INDIAN FINANCIAL SYSTEM

Financial System
An institutional framework existing in a country to enable financial transactions. Three main parts : 1. Financial assets/instruments. 2. Financial Institutions. 3. Financial Markets Regulations is another aspect of financial system (SEBI,RBI,IRDA)

PRE-LIBRALIZED PERIOD
Inward looking Policy. Import Substitution. Overmanned and Inefficient policy. Rise in fiscal deficit. Rising debt service commitments.

Structural reforms
It was aim to reduce the balance of payment deficit. Focus on external sector reforms Import licenses abolished and tariffs reduced. FDI was encouraged. Financial markets liberalized.

Major Sector of reforms

Banking Sector Financial Markets Forex Markets

Banking Sector Reforms

Operational autonomy to public sector banks. Reduction public ownership of public sector - can raise capital from equity market up to 49% of paid up capital. Banks were allowed to go for public listing. Reduction in CRR and SLR.

Lending Rates : 1.Prime lending rate loan and credit 2.Prime term lending rate term loan of years and above. 3. Tenor rate time lending rate operate different PLR for different maturities. Benchmark Prime Lending rate BPLR was later replaced by base rate.

Prudential Regulations
Basel 1 Tier 1 share capital and disclose reserves. Tier 2 undisclosed and latent reserves, general provision, hybrid capital, and subordinate debt.

Basel 2 Minimum Capital Requirements. Supervisory reviews. Market Disciplines.

IMPACT OF REFORMS
PLR of each bank synchronized with bank rate. Minimum Capital to Risk Asset ratio is at 9% higher than the Basel norm of 8%. Excess SLR source of liquidity buffer. Banks were advised to adopt the method based on maturity period.

Reforms in Debt Market

Debt markets are dominated by Government of Indian Securities. Initiated to essentially move from a stratergy of pre-emption of resources from banks at administered interest rate to a more market oriented system. Repurchase Agreement(repo) was introduced and subsequently Liquidity Adjustment Facility (LAF) was introduced. OTC interest rate derivaties like IRS/FRAs were introduced.

Foreign Exchange Market Reforms

Foreign Exchange was made available by RBI. FERA was replaced by FEMA.

Exchange Rate Regime. Increase in instruments in foreign exchange market. Liberalization Measures.

INDIAN CAPITAL MARKETPRIOR TO 1991

Prior to 1991 ,Indian capital market was regulated by Capital Issues Act 1947 Government owned agencies like UTI ,LIC,IDBI are prevailed in the market but did not trade in equities Speculators and market retailers dominated the market Bombay stock exchange is managed for the interest of member brokers only

Unregulated and murky trade practices were prevalent

CAPITAL MARTKET-AFTER REFORMS

Capital

issues act was repealed and SEBI(Securities Exchange Board of India ) was set up Online trading and dematerialized trading were introduced FII were allowed to be traded in primary and secondary market Indian companies are allowed to raise funds through Global depository receipts and Foreign Currency Convertible Bonds National Stock Exchange was incorporated in 1992 to provide trading facility for all types of securities NSE introduced shorter settlement cycle electronically NSE is first demutualised stock exchange with professional management team

DYNAMIC CAPITAL MARKET

SEBI regulations ensured participation of individual investors It ensures unique stock price across the country for the listed firms Helps in detecting insider trading, manipulations and scams Technology based systems helps to minimize systematic and settlement risk More foreign funds in the market and attract foreign direct and portfolio investment

ECONOMIC REFORMS
Due to economic reforms, there was impressive acceleration in GDP growth. In second half, the growth rate was de-accelerated. Economist opine that gradualism, liberalization of capital account and slow pace of reforms saved India from the