Financial Sector Reforms in India: An Overview
RADHIKAKRISHNAN
ASSISSTANT PROFESSOR
DEPARTMENT OF ECONOMICS
NSS COLLEGE PANDALAM
FINANCIALSECTOR
REFORMS IN INDIA
Early 1990’s were
Lack of proper banking system
Administered interest rates
Lack of proper accounting and transparency
Extensive regulation
Financial repression
Major sectors
Banking sector
Monetary policy
Financial market
Forex market
Banking sector reforms
Two such expert Committees were set up under the
chairmanship of M. Narasimham. They submitted
their recommendations in the 1990s in reports
widely known as the Narasimham Committee-I
(1991) report and the Narasimham Committee-II
(1998) Report.
Lowering SLR and CRR
-The high SLR and CRR reduced
the profits of the banks. The SLR had been reduced from
38.5% in 1991 to 25% in 1997. This has left more funds
with banks for allocation to agriculture, industry, trade
etc
Prudential norms
have been started by RBI in order to
impart professionalism in commercial banks. The
purpose of prudential norms includes proper disclosure
of income, classification of assets and provision for Bad
debts so as to ensure that the books of commercial banks
reflect the accurate and correct picture of financial
position
Capital Adequacy Norms (CAN): –Capital Adequacy
ratio is the ratio of minimum capital to risk asset
ratio. In April 1992 RBI fixed CAN at 8%. By March
1996, all public sector banks had attained the ratio of
8%. It was also attained by foreign banks.
Deregulation of Interest Rates-The Narasimhan
Committee advocated that interest rates should be
allowed to be determined by market forces. Since
1992, interest rates have become much simpler and
freer.
The Government of India passed the “Recovery of
debts due to Banks and Financial Institutions Act
1993” in order to facilitate and speed up the recovery
of debts due to banks and financial institutions. Six
Special Recovery Tribunals have been set up. An
Appellate Tribunal has also been set up in Mumbai.
New private sector banks have already started
functioning. These new private sector banks are
allowed to raise capital contribution from foreign
institutional investors up to 20% and from NRIs up
to 40%. This has led to increased competition.
Scheduled Commercial Banks are given freedom to
open new branches and upgrade extension counters,
after attaining capital adequacy ratio and prudential
accounting norms. The banks are also permitted to
close non-viable branches other than in rural areas.
The RBI has set up a Board of financial Supervision
with an advisory Council to strengthen the
supervision of banks and financial institutions. In
1993, RBI established a new department known as
Department of Supervision as an independent unit
for supervision of commercial banks.
Permission to banks to diversify business activities
like merchant banking, underwriting, mutual funds,
insurance to increase productivity ,competency and
profitability
Phasing out of directed credit programmes and
redefinition of priority sector
Asset classification into4-Standard or performing
assets,sub-std assets(remains NPA forless than 18
months)doubtful assets(excd 18 months) and loss
assets (cannot be recovered)
Banking ombudsman scheme 1995 was started for
redressing grievances of public against banks
Banks were asked to disclose and share any
information regarding defaulting borrowers to
improve the recovery and discipline among
borrowers.
Banks were required to categorize their assets into
performing and non performing.an asset became an
NPA if the borrower does not pay dues for a period of
90 days.
CAPITAL MARKET REFORMS
An important measure regarding capital market
reforms is the setting up of Securities and Exchange
Board of India (SEBI) as the regulator of equity
market in India.
Another important reform is the permission granted
to the private sector firms to start Mutual Funds.
Many private sector companies such as Tata,
Reliance, Birla have set up their mutual funds
through which they raise money from the public.
Indian capital market has been opened up for foreign
institutional institutions (FII). That is, FII can now buy
shares and debentures of private Indian companies . The
Indian corporate sector has been allowed to raise funds
in the international capital markets through American
Depository Receipts (ADRs), Global Depository Receipts
(GDR), Foreign Currency Convertible Bonds (FCCBs)
and External Commercial Borrowings (ECBs). Similarly,
Overseas Corporate Bodies (OCBs) and Non-resident
Indians have been allowed to invest in the equity capital
of the Indian companies,stock market and can also invest
in government securities
banks have been allowed to lend against various capital
market instruments such as corporate shares and debentures
to individuals, investment companies, trusts and endowment
share and stock brokers, industrial and corporate buyers and
SEBI-approved market makers.
Establishment of Creditors Rating Agencies :
The Investment Information & Credit Rating Agency of India
Limited (ICRA - 1991)
The Credit Rating Information Services of India Limited
(CRISIL - 1988) &
CreditAnalysis and Research Limited (CARE) were set up in
order to assess the financial health of different
financialinstitutions & agencies related to the stock market
activities.
Depositories Act was passed in 1996 and NSDLand CDSL
estd
Stock exchanges were demutualised.(owned and
operated by shareholders and not by traders)
Many Indian & foreign commercial banks have set up
their MBD (Merchant Banking Divisions) in the last few
years. MBD provide financial services such as
consultancy services, underwriting facilities, issue
organizing,etc.
The Insurance Regulatory & Development Authority
(IRDA) was set up in 2000. The main purpose of IRDA
is regulating the Insurance companies in India(i.e Public
& Private Sectors)
IMPACT OF CAPITAL MARKET REFORMS
New and innovative Fin.instruments
Active participation of FII’s
Shorter trade cycles
Growth of stock exchanges and derivative mkt
More technology application
Establishment of NSE
Measures to protect investors and setting up of IEPF
Trades in DEMAT form,newinstruments
Demutualization of SE
EXTERNAL SECTOR REFORMS IN INDIA
Flexible exchange rate system was introduced
An important policy in external sector has been to open
up the Indian economy to foreign trade. In place of
import-substitution, export-led growth strategy has been
adopted.
The Indian rupee was made convertible on current
account transactions. This facilitated the foreign
exchange transactions at the exchange rate determined
by market forces.
Foreign Investment Promotion Council Board was estd
to promote foreign investments in India. Automatic
approval scheme for FDI was introduced in many
industrial sectors
Another important reform in the external sector was
Foreign Exchange Regulation Act (FERA) was
replaced by Foreign Exchange Management Act
(FEMA). The stringent provisions of FERA had
become obsolete in the context of liberalisation of
foreign trade, foreign investment and foreign ex
change market in the early nineties.
Encouraging FDI by increasing maximum limit on
share of foreign capital in joint ventures from
40to51%
IMPACTOF EXTERNAL SECTOR REFORMS
SustainableBoP
Volatality of exchange rate reduced
Foreign Investment,portfolio investment etc
increased
Exports increased
In the early 1990s, India witnessed significant reforms in its financial sector, addressing issues like lack of transparency, extensive regulation, and financial repression. Key reforms included setting up expert committees, reducing SLR and CRR, implementing prudential norms, and deregulating interest rates. The introduction of Capital Adequacy Norms and the Recovery of Debts Act further bolstered the sector, leading to the emergence of new private banks and increased competition.
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Presentation Transcript
FINANCIALSECTOR REFORMS IN INDIA RADHIKAKRISHNAN ASSISSTANT PROFESSOR DEPARTMENT OF ECONOMICS NSS COLLEGE PANDALAM
Early 1990s were Lack of proper banking system Administered interest rates Lack of proper accounting and transparency Extensive regulation Financial repression
Major sectors Banking sector Monetary policy Financial market Forex market
Banking sector reforms Two such expert Committees were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report.
Lowering SLR and CRR-The high SLR and CRR reduced the profits of the banks. The SLR had been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade etc Prudential norms have been started by RBI in order to impart professionalism in commercial banks. The purpose of prudential norms includes proper disclosure of income, classification of assets and provision for Bad debts so as to ensure that the books of commercial banks reflect the accurate and correct picture of financial position
Capital Adequacy Norms (CAN): Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%. It was also attained by foreign banks. Deregulation of Interest Rates-The Narasimhan Committee advocated that interest rates should be allowed to be determined by market forces. Since 1992, interest rates have become much simpler and freer.
The Government of India passed the Recovery of debts due to Banks and Financial Institutions Act 1993 in order to facilitate and speed up the recovery of debts due to banks and financial institutions. Six Special Recovery Tribunals have been set up. An Appellate Tribunal has also been set up in Mumbai. New private sector banks have already started functioning. These new private sector banks are allowed to raise capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has led to increased competition.
Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also permitted to close non-viable branches other than in rural areas. The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the supervision of banks and financial institutions. In 1993, RBI established a new department known as Department of Supervision as an independent unit for supervision of commercial banks.
Permission to banks to diversify business activities like merchant banking, underwriting, mutual funds, insurance to increase productivity ,competency and profitability Phasing out of directed credit programmes and redefinition of priority sector Asset classification into4-Standard or performing assets,sub-std assets(remains NPA forless than 18 months)doubtful assets(excd 18 months) and loss assets (cannot be recovered)
Banking ombudsman scheme 1995 was started for redressing grievances of public against banks Banks were asked to disclose and share any information regarding defaulting borrowers to improve the recovery and discipline among borrowers. Banks were required to categorize their assets into performing and non performing.an asset became an NPA if the borrower does not pay dues for a period of 90 days.
CAPITAL MARKET REFORMS An important measure regarding capital market reforms is the setting up of Securities and Exchange Board of India (SEBI) as the regulator of equity market in India. Another important reform is the permission granted to the private sector firms to start Mutual Funds. Many private sector companies such as Tata, Reliance, Birla have set up their mutual funds through which they raise money from the public.
Indian capital market has been opened up for foreign institutional institutions (FII). That is, FII can now buy shares and debentures of private Indian companies . The Indian corporate sector has been allowed to raise funds in the international capital markets through American Depository Receipts (ADRs), Global Depository Receipts (GDR), Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Similarly, Overseas Corporate Bodies (OCBs) and Non-resident Indians have been allowed to invest in the equity capital of the Indian companies,stock market and can also invest in government securities
banks have been allowed to lend against various capital market instruments such as corporate shares and debentures to individuals, investment companies, trusts and endowment share and stock brokers, industrial and corporate buyers and SEBI-approved market makers. Establishment of Creditors Rating Agencies : The Investment Information & Credit Rating Agency of India Limited (ICRA - 1991) The Credit Rating Information Services of India Limited (CRISIL - 1988) & CreditAnalysis and Research Limited (CARE) were set up in order to assess the financial health of different financialinstitutions & agencies related to the stock market activities.
Depositories Act was passed in 1996 and NSDLand CDSL estd Stock exchanges were demutualised.(owned and operated by shareholders and not by traders) Many Indian & foreign commercial banks have set up their MBD (Merchant Banking Divisions) in the last few years. MBD provide financial services such as consultancy services, underwriting facilities, issue organizing,etc. The Insurance Regulatory & Development Authority (IRDA) was set up in 2000. The main purpose of IRDA is regulating the Insurance companies in India(i.e Public & Private Sectors)
IMPACT OF CAPITAL MARKET REFORMS New and innovative Fin.instruments Active participation of FII s Shorter trade cycles Growth of stock exchanges and derivative mkt More technology application Establishment of NSE Measures to protect investors and setting up of IEPF Trades in DEMAT form,newinstruments Demutualization of SE
EXTERNAL SECTOR REFORMS IN INDIA Flexible exchange rate system was introduced An important policy in external sector has been to open up the Indian economy to foreign trade. In place of import-substitution, export-led growth strategy has been adopted. The Indian rupee was made convertible on current account transactions. This facilitated the foreign exchange transactions at the exchange rate determined by market forces. Foreign Investment Promotion Council Board was estd to promote foreign investments in India. Automatic approval scheme for FDI was introduced in many industrial sectors
Another important reform in the external sector was Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act (FEMA). The stringent provisions of FERA had become obsolete in the context of liberalisation of foreign trade, foreign investment and foreign ex- change market in the early nineties. Encouraging FDI by increasing maximum limit on share of foreign capital in joint ventures from 40to51%
IMPACTOF EXTERNAL SECTOR REFORMS SustainableBoP Volatality of exchange rate reduced Foreign Investment,portfolio investment etc increased Exports increased
