Insulate India from the US sub prime mortgage crisis

New Delhi, Sep 2 (UNI) Raising an alarm for the Indian economy against the adverse impact of US sub prime mortgages, industry body PHDCCI today suggested the Government and industry to chalk out strategies for insulating India from the looming crisis.

The chamber said the increasing number of defaults in the housing loans at higher rate of interest, for the time being could be limited to the loans given to people who have inadequate credit worthiness.

''But in the long term, there is a lurching fear that the crisis might spill over to prime segment unless corrective measures are taken in time,'' PHDCCI President Sanjay Bhatia said.

PHDCCI noted that the indirect connect to the Indian scene is due to the increasing number of private equity funds in the US becoming bankrupt on account of their large exposure to securities of sub-prime lending agencies.

To derive greater returns on investment, private equity funds, FIIs and pension funds have parked their funds in these securities.

Now, they are engaged in distress selling at a heavy loss and those which can not absorb the losses are closing down, the chamber claimed.

''This would compel many FIIs and pension funds to either cut back or withdraw their investments in markets like India, adversely impacting the Indian stock and debt market.'' The body suggested that to overcome such crisis Indian financial institutions like LIC, IDBI etc should enhance their exposure in the Indian capital market.

''With the coming of FIIs, these institutions are shying away from investing in the Indian market. It is time they reconsider this approach and remain directly connected to the Indian markets,'' Mr Bhatia added.

The other adverse impact could be on the BPO industry, which is a major export earner and employment provider in India. Many mainline financial companies have outsourced their operations to India.

With the closure of these units, outsourcing contracts to India automatically get cancelled. Huge revenue losses are reported by such units, which will have an adverse impact on their bottomlines and consequently on the quantum of work outsourced.

The SME sector in the software and services could leverage their earnings and risks by increasingly going for work exposures in India. With the hardening of the rupee against the dollar and other major currencies, there is a lot of merit in taking the domestic works, despite the fact that it would not derive tax concessions applicable to exports.

In the US, the sub prime crisis is mainly the backlash of a real estate bubble that lasted for more than two decades. In India also, it is widely perceived that there is a lot of speculation in the real estate sector, which artificially pushes up prices and creates a bubble like situation.

The recent increase in EMI and extending the length of loans have also created consternation among the Indian borrowers, Mr Bhatia added.

''This can be mitigated by putting more houses in the market and following a realistic interest policy.'' UNI