FINANCIAL SECTOR REFORMS

BY
MINISHA GUPTA
LECTURER(FINANCE)

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 Topics to be covered
• Context

• Need

• Objectives

• Approach

• Contents or Particulars

• Appraisal of Financial Sector Reforms in India

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History of Financial Sector Reforms
• New Economic Policy of structural adjustments and
stabilisation programme was given a big thrust in India
in June 1991.

• From this policy Financial Sector Reforms get special

attention.

• After the policy a lot of changes occurred in the

structure, organisation, functions and procedures of
Financial System.

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 Need for Financial Reforms
• The financial institutions and markets were in bad shape.

• The banking sector suffered a lack of competition, low capital base,

low productivity and high intermediate cost.

• Role of technology was minimal and Quality of service did not receive
adequate attention.

• Proper risk management system was not followed and prudential norms
were weak.

• Little competition in insurance and mutual fund industry.

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 Main objectives of Financial Sector Reforms
1. To develop a market oriented, competitive, world integrated,
diversified, autonomous, transparent financial system.

2. To increase the allocative efficiency of available savings and to

promote accelerated growth of the real sector.

3. To increase or bring about the effectiveness, accountability,

profitability, viability, vibrancy, balanced growth, operational
economy and flexibility, professionalism and depoliticisation in the
financial sector.

4. To increase the rate of return on real investment.

5. To promote competition by creating level-playing fields and

facilitating free entry and exit for institutions and market players.

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 Main objectives of Financial Sector Reforms contd…
6. To ensure that the rationalisation of interest rates structure occurs,
that interest rates are flexible, market determined or market
related and that the system offers to its users a reasonable level of
positive real interest rates.

7. To reduce the levels of resource pre-emption and to improve the

effectiveness of directed credit programmes.

8. To build a financial infrastructure relating to supervision, audit,

technology and legal matters.

9. To modernise the instruments of monetary control so as to make

them more suitable for the conduct of monetary policy in a
market economy.
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 Major Reforms After 1991
I. Systemic and Policy Reforms

II. Banking Reforms

III. Primary and Secondary Stock Market Reforms

IV. Government Securities Market Reforms

V. External Financial Market Reforms

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 I. Systemic and Policy Reforms
• The structure of interest rates is simplified.

• Pre-emption of banks’ resources through SLR and rate of return on SLR

securities is maintained.

• Capital adequacy norms for banks, financial institutions and virtually all
market intermediaries introduced.

• Board of Financial Supervision (BFS) was established in RBI.

• SEBI made a statutory body in February 1992 and armed with necessary
authority and powers for regulation and reform of the capital market.

• Floating interest rate on Financial assistance introduced by all-India

development banks.
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 II. Banking Reforms
• State Bank of India and other centralised banks enabled to access the capital
market for debt and equity.

• Banks given more freedom to open, shift and swap branches.

• Performance Obligations and Commitments (PO&C) obtained by RBI from each

bank.

• Banks required to make their balance sheets fully transparent and make full
disclosures in keeping with International Accounts Standards Committee.

• Budgetary support extended for recapitalisation of weak public sector banks.

• Banks set free to fix their own foreign exchange open position limit subject to
RB approval.

• Loan system introduced for delivery of bank credit.

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 III. Primary and Secondary Stock Market Reforms
• A norm of 5 shareholders for every Rs. 1 Lakh of fresh issues of capital and
10 shareholders for every Rs. 1 Lakh of offer for sale prescribed as an initial
and continuing listing requirements.

• The payment of any direct or indirect discounts or commissions to persons

receiving firm allotment prohibited.

• Debt issues not accomplished by an equity component permitted to be sold

entirely by the book building process.

• Issuers allowed to list debt securities on stock exchanges without their equity
being listed.

• Mutual fund permitted to underwrite public issues.

• Stock exchanges are being modernised (BOLT)

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 IV. Government Securities Market Reforms
• A 364-day treasury bill (TB) replaced the 182-day TB in 1992-1993.

• Auction of 91-day TB commenced from January 1993.

• Maturity period for new issues of central govt. securities shortened from 20
to 10 years.

• State govt. and provident funds allowed to participate

• Institution of primary dealers in govt. securities established and guidelines

for them issued in March 1995.

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 V. External Financial Market Reforms
• Flexible exchange rate system introduced and exchange controls
largely determined.

• FIIs allowed to access to Indian Capital market on registration with

SEBI.

• Indian companies permitted to access International Capital Markets.

• FERA got replaced by FEMA.

• Rupee made convertible on current account.

• Rate of long term capital gain tax on portfolio investment by NRIs

reduced from 20% to 10%.
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 Impact of Reforms on Corporate Governance
• Reforms made the companies rely on capital markets to a greater
degree for their capital needs.

• Globalization of financial markets has exposed issuers, investors and

intermediaries to higher standards of disclosure.

• Corporate sector was exposed to international competition and

subsidized finance gave way to a regime of high real interest rates.

• Better debt issue management due to good rating in corporate sector.

• Effective cash flow management with the enactment of the Board of

Industrial and Financial Reconstruction (BIFR)

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THANK YOU

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