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Exchange Board of India (SEBI), market-determined prices by the tax incentives for acquiring residential property, leading
and allocation of resources, screen-based nation-wide trading, to a particularly high growth in housing finance. Going forward,
dematerialisation and electronic transfer of securities, rolling the infrastructure, retail and small and medium enterprise
settlement and derivatives trading have greatly improved both segments would provide large growth opportunities, while the
the regulatory framework and efficiency of trading and manufacturing sector is expected to continue its consolidation
settlement. On account of the subdued global economic phase, with selective additions to capacity. However, success in
conditions and the impact on the Indian economy of the drought these segments presents several challenges. Retail and SME
conditions prevailing in the country, 2002-03 was a subdued banking requires extremely effective distribution systems that
year for equity markets. Despite this, the National Stock are capable of offering flexibility and convenience to the
Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked customer, while maintaining cost-efficiency for banks. At the
third and sixth respectively among all exchanges in the world same time, banks need to put in place high-quality credit
with respect to the number of transactions. The year also
witnessed the grant of approval for setting up of a multi- The increasing disintermediation in
commodity exchange for trading of various commodities.
the corporate credit market,
In the midst of these positive developments, a key issue that
continues to impact the Indian financial sector adversely is that
slowdown in creation of new capital
of asset quality and consequent pressure on capital. The assets as companies focus on
liberalisation and globalisation of the Indian economy led to a improving existing capacity
process of restructuring and consolidation across several sectors
of the economy. Several units that were set up in a protectionist
utilisation and improving working
environment became unviable in the new paradigm of capital efficiency of Indian corporates
competition in the global market place. Volatility in global has led to lower demand for credit
commodity prices has a major impact on Indian companies.
This has led to non-performing loans and provisioning for credit
from the corporate sector in the past
losses becoming a key area of concern for the Indian financial two years. This has been replaced
system. The NPA problem in India, viewed in the context of by the huge retail finance
comparison with other Asian economies, does not pose an
insoluble systemic problem; at 8% of GDP, the NPA levels are
opportunity. Existing low penetration
significantly lower than the levels of 30-40% seen in other levels, increasing affordability of
Asian economies. The key problems in India have been the credit and rising income levels have
inability of banks to quickly enforce security and access their
collateral, and the capital constraints in recognising large loan
led to a growing demand for retail
losses. Recent measures taken by the Government have credit.
attempted to address both these problems. The Securitisation
modelling and data mining systems. This is essential to
and Reconstruction of Financial Assets and Enforcement of
appropriately assess and price risk and allocate capital in a manner
Security Interest (SARFAESI) Act creates a long-overdue
that would optimise risk-adjusted returns. The Indian financial
framework for resolving the distressed credit problem in India,
system would also witness greater activity in the debt markets,
by providing legal support to the resolution process and thereby
as originators of credit increasingly seek to proactively manage
encourages the flow of capital into this specialised sector. The
their portfolios by structuring and selling down loan portfolios
proposal for swapping high-yield Government securities held
to entities that have capital to deploy but lack the origination
by banks into lower-yield securities, thereby realising mark-to-
and structuring capabilities.
market gains and utilising the same to make additional
provisions, would also strengthen the balance sheets of banks. India has made considerable progress in the post-1991 period.
During the year the RBI operationalised the corporate debt The country’s macroeconomic fundamentals have improved and
restructuring forum, which has a made significant progress in external vulnerability has been sharply reduced. Reforms in the
building lender consensus on restructuring. The next major financial sector have appropriately addressed the pre-1991
initiative would be the operationalisation of an asset weaknesses in the sector and improved its competitive strength
reconstruction company, and the development of a market for domestically as well as globally. Individual players now need to
distressed credit similar to those in other countries. adopt proactive competitive strategies that will enable them to
capture the emerging opportunities. Exposure to global practices
The increasing disintermediation in the corporate credit market,
has made the Indian customer more discerning and demanding.
slowdown in creation of new capital assets as companies focus
There has been a clear shift towards those entities that are able
on improving existing capacity utilisation and improving
to offer products and services in the most innovative and cost-
working capital efficiency of Indian corporates has led to lower
efficient manner. The financial sector will need to adopt a
demand for credit from the corporate sector in the past two
customer-centric business focus. It will also have to create value
years. This has been replaced by the huge retail finance
for its shareholders as well as its customers, competing for the
opportunity. Existing low penetration levels, increasing
capital necessary to fund growth as well as for customer market
affordability of credit and rising income levels have led to a
share. This indeed will be the challenge in the coming years.
growing demand for retail credit. This has been strengthened
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