FINANCIAL SECTOR REFORMS

TEAM - 2

Presented by:
Harsha Vardhan -17063
Samreen – 17074
Rahul – 17096
Sai Nandu Kalyan – 17059
Rohan - 17043
 FINANCIAL SECTOR REFORMS

 To improve the allocative efficiency of resources and ensures financial stability and maintain confidence
in financial system by enhancing its soundness & efficiency.
 Liberalisation
 In order to get out of the macro-economic crisis in 1991, India launched a New Economic Policy, which was
based on LPG or Liberalisation, Privatisation and Globalisation model.

 Prior to 1991, there were large number of government restrictions in India in the areas of licensing, import
and export trade, dealings in foreign exchange, etc.

 The main aim of liberalisation is to make the economy more market-oriented and expand the role of private
and foreign investment.

 Liberalisation could increase growth rate in small run and this also could result into higher imports and
exports.
 FINANCIAL SECTOR REFORMS

 Financial Sector Reforms are steps taken to change the banking system,
capital market, Govt.debt market, foreign exchange market, etc.,

 An efficient financial sector enables the mobilization of household savings

and ensures their proper utilization in productive sectors.

 The main sectors are,

a) Banking & non Banking
b) Stock Exchange Market
c) Foreign Exchange Market
Need for Financial Reforms

By: SAMREEN SULTANA

Reg No: 17074
1)Lack of Competitors

2) Low Capital base

3) Low Productivity

4)High Transactions Cost

5)No Proper Risk Management

6)Loan Defaults

7)Weak Management and Control functions

8)High CRR and SLR

9)Poor Customers services

10)Outdated Technology
Objective for Financial Reforms
 To Develop Competitions, diversify autonomy

 To Increase Effectiveness, accountability, profitability etc and Rate of return

 To Ensure Rationalization of Interest rate structure

 To Build supervision, Audit, Technology and legal matter authority

 To moderate instruments

 To improve direct credit policy

FINANCIAL SECTOR REFORMS AFTER 1991
 Major Reforms in Financial Sector After 1991

 Systematic and Policy Reforms

 Banking Reforms
 Primary and Secondary Stock Market Reforms
 Government Securities Market Reforms
 External Financial Market Reforms
Systematic and Policy Reforms
 Deregulation of Interest Rates and Market rates on Government Securities, Dismantle of Administered Interest Rates and
Simplification of Interest rate Structure.
 There has been a Decrease in the Estimation of Resources of Banks Based on SLR & SLP has been set Around the Market Rates
and Reduced from 38.5% to 25%.
 Changes in CRR, there has been Observed a Decline in the Average CRR from 15% to 10%.
 Establishment of BASEL COMMITTEE to Introduce Capital Adequacy Norms.
 In 1995, RBI has Established a Board of Financial Supervision to Monitor and Control the Performance of Financial Institutions &
Supervisory Reporting System to Monitor Capital Adequacy, Asset Quality and Management and Liquidity.
 Government Enforced the Banks and Financial Institutions act in 1993 to Establish Special Recovery Tribunals for Debt Recovery.
 In1994, RBI and Government Enforced an Agreement on ad hoc TB to Reduce the Monetization of Budget.
 In1992, SEBI was Established to Monitor and Control the Capital Market.
 Developmental Banks of India were Introduced Floating Interest Rates.
 Over the Counter Exchange of India were Introduced Floating Interest Rates.
 Over the Counter Exchange of India and NSE Become Operational in Stock Market.

Banking Reforms
 The High SLR and CRR Reduced the Profits of the Banks. The SLR has been Reduced from 38.5% in 1991 to 25% in 1997. This
has Left more funds with Banks for Allocation to Agriculture, Industry, Trade etc.
 The CRR is the Cash Ratio of a Bank’s Total Deposits to be Maintained with RBI. The CRR has been Brought down from 15% in
1991 to 4.1% in June 2003, The Purpose is to Release the Funds Locked up with RBI.
 Prudential norms have been Started by RBI in Order to Impart Professionalism in Commercial Banks. The Purpose of Prudential
norms Include Proper Disclosure of Income, Classification of Assets and Provision for Bad debts so as to ensure that the Books of
Commercial Banks Reflect the Accurate and Correct Picture of Financial Position.
 Prudential norms Required Banks to make 100% Provision for all Non Performing Assets.
 Capital Adequacy Ratio is the Ratio of Minimum Capital to Risk Asset Ratio. In April 1992 RBI Fixed CAR at 8%. By March 1996,
all Public Sector Banks had Attained the Ratio of 8%. It was also Attained by Foreign Banks.
 The Interest Rates on Deposits and Advances of all Co – Operative Banks have been Deregulated Subject to a Minimum Lending
rate of 13%.
 The New Private Sector Banks are Allowed to Raise Capital Contribution from Foreign Institutional Investors up to 20% and from
NRIs up to 40%. This has led to Increased Competition.
 The Banking Companies Act was amended to Enable the Banks to Raise Capital through Public Issues. This is Subject to Provision
that the Holding of Central Govt Would not fall Below 51% of Paid up Capital. SBI has already Raised Substantial Amount of
Funds Through Equity and Bonds.
Primary and Secondary Stock Market Reforms
 Free Pricing
 Introduction of Book Building
 Electronic Trading
 Instruments and Market Participants
 Improvement in Trading, Clearing and Settlement System
 Increased Dematerialization
 Elimination of Counter Party Risk
 Circuit Breakers/Price Bond
 Focusing on Fair Trading Practices
 Structure of Information Flows
Government Securities Market Reforms
 Introduction of 364 days in TB in 1992.
 Auction of 91 days TB from 1993.
 In 1993 Govt Allowed the Investors to Convert Auction TBS into Fixed Coupon dated Securities on their Interest.
 During 1994 – 97 SEBI Introduced 6 new Instruments such as Zero Coupons, Partly paid Govt Stock.

External Financial Market Reforms

The Tax Rates on Portfolio Investment of NRI’s were Reduced to 10% from 20%. The Foreign Investment in India Firms
Limitations Increased to 24% to 10%.
Financial Market Reforms
• The Indian market has witnessed major reforms in the decade 1990
• Major reforms were made to improve the working of the Indian stock exchange and to make it more progressive
and vibrant
• There are Major reforms in the Indian market are
• Establishment of SEBI
• Establishment of Credit Rating Agencies
• Growth of Derivate transactions
• Raising Electronic Transactions
• Screen-Based Trading
• Growing stock exchange
 Establishment of security exchange board of India
• It was established in the year 1988
• Its main objective is to regulate the stock market
• Government of India has established this body.

Growth of Derivate Transactions

• It was introduced by NSE in June 2000

• In 2001 it also introduced Future and options

• This innovation gave a variety of investments leading to the expansion of the capital market
Raising Electronic Transactions
• With the development of the technology in past years paperless transactions have been promoted
• In the stock market for example most of it runs on paper less transactions
• It has made investing safer, and easier and encourage more people to invest in the market

Screen-Based Trading
• Before everyone traded using the help of Agents and brokers
• Now the investors can use their mobiles and systems to complete trading from anywhere
and anytime.
Growing Stock Exchange
• There are many stock exchanges in India now
• Before there was only BSE, now because of NSE there are many stock exchanges in India
THANK YOU