Global Meltdown Challenges & Opportunities

1. Global MeltdownChallenges & Opportunities N. Sivaraman Executive Vice-President Financial Services 7th November 2008

2. The Times of Turmoil

3. Great Past • Low interest rates to spur growth after the dotcom bust • Growth world over supported by • Easy and cheap money • Low commodity prices • Improving efficiencies • Opening up of economies • Rising income and credit leading to large investments in housing sector across the globe • More in US and UK

4. Recent past • Sharp rise in commodity prices • Investors chasing commodities accelerated the trend • Rising global inflation on the back of rising commodity and food prices • Central banks responded by raising interest rates • Housing prices dropped in response to higher cost of credit and delinquencies • Signs of stress visible in mid-2007 in the global financial system • Start of a spiral?

5. Current gloom • Near paralysis of credit markets • Lack of liquidity • Preserving cash for fear of loss and unknowns • Lack of trust • Non-availability of capital • Equity or debt • Fear all over • World’s major economies on the throes of negative economic cycle • Could it be for long?

6. Themes across the world • Cash is King • Large losses have reduced cash availability • Institutions holding on to cash for fear of unknown • Lending among banks is at premium over Libor (even L+ 3-4%) • Libor loses benchmark status, Lending on ‘Cost of funds’ basis • Corporate lending is for shorter tenors (3-5yrs) • Indian Mibor touching 18% • Asia-Pac banks, though healthier, have increased their lending margins due to high opportunity cost • Flight to safety • Risk Aversion • De-leveraging, Re-capitalisation

7. Cause of gloom • Creativity • Confidence • Comfort • Everything got stretched at the margin – almost continuously • Expectations of perpetuity

8. Cure administered • Fire-sale of institutions • Massive injection of liquidity by central banks • Infusion of equity by governments • Quasi-nationalisation • Large rate cuts • Federal Reserve lends directly to corporates

9. In India • India was a beneficiary of large capital flows over the last five years • Excessive liquidity and consumption growth • Exuberance – justifiable to a large extent • Recent sharp increase in inflation • RBI curtails liquidity and raises rates • A decoupled India? • India suffers the pangs of global financial crisis as capital flows reversed/dried up • Financial systems remains resilient with RBI’s right balance between control and de-regulation

10. Recent RBI actions • Cuts CRR by 350 bps • Cuts Repo-rate by 150 bps • Cuts SLR by 100 bps • 90 day refinancing facility of upto 100 bps of deposits • Refinancing 150 bps of deposits for financing MFs and NBFCs • Relaxed ECB norms for NBFCs also • Repurchase of Market Stabilisation Securities – Rs. 160,000 crores • Cumulative increase in liquidity of about Rs. 440,000 crores in various stages

11. Challenges & Opportunities

12. The Challenges • Sustain economic growth • Difficult financial conditions • Overcoming balance of payment issues • Need to find capital in the absence of overseas flows • Restoration of confidence in banking system • Ensure liquidity in the system • Continued lending by banks • Mitigate credit losses due to bankruptcy • Mitigate the impact of mutual funds ceasing to be a source of capital • Delay in availability/Increased cost of capital leading to cost overruns and project delays • Balancing of growth and inflation • Slowdown in jobs

13. Opportunities • Wave of industry consolidation • Increase in “restructuring mergers” • Improved cost control measures • Sustainable initiatives • Outsourcing opportunities • Strong Indian entities can grow globally • World moves to a conservative regulatory regime • Complex & over-clever financial instruments under check

14. Thank You