Changes in Indain Financial System Since 1991
2011
CHANGES IN INDIAN FINANCIAL SYSTEM SINCE 1991
SUPPLEMENTARY PROJECT REPORT IFS
IILM INSTITITE OF HIGHER EDUCATION LODHI ROAD
HARJAS MANRAL
PG20101087
INTRODUCTION
As the economy grows and becomes more sophisticated, the banking sector has to develop parallely in a manner that it supports and stimulates such growth. With increasing global integration, the Indian banking system and financial system has as a whole had to be strengthened so as to be able to compete. India has had around two decade of financial sector reforms during which there has been substantial transformation and liberalization of the whole financial system.. Until the beginning of the 1990s, the state of the financial sector in India could be described as a classic example of “financial repression” ( MacKinnon and Shaw). The sector was characterized by administered interest rates, large pre-emption of resources by the authorities and extensive micro-regulations directing the major portion of the flow of funds to and from financial intermediaries, segmented and underdeveloped financial markets coupled with lack of instruments. While the true health of financial intermediaries, most of them public sector entities, was masked by relatively opaque accounting norms and limited disclosure, there were general concerns about their viability. Insurance companies– both life and nonlife - were all publicly owned and offered very little product choice. There were very complex regulations and extensive restrictions on new equity issues in security market. There was very little transparency and depth in the secondary market trading of such securities. Interest rates on government securities, the predominant segment of fixed-income securities, were decided through administration authorities. The market for such securities was a captive one where the players were mainly financial intermediaries, who had to invest in government securities to fulfill high statutory reserve requirements. There was little
CHANGES IN INDIAN FINANCIAL SYSTEM SINCE 1991
SUPPLEMENTARY PROJECT REPORT IFS
IILM INSTITITE OF HIGHER EDUCATION LODHI ROAD
HARJAS MANRAL
PG20101087
INTRODUCTION
As the economy grows and becomes more sophisticated, the banking sector has to develop parallely in a manner that it supports and stimulates such growth. With increasing global integration, the Indian banking system and financial system has as a whole had to be strengthened so as to be able to compete. India has had around two decade of financial sector reforms during which there has been substantial transformation and liberalization of the whole financial system.. Until the beginning of the 1990s, the state of the financial sector in India could be described as a classic example of “financial repression” ( MacKinnon and Shaw). The sector was characterized by administered interest rates, large pre-emption of resources by the authorities and extensive micro-regulations directing the major portion of the flow of funds to and from financial intermediaries, segmented and underdeveloped financial markets coupled with lack of instruments. While the true health of financial intermediaries, most of them public sector entities, was masked by relatively opaque accounting norms and limited disclosure, there were general concerns about their viability. Insurance companies– both life and nonlife - were all publicly owned and offered very little product choice. There were very complex regulations and extensive restrictions on new equity issues in security market. There was very little transparency and depth in the secondary market trading of such securities. Interest rates on government securities, the predominant segment of fixed-income securities, were decided through administration authorities. The market for such securities was a captive one where the players were mainly financial intermediaries, who had to invest in government securities to fulfill high statutory reserve requirements. There was little