Slides explaining the financial reforms of our country

1. Indian Financial Sector Reform
Submitted by:-
Surangama Banerjee
Gaurav Gupta

2. Coverage:-
Introduction
Major Contours of Reforms
Banking Sector Reforms
Monetory Policy Reforms
Financial Market Reforms
Assessment
Conclusions

3. In early 1990’s
• Financial Repression
- Extensive Regulations
- Administered Interest Rates
- Directed Credit Programmes
- Weak Banking Structure
- Lack of Proper Accounting & Risk Management Systems
- Lack of Transparency in Operations

4. In early 1990’s
- Pre-emption of resources from the banking system by the govt.
to finance its fiscal deficit.
- Excessive structural and micro regulation that inhibited
financial innovation and increased transaction costs.
- Relatively inadequate level of prudential regulation in the
financial sector
- Poorly developed debt and money market.
- Outdated technological and institutional structures that made
the capital markets and the rest of the financial system highly
inefficient.

5. Resulting into…
- Govt. regulated the price at which firms could issue equity, the rate
of interest which they could offer on their bond, and the debt equity
ratio that was permissible in different industries.
- Working capital was financed almost entirely by banks at interest
rates laid down by the central bank
- Working capital finance was related more to the credit need of the
borrower than to creditworthiness.

6. At larger level…
• The balance of payment crisis that threatened the international
credibility of the country and pushed it to the brink of default.
• The grave threat of insolvency confronting the banking system
which had for years concealed its problems with the help of
defective accounting policies.
• Hindered efficient allocation of resources.

7. Major Contours of Reforms
• Removal of existing financial repression.
• Creation of an efficient, Productive and profitable financial sector.
• Enabling the process of price discovery by the market determination
of interest rates that improves allocative efficiency of resources.
• Providing operational and functional autonomy to institutions
• Preparing the financial system for increasing international
competition.
• Opening the external sector in a calibrated manner.
• Promoting financial stability in the wake of domestic and external
shocks.

8. • First Generation (Early 1990):- Ist Phase:
— Creating an efficient, productive and profitable financial sector to
function with operational flexibility and functional autonomy.
• Second Generation (Mid 1990 ...) ‘IInd phase
— Strengthening the financial system and introducing structural
improvements

9. Major Sectors of Reforms
• Banking Sector
• Monetary policy
• Financial Market
• Forex Market

10. Banking Sector Reform
• Competition Enhancing Measures
• Measures Enhancing Role of Market Forces
• Prudential Measures
• Institutional and Legal Measures
• Supervisory Measures
• Technology related Measures

11. Banking Sector Reform :
Competition Enhancing Measures
• Operational autonomy to Public Sector banks in 2005 under
which PSBs are now allowed to acquire any company, NBFC or even
their private sector competitors. They also have the autonomy to enter
any business which offers a greater potential for growth.
• Reduction in public ownership of public sector banks
- Can raise capital from equity market up to 49% of paid
up Capital
• Transparent Norms related to entry, mergers /amalgamation and _
governance issues for Indian private sector, foreign and joint-venture
banks, NBFC's and insurance companies .
• The Industrial Development Bank of India, 1964 amended to allow
IDBI to raise upto 49% of its paid up capital from public and to induct
private participation in its board of directors.

12. Banking Sector Reform :
Measures Enhancing Role of Market Forces
• Sharp reduction in pre-emption through reserve
requirement.
• Market determined pricing for government securities.
• Disbanding of administered interest rates.
• Enhanced transparency and disclosure norms to facilitate
market discipline.
• Introduction of pure inter-bank call money market and
developing markets for securitized assets.
• Auction-based repos-reverse repos for short-term liquidity
management and Improved payments and settlement
mechanism.

13. Banking Sector Reform :
Prudential Measures
• Introduction and phased implementation of international best
practices and norms related to:- CRAR, Income recognition,
Provisioning and Exposure.
• Strengthen Risk management
- Assignment of risk-weights to various asset classes
— Norms on connected lending, risk concentration
— Application of marked-to-market principle for investment
portfolio and limits on deployment of fund in sensitive activities
— 'Know Your Customer’ norms
— 'Anti Money Laundering' guidelines
— Graded provisioning for NPA's
— Capital charge for market risk
• Guidelines for ownership and governance, securitization and debt
restructuring mechanisms norms, etc.

14. Banking Sector Reform :
Institutional and Legal Measures
• Setting up of Lok-Adalats (people's courts), debt recovery
tribunals, asset reconstruction companies, settlement advisory
committees, corporate debt restructuring mechanism, etc.
• Promulgation of Securitization and Reconstruction of Financial
Assets Enforcement of Securities Interest (SARFAESI) Act, 2002
and its sequent amendment to ensure creditor rights
• Setting up of Credit Information Bureau of India Limited
(CIBIL) in August,2000 for Information sharing on defaulters as
also other borrowers
• Setting up of Clearing Corporation of India Limited (CCIL) to
act as central counter party for facilitating payments and
settlement system relating to fixed income securities and money
market instruments.

15. Banking Sector Reform :
Supervisory Measures-
• Board for Financial Supervision as the apex supervisory
authority for based supervision
• Introduction of CAMELS supervisory rating system
(capital adequacy, asset quality, management, earning,
liquidity and system and control).
• Consolidated supervision of financial conglomerates.
• Recasting of the role of statutory auditors with increased
internal control through strengthening of internal audit.
• Strengthening corporate governance.
• Fit and proper tests for directors along-with enhanced due
diligence on important shareholders.

16. Banking Sector Reform :
Technology Related Measures-
• INFINET as the communication backbone for
the financial sector
• Negotiated Dealing System (NDS) for screen-based
trading in Government securities.
• Real Time Gross Settlement (RTGS) System
“True test of the success of the banking reforms
would be the extent of NPA's.”

17. Monetory Policy Reforms
• Objectives
• Instruments
• Development Measures
• Institutional Measures

18. Monetory Policy Reforms:
Objectives
• Twin objectives of "Maintaining price stability" and
"Ensuring lability of adequate credit to productive
sectors.
• Use of broad money (M2) as an intermediate target
has been de-emphasized and a multiple indicator
approach has been adopted.
• Development of multiple instruments to transmit
liquidity and interest rate signals in the short-term in a
flexible and bi-directional manner.
• Increase of the inter-linkage between various
segments of the financial market including money,
government security and forex markets.

19. Monetory Policy Reforms:
Instruments : Shifts from: Indirect to Direct
• Open Market Operation(OMO) to deal with overall market
liquidity situation especially those emanating from capital flows.
• Introduction of Market Stabilization Scheme (MSS) as an
additional instrument to deal with enduring capital inflows
without affecting short-term liquidity management role of LAF.
• Introduction of Liquidity Adjustment Flow(LAF) which operates
through repo and reverse repo auctions Liquidity Adjustment
Flow(LAF).
— To nudge overnight interest rates within a specified corridor.
— TO de-emphasize targeting of bank reserves and focus increasingly
on interest rates.
— reducing the cash reserve ratio (CRR) without loss of monetary
control.

20. LAF + MSS + OMO => Flexibility
• Transition from Direct instruments of monetary control (such as
administered interest rate, reserve requirement, selective capital control)
to indirect instruments like OMO, purchase and repurchase of govt.
securities.

21. Monetory Policy Reforms:
Developmental Measures
• Discontinuation of automatic monetization through an agreement
between the Government and the Reserve Bank.
• Amendment of Securities Contracts Regulation Act (SCRA), to
create the regulatory framework.
• Introduction of automated screen-based trading in govt. securities
through Negotiated Dealing System(NDS).
• Setting up of risk-free payments and system in government
securities through Clearing Corporation of India Limited(CCIL).
• Phased introduction of Real Time Gross Settlement (RTGS) System
• Deepening of inter-bank Repo market Deepening of government
securities market by making the interest rates on such securities
market related

22. Monetory Policy Reforms:
Institutional Measures
• Setting up of Technical Advisory Committee on Monetary with
outside experts to review macroeconomic and monetory
developments and advise the Reserve Bank on the instance of
monetary policy
• Creation of a separate Financial Market Department with in the RBI.
• Development of appropriate trading, payments and settlement
systems along with technological infrastructure.
• Success of Monitory management such as interest rates, is
contingent upon the extent and speed with which changes in the
central bank's Policy rate are transmitted to the spectrum of market
interest rates and exchange rate in the economy and onward to the
real sector.

23. Capital Market Reforms :
• -Abolition of capital issues control and the introduction of free pricing of
equity issues (CCI)
• Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
• Primary market regulations:
— Entry norms for capital issues were tightened
— Disclosure requirements were improved
— Regulations were framed and code of conduct laid down for
— merchant bankers
— Underwriters, mutual funds, bankers to the issue and other
intermediaries
• Corporate governance regulations:
— Regulations were framed for insider trading
— Regulatory framework for take overs was revamped

24. Capital Market Reforms:-
• Secondary market regulations:
— Capital adequacy and prudential regulations
were introduced for brokers, and other
intermediaries
— Dematerialization of scrips was initiated with the
creation of a legislative framework and the setting
up of the first depository
— settlement period was reduced to one week
— Carry forward trading was banned
— Tentative moves were made towards a rolling settlement
system.

25. Reforms in Government Securities
Market:-
• Institutional Measures
• Increase in Instruments in the Government
Securities Market
• Enabling Measures

26. Government Securities Market:-
Institutional Measures
• Administrated interest rates on government securities were
replaced auction system for price discovery
• Banks have been permitted to undertake primary dealer
business while primary dealers are being allowed to
diversify their business.
• 'Central Government would cease to raise resources on
behalf of State Governments. State Governments'
capability in raising resources will be market determined
and based on their own financial health
• Effective April 1, 2006, RBI has withdrawn from
participating in primary market auctions of Government
paper
— fully market based system in the G-sec market.

27. Government Securities Market:-
Increase in Instruments
• Market Stabilization Scheme (MSS) has been introduced, which has
expanded the instruments available to the Reserve Bank for
managing the enduring surplus liquidity in the system.
— 91-day Treasury bill was introduced for
benchmarking
— Zero Coupon Bonds, Floating Rate Bonds, Capital
Indexed Bonds were issued
— Exchange traded interest rate futures were introduced
— OTC interest rate derivatives like IRS/ FRAs were introduced
• Repo status has been granted to State Government securities in
order to improve secondary market.

28. Government Securities Market:-
Enabling Measures
• Foreign Institutional Investors (FIIs) were
allowed to invest in government securities
subject to certain limits with non-banks
allowed participate in repo market.
• Introduction of trading in government
securities on stock exchanges for promoting
retailing and Non-banks participation.

29. Reforms in Foreign Exchange Market:-
• Exchange Rate Regime
• Finance Mobilization
• Institutional Framework
• Increase in Instrument in foreign Exchange
Market
• Liberalization Measures

30. Reforms in Foreign Exchange Market:-
Exchange Rate Regime
• Evolution of exchange rate regime from a single-currency
fixed-exchange rate system to fixing the value
of rupee against a basket of currencies and further to
market-determined floating exchange rate regime.
• Adoption of convertibility of rupee for current account
transactions with acceptance of Article VIII of the
Articles of Agreement of the IMF
• De facto full capital account convertibility for non
residents
• Calibrated liberalization of transactions undertaken for
capital account purposes in the case of residents

31. Reforms in Foreign Exchange Market:-
Finance Mobilization
• companies were allowed to raise equity in
international markets subject to various restrictions.
• Indian companies were allowed to borrow in
international markets subject to a minimum maturity, a
ceiling on the maximum interest e, and annual caps on
aggregate external commercial borrowings all entities
put together.
• Indian mutual funds were allowed to invest a small
portion of their — assets abroad.
• Indian companies were given access to long dated
forward contracts and to cross currency options.

32. Reforms in Foreign Exchange Market:-
Institutional Framework
• Replacement of the earlier Foreign Exchange
Regulation Act (FERA), y the market friendly
Foreign Exchange Management Act, 1999
• Delegation of considerable powers by RBI to
Authorized Dealers to release foreign
exchange for a variety of purposes.

33. Reforms in Foreign Exchange Market:-
Increase in Instruments
• Development of rupee-foreign currency swap
market.
• Introduction of additional hedging instruments,
such as, foreign currency-rupee options
• Permission to use innovative products like cross-currency
options, interest rate swaps (IRS) and
currency swaps, caps/collars and forward rate
agreements (FRAs) in the international forex
market.

34. Reforms in Foreign Exchange Market:-
Liberalization Measures
• Authorized dealers permitted to initiate trading positions,
borrow and in overseas market subject to certain
specifications and ratification by respective Banks' Boards
• Banks are also permitted to fix interest rates on non-resident
deposits, subject to certain specifications.
• Use of derivative products for asset-liability management
and to overnight open position limits and gap limits in the
foreign exchange market, subject to ratification by RBI.
• Permission to various participants in the foreign exchange
market, including exporters, Indians investing abroad, FIIs,
to avail forward cover and enter into swap transactions
without any limit subject to genuine underlying exposure.

35. (Per cent)
5. Ratios and Rates
2013
2014
Aug. 16 Jul. 18 Jul. 25 Aug. 1 Aug. 8 Aug. 15
1 2 3 4 5 6
Item/Week Ended
Ratios
Cash Reserve Ratio 4.00 4.00 4.00 4.00 4.00 4.00
Statutory Liquidity Ratio 23.00 22.50 22.50 22.50 22.50 22.00
Cash-Deposit Ratio .. .. 4.83 .. 4.64 ..
Credit-Deposit Ratio .. .. 76.54 .. 76.06 ..
Incremental Credit-Deposit Ratio .. .. 42.25 .. 38.21 ..
Investment-Deposit Ratio .. .. 29.09 .. 29.39 ..
Incremental Investment-Deposit Ratio .. .. 39.42 .. 44.19 ..
Rates
Policy Repo Rate 7.25 8.00 8.00 8.00 8.00 8.00
Reverse Repo Rate 6.25 7.00 7.00 7.00 7.00 7.00
Marginal Standing Facility (MSF) Rate 10.25 9.00 9.00 9.00 9.00 9.00
Bank Rate 10.25 9.00 9.00 9.00 9.00 9.00
Base Rate 9.70/10.25 10.00/10.25 10.00/10.25 10.00/10.25 10.00/10.25 10.00/10.25
Term Deposit Rate >1 Year 8.00/9.00 8.00/9.05 8.00/9.05 8.00/9.05 8.00/9.05 8.00/9.05
Savings Deposit Rate 4.00 4.00 4.00 4.00 4.00 4.00
Call Money Rate (Weighted Average) 10.18 8.05 8.67 8.05 7.97 8.25
91-Day Treasury Bill (Primary) Yield 11.43 8.60 8.60 8.65 8.65 8.65
182-Day Treasury Bill (Primary) Yield 11.00 8.64 .. 8.71 .. 8.71
364-Day Treasury Bill (Primary) Yield .. .. 8.70 .. 8.74 ..
10-Year Government Securities Yield 8.78 8.77 8.40 8.52 8.65 8.53
RBI Reference Rate and Forward Premia
INR-US$ Spot Rate (` Per Foreign Currency) 61.82 60.33 60.14 60.85 61.56 61.06
INR-Euro Spot Rate (` Per Foreign Currency) 82.45 81.58 81.02 81.46 82.41 81.56
Forward Premia of US$ 1-month 10.29 8.75 8.18 8.87 8.77 9.14
3-month 9.90 8.55 8.71 8.55 8.58 8.52
6-month 9.46 8.55 8.68 8.51 8.51 8.48

36. Conclusion:-
• Financial system in India, through a measured, gradual,
cautious, and steady process, has undergone
substantial transformation
• Reasonably sophisticated, diverse and resilient system
through well-sequenced and coordinated policy
measures aimed at making the Indian financial sector
more competitive, efficient, and stable
• Effective monetary management has enabled price
stability while ensuring availability of credit to support
investment demand and growth in the economy.

37. • The multi-pronged approach towards managing capital
account in conjunction with prudential and cautious
approach to financial liberalisation has ensured financial
stability in contrast to the experience of many developing
and emerging economies
• Monetary policy and financial sector reforms in India had to
be fine tuned to meet the challenges emanating from all
global and domestic shocks.
• Viewed in this light, the success in maintaining price and
financial stability is all the more creditworthy.
• The overall objective of maintaining price stability in the
context of economic growth and financial stability will
remain

38. Thank You