2. Recent Reforms in Financial Sector
Due to the repercussion of the East Asian crisis,
since weaknesses in the financial sector are
broadly regarded as one of the major causes of
collapse in that region.
3. The elements of the financial sector are
Banks, Financial Institutions, Instruments
and markets which mobilise the resources
from the surplus sector and channelize the
same to the different needy sectors in the
economy.
4. Reform of the financial sector was recognized as
integral part of the economic reforms initiated in
1991.
The economic reform process occurred amidst 02
serious crisis involving the financial sector :
1. The balance of payments crisis that endangered
the international credibility of the country and
pushed it to the edge of default; and
2.The grave threat of insolvency confronting the
banking system which had for years concealed its
problems with the help of faulty accounting
strategies.
5. Poorly developed debt and money markets. And
outdated (often primitive) technological and
institutional structures that made the capital
markets and the rest of the financial system
highly inefficient (Mathieu, 1998).
6. Major aims of the financial sector reforms are
to allocate the resources proficiently,
increasing the return on investment and
hastened growth of the real sectors in the
economy.
7. At global level, financial sector reforms have been
driven by 02 apparently contrary forces.
1. The first is a thrust towards liberalization, which
seeks to decrease, if not eliminate a number of
direct controls over banks and other financial
market participants.
2. The second is a thrust in favour of strict
regulation of the financial sector. This dual
approach is also apparent in the reforms tried in
India.
8. Financial and banking sector reforms are
in following areas:
1. Financial markets
2. Regulators
3. The banking system
4. Non-banking finance companies
5. The capital market
6. Mutual funds
7. Deregulation of banking system
8. Capital market developments
9. Regulators
The Finance Ministry constantly formulated major
strategies in the field of financial sector of the country.
The Government acknowledged the important role of
regulators.
The Reserve Bank of India (RBI) has become more
independent.
Securities and Exchange Board of India (SEBI) and the
Insurance Regulatory and Development Authority
(IRDA) became important institutions.
10. Indian Banking Sector and Financial Reforms
The main intent of banking sector reforms was to
uphold a diversified, efficient and competitive
financial system with the aim of improving the
allocative efficiency of resources through operational
flexibility, improved financial viability and
institutional solidification.
11. The Finance Ministry of Government of
India (GOI) set up various committees with the
task of analysing India's banking sector and
recommending legislation and regulations to
make it more effective, competitive and efficient.
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.
12.
13. The major reforms relating to the
banking system were:
Capital base of the banks were strengthened by
recapitalization, public equity issues etc.
Norms were introduced and progressively tightened
for income recognition, classification of assets,
provisioning of bad debts, marking to market of
investments.
New private sector banks were licensed and branch
licensing restrictions were relaxed.
14. Several operational reforms were introduced
in the area of credit policy:
Detailed regulations relating to Maximum
Permissible Bank Finance were abolished.
Consortium regulations were relaxed
substantially. (Consortium is a group of
Independent Companies participating in a Joint
Venture for mutual benefit).
Credit delivery was shifted away from cash credit
to loan method.
15. Forex market reforms
Forex market reform took place in 1993 .Under these
reforms,
1. Authorised dealers of foreign exchange as well as
banks have been given greater sovereignty to perform
in activities and numerous operations.
2. The entry of new companies have been allowed in
the market.
16. Capital Market Reforms
Capital market is defined as a financial market that
works as a channel for demand and supply of debt and
equity capital.
It channels the money provided by savers and
depository institutions (banks, credit unions,
insurance companies, etc.) to borrowers and
investees through a variety of financial instruments
(bonds, notes, shares) called securities.
It deals in long-term capital securities.
17. SEBI
The Securities and Exchange Board of India (SEBI)
was well-known in 1988. It got a legal status in 1992.
SEBI was principally set up to control the activities of
the commercial banks.
18. The main functions of SEBI are as follows:
To control the business of the stock market and
other securities market.
To promote and regulate the self-regulatory
organizations.
To forbid fraudulent and unfair trade practices in
securities market.
To promote awareness among investors and
training of intermediaries about safety of market.
To regulate huge acquisition of shares and
takeover of companies.
19. Modernization of Trading and Settlement Systems
Major developments occurred in trading methods
which were highly antiquated earlier. The National
Stock Exchange (NSE) was established in 1994 as an
automated electronic exchange.
It empowered brokers in 220 cities all over the country
to link up with the NSE computers via VSATs and trade
in a unified exchange with automatic matching of buy
and sell orders with price time priority, thus ensuring
maximum transparency for investors.
20.
21. Reform of the Insurance Sector
The Insurance sector in India directed by
Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and General Insurance
Business (Nationalisation) Act, 1972, Insurance
Regulatory and Development Authority (IRDA)
Act, 1999 and other related Acts.
A healthy insurance is an important source of
long-term capital in domestic currency which is
especially for infrastructure financing.
Improvements in insurance will strengthen the
capital market at the long-term end by adding
new companies in this section of the market,
22. The Malhotra Committee had suggested opening up
the insurance sector to new private companies as early
as 1994.
It took five years to build an agreement on this issue
and legislation to open up insurance, allowing foreign
equity up to 26 per cent was finally submitted to
Parliament in 1999.
23. There are ten broad themes where reforms seem to be
headed in the correct direction:
Consumer Protection: Work on establishment of the
Financial Redress Agency (FRA) is on track.
Systemic Risk Regulation: A law is being introduced
to set up a statutory Financial Data Management
Centre (FDMC).
24. Digital Payments: A statutory Payments
Regulatory Board (PRB) is being constituted
within RBI to regulate payments.
Monetary Policy: The monetary framework
machinery for inflation targeting is now in
place.
25. Government's debt Management and its bond
market: An advisory Public Debt Management Cell
(PDMC) is in place.
Debt Recovery: The infrastructure at the Debt
Recovery Tribunals (DRTs) is being strengthened and
vacancies are being filled up.
26. Market for stressed assets: The listing and trading
of securities receipts issued by a securitisation
company is allowed.
Mechanism to close down failed financial firms: A
statutory Resolution Corporation (RC) to be set up to
ensure that situations related to bankruptcy of banks,
insurance companies.
Taxation: The four rate GST, backed by the
constitutional amendment, has been rolled out.