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Sub-prime bomb ticking in India

The “sub-prime” crisis here is likened to a scenario in which banks may be saddled with huge defaults, reports BS Srinivasalu Reddy.

india Updated: Oct 16, 2007 22:46 IST
BS Srinivasalu Reddy

Are there any signs of a home-grown sub-prime crisis? Yes, it is ticking bomb, which could explode anytime, says former RBI Deputy Governor SS Tarapore. The “sub-prime” crisis here is likened to a scenario in which banks may be saddled with huge defaults.

Tarapore has warned that India is heading towards such risks after four years of scorching credit growth, particularly in loans provided to newer market segments. It is estimated that at least Rs 41,200 crore of sub-prime loans may go bad, comprising personal loans from banks and credit companies, and amounts borrowed on credit cards. “This does not include other sectors which are risk-prone, like automobile and housing loans,” Tarapore, also the chairman of the committee on fuller capital account convertibility, said at a risk management seminar organised by Dun and Bradstreet.

Citing banks using musclemen for recovering loans, Tarapore said, “After years of frenzied lending, the music has stopped. As the lenders pick up the pieces, musclemen have become visible as banks and other financial institutions are trying to claw back after years of benign neglect to step up recovery efforts in these sectors.”

Citing illustrative calculations done by MG Bhide, former chairman of the Bank of India, Tarapore added up the possible defaults as follows: Rs 4,800 crore in personal loan pools securitised over the last 12 months and Rs 2,000 in personal loan pools securitised before that, 80 per cent of the estimated Rs 35,000 crore personal loans with banks and credit companies, and 40 per cent of the Rs 16,000 crore outstanding credit card dues.