financial sector reforms in india
TRANSCRIPT
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Economic ReformsFinancial Sector Reforms
in India
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Types of Reforms introduced
A) Economic Reform
B) Financial Sector Reform
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The term economic reform broadly indicates necessary
structural adjustments to external events.
It include the function of countrys spending to thelevel parallel to its income and thereby reducing fiscal
deficits.
This requires gradual reduction in import and increase
in export. These adjustments also requires market
change in order to make economy flexible.
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The present process of economic reforms was
born out of the crisis in the economy, which
climaxed in 1991. The crisis compelled thegovernment to adopt a new path-breaking
economic policy under which a series of
economic reform measures were initiated
with the objective to deal with the crisis andto take the economy on a high-growth path.
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Increase in Fiscal Deficit
Increase in adverse balance of Payment
Fall in foreign Exchange Reserve
Rise in Prices
Poor Performance of Public Sector
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Need for Financial sector reforms
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Till the early 1990s the Indian financial
sector could be described as a classic
example offinancialrepression .
Monetary policy was subservient to the
fiscal Policy.
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Resulting into
Government regulated the price at which firms couldissue equity, the rate of interest which they could offer on
their bonds, and the debt equity ratio that was permissible
in different Industries
Working capital management was even moreconstrained with detailed regulations on how much
inventory the firms could carry or how much credit they
could give to their customers.
Working capital was financed almost entirely by banksat interest rates laid down by the central bank
Working capital finance was related more to the credit
need of the borrower than to creditworthiness.
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BACKGROUND OF FINANCIAL SYSTEM
REFORM
The pre-reforms period i.e. from the mid 1960s to
the early 1990s was characterized by interest
rates, industrial licensing and controls dominated
by public sector and limited competition.
The government initiated economic reforms in
June 1991 to provide an environment for
sustainable growth and stability.
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ECONOMICREFORMS
LIBERALISATION
PRIVATISATION
GLOBALISATION
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It means to free the economy from direct or physical
controls imposed by the government.
Prior 1991, government had imposed several types of
controls on Indian economy e.g. industrial licensing
system, price control or financial control on goods,
import license, foreign exchange control,restriction on investment by big business houses,
etc.
These controls leads to fall in economy growth.
Economic reforms were based on the assumptionthat market forces could guide the economy in a
more effective manner than government control.
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Abolition of industrial licensing and Registration
with a few exceptions.
Freedom from Expansion and Production to
Industries Increase in the Investment Limit of the Small
Industries:
Freedom to import capital goods
Freedom to import technology
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Privatisation means allowing the private
sector to set up more and more of industries
that were previously reserved for public
sector.
It can take in three in forms:a. Change in ownership: Degree of privatisation
judged by the extent of ownership
transferred from public to private sector.
i) Public Private Partnershipii) Joint Venture
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It is defined as a process associated with
increasing openness, growing economic
independence and Deeping economic
integration in the world economy.
Reduction of trade barriers
Free flow of capital
Free flow of technology
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Reduction of import duties
Encouragement of foreigninvestment
Reducing custom duty
Devaluation of currencyPartial convertibility
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Financial Sector Reforms
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Major contours of the financial sector
reforms in India
Reduction in CRR and SLR in a phased manner
Deregulation of Interest Rate:
Fixing prudential Norms:
Introduction of CRAR:
Operational Autonomy
Banking Diversification
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New Generation Banks, thereby inducing competition
Improved Profitability and Efficiency:
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First Phase of Banking Sector Reforms
1)Reduction in SLR & CRR
2.) Deregulation of interest rates
3.) Transparent guidelines or norms for entry and exit of
private sector banks
4.) Public sector banks allowed for direct access to capital
markets
5.) Branch licensing policy has been liberalized
6.) Setting up of Debt Recovery Tribunals
7.) Asset classification and provisioning
8.) Income recognition
9. Asset Reconstruction Fund ARF
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Second Phase of Reforms measures
Merger of strong units of banks
Adaptation of the narrowbanking concept to
rehabilitate weak banks
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A NarrowBank in its narrow sense, can be defined as
the system of banking under which a bank places itsfunds in risk-free assets with maturity period matching
its liability maturity profile, so that there is no problem
relating to asset liability mismatch and the quality ofassets remains intact without leading to emergence of
sub-standard assets.
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What are advantages :
Such an approach can ensure the regular
deployment of funds in low risk liquid assets. With
such pattern of deployment of funds, these banks
are expected to remove the problems of bank
failures and the consequent systemic risks and loss
to depositors.
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What is status of narrow banking in India ?
The concept is practically being implemented by the
Indian banking system partly, as a large part of the
deposits mobilized (i.e. more than 46%) by the banks,
has been deployed in Govt. securities (against a
prescription of 25% in the form of SLR) as it provides a
safe avenue of investment but at a very low return. This
keeps the level of non-performing assets (rather than
advances) low and the requirement of capital adequacy
ratio also low, as the risk weight allotted to such
securities is only 2.5% compared to 100% in loan
assets