Topic: what is subprime factor fear?

How does it affects Indian share market?

Let me first answer for you what is sub-prime lending. Simply put, there are a pool of borrowers who cannot get credit because they do not have the income to support the EMIs or do not have a good credit history or ability to pay the loan.

Sub-prime lending allows these borrowers to access the credit markets and get a home loan, but at a very high cost of borrowing compared to someone who has very good quality credit history and income.

Since the beginning of this century, there has been a lot of lending in the us markets to such sub-prime borrowers. This was OK for a large part of the last five years because interest rates were very low, close to 1%. However, in the past 6-7 months, problems have arisen as the interest rates have gone up. Again to simplify, these borrowers are not able to meet their higher EMI obligations. So, these loans are defaulting.

The risk of default of loans in the us economy is creating this fear that the economy will be affected by further troubles while the system gets cleaned out of these loans.

Sub-prime so far has mostly been a problem related to lending in the us housing market. However, today markets are quite linked globally. Bad news from one part of the world can affect markets in other countries. so, if the crisis gets worse and the us hits a much deeper recession than expected, then there will be some impact on the Indian market as well. Its hard to quantify the impact, but the psychological risk factors go up in the Indian market. but, generally speaking, the Indian market has very good long terms fundamentals.

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