The subprime loan crisis in the US has taken its first toll in India with ICICI Bank's profit taking a hit of more than Rs 1,050 crore ($264 million) in 2007-08.
While the disclosure was made in Parliament on Tuesday, the bank said it had neither invested directly in the USD market nor taken an exposure in the US subprime loan market. ICICI lost money due to depreciation in the value of securities it bought in the international markets. Due to a rise in global interest rates after the subprime loan crisis, the value of these securities fell, forcing the bank to provide for the difference from its profits.
The loss, however, is notional since the bank has not actually sold these securities.
According to one estimate, global majors like Citibank, Merrill Lynch and Deutsche Bank, have lost over $180 billion due to the subprime crisis. While ICICI Bank is the first Indian bank to report the provisioning, public sector players are expected to announce similar losses in coming days.
Following minister of state for finance Pawan Kumar Bansal's reply in RS, ICICI Bank closed more than 5% lower at Rs 971 on BSE. Other bank shares too took a hit. Canara Bank fell 6.43% to Rs 239, PNB 5.36% to Rs 516, Bank of India 5.88% to Rs 309 and SBI 2.57% to Rs 1,873. Overall, the index of banking shares fell 4% on Tuesday in the expectation that other banks will also announce the impact of subprime crisis on their global businesses.
At the root of the subprime crisis is the large number of loans given by banks in the US to domestic borrowers with low repaying power (called "subprime" borrowers). As the US economy got caught in a slowdown, they started defaulting, forcing banks to take a hit on their account books.