LARSEN & TOUBRO

Global Meltdown Challenges & OpportunitiesChallenges & Opportunities

77thth November 2008 November 2008N. SivaramanN. Sivaraman

Executive Vice-PresidentExecutive Vice-President

Financial ServicesFinancial Services

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The Times of Turmoil

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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

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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?

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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?

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Themes across the world

Cash is KingCash 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 safetyFlight to safety

Risk Aversion

De-leveraging, Re-capitalisation

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Cause of gloom

Creativity

Confidence

Comfort

•Everything got stretched at the margin – almost continuously

•Expectations of perpetuity

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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

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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

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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

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Challenges & Opportunities

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The Challenges

Sustain economic growthSustain 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 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 Mitigate the impact of mutual funds ceasing to be a source of capitalcapital

Delay in availability/Increased cost of capital leading to cost overruns and project delays

Balancing of growth and inflationBalancing of growth and inflation

Slowdown in jobs

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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

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Thank You