SCHOOL OF ECONOMICS

DAVV
SYNOPSIS OF MAJOR RESEARCH PROJECT

TITLE: “FINANCIAL ANALYSIS OF BANKING SECTOR”.

SUBMITTED TO: SUBMITTED BY:

MR.VASIM KHAN KHUSHBOO KINGRANI
MBA (FS) 4TH SEM
ROLL NO.-9319
INTRODUCTION:

One of the most enduring debates in economics is whether financial development causes economic
growth or whether it is a consequence of increased economic activity. Schumpeter(1912) argued that
technological innovation is the force underlying long-run economic growth, and that the causes of
innovation is the financial sector’s ability to extend credit to the “entrepreneur”. it can be described by
increasing integration of the financial markets and implementation of various stock market reforms
measures in India. The activities in stock market & their relationship with the macro economy have
assumed significant importance. Joan Robinson, on the other hand, maintain the economic growth
creates a demand for various types of financial services to which the fin system responds.

Stock exchange are expected to accelerate economic growth by increasing liquidity of financial assets,
making global risk, diversification easier for investors, promoting wiser investment decisions by saving
surplus units based on available information, forcing corporate managers to work harder for
shareholders’ interests, and channeling more savings to corporations.

Academic literature relationship between financial development and economic growth dates back to as
early as the early twenty century (schumpter,1911).the issue has been of great interest and generated
considerable amount of debate amongst economist for many years .the debate primarily revolved
around two major question: first whether at all there is relationship between development of financial
sector on economic growth and second: what could be the nature and direction of casual relationships,
if any that is does development of financial sector promote economic growth or does economic
development foster financial sector development ? the possible directions of causality between financial
sectors development and economics growth were highlighted by patric(1966) in his “supply leading “and
“demand following” hypothesis. The “supply leading “hypotheses claims a causal relationship from
financial development to economic growth by saying that intentional creation and development of
financial institutions and markets would increase the supply of financial services and lead to economic
growth while the demand following hypothesis claims that is the growth of the economy which causes
increased demand for financial services which in turn leads to development of the financial markets.

In a well developed stock market share ownership provide indiviusla with relatively liquid means of
sharing risks when investing I promising projects.

The stock markets help investors to cope with liquidity risks by allowing those who are hit by a liquidity
shock to sell there shares to other investors who do not suffer from a liquidty shock.the results is that
capital is not prematurely removed from firms to meet short term liquidity needs.
Studying the link between domestic stock markets development a
internationalization,claessens,klingbiel and schmukler (2006)using a panel data technique concluded
that the domestic stock market internationalization are positively influenced by the log of GDP per
capita,the stock market liberalization,the capital account liberalization and the country growth
opportunities and negatively influenced by the government deficit/GDP ratio.
REVIEW OF LITERATURE:
An extensive volume of literature and research work has emerged attempting to answer the
above questions,both the theoretical and empirical level. The findings and views express in this
works have been generally conflicting in nature. Some studies like King and Levin (1993a,b),
Levin and Zervos (1998), Demirguc and Maksimovic (1996) have found positive casual effects
of financial development and economic growth in line with the ‘supply leading’ hypothesis.

These studies claim that country with better developed financial system large well organized and
smoothly functioning stock markets tend to grow much faster by providing access to much
needed funds for financially constrained economic enterprises.

Kletzer and Pradhan (1987), Beck (2002), also argue along similar lines but they also try to
establish that financial development is much more effective in promoting economic growth in
more industrialized economies than in agriculture economies. Their view has been contradicted
in some other studies which argue that countries at their early stage of development benefit more
from financial sector development than the older and mature counter parts.

However most of these studies being cross country regression based studies; there were some
inherent weaknesses in such analysis that drew considerable criticism from contemporary
researches. Robinsson (1952) argued that financial development primarily follows growth in the
real economy, as a result of increased demand for financial services.

Theoretically, a growing literature argues that stock market development boost economic
growth. Greenwood & Smith(1997) show that large stock markets can decrease the cost of
mobilizing savings, thus facilitating investment in most productive technologies.

From the point of view of Greenwood & Jovanovic (1990); king & Levine (1993), a new stock
exchange can increase economic growth by aggregating information about firms, prospects,
thereby directing capital to investment with returns. These effects of a stock market opening
result in a measured increase in productivity. Stock exchanges exist for the purpose of trading
ownership rights in firms, and new stock exchange may increase productivity growth for this
reason as well.

According to north(1991), the creation of stock exchange can increase economic growth by
lowering the cost of exchanging ownership rights in firms, an important part of some
institutional stories of economic growth. Furthermore, Bencivenga & Smith (1992) state that a
new stock market also can increase economic growth by reducing holdings of liquid assets and
increasing the growth rate of physical capital, atleast in the long run. In the shortrun, however,
the equilibrium response of the capital stock to a new exchange can be negative because the
opening of an exchange can increase households,wealth and raise their contemporaneous
consumption enugh to temporarily lower the growth rate of capital.

There also is a theoretical literature that suggests that a well

developed stock market may promote risk
diversification,liquidity,information processing,and capital
mobilization and that these services may accelerate long run
growth.For example see Levine(1991),Greenwood and Smith
(1994),obstfeld(1994).In addition,Greenwood
OBJECTIVES:

 Recommending and developing strategies towards this area.

 METHODOLOGY:

The study is will be done by collecting data from both primary and secondary sources.

Primary data is being collected from discussion with employees and past employees of
different banks .

Secondary is being collected from:

 Articles

 Newspapers

 Magazines

 Internet