Kathiravan R CBM Assignment 1 PGP/23/286

Financial Design for India

In the Bank-based financial systems, banks play an essential role in mobilizing savings,
capital allocation, investment decisions of corporate managers overseen, and risk
management vehicles. The banking-sector of India as higher share in development as
compared to the stock market development, both considered in terms of activity, size, and
efficiency. Around 90% of our borrowings are from banks, while 10% come from the capital
markets. So, considering all these, we can say that India has a Bank-based financial design in
terms of volume.
In the Market-based financial systems, the securities markets edge ahead of the banks when
it comes to getting savings from society to the corporate firms, exerting and maintaining
corporate control, and easing risk management. Post-1991, the Indian market opened up,
and we brought in SEBI, IRDA, PFRDA, etc., and the transactions are done through financial
instruments and require a financial intermediary. Both Investors and borrowers are getting
attractive terms, and financing of new technologies is allowed. Hence, if we go by the
definition, India currently has a Market-based financial design type.
I believe that the Bank-based financial design would be beneficial for India. Although the
Indian stock market has grown well in the past few years, we still see that the majority of
the population depends on the banks for financing. Also, in countries with higher GDP,
banks, stock markets, and other financial intermediaries are more efficient than countries
with lower GDP. Countries with higher GDP generally tend to have a stock market that is
both efficient and active than the banks, which tends to be more market-based. In India, the
bank-based financial system performs better than the market-based financial system as
many players in the Indian stock market are relatively small firms, which hinders full usage
of the stock market. Also, except for few years, the ratio of market capitalization to GDP was
lower than the ratio of credit to GDP from 1980 to 2011, which implies that the Indian
financial system worked more on a Bank-based design.
I believe that the bank based financial design is most beneficial for India given the current
situation and based on the above mentioned analysis.

References:
https://www.rbi.org.in/scripts/PublicationsView.aspx?id=14945

https://ideas.repec.org/p/wbk/wbrwps/2143.html

https://pdfs.semanticscholar.org/18e5/660bef2325f326bb8077bd0dd6f5225b1bf8.pdf