CIA 1 A

Comparative analysis of Indian Financial System with financial

system of a foreign country
Submitted By:
Abishek Mahesh 1920402
Shruti Nayata 1920448
Aayush Jain 1920455
Damini Arvind 1920464

CHRIST (Deemed to be University), Bangalore

Date of Submission:
07/02/2021
 TABLE OF CONTENTS

Introduction to Indian financial system 2

Introduction to Luxembourg’s financial system 3

Policy 1: Fiscal Responsibility and Budget Management Act, 2003 3

Policy 2: National stock exchange 5

Policy 3: Prevention of money laundering act 7

Policy 4: Nationalization of bank 8

Policy 5: Foreign exchange management 10

Policy 6: Macroprudential Policy 11

Policy 7: Foreign direct investment policy 12

Conclusion 14

REFERENCES 15

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Introduction to Indian financial system

Institutions

The financial landscape in India is diversified and interconnected. The sector has grown rapidly,
especially over the last couple of decades with overall assets amounting to nearly 150% of the
country’s GDP. The system is bank dominated with commercial banks constituting 61% of the
financial system’s total assets.

Within the commercial banking sector, public sector banks comprise the largest segment,
accounting for 72% of the commercial banking sector’s total assets. Other credit institutions in
the country comprise regional rural banks, cooperative credit institutions and deposit taking
non‑banking financial companies (NBFCs), which account for 9% of total financial sector assets.
Complementing the deposit taking institutions in the country are the NBFCs (non‑deposit
taking), insurance companies, mutual funds and pension funds.

Regulatory arrangements

The country has a well‑defined regulatory architecture. RBI regulates the banks and the NBFCs.
It also regulates the money, government securities and foreign exchange markets and the
payment and settlement systems. There are other sector specific regulators in the country for the
capital market, insurance sector and pension funds.

Pursuit of financial stability

In India, prior to the crisis, no agency was explicitly granted a mandate for financial stability
though RBI acted as the implicit systemic regulator. The Reserve

Bank of India Act (1934) provides a broad legal mandate to RBI to secure monetary stability and
generally to operate the currency and credit system of the country to its advantage. In practice,
this meant the dual objective of growth and price stability, the relative emphasis being dependent
on the context. In 2004, RBI formally added financial stability as an additional policy objective
in view of the growing size and importance of the financial sector.

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Introduction to Luxembourg’s financial system

Luxembourg is an international financial centre located at the heart of Europe. The financial
sector includes various banking business models, from international private and wealth
management, retail banking, corporate finance to fund services and depositary banking. As well
as the key industries, Luxembourg boasts a unique and complete financial eco system,
comprising the whole range of services and skills necessary to support and develop the industry
as a whole: market infrastructures, law firms, consultants, education and training, IT partners and
FinTech firms.Financial activities in Luxembourg rank as the most international-minded of all
countries in the Benelux region (an abbreviation of Belgium, the Netherlands and Luxembourg).
In the most recent Global Financial Centers Index, Luxembourg was ranked as having the sixth
most competitive financial center in Europe.
The Luxembourg economy grew by 2.3% in 2019, mainly driven by strong consumer spending.
Employment grew 0.8% year-on-year, and by 3% in the financial sector. The Luxembourg
financial services workforce is internationally recognised as extremely skilled, multicultural and
highly productive. The financial sector is the economic engine of the country, representing
around a third of GDP, 11% of employment and contributing 21% of fiscal revenues in 2019.
The Luxembourg Stock Exchange was incorporated in 1928, and initiated its first trading in
1929. It introduced its own index LuxX in 1999 and is also the first exchange in the world to list
a green bond. For the first time, LuxSE wins the prestigious United Nations Global Climate
Action Award in the category ‘Financing for Climate Friendly Investment’.

Policy 1: Fiscal Responsibility and Budget Management Act, 2003

India

Importance and impact

The importance of the following act was to allocate financial discipline, reduce India's fiscal
deficit, overall management of public funds moving towards a more balanced budget and
improve the fiscal policy basically to eliminate fiscal deficit. This act was enforced to provide

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the RBI with maximum flexibility to control the inflation. Speaking about the impact of this act
it impacted the revenue deficit, fiscal deficit and the total debt:

Revenue deficit
Minimum annual reduction – 0.5% of GDP

Fiscal Deficit
Ceiling – 3% of the GDP by 31 March 2008
Minimum annual reduction – 0.3% of GDP

Total Debt
9% of the GDP
Annual reduction – 1% of GDP

Cause of its framework and its success

The main causes for its framework are as follows:

 transparent fiscal management systems in the country
 equal distribution of debts over the years
 to bring fiscal stability in the country over the years
 Reviewing the existing FRBM Act helped in identifying changes, past outcomes, global
economic developments, this improved and brought a positive impact in the institutional
framework.
Suggestions for better economic growth

 The government can increase its spending.

 The increase in spending and tax cutting will increase aggregate demand
 The increase depends on the spending and tax multipliers.

Luxembourg

Luxembourg is one of the major financial sectors, with the banking and financial services
industry contributing an estimated 30% to GDP. Budgetary policy in the light of the percentage

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increase in the economic growth as well as the GDP where the government had achieved a
surplus of 262 million and deficit of 910 million, he 38 percent rise in GDP of this sum was
spent subsidies, while another 23% goes to salaries and 14% to public investments.
Luxembourg’s real GDP collapsed by 5.6% during the crisis years of 2008. Luxembourg’s trade
deficit increased by 16.6% in 2017

Policy 2: National stock exchange

India
India biggest stock exchange surpassing Bombay stock exchange and other regional stock
exchanges was incorporated in 1992 recognized by SEBI in 1994. National stock exchange can
be seen as the pioneer of India’s modern trading system, which brough about a fundamental and
technological shift in the way equities were traded.

Importance

Being one of the largest exchanges in world it provides premiere market to list a company and
raise funds much more effectively and efficiently. With high technological trading methods, it
raises the transparency and high liquidity. Establishment of NSE increased the sheer number of
investors because of easy access to securities. Raising capital became much more transparent
outcrying BSE’s old paper securities.

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Impact

After NSE came into existence it brought a major turn in the Indian stock market. It introduced
advance computing trading system which resulted in increased transparency and it offered
anonymous trading with guaranteed settlement. It reduced brokerage from 2.5% to 0.5 which
induced many investors to trade from all-over India. NSE became the reason for change in BSE
which continuously compete with each other.
Framework & success
NSE was set up by a gathering of driving Indian financial institutions at the command of the
Government of India to carry straightforwardness to the Indian capital market. Rather than
trading participations being bound to a gathering of brokers, NSE guaranteed that any individual
who was qualified, experienced and met the base financial prerequisites was permitted to
exchange. it isolated possession and the executives of the exchange under SEBI's watch.
Currently NSE has more than US$ 2.27 trillion with 1952 companies listed on it making it one of
the largest stock exchanges in world.

Suggestions

NSE allows only Indian companies to list on it while in NYSE many other countries trade in.
NSE could open up path for these companies which will result in much more capitalization in
Indian financial markets. It would certainly impart in India’s economic growth. This might be
possible in near future if not now but as many countries/companies are coming to India, it sure
has made it hotspot for investors and financial literates.

Luxembourg stock exchange- LuxSE

Luxembourg is a reliable country which might be small in size but financially giant.
Luxembourg stock exchange has vast history starting form 1928 unlike NSE, it had plenty of
history to cover. But the electronic trading system in LuxSE came around in the same time as in
NSE i.e., in 1991. Being a newly founded stock exchange NSE brought whole new level of
change by introducing depositories for dematerialization of shares. As compared to LuxSE, NSE

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had calculated various aspects required for a stock market to revolutionize in order to create
transparency and imbibe financial literacy to much larger population of India.

Policy 3: Prevention of money laundering act

India

Introduction

Prevention of Money Laundering Act, 2002 was introduced to fight against the criminal offence
of legalizing the income/profits from an illegal source. The Prevention of Money Laundering
Act, 2002 enables the Government or the public authority to seize the property earned from the
illegally sources.

Importance and impact

The PML Act tries to reduce the money laundering in India and has three main objectives: To
prevent and control money laundering. To confiscate and seize the property obtained from the
laundered money; and. To deal with any other issue connected with money laundering in India.

Success and framework

The Prevention of Money Laundering Amendment Act, 2013 has been made strictly in order to
solve the menace of Money laundering, that rises out of illegal money through dubious means.
The provisions of the Act are equally harsh on one who such commits the offence and the person
in whose name it is layered.
Many agencies have been roped into generate information regarding such activities which
include RBI/SEBI/Registration Authorities/Banks/Business Entities. Information is being
collated and acted upon in real time

Suggestions
Even after the law has been passed several institutions and government officials has been caught
in such dubious acts yet no strict action has been taken.

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There should be strict laws so that the investigation undertaking should be completed within a
certain period.
Luxembourg
Money laundering in Luxembourg is an insignificant issue. The Law of April 5, 1993 on the
Financial Sector established the foundations of the obligations of financial institutions to reduce
the abuse of the financial system for money laundering purposes.

Policy 4: Nationalization of bank

India

Introduction

On 19 July 1969, the then finance minister who also was the the Prime Minister Indira Ghandhi
decided to nationalize the 14 largest private banks of India

Importance

The reason for nationalizing banks was to sync the banking sector with the goals of socialism
adopted by the Indian government after the independence.

Impact

 Due to the nationalization of banks, the efficiency of the banking system in India
improved. This also boosted the confidence of the public in banks.

 The sectors that were lagging behind like small-scale industries and agriculture got a
boost. This led to an increase in funds and increase in the economic growth of India.

 The nationalization of banks also increased the penetration of banks. This was mainly
seen in the rural areas of India.

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Framework and cause of success

The impact of bank nationalization can be thought about in terms of three core areas: deposits,
lending and interest rates. The one positive impact of bank nationalization was that financial
savings rose as lenders opened new branches in areas that were unbanked. Gross domestic
savings almost doubled as a percentage of national income in the 1970s.

Suggestions

 Due to the nationalization of the bank’s corruption on the officer’s part has increased due
to the power. This has also resulted to bad loans. Policies should be added where the
power is divided so that such incidents don’t take place.

 The government pressure from the top for implementing even loss-making schemes or
full waiver of loans for electoral benefits is largely responsible for NPAs.

Luxembourg

The Law of 5 April 1993 on the financial sector, as amended covers two types of banks:
universal banks and banks issuing mortgage bonds.
As of 2 January 2020, the Luxembourg banking sector was composed of 129 banks, including:
• 83 universal banks;
• two banks issuing mortgage bonds;
• 13 branches of third country credit institutions; and
• 31 branches of credit institutions established in the European Union.
• Corporate banking, private banking, investment funds servicing and custody are the
main business areas for banks in Luxembourg.

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Policy 5: Foreign exchange management

India

Introduction

The main objective behind the Foreign Exchange Management Act 1999 is to amend the law
relating to foreign exchange with purpose of facilitating foreign trade and money and for
promoting the linear development and maintenance of foreign exchange market in India.

FEMA is applicable to the all parts of India. The act is also applicable to all branches, offices and
agencies outside India owned or controlled by a person who is resident of India.

Impact and Success

The Rules bring about a number of investor friendly changes to provide the investors a smooth
investment experience. As a welcome change, the Rules state that the valuation of convertible
instruments is to be done only at the time of their issuance and not at the time of their
conversion.1 This reduces the equity downside risk that the investor would otherwise face due to
a dual valuation.

Foreign venture capital investment has also seen a few favorable changes pursuant to the
inception of the Rules. More investment options have been created for foreign venture capital
investors as they can invest in start-ups engaged in any sector and have to adhere to the Sector
Specific Conditions which was not there earlier.10

Mutual funds having more than 50% investment in equity governed by Securities and Exchange
Board of India have been recognized as investment vehicles

Success and framework

According to Section 3 of FEMA, all the current record exchanges are free; anyway focal
government whenever could force sensible guidelines by giving unique principles. According to
Section 6 of FEMA, Capital Account Transactions are allowed distinctly to the degree as
indicated by RBI in its gave guidelines. According to Section 10 of FEMA, RBI have controlling
part in its administration anyway RBI can't straightforwardly deal with unfamiliar trade
exchange and should approve an individual to manage it according to bearings set by RBI.

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FEMA likewise have arrangements of different requirement, punishments, mediation and offers
here.

Luxembourg

There are no exchange control or currency regulations. However, under the anti-money
laundering rules contained in Article 2(15) of the Act of 12 November 2004 on the fight against
money laundering and terrorist financing Anti-Money-Laundering-Act, identification
requirements must be fulfilled when entering into business relations, opening bank accounts or
transferring more than EUR10,000.

Policy 6: Macroprudential Policy

India

India’s experience with the conduct of macroprudential policy has spanned initiatives to address
both dimensions of systemic risks – procyclicality and cross-sectional risks. Policies to counter
procyclical trends through pre-emptive countercyclical provisioning and differentiated risk
weights for certain sensitive sectors were adopted in 2004, during the expansionary phase of the
economy.
The experience with the policies to address interconnectedness in the financial system is
relatively longer. India has put in place a framework for closer monitoring and supervision of
large and potentially systemically important financial institutions/groups – termed financial
conglomerates – in 2004, well ahead of the post crisis global initiatives. Evidence of India’s
experience with macroprudential measures also spans certain concerns specific to emerging
markets, notably its approach to capital account management.

Luxembourg

The new macroprudential policy framework appears to be working well in practice and could be
strengthened further. The institutional framework could be enhanced by removing the potential
inaction bias arising from unanimous decision making; enshrining in law the lead role of the
Banque centrale du Luxembourg (BCL); and awarding it formal powers to issue
recommendations. Surveillance of real estate and bank-investment fund vulnerabilities is

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appropriate, and closing related data gaps is a priority. The instrument toolkit should be
expanded to include borrower-based limits, as further macroprudential tightening may be
required.

Policy 7: Foreign direct investment policy

India

Introduction

Foreign direct investment (FDI) in India is a major monetary source for economic development
in India. Foreign companies invest directly in fast growing private Indian businesses to take
benefits of cheaper wages and changing business environment of India. Economic liberalisation
started in India in wake of the 1991 economic crisis and since then FDI has steadily increased in
India, which subsequently generated more than one crore jobs.

Investment climate in India has improved considerably since the opening up of the economy in
1991. This is largely attributed to ease in FDI norms across sectors of the economy. India, today
is a part of top 100 club on Ease of Doing Business (EoDB). FDI inflows in India stood at
$45.15 bn in 2014-15 and have consistently increased since then. Moreover, total FDI inflow
grew by 55%, i.e. from $231.37 bn in 2008-14 to $358.29 bn in 2014-20 and FDI equity inflow
also increased by 57% from $160.46 billion during 2008-14 to $252.42 bn (2014-20).

Impact of FDI in India

According to a recent study it was shown that there is a direct link between the GDP growth and
FDI in India. FDI inflow supplements domestic capital, as well as technology and skills of
existing companies. It also helps to establish new companies. All of these contribute to economic
growth of the Indian Economy. India’s Foreign Direct Investment (FDI) policy has been
gradually liberalised to make the market more investor friendly. The results have been
encouraging. These days, the country is consistently ranked among the top three global
investment destinations by all international bodies, including the World Bank, according to a
United Nations (UN) report.

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Current challenges faced

Resource challenge: India is known to have huge amounts of resources. There is manpower and
significant availability of fixed and working capital. At the same time, there are some
underexploited or unexploited resources. The resources are well available in the rural as well as
the urban areas. The focus is to increase infrastructure 10 years down the line, for which the
requirement will be an amount of about US$ 150 billion. This is the first step to overcome
challenges facing larger FDI.

• Equity challenge: India is definitely developing in a much faster pace now than before but in
spite of that it can be identified that developments have taken place unevenly. This means that
while the more urban areas have been tapped, the poorer sections are inadequately exploited. To
get the complete picture of growth, it is essential to make sure that the rural section has more or
less the same amount of development as the urbanized ones. Thus, fostering social equality and
at the same time, a balanced economic growth.

• Political Challenge: The support of the political structure has to be there towards the investing
countries abroad. This can be worked out when foreign investors put forward their persuasion for
increasing FDI capital in various sectors like banking, and insurance. So, there has to be a
common ground between the Parliament and the foreign countries investing in India. This would
increase the reforms in the FDI area of the country.

Luxembourg

Introduction

Luxembourg offers a business climate favourable to foreign investment, with a very attractive
tax system. The country ranks 18th on the “2019 Global Competitiveness Index.” The
government of Luxembourg has established some measures in order to make the country even
more attractive to FDI, such as fiscal benefits, equipment and construction projects. The
government focused on key innovative industries like logistics; ICT; health technologies,
including biotechnology and biomedical research; clean energy technologies; space technology
and financial services technologies. The country has long been considered a tax haven, although

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in recent years it has taken steps related to the process of harmonisation of financial standards
both within the EU and at international level.

Impact of FDI in Luxembourg

The country experienced a record year for FDI in 2016, when FDI inward flows reached USD
31.8 billion. However, since 2017, FDI inflows have turned negative. According to UNCTAD's
2020 World Investment Report, FDI inflows stood at USD -11,4 billion in 2019, compared to
USD -16,8 billion in 2018. In the same year, the total stock of FDI stood at USD 128,4 billion.
According to figures from OECD, half of FDI received by Luxembourg comes.

Conclusion

India has a diversified financial sector undergoing rapid expansion, both in terms of strong
growth of existing financial services firms and new entities entering the market. The sector
comprises commercial banks, insurance companies, non-banking financial companies, co-
operatives, pension funds, mutual funds and other smaller financial entities. The banking
regulator has allowed new entities such as payment banks to be created recently, thereby adding
to the type of entities operating in the sector. However, financial sector in India is predominantly
a banking sector with commercial banks accounting for more than 64% of the total assets held by
the financial system. Also, the India Financial System stood tall even after the whole of world
being hit by the Covid-19 virus including India.

The economy of Luxembourg is largely dependent on its financial sector. Luxembourg’s

economy is characterised by its fiscal system and a high level of international openness. The
financial sector is the main driving force behind its economy, representing about one-third of the
country’s GDP, making the country vulnerable to external shocks. Hence, the country is and in
future will be largely affected by the global market and trends. One good example of such
situation is that of Coovid-19. Luxembourg’s GDP is expected to report a 6% decline in the year
2020.

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 REFERENCES
LUXEMBOURG FINANCIAL SYSTEM STABILITY ASSESSMENT [PDF]. (2017). Washington,
DC: International Monetary Fund.

Chakrabarty, K. C. (2014, April). Framework for the conduct of macroprudential policy in India:
Experiences and perspectives [PDF]. Banque de France

Brand India. (n.d.). Retrieved February 07, 2021, from https://www.ibef.org/industry/financial-

services-india.aspx

About us. (n.d.). Retrieved February 07, 2021, from https://www.bourse.lu/about- us

Best, R. (n.d.). Topic: The financial sector in Luxembourg. Retrieved February 07, 2021, from
https://www.statista.com/topics/4189/the- financial-sector- in- luxembourg/

LUXEMBOURG. (n.d.). Retrieved February 07, 2021, from https://www.ebf.eu/luxembourg/

Best, R. (n.d.). Topic: The financial sector in Luxembourg. Retrieved February 07, 2021, from
https://www.statista.com/topics/4189/the- financial-sector- in- luxembourg/

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