REFORMING INDIA’S FINANCIAL SYSTEM

PRESENTED BY – GROUP 4 – Pratikshya Sahoo, Shaivi Kharbikar, Sekhar Choudhury, Ipshita Shukla, Manal Verma, Keshav Tyagi

INTRODUCTION Financial system – A system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national, global, and firm-specific levels. Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products.

Financial InstitutionsFinancial MarketsFinancial Instruments

Financial Services

ABOUT THE CASE India’s financial system is underdeveloped yet India’s economy has made progress. When it comes to allocating capital, India is much more effective than China. Bad debts are under control and the market share of private and foreign banks are going up. India has to mobilize its funds as Indians are largest purchasers of gold, equal to nearly country’s bank deposits. Steps like reducing fiscal deficit, encouraging consumers to use banks, cutting the cost of bank intermediation and developing the capital markets should be taken.

KEY WORDS Fiscal deficit is when a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits. Private investment, from a macroeconomic standpoint, is the purchase of a capital asset that is expected to produce income, appreciate in value, or both generate income and appreciate in value. A capital asset is simply property that is not easily sold and is generally purchased to help an investor to generate a profit. Examples of capital assets include land, buildings, machinery, and equipment. Household saving is defined as the difference between a household’s disposable income (wages, income of the self-employed and net property income) and its consumption (expenditures on goods and services.)

KEY INFORMATIONNo of companies listed in BSE- 5000 roughly till 2005, 5788 and NSE- 1659 as of Oct ‘15GDP growth @ 2015 China- $10 trillion and India- $ 2 trillionTotal Stock value China- $9.29 trillion and India- $1.61 trillion 21% - loans for health care 10% - education 9%- business 4%- mortgageIndian households have amassed up to 20,000 tonnes for a historic high of $1.16 trillion.

GROSS DOMESTIC SAVINGS 2005 2014

INDIA HOUSEHOLDS SAVINGS - 1951-2016 Personal Savings in India increased to 22124.14 INR Billion in 2013 from 20547.37 INR Billion in 2012. Personal Savings in India averaged 2819.47 INR Billion from 1951 until 2013, reaching an all time high of 22124.14 INR Billion in 2013 and a record low of 6.34 INR Billion in 1952. Personal Savings in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI).

DISTRIBUTION OF HOUSEHOLD SAVINGS

FLASHBACK 2014-15: FINANCIAL SECTOR MILESTONES FLASHBACK 2014-15: FINANCIAL SECTOR MILESTONES

APRIL After a gap for more than a decade, new bank licences were awarded by the Reserve Bank of India (RBI) to two applicants, IDFC & Bandhan Financial Services

A new monetary framework kicks in, with 6 reviews per year as compared to 8 earlier JULY To boost infra financing CRR/SLR exemption announced for banks for funds raised via infra bonds

RBI issues draft norms for payments and small banks; for the first time a process to issue differentiated licences initiated

AUGUSTCBI arrests Syndicate Bank Chairman and Managing Director (CMD) S K Jain over alleged bribery charges. Jain later sacked by the government, which,  in an unprecedented move, cancels all CMD appointment decisions taken by the previous government

Prime Minister Narendra Modi launches Pradhan mantri Jan Dhan Yojana – a scheme for opening bank accounts to foster financial inclusion. More than 130 million accounts opened in a matter of five months

NOVEMBERKotak Mahindra Bank accounces it will acquire ING Vysya Bank to become the fourth largest private bank in the country

DECEMBERGoverment splits chairman and managing director’s post in public sector banks, signalling its intention to initiate long-pending reforms in the banking sector

Government issues ordinance to allow foreign firms to have 49 per cent stake in insurance companies, a decision that was stuck for several years

JANUARYIn a first, government calls bankers for a brainstorming session, christened as Gyan Sangam, to chart the road ahead for the banking sector

RBI brings out final guidelines on banks becoming insurance brokers FEBRUARYRBI gets 41 applications for payments bank licence, 72 for small finance bank licence

Government allocates capital to public sector banks based on their efficiency, clearly indicating its stance — perform or perish

CEO position in government banks opened for private sector players with market-linked remuneration

Union budget starts implementing proposals of the Financial Sector Legislative Reforms Commission, which takes away some important functions of the central bank like government debt management

MARCHInsurance Bill passed by both Houses of the Parliament SBI, the country’s largest lender, says it will dilute its stake in its general insurance venture

ISSUES

How Indian financial system must mobilize savings more effectively?

PRIVATE BANK – Axis Bank, Development Credit Bank (DCB Bank Ltd), HDFC Bank, ICICI Bank, IndusInd Bank, Kotak Mahindra Bank, Yes Bank,

IDFC and Bandhan Bank of Bandhan Financial Services.April ’14, RBI awarded universal bank license.

FOREIGN BANK - DOHA, HSBC, UNITED OVERSEAS, Deutsche Bank, Barclays Bank, Standard Chartered Bank, BNP PARIBAS, etc.

ROLE OF BANK Banks act as delegated monitors and ensure that firms use the resources allocated to them effectively. They also play an important role in sharing risk in the economy by diversifying and smoothing fluctuations over time. These are positive aspects of the roles banks play. However, the fixed nature of the claims they issue can cause fragility in the financial system. Banks are often at the center of financial crises as in the crisis that started in August 2007. They can help spread crises if there is contagion and small shocks can have a large effect on the financial system and the economy. Banks play an important role in providing funds for firms and helping them and the economy to grow. They are also important for corporate governance, particularly in countries like Germany where bankers sit on boards and control a significant number of proxy votes. Finally, banks can help overcome asymmetric information problems by forming long-lived relationships with firms.

ROLE OF STOCK MARKETS Stock markets are, first and foremost, financial institutions established to help businesses and entrepreneurs come together to buy, sell and trade shares for the purpose of capitalizing enterprises in need of cash infusions. Were it not for stock exchanges, entrepreneurs would be left to their own devices to find investors, and consumers could wind up at the mercy of unlicensed and unregulated financial products with no oversight. 

SOLUTIONS

INCREASE BANK PENETRATION Bank a/c penetration increased from 35% to 53% in India and 64% to 79% in China. 170 million in India became a/c holder in 2014 India has 43% dormancy rate i.e. 195 million of the $60 million dormant a/c around the world. Aug 2014, Government launched Jan Dhan Yojana with the goal of opening bank a/c for every household. Under this the schemes offered where zero balance, over draft facilities, free life insurance. 97% of new a/c are at public sector and 72% of it show zero balance. 39% of all a/c holders own a debit card or ATM card.

REDUCE THE COST OF BANK INTERMEDIATION Improvements in the institutional environment (encompassing better property rights, stronger contract enforcement, and a higher level judicial efficiency) increase the value of collateral for bank loans and therefore reduce the cost of financial intermediation for existing borrowers.

REDUCE THE FISCAL DEFICIT CUT GOVT SPENDINGThe government can cut its public spending to reduce its fiscal deficit. TAX INCREASESHigher taxes increase revenue and help to reduce the budget deficit. Like spending cuts, they could cause lower spending and lead to a fall in economic growth. Again it depends on the timing of tax increases. In a recession, tax increases could cause a big drop in spending. During high growth, tax increases won’t harm spending as much. It also depends on the type of tax you increase.The best way to reduce the budget deficit is to aim for positive economic growth, but in the long-term evaluate government spending commitments and reduce spending to sustainable levels.

DEVELOP THE CAPITAL MARKETS

1. Investor education and regulation of mutual fund distributors 2. Allowing AMCs to the flexibility to charge fees 3. Innovative products across different asset classes Increased focus on accountability and oversight of seed capital programs has caused continued formalization of policies and procedures governing strategy and investment

4. Amending tax regime to encourage domestic AMCs to manage foreign funds from India

5. Although higher investment by domestic institutional investors such as insurance companies , pension funds to make investment in capital markets

6. Allowing institutional investors to participate in commodity markets

CONTRIBUTION OF CAPITAL MARKET GLOBALLY

RECOMMENDATIONS India being an emerging economy needs innovations and reforms in the financial market. Innovation and reforms not only add value in the existing technology and system. Emerging economies like India depends heavily on the banking system for financing its capital needs. But banks which are highly protected in India hardly fulfil its funding requirements. Thus, there is the need to develop its capital market. Capture more savings. Privatisation -  transfer enterprise or industry from the public sector to the private sector. Disinvestment - selling or liquidating assets or subsidiary. Reduction in Subsidies - Additional tax collection Organised or regulated business environment Proper banking Suitability and feasibility of investment of micro finance project. Developing bond market.

THANK YOU!