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Page 1: Commercial Banking PPT

RAGHURAM RAJAN COMMITTEE REPORT ON

FINANCIAL SECTOR REFORMS

Presented by:

GROUP: 06

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Honorary economic adviser to Prime Minister Manmohan Singh

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Macroeconomic Framework and financial sector development

• High growth, moderate inflation, absence of major

turbulence(target of 9% growth,07-12)

• Economy faces major challenges in maintaining high growth &

moderate inflation

• Sustainability of this growth process depends on its being inclusive

& remaining non-inflationary

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Some basic question(Due to recent painful surge in inflation)

• Is the present monetary policy right for stabilizing inflation expectation over 2-3

years

• Is policy framework adapted able to cope up with the practical realities on the ground.

• Sophistication and complexity of financial markets can be or should be unwounded

• How do macroeconomic policies fit in to the game plan for financial sector reforms

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Answer is…….

• Disciplined and predictable monetary, fiscal and debt

management policies constitute the crucial foundation for further

progress

• A well-functioning financial system is essential for

macroeconomic stability, and can be particularly helpful in

reducing the secondary effects of various shocks that inevitably

hit any economy

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How macroeconomic policy can influence the evolution of the financial sector

• Challenges from capital inflows(inflow quadrupled)

• In 2006–07, net capital inflows amounted to 45 billion US

dollars(equivalent to nearly 5 per cent of India’s GDP)

• These inflows far exceed the current account deficit, which was 10

billion dollars

• Eased of in 2008-09 mainly due to turmoil in international financial

markets

• Monetary and forex rate are equally related to the increased scale of

gross inflows and outflows

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Confidence in India remains strong

• It would therefore be prudent to adapt the financial system to larger

inflows than in the past

• It would also be wise to be prepared for a larger outflow of funds if

either domestic or global circumstances were to deteriorate

• Current account deficit makes it vulnerable to a sudden stop of inflows,

although the level of foreign currency reserves does provide a cushion

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In Nutshell

• There are no ‘correct’ or ‘ideal’ solutions for managing the

integration of a large domestic financial system into the global

economy

• mistakes can be both large and harsh

• What is clear is there is a premium on consistency, clarity,

credibility and continuity of policies

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Challenges

• capital inflow result in home currency

• Main issue is how to handle exchange rate?

Higher earnings in more non traded goods sector will cause

appreciation of real exchange rate

Govt budget deficit as well as capital inflow creates imbalance

b/w demand and supply causing real exchange rate to appreciate

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Countering real appreciationpressures

• Slow down productivity growth

• Restraining private consumption(key-fiscal policy)

• limiting net inflows could help slow appreciation pressures.

capital control(not a sensible approach)

encourage domestic capital to flow out

.Buy companies abroad

.Individual investment abroad

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Motto of monetary policy

• Recommends Price stability(stable inflation)

• It will :-

Stabilize GDP growth

Help house hold & firms make long

term plans

Increase investment

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Capital Account Liberalization

Opening up to foreign banks and other financial firms and to foreign

direct investment in the financial sector has many potential benefits

• Introduction of financial innovations and sophisticated financial

instruments by foreign financial firms

• Depth in domestic financial markets due to foreign inflows

• More efficiency in the domestic banking sector through increased

competition

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LEVELLING THE PLAYING FIELD

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• Anyone can offer financial services as long as he can

compete with the others.

• In an efficient financial system, the playing field is level –

– Privileges

– Resources allocated efficiently

– Maximum out of productive resources

• Challenge to level fields in India

– Privileges given to certain firms namely public sector.

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• Social Obligations for Banks in India:

– Lending to Priority sector

–Meeting prudential norms

– Statutory liquidity ratio

– Funding the government

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• Let competition decide

– Steadily lowering privileges, obligations and

regulations for the most efficient form to prevail.

• Neutral Institutional Ownership:

– Removing the overlay of costs & benefits imposed

by Govt. ownership.

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Welcoming Foreign Financial Firms

• Equalization by removing burdens.

• Should be given time to adjust.

• Financial Integration.

• Check on the misuse of their freedom of

activity.

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Deficiencies in the Banking System

• Smaller role relative to GDP.

• Largest Indian Bank (SBI) is relatively small.

• India ranked at 102, by the share of the top there

banks in total banking assets.

• India doesn't have many small private banks.

• Foreign banks earning more profits.

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• Average spread exceeds 5%

• Less use of technology to reduce transaction

costs.

• Fundamental differences between the new

private sector and foreign banks; and public

sector and old private sector banks.

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Proposals

• Proposal 1:

• Reforming the public sector banks:

– To free the public sector banks from factors that cripple

their ability to compete

The major steps include:

Create stronger boards of PSBs

Delink banks from the government

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• Proposal 2:

• Encourage, but don't force, consolidation.

– To improve variety and efficiency in the banking sector

specifically, and in the financial sector more generally.

Takeovers of PSB

Takeovers by private banks and eligible financial institutions

Takeovers by large Indian banks

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• Proposal 3:

• Reduce barriers to competition:

– To reduce the overlay of obligations and benefits

on the banking sector as a whole

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• Proposal 4:

• Moving to holding company structure

– To allow for a more effective provision of products

that cut across financial activities.

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