FINANCIAL SECTOR REFORMS

FINANCIAL SECTOR IS THE MAINSTAY OF ANY ECONOMY

THE CORE FUNCTION OF FINANCIAL SYSTEM IS:
MOBILISATION OF RESOURCES
ALLOCATION OF RESOURCES TO MOST PRODUCTIVE
SECTORS OF ECONOMY
FINANCIAL SECTOR REFORMS ARE INTENDED TO:
ENHANCE EFFICIENCY OF RESOURCE AGGREGATION
DISTRIBUTION OF FINANCE INTO PRODUCTIVE AVENUES
ENSURE MACROECONOMIC STABILITY.
WEAKNESSES IN THE FINANCIAL SECTOR WERE REGARDED
AS MAJOR CAUSE OF COLLAPSE OF EAST ASIAN
ECONOMIES IN 1997

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 FINANCIAL SECTOR REFORMS
FINANCIAL SECTOR REFORMS ARE APPLICABLE TO
ALL THE CONSTITUENTS – BANKS AND OTHER
FINANCIAL INSTITUTIONS,FINANCIAL
INSTRUMENTS, FINANCIAL SERVICES ETC.
IN INDIA FINANCIAL SECTOR REFORMS WERE PART
OF ECONOMIC REFORMS INSTITUTED IN 1991.
THE ECONOMIC REFORMS BECAME IMPERATIVE IN
THE CONTEXT OF SEVERE BALANCE PAYMENT
CRISIS AND SEVERAL BANKS FACING THREAT OF
INSOLVENCY.
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 FINANCIAL SECTOR REFORMS
AT A GLOBAL LEVEL FINANCIAL SECTOR
REFORMS HAVE BEEN DRIVEN BY TWO
PRONGED APPROACH
- THRUST TOWARDS LIBERALISATION,
MEANING TO REDUCE /ELIMINATE SEVERAL
DIRECT CONTROLS OVER BANKS AND OTHER
FINANCIAL MARKET PATICIPANTS
- STRICT REGULATION OF FINANCIAL SECTOR

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 FINANCIAL SECTOR REFORMS
FINANCIAL REFORMS IN THE BANKING SECTOR.
IN AUGUST 1991, CENTRAL GOVT. SET-UP A HIGH LEVEL COMMITTEE
(THE NARASIMHAM COMMITTEE ON FINANCIAL SYSTEMS) TO LOOK
INTO ALL FACETS OF THE FINANCIAL SYSTEM AND MAKE
COMPREHENSIVE RECOMMENDATIONS FOR IMPROVEMENTS IN
EFFICIENCY AND PRODUCTIVITY.
THE COMMITTEE SUBMITTED ITS REPORT IN NOV. 1991, MAKING
SEVERAL RECOMMENDATIONS FOR REFORMS IN BANKING SECTOR
AND ALSO IN THE CAPITAL MARKET.
A SECOND COMMITTEE , SPECIFICALLY ON BANKING SECTOR REFORMS
WAS APPOINTED BY GOVT. IN DEC. 1997 . THE REPORT OF THE
SECOND COMMITTEE WAS SUBMITTED TO GOVT. IN APR. 1998.

GOVT. BROADLY ACCEPTED THE RECOMMENDATIONS , AND SET IN

MOTION THE PROCESS TO GRADUALLY BRING ABOUT THE
RECOMMENDED MEASURES.

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 FINANCIAL SECTOR REFORMS
SOME OF THE MAJOR RECOMMENDATIONS OF THE FIRST
COMMITTEE WERE:
- REDUCTION OF STATUTORY LIQUIDITY RATIO (SLR) TO 25% OVER
A PERIOD OF FIVE YEARS.
- PROGRESSIVE REDUCTION IN CASH RESERVE RATIO (CRR) TO 3-5%
- ACHIEVE CAPITAL ADEQUACY RATIO (CAR) OF 8% BY MARCH
1996.
- ADOPTION OF UNIFORM ACCOUNTING PRACTICES WITH REGARD
TO INCOME RECOGNITION, ASSET CLASSIFICATION AND
PROVISIONING AGAINST BAD AND DOUBTFUL DEBTS
- SETTING UP ASSET RECONSTRUCTION FUNDS(ARFs) TO TAKE OVER
FROM THE BANKS A PORTION OF THEIR BAD AND DOUBTFUL
ADVANCES
- ABOLITION OF BRANCH LICENSING
- LIBERALISING THE POLICY FOR ALLOWING FOREIGN BANKS TO
OPEN THEIR OFFICES IN INDIA.

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 FINANCIAL SECTOR REFORMS
- GIVING FREEDOM TO INDIVIDUAL BANKS TO
RECRUIT
- REVISED PROCEDURE FOR SELECTION OF CHIEF
EXECUTIVES AND DIRECTORS ON THE BOARDS
OF PUBLIC SECTOR BANKS
- SPEEDY LIBERALISATION OF CAPITAL MARKET
- ENACTMENT OF SEPARATE LEGISLATION
PROVIDING APPROPRIATE LEGAL FRAMEWORK
FOR MUTUAL FUNDS AND LAYING DOWN
PRUDENTIAL NORMS FOR SUCH INSTITUTIONS
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 FINANCIAL SECTOR REFORMS
MAJOR RECOMMENDATIONS OF
NARASIMHAM COMMITTEE-II WERE IN THE
AREAS OF:
- NEED FOR STRONGER BANKING SYSTEM
- SMALL LOCAL BANKS
- REVIEW AND UPDATE BANKING LAWS
- OTHER RECOMMENDATIONS, AUTOMATION
OF PSBs ETC.
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 FINANCIAL SECTOR REFORMS
OTHER REFORMS
-DEREGULATION OF INTEREST RATES
- DEREGULATION OF FOREX RATES
- EMERGENCE OF NEW MONEY MARKET INSTRUMENTS
- STREAMLINING OF MUTUAL FUNDS OPERATIONS
- STREAMLINING OF TRANSACTIONS IN GOVT SECURITIES
- PCA INTERVENTIONS BY RBI
- REFORMS IN INSURANCE AND PENSION SECTORS
- RISING ELECTRONIC TRANSACTIONS IN CAPITAL MARKET
TRADINGS
- DERIVATIVE PRODUCTS
- INVESTORS PROTECTION
- CORPORATE GOVERNANCE NORMS
- ENACTMENT OF INSOLVENCY AND BANKRUPTCY CODE
- COMMODITY TRADING

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 FINANCIAL STABILITY AND ASSESSMENT
Since the mid-1990s, financial crises have erupted in some of the
developing and emerging market countries in Asia, Latin America, as
well as in Russia.
Financial crises lead to bank failures, corporate bankruptcies, job losses,
increased financial burdens, depletion of foreign exchange reserves,
depressed economic activities, and even in some cases, political and
social turbulence.
The affected countries have suffered heavily from the financial
instability.
In 1997, Thailand, Indonesia, South Korea went through severe financial
crisis. Even Japan saw slumping currency, devalued stock market, and
huge rise in private debt.
In 2008, USA faced sub prime crisis leading to a recession phase.
South European countries , Greece, Cyprus and Portugal experienced
economic melt down in 2008. Russia faced severe depreciation of
local currency and soaring foreign debt in 1998.
A severe financial and political crisis presently in existence in Venezuela.

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 FINANCIAL STABILITY AND ASSESSMENT
Analysis shows that the prime reasons for the
financial crises are:
• Excessive short-term borrowings by the
Governments and private sector entities.
• Volatile flow of short-term capital
• Deficit budgets
• Adverse balance of payment
• Weaknesses in national financial systems.

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 FINANCIAL STABILITY ASSESSMENT
Concerns of international community:
Due to globalisation, such financial instability no
longer remain confined to the affected
country/region. The tremors are felt by many
other countries to some or other degree
Increased level of cross- boarder
investments(portfolio and productive investments)
Increased global trade
Due to technological advancements, funds move
in and out of countries more rapidly

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 FINANCIAL STABILITY ASSESSMENT
To achieve financial stability , countries need financial
systems that are deep, broad and resilient. All the
countries must address the weaknesses that make
their systems vulnerable to shocks.
To help countries strength their financial sectors and to
preserve the stability of the international financial
system, the IMF - has intensified its work on financial
sector issues.
The Financial Sector Assessment Programme (FSAP)
launched by IMF and World Bank is a health check up
of a country’s financial system- designed to identify
strengths and vulnerabilities and devise measures to
reduce the potential for crisis.

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 FINANCIAL STABILITY ASSESSMENT
Financial sector Assessment Programme(FSAP) includes :
 Sensitivity of financial system to withstand the instabilities ,
soundness of Capital Adequacy Ratio(CAR) , extent of non-performing
assets in banks’ portfolio, earning trends.
 Assessment of liquidity developments, policies, the crisis –
management framework, the regulation and supervision of the
financial sector, adherence to internationally accepted financial sector
standards and codes etc.
 To promote transparency , integrity of financial systems and prevent
their abuse, legal provisions to combat money laundering, financing
terrorism
 The assessment covers financial institutions like banks, mutual funds,
insurance companies and the financial markets( securities, foreign
exchange and money market) ,payment systems, regulatory,
supervisory and legal frame works.
 Financial stability assessment mainly focuses on removing systemic
loopholes and building robust and shock –proof institutions and
systems.

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 OVERVIEW OF THE INDIAN FINANCIAL SYSTEM -
SUMMARY
 The financial system provides the principal means by which
savings are transformed into investments
 The financial system provides a payment mechanism ,
enables the pooling of funds, transfers resources into
productive avenues , facilitates management of risks ,
generates information for decision making,
 Financial assets such as bonds and stocks represent claims
against the future income and wealth of others. Financial
liabilities are the counterparts of financial assets.
 A financial market is a market for the creation and exchange
of financial securities. Financial markets facilitate price
discovery, provide liquidity , and reduce the cost of
transacting.
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 OVERVIEW OF THE INDIAN FINANCIAL SYSTEM-
SUMMARY
 Financial intermediaries are firms that provide services
and products that customers may not be able to get
efficiently by themselves in the financial markets.
 Financial intermediaries offer several advantages:
diversification, lower transaction cost, economies of
scale, confidentiality etc.
 Commercial banks, term-lending financial institutions,
insurance companies mutual funds, provident funds,
pension funds, non-banking financial companies and
merchant banks are the major financial intermediaries
in India.
 RBI ,SEBI, IRDA, PFRDA Board of Financial Supervision
are the major regulators of the Indian financial system
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 OVERVIEW OF THE INDIAN FINANCIAL SYSTEM
AND FINANCIAL MARKETS
1. Discuss the functions performed by the financial system.
2. Give some examples of financial assets(Instruments)
3. Discuss the important functions performed by financial
markets
4. What are different ways of classifying financial markets
5. Discuss the role played by financial intermediaries
6. Give some examples of financial intermediaries in India
7. What have been the key developments and reforms of the
Indian financial sector since 1990s
8. What functions are performed by RBI
9. What are the principal tasks performed by SEBI
10. Give some examples of financial services in India
11. Explain in brief the components of financial system

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