Subprime effect on Indian markets

August 12, 2007

Subprime effectSub prime lending, also called ‘B-Paper’, ‘near-prime’ or ‘second chance’ lending, refers to the practice of making loans to borrowers at interest rates above the prevailing market rates because of their low credit status and increased risk due to either a limited credit history, or histories of payment delinquencies, charge-offs or bankruptcies.

Sub prime lending includes mortgages, credit cards and car loans and is risky for both lender and borrower. It helps those consumers who otherwise would not have access to credit market but on the flip side the borrowers do not have the resources to meet the long term loan obligations.

But the crisis began in 2006, when in US, thousands of borrowers defaulted in payments as a result many lenders had to file for bankruptcy leading to a direct impact U.S. housing market and economy as a whole.

The impact can be that there could be a likely recession in US which would eventually affect entire world economy. India itself does not have any exposure to subprime lending and is not completely dependent on the US. Also the huge internal market demand in India is self-sufficient for its growth. So, in the wake of falling share prices owing to negative sentiments, there may be a good buying opportunity for investors.