Meaning of Bank

An Institution having the following features: It deals with money; it accepts deposits & advances loans It deals with credit; has the ability to create credit Its a commercial organisation; its aim is to earn profit It is a unique financial institution that creates demand deposits which serve as a medium of exchange &, as a result, the banks manage the payment system of the country. FUNCTIONS: Accepting Deposits Fixed Deposits Account Current Deposits Account Savings Account Recurring Deposit Account Agency Functions Remittance of Funds Collection & Payment of Credit Instruments Execution of Standing Orders Purchasing & Sale of Securities Collection of Dividends on Shares Income Tax Consultancy Acting as Trustee & Executor Acting as Representative & Correspondent Advancing of Loans Money at Call Cash Credit Overdraft Discounting of Bills of Exchange (BoE) Term Loans General Utility Function Locker Facility Traveler's Cheque Letter of Credit Collection of Statistics Underwriting Securities Gift Cheques Acting as Referee Foreign Exchange Business

Role of Commercial banks: Capital formation Generation of Savings Mobilization of Savings Canalization of Savings in productive uses Encouragement to Entrepreneurial innovations Monetization of Economy They buy debts & in exchange, create Demand Deposits Convert Non-Monetized sectors into Monetized sectors by spreading their branches in rural & backward areas. Influencing Economic activity through : Rate of Interest

Availability of Credit Implementation of Monetary Policy Control & Regulation of credit by the monetary authority is not possible without the active co-operation of the banking system in the country. Promotion of Trade industry Regional Development Development of Agricultural & other neglected sectors Types of Banks: Commercial banks Industrial Banks Agricultural banks Exchange Banks Savings Banks Central Banks

Public Sector Banks In India

Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932). Oriental Bank of Commerce (OBC), a Governmet of India Undertaking offers Domestic, NRI and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Raiasthan) disbursing small loans. This Public Secotor Bank India has implemented 14 point action plan for strengthening of credit delivery to women and has designated 5 branches as specialized branches for women entrepreneurs.

The following are the list of Public Sector Banks in India Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank

Union Bank of India United Bank of India Vijaya Bank

List of State Bank of India and its subsidiary, a Public Sector Banks State Bank of India o State Bank of Bikaner & Jaipur o State Bank of Hyderabad o State Bank of Indore o State Bank of Mysore o State Bank of Saurastra o State Bank of Travancore

Private Sector Banks

Private banking in India was practiced since the begining of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was Indus Ind Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest development bank in the world as Private Banks in India and has promoted a world class institution in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.

List of Private Banks in India Bank of Punjab Bank of Rajasthan Catholic Syrian Bank Centurion Bank City Union Bank Dhanalakshmi Bank Development Credit Bank Federal Bank HDFC Bank ICICI Bank IDBI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank

Karnataka Bank Karur Vysya Bank Laxmi Vilas Bank South Indian Bank United Western Bank
Axis Bank

Cooperative Banks in India

The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businessess of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary cooperative banks. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Cooperative Societies) Act, 1965.

Cooperative banks in India finance rural areas under: Farming Cattle Milk Hatchery Personal finance

Cooperative banks in India finance urban areas under: Self-employment Industries Small scale units Home finance Consumer finance Personal finance

Some facts about Cooperative banks in India

Some cooperative banks in India are more forward than many of the state and private sector banks. According to NAFCUB the total deposits & lendings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks. This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, their ability to catch the nerve of the local clientele

Regional Rural Banks in India

Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. Apart from SBI, there are other few banks which functions for the development of the rural areas in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as HARCOBANK plays a vital role in rural banking in the economy of Haryana State and has been providing aids and financing farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and giving service to its depositors.

NABARD
National Bank for Agriculture and Rural Development (NABARD) is a development bank in the sector of Regional Rural Banks in India. It provides and regulates credit and gives service for the promotion and development of rural sectors mainly agriculture, small scale industries, cottage and village industries, handicrafts. It also finance rural crafts and other allied rural economic activities to promote integrated rural development. It helps in securing rural prosperity and its connected matters.

Sindhanur Urban Souharda Co-operative Bank

Sindhanur Urban Souharda Co-operative Bank, popularly known as SUCO BANK is the first of its kind in rural banks of India. The impressive story of its inception is interesting and inspiring for all the youth of this country.

United Bank of India

United Bank of India (UBI) also plays an important role in regional rural banks. It has expanded its branch network in a big way to actively participate in the developmental of the rural and semi-urban areas in conformity with the objectives of nationalisation. Syndicate Bank was firmly rooted in rural India as rural banking and have a clear vision of future India by understanding the grassroot realities. Its progress has been abreast of the phase of progressive banking in India especially in rural banks.

Foreign Banks In India

Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. New rules announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allows them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that forign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. Please see the list of Foreign banks in India till date.

List of Foreign Banks in India ABN-AMRO Bank Abu Dhabi Commercial Bank Bank of Ceylon BNP Paribas Bank Citi Bank China Trust Commercial Bank Deutsche Bank HSBC JPMorgan Chase Bank Standard Chartered Bank Scotia Bank Taib Bank

By the year 2009, the list of foreign banks in India is going to become more quantitative as number of foreign banks are still waiting with baggage to start business in India.

Upcoming Foreign Banks in India

By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for foreign banks in India greater freedom in India. Among them is the world's best private bank by EuroMoney magazine, Switzerland's UBS.

The following are the list of foreign banks going to set up business in India Royal Bank of Scotland Switzerland's UBS US-based GE Capital Credit Suisse Group Industrial and Commercial Bank of China
Merrill Lynch is having a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms. GE Capital is also having a wide presence in consumer finance through GE Capital India. India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from.

The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009.

Indian Banks Association (IBA)

The Indian Banks Association (IBA) was formed on the 26th September, 1946 with 22 members. Today IBA has more than 156 members comprising of Public Sector banks, Private Sector banks, Foreign banks having offices in India, Urban Co-operative banks, Developmental financial institutions, Federations, merchant banks, mutual funds, housing finance corporations, etc.

The functioning of IBA

To promote sound and progressive banking principles and practices. To render assistance and to provide common services to members. To organise co-ordination and co-operation on procedural, legal, technical, administrative and professional matters. To collect, classify and circulate statistical and other information. To pool together expertise towards common purposes such as reduction in costs, increase in efficiency, productivity and improve systems, procedures and banking practices. To project good public image of banking through publicity and public relations. To encourage sports and cultural activities among bank employees.

Types of Banking Systems: Branch Banking System Economies of Large Scale Operations, Spreading of Risk, Economy in Cash Reserves, Diversification of Deposits & Assets, Cheap Remittance Facilities, Uniform Interest Rates, Proper use of Capital, Better Facilities to Customers, Banking Facilities in Backward Areas & Effective Control

Unit Banking System Local Development, Promotes Regional Balance, Easy Management, Initiative in Banking Business, No Monopolistic Tendencies, No Inefficiency,

Group Banking System Chain Banking System

RBI:
Established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 . Central Office at Mumbai since inception

Though originally privately owned, since nationalisation in 1949, fully owned by the Government of India The Preamble prescribes the objective as: "to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Functions:
Note Issue Banker to Government Bankers Bank Custodian of Exchange Reserves Controller of Credit Ordinary Banking Functions Promotional & Developmental Functions

RESERVE BANK OF INDIA

Central Central bank bank and and supreme supreme monetary monetary authority authority

Scheduled Banks Commercial banks Regional Foreign Regional

Banks (40)

Cooperatives
Cooperatives Cooperatives

rural rural Banks Banks (196) (196)

Urban (52)

Cooperatives Cooperatives

State
(16)

Public Sector Banks (27)

Private Sector Banks (27)

Old (22) New (8)

State Bank of India And associate banks (8)

Other Nationalised Banks (19)

Monetary Policy: It refers to the policy of Central Bank to regulate / control the volume and cost & allocation of money & credit with the objective of attaining optimum level of output, employment, price stability & BOP Equilibrium. Purpose Control Inflationary tendencies Increasing Savings Checking Credit Expansion by Banks Discourage Deficit Financing by Government

Tools used by RBI to Implement Monetary Policy: Bank Rate Net Liquidity Ratio Open Market Operations Cash Reserve Ratio Statutory Liquidity Ratio Selective Credit Controls Moral Suasion

INSURANCE:

History in India dates back to 1818 Private Players allowed entry in 1999 Primary legislation that deals with insurance business in India is: Insurance Act, 1938, and Insurance Regulatory & Development (IRDA) Act, 1999 Life Insurance Accounts to 2.5% of GDP General Insurance 0.65% of GDP Authority

Evolution of Life Insurance in India

1870 Establishment of first Indian Life Insurance office- Bombay Mutual Assurance Society Life Insurance Sector regulated- Indian Life Assurance Companies Act enacted. Insurance Act 1938 passed Life Insurance Nationalised through Life Insurance Corporation of India Act- Becomes a State monopoly Liberalisation of the Indian economy Opening up of the Insurance sector for private players- Presently, FDI permitted upto 26% 14 companies offering life insurance- one dominant nationalised player and 13 private companies 20 life companies more in the pipeline

1912; 1938

1956 1991 2000 2005 2008

BUDGET:
Annual Financial Statement It has to be passed by the House before it is incorporated. 1. What is a Budget ? Budget is Estimate of inflows and outflows of the Government during a year. Budget is presented for the ensuing Financial year. 2. What does Budget consist of? Every budget consist of Actual figures for preceding years, Budget and revised figures for the current year So the Budget presented in March 2008 will be estimate of Inflows and outflows of the Funds for the period beginning from 1st April 2008 to 31st March 2009. 3. When is Budget presented? Budget is to be presented in Lok Sabha on a day as the President directs. By convention, the Budget is presented in Parliament on the last working day of February.

4. Who draws the timetable for Budget? Timetable is drawn by the Business Advisory Committee (BAC) of Parliament. In the schedule drawn up by the BAC, there is a fixed period of discussion for each ministry. 5. Who has the responsibility for Budget? Budget Division in the Finance Ministry has the overall responsibility. It prepares the budget on basis of proposal received from various departments and ministries and the availability of funds. However, final approval is from the Prime Minister. 6. What if Budget is not approved by 1st April? The Constitution empowers Lok Sabha to grant a Vote-on-Account (Article 116) so that the government can continue with the necessary expenditure into the new fiscal, before the Budget proposals actually get passed after necessary discussions. The vote-on-account normally covers the expenditure requirement of the government for two months. 7. Is it compulsory to have budget for every year? Yes. Under Article 112 of the Constitution, a Statement of estimated receipts and expenditure of the Union Government has to be laid before the Parliament in respect of every financial year running from 1st April to 31st March. The Receipt and Payments of the Government is categorized in three parts: 1. Consolidated Fund. : All the inflows like Tax and other Revenues as well as Loans raised by it form part of this category. All outflow including expenses etc also form part of this Account. For withdrawal from this fund parliament authorisation is required. 2. Contingency Fund: It is the money kept at the disposal of the President to meet out any unforeseen expenses. 3. Public Account: This category comprises of money raised from various Schemes of the Government like Provident Fund. 8. What is the process of Budget approval? The Finance Minister introduces the budget in the Lower House of the Parliament or the Lok Sabha & makes a short speech, giving a overall view of the budget. After the presentation of the Budget, Parliament allots some time for a general discussion on the Budget. The finance minister replies at the end of the general discussion. The reply is also of a general nature and no specifics of the Budget are discussed. However, no motion is moved nor voting required at this stage. After the finance minister's reply, Lok Sabha takes up for discussion each ministry's expenditure proposals, and is known as demand for grants. The demands for grants presented by each ministry are taken up by the House.

After, the prescribed period for the discussion on demands for grants is over, the Speaker applies the `guillotine', and all the outstanding demands for grants, whether discussed or not, are put to vote at once. Only the Lower House is entitled to vote. Appropriation Bill is introduced in the Lok Sabha after it has passed all demands for grants relating to all ministries. This is to authorise the government to draw funds from the Consolidated Fund of India. Once this Bill is passed, it becomes the Appropriation Act and is certified as a Money Bill. After passing of Appropriation Bill, the Finance Bill is introduced and it incorporates all taxation proposals. At this stage, amendments for tax proposal can be moved. After the passing of this Bill, it enters the statute as the Finance Act. Thus the final Budget gets approved

Fact File of Banks:

The first, the oldest, the largest, the biggest, get all such types of informations about Banking in India in this section. The first bank in India to be given an ISO Certification The first bank in Northern India to get ISO 9002 certification for their selected branches The first Indian bank to have been started solely with Indian capital The first among the private sector banks in Kerala to become a scheduled bank in 1946 under the RBI Act India's oldest, largest and most successful commercial bank, offering the widest possible range of domestic, international and NRI products and services, through its vast network in India and overseas India's second largest private sector bank and is now the largest scheduled commercial bank in India Bank which started as private shareholders banks, mostly Europeans shareholders The first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974 The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 132 years Canara Bank Punjab and Sind Bank Punjab National Bank South Indian Bank

State Bank of India

The Federal Bank Limited Imperial Bank of India Bank of India, founded in 1906 in Mumbai Allahabad Bank

The first Indian commercial bank which was wholly owned and managed by Indians

Central Bank of India

Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974. Top Banks in India:
Abn Amro Bank | Allahabad Bank | American Express Bank | Andhra Bank | Bank Of India | Canara Bank | Central Bank Of India | Citibank | Corporation Bank | HDFC Bank | HSBC Bank | ICICI Bank | Indian Overseas Bank | Oriental Bank Of Commerce | Punjab National Bank | State Bank Of India (SBI) | Standard Chartered Bank | IDBI | United Bank Of India | Axis bank

NEWS:
1) India's No.1 private lender, ICICI Bank (ICBK.BO), said Chanda Kochhar will become chief executive next year, as expected, and she forecast lower rates would give a lift to loan growth sagging from a tough year for banks. Kochhar, 47, and currently joint managing director, joined ICICI as a management trainee in 1984 and will take over the top job from K.V. Kamath in May and serve for five years, the bank said on Friday.
2) Inflation almost halved to 6.61 per cent for the week ended December 13 from the peak of

12.91 four months ago as manufactured goods and some food items turned cheaper.

Subprime Loan:

What Does Subprime Loan Mean? A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment. Investopedia explains Subprime Loan... Subprime loans tend to have a higher interest rate than the prime rate offered on traditional loans. The additional percentage points of interest often translate to tens of thousands of dollars worth of additional interest payments over the life of a longer term loan.
However, getting a subprime loan could still be a good idea if the loan is meant to pay off a higher interest debt (such as credit card debt) and the borrower has no other means for payment. The specific amount of interest charged on a subprime loan is not set in stone. Different lenders may not value a borrower's risk in the same manner. This means that a subprime loan borrower has an opportunity to save some additional money by shopping around

Subprime Mortgage Crisis

The subprime mortgage financial crisis was the sharp rise in foreclosures in the subprime mortgage market that began in the United States in 2006 and became a global financial crisis in July 2007. Rising interest rates increased the monthly payments on newlypopular adjustable rate mortgages and property values suffered declines from the demise of the US housing bubble, leaving home owners unable to meet financial commitments and lenders without a means to recoup their losses. Many observers believe this has resulted in a severe credit crunch, threatening the solvency of a number of marginal private banks and other financial institutions. The sharp rise in foreclosures after the housing bubble caused several major subprime mortgage lenders, such as New Century Financial Corporation, to shut down or file for bankruptcy, with some accused of actively encouraging fraudulent income inflation on loan applications, leading to the collapse of stock prices for many in the subprime mortgage industry, and drops in stock prices of some large lenders like Countrywide Financial.[1] This has been associated with declines in stock markets worldwide, several hedge funds becoming worthless, coordinated national bank interventions, contractions of retail profits, and bankruptcy of several mortgage lenders. Observers of the meltdown have cast blame widely. Some, like Senate Banking, Housing, and Urban Affairs Committee chairman Chris Dodd of Connecticut, have highlighted the predatory lending practices of subprime lenders and the lack of effective government oversight.[2] Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the portfolios. Borrowers have also been criticized for over-stating their incomes on loan applications[3] and entering into loan agreements they could not meet. [4] The effects of the meltdown spread beyond housing and disrupted global financial markets (see financial contagion and systemic risk) as investors, largely deregulated foreign and domestic hedge funds, were forced to re-evaluate the risks they were taking and consumers lost the ability to finance further consumer spending, causing increased volatility in the fixed income, equity, and derivative markets. The impact on the economy of this American problem was also felt in Europe, where the European Central Bank tried to control the crisis by injecting over 205 billion U.S. Dollars in the European financial markets.[5]

Article: Yeh sub-prime crisis kya hai, yeh sub-prime crisis?

The last week saw our bai ask us for a loan of a million Indian Rupees. When the better half asked her for a reason, the bai talked to us about the liquidity crisis and how she has lost a significant part of her income kyun ki bajoo waale ghar ke Tandon saab ka subprime crisis ho gaya. It was early in the morning and I hadnt yet had my cuppa of filtered Arabica so I couldnt jump out of my chair. Calisthenics isnt a strong point of mine during that time of the day. But I was worried, very worried. Tandonji ka sub-prime crisis ho gaya had a ring of impending doom. After all, Tandonji is kind of Aditya Shroff of Rock On whose wife has designers coming to her home to showcase their collections. Of late, he had even restarted his college Rock Band at his home with decibel levels that created reasonable distress for everyone around. Agar unka sub-prime crisis ho gaya, then this thing has reached much closer home than I ever thought. Nobody is safe, nobody is insulated, I thought. You dont live in a bullet-proof world and even if you do, you will do well to remember this famous Mithun dialog: Minister: Yeh kaanch bulletproof hai. Tum mera baal bhi baanka nahin kar sakte. Mithun: Yeh bulletproof hai magar patthar proof nahin. Crash (as Mithun breaks the glass with a stone). But, why do you need a million bucks? the better half arched her eyebrows. I-Phone kharidna hai. Aur Minnisha Lamba waale patiala ka sale bhi laga hua hai, the bai responded. Kareena waala Jab We Met style purana ho chukka hai, she added helpfully. I looked at my Nokia 1110 (with the torch light at its end) and felt a mild throbbing in the head. This was clearly a bai steeped in the ethos of conspicuous consumption. She had insisted on getting married to a Peepal tree when Aishwarya had allegedly done the same. I had argued in her favor then reasoning trees are, after all, Peepal too. We had hoped that she might turn a new leaf. But it clearly wasnt the case. We had barked up the wrong tree. I needed some early morning entertainment and it was time for India TV news. India TV news and comments on Rediff newsboard allow me to appreciate the state of our nation and its great citizenry. Also, no general entertainment channel packs in as much as they do. Only a few weeks back India TV provided heaps of intellectual fodder to me when they broke the story of how UFOs are abducting our cows (link courtesy Techieminds http://www.techieminds.org/?p=532) and asked this most amazing question, kya aliens ke liye bhi gaay unki maata hai(do aliens also worship cows as their mother?)? I could

have told them it is entirely possible since I had interviewed Jan Bakuldas Kolesnikov Shukla on aliens last week (see here). True to its reputation, it had a news item on Finance ki duniya mein traahi traahi (translation: major chaos in finance world). So, this sub-prime thing had reached India TV. This must be serious stuff. Think of all the important news about UFOs, bhoot-pret etc they must be keeping aside for showing this trahi trahi on Wall Street. Trahi Trahi was something that I had last heard in Ramanand Sagars Ramayan when Kumbhakarn had descended on vaanar-sena. And, it was then I realized that I could no longer ignore the thousands of mails we receive at PFC asking us about sub-prime crisis and liquidity crunch. They could no longer be ignored. These requests need answers the same way Sambhavna Seth needs tissue papers on Bigg Boss. As one possessing a curious (and a beautiful) mind, I always watched the many films from the 60s that Doordarshan played during its glory days with deep interest. Among many sociologically relevant scenes that have shaped me as an individual, one particularly amazing and often recurring scene is from a typical 60s film where Nazir Hussain (with a name like Diwan Deen Dayal), playing the father of Saira Banu or Sadhna, has a cardiac arrest kyun ki he is informed that unke bank ka diwalaa nikal gaya hai (translation: banks gone kaput). The cause and effect paradigms were so strongly intertwined in such cases that I could almost see Nazir Husssains right hand crawl across his chest even before the word diwalaa was uttered. How the global financial world must be missing Nazir Hussain and his ability to predict banks ka diwalaa? But I am getting ahead of my story. Lets go back to mid to late 90s. When we were watching Mithun churn out gems like Loha, Gunda, Yamraaj, Sher-e-Hindustan, Hitler and Military Raaj, Americans were going similarly berserk buying up homes. Statistics dont lie. Mithun made about 30 films in those 3 years while the percentage of home-ownership which had remained constant for over two decades went up by a whopping 400 basis points in the USA. The reasons for these two distant events were the same easy availability of capital. Where did US mortgage lenders get this capital from? The answer, in great part, lies in Japan. Apart from loving Rajnikant in Muthu (aka The Dancing Maharaja), the Japanese have another quirk. They have among the lowest interest rates in the world. As low as a quarter of percentage!! This meant that there was nothing to gain from a savings account. So for a Japanese bank, any instrument that gave an annual return of more than 0.25%, was manna from heaven. US financial institutions accessed this easy money through a phenomenon called Yen carry trade where they borrowed in Yen from Japan and lend in Dollars relying on a stable currency exchange rate. All clear, till now? Basically, easy money flowed in and US mortgage lenders didnt know what to do with it? While the sources of funds for Kanti Shah, TLV Prasad and Rajiv Babbar will never be known, they did exactly what US mortgage lenders did when faced with it excess funds. First, they found a new market. In case of US mortgage lenders, till then, they followed a

relatively strict method of assessing credit worthiness of an individual (income, inheritance, education, career prospects etc) and only loaned money to such prime prospects at market interest rate. However, with this extra money at their disposal, the lenders started easing on credit check and focused on what they called sub-prime prospects who were not very well off now but who might do well in future and pay out the mortgage loan. Similarly, a new audience was found for Mithun movies, what the industry terms the B and C centre and the Shahs and the Prasads spent money indiscriminately for Mukesh Rishis, Payal Malhotras and Monarch Hotels to draw in people from Chhabra to Chandrapur. As has been seen before, such phenomenon can take a life of its own and spiral out of control. As more sub-prime prospects get easy access to money and start buying homes, the prices of homes keep going up. As prices go up, more people are drawn into the net in the hope of making a good investment. Mortgage lenders become more and more relaxed in terms of giving loans as nobody wants to miss a ride on the gravy train. And that brings more people into the net of easy loans. A scenario that is as relevant for the slew of lewd comedies that keep showing up week on week at the box office in the hope that this is exactly what aam aadmi wants. Things would have been bad enough with this. But theres no end to human greed. The mortgage lenders started pooling these loan portfolios and started offering them as collaterals for others to invest in. That is they packaged them into a financial instrument and started transferring the risk to others. This process, called securitization, created Mortgage-backed Securities (MBS) or its cousin Collateralized Debt Obligations (CDOs) which were lapped up by investors looking for new avenues of investments especially in the growing real estate market. The credit rating agencies that should have been checking on the nature of such instruments thoroughly turned a blind eye and happily graded these instruments as high-grade investment products. So now, not only were the lenders and the borrowers in the game, there were investors in MBS, CDOs, brokers, underwriters, other Investment Banks and everyone who thought of making easy money in this process. There were such excesses committed in the heady days of housing boom it appears that only mass suspension of disbelief could explain how no one thought about the one delicate prop on which this entire edifice rests on the ability of the borrower to repay his loan. This was like Balaji Telefilms and Mukta Arts going public and raising money from the capital markets to fund such classics like C Kkompany and Good Boy, Bad Boy. More comedies followed and more excesses were committed multi-crore multi-film deals, toilet humor, calendars booked for 18 months for leading actors et al culminating into a rumored a single film Rs. 71 crore deal for hottest star around. Another case of mass suspension of disbelief! The cycle in the housing boom started reversing as the economy slowed down in the USA and home owners started defaulting on their obligations. As the mortgage lenders foreclosed the loans and started selling off the properties, the prices of houses started falling. This led to more people defaulting and selling off their homes. As easily as the

cycle built up, it started unwinding faster. The first to be affected were the lenders themselves who started losing money in their sub-prime portfolio. The securitization phenomenon, however, had created a network that had left no one covered, I-banks, Insurance firms, Retail Banks, none at all. So, Countrywide and IndyMac going bankrupt led to a chain of events that led to Bear Stearns collapsing, Lehman Brothers going bankrupt, Merrill and HBOS sold off, Freddie, Fannie and AIG being nationalized and possibly many more bad news to follow. Of course, oil prices touching $100 a barrel, commodity prices touching record highs and an economic recession didnt help either. Where do we go from here? Well, be prepared for worse. Lesson learnt? Yes! Essentially, badly designed products drawing in masses on a flawed premise might give some instant gratification but will eventually result in excruciating pain. So, a mild warning to the producers of mindless comedies there wont be Nazir Hussain saab to predict oncoming bank ka diwalaa. I would only echo Mithuns warning about bulletproof glass. Sambhal jao, warna tumhara sub-prime crisis ho jaayega.