Financial and Banking sector reforms

<–2/”>a >The Banking System at the time of independence was largely urban oriented and remained out of reach of rural Population. Commercial Banks mostly confined their lending to trade, commerce and Industry and treated agriculture as a non priority. Security- oriented lending was the order of the day. Banks did not pay any attention to the farming community, the Agriculturist was forced to borrow from Money lenders, who charged exorbitant rates of interest and imposed onerous conditions.To overcome these issues, ‘Social Control measures’ were initiated by then Prime Minister Smt. Indira Gandhi in 1968 to help the Indian masses in POVERTY alleviation.

The main objective of the Financial Sector Reforms in India initiated in the early 1990s was to create an efficient, competitive and stable financial sector that could then contribute in greater measure to stimulate Growth.

Situation before reforms
- Financial Markets were marked by administered interest rates, quantitative ceilings, statutory pre-emptions, captive market for Government Securities, excessive reliance on central bank financing of Fiscal Deficit, pegged exchange rate and current and Capital Account restrictions.
Reforms
- Phased reductions in statutory pre-emption like CRR and SLR
- Deregulation of interest rates on deposits and lending, except for a select segment.
- Diversification of ownership of banking institutions: private shareholding in Public Sector Banks
- Financial Markets: removal of structural bottlenecks, introduction/diversification of new players/instruments, free pricing of financial assets, relaxation of quantitative restrictions, better regulatory systems, introduction of new technology, improvement in trading Infrastructure-2/”>INFRASTRUCTURE, clearing and settlement practices and greater transparency.
Effects
- The banking sector reform combines a comprehensive reorientation of competition, regulation and ownership in a non-disruptive and cost-effective manner.
- FDI in the Private Sector Banks is now allowed upto 74 pc
- 100 pc FDI is allowed under the automatic route in NBFCs
- Urban Cooperative banks suffer from various problems. Several structural, legislative and regulatory measures have been initiated in recent years for UCBs with a view to evolving a policy framework oriented towards revival and healthy growth of the sector.
- Fin mkt: the price discovery in the Primary Market is more credible than before and secondary markets have acquired greater depth and liquidity.
- Number of steps (like RTGS) for making the payment systems safe, secure and efficient.

At present, financial regulation in India is oriented towards product regulation, i.e. each product is separately regulated. For example, fixed deposits and other banking products are regulated by the Reserve Bank of India (RBI), small Savings products by the Government of India (GoI), Mutual Funds and Equity markets by the Securities and Exchange Board of India (SEBI), insurance by the Insurance Regulatory Development Authority of India (IRDA) and the New Pension Scheme (NPS) by the Pension Fund Regulatory and Development Authority (PFRDA).

The nationalisation of 14 major Banks on 19th July 1969 by then Prime Minister Mrs. Indira Gandhi was done with the following objectives and reasons :-

To serve a large social purpose and to sub-serve national priorities
Rapid growth of agriculture, small industries, exports,
raising EMPLOYMENT levels, e
ncouragement of new entrepreneurs and development of backward areas.

‘The Committee on Financial System’ was constituted by the Government of India, under the Chairmanship of Mr M Narasimham, former Governor of RBI. The aim of the said committee was to recommend measures to restore the financial Health of Commercial Banks and make them function efficiently and profitably.

Recommendations of the Narasimham Committee

Autonomy in Banking
Reform in the role of RBI
Stronger banking system
Non-performing assets
Capital adequacy and tightening of provisioning norms
Entry of Foreign Banks

Financial sector reforms are a set of policies that aim to improve the efficiency and stability of the financial system. These reforms can include deregulation, Privatization, Globalization/”>Globalization-3/”>Globalization, and financial stability measures.

Deregulation is the process of removing government restrictions on the financial sector. This can include measures such as reducing the number of required licenses for financial institutions, loosening capital requirements, and allowing banks to engage in new activities. Deregulation can lead to increased competition and innovation in the financial sector, which can lower costs and improve efficiency. However, deregulation can also increase risk-taking by financial institutions, which can lead to instability.

Privatization is the process of transferring ownership of government-owned financial institutions to private investors. This can lead to increased efficiency and innovation, as private investors are often more motivated to improve performance than government bureaucrats. However, privatization can also lead to increased concentration of power in the financial sector, which can increase risk.

Globalization is the process of increasing integration of the world’s financial markets. This can lead to increased competition and efficiency, as financial institutions are able to access a wider range of Resources and customers. However, globalization can also increase risk, as financial institutions are more exposed to shocks in other countries.

Financial stability measures are designed to prevent or mitigate financial crises. These measures can include capital requirements, liquidity requirements, and Stress tests. Capital requirements require banks to hold a certain amount of capital in reserve, which helps to absorb losses in the event of a crisis. Liquidity requirements require banks to hold a certain amount of liquid assets, which helps them to meet their obligations in the event of a run on the bank. Stress tests assess the ability of banks to withstand shocks, and can be used to identify banks that are at risk of failure.

Consumer protection measures are designed to protect consumers from unfair or deceptive practices by financial institutions. These measures can include credit reporting, debt collection, and mortgage lending regulations. Credit reporting regulations require credit bureaus to provide accurate and complete information about consumers’ credit histories. Debt collection regulations prohibit debt collectors from using abusive or deceptive practices. Mortgage lending regulations require lenders to provide accurate information about mortgage terms and conditions, and to assess borrowers’ ability to repay their loans.

Financial Inclusion is the process of ensuring that everyone has access to affordable and reliable financial Services. This can include measures such as microfinance, mobile banking, and digital payments. Microfinance provides small loans to low-income individuals and businesses. Mobile banking allows customers to access financial services through their mobile phones. Digital payments allow customers to make payments electronically, without the need for cash or checks.

Financial technology (FinTech) is the use of technology to improve financial services. FinTech companies are developing new technologies to improve efficiency, transparency, and security in the financial sector. Some examples of FinTech include blockchain, Artificial Intelligence, and machine Learning. Blockchain is a distributed ledger technology that can be used to record transactions in a secure and transparent way. Artificial intelligence is a branch of computer science that can be used to automate tasks and make decisions. Machine learning is a type of artificial intelligence that can learn from data and improve its performance over time.

Financial sector reforms are essential to ensuring the stability and efficiency of the financial system. These reforms can help to reduce risk, increase competition, and protect consumers. FinTech is also playing a role in transforming the financial sector, and is likely to have a significant impact in the years to come.

What are the benefits of financial and banking sector reforms?

Financial and banking sector reforms can lead to a number of benefits, including:

Increased efficiency and productivity in the financial sector
Improved access to financial services for businesses and consumers
Reduced risk of financial instability
Increased competition and innovation in the financial sector

What are the challenges of financial and banking sector reforms?

Financial and banking sector reforms can also face a number of challenges, including:

The risk of unintended consequences, such as increased systemic risk or reduced access to financial services for some businesses and consumers
The difficulty of coordinating reforms across different countries and jurisdictions
The political economy of reform, which can make it difficult to implement reforms that are in the long-term interests of the economy but that may have short-term costs for some groups

What are some examples of successful financial and banking sector reforms?

Some examples of successful financial and banking sector reforms include:

The reforms of the financial sector in Chile in the 1980s, which led to a significant increase in the efficiency and productivity of the financial sector
The reforms of the financial sector in Mexico in the 1990s, which led to a significant increase in access to financial services for businesses and consumers
The reforms of the financial sector in China in the 2000s, which led to a significant increase in competition and innovation in the financial sector

What are some examples of unsuccessful financial and banking sector reforms?

Some examples of unsuccessful financial and banking sector reforms include:

The reforms of the financial sector in Argentina in the 1990s, which led to a significant increase in systemic risk and a financial crisis in 2001
The reforms of the financial sector in Russia in the 1990s, which led to a significant increase in Corruption and a financial crisis in 1998
The reforms of the financial sector in Greece in the 2000s, which led to a significant increase in government debt and a financial crisis in 2009

What are the lessons learned from successful and unsuccessful financial and banking sector reforms?

The lessons learned from successful and unsuccessful financial and banking sector reforms include:

The importance of careful planning and coordination of reforms
The need to take into account the political economy of reform
The importance of sequencing reforms carefully
The need to build strong institutions to support the reforms
The importance of monitoring and evaluating the reforms to ensure that they are achieving their intended objectives

Which of the following is not a type of financial institution?
(A) Commercial bank
(B) Investment bank
(C) Insurance company
(D) Central bank
Which of the following is the primary function of a commercial bank?
(A) To provide loans to businesses and individuals
(B) To invest in securities
(C) To insure against risk
(D) To control the Money Supply
Which of the following is the primary function of an investment bank?
(A) To provide loans to businesses and individuals
(B) To invest in securities
(C) To insure against risk
(D) To underwrite and distribute securities
Which of the following is the primary function of an insurance company?
(A) To provide loans to businesses and individuals
(B) To invest in securities
(C) To insure against risk
(D) To control the money supply
Which of the following is the primary function of a central bank?
(A) To provide loans to businesses and individuals
(B) To invest in securities
(C) To insure against risk
(D) To control the money supply
Which of the following is a type of financial market?
(A) Stock market
(B) Bond market
(C) Foreign Exchange market
(D) All of the above
Which of the following is a type of financial instrument?
(A) Stock
(B) Bond
(C) Derivative
(D) All of the above
Which of the following is a type of financial regulation?
(A) Capital requirements
(B) Liquidity requirements
(C) Risk management requirements
(D) All of the above
Which of the following is a type of financial crisis?
(A) Banking crisis
(B) Currency crisis
(C) Debt crisis
(D) All of the above
Which of the following is a type of financial innovation?
(A) Derivatives
(B) Securitization
(C) Credit default swaps
(D) All of the above