The term "subprime" refers to the credit status of the borrower, which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history.Subprime lending is also called B-Paper, near-prime, or second chance lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk.Sub-prime mortgage crisis begin when housing prices began spiraling upwards in the US in the early years of this decade and continued through mid-2006, with the borrowing and lending rates extremely lower which helped boost the demand for and supply of new and existing houses. Many institutions offered home loans to borrowers with poor or no credit histories by requiring higher than normal repayment levels, creating what is now referred to as “sub-prime mortgages”, attracting investment banks and hedge fund owners to bet big on this emerging aspect of the US economy.
Subprime Crisis: Impact on Equity Markets
At the global level, especially in advanced markets such as US, UK, France, Germany and Japan, the linkages between markets are strong. Pricing and participant linkages are strong. As interest rates have risen and sub-prime has affected risk appetite (investors are now showing appetite for lower risk), equity markets have been impacted. As FII flows and hedge fund investments have been significant factors in emerging markets, the developments in the US have spread the low risk appetite to other markets and lead to high degree of volatility in prices and price weakness.The sub-prime and credit market crisis is not likely to have an impact on the fundamental story in India. It is likely to have an impact on sentiment and liquidity flows. This could lead to high volatility and corrective phases. It does not change our long-term outlook and our view on likely trends in medium term in the markets. RBI: According to the reports, the banking system has the ability to cope with the situation arising out of any adverse development and a strong domestic growth will continue to have a positive impact on the balance sheet of the banking sector.
Subprime Crisis: Impact on Equity Markets
At the global level, especially in advanced markets such as US, UK, France, Germany and Japan, the linkages between markets are strong. Pricing and participant linkages are strong. As interest rates have risen and sub-prime has affected risk appetite (investors are now showing appetite for lower risk), equity markets have been impacted. As FII flows and hedge fund investments have been significant factors in emerging markets, the developments in the US have spread the low risk appetite to other markets and lead to high degree of volatility in prices and price weakness.The sub-prime and credit market crisis is not likely to have an impact on the fundamental story in India. It is likely to have an impact on sentiment and liquidity flows. This could lead to high volatility and corrective phases. It does not change our long-term outlook and our view on likely trends in medium term in the markets. RBI: According to the reports, the banking system has the ability to cope with the situation arising out of any adverse development and a strong domestic growth will continue to have a positive impact on the balance sheet of the banking sector.
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