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In India, a decade old on-going financial reforms have transformed the operating environment of the finance sector from an “administrative reg
Since mid-1991, a number of reforms have been introduced in the financial sector in India. [2] Rangarajan once noted that domestic financial lib
of directed credit, reforming the banking system, improving the functioning of the capital market, including the government securities market”.
system so as to improve the performance of public sector banks. [4] The Narasimhan Committee constituted in 1991 laid the foundation for the
reports- in 1992 and 1998 which gave immense importance on enhancing the efficiency and viability of this sector. [5]
Taking a cue from the developments in the finance sector taking place globally, India undertook structural changes by way of these reforms an
Cash Reserve Ratio and Statutory Liquidity Ratio, capital adequacy reforms, restructuring and recapitulation of banks and enhancement in the c
India had to give a go-by to their traditional operational methods of directed credit, fixed interest rates and directed investments, all of which,
capital and erosion of profitability. [7]
Another prominent consequence of the reforms was the sprouting up of a number of banks due to the entry of new private and foreign banks,
prudential norms and increase in the role of the market forces due to the deregulated interest rates. [8] All these measures lead to major chang
The objective of this paper is to analyse the financial sector reforms that have been carried out in India since the 1990s. The first chapter analys
explain in detail the policy reforms undertaken in this sector and puts forth a four-pronged approach to understand the various elements withi
Chapter IV which essentially recognises the elements integral to the reformation process. It includes the suggestions made by Y.V. Reddy. Final
this research paper.
The crisis involving the balance of payments that had threatened the international credibility of the country and dragged it towards the brink o
The crisis involving the grave threat of insolvency threatening the banking system which had concealed its problems for years with the aid of de
Apart from the above two dilemmas, there were many deeply rooted problems of the Indian economy in the early 1990s which were strongly re
As mentioned by McKinnon and Shaw, till the early 1990s, the Indian financial sector could be described as an example of financial repression.
unrealistically low levels, [13] large pre-emption of resources by authorities and micro regulations which direct the major flow of funds back and
The act of the government involving large scale pre-emption of resources from the banking system to finance its fiscal deficit.
More than necessary structural and micro-regulation that inhibited financial innovation and increased transaction costs.
Obsolete and out-dated technological and institutional structures that lead to the consequent inefficiency of the capital markets and the rest o
Till the early 1990s, the Indian financial system was characterised by extensive regulations viz. administered interest rates, weak banking structu
systems and lack of transparency in operations of major financial market participants. [15] Furthermore, this period was characterised by the res
and 1980, almost 90 per cent of the banking assets were under the control of government owned banks and financial institutions. [16] The fina
the view of enhancing efficient allocation of resources in the Indian economy.
The Reserve Bank of India had been making efforts since 1986 to develop efficient and healthy financial markets which were accelerated after 1
market, government securities market and the forex markets. [17] Financial markets also benefited from close coordination between the Centra
The focal issues addressed by financial sector reforms in India have primarily aimed to include the following: [19]
Enabling the process of price discovery by market determination of interest rates which leads to an improvement in the efficiency in the allocat
The financial reforms since the 1990s can be classified into two phases. The first phase, also known as the first generation reforms, was aimed a
which would function in an environment of functional autonomy and operational flexibility. [21] The first phase was initiated in 1992 based on t
early phase of reforms was being implemented, the global economy was also witnessing prominent changes coinciding with the movement tow
noted that the objective of Financial Sector Reforms in India should not focus on correcting the present financial weaknesses but should strive t
Indian market economy. [24]
The second generation reforms or the second phase commenced in the mid-1990s and laid greater emphasis on strengthening the financial sy
Committee II was to look into the extent of the effectiveness of the implementation of reforms suggested by Narasimhan Committee I and was
growth and integration of the Indian banking sector with international standards. [26]
Introduction of various measures by cautious and gradual phasing thus giving time to various agents to carry out the necessary norms. For inst
Mutually reinforcing measures, that would serve as enabling reforms which would not in anyway disrupt the confidence in the system. E.g. Impr
and Cash Reserve Ratio.
Complementary nature of the reforms in the banking sector with other commensurate changes in fiscal, external and monetary policies.
Development of the financial infrastructure in terms of technology, changing legal framework, setting up of a supervisory body, and laying dow
Introducing initiatives to nurture, integrate and develop money, forex and debt market so as to give an equal opportunity to all major banks to
The main idea was to increase the competition in the banking system by a gradual process and unlike other countries, banking reform in India,
ownership, majority of these banks have been publicly listed which in turn has brought about greater transparency through enhanced disclosur
expansion in the number of foreign banks provided for a new level of competition. [33] Furthermore, increasingly tight capital adequacy norms
regardless of their ownership. [34]
Till the 1990s, insurance business was under the public ownership. After the passage of the Insurance Regulation and Development Act in 1999
the setting up of the Insurance Regulatory and Development Agency as well as the setting up of joint ventures to handle insurance business on
Another important step has been the setting of the Securities and Exchange Board of India as a regulator for equity markets and to improve ma
practices regarding trading. [46] The reform measures in the equity market since 1992 have laid emphasis mainly on regulatory effectiveness, e
development of modern technological infrastructure, mitigation of transaction costs and lastly, controlling of speculation in the securities mark
monopoly of the United Trust of India by opening up of mutual funds to the private sector in 1992. [48] Mutual funds have been permitted to o
jurisdictions. Another development which took place in 1992 was the opening up of the Indian capital market for foreign institutional investors.
international capital markets through American Depository Receipts, Foreign Currency Convertible Bonds, Global Depository Receipts and Exter
and non-resident are allowed to invest in Indian companies. [51]
List of banking correspondents has now been expanded to include individual petty, medical as well as fair price shop owners and also agents o
retired teachers.
At present, the Reserve Bank is reviewing the guidelines of the priority sector lending and the feasibility of trading in priority sector lending cer
A working group set up under the Reserve Bank has recommended the removal of interest rate ceiling on loans upto Rs. 2 lakhs.
Another proposal under consideration is that of granting a few more licenses to local area banks for a fixed period of time. Past strategies for fi
of special special-purpose government-sponsored institutions. [65] It needs to be noted that a new strategy for financial inclusion is the need o
of a variety of financial services such as saving accounts, insurance, and remittance products. [66]
Chapter 5 Conclusion
Finance and growth are interlinked; with increasing developments all around the world, the Indian banking and financial system has to develop
undergone more than decade of financial sector reforms which has lead to substantial transformation and liberalisation of the entire financial s
Over a period of time, the Indian Government gradually liberalised the financial sector, mainly after the recommendations of the Narasimham C
that took place in the 1990s and early 2000s. [69] Most of the changes or amendments recommended in the legislative framework by both of t
still needs to be done.
In this regard, it becomes relevant to quantify the performance of the financial sector after such reforms in an objective manner. It is important
contrasting from majority of the other market economies. It has been a measured, cautious, gradual and steady process which is lacking of vari
Reforms are still continuing and the recent amendments in the State Bank of Indi Act, 1955 by way of the State Bank of India (Amendment) Act
Banking Sector reforms is evidence to this fact. [72] The time has come for a second wave of financial reforms which will strive to ensure that th
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