There were many other notable developments besides the ones mentioned here. Many of the important points have been taken. Hope that this presentation is helpful for everyone.
06_Joeri Van Speybroek_Dell_MeetupDora&Cybersecurity.pdf
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Post reform scenario of indian financial system
1. POST REFORM SCENARIO
OF INDIAN FINANCIAL
SYSTEM
Submitted By:
1) Anshul Surana
2) Sushma Thapa
3) Gautam Ola
4) Suresh Rizal
5) Melambor Lyngdoh
2. What is a Financial System?
⢠It is a set of institutionsthatallows theexchangeof funds
between lenders, investors and borrowers.
⢠It helps in usefullyallocatingthescarce resources of a
country.
⢠It is a complex and well integrated set of sub-systems of
financialinstitutions,markets, instrumentsand services which
facilitatesthetransfer and allocation of funds efficientlyand
effectively.
3. The Indian Financial System
TheIndian FinancialSystem can beclassifiedintotwobroad groups
:-
1) Organized Sector 2)UnorganizedSector
⢠The Organized Sector consists of Regulators, Financial
Institutions,Financialmarkets,FinancialInstrumentsand
FinancialServices.
⢠The Unorganizedsectorconsists ofmoney lenders,local bankers,
traders,landlords and brokers.
⢠It canbefurther classifiedintovarious other groups.
⢠In thispresentationwe willfocus on the changesthattook placein
theIndian FinancialSystemafterreform,i.e,after1990.
4. INDIAN FINANCIAL SYSTEM IN
THE PRE- REFORM PERIOD
The pre reform period of IndianFinancialSystem, i.e, theperiod
from mid 1960âs to theearly 1990âs was characterized by
administered interestrates ,industrial licensing and control ,
dominantpublic sector, and limited competition.The Indian
financialSystem consisted of unorganized sector. It was a
shallowmarket with the public sector playing a dominant
role. It lacked efficiency in thesecondary marketand so it was
yet to be developed
5. NEED FOR A REFORM
⢠India desperately needed a reform because its financial system some two
decades ago was bluntly described as tools in the hands of government
used slightly for development process and majorly tapped for funds to
finance the government and public expenditure.
⢠There were no competitive institutions to challenge the terms and
policies of the government institutions in the various sectors of financial
system. The people had to accept whatever terms and policies were
designed for them despite of it not being a reasonable choice.
⢠The emphasis needed a shift from the government and public sector to
private sector due to governmentâs failure to attainsocial objectives and
thereby, lacking in the growth and development of itâs financial system.
6. ⢠In this era of globalization and intense competitionIndia
lacked a continuousflow of funds due to thelack of domestic
institutionand foreign investment.
⢠The IndianFinancial system majorly compromised of the
unorganized sector, therefore it lackedefficiencyin the
Secondary market. The important factors for thedevelopment
of the system such as stocks, investmentsand purchase of
bonds was a very small part of the Indian FinancialSystem.
7. OBJECTIVES OF FINANCIAL
SYSTEM REFORMS
⢠The reform aimed atincreasing competitive efficiency in the operation of
the Indian Financial system, making it healthy and profitable and
imparting to it an operational flexibilityand autonomy for working
efficiently.
⢠Another objective was to make Indian Financial System much wider by
increasing the number of financial instruments and financial institutions .
This would result into greater accumulation of capitalfunds.
⢠A basic priority of the early reform period was to remove structural
rigidities and ineffectiveness in the financial system.
8. ⢠The pre-reform characteristics of IndianFinancial system such
as control over the pricing of financialassets , restrictions on
transactions, barriers to enter the financialsystem , low
liquidity , and highcosts hinderedthedevelopment of Indian
Financialsystem. So it aimed at removing all these barriers for
better development.
⢠Lastlyit aims at attaininga balance betweenthegoals of
financialstability and and integrated and efficientmarket.
9. NOTABLE DEVELOPMENTS OF INDIAN
FINANCIAL SYSTEM IN THE POST
REFORM ERA
⢠The FinancialInstitutionswere privatized increasing the
competitiveefficiencyin thesystem.
⢠Reorganizationof Institutionalstructure.
⢠Indian Financialmarketwas integratedwithglobalmarketand
foreigninvestmentswere now accepted.
⢠Protectionto investors were provided.
⢠RegulatoryBody for Insurance was setup (Insurance Regulatory
andDevelopmentAuthority).
10. ⢠Abolition of licensing forvarious industries.
⢠Abolition of Foreign ExchangeManagementAct (FERA) in
1999 and Liberalization of Monopolistic and Restrictive Trade
Practice(MRTP) in1988
⢠The percentage of foreign holdings were increased.
⢠The oilsector, telecom industry, bankingand insurance
sector, aviation and miningindustry were all privatised.
⢠More autonomywere given to public sector.
11. ⢠The prices of corporate tax, excise dutiesand import duties
were all lowered.
⢠The branches of Indiancompanies were establishedon a
global scale and investmentsfrom global market were also
welcomed.
⢠Various regulatory bodies like Telecom Regulatory Authority
of India (TRAI), Securities and ExchangeBoard of India (SEBI),
Insurance Regulatoryand Development Authority (IRDA)
were set up for organizing the FinancialSystem.
⢠Foreign Direct investments(FDI) and Multinational
corporation (MNC) were also introduced.
12. ENTRY OF PRIVATE BANKS
In the early 1990âs Indian had a completely Government owned banking
system where entry of foreign or private banks were completely
blocked. Between 1994-2004 the entry barriers in the banking
industry were eased and 12 new banks were introduced and much of
the assetsof Indian publicwere given to these banks . While some of
these new private banks fared badly, others have done well. They have
experienced sharp growth in assets. They dominate certain newer
market segments, such ascards and POS terminals.
13. They have exerted a certain limited competitivepressure upon
publicsector banks. As an example,public sector banks now
accept computers and ATMs on a scale thatwas not seen in
1993, and it is likely thatcompetitivepressure from private
banks has helped. In summary, thelimited economic reform,
of bringing in 12 newprivate banks from 1994 to 2004, was
one of the important milestonesof change inIndianfinance,
even thoughit was highlylimited in scope and onerous entry
barriers remain in place.
14. COMMERCIAL PAPER IN INDIA
1990
⢠Commercial Paper in India is a new addition to short-term
instruments in Indian Money market since 1990 onward. The
introduction of Commercial Paper asthe short-term monetary
instrument was the beginning of a reform in Indian Money market on
the background of trend ofLiberalization which began in the world
economy during 1985 to 1990. A commercial paper in India is the
monetary instrument issued in the form of promissory note. It acts as
the debt instrument to be used by large corporate companies for
borrowing short-term monetary funds inthe money market. An
introduction of Commercial Paper in Indian money market is an
innovation in the Financialsystem of India.
15. Prior to injectionof Commercial Paperin Indian money
market i.e. before 1990, the corporate companies had to
depend upon the crude and traditional methodof borrowing
working capital from thecommercial banks by pledging the
inventory of raw materialsas Collateral security. It involved
more loss of time for theborrowing companies in availing the
short-term fundsfor day-to-day production activities. The
commercial paper has becomeeffectiveinstrumentfor these
corporate companies to avail theshort-term fundsfrom the
money market withinshortest possible time limitby avoiding
the hassles of direct negotiationwiththe commercial banks
for availing the short-termloans.
16. LIQUIDITY ADJUSTMENT
FACILITY (LAF)- 2000
Liquidity adjustment facility (LAF) is a monetary policy which allows
banks borrow money through repurchase agreements. LAF is used to
aid banks in adjusting the day to day mismatches in liquidity.. LAF
consists of repo (repurchase agreement) and reverse repo operations.
Repo or repurchase option isa collaterised lending i.e. banksborrow
money from Reserve bank of India to meet short term needs by
selling securities to RBI with an agreement to repurchase the same at
predetermined rate and date. The rate charged by RBI for this
transaction iscalled the repo rate. Repo operations therefore
inject liquidity into the system.
17. Reverse repo operation is when RBI borrows money from
banks by lendingsecurities. The interestrate paid by RBI in
this case is called thereverse repo rate. Reverse repo
operation therefore absorbs theliquidity in the system. The
collateral used for repo and reverse repo operations are
Government of India securities. Oilbonds have been also
suggestedto be included as collateral for Liquidity adjustment
facility. In LAF, money transaction is done via RTGS (Real time
Gross settlementanonlinemoneytransfermethod).
18. REAL TIME GROSS SETTLEMENT
(RTGS)- 2004
Real Time Gross Settlement (RTGS) was introduced in the year 2004, is
an electronic form of fund transfer where the transfer of money takes
place from one bank to another bank on a real-time and gross basis.
Reserve Bankof India (RBI) maintainsand operates the RTGS system
by providing the efficient and faster fund transfer among banks
facilitatingtheir financialoperations. Therefore, RTGS is the
continuous process of settling payments on an individual order basis
without netting debits with credits across the books of a central bank
(e.g. bundling transactions). Once completed, real-time gross
settlement payments are finaland irrevocable.
19. CONCLUSION
After thereform theIndian financialsystem is fairly
integrated ,stable and efficient.There are weaknessin the
system which need to be addressed. These include high level
of non performing assets in some banks and financial
institutions,disciplinary issues withregard to non banking
financialcompanies, governmentâs high domestic debt and
borrowings, volatility in financialmarkets, absence of yield
curve and co-operative bank scams.