CHANGES IN INDIAN FINANCIAL SYSTEM SINCE 1991
SUPPLEMENTARY PROJECT REPORT IFS
IILM INSTITITE OF HIGHER EDUCATION LODHI ROAD
As the economy grows and becomes more sophisticated, the banking sector has to develop parallely in a manner that it supports and stimulates such growth. With increasing global integration, the Indian banking system and financial system has as a whole had to be strengthened so as to be able to compete. India has had around two decade of financial sector reforms during which there has been substantial transformation and liberalization of the whole financial system.. Until the beginning of the 1990s, the state of the financial sector in India could be described as a classic example of “financial repression” ( MacKinnon and Shaw). The sector was characterized by administered interest rates, large pre-emption of resources by the authorities and extensive micro-regulations directing the major portion of the flow of funds to and from financial intermediaries, segmented and underdeveloped financial markets coupled with lack of instruments. While the true health of financial intermediaries, most of them public sector entities, was masked by relatively opaque accounting norms and limited disclosure, there were general concerns about their viability. Insurance companies– both life and nonlife - were all publicly owned and offered very little product choice. There were very complex regulations and extensive restrictions on new equity issues in security market. There was very little transparency and depth in the secondary market trading of such securities. Interest rates on government securities, the predominant segment of fixed-income securities, were decided through administration authorities. The market for such securities was a captive one where the players were mainly financial intermediaries, who had to invest in government securities to fulfill high statutory reserve requirements. There was little scope in the A financial system plays role in the economic growth of a country. It intermediates between the flow of funds belonging to those who save a part of their income & those who invest in productive assets. It mobilizes & usefully allocates scarce resources of a country. A financial system is a complex well integrated set of sub systems of financial institutions, markets, instruments, & services which facilitates the transfer & allocation of funds, efficiently & effectively The financial systems of most of the countries are characterized by coexistence & corporation between the formal & informal financial sectors. Thus Indian financial system can also be divided into the formal (organized) financial system & informal financial (unorganized) system. The formal financial system comes under the purview of Ministry of Finance (MoF), Reserve Bank of India (RBI) & Securities & Exchange Board of India (SEBI), & other regulatory bodies. The informal system consists of: Individual money lenders Group of persons operating as ‘funds’& ‘associations’. Partnership firms & nonbank Financial intermediaries
foreign exchange market as most such transactions were dominated by inflexible and low limits and also prior approval requirements. The pre-reform period also characterized by industrial licensing & controls, dominant public sector, & limited competition. This resulted in an economy characterized by uneconomic & inefficient production system which leads to high cost. This inefficient allocation & use of resources resulted in high capital output ratios. There was a huge dependence on aid & assistance from abroad to meet urgent situations. Financial system for about two decades ago, were viewed primarily as tool in the hands of government to be used in development process. On one hand financial institutions were meant for funds to finance government& public expenditure & , on the other hand channelized credit to priority sector. There was very little...