• Financial Sector has been incrementally deregulated and exposed to international financial markets in the last 15 years;

• Consequently, elements of the Indian financial sector are close to international standards.

• Global financial market conditions are favourable

• Are we seizing the opportunity for urgent reforms and greater integration?

• How do we decide what is an optimal rate to integrate with global financial markets?

• Increase competition and thereby enhance the efficiency of financial intermediation and promote overall savings;

• Widen and deepen the reach of the formal financial sector;

• Ensure that the country’s savings are utilized most productively; and

• Manage the risks stemming from disturbances in global markets to insulate the financial sector and the Indian economy.

OBJECTIVES

• There should be an adequate number of buyers and sellers such that all market participants are price-takers

• The primary market (for all issuance) should have a large number of participants

• Valuations in the secondary market should be transparent and liquid enough to allow easy exit

• The bid-ask spreads in the secondary markets should be narrow.

CRITERIA FOR COMPETITIVE MARKETS

ISSUES

• The depth of the financial sector is relatively low

• About two-thirds of private savings are mobilized by the financial sector.

• Productivity of investments should be given greater weightage in allocation of credit.

Table 1

Stock of Financial Assets as % of GDP(2004)

 

Country Financial Assets

India 160

Japan 420

Malaysia 400

South Korea 235

China 220

 

 

• A gradualist approach to “Fuller Capital Account Convertibility” is in order. The risks stemming from potential demand for investments in foreign assets (including real-estate) are not quantifiable and may be unmanageable in times of domestic-international stress

• Domestic interest rates are not adequately market determined i.e. there is need for further deregulation of interest rates

Table 3

Financial Sector Regulators

Country Regulators of Financial Services

UK Financial Service Authority (FSA)

Japan Financial Service Agency (FSA)

Germany The Federal Financial Supervisory Authority (BaFin)

India Banking – RBICapital Markets – SEBI

Insurance – IRDAPension – PFRDA

China Banking – China Banking Regulatory Commission (CBRC)Capital Markets – State Council Securities Commission (SCSC)Insurance – The China Insurance Regulatory Commission (CIR)

USA Banking – Federal Reserve BankCapital Markets – Securities and Exchange Commission (SEC)Derivatives – Commodities and Futures Trading Commission (CFTC)

• The banking sector has reformed considerably since the early 1990s but is excessively dominated by the public sector which receives 78% of the deposits and makes about 73% of the loans

Table 4

Indian Banks – Market shares (in percent) Deposits Loans

Mar 2000 Mar 2005 Mar 2000 Mar 2005

Public Sector

81.9 78 79.3 73.2

New Private

5.2 10.9 5.0 13.8

Old Private

7.4 6.4 7.6 6.2

Foreign 5.5 4.7 8.0 6.8

Table 5

Bank Lending as percentage of Deposits

(2004) Country Lending as percent of Deposits

China 130

UK 114

Malaysia 101

USA 92

India 61

• Efficiency in the banking sector lags international comparators in terms of intermediation costs

• Just two domestic private banks have entered this sector in the last ten years

• A coordinated effort is needed to hasten consolidation among and international listings of public sector banks and entry of new private sector banks

• Separate regulator for banking

• We should not mix up insolvency with illiquidity

• Indian equity and related exchange traded derivatives markets and to some extent the mutual fund industry compare well with international markets

• The over the counter (OTC) interest rate and currency swap markets cannot grow without better market determination of domestic interest rates and further capital account convertibility (FCAC)

• The corporate debt market is miniscule and needs a series of reforms including stamp duty rationalization, repos in corporate bonds, settlement and clearing of corporate bonds through the same clearing system as government securities, introduction of credit derivatives, lifting of limits for FII purchases of corporate bonds

• Exchange traded interest rate derivatives should be encouraged since this will improve the market determination of domestic interest rates and help the corporate bond market to grow

• Exchange traded currency derivatives can wait for next steps towards FCAC

• Commodity derivatives markets should be regulated by SEBI

• The Companies Act needs to be amended and SEBI strengthened to take over the regulatory responsibilities under this Act

• The private equity market should be courted and exit valuation methodologies made transparent and predictable.

• The asset backed securities market will not develop without considerable preparatory work particularly on the legal issues involved. Hence, special efforts need to be directed to this end.

• In cross-country terms, the Indian insurance industry is small in depth and coverage and there is tremendous potential for growth. Premiums should be deregulated, the requirement to hold at least 50% of assets in government securities should be gradually relaxed as also the ceiling of 26% ceiling for foreign ownership

• The pension sector is almost entirely in the public sector and covers only about 16% of the work-force. Progress is hindered by a multiplicity of Acts, administered by several GoI Ministries, which have subdivided the sector. The pay-as-you-go government administered pension systems should be gradually replaced by defined contribution schemes in which pension assets are invested in securities, both debt and equity. The pension sector needs to be comprehensively reviewed, at a GoI wide level, in the light of the potential for it to help boost the equity and bond markets and thereby the entire financial sector

• The complex web of legislation that applies to the financial sector needs to be simplified. Further, there are obvious anomalies in certain Acts e.g. those which provide for RBI representation on the boards of public sector banks such as State Bank of India (SBI), National Housing Bank (NHB).

Table 6

Debit and Credit Card Penetration2004

(percent of population)

India 3

South Korea 174

Brazil 71

China 61

Thailand 54

Mexico 44

Table 7

Equity Market Capitalisation and Traded Values(2005)

Country Market Capitalisation

Value Added Listed Domestic Cos.

India 71 57 4763

USA 136 172 5143

Japan 104 109 3279

UK 139 189 2759

Germany 44 63 648

China 35 26 1387

*Figures in percent

Table 8

OTC and Exchange Traded Derivatives

Country/ Region

OTC Derivatives Markets Average daily turnover*

Exchange-tradedDerivatives MarketsAnnual turnover**

India (2005) Not available 1

USA (2004) 355 819

EU (2004) 1001 487

*US$ billion; ** US$ trillion

Table 9

Mutual Fund Assets Under Management(US$ billion end 2005)

Country Mutual Fund Assets % of GDP

India 64 8

USA 8,905 71

France 1,363 65

Switzerland 117 32

UK 547 25

Netherlands 94 15

Germany 297 11

Japan 470 10

Table 10

Issuance of Equity and Debt

Year Equity Issues

Rs. Crores

GOI Securities

Rs. Crores

Debt Issues

Publicly placed

Privately placed

2004-05 28,200 (0.9)

1,06,501 (3.4)

4,094 55,408 (1.8)

2005-06 36,533 (1.0)

1,60,018 (4.5)

-- 81,846 (2.3)

2006-07

(Apr-Sep)

8,205 BE 1,81,875

-- 47,945

Figures in () are percent of GDP

Table 11

Corporate Bond Markets(2004)

Country % of GDPIndia 2

USA 145

Germany 116

UK 83

Malaysia 73

Thailand 22

South Africa 17

China 1

Table 12

Mortgage Balances Outstanding 2005

(Percent of GDP)

India 3

USA 51

UK 54

South Korea 13

Thailand 9

Malaysia 23

Germany 48

Table 13

OTC and Exchange Traded Commodity Derivatives

Country OTC Commodity Derivatives Trading (Average daily turnover 2004 – US$ billion)

Exchange Traded Commodity Derivatives (Annual turnover 2005 – US$ trillion)

India -- 0.33

USA 4.6 82

EU 13 49

Table 14

International Comparision of Insurance Penetration

Country 20022002 20032003 20042004

Total Life Non-life

Total Life Non-life

Total Life Non-life

USA 9.58 4.6 4.98 9.61 4.25 5.15 9.17 4.12 5.05

UK 14.75 10.19 4.56 13.37 8.62 4.75 12.6 8.92 3.68

Germany 6.76 3.06 3.7 6.99 3.17 3.82 6.97 3.11 3.86

Japan 10.86 8.64 2.22 10.81 8.61 2.2 9.52 6.75 2.77

India 3.26 2.59 0.67 2.88 2.26 0.62 3.17 2.53 0.65

China 2.98 2.03 0.96 3.33 2.3 1.03 3.06 2.21 1.05

World 8.14 4.76 3.38 8.06 4.59 3.48 7.99 4.55 3.43

Table 15

International Comparision of Insurance Density

CountryCountry 20032003 20042004

Total Life Non-life Total Life Non-life

USA 3637.7 1657.5 1980.2 3755.1 1692.5 2062.6

UK 4058.5 2617.1 1441.4 4508.4 3190.4 1318.0

Germany 2051.2 930.4 1120.8 2286.6 1021.3 1265.3

Japan 3770.9 3002.9 768 3874.8 3044 830.8

India 16.4 12.9 3.5 19.7 15.7 4.0

China 36.3 25.1 12.2 40.2 27.3 12.9

World 469.6 267.1 202.5 511.5 291.5 220

Table 16

Insurance Assets Under Management (US$ billion end 2005)

Country Insurance Assets % of GDP

India 22 3

USA 5,465 44

Japan 2,264 50

UK 1,907 87

France 1,527 72

Germany 1,370 49

Netherlands 385 61

Switzerland 337 91

Table 17

Pension Assets Under Management (US$ billion end 2005)

Country Pension Funds % of GDP

India 60* 8

Switzerland 469 127

Netherlands 693 110

USA 12,119 97

Japan 3,419 75

UK 1,607 73

France 165 8

Germany 114 4

* Estimate of EPFO, EPS and PF Funds.

Table 18

Asset Allocation of Pension Funds (2005)

Country Domestic Equity

International Equity

Domestic Bonds

International Bonds

Cash Others

Japan 29 16 26 11 11 7

UK 39 28 23 1 2 7

USA 47 13 33 1 1 5

Table 19

Old-dependency ratio (population above 64 years of age divided by the

population between 14-64)

20052005 20502050

World 11 25G10 23 42China 11 37Latin America 9 29India 8 22