Causes of Global Financial Crises and Impact on India
--> Posted on 2010-03-04 10:05:38 By Lokesh Chawla
Causes of Crisis
The entire financial risk analysis was based on unrealistic assumption that property prices will not fall drastically.
Failure of Risk management models to predict low probability but high impact events
Too much greed and unrealistic expectations of higher return from mortgage based loan.
The underestimation of underlying risk involved in complex financial instruments.
Over reliance of quantitative analysis. Non consideration of systemic risk.
Impact on India
Indian economy was impacted less mainly due to 2 reasons-
1. Indian economy is not yet fully integrated to World economy
2. Indian financial system is comparatively much more regulated and banks are also conservative to lend recklessly in sensitive sectors.
The sectors which were affected the most were mainly exports and exports related sector like
Tourism
Cargo
Ports
Textiles / Software/ Gems & Jewellery / Leather/ etc.
Howeverm the economy is shoeing signs of revival
(% Output Growth) 2007 2008 2009 2010
Advanced Economies 5.2 3 -1.1 3.1
Other Emerging Market 8.3 6 1.7 5.1
and Developing Countries
India 9.4 7.3 5.4 6.4
Action Needed
1. Diversification of risky assets
2. Banks must set risk exposure limit based on its own risk appetite and risk absorption capacity.
3. Compliance of risk capital is necessary condition but not sufficient to avoid any extreme unexpected loss events.
4. Need for developing proper risk culture where every employee acts as a risk manager.
5. Need for proper balance between efficient and stable financial system with innovation of new complex financial products.
6. Need to address systemic risk in the financial market.
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