Pratik Kharde CBM Assignment 1 PGP/23/273

Financial Design for India

In the Bank-based financial systems, banks are playing an important role in mobilizing
savings, capital allocation, investment decisions of corporate managers are overseen and
risk management vehicles are provided. India has a higher share of banking-sector
development as compared to the stock market development, both considered in terms of
activity, size and efficiency. Around 90% of our borrowings are from banks, while 10% come
from the capital markets. So, considering all these, we can say that in terms of Volume, India
has a Bank-based financial design.
In the Market-based financial systems, the securities markets edge ahead of the banks when
it comes to getting savings of the society to the corporate firms, exerting and maintaining
the corporate control and also risk management easing. Post-1991, the Indian market
opened up and we brought in SEBI, IRDA, PFRDA, etc. and the transactions are done through
financial instruments and require a financial intermediary. Both Investors and borrowers are
getting attractive terms and financing of new technologies is allowed. Hence, if we go by the
definition, India currently has a Market-based financial design type.
I believe that the Bank-based financial design would be beneficial for India. Although the
Indian stock market has grown well in the past few years, we do still see that majority of the
population is dependent on the banks for the financing. Also, in countries with higher GDP,
banks, stock markets and other financial intermediaries are more efficient as compared to
countries with lower GDP. They generally tend to have a stock market that is both efficient
and active than the banks, which tends them to be more towards market-based. In India,
the bank-based financial system performs better than the market-based financial system as
many players in the Indian stock market are relatively small firms, which hinders full usage
of the stock market. Also, except for few years, the ratio of market capitalization to GDP was
lower than the ratio of credit to GDP from 1980 to 2011, which implies that the Indian
financial system worked more on Bank-based design.
Thus, given the current situation and based on the above analysis, I believe that the Bank-
based financial design is beneficial for India.

References:
https://www.rbi.org.in/scripts/PublicationsView.aspx?id=14945

https://ideas.repec.org/p/wbk/wbrwps/2143.html

https://pdfs.semanticscholar.org/18e5/660bef2325f326bb8077bd0dd6f5225b1bf8.pdf