The Financial Sector Reforms and It’s Impact on Financial Inclusion

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  • Topic: Bank, Financial market, Basel II
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  • Published : April 15, 2012
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THE FINANCIAL SECTOR REFORMS AND IT’S IMPACT ON FINANCIAL INCLUSION

SEMINAR PAPER BY: Manju S.V, Assistant Professor S.N.College, Chathannur UNDER GUIDANCE OF D.R. GABRIEL SIMON THATTIL,

Professor, Department of Commerce University of kerala

INTRODUCTION
Banking sector plays a pivotal role in the development of the economy. Banking business is exposed to various risks such as credit risk, liquidity risk, interest risk market risk operational risk and management risk. This risk in order to be reduced requires national and international norms of performance for banks. Liberalization and de-regulation process started in 1991-92 has made a sea change in the banking system. From a totally regulated environment, we have gradually moved into a market driven competitive system. Our move towards global benchmarks has been, by and large, calibrated and regulator driven. Sound regulatory and supervisory framework for banks and NBFC proved crucial in containing the impact of the contagion from global financial crisis on the Indian financial system. The calibrated approach to financial sector reforms and limited exposure of the banking system to synthetic and complex structured products provided the most effective shield against the contagion effects of the financial crisis.

The financial sector reforms ushered in the year 1991 have been well calibrated and timed to ensure a smooth transition of the system from a highly regulated regime to a market economy. The first phase of reforms focused on modification in the policy framework, improvement in financial health through introduction of various prudential norms and creation of a competitive environment. The second phase of reforms started in the latter half of 90s, targeted strengthening the foundation of banking system, streamlining procedures, upgrading technology and human resources development and further structural changes. The financial sector reforms carried out so far have made the balance sheets of banks look healthier and helped them move towards achieving global benchmarks in terms of prudential norms and best practices.

The traditional banking functions would give way to a system geared to meet all the financial needs of the customer. We could see emergence of highly varied financial products, which are tailored to meet specific needs of the customers in the retail as well as corporate segments. The advent of new technologies could see the emergence of new financial players doing financial intermediation. For example, we could see utility service providers offering say, bill payment services or supermarkets or retailers doing basic lending operations. The conventional definition of banking might undergo changes.

The competitive environment in the banking sector is likely to result in individual players working out differentiated strategies based on their strengths and market niches. For example, some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor. The pace of changes gained momentum in the last few years. Four trends change the banking industry world over, viz. 1) Consolidation of players through mergers and acquisitions, 2) Globalization of operations, 3) Development of new technology and 4) Universalisation of banking.

THE BASEL NORMS
Under the Basel I Capital Accord, allocation of capital follows a one-size-fit-all approach. This is replaced by a risk based...
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