Financial Reforms : Financial Reforms Presented By:-
Shakti nath jaiswal FINANCIAL SYSTEM : FINANCIAL SYSTEM Financial system is a complex, well integrated set of sub-system of financial institutions, markets, instruments and services which facilitates the transfer and allocation of funds, efficiently and effectively. Slide 3: WHY FINANCIAL REFORMS WERE INITIATED IN INDIA ? BACKGROUND OF FINANCIAL SYSTEM REFORM : 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. INTRODUCTION : INTRODUCTION As the economy grows and becomes more sophisticated the financial sector has to be developed in such a manner that it supports and stimulate growth.
With the increasing global integration, the financial system and financial system as a whole has to be strengthened to be able to compete. OBJECTIVE OF FINANCIAL REFORM : OBJECTIVE OF FINANCIAL REFORM STRUCTURAL TRANSFORMATION
FINANCIAL EFFICIENCY AND STABILITY
INTEGRATION OF FINANCIAL MARKETS MUTUAL FUNDS : MUTUAL FUNDS A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective.
Reforms In Mutual funds are as follows :-
The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India.
Phase 1. Establishment and Growth of Unit Trust of India - 1964-87
Phase II. Entry of Public Sector Funds - 1987-1993:- Slide 8: SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Muatual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.
Phase III. Emergence of Private Secor Funds - 1993-96:-
Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.
Phase IV. Growth and SEBI Regulation - 1996-2004:-The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. NON BANKING FINANCE COMPANY : NON BANKING FINANCE COMPANY NBFCs do offer all sorts of banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activites. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business.
Depending upon their nature of activities, non- banking finance companies can be classified into the following categories:
Development finance institutions
House finance companies
Venture capital companies
Corporate development companies Slide 10: RBI REGULATIONS ON NBFCs
The debt market is the market for trading debt securities. The debt market thus involves corporate bonds, government bonds, municipal bonds, negotiable certificates of deposit, and various money market investments. The debt market also includes individual loans bought from lenders and often packaged together in large amounts. The debt market includes the primary market, where debts are first sold to the public; and the secondary market, where investors sell debts to each other afterward. On the secondary debt market, debts can be sold on exchanges or on the over-the-counter market, but most are traded over the counter. Many debts are also packaged together into mutual funds. There are publications that publish the daily prices of bonds on the debt market. Slide 11: An example of a thriving secondary market in India is the secondary market for equities. With 22 stock exchanges across the country and the use of advanced technology, India is comparable to the world’s most advanced secondary markets for equity.
The growth in the equity markets in India can be traced to the enactment of the SEBI Act, 1992, that was made possible largely due to changes in policy made in conjunction with economic and financial reforms.
However, India still does not have a well-developed secondary market for debt instruments. Liquidity in such markets continues to remain a challenge and very few risk classes have any semblance of liquidity. In the absence of such markets, banks and other financial institutions need to hold all such assets on their books until maturity and maintain the requisite levels of equity on their books. This translates into a higher cost of funds, which is inevitably passed on to borrowers. Economic Reforms of the Banking Sector In India : Economic 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.… : 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 licences to new private sector banks as part of the liberalisation process. The RBI has also been granting licences 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 constrait 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.… : 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.
Deregulation of Interest Rate : Banks now enjoy freedom of fixing the lower and upper limit of interest on deposits..Interest rates on the bank loans above Rs.2 lakhs are full decontrolled. Cont.... : 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.…. : 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 stared 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.…. : 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 : 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.….. : 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.….. : 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.….. : 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.….. : Cont.….. Growing Merchant Banking Activities : Many Indian and foreign commercial banks haves 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.….. : 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.….. : 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.….. : 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.….. : 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.
Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges.
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.….. : 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. Cont.….. : Cont.….. Commodity Trading :
Along with the trading of ordinary securities, the trading in commodities is also recently encouraged.
The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate.
Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL), Venture Funds, etc. have resulted into the tremendous growth of Indian capital market. Economy of The Republic of India : Economy of The Republic of India GDP-- $1.53 TRILLION
GDP Growth– 8.5%
GDP by Sector– Services(55.3%), Industry( 28.6%), Agriculture( 16.1%)
Main Industries –Telecommunications, Textiles, Chemicals, Food Processing, Steel, Transport Equipment, Cement, Mining, Petroleum, Machinery, Information Technology, Pharmaceuticals.
Exports -- $ 247.4 billion
Export Goods – Petroleum Products, Precious Stones, Machinery, Iron and Steel, Chemicals, Vechiles
Main Export – UAE (12.87%), US (12.59%), China (5.59%) Cont.….. : Cont.….. Import -- $ 359.3 billlion
Import Goods – Crude Oil, Precious Stones, Machinery, Fertilizer, Iron and Steel, Chemicals
Main Import – China 10.94%, US 7.16%, Saudi Arabia 5.36%, UAE 5.18%, Australia, Germany Singapore
FDI Stocks -- $ 35.6 billion
Gross External Debt -- $ 237.1 billion
Foreign Reserve -- $ 319 billion . : . Reforms in Industrial Sectors in India : Reforms in Industrial Sectors in India Industrial Sector was among the first sectors to be liberalized in India in a series of measures. Industrial licensing has been abolished except in a small number of sectors where it has been retained on strategic considerations. Slide 33: Industrial Policy
Foreign Direct Investment Policy
Foreign Investment Promotion Board (FIPB)
Setting up a company Slide 34: Foreign Exchange Management Act (FEMA)
Taxation in India Recent Reforms in Indian Money Market : Recent Reforms in Indian Money Market Indian Government appointed different committee’s to review the Indian monetary system. As per the recommendations of these study groups, the government has adopted following major reforms in the Indian money market. Reforms made in the Indian Money Market : Reforms made in the Indian Money Market Deregulation of the Interest Rate
Money Market Mutual Fund (MMMFs)
Establishment of the DFHI
Liquidity Adjustment Facility (LAF) Slide 37: Electronic Transactions
Establishment of the CCIL
Development of New Market Instruments Slide 38: THANK YOU