ANALYSIS OF INDIAN FINANCIAL REFORMS WITH REFERENCE TO BANKING SECTOR

Analysis of Indian Financial Sector reveals that it is at present going through a phase of stable growth rate which is experiencing a upward swing. The rise can be maintained over a long period by keeping the inflation down. The financial sector in India has experienced a growth rate of 8.5% per annum. The rise in the growth rate suggests the growth of the economy. The financial policies and the monetary policies are able to sustain a stable growth rate. The reforms pertaining to the monetary policies and the macro economic policies over the last few years have influenced the Indian economy to the core. The major step towards opening up of the financial market further was the nullification of the regulations restricting the growth in the financial sector. To maintain such a growth for a long term the inflation has to come down further. The analysis of Indian financial sector shows the growth of the sector was the result of the individual development of the divisions under the sector.

Analysis of the Indian Capital market

• The ratio of the transaction was increased with the share ratio and deposit system
• The removal of the pliable but ill-used forward trading mechanism
• The introduction of InfoTech systems in the National Stock Exchange (NSE) in order to cater to the various investors in different locations
• Privatization of stock exchanges

Analysis of the Indian Venture Capital market

• The venture capital sector in India is one of the most active in the financial sector in spite of the hindrances by the external set up
• Presently in India there are around 34 national and 2 international SEBI registered venture capital funds

Analysis of the Indian Banking sector

• The banking system in India is the most extensive. The total asset value of the entire banking sector in India is nearly US$ 270 billion.
• The total deposit is nearly US$ 220 billion. Banking sector in India has been transformed completely.
• Presently the latest inclusions such as Internet banking and Core banking have made banking operations more users friendly and easy.

Analysis of the Indian Insurance sector

• With the opening of the market, foreign and private Indian players are keen to convert untapped market potential into opportunities by providing tailor-made products:
• The insurance market is filled up with new players which has led to the introduction of several innovative insurance based products, value add-ons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life
• The competition among the companies has led to aggressive marketing, and distribution techniques
• The active part of the Insurance Regulatory and Development Authority (IRDA) as a regulatory body has provided to the development of the sector

Investment in India – Financial Sector & Reforms

Bank norms liberalized and banks given the freedom to decide levels of holding of individual items of inventories and receivables. Ceiling on term loans raised to Rs. 10,000 million for projects involving expansion/modernization of power generation capacities. Banks allowed setting their own interest rate on post-shipment export credit (in Rupees) for over 90 days. Deregulation of interest rates on loans over Rs. 200,000 against term deposits and on domestic deposits with maturity periods over two years. Banks freed to fix their own foreign exchange open position limit subject to RBI approval

Guidelines issued to banks to ensure qualitative improvement in their customer service. Loan system introduced for delivery of bank credit. Banks required to bifurcate the maximum permissible bank finance of Rs. 200 million and above into loan component of 40% (short term working capital loan) and cash credit component of 60%.

Impact of Financial Sector Reforms in India

Banks have been accorded greater discretion in sourcing and utilization of resources, albeit in an increasingly competitive environment. The outreach of the Indian banking system has increased in terms of expansion of branches/ATMs. In the post-reform period, assets/liabilities of banks have grown consistently at a high rate. The financial performance of banks also improved as reflected in their increased profitability. Net profit to assets ratio improved from 0.49 per cent in 2000-01 to 1.13 per cent in 2003-04. Although it subsequently declined to 0.88 per cent in 2005-06, it was still significantly higher than that in the early 1990s. Banks have been successful in weathering the impact of upturn in interest rate cycle through increasing diversification of their income. Though banks had to incur huge expenditures on up gradation of information technology, the restructuring of the workforce in public sector banks helped them cut down the staff cost and increase in business per employee. Another welcome development has been the sharp reduction in non-performing loans (NPLs). Both gross and net NPLs started to decline in absolute terms since 2002-03. Gross NPLs as percentage of gross advances, which were above 15 per cent in the early 1990s, are now less than 3 per cent. This distinct improvement in asset quality may be attributed to the improved recovery climate underpinned by strong macroeconomic performance as well as several institutional measures initiated by the Reserve Bank/Government such as debt recovery tribunals, Lok Adalats, scheme of corporate debt restructuring in 2001, the SARFAESI Act in 2002. Since 1995-96, the banking sector, on the whole, has been consistently maintaining CRAR well above the minimum stipulated norm. The overall CRAR for scheduled commercial banks increased from 8.7 per cent at end-March 1996 to 12.3 per cent at end-March 2006. The number of banks not complying with the minimum CRAR also declined from at end-March 1996 to just two by end-March 2006. Improved capital position stemmed largely from the improvement in profitability and rising of capital from the market, though in the initial stages the Government had to provide funds to recapitalize weak public sector banks. Even though public sector banks continue to dominate the Indian banking system, accounting for nearly three-fourths of total assets and income, the increasing competition in the banking system has led to a falling share of public sector banks, and increasing share of the new private sector banks, which were set up around mid-1990s. It is clear that we are at the beginning of this new phase in the Indian banking with competitive pressure, both domestic and external, catching up and the need for banks to continuously reassess and reposition themselves in their business plans.

To conclude, the financial system in India, through a measured, gradual, cautious, and steady process, has undergone substantial transformation. It has been transformed into a reasonably sophisticated, diverse and resilient system through well-sequenced and coordinated policy measures aimed at making the Indian financial sector more competitive, efficient, and stable. Concomitantly, effective monetary management has enabled price stability while ensuring availability of credit to support investment demand and growth in the economy. Finally, the multi-pronged approach towards managing capital account in conjunction with prudential and cautious approach to financial liberalization has ensured financial stability in contrast to the experience of many developing and emerging economies. This is despite the fact that we faced a large number of shocks, both global and domestic. Monetary policy and financial sector reforms in India had to be fine tuned to meet the challenges emanating from all these shocks. Viewed in this light, the success in maintaining price and financial stability is all the more creditworthy.

S.Saravanakumar,
Assistant Professor,
Excel Business School,
Namakkal District

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