Monday, February 25, 2008

RBI Increases MNC Monitoring Fearing Subprime Crisis

by Phillip Horton

The US led Subprime mortgage crisis has affected the economies of the world and the effects of the crisis are yet to be fully realized for some nations. In Asia the effects of the subprime crisis for some time now has had little or no effect on the Chinese and the Indian economies but government institutions like Reserve Bank of India are stepping up their efforts so that the effects of the subprime mortgage crisis can be averted. The Reserve Bank of India recently indicated that it has tightened its monitoring process on the foreign banks doing business in India. Many banks have written down loans amounting to millions of dollars in the wake of the subprime mortgage. Anand Sinha, the executive director of RBI hinted last week in a seminar that RBI would be closely following the MNCs doing business in India. The top officials in policy making in January had said that the spreading fallouts of the subprime mortgage crisis for India have not been that significant.

Y. V. Reddy, governor of the Reserve Bank of India expressed that extraordinary developments in the west were ominous of increased instability and it can be a risk for the regular carrying on of the monetary policy and more so for market economies. This opinion by the high official clearly states that the Reserve Bank of India is trading very cautiously in the wake of the US led subprime crisis. In the opinion of Anand Sinha, executive director of RBI India so far did not have to suffer from any financial disaster and this is the sign of the strength of the local banking mechanism in India. The same situation in the United States and in Europe is far different, as in these parts of the world many of the top most banks had to suffer crises due to their exposure to the loans which were borrowed by customers who had very bad credit history. So far these banks have waived loans amounting to $150 billion. The possibility of further loan write offs is expected to go on and the amount so waived off will rise to $400 billion.

In the wake of the subprime crisis the foreign banks have become cautious and are removing their exposure and credit limits all over the world. The foreign banks operating in India too have cut down their exposure and these banks are treading very carefully while giving loans to Indian companies to fund their foreign needs. The executive director also sounded a warning alert on the likelihood of predatory race which will take hold of the local banking system in the country. The executive director also detailed that banks in search of funds initiated the whole US subprime mortgage crisis. Unstable deposits and not core deposits was the reason behind banks looking for funds in the United States. Sinha said that if India wants to avoid such crisis there has to be higher financial inclusion and banks must maintain higher quality of deposits. Economic stability lies in core deposits he further added.

 

 

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