media to distort the facts. Please people, wake up and tell the media no more. Boycott all the products advertised on publications like the Newsweek, Time magazine and other propaganda machines like the New York Times. Also do the same with CNN and other communist propaganda news sources. Even the Fox News network is starting to sway the viewer decision. After Thursday’s presidential debate, watching Chris Wallace interview a communist from Saint Louis made me sick. Even bad journalists should realize that when you ask a communist or a skin head to give you their views, you can pretty much expect what they are going to say.
    I certainly had enough of all of the $%#@Comunism.org
    Cybercorrespondent

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