FINANCIALSECTOR

REFORMS

Introduction
Since independence, India followed the mixed economy.
India has been able to achieve growth in savings, diversified
industrial sector, ensured food security etc.
In 1991, India met with economic crisis and govt. was not able to
make repayments on its borrowings from abroad and foreign
exchange reserves.
All this led the govt. to introduce a new set of policy measures which
changed the direction of our developmental strategies.

Contd
The origin of financial crisis can be traced from the inefficient
management of the Indian economy in 1980s
For implementing various policies, the govt. generates funds such as
taxation.
When expenditure is more than income, the government borrows to
finance the deficit from banks and from people within the country and
from international institution.

Contd.
India approached International bank for reconstruction and
development (IBRD)
India agreed to the conditions of world bank and announced new
economic policy.
The set of policies were classified into two groups namely
stabilization measures and the structural reform measure.

Context
The new economic policy(NEP) of structural adjustment and
stabilization programme was given a big thrust in India in June 1991.
Financial sector reforms have received special attention as a part of
this policy because of perceived interdependent relationship between
the real and financial sectors of the modern economy.
Immediately after the announcement of NEP, the government had
appointed a high level committee on financial system to examine all
aspects relating to the structure , organization, functions and
procedure of the financial system.

Contd.
The committee submitted the report in November 1991.
Since then the authorities have introduced a large number of changes
or reforms in the Indian financial sector in the light of the said report.

Financial Reforms of the Banking

Sector In India

This reform have not only influenced the productivity and efficiency of
many of the Indian Banks, but has left everlasting footprints on the
working of the banking sector in India.

Cont.

Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs
are still dominating the commercial banking system. Shares of the leading PSBs are
already listed on the stock exchanges.

The RBI has given licenses to new private sector banks as part of the liberalization
process. The RBI has also been granting licenses to industrial houses. Many banks
are successfully running in the retail and consumer segments but are yet to deliver
services to industrial finance, retail trade, small business and agricultural finance.

The PSBs will play an important role in the industry due to its number of branches
and foreign banks facing the constraint of limited number of branches. Hence, in
order to achieve an efficient banking system, the onus is on the Government to
encourage the PSBs to be run on professional lines

Cont.
Reduced CRR and SLR :
By Law in India the CRR remains between 3-15% of the Net Demand
and Time Liabilities.
It is reduced from the earlier high level of 15% plus incremental
CRR of 10% to current 4% level.
Similarly, the SLR Is also reduced from early 38.5% to current
minimum of 25% level( presently 21% percent).
Deregulation of Interest Rate : Banks now enjoy freedom of fixing
the lower and upper limit of interest on deposits.

Cont....
Fixing prudential Norms :
The RBI fixed prudential norms for commercial banks. It includes recognition of
income sources. Classification of assets, provisions for bad debts, maintaining
international standards in accounting practices, etc. It helped banks in reducing and
restructuring Non-performing assets (NPAs).
Introduction of CRAR :
Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992.

It resulted in an improvement in the capital position of commercial banks, all most

all the banks in India has reached the Capital Adequacy Ratio (CAR) above the
statutory level of 9%.

Cont..
Operational Autonomy : If a bank satisfies the CAR then it gets
freedom in opening new branches, upgrading the extension counters,
closing down existing branches and they get liberal lending norms.
Banking Diversification :
Many of the banks have started new services and new products.
Some of them have established subsidiaries in merchant banking,
mutual funds, insurance, venture capital, etc which has led to
diversified sources of income of them.

Cont..
New Generation Banks :
During the reforms period many new generation banks have
successfully emerged on the financial horizon.
Banks such as ICICI Bank, HDFC Bank, UTI Bank have given a big
challenge to the public sector banks leading to a greater degree of
competition.
Improved Profitability and Efficiency :
It has happened due to the reduced Non-performing loans, increased
use of technology, more computerization and some other relevant
measures adopted by the government.

Recent Developments In Capital

Market of India
The capital market has witnessed major reforms in the decade of
1990s and there after. It is on the verge of the growth. Thus the
Government of India and SEBI has taken a number of measures in
order to improve the working of the Indian Stock Exchanges and to
make it more progressive and vibrant.

Cont...

Establishment of SEBI : The Securities and Exchange Board of India

(SEBI) was established in 1988. It got a legal status in 1992.

SEBI was primarily set up to regulate the activities of the merchant banks, to
control the operations of mutual funds, to work as a promoter of the stock
exchange activities and to act as a regulatory authority of new issue
activities of companies.
The SEBI was set up with the fundamental objective, "to protect the interest
of investors in securities market and for matters connected therewith or
incidental thereto."

Cont...
The Main Functions of SEBI are : To regulate the business of the stock market and other securities
market.
To promote and regulate the self regulatory organizations.
To prohibit fraudulent and unfair trade practices in securities market.
To promote awareness among investors and training of intermediaries
about safety of market.
To prohibit insider trading in securities market.
To regulate huge acquisition of shares and takeover of companies.

Cont...
Establishment of Creditors Rating Agencies
The Credit Rating Information Services of India Limited (CRISIL 1988)
The Investment Information and Credit Rating Agency of India
Limited (ICRA - 1991)
Credit Analysis and Research Limited (CARE)
These were set up in order to assess the financial health of different
financial institutions and agencies related to the stock market activities.

Cont...
Growing Merchant Banking Activities : Many Indian and foreign
commercial banks have set up their merchant banking divisions in the
last few years. These divisions provide financial services such as
underwriting facilities, issue organizing, consultancy services, etc. It
has proved as a helping hand to factors related to the capital market.

Cont...
Candid Performance of Indian Economy :
It has attracted a huge inflow of Foreign Institutional Investments
(FII). The massive entry of FIIs in the Indian capital market has given
good appreciation for the Indian investors in recent times.
Similarly many new companies are emerging on the horizon of the
Indian capital market to raise capital for their expansions.

Cont...
Growing of Electronic Transactions :
The physical transaction with more paper work is reduced.
Now paperless transactions are increasing at a rapid rate.
It saves money, time and energy of investors.
Thus it has made investing safer and hassle free encouraging more
people to join the capital market.

Cont...
Growing Mutual Fund Industry :
Public sector banks, foreign banks, financial institutions and joint
mutual funds between the Indian and foreign firms have launched
many new funds.
A big diversification in terms of schemes, maturity, etc. has taken
place in mutual funds in India.
It has given a wide choice for the common investors to enter the capital
market.

Cont...
Growing Stock Exchanges :
Initially the BSE was the main exchange, but now after the setting up
of the NSE and the OTCEI, stock exchanges have spread across the
country.
Investor's Protection :
Under the purview of the SEBI the Central Government of India has
set up the Investors Education and Protection Fund (IEPF) in 2001.
It works in educating and guiding investors. It tries to protect the
interest of the small investors from frauds and malpractices in the
capital market.

Cont...
Growth of Derivative Transactions :
Since June 2000, the NSE has introduced the derivatives
trading in the equities.
In November 2001 it also introduced the future and options
transactions.
These innovative products have given variety for the
investment leading to the expansion of the capital market.
Insurance Sector Reforms :
Indian insurance sector has also witnessed massive reforms in
last few years. The Insurance Regulatory and Development
Authority (IRDA) was set up in 2000. It paved the entry of the
private insurance firms in India.
As many insurance companies invest their money in the capital
market, it has expanded.

OBJECTIVE OF FINANCIAL
REFORM
STRUCTURAL TRANSFORMATION
FINANCIAL EFFICIENCY AND STABILITY
INTEGRATION OF FINANCIAL MARKETS