FINANCIAL AND BANKING SECTOR REFORMS The last decade witnessed the maturity of India's financial markets.

Since 1991, every governments of India took major steps in reforming the financial sector of the country. The important achievement in the following fields is discussed under separate heads !inancial markets "egulators The #anking system $on%#anking finance companies The capital market &utual funds 'verall approach to reforms (eregulation of #anking system )apital market developments )onsolidation imperative

$ow let us discuss each segment separately. FINANCIAL MARKETS: In the last decade, *rivate Sector Institutions played an important role. They grew rapidly in commercial #anking and asset management #usiness. +ith the openings in the insurance sector for these institutions, they started making de#t in the market. )ompetition among financial intermediaries gradually helped the interest rates to decline. (eregulation added to it. The real interest rate was maintained. The #orrowers did not pay high price while depositors had incentives to save. It was something #etween the nominal rate of interest and the e,pected rate of inflation. REGULATORS The !inance &inistry continuously formulated major policies in the field of financial sector of the country. The -overnment accepted the important role of regulators. The "eserve .ank of India /".I0 has #ecome more independant. Securities and 1,change .oard of India /S1.I0 and the Insurance "egulatory and (evelopment 2uthority /I"(20 #ecame important institutions. 'pinions are also there that there should #e a super% regulator for the financial services sector instead of multiplicity of regulators. THE BANKING SYSTEM 2lmost 345 of the #usiness are still controlled #y *u#lic Sector .anks /*S.s0. *S.s are still dominating the commercial #anking system. Shares of the leading *S.s are already listed on the stock e,changes. The ".I has given licenses to new private sector #anks as part of the li#erali6ation process. The ".I has also #een granting licenses to industrial houses. &any #anks are

successfully running in the retail and consumer segments #ut are yet to deliver services to industrial finance, retail trade, small #usiness and agricultural finance. The *S.s will play an important role in the industry due to its num#er of #ranches and foreign #anks facing the constraint of limited num#er of #ranches. 7ence, in order to achieve an efficient #anking system, the onus is on the -overnment to encourage the *S.s to #e run on professional lines. (1819'*&1$T !I$2$)1 I$STIT:TI'$S !Is's access to S9" funds reduced. $ow they have to approach the capital market for de#t and e;uity funds. )onverti#ility clause no longer o#ligatory for assistance to corporates sanctioned #y term%lending institutions. )2*IT29 2(1<:2)= $'"&S 1>T1$(1( T' !I$2$)I29 I$STIT:TI'$S. (!Is such as I(.I and I)I)I have entered other segments of financial services such as commercial #anking, asset management and insurance through separate ventures. The move to universal #anking has started. NON-BANKING FINANCE COMPANIES In the case of new $.!)s seeking registration with the ".I, the re;uirement of minimum net owned funds, has #een raised to "s. ? crores. :ntil recently, the money market in India was narrow and circumscri#ed #y tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked li;uidity. Several measures have #een initiated and include new money market instruments, strengthening of e,isting instruments and setting up of the (iscount and !inance 7ouse of India /(!7I0. The ".I conducts its sales of dated securities and treasury #ills through its open market operations /'&'0 window. *rimary dealers #id for these securities and also trade in them. The (!7I is the principal agency for developing a secondary market for money market instruments and -overnment of India treasury #ills. The ".I has introduced a li;uidity adjustment facility /92!0 in which li;uidity is injected through reverse repo auctions and li;uidity is sucked out through repo auctions. 'n account of the su#stantial issue of government de#t, the gilt% edged market occupies an important position in the financial set% up. The Securities Trading )orporation of India /ST)I0, which started operations in @une 199A has a mandate to develop the secondary market in government securities. 9ong%term de#t market The development of a long%term de#t market is crucial to the financing of infrastructure. 2fter #ringing some order to the e;uity market, the S1.I has now decided to concentrate on the development of the de#t market. Stamp duty is #eing withdrawn at the time of dematerialisation of de#t instruments in order to encourage paperless trading.

THE CAPITAL MARKET The num#er of shareholders in India is estimated at ?B million. 7owever, only an estimated two lakh persons actively trade in stocks. There has #een a dramatic improvement in the country's stock market trading infrastructure during the last few years. 1,pectations are that India will #e an attractive emerging market with tremendous potential. :nfortunately, during recent times the stock markets have #een constrained #y some unsavoury developments, which has led to retail investors deserting the stock markets. MUTUAL FUNDS The mutual funds industry is now regulated under the S1.I /&utual !unds0 "egulations, 199C and amendments thereto. +ith the issuance of S1.I guidelines, the industry had a framework for the esta#lishment of many more players, #oth Indian and foreign players. The :nit Trust of India remains easily the #iggest mutual fund controlling a corpus of nearly "s.D4,444 crores, #ut its share is going down. The #iggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the :S CA scheme. +ith the growth in the securities markets and ta, advantages granted for investment in mutual fund units, mutual funds started #ecoming popular. The foreign owned 2&)s are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and e,perimenting with new types of distri#ution. The insurance industry is the latest to #e thrown open to competition from the private sector including foreign players. !oreign companies can only enter joint ventures with Indian companies, with participation restricted to ?C per cent of e;uity. It is too early to conclude whether the erstwhile pu#lic sector monopolies will successfully #e a#le to face up to the competition posed #y the new players, #ut it can #e e,pected that the customer will gain from improved service. The new players will need to #ring in innovative products as well as fresh ideas on marketing and distri#ution, in order to improve the low per capita insurance coverage. -ood regulation will, of course, #e essential. OVERALL APPROACH TO REFORMS The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step% #y%step approach, not a #ig #ang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain /for e,ample lack of an inter% #ank interest rate #enchmark, an active corporate de#t market and a developed derivatives market0. 'n the whole, the cumulative effect of the developments since 1991 has #een ;uite encouraging. 2n indication of the strength of the reformed Indian financial system can #e seen from the way India was not affected #y the Southeast 2sian crisis.

7owever, financial li#erali6ation alone will not ensure sta#le economic growth. Some tough decisions still need to #e taken. +ithout fiscal control, financial sta#ility cannot #e ensured. The fate of the !iscal "esponsi#ility .ill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures hve to ensure that #orrowers repay on time the loans they have taken. The phenomenon of rich industrialists and #ankrupt companies continues. !urther, frauds cannot #e totally prevented, even with the #est of regulation. 7owever, punishment has to follow crime, which is often not the case in India. DEREGULATION OF BANKING SYSTEM *rudential norms were introduced for income recognition, asset classification, provisioning for delin;uent loans and for capital ade;uacy. In order to reach the stipulated capital ade;uacy norms, su#stantial capital were provided #y the -overnment to *S.s. -overnment pre%emption of #anks' resources through statutory li;uidity ratio /S9"0 and cash reserve ratio /)""0 #rought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. $ew private sector #anks allowed to promote and encourage competition. *S.s were encouraged to approach the pu#lic for raising resources. "ecovery of de#ts due to #anks and the !inancial Institutions 2ct, 199E was passed, and special recovery tri#unals set up to facilitate ;uicker recovery of loan arrears. .ank lending norms li#eralised and a loan system to ensure #etter control over credit introduced. .anks asked to set up asset lia#ility management /29&0 systems. ".I guidelines issued for risk management systems in #anks encompassing credit, market and operational risks. 2 credit information #ureau #eing esta#lished to identify #ad risks. (erivative products such as forward rate agreements /!"2s0 and interest rate swaps /I"Ss0 introduced. CAPITAL MARKET DEVELOPMENTS The )apital Issues /)ontrol0 2ct, 19AD, repealed, office of the )ontroller of )apital Issues were a#olished and the initial share pricing were decontrolled. S1.I, the capital market regulator was esta#lished in 199?. !oreign institutional investors /!IIs0 were allowed to invest in Indian capital markets after registration with the S1.I. Indian companies were permitted to access international capital markets through euro issues. The $ational Stock 1,change /$S10, with nationwide stock trading and electronic display, clearing and settlement facilities was esta#lished. Several local stock e,changes changed over from floor #ased trading to screen #ased trading. PRIVATE MUTUAL FUNDS PERMITTED

The (epositories 2ct had given a legal framework for the esta#lishment of depositories to record ownership deals in #ook entry form. (ematerialisation of stocks encouraged paperless trading. )ompanies were re;uired to disclose all material facts and specific risk factors associated with their projects while making pu#lic issues. To reduce the cost of issue, underwriting #y the issuer were made optional, su#ject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued #y S1.I. S1.I reconstituted governing #oards of the stock e,changes, introduced capital ade;uacy norms for #rokers, and made rules for making client or #roker relationship more transparent which included separation of client and #roker accounts. BUY BACK OF SHARES ALLOWED The S1.I started insisting on greater corporate disclosures. Steps were taken to improve corporate governance #ased on the report of a committee. S1.I issued detailed employee stock option scheme and employee stock purchase scheme for listed companies. Standard denomination for e;uity shares of "s. 14 and "s. 144 were a#olished. )ompanies given the freedom to issue demateriali6ed shares in any denomination. (erivatives trading starts with inde, options and futures. 2 system of rolling settlements introduced. S1.I empowered to register and regulate venture capital funds. The S1.I /)redit "ating 2gencies0 "egulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India. CONSOLIDATION IMPERATIVE 2nother aspect of the financial sector reforms in India is the consolidation of e,isting institutions which is especially applica#le to the commercial #anks. In India the #anks are in huge ;uantity. !irst, there is no need for ?D *S.s with #ranches all over India. 2 num#er of them can #e merged. The merger of *unja# $ational .ank and $ew .ank of India was a difficult one, #ut the situation is different now. $o one e,pected so many employees to take voluntary retirement from *S.s, which at one time were much sought after jo#s. *rivate sector #anks will #e self consolidated while co%operative and rural #anks will #e encouraged for consolidation, and anyway play only a niche role. In the case of insurance, the 9ife Insurance )orporation of India is a #ehemoth, while the four pu#lic sector general insurance companies will pro#a#ly move towards consolidation with a #it of nudging. The :TI is yet again a #ig institution, even though facing difficult times, and most other pu#lic sector players are already e,iting the mutual fund #usiness. There are a num#er of small mutual fund players in the private sector, #ut the #usiness #eing comparatively new for the private players, it will take some time.

+e finally come to convergence in the financial sector, the new #u66word internationally. 7i%tech and the need to meet increasing consumer needs is encouraging convergence, even though it has not always #een a success till date. In India organi6ations such as I(.I, I)I)I, 7(!) and S.I are already trying to offer various services to the customer under one um#rella. This phenomenon is e,pected to grow rapidly in the coming years. +here mergers may not #e possi#le, alliances #etween organi6ations may #e effective. 8arious forms of #anc assurance are #eing introduced, with the ".I having already come out with detailed guidelines for entry of #anks into insurance. The 9I) has #ought into )orporation .ank in order to spread its insurance distri#ution network. .oth #anks and insurance companies have started entering the asset management #usiness, as there is a great deal of synergy among these #usinesses. The pensions market is e,pected to open up fresh opportunities for insurance companies and mutual funds. It is not possi#le to play the role of the 'racle of (elphi when a vast nation like India is involved. 7owever, a few trends are evident, and the coming decade should #e as interesting as the last one.