Financial sector of India-An Analysis

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28 The economic reforms have favoured the need for shifting the policy objective from protection to promotion of industries and the creation of more integrated infrastructural facilities. The employment potential of the SSIs and MSIs is also a pointer to the government to take adequate steps to ensure a smooth start of these units. Among them, the timely and adequate availability of credit is the crucial one, and the development banks have a major role to ensure the same. As the banks are generally unwilling to extend credit facilities at the initial stage of an industrial unit, the major portion of the financial assistance of the development banks are availed by the new unit/ new generation entrepreneur at liberal terms. Hitherto, the social objectives acted as the backdrop of the major policies of the development banks and hence the profit earning motive was treated secondary. This has adversely affected the financial health of the development banks as there is always an inherent risk of failure lies in the financing the new units/new generation entrepreneur. The reform process has suggested for the restructuring of the development banks and making them abide by the prudential norms, but the same is difficult to achieve as the social objectives and the prudential banking cannot go hand in hand. Hence, steps should be taken to ensure the smoother flow of funds to these development banks who in turn will channelise the same to the needy sectors of the society in order to foster balanced economic growth.

INTRODUCTION

Financial sector is the backbone of any economy and it plays a crucial role in the mobilisation and allocation of resources. The constituents of the financial sector are Banks, Financial Institutions, Instruments and markets which mobilise the resources from the surplus sector and channelise the same to the different needy sectors in the economy. The process of increasing capital accumulation through institutionalisation of savings and investment fosters economic growth. The main objectives of the financial sector reforms are to allocate the resources efficiently, increasing the return on investment and accelerated growth of the real sectors in the economy. The measures initiated by the Government of India under the reform process are meant to increase the operational efficiency of each of the constituent of the financial sector. The discussion of the present text has been restricted to the role of the development banks in the era of reforms.

The far-reaching changes in the Indian economy since liberalization have had a deep impact on the Indian financial services sector. Financial sector reforms that were initiated by the government since the early ‘90s have been to meet the challenges of a complex financial architecture. This has ensured that the new emerging face of the Indian financial sector will culminate in a strong, transparent and resilient system.

Broadly, financial sector reforms can be categorized in two phases.

  • The first phase of economic reforms that started in 1985 focused on increasing productivity, new technology import and effective use of human resources. These efforts were in line with the changes in international markets, organisations and production areas.

  • In the second phase, beginning in 1991-92, the government aimed at reducing fiscal deficit by opening the economy to foreign investments.

  • Financial sector reforms during this period focused on modification of the policy framework, improvement in financial health of the entities and creation of a competitive environment.

These reforms targeted three interrelated issues viz.

(i) strengthening the foundations of the banking system;

(ii) streamlining procedures, upgrading technology and human resource development; and

(iii) structural changes in the system.

Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA) etc. are the major financial regulatory bodies in India.

Important Initiatives for financial sector reforms:

  • To improve access to financial services through its Jan Dhan Yojana;

  • taken steps to improve governance among state-owned banks through the creation of a Banks Board Bureau (BBB);

  • given the economy a Bankruptcy Code and is now attempting consolidation within the banking sector.

  • Improvement in Corporate Governance norms

  • Establishment of a foreign portfolio investor for better functioning of both primary and secondary markets

Solutions:

  • Financial sector regulators too have been proactive in ensuring that new regulations and guidelines are more or less in tandem with the growth in the financial sector.

  • Financial intermediaries have gradually moved to internationally acceptable norms for income recognition, asset classification, provisioning and capital adequacy.

  • These developments have given a strong impetus to the development and modernization of the financial sector in India.

  • Going forward the aim would be to achieve international standards in this area within the shortest possible period.

  • A better strategy, if the government can find an out-of-the-box way to raise capital, would be to first recapitalize these banks and then attempt a reduction in the state’s holding. Consolidation, an effort worth pursuing to reduce redundancies in the banking sector, is not the answer to the shortage of capital.

  • The one reform that will go a long way in improving the working environment for investors and lenders, albeit in the long run, is the introduction of the Bankruptcy Code. While everyone agrees that the code was much needed, any tangible benefits from it are still at least a couple of years away. The code will only work if the judicial infrastructure is strengthened to support it so as to prevent a build-up of pending cases.

  • The Debt Recovery Tribunals (DRTs), and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, when introduced, were also thought to be significant steps in improving the resolution environment in India.

CONCLUSION

The economic reforms have favoured the need for shifting the policy objective from protection to promotion of industries and the creation of more integrated infrastructural facilities.   The employment potential of the SSIs and MSIs is also a pointer to the government to take adequate steps to ensure a smooth start of these units.   Among them, the timely and adequate availability of credit is the crucial one, and the development banks have a major role to ensure the same.   As the banks are generally unwilling to extend credit facilities at the initial stage of an industrial unit, the major portion of the financial assistance of the development banks are availed by the new unit/ new generation entrepreneur at liberal terms.   Hitherto, the social objectives acted as the backdrop of the major policies of the development banks and hence the profit earning motive was treated secondary.   This has adversely affected the financial health of the development banks as there is always an inherent risk of failure lies in the financing the new units/new generation entrepreneur.   The reform process has suggested for the restructuring of the development banks and making them abide by the prudential norms, but the same is difficult to achieve as the social objectives and the prudential banking cannot go hand in hand.   Hence, steps should be taken to ensure the smoother flow of funds to these development banks who in turn will channelise the same to the needy sectors of the society in order to foster balanced economic growth.   

Source:TH/IFCCI/cosidici.com

 

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