The Financial Sector Reforms in India
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Sep 09, 2009
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PresentationPresentation
Economic Environment of BusinessEconomic Environment of Business
The Financial Sector ReformsThe Financial Sector Reforms
September 9, 2009
The financial Sector Reforms
1
Slow but steady …not to forget the socio economic needs …
Economic Environment of BusinessEconomic Environment of Business
The Financial Sector ReformsThe Financial Sector Reforms
September 9, 2009
The financial Sector Reforms
1
Slow but steady …not to forget the socio economic needs …
GROUPGROUP
••AJAY K. DHAMIJAAJAY K. DHAMIJA NN--11
••SNEHAL SONISNEHAL SONI NN--4747
September 9, 2009
The financial Sector Reforms
2
••AJAY K. DHAMIJAAJAY K. DHAMIJA NN--11
••SNEHAL SONISNEHAL SONI NN--4747
September 9, 2009
The financial Sector Reforms
2
•Introduction
•Major Contours of Reforms
•Banking sector Reforms
•Monitory Policy Reforms
•Financial Markets Reforms
•Forex Market Reforms
•Assesment
•Conclusions
CoverageCoverage
September 9, 2009
The financial Sector Reforms
3
•Introduction
•Major Contours of Reforms
•Banking sector Reforms
•Monitory Policy Reforms
•Financial Markets Reforms
•Forex Market Reforms
•Assesment
•Conclusions
•Major Contours of Reforms
•Banking sector Reforms
•Monitory Policy Reforms
•Financial Markets Reforms
•Forex Market Reforms
•Assesment
•Conclusions
CoverageCoverage
September 9, 2009
The financial Sector Reforms
3
•Introduction
•Major Contours of Reforms
•Banking sector Reforms
•Monitory Policy Reforms
•Financial Markets Reforms
•Forex Market Reforms
•Assesment
•Conclusions
IntroductionIntroduction
••FIVE PrincipleFIVE Principle
––Measured, gradual, cautious and steady sequencing of reformsMeasured, gradual, cautious and steady sequencing of reforms
––Introduction of mutually reinforcing normsIntroduction of mutually reinforcing norms
––Development of an Efficient, Competitive and Stable financialDevelopment of an Efficient, Competitive and Stable financial
sectorsector
––Development of Financial InstitutionsDevelopment of Financial Institutions
––Introduction of complementary reforms across Monetary, Fiscal andIntroduction of complementary reforms across Monetary, Fiscal and
external sectorexternal sector
••Broad based reforms touching every sectorBroad based reforms touching every sector
––Financial SectorFinancial Sector
––Monetary and Fiscal PolicyMonetary and Fiscal Policy
––Capital MarketCapital Market
––Foreign Exchange MarketForeign Exchange Market
––Money and Government Securities MarketMoney and Government Securities Market
September 9, 2009
The financial Sector Reforms
4
••FIVE PrincipleFIVE Principle
––Measured, gradual, cautious and steady sequencing of reformsMeasured, gradual, cautious and steady sequencing of reforms
––Introduction of mutually reinforcing normsIntroduction of mutually reinforcing norms
––Development of an Efficient, Competitive and Stable financialDevelopment of an Efficient, Competitive and Stable financial
sectorsector
––Development of Financial InstitutionsDevelopment of Financial Institutions
––Introduction of complementary reforms across Monetary, Fiscal andIntroduction of complementary reforms across Monetary, Fiscal and
external sectorexternal sector
••Broad based reforms touching every sectorBroad based reforms touching every sector
––Financial SectorFinancial Sector
––Monetary and Fiscal PolicyMonetary and Fiscal Policy
––Capital MarketCapital Market
––Foreign Exchange MarketForeign Exchange Market
––Money and Government Securities MarketMoney and Government Securities Market
••FIVE PrincipleFIVE Principle
––Measured, gradual, cautious and steady sequencing of reformsMeasured, gradual, cautious and steady sequencing of reforms
––Introduction of mutually reinforcing normsIntroduction of mutually reinforcing norms
––Development of an Efficient, Competitive and Stable financialDevelopment of an Efficient, Competitive and Stable financial
sectorsector
––Development of Financial InstitutionsDevelopment of Financial Institutions
––Introduction of complementary reforms across Monetary, Fiscal andIntroduction of complementary reforms across Monetary, Fiscal and
external sectorexternal sector
••Broad based reforms touching every sectorBroad based reforms touching every sector
––Financial SectorFinancial Sector
––Monetary and Fiscal PolicyMonetary and Fiscal Policy
––Capital MarketCapital Market
––Foreign Exchange MarketForeign Exchange Market
––Money and Government Securities MarketMoney and Government Securities Market
September 9, 2009
The financial Sector Reforms
4
••FIVE PrincipleFIVE Principle
––Measured, gradual, cautious and steady sequencing of reformsMeasured, gradual, cautious and steady sequencing of reforms
––Introduction of mutually reinforcing normsIntroduction of mutually reinforcing norms
––Development of an Efficient, Competitive and Stable financialDevelopment of an Efficient, Competitive and Stable financial
sectorsector
––Development of Financial InstitutionsDevelopment of Financial Institutions
––Introduction of complementary reforms across Monetary, Fiscal andIntroduction of complementary reforms across Monetary, Fiscal and
external sectorexternal sector
••Broad based reforms touching every sectorBroad based reforms touching every sector
––Financial SectorFinancial Sector
––Monetary and Fiscal PolicyMonetary and Fiscal Policy
––Capital MarketCapital Market
––Foreign Exchange MarketForeign Exchange Market
––Money and Government Securities MarketMoney and Government Securities Market
In early 1990sIn early 1990s
••Financial RepressionFinancial Repression
––Extensive RegulationsExtensive Regulations
––Administered Interest ratesAdministered Interest rates
––Directed Credit ProgrammesDirected Credit Programmes
––Weak Banking StructureWeak Banking Structure
––Lack of Proper Accounting & Risk management systemsLack of Proper Accounting & Risk management systems
––Lack of transparency in operationsLack of transparency in operations
Lion in jungle
vs
lion in cage
September 9, 2009
The financial Sector Reforms
5
••Financial RepressionFinancial Repression
––Extensive RegulationsExtensive Regulations
––Administered Interest ratesAdministered Interest rates
––Directed Credit ProgrammesDirected Credit Programmes
––Weak Banking StructureWeak Banking Structure
––Lack of Proper Accounting & Risk management systemsLack of Proper Accounting & Risk management systems
––Lack of transparency in operationsLack of transparency in operations
••Financial RepressionFinancial Repression
––Extensive RegulationsExtensive Regulations
––Administered Interest ratesAdministered Interest rates
––Directed Credit ProgrammesDirected Credit Programmes
––Weak Banking StructureWeak Banking Structure
––Lack of Proper Accounting & Risk management systemsLack of Proper Accounting & Risk management systems
––Lack of transparency in operationsLack of transparency in operations
Lion in jungle
vs
lion in cage
September 9, 2009
The financial Sector Reforms
5
••Financial RepressionFinancial Repression
––Extensive RegulationsExtensive Regulations
––Administered Interest ratesAdministered Interest rates
––Directed Credit ProgrammesDirected Credit Programmes
––Weak Banking StructureWeak Banking Structure
––Lack of Proper Accounting & Risk management systemsLack of Proper Accounting & Risk management systems
––Lack of transparency in operationsLack of transparency in operations
In early 1990s…In early 1990s…
––PrePre--emption of resources from the banking system by theemption of resources from the banking system by the
government to finance its fiscal deficitgovernment to finance its fiscal deficit
––Excessive structural and micro regulation that inhibited financialExcessive structural and micro regulation that inhibited financial
innovation and increased transaction costsinnovation and increased transaction costs
––Relatively inadequate level of prudential regulation in theRelatively inadequate level of prudential regulation in the
financial sectorfinancial sector
––Poorly developed debt and money marketsPoorly developed debt and money markets
––Outdated (often primitive) technological and institutionalOutdated (often primitive) technological and institutional
structures that made the capital markets and the rest of thestructures that made the capital markets and the rest of the
financial system highly inefficient.financial system highly inefficient.
September 9, 2009
The financial Sector Reforms
6
––PrePre--emption of resources from the banking system by theemption of resources from the banking system by the
government to finance its fiscal deficitgovernment to finance its fiscal deficit
––Excessive structural and micro regulation that inhibited financialExcessive structural and micro regulation that inhibited financial
innovation and increased transaction costsinnovation and increased transaction costs
––Relatively inadequate level of prudential regulation in theRelatively inadequate level of prudential regulation in the
financial sectorfinancial sector
––Poorly developed debt and money marketsPoorly developed debt and money markets
––Outdated (often primitive) technological and institutionalOutdated (often primitive) technological and institutional
structures that made the capital markets and the rest of thestructures that made the capital markets and the rest of the
financial system highly inefficient.financial system highly inefficient.
––PrePre--emption of resources from the banking system by theemption of resources from the banking system by the
government to finance its fiscal deficitgovernment to finance its fiscal deficit
––Excessive structural and micro regulation that inhibited financialExcessive structural and micro regulation that inhibited financial
innovation and increased transaction costsinnovation and increased transaction costs
––Relatively inadequate level of prudential regulation in theRelatively inadequate level of prudential regulation in the
financial sectorfinancial sector
––Poorly developed debt and money marketsPoorly developed debt and money markets
––Outdated (often primitive) technological and institutionalOutdated (often primitive) technological and institutional
structures that made the capital markets and the rest of thestructures that made the capital markets and the rest of the
financial system highly inefficient.financial system highly inefficient.
September 9, 2009
The financial Sector Reforms
6
––PrePre--emption of resources from the banking system by theemption of resources from the banking system by the
government to finance its fiscal deficitgovernment to finance its fiscal deficit
––Excessive structural and micro regulation that inhibited financialExcessive structural and micro regulation that inhibited financial
innovation and increased transaction costsinnovation and increased transaction costs
––Relatively inadequate level of prudential regulation in theRelatively inadequate level of prudential regulation in the
financial sectorfinancial sector
––Poorly developed debt and money marketsPoorly developed debt and money markets
––Outdated (often primitive) technological and institutionalOutdated (often primitive) technological and institutional
structures that made the capital markets and the rest of thestructures that made the capital markets and the rest of the
financial system highly inefficient.financial system highly inefficient.
Resulting into …Resulting into …
••Government regulated the price at which firms could issue equity,Government regulated the price at which firms could issue equity,
the rate of interest which they could offer on their bonds, and thethe rate of interest which they could offer on their bonds, and the
debt equity ratio that was permissible in different Industriesdebt equity ratio that was permissible in different Industries
••Working capital management was even more constrained withWorking capital management was even more constrained with
detailed regulations on how much inventory the firms could carrydetailed regulations on how much inventory the firms could carry
or how much credit they could give to their customers.or how much credit they could give to their customers.
••Working capital was financed almost entirely by banks at interestWorking capital was financed almost entirely by banks at interest
rates laid down by the central bankrates laid down by the central bank
••Working capital finance was related more to the credit need of theWorking capital finance was related more to the credit need of the
borrower than to creditworthinessborrower than to creditworthiness
September 9, 2009
The financial Sector Reforms
7
••Government regulated the price at which firms could issue equity,Government regulated the price at which firms could issue equity,
the rate of interest which they could offer on their bonds, and thethe rate of interest which they could offer on their bonds, and the
debt equity ratio that was permissible in different Industriesdebt equity ratio that was permissible in different Industries
••Working capital management was even more constrained withWorking capital management was even more constrained with
detailed regulations on how much inventory the firms could carrydetailed regulations on how much inventory the firms could carry
or how much credit they could give to their customers.or how much credit they could give to their customers.
••Working capital was financed almost entirely by banks at interestWorking capital was financed almost entirely by banks at interest
rates laid down by the central bankrates laid down by the central bank
••Working capital finance was related more to the credit need of theWorking capital finance was related more to the credit need of the
borrower than to creditworthinessborrower than to creditworthiness
••Government regulated the price at which firms could issue equity,Government regulated the price at which firms could issue equity,
the rate of interest which they could offer on their bonds, and thethe rate of interest which they could offer on their bonds, and the
debt equity ratio that was permissible in different Industriesdebt equity ratio that was permissible in different Industries
••Working capital management was even more constrained withWorking capital management was even more constrained with
detailed regulations on how much inventory the firms could carrydetailed regulations on how much inventory the firms could carry
or how much credit they could give to their customers.or how much credit they could give to their customers.
••Working capital was financed almost entirely by banks at interestWorking capital was financed almost entirely by banks at interest
rates laid down by the central bankrates laid down by the central bank
••Working capital finance was related more to the credit need of theWorking capital finance was related more to the credit need of the
borrower than to creditworthinessborrower than to creditworthiness
September 9, 2009
The financial Sector Reforms
7
••Government regulated the price at which firms could issue equity,Government regulated the price at which firms could issue equity,
the rate of interest which they could offer on their bonds, and thethe rate of interest which they could offer on their bonds, and the
debt equity ratio that was permissible in different Industriesdebt equity ratio that was permissible in different Industries
••Working capital management was even more constrained withWorking capital management was even more constrained with
detailed regulations on how much inventory the firms could carrydetailed regulations on how much inventory the firms could carry
or how much credit they could give to their customers.or how much credit they could give to their customers.
••Working capital was financed almost entirely by banks at interestWorking capital was financed almost entirely by banks at interest
rates laid down by the central bankrates laid down by the central bank
••Working capital finance was related more to the credit need of theWorking capital finance was related more to the credit need of the
borrower than to creditworthinessborrower than to creditworthiness
… and …… and …
••Volatility was not something that most finance managers worriedVolatility was not something that most finance managers worried
about or needed to.about or needed to.
––The exchange rate of the rupee changed predictably and almostThe exchange rate of the rupee changed predictably and almost
imperceptiblyimperceptibly
––Administered interest rates were changed infrequently and theAdministered interest rates were changed infrequently and the
changes too were usually quite smallchanges too were usually quite small
••Financial genius consisted largely of finding one’s way through theFinancial genius consisted largely of finding one’s way through the
regulatory maze, exploiting loopholes wherever they existed and aboveregulatory maze, exploiting loopholes wherever they existed and above
all cultivating relationships with those officials in the banks andall cultivating relationships with those officials in the banks and
institutions who had some discretionary powers.institutions who had some discretionary powers.
••Even an overnight cash surplus could be parked in the overdraftEven an overnight cash surplus could be parked in the overdraft
account where it could earn (or rather save) interest at the firm’saccount where it could earn (or rather save) interest at the firm’s
borrowing rate.borrowing rate.
September 9, 2009
The financial Sector Reforms
8
••Volatility was not something that most finance managers worriedVolatility was not something that most finance managers worried
about or needed to.about or needed to.
––The exchange rate of the rupee changed predictably and almostThe exchange rate of the rupee changed predictably and almost
imperceptiblyimperceptibly
––Administered interest rates were changed infrequently and theAdministered interest rates were changed infrequently and the
changes too were usually quite smallchanges too were usually quite small
••Financial genius consisted largely of finding one’s way through theFinancial genius consisted largely of finding one’s way through the
regulatory maze, exploiting loopholes wherever they existed and aboveregulatory maze, exploiting loopholes wherever they existed and above
all cultivating relationships with those officials in the banks andall cultivating relationships with those officials in the banks and
institutions who had some discretionary powers.institutions who had some discretionary powers.
••Even an overnight cash surplus could be parked in the overdraftEven an overnight cash surplus could be parked in the overdraft
account where it could earn (or rather save) interest at the firm’saccount where it could earn (or rather save) interest at the firm’s
borrowing rate.borrowing rate.
••Volatility was not something that most finance managers worriedVolatility was not something that most finance managers worried
about or needed to.about or needed to.
––The exchange rate of the rupee changed predictably and almostThe exchange rate of the rupee changed predictably and almost
imperceptiblyimperceptibly
––Administered interest rates were changed infrequently and theAdministered interest rates were changed infrequently and the
changes too were usually quite smallchanges too were usually quite small
••Financial genius consisted largely of finding one’s way through theFinancial genius consisted largely of finding one’s way through the
regulatory maze, exploiting loopholes wherever they existed and aboveregulatory maze, exploiting loopholes wherever they existed and above
all cultivating relationships with those officials in the banks andall cultivating relationships with those officials in the banks and
institutions who had some discretionary powers.institutions who had some discretionary powers.
••Even an overnight cash surplus could be parked in the overdraftEven an overnight cash surplus could be parked in the overdraft
account where it could earn (or rather save) interest at the firm’saccount where it could earn (or rather save) interest at the firm’s
borrowing rate.borrowing rate.
September 9, 2009
The financial Sector Reforms
8
••Volatility was not something that most finance managers worriedVolatility was not something that most finance managers worried
about or needed to.about or needed to.
––The exchange rate of the rupee changed predictably and almostThe exchange rate of the rupee changed predictably and almost
imperceptiblyimperceptibly
––Administered interest rates were changed infrequently and theAdministered interest rates were changed infrequently and the
changes too were usually quite smallchanges too were usually quite small
••Financial genius consisted largely of finding one’s way through theFinancial genius consisted largely of finding one’s way through the
regulatory maze, exploiting loopholes wherever they existed and aboveregulatory maze, exploiting loopholes wherever they existed and above
all cultivating relationships with those officials in the banks andall cultivating relationships with those officials in the banks and
institutions who had some discretionary powers.institutions who had some discretionary powers.
••Even an overnight cash surplus could be parked in the overdraftEven an overnight cash surplus could be parked in the overdraft
account where it could earn (or rather save) interest at the firm’saccount where it could earn (or rather save) interest at the firm’s
borrowing rate.borrowing rate.
At larger level …At larger level …
••The balance of payments crisis that threatened the internationalThe balance of payments crisis that threatened the international
credibility of the country and pushed it to the brink of defaultcredibility of the country and pushed it to the brink of default
•The grave threat of insolvency confronting the banking system whichThe grave threat of insolvency confronting the banking system which
had for years concealed its problems with the help of defectivehad for years concealed its problems with the help of defective
accounting policies.accounting policies.
••Hindered efficient allocation of resourcesHindered efficient allocation of resources
September 9, 2009
The financial Sector Reforms
9
••The balance of payments crisis that threatened the internationalThe balance of payments crisis that threatened the international
credibility of the country and pushed it to the brink of defaultcredibility of the country and pushed it to the brink of default
•The grave threat of insolvency confronting the banking system whichThe grave threat of insolvency confronting the banking system which
had for years concealed its problems with the help of defectivehad for years concealed its problems with the help of defective
accounting policies.accounting policies.
••Hindered efficient allocation of resourcesHindered efficient allocation of resources
September 9, 2009
The financial Sector Reforms
9
Major Contours of ReformsMajor Contours of Reforms
••Removal of existing financial repressionRemoval of existing financial repression
••Creation of an efficient, productive and profitable financial sectorCreation of an efficient, productive and profitable financial sector
••Enabling the process of price discovery by the market determination ofEnabling the process of price discovery by the market determination of
interest rates that improves allocative efficiency of resourcesinterest rates that improves allocative efficiency of resources
••Providing operational and functional autonomy to institutionsProviding operational and functional autonomy to institutions
••Preparing the financial system for increasing international competitionPreparing the financial system for increasing international competition
••Opening the external sector in a a calibrated mannerOpening the external sector in a a calibrated manner
••Promoting financial stability in the wake of domestic and externalPromoting financial stability in the wake of domestic and external
shocksshocks
September 9, 2009
The financial Sector Reforms
10
••Removal of existing financial repressionRemoval of existing financial repression
••Creation of an efficient, productive and profitable financial sectorCreation of an efficient, productive and profitable financial sector
••Enabling the process of price discovery by the market determination ofEnabling the process of price discovery by the market determination of
interest rates that improves allocative efficiency of resourcesinterest rates that improves allocative efficiency of resources
••Providing operational and functional autonomy to institutionsProviding operational and functional autonomy to institutions
••Preparing the financial system for increasing international competitionPreparing the financial system for increasing international competition
••Opening the external sector in a a calibrated mannerOpening the external sector in a a calibrated manner
••Promoting financial stability in the wake of domestic and externalPromoting financial stability in the wake of domestic and external
shocksshocks
••Removal of existing financial repressionRemoval of existing financial repression
••Creation of an efficient, productive and profitable financial sectorCreation of an efficient, productive and profitable financial sector
••Enabling the process of price discovery by the market determination ofEnabling the process of price discovery by the market determination of
interest rates that improves allocative efficiency of resourcesinterest rates that improves allocative efficiency of resources
••Providing operational and functional autonomy to institutionsProviding operational and functional autonomy to institutions
••Preparing the financial system for increasing international competitionPreparing the financial system for increasing international competition
••Opening the external sector in a a calibrated mannerOpening the external sector in a a calibrated manner
••Promoting financial stability in the wake of domestic and externalPromoting financial stability in the wake of domestic and external
shocksshocks
September 9, 2009
The financial Sector Reforms
10
••Removal of existing financial repressionRemoval of existing financial repression
••Creation of an efficient, productive and profitable financial sectorCreation of an efficient, productive and profitable financial sector
••Enabling the process of price discovery by the market determination ofEnabling the process of price discovery by the market determination of
interest rates that improves allocative efficiency of resourcesinterest rates that improves allocative efficiency of resources
••Providing operational and functional autonomy to institutionsProviding operational and functional autonomy to institutions
••Preparing the financial system for increasing international competitionPreparing the financial system for increasing international competition
••Opening the external sector in a a calibrated mannerOpening the external sector in a a calibrated manner
••Promoting financial stability in the wake of domestic and externalPromoting financial stability in the wake of domestic and external
shocksshocks
Two phased ReformsTwo phased Reforms
••First Generation (Early 1990):First Generation (Early 1990):--II
stst
Phase:Phase:
––Creating an efficient, productive and profitable financialCreating an efficient, productive and profitable financial
sector to function with operational flexibility andsector to function with operational flexibility and
functional autonomyfunctional autonomy
••Second Generation (Mid 1990 …) :Second Generation (Mid 1990 …) :--IIII
ndnd
phasephase
––Strengthening the financial system and introducingStrengthening the financial system and introducing
structural improvementsstructural improvements
September 9, 2009
The financial Sector Reforms
11
••First Generation (Early 1990):First Generation (Early 1990):--II
stst
Phase:Phase:
––Creating an efficient, productive and profitable financialCreating an efficient, productive and profitable financial
sector to function with operational flexibility andsector to function with operational flexibility and
functional autonomyfunctional autonomy
••Second Generation (Mid 1990 …) :Second Generation (Mid 1990 …) :--IIII
ndnd
phasephase
––Strengthening the financial system and introducingStrengthening the financial system and introducing
structural improvementsstructural improvements
••First Generation (Early 1990):First Generation (Early 1990):--II
stst
Phase:Phase:
––Creating an efficient, productive and profitable financialCreating an efficient, productive and profitable financial
sector to function with operational flexibility andsector to function with operational flexibility and
functional autonomyfunctional autonomy
••Second Generation (Mid 1990 …) :Second Generation (Mid 1990 …) :--IIII
ndnd
phasephase
––Strengthening the financial system and introducingStrengthening the financial system and introducing
structural improvementsstructural improvements
September 9, 2009
The financial Sector Reforms
11
••First Generation (Early 1990):First Generation (Early 1990):--II
stst
Phase:Phase:
––Creating an efficient, productive and profitable financialCreating an efficient, productive and profitable financial
sector to function with operational flexibility andsector to function with operational flexibility and
functional autonomyfunctional autonomy
••Second Generation (Mid 1990 …) :Second Generation (Mid 1990 …) :--IIII
ndnd
phasephase
––Strengthening the financial system and introducingStrengthening the financial system and introducing
structural improvementsstructural improvements
Major Sectors of ReformsMajor Sectors of Reforms
••Banking SectorBanking Sector
••Monetary PolicyMonetary Policy
••Financial MarketsFinancial Markets
••Forex MarketForex Market
September 9, 2009
The financial Sector Reforms
12
••Banking SectorBanking Sector
••Monetary PolicyMonetary Policy
••Financial MarketsFinancial Markets
••Forex MarketForex Market
••Banking SectorBanking Sector
••Monetary PolicyMonetary Policy
••Financial MarketsFinancial Markets
••Forex MarketForex Market
September 9, 2009
The financial Sector Reforms
12
••Banking SectorBanking Sector
••Monetary PolicyMonetary Policy
••Financial MarketsFinancial Markets
••Forex MarketForex Market
Banking Sector ReformsBanking Sector Reforms
••CompetitionCompetitionEnhancingEnhancingMeasuresMeasures
••Measures Enhancing Role of Market ForcesMeasures Enhancing Role of Market Forces
••Prudential MeasuresPrudential Measures
••Institutional and Legal MeasuresInstitutional and Legal Measures
••Supervisory MeasuresSupervisory Measures
••Technology Related MeasuresTechnology Related Measures
September 9, 2009
The financial Sector Reforms
13
••CompetitionCompetitionEnhancingEnhancingMeasuresMeasures
••Measures Enhancing Role of Market ForcesMeasures Enhancing Role of Market Forces
••Prudential MeasuresPrudential Measures
••Institutional and Legal MeasuresInstitutional and Legal Measures
••Supervisory MeasuresSupervisory Measures
••Technology Related MeasuresTechnology Related Measures
••CompetitionCompetitionEnhancingEnhancingMeasuresMeasures
••Measures Enhancing Role of Market ForcesMeasures Enhancing Role of Market Forces
••Prudential MeasuresPrudential Measures
••Institutional and Legal MeasuresInstitutional and Legal Measures
••Supervisory MeasuresSupervisory Measures
••Technology Related MeasuresTechnology Related Measures
September 9, 2009
The financial Sector Reforms
13
••CompetitionCompetitionEnhancingEnhancingMeasuresMeasures
••Measures Enhancing Role of Market ForcesMeasures Enhancing Role of Market Forces
••Prudential MeasuresPrudential Measures
••Institutional and Legal MeasuresInstitutional and Legal Measures
••Supervisory MeasuresSupervisory Measures
••Technology Related MeasuresTechnology Related Measures
Banking Sector Reforms :Banking Sector Reforms :
Competition Enhancing MeasuresCompetition Enhancing Measures
••Operational autonomy to Public Sector banksOperational autonomy to Public Sector banks
••Reduction in public ownership of public sector banksReduction in public ownership of public sector banks
––Can raise capital from equity market up to 49% of paid up capitalCan raise capital from equity market up to 49% of paid up capital
••Transparent Norms related to entry, mergers /amalgamation andTransparent Norms related to entry, mergers /amalgamation and
governance issues for Indian private sector, foreign and jointgovernance issues for Indian private sector, foreign and joint--ventureventure
banks, NBFC’s and insurance companiesbanks, NBFC’s and insurance companies
••Permission for foreign investment in the financial sector in the form ofPermission for foreign investment in the financial sector in the form of
Foreign Direct Investment (FDI) as well as portfolio investmentForeign Direct Investment (FDI) as well as portfolio investment
••Permission to banks to diversify product portfolio and businessPermission to banks to diversify product portfolio and business
activitiesactivities
September 9, 2009
The financial Sector Reforms
14
••Operational autonomy to Public Sector banksOperational autonomy to Public Sector banks
••Reduction in public ownership of public sector banksReduction in public ownership of public sector banks
––Can raise capital from equity market up to 49% of paid up capitalCan raise capital from equity market up to 49% of paid up capital
••Transparent Norms related to entry, mergers /amalgamation andTransparent Norms related to entry, mergers /amalgamation and
governance issues for Indian private sector, foreign and jointgovernance issues for Indian private sector, foreign and joint--ventureventure
banks, NBFC’s and insurance companiesbanks, NBFC’s and insurance companies
••Permission for foreign investment in the financial sector in the form ofPermission for foreign investment in the financial sector in the form of
Foreign Direct Investment (FDI) as well as portfolio investmentForeign Direct Investment (FDI) as well as portfolio investment
••Permission to banks to diversify product portfolio and businessPermission to banks to diversify product portfolio and business
activitiesactivities
Competition Enhancing MeasuresCompetition Enhancing Measures
••Operational autonomy to Public Sector banksOperational autonomy to Public Sector banks
••Reduction in public ownership of public sector banksReduction in public ownership of public sector banks
––Can raise capital from equity market up to 49% of paid up capitalCan raise capital from equity market up to 49% of paid up capital
••Transparent Norms related to entry, mergers /amalgamation andTransparent Norms related to entry, mergers /amalgamation and
governance issues for Indian private sector, foreign and jointgovernance issues for Indian private sector, foreign and joint--ventureventure
banks, NBFC’s and insurance companiesbanks, NBFC’s and insurance companies
••Permission for foreign investment in the financial sector in the form ofPermission for foreign investment in the financial sector in the form of
Foreign Direct Investment (FDI) as well as portfolio investmentForeign Direct Investment (FDI) as well as portfolio investment
••Permission to banks to diversify product portfolio and businessPermission to banks to diversify product portfolio and business
activitiesactivities
September 9, 2009
The financial Sector Reforms
14
••Operational autonomy to Public Sector banksOperational autonomy to Public Sector banks
••Reduction in public ownership of public sector banksReduction in public ownership of public sector banks
––Can raise capital from equity market up to 49% of paid up capitalCan raise capital from equity market up to 49% of paid up capital
••Transparent Norms related to entry, mergers /amalgamation andTransparent Norms related to entry, mergers /amalgamation and
governance issues for Indian private sector, foreign and jointgovernance issues for Indian private sector, foreign and joint--ventureventure
banks, NBFC’s and insurance companiesbanks, NBFC’s and insurance companies
••Permission for foreign investment in the financial sector in the form ofPermission for foreign investment in the financial sector in the form of
Foreign Direct Investment (FDI) as well as portfolio investmentForeign Direct Investment (FDI) as well as portfolio investment
••Permission to banks to diversify product portfolio and businessPermission to banks to diversify product portfolio and business
activitiesactivities
Banking Sector Reforms :Banking Sector Reforms :
Measures Enhancing Role of Market ForcesMeasures Enhancing Role of Market Forces
••Sharp reduction in preSharp reduction in pre--emption through reserve requirementemption through reserve requirement
••Market determined pricing for government securitiesMarket determined pricing for government securities
••Disbanding of administered interest ratesDisbanding of administered interest rates
••Enhanced transparency and disclosure norms to facilitate marketEnhanced transparency and disclosure norms to facilitate market
disciplinediscipline
••Introduction of pure interIntroduction of pure inter--bank call money market and developingbank call money market and developing
markets for securitized assetsmarkets for securitized assets
••AuctionAuction--based reposbased repos--reverse repos for shortreverse repos for short--term liquidityterm liquidity
management and Improved payments and settlementmanagement and Improved payments and settlement
mechanismmechanism
September 9, 2009
The financial Sector Reforms
15
••Sharp reduction in preSharp reduction in pre--emption through reserve requirementemption through reserve requirement
••Market determined pricing for government securitiesMarket determined pricing for government securities
••Disbanding of administered interest ratesDisbanding of administered interest rates
••Enhanced transparency and disclosure norms to facilitate marketEnhanced transparency and disclosure norms to facilitate market
disciplinediscipline
••Introduction of pure interIntroduction of pure inter--bank call money market and developingbank call money market and developing
markets for securitized assetsmarkets for securitized assets
••AuctionAuction--based reposbased repos--reverse repos for shortreverse repos for short--term liquidityterm liquidity
management and Improved payments and settlementmanagement and Improved payments and settlement
mechanismmechanism
Measures Enhancing Role of Market ForcesMeasures Enhancing Role of Market Forces
••Sharp reduction in preSharp reduction in pre--emption through reserve requirementemption through reserve requirement
••Market determined pricing for government securitiesMarket determined pricing for government securities
••Disbanding of administered interest ratesDisbanding of administered interest rates
••Enhanced transparency and disclosure norms to facilitate marketEnhanced transparency and disclosure norms to facilitate market
disciplinediscipline
••Introduction of pure interIntroduction of pure inter--bank call money market and developingbank call money market and developing
markets for securitized assetsmarkets for securitized assets
••AuctionAuction--based reposbased repos--reverse repos for shortreverse repos for short--term liquidityterm liquidity
management and Improved payments and settlementmanagement and Improved payments and settlement
mechanismmechanism
September 9, 2009
The financial Sector Reforms
15
••Sharp reduction in preSharp reduction in pre--emption through reserve requirementemption through reserve requirement
••Market determined pricing for government securitiesMarket determined pricing for government securities
••Disbanding of administered interest ratesDisbanding of administered interest rates
••Enhanced transparency and disclosure norms to facilitate marketEnhanced transparency and disclosure norms to facilitate market
disciplinediscipline
••Introduction of pure interIntroduction of pure inter--bank call money market and developingbank call money market and developing
markets for securitized assetsmarkets for securitized assets
••AuctionAuction--based reposbased repos--reverse repos for shortreverse repos for short--term liquidityterm liquidity
management and Improved payments and settlementmanagement and Improved payments and settlement
mechanismmechanism
Banking Sector Reforms :Banking Sector Reforms :
Prudential MeasuresPrudential Measures
•Introduction and phased implementation of international best practices
and norms related to:-CRAR, Income recognition, Provisioning and
Exposure
•Strengthen risk management :-
–Assignment of risk-weights to various asset classes
–Norms on connected lending, risk concentration
–Application of marked-to-market principle for investment portfolio and
limits on deployment of fund in sensitive activities
–'Know Your Customer‘ norms
–'Anti Money Laundering' guidelines
–Graded provisioning for NPA’s
–Capital charge for market risk
•Guidelines for ownership and governance, securitization and debt
restructuring mechanisms norms, etc
September 9, 2009
The financial Sector Reforms
16
•Introduction and phased implementation of international best practices
and norms related to:-CRAR, Income recognition, Provisioning and
Exposure
•Strengthen risk management :-
–Assignment of risk-weights to various asset classes
–Norms on connected lending, risk concentration
–Application of marked-to-market principle for investment portfolio and
limits on deployment of fund in sensitive activities
–'Know Your Customer‘ norms
–'Anti Money Laundering' guidelines
–Graded provisioning for NPA’s
–Capital charge for market risk
•Guidelines for ownership and governance, securitization and debt
restructuring mechanisms norms, etc
Prudential MeasuresPrudential Measures
•Introduction and phased implementation of international best practices
and norms related to:-CRAR, Income recognition, Provisioning and
Exposure
•Strengthen risk management :-
–Assignment of risk-weights to various asset classes
–Norms on connected lending, risk concentration
–Application of marked-to-market principle for investment portfolio and
limits on deployment of fund in sensitive activities
–'Know Your Customer‘ norms
–'Anti Money Laundering' guidelines
–Graded provisioning for NPA’s
–Capital charge for market risk
•Guidelines for ownership and governance, securitization and debt
restructuring mechanisms norms, etc
September 9, 2009
The financial Sector Reforms
16
•Introduction and phased implementation of international best practices
and norms related to:-CRAR, Income recognition, Provisioning and
Exposure
•Strengthen risk management :-
–Assignment of risk-weights to various asset classes
–Norms on connected lending, risk concentration
–Application of marked-to-market principle for investment portfolio and
limits on deployment of fund in sensitive activities
–'Know Your Customer‘ norms
–'Anti Money Laundering' guidelines
–Graded provisioning for NPA’s
–Capital charge for market risk
•Guidelines for ownership and governance, securitization and debt
restructuring mechanisms norms, etc
Banking Sector Reforms :Banking Sector Reforms :
Prudential Measures:Prudential Measures:--Roadmap for Basel IIRoadmap for Basel II
••Implementing Basel II with effect from March 31, 2007Implementing Basel II with effect from March 31, 2007
••Standardized Approach for credit risk and Basic IndicatorStandardized Approach for credit risk and Basic Indicator
Approach for operational risk (First Phase)Approach for operational risk (First Phase)
••Migrate to the Internal Rating Based (IRB) Approach afterMigrate to the Internal Rating Based (IRB) Approach after
adequate skills are developed (Second Phase)adequate skills are developed (Second Phase)
••Basel II will require more capital for banks in IndiaBasel II will require more capital for banks in India
––Presently CRAR is over 12 per centPresently CRAR is over 12 per cent
––New and Innovative Funding optionsNew and Innovative Funding options
?v?vPerpetual debt instruments and nonPerpetual debt instruments and non--
cumulative preference sharescumulative preference shares
?v?vRedeemable cumulative preference sharesRedeemable cumulative preference shares
and hybrid debt instrumentsand hybrid debt instruments
September 9, 2009
The financial Sector Reforms
17
••Implementing Basel II with effect from March 31, 2007Implementing Basel II with effect from March 31, 2007
••Standardized Approach for credit risk and Basic IndicatorStandardized Approach for credit risk and Basic Indicator
Approach for operational risk (First Phase)Approach for operational risk (First Phase)
••Migrate to the Internal Rating Based (IRB) Approach afterMigrate to the Internal Rating Based (IRB) Approach after
adequate skills are developed (Second Phase)adequate skills are developed (Second Phase)
••Basel II will require more capital for banks in IndiaBasel II will require more capital for banks in India
––Presently CRAR is over 12 per centPresently CRAR is over 12 per cent
––New and Innovative Funding optionsNew and Innovative Funding options
?v?vPerpetual debt instruments and nonPerpetual debt instruments and non--
cumulative preference sharescumulative preference shares
?v?vRedeemable cumulative preference sharesRedeemable cumulative preference shares
and hybrid debt instrumentsand hybrid debt instruments
Prudential Measures:Prudential Measures:--Roadmap for Basel IIRoadmap for Basel II
••Implementing Basel II with effect from March 31, 2007Implementing Basel II with effect from March 31, 2007
••Standardized Approach for credit risk and Basic IndicatorStandardized Approach for credit risk and Basic Indicator
Approach for operational risk (First Phase)Approach for operational risk (First Phase)
••Migrate to the Internal Rating Based (IRB) Approach afterMigrate to the Internal Rating Based (IRB) Approach after
adequate skills are developed (Second Phase)adequate skills are developed (Second Phase)
••Basel II will require more capital for banks in IndiaBasel II will require more capital for banks in India
––Presently CRAR is over 12 per centPresently CRAR is over 12 per cent
––New and Innovative Funding optionsNew and Innovative Funding options
?v?vPerpetual debt instruments and nonPerpetual debt instruments and non--
cumulative preference sharescumulative preference shares
?v?vRedeemable cumulative preference sharesRedeemable cumulative preference shares
and hybrid debt instrumentsand hybrid debt instruments
September 9, 2009
The financial Sector Reforms
17
••Implementing Basel II with effect from March 31, 2007Implementing Basel II with effect from March 31, 2007
••Standardized Approach for credit risk and Basic IndicatorStandardized Approach for credit risk and Basic Indicator
Approach for operational risk (First Phase)Approach for operational risk (First Phase)
••Migrate to the Internal Rating Based (IRB) Approach afterMigrate to the Internal Rating Based (IRB) Approach after
adequate skills are developed (Second Phase)adequate skills are developed (Second Phase)
••Basel II will require more capital for banks in IndiaBasel II will require more capital for banks in India
––Presently CRAR is over 12 per centPresently CRAR is over 12 per cent
––New and Innovative Funding optionsNew and Innovative Funding options
?v?vPerpetual debt instruments and nonPerpetual debt instruments and non--
cumulative preference sharescumulative preference shares
?v?vRedeemable cumulative preference sharesRedeemable cumulative preference shares
and hybrid debt instrumentsand hybrid debt instruments
Banking Sector Reforms :Banking Sector Reforms :
Institutional and Legal MeasuresInstitutional and Legal Measures
•Setting up of Lok Adalats (people’s courts), debt recovery tribunals,
asset reconstruction companies, settlement advisory committees,
corporate debt restructuring mechanism, etc.
•Promulgation of Securitization and Reconstruction of Financial Assets
and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its
subsequent amendment to ensure creditor rights
•Setting up of Credit Information Bureau of India Limited (CIBIL) for
information sharing on defaulters as also other borrowers
•Setting up of Clearing Corporation of India Limited (CCIL) to act as
central counter party for facilitating payments and settlement system
relating to fixed income securities and money market instruments
September 9, 2009
The financial Sector Reforms
18
•Setting up of Lok Adalats (people’s courts), debt recovery tribunals,
asset reconstruction companies, settlement advisory committees,
corporate debt restructuring mechanism, etc.
•Promulgation of Securitization and Reconstruction of Financial Assets
and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its
subsequent amendment to ensure creditor rights
•Setting up of Credit Information Bureau of India Limited (CIBIL) for
information sharing on defaulters as also other borrowers
•Setting up of Clearing Corporation of India Limited (CCIL) to act as
central counter party for facilitating payments and settlement system
relating to fixed income securities and money market instruments
Institutional and Legal MeasuresInstitutional and Legal Measures
•Setting up of Lok Adalats (people’s courts), debt recovery tribunals,
asset reconstruction companies, settlement advisory committees,
corporate debt restructuring mechanism, etc.
•Promulgation of Securitization and Reconstruction of Financial Assets
and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its
subsequent amendment to ensure creditor rights
•Setting up of Credit Information Bureau of India Limited (CIBIL) for
information sharing on defaulters as also other borrowers
•Setting up of Clearing Corporation of India Limited (CCIL) to act as
central counter party for facilitating payments and settlement system
relating to fixed income securities and money market instruments
September 9, 2009
The financial Sector Reforms
18
•Setting up of Lok Adalats (people’s courts), debt recovery tribunals,
asset reconstruction companies, settlement advisory committees,
corporate debt restructuring mechanism, etc.
•Promulgation of Securitization and Reconstruction of Financial Assets
and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its
subsequent amendment to ensure creditor rights
•Setting up of Credit Information Bureau of India Limited (CIBIL) for
information sharing on defaulters as also other borrowers
•Setting up of Clearing Corporation of India Limited (CCIL) to act as
central counter party for facilitating payments and settlement system
relating to fixed income securities and money market instruments
Banking Sector Reforms :Banking Sector Reforms :
Supervisory MeasuresSupervisory Measures
•Board for Financial Supervision as the apex supervisory authority for
Risk based supervision
•Introduction ofCAMELSsupervisory rating system
(i.e., capital adequacy, asset quality, management, earning,
liquidity and system and control).
•Consolidated supervision of financial conglomerates
•Recasting of the role of statutory auditors with increased internal
control through strengthening of internal audit
•Strengthening corporate governance
•Fit and proper tests for directors along-with enhanced due diligence on
important shareholders
September 9, 2009
The financial Sector Reforms
19
•Board for Financial Supervision as the apex supervisory authority for
Risk based supervision
•Introduction ofCAMELSsupervisory rating system
(i.e., capital adequacy, asset quality, management, earning,
liquidity and system and control).
•Consolidated supervision of financial conglomerates
•Recasting of the role of statutory auditors with increased internal
control through strengthening of internal audit
•Strengthening corporate governance
•Fit and proper tests for directors along-with enhanced due diligence on
important shareholders
Supervisory MeasuresSupervisory Measures
•Board for Financial Supervision as the apex supervisory authority for
Risk based supervision
•Introduction ofCAMELSsupervisory rating system
(i.e., capital adequacy, asset quality, management, earning,
liquidity and system and control).
•Consolidated supervision of financial conglomerates
•Recasting of the role of statutory auditors with increased internal
control through strengthening of internal audit
•Strengthening corporate governance
•Fit and proper tests for directors along-with enhanced due diligence on
important shareholders
September 9, 2009
The financial Sector Reforms
19
•Board for Financial Supervision as the apex supervisory authority for
Risk based supervision
•Introduction ofCAMELSsupervisory rating system
(i.e., capital adequacy, asset quality, management, earning,
liquidity and system and control).
•Consolidated supervision of financial conglomerates
•Recasting of the role of statutory auditors with increased internal
control through strengthening of internal audit
•Strengthening corporate governance
•Fit and proper tests for directors along-with enhanced due diligence on
important shareholders
Banking Sector Reforms :Banking Sector Reforms :
Technology Related MeasuresTechnology Related Measures
•INFINET as the communication backbone for the financial
sector
•Negotiated Dealing System (NDS) for screen-based trading in
government securities
•Real Time Gross Settlement (RTGS) System
True test of the success of the banking
reforms would be the extent of NPA’s
September 9, 2009
The financial Sector Reforms
20
•INFINET as the communication backbone for the financial
sector
•Negotiated Dealing System (NDS) for screen-based trading in
government securities
•Real Time Gross Settlement (RTGS) System
True test of the success of the banking
reforms would be the extent of NPA’s
Technology Related MeasuresTechnology Related Measures
•INFINET as the communication backbone for the financial
sector
•Negotiated Dealing System (NDS) for screen-based trading in
government securities
•Real Time Gross Settlement (RTGS) System
True test of the success of the banking
reforms would be the extent of NPA’s
September 9, 2009
The financial Sector Reforms
20
•INFINET as the communication backbone for the financial
sector
•Negotiated Dealing System (NDS) for screen-based trading in
government securities
•Real Time Gross Settlement (RTGS) System
True test of the success of the banking
reforms would be the extent of NPA’s
Monitory Policy ReformsMonitory Policy Reforms
•Objectives
•Instruments
•Developmental Measures
•Institutional Measures
September 9, 2009
The financial Sector Reforms
21
•Objectives
•Instruments
•Developmental Measures
•Institutional Measures
•Objectives
•Instruments
•Developmental Measures
•Institutional Measures
September 9, 2009
The financial Sector Reforms
21
•Objectives
•Instruments
•Developmental Measures
•Institutional Measures
Monitory Policy Reforms :Monitory Policy Reforms :
ObjectivesObjectives
•Twin objectives of “Maintaining price stability” and “Ensuring
availability of adequate credit to productive sectors
•Use of broad money (M2) as an intermediate target has been de-
emphasized and a multiple indicator approach has been adopted
•Development of multiple instruments to transmit liquidity and interest
rate signals in the short-term in a flexible and bi-directional manner
•Increase of the inter-linkage between various segments of the financial
market including money, government security and forex markets
September 9, 2009
The financial Sector Reforms
22
•Twin objectives of “Maintaining price stability” and “Ensuring
availability of adequate credit to productive sectors
•Use of broad money (M2) as an intermediate target has been de-
emphasized and a multiple indicator approach has been adopted
•Development of multiple instruments to transmit liquidity and interest
rate signals in the short-term in a flexible and bi-directional manner
•Increase of the inter-linkage between various segments of the financial
market including money, government security and forex markets
ObjectivesObjectives
•Twin objectives of “Maintaining price stability” and “Ensuring
availability of adequate credit to productive sectors
•Use of broad money (M2) as an intermediate target has been de-
emphasized and a multiple indicator approach has been adopted
•Development of multiple instruments to transmit liquidity and interest
rate signals in the short-term in a flexible and bi-directional manner
•Increase of the inter-linkage between various segments of the financial
market including money, government security and forex markets
September 9, 2009
The financial Sector Reforms
22
•Twin objectives of “Maintaining price stability” and “Ensuring
availability of adequate credit to productive sectors
•Use of broad money (M2) as an intermediate target has been de-
emphasized and a multiple indicator approach has been adopted
•Development of multiple instruments to transmit liquidity and interest
rate signals in the short-term in a flexible and bi-directional manner
•Increase of the inter-linkage between various segments of the financial
market including money, government security and forex markets
Monitory Policy Reforms :Monitory Policy Reforms :
Instruments:Instruments:Strategic Shift: From Direct to IndirectStrategic Shift: From Direct to Indirect
•Open market operations (OMO) to deal with overall market liquidity
situation especially those emanating from capital flows
•Introduction of Market Stabilization Scheme (MSS) as an additional
instrument to deal with enduring capital inflows without affecting
short-term liquidity management role of LAF
•Introduction of Liquidity Adjustment Facility (LAF), which operates
through repo and reverse repo auctions Liquidity Adjustment Facility
( LAF )
–To nudge overnight interest rates within a specified corridor.
–TO de-emphasize targeting of bank reserves and focus increasingly on
interest rates.
–reducing the cash reserve ratio (CRR) without loss of monetary control.
September 9, 2009
The financial Sector Reforms
23
•Open market operations (OMO) to deal with overall market liquidity
situation especially those emanating from capital flows
•Introduction of Market Stabilization Scheme (MSS) as an additional
instrument to deal with enduring capital inflows without affecting
short-term liquidity management role of LAF
•Introduction of Liquidity Adjustment Facility (LAF), which operates
through repo and reverse repo auctions Liquidity Adjustment Facility
( LAF )
–To nudge overnight interest rates within a specified corridor.
–TO de-emphasize targeting of bank reserves and focus increasingly on
interest rates.
–reducing the cash reserve ratio (CRR) without loss of monetary control.
Instruments:Instruments:Strategic Shift: From Direct to IndirectStrategic Shift: From Direct to Indirect
•Open market operations (OMO) to deal with overall market liquidity
situation especially those emanating from capital flows
•Introduction of Market Stabilization Scheme (MSS) as an additional
instrument to deal with enduring capital inflows without affecting
short-term liquidity management role of LAF
•Introduction of Liquidity Adjustment Facility (LAF), which operates
through repo and reverse repo auctions Liquidity Adjustment Facility
( LAF )
–To nudge overnight interest rates within a specified corridor.
–TO de-emphasize targeting of bank reserves and focus increasingly on
interest rates.
–reducing the cash reserve ratio (CRR) without loss of monetary control.
September 9, 2009
The financial Sector Reforms
23
•Open market operations (OMO) to deal with overall market liquidity
situation especially those emanating from capital flows
•Introduction of Market Stabilization Scheme (MSS) as an additional
instrument to deal with enduring capital inflows without affecting
short-term liquidity management role of LAF
•Introduction of Liquidity Adjustment Facility (LAF), which operates
through repo and reverse repo auctions Liquidity Adjustment Facility
( LAF )
–To nudge overnight interest rates within a specified corridor.
–TO de-emphasize targeting of bank reserves and focus increasingly on
interest rates.
–reducing the cash reserve ratio (CRR) without loss of monetary control.
LAF + OMO + MSS => FlexibilityLAF + OMO + MSS => Flexibility
Transition from direct instruments of monetary control
such as administered interest rate, reserve requirement,
selective capital control) to indirect instruments like open
market operations, purchase and repurchase of
government securities
•Advantages
–Certain dead weight loss for the system was saved.
–Greater flexibility in determining both the quantum of adjustment
as well as the rates by responding to the needs of the system on
a daily basis.
–Modulation of the supply of funds on a daily basis to meet day-
to-day liquidity mismatches.
–demand for funds are affected through policy rate changes.
–Stabilization of short-term money market rates.
September 9, 2009
The financial Sector Reforms
24
Transition from direct instruments of monetary control
such as administered interest rate, reserve requirement,
selective capital control) to indirect instruments like open
market operations, purchase and repurchase of
government securities
•Advantages
–Certain dead weight loss for the system was saved.
–Greater flexibility in determining both the quantum of adjustment
as well as the rates by responding to the needs of the system on
a daily basis.
–Modulation of the supply of funds on a daily basis to meet day-
to-day liquidity mismatches.
–demand for funds are affected through policy rate changes.
–Stabilization of short-term money market rates.
Transition from direct instruments of monetary control
such as administered interest rate, reserve requirement,
selective capital control) to indirect instruments like open
market operations, purchase and repurchase of
government securities
•Advantages
–Certain dead weight loss for the system was saved.
–Greater flexibility in determining both the quantum of adjustment
as well as the rates by responding to the needs of the system on
a daily basis.
–Modulation of the supply of funds on a daily basis to meet day-
to-day liquidity mismatches.
–demand for funds are affected through policy rate changes.
–Stabilization of short-term money market rates.
September 9, 2009
The financial Sector Reforms
24
Transition from direct instruments of monetary control
such as administered interest rate, reserve requirement,
selective capital control) to indirect instruments like open
market operations, purchase and repurchase of
government securities
•Advantages
–Certain dead weight loss for the system was saved.
–Greater flexibility in determining both the quantum of adjustment
as well as the rates by responding to the needs of the system on
a daily basis.
–Modulation of the supply of funds on a daily basis to meet day-
to-day liquidity mismatches.
–demand for funds are affected through policy rate changes.
–Stabilization of short-term money market rates.
Monitory Policy Reforms :Monitory Policy Reforms :
Developmental MeasuresDevelopmental Measures
•Discontinuation of automatic monetization through an agreement
between the Government and the Reserve Bank
•Amendment of Securities Contracts Regulation Act (SCRA), to create
the regulatory framework
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS).
•Setting up of risk-free payments and system in government securities
through Clearing Corporation of India Limited (CCIL).
•Phased introduction of Real Time Gross Settlement (RTGS) System
•Deepening of inter-bank Repo market Deepening of government
securities market by making the interest rates on such securities
market related
September 9, 2009
The financial Sector Reforms
25
•Discontinuation of automatic monetization through an agreement
between the Government and the Reserve Bank
•Amendment of Securities Contracts Regulation Act (SCRA), to create
the regulatory framework
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS).
•Setting up of risk-free payments and system in government securities
through Clearing Corporation of India Limited (CCIL).
•Phased introduction of Real Time Gross Settlement (RTGS) System
•Deepening of inter-bank Repo market Deepening of government
securities market by making the interest rates on such securities
market related
Developmental MeasuresDevelopmental Measures
•Discontinuation of automatic monetization through an agreement
between the Government and the Reserve Bank
•Amendment of Securities Contracts Regulation Act (SCRA), to create
the regulatory framework
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS).
•Setting up of risk-free payments and system in government securities
through Clearing Corporation of India Limited (CCIL).
•Phased introduction of Real Time Gross Settlement (RTGS) System
•Deepening of inter-bank Repo market Deepening of government
securities market by making the interest rates on such securities
market related
September 9, 2009
The financial Sector Reforms
25
•Discontinuation of automatic monetization through an agreement
between the Government and the Reserve Bank
•Amendment of Securities Contracts Regulation Act (SCRA), to create
the regulatory framework
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS).
•Setting up of risk-free payments and system in government securities
through Clearing Corporation of India Limited (CCIL).
•Phased introduction of Real Time Gross Settlement (RTGS) System
•Deepening of inter-bank Repo market Deepening of government
securities market by making the interest rates on such securities
market related
Monitory Policy Reforms :Monitory Policy Reforms :
Institutional MeasuresInstitutional Measures
••Setting up of Technical Advisory Committee on MonetarySetting up of Technical Advisory Committee on Monetary
Policy with outside experts to review macroeconomic andPolicy with outside experts to review macroeconomic and
monetary developments and advise the Reserve Bank onmonetary developments and advise the Reserve Bank on
the stance of monetary policythe stance of monetary policy
••Creation of a separate Financial Market Department withinCreation of a separate Financial Market Department within
the RBIthe RBI
••Development of appropriate trading, payments andDevelopment of appropriate trading, payments and
settlement systems along with technological infrastructure.settlement systems along with technological infrastructure.
Success of monetary management such as interest rates, is contingent
upon the extent and speed with which changes in the central bank's
policy rate are transmitted to the spectrum of market interest rates
and exchange rate in the economy and onward to the real sector.
September 9, 2009
The financial Sector Reforms
26
••Setting up of Technical Advisory Committee on MonetarySetting up of Technical Advisory Committee on Monetary
Policy with outside experts to review macroeconomic andPolicy with outside experts to review macroeconomic and
monetary developments and advise the Reserve Bank onmonetary developments and advise the Reserve Bank on
the stance of monetary policythe stance of monetary policy
••Creation of a separate Financial Market Department withinCreation of a separate Financial Market Department within
the RBIthe RBI
••Development of appropriate trading, payments andDevelopment of appropriate trading, payments and
settlement systems along with technological infrastructure.settlement systems along with technological infrastructure.
Success of monetary management such as interest rates, is contingent
upon the extent and speed with which changes in the central bank's
policy rate are transmitted to the spectrum of market interest rates
and exchange rate in the economy and onward to the real sector.
Institutional MeasuresInstitutional Measures
••Setting up of Technical Advisory Committee on MonetarySetting up of Technical Advisory Committee on Monetary
Policy with outside experts to review macroeconomic andPolicy with outside experts to review macroeconomic and
monetary developments and advise the Reserve Bank onmonetary developments and advise the Reserve Bank on
the stance of monetary policythe stance of monetary policy
••Creation of a separate Financial Market Department withinCreation of a separate Financial Market Department within
the RBIthe RBI
••Development of appropriate trading, payments andDevelopment of appropriate trading, payments and
settlement systems along with technological infrastructure.settlement systems along with technological infrastructure.
Success of monetary management such as interest rates, is contingent
upon the extent and speed with which changes in the central bank's
policy rate are transmitted to the spectrum of market interest rates
and exchange rate in the economy and onward to the real sector.
September 9, 2009
The financial Sector Reforms
26
••Setting up of Technical Advisory Committee on MonetarySetting up of Technical Advisory Committee on Monetary
Policy with outside experts to review macroeconomic andPolicy with outside experts to review macroeconomic and
monetary developments and advise the Reserve Bank onmonetary developments and advise the Reserve Bank on
the stance of monetary policythe stance of monetary policy
••Creation of a separate Financial Market Department withinCreation of a separate Financial Market Department within
the RBIthe RBI
••Development of appropriate trading, payments andDevelopment of appropriate trading, payments and
settlement systems along with technological infrastructure.settlement systems along with technological infrastructure.
Success of monetary management such as interest rates, is contingent
upon the extent and speed with which changes in the central bank's
policy rate are transmitted to the spectrum of market interest rates
and exchange rate in the economy and onward to the real sector.
Capital Market Reforms :
•Abolition of capital issues control and the introduction of free pricing of
equity issues (CCI)
•Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
•Primary market regulations:
–Entry norms for capital issues were tightened
–Disclosure requirements were improved
–Regulations were framed and code of conduct laid down for
merchant bankers
–Underwriters, mutual funds, bankers to the issue and other
intermediaries
•Corporate governance regulations:
–Regulations were framed for insider trading
–Regulatory framework for take overs was revamped
September 9, 2009
The financial Sector Reforms
27
•Abolition of capital issues control and the introduction of free pricing of
equity issues (CCI)
•Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
•Primary market regulations:
–Entry norms for capital issues were tightened
–Disclosure requirements were improved
–Regulations were framed and code of conduct laid down for
merchant bankers
–Underwriters, mutual funds, bankers to the issue and other
intermediaries
•Corporate governance regulations:
–Regulations were framed for insider trading
–Regulatory framework for take overs was revamped
•Abolition of capital issues control and the introduction of free pricing of
equity issues (CCI)
•Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
•Primary market regulations:
–Entry norms for capital issues were tightened
–Disclosure requirements were improved
–Regulations were framed and code of conduct laid down for
merchant bankers
–Underwriters, mutual funds, bankers to the issue and other
intermediaries
•Corporate governance regulations:
–Regulations were framed for insider trading
–Regulatory framework for take overs was revamped
September 9, 2009
The financial Sector Reforms
27
•Abolition of capital issues control and the introduction of free pricing of
equity issues (CCI)
•Securities and Exchange Board of India (SEBI) was set up as the apex
regulator of the Indian capital markets.
•Primary market regulations:
–Entry norms for capital issues were tightened
–Disclosure requirements were improved
–Regulations were framed and code of conduct laid down for
merchant bankers
–Underwriters, mutual funds, bankers to the issue and other
intermediaries
•Corporate governance regulations:
–Regulations were framed for insider trading
–Regulatory framework for take overs was revamped
Capital Market Reforms
•Secondary market regulations:
–Capital adequacy and prudential regulations were introduced for brokers,
and other intermediaries
–Dematerialization of scrips was initiated with the creation of a legislative
framework and the setting up of the first depository
–Settlement period was reduced to one week
–Carry forward trading was banned
–Tentative moves were made towards a rolling settlement system.
September 9, 2009
The financial Sector Reforms
28
•Secondary market regulations:
–Capital adequacy and prudential regulations were introduced for brokers,
and other intermediaries
–Dematerialization of scrips was initiated with the creation of a legislative
framework and the setting up of the first depository
–Settlement period was reduced to one week
–Carry forward trading was banned
–Tentative moves were made towards a rolling settlement system.
•Secondary market regulations:
–Capital adequacy and prudential regulations were introduced for brokers,
and other intermediaries
–Dematerialization of scrips was initiated with the creation of a legislative
framework and the setting up of the first depository
–Settlement period was reduced to one week
–Carry forward trading was banned
–Tentative moves were made towards a rolling settlement system.
September 9, 2009
The financial Sector Reforms
28
•Secondary market regulations:
–Capital adequacy and prudential regulations were introduced for brokers,
and other intermediaries
–Dematerialization of scrips was initiated with the creation of a legislative
framework and the setting up of the first depository
–Settlement period was reduced to one week
–Carry forward trading was banned
–Tentative moves were made towards a rolling settlement system.
Reforms in Government Securities
Market
•Institutional Measures
•Increase in Instruments in the Government Securities
Market
•Enabling Measures
September 9, 2009
The financial Sector Reforms
29
•Institutional Measures
•Increase in Instruments in the Government Securities
Market
•Enabling Measures
Market
•Institutional Measures
•Increase in Instruments in the Government Securities
Market
•Enabling Measures
September 9, 2009
The financial Sector Reforms
29
•Institutional Measures
•Increase in Instruments in the Government Securities
Market
•Enabling Measures
Government Securities Market :
Institutional Measures
•Administered interest rates on government securities were replaced
by an auction system for price discovery
•Banks have been permitted to undertake primary dealer business while
primary dealers are being allowed to diversify their business
•Central Government would cease to raise resources on behalf of State
Governments . State Governments' capability in raising resources will
be market determined and based on their own financial health
•Effective April 1, 2006, RBI has withdrawn from participating in
primary market auctions of Government paper
–fully market based system in the G-sec market.
September 9, 2009
The financial Sector Reforms
30
•Administered interest rates on government securities were replaced
by an auction system for price discovery
•Banks have been permitted to undertake primary dealer business while
primary dealers are being allowed to diversify their business
•Central Government would cease to raise resources on behalf of State
Governments . State Governments' capability in raising resources will
be market determined and based on their own financial health
•Effective April 1, 2006, RBI has withdrawn from participating in
primary market auctions of Government paper
–fully market based system in the G-sec market.
Institutional Measures
•Administered interest rates on government securities were replaced
by an auction system for price discovery
•Banks have been permitted to undertake primary dealer business while
primary dealers are being allowed to diversify their business
•Central Government would cease to raise resources on behalf of State
Governments . State Governments' capability in raising resources will
be market determined and based on their own financial health
•Effective April 1, 2006, RBI has withdrawn from participating in
primary market auctions of Government paper
–fully market based system in the G-sec market.
September 9, 2009
The financial Sector Reforms
30
•Administered interest rates on government securities were replaced
by an auction system for price discovery
•Banks have been permitted to undertake primary dealer business while
primary dealers are being allowed to diversify their business
•Central Government would cease to raise resources on behalf of State
Governments . State Governments' capability in raising resources will
be market determined and based on their own financial health
•Effective April 1, 2006, RBI has withdrawn from participating in
primary market auctions of Government paper
–fully market based system in the G-sec market.
Government Securities Market :
Increase in Instruments
•Market Stabilization Scheme (MSS) has been introduced, which has
expanded the instruments available to the Reserve Bank for managing
the enduring surplus liquidity in the system
–91-day Treasury bill was introduced for benchmarking
–Zero Coupon Bonds, Floating Rate Bonds, Capital Indexed Bonds were
issued
–Exchange traded interest rate futures were introduced
–OTC interest rate derivatives like IRS/ FRAs were introduced
•Repo status has been granted to State Government securities in order
to improve secondary market
September 9, 2009
The financial Sector Reforms
31
•Market Stabilization Scheme (MSS) has been introduced, which has
expanded the instruments available to the Reserve Bank for managing
the enduring surplus liquidity in the system
–91-day Treasury bill was introduced for benchmarking
–Zero Coupon Bonds, Floating Rate Bonds, Capital Indexed Bonds were
issued
–Exchange traded interest rate futures were introduced
–OTC interest rate derivatives like IRS/ FRAs were introduced
•Repo status has been granted to State Government securities in order
to improve secondary market
Increase in Instruments
•Market Stabilization Scheme (MSS) has been introduced, which has
expanded the instruments available to the Reserve Bank for managing
the enduring surplus liquidity in the system
–91-day Treasury bill was introduced for benchmarking
–Zero Coupon Bonds, Floating Rate Bonds, Capital Indexed Bonds were
issued
–Exchange traded interest rate futures were introduced
–OTC interest rate derivatives like IRS/ FRAs were introduced
•Repo status has been granted to State Government securities in order
to improve secondary market
September 9, 2009
The financial Sector Reforms
31
•Market Stabilization Scheme (MSS) has been introduced, which has
expanded the instruments available to the Reserve Bank for managing
the enduring surplus liquidity in the system
–91-day Treasury bill was introduced for benchmarking
–Zero Coupon Bonds, Floating Rate Bonds, Capital Indexed Bonds were
issued
–Exchange traded interest rate futures were introduced
–OTC interest rate derivatives like IRS/ FRAs were introduced
•Repo status has been granted to State Government securities in order
to improve secondary market
Government Securities Market :
Enabling Measures
•Foreign Institutional Investors (FIIs) were allowed to invest in
government securities subject to certain limits with non-banks allowed
to participate in repo market
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS)
•Setting up of risk-free payments and settlement system in government
securities through Clearing Corporation of India Limited (CCIL)
•Phased introduction of Real Time Gross Settlement System (RTGS).
•Introduction of trading in government securities on stock exchanges
for promoting retailing and Non-banks participation
September 9, 2009
The financial Sector Reforms
32
•Foreign Institutional Investors (FIIs) were allowed to invest in
government securities subject to certain limits with non-banks allowed
to participate in repo market
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS)
•Setting up of risk-free payments and settlement system in government
securities through Clearing Corporation of India Limited (CCIL)
•Phased introduction of Real Time Gross Settlement System (RTGS).
•Introduction of trading in government securities on stock exchanges
for promoting retailing and Non-banks participation
Enabling Measures
•Foreign Institutional Investors (FIIs) were allowed to invest in
government securities subject to certain limits with non-banks allowed
to participate in repo market
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS)
•Setting up of risk-free payments and settlement system in government
securities through Clearing Corporation of India Limited (CCIL)
•Phased introduction of Real Time Gross Settlement System (RTGS).
•Introduction of trading in government securities on stock exchanges
for promoting retailing and Non-banks participation
September 9, 2009
The financial Sector Reforms
32
•Foreign Institutional Investors (FIIs) were allowed to invest in
government securities subject to certain limits with non-banks allowed
to participate in repo market
•Introduction of automated screen-based trading in government
securities through Negotiated Dealing System (NDS)
•Setting up of risk-free payments and settlement system in government
securities through Clearing Corporation of India Limited (CCIL)
•Phased introduction of Real Time Gross Settlement System (RTGS).
•Introduction of trading in government securities on stock exchanges
for promoting retailing and Non-banks participation
Reforms in Foreign Exchange MarketReforms in Foreign Exchange Market
•Exchange Rate Regime
•Finance Mobilization
•Institutional Framework
•Increase in Instruments in the Foreign Exchange Market
•Liberalization Measures
September 9, 2009
The financial Sector Reforms
33
•Exchange Rate Regime
•Finance Mobilization
•Institutional Framework
•Increase in Instruments in the Foreign Exchange Market
•Liberalization Measures
•Exchange Rate Regime
•Finance Mobilization
•Institutional Framework
•Increase in Instruments in the Foreign Exchange Market
•Liberalization Measures
September 9, 2009
The financial Sector Reforms
33
•Exchange Rate Regime
•Finance Mobilization
•Institutional Framework
•Increase in Instruments in the Foreign Exchange Market
•Liberalization Measures
Reforms in Foreign Exchange Market :Reforms in Foreign Exchange Market :
Exchange Rate RegimeExchange Rate Regime
•Evolution of exchange rate regime from a single-currency fixed-
exchange rate system to fixing the value of rupee against a basket of
currencies and further to market-determined floating exchange rate
regime
•Adoption of convertibility of rupee for current account transactions
with acceptance of Article VIII of the Articles of Agreement of the IMF
•De facto full capital account convertibility for non residents
•Calibrated liberalization of transactions undertaken for capital account
purposes in the case of residents
September 9, 2009
The financial Sector Reforms
34
•Evolution of exchange rate regime from a single-currency fixed-
exchange rate system to fixing the value of rupee against a basket of
currencies and further to market-determined floating exchange rate
regime
•Adoption of convertibility of rupee for current account transactions
with acceptance of Article VIII of the Articles of Agreement of the IMF
•De facto full capital account convertibility for non residents
•Calibrated liberalization of transactions undertaken for capital account
purposes in the case of residents
Exchange Rate RegimeExchange Rate Regime
•Evolution of exchange rate regime from a single-currency fixed-
exchange rate system to fixing the value of rupee against a basket of
currencies and further to market-determined floating exchange rate
regime
•Adoption of convertibility of rupee for current account transactions
with acceptance of Article VIII of the Articles of Agreement of the IMF
•De facto full capital account convertibility for non residents
•Calibrated liberalization of transactions undertaken for capital account
purposes in the case of residents
September 9, 2009
The financial Sector Reforms
34
•Evolution of exchange rate regime from a single-currency fixed-
exchange rate system to fixing the value of rupee against a basket of
currencies and further to market-determined floating exchange rate
regime
•Adoption of convertibility of rupee for current account transactions
with acceptance of Article VIII of the Articles of Agreement of the IMF
•De facto full capital account convertibility for non residents
•Calibrated liberalization of transactions undertaken for capital account
purposes in the case of residents
Reforms in Foreign Exchange Market :Reforms in Foreign Exchange Market :
Finance MobilizationFinance Mobilization
•Indian companies were allowed to raise equity in international markets
subject to various restrictions.
•Indian companies were allowed to borrow in international markets
subject to a minimum maturity, a ceiling on the maximum interest
rate, and annual caps on aggregate external commercial borrowings
by all entities put together.
•Indian mutual funds were allowed to invest a small portion of their
assets abroad.
•Indian companies were given access to long dated forward contracts
and to cross currency options.
September 9, 2009
The financial Sector Reforms
35
•Indian companies were allowed to raise equity in international markets
subject to various restrictions.
•Indian companies were allowed to borrow in international markets
subject to a minimum maturity, a ceiling on the maximum interest
rate, and annual caps on aggregate external commercial borrowings
by all entities put together.
•Indian mutual funds were allowed to invest a small portion of their
assets abroad.
•Indian companies were given access to long dated forward contracts
and to cross currency options.
Finance MobilizationFinance Mobilization
•Indian companies were allowed to raise equity in international markets
subject to various restrictions.
•Indian companies were allowed to borrow in international markets
subject to a minimum maturity, a ceiling on the maximum interest
rate, and annual caps on aggregate external commercial borrowings
by all entities put together.
•Indian mutual funds were allowed to invest a small portion of their
assets abroad.
•Indian companies were given access to long dated forward contracts
and to cross currency options.
September 9, 2009
The financial Sector Reforms
35
•Indian companies were allowed to raise equity in international markets
subject to various restrictions.
•Indian companies were allowed to borrow in international markets
subject to a minimum maturity, a ceiling on the maximum interest
rate, and annual caps on aggregate external commercial borrowings
by all entities put together.
•Indian mutual funds were allowed to invest a small portion of their
assets abroad.
•Indian companies were given access to long dated forward contracts
and to cross currency options.
Reforms in Foreign Exchange Market :Reforms in Foreign Exchange Market :
Institutional FrameworkInstitutional Framework
•Replacement of the earlier Foreign Exchange Regulation Act (FERA),
1973 by the market friendly Foreign Exchange Management Act, 1999
(FEMA)
•Delegation of considerable powers by RBI to Authorized Dealers to
release foreign exchange for a variety of purposes
September 9, 2009
The financial Sector Reforms
36
•Replacement of the earlier Foreign Exchange Regulation Act (FERA),
1973 by the market friendly Foreign Exchange Management Act, 1999
(FEMA)
•Delegation of considerable powers by RBI to Authorized Dealers to
release foreign exchange for a variety of purposes
Institutional FrameworkInstitutional Framework
•Replacement of the earlier Foreign Exchange Regulation Act (FERA),
1973 by the market friendly Foreign Exchange Management Act, 1999
(FEMA)
•Delegation of considerable powers by RBI to Authorized Dealers to
release foreign exchange for a variety of purposes
September 9, 2009
The financial Sector Reforms
36
•Replacement of the earlier Foreign Exchange Regulation Act (FERA),
1973 by the market friendly Foreign Exchange Management Act, 1999
(FEMA)
•Delegation of considerable powers by RBI to Authorized Dealers to
release foreign exchange for a variety of purposes
Reforms in Foreign Exchange Market :Reforms in Foreign Exchange Market :
Increase in InstrumentsIncrease in Instruments
•Development of rupee-foreign currency swap market
•Introduction of additional hedging instruments, such as, foreign
currency-rupee options
•Permission to use innovative products like cross-currency options,
interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) in the international forex market.
September 9, 2009
The financial Sector Reforms
37
•Development of rupee-foreign currency swap market
•Introduction of additional hedging instruments, such as, foreign
currency-rupee options
•Permission to use innovative products like cross-currency options,
interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) in the international forex market.
Increase in InstrumentsIncrease in Instruments
•Development of rupee-foreign currency swap market
•Introduction of additional hedging instruments, such as, foreign
currency-rupee options
•Permission to use innovative products like cross-currency options,
interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) in the international forex market.
September 9, 2009
The financial Sector Reforms
37
•Development of rupee-foreign currency swap market
•Introduction of additional hedging instruments, such as, foreign
currency-rupee options
•Permission to use innovative products like cross-currency options,
interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) in the international forex market.
Reforms in Foreign Exchange Market :Reforms in Foreign Exchange Market :
Liberalization MeasuresLiberalization Measures
•Authorized dealers permitted to initiate trading positions, borrow and
invest in overseas market subject to certain specifications and
ratification by respective Banks’ Boards
•Banks are also permitted to fix interest rates on non-resident deposits,
subject to certain specifications
•Use of derivative products for asset-liability management and fix
overnight open position limits and gap limits in the foreign exchange
market, subject to ratification by RBI
•Permission to various participants in the foreign exchange market,
including exporters, Indians investing abroad, FIIs, to avail forward
cover and enter into swap transactions without any limit subject to
genuine underlying exposure
September 9, 2009
The financial Sector Reforms
38
•Authorized dealers permitted to initiate trading positions, borrow and
invest in overseas market subject to certain specifications and
ratification by respective Banks’ Boards
•Banks are also permitted to fix interest rates on non-resident deposits,
subject to certain specifications
•Use of derivative products for asset-liability management and fix
overnight open position limits and gap limits in the foreign exchange
market, subject to ratification by RBI
•Permission to various participants in the foreign exchange market,
including exporters, Indians investing abroad, FIIs, to avail forward
cover and enter into swap transactions without any limit subject to
genuine underlying exposure
Liberalization MeasuresLiberalization Measures
•Authorized dealers permitted to initiate trading positions, borrow and
invest in overseas market subject to certain specifications and
ratification by respective Banks’ Boards
•Banks are also permitted to fix interest rates on non-resident deposits,
subject to certain specifications
•Use of derivative products for asset-liability management and fix
overnight open position limits and gap limits in the foreign exchange
market, subject to ratification by RBI
•Permission to various participants in the foreign exchange market,
including exporters, Indians investing abroad, FIIs, to avail forward
cover and enter into swap transactions without any limit subject to
genuine underlying exposure
September 9, 2009
The financial Sector Reforms
38
•Authorized dealers permitted to initiate trading positions, borrow and
invest in overseas market subject to certain specifications and
ratification by respective Banks’ Boards
•Banks are also permitted to fix interest rates on non-resident deposits,
subject to certain specifications
•Use of derivative products for asset-liability management and fix
overnight open position limits and gap limits in the foreign exchange
market, subject to ratification by RBI
•Permission to various participants in the foreign exchange market,
including exporters, Indians investing abroad, FIIs, to avail forward
cover and enter into swap transactions without any limit subject to
genuine underlying exposure
Reforms in Foreign Exchange Market :Reforms in Foreign Exchange Market :
Liberalization MeasuresLiberalization Measures
•FII’s and NRI’s permitted to trade in exchange-traded derivative
contracts subject to certain conditions
•Foreign exchange earners permitted to maintain foreign currency
accounts
•Residents are permitted to open such accounts within the general limit
of US $ 200,000 per year
September 9, 2009
The financial Sector Reforms
39
•FII’s and NRI’s permitted to trade in exchange-traded derivative
contracts subject to certain conditions
•Foreign exchange earners permitted to maintain foreign currency
accounts
•Residents are permitted to open such accounts within the general limit
of US $ 200,000 per year
Liberalization MeasuresLiberalization Measures
•FII’s and NRI’s permitted to trade in exchange-traded derivative
contracts subject to certain conditions
•Foreign exchange earners permitted to maintain foreign currency
accounts
•Residents are permitted to open such accounts within the general limit
of US $ 200,000 per year
September 9, 2009
The financial Sector Reforms
39
•FII’s and NRI’s permitted to trade in exchange-traded derivative
contracts subject to certain conditions
•Foreign exchange earners permitted to maintain foreign currency
accounts
•Residents are permitted to open such accounts within the general limit
of US $ 200,000 per year
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms : An assessmentPolicy Reforms : An assessment
Progress of Commercial Banking in India
19691980 1991 19952000 2005
1 2 3 4 5 6 7
1 Commercial Banks 73 154 272 284 298 288
2 No. of Bank Offices8,26234,59460,57064,23467,86868,339
Rural and semi
-urban bank offices5,172 23,22746,55046,60247,69347491
3 Population per
Office (’000s) 64 16 14 15 15 16
4 Per capita
Deposit (Rs.) 88 738 2,368 4,242 8,542 16,699
5 Per capita Credit
(Rs.) 68 457 1,434 2,320 4,555 10,135
6 Priority Sector
Advances@ (%) 15 37 39 34 35 40
7 Deposits (% of
National Income)16 36 48 48 54 65
September 9, 2009
The financial Sector Reforms
40
Progress of Commercial Banking in India
19691980 1991 19952000 2005
1 2 3 4 5 6 7
1 Commercial Banks 73 154 272 284 298 288
2 No. of Bank Offices8,26234,59460,57064,23467,86868,339
Rural and semi
-urban bank offices5,172 23,22746,55046,60247,69347491
3 Population per
Office (’000s) 64 16 14 15 15 16
4 Per capita
Deposit (Rs.) 88 738 2,368 4,242 8,542 16,699
5 Per capita Credit
(Rs.) 68 457 1,434 2,320 4,555 10,135
6 Priority Sector
Advances@ (%) 15 37 39 34 35 40
7 Deposits (% of
National Income)16 36 48 48 54 65
Policy Reforms : An assessmentPolicy Reforms : An assessment
Progress of Commercial Banking in India
19691980 1991 19952000 2005
1 2 3 4 5 6 7
1 Commercial Banks 73 154 272 284 298 288
2 No. of Bank Offices8,26234,59460,57064,23467,86868,339
Rural and semi
-urban bank offices5,172 23,22746,55046,60247,69347491
3 Population per
Office (’000s) 64 16 14 15 15 16
4 Per capita
Deposit (Rs.) 88 738 2,368 4,242 8,542 16,699
5 Per capita Credit
(Rs.) 68 457 1,434 2,320 4,555 10,135
6 Priority Sector
Advances@ (%) 15 37 39 34 35 40
7 Deposits (% of
National Income)16 36 48 48 54 65
September 9, 2009
The financial Sector Reforms
40
Progress of Commercial Banking in India
19691980 1991 19952000 2005
1 2 3 4 5 6 7
1 Commercial Banks 73 154 272 284 298 288
2 No. of Bank Offices8,26234,59460,57064,23467,86868,339
Rural and semi
-urban bank offices5,172 23,22746,55046,60247,69347491
3 Population per
Office (’000s) 64 16 14 15 15 16
4 Per capita
Deposit (Rs.) 88 738 2,368 4,242 8,542 16,699
5 Per capita Credit
(Rs.) 68 457 1,434 2,320 4,555 10,135
6 Priority Sector
Advances@ (%) 15 37 39 34 35 40
7 Deposits (% of
National Income)16 36 48 48 54 65
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
Distribution of Commercial Banks According to Risk-weighted
Capital Adequacy
Year <4% 4-9 %9-10 % >10 % Total
1 2 3 4 5 6
1995-96 8 9 33 42 92
2000-01 3 2 11 84 100
2004-05 1 1 8 78 88
September 9, 2009
The financial Sector Reforms
41
Distribution of Commercial Banks According to Risk-weighted
Capital Adequacy
Year <4% 4-9 %9-10 % >10 % Total
1 2 3 4 5 6
1995-96 8 9 33 42 92
2000-01 3 2 11 84 100
2004-05 1 1 8 78 88
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
Distribution of Commercial Banks According to Risk-weighted
Capital Adequacy
Year <4% 4-9 %9-10 % >10 % Total
1 2 3 4 5 6
1995-96 8 9 33 42 92
2000-01 3 2 11 84 100
2004-05 1 1 8 78 88
September 9, 2009
The financial Sector Reforms
41
Distribution of Commercial Banks According to Risk-weighted
Capital Adequacy
Year <4% 4-9 %9-10 % >10 % Total
1 2 3 4 5 6
1995-96 8 9 33 42 92
2000-01 3 2 11 84 100
2004-05 1 1 8 78 88
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
Non-Performing Loans (NPL) of Scheduled Commercial Banks(%)
Gross NPL/ Gross NPL/ Net NPL/ Net NPL/
advances Assets advances Assets
1 2 3 4 5
1996-97 15.7 7 8.1 3.3
1997-98 14.4 6.4 7.3 3.0
1998-99 14.7 6.2 7.6 2.9
1999-00 12.7 5.5 6.8 2.7
2000-01 11.4 4.9 6.2 2.5
2001-02 10.4 4.6 5.5 2.3
2002-03 8.8 4 4.4 1.9
2003-04 7.2 3.3 2.9 1.2
2004-05 5.2 2.6 2 0.9
September 9, 2009
The financial Sector Reforms
42
Non-Performing Loans (NPL) of Scheduled Commercial Banks(%)
Gross NPL/ Gross NPL/ Net NPL/ Net NPL/
advances Assets advances Assets
1 2 3 4 5
1996-97 15.7 7 8.1 3.3
1997-98 14.4 6.4 7.3 3.0
1998-99 14.7 6.2 7.6 2.9
1999-00 12.7 5.5 6.8 2.7
2000-01 11.4 4.9 6.2 2.5
2001-02 10.4 4.6 5.5 2.3
2002-03 8.8 4 4.4 1.9
2003-04 7.2 3.3 2.9 1.2
2004-05 5.2 2.6 2 0.9
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
Non-Performing Loans (NPL) of Scheduled Commercial Banks(%)
Gross NPL/ Gross NPL/ Net NPL/ Net NPL/
advances Assets advances Assets
1 2 3 4 5
1996-97 15.7 7 8.1 3.3
1997-98 14.4 6.4 7.3 3.0
1998-99 14.7 6.2 7.6 2.9
1999-00 12.7 5.5 6.8 2.7
2000-01 11.4 4.9 6.2 2.5
2001-02 10.4 4.6 5.5 2.3
2002-03 8.8 4 4.4 1.9
2003-04 7.2 3.3 2.9 1.2
2004-05 5.2 2.6 2 0.9
September 9, 2009
The financial Sector Reforms
42
Non-Performing Loans (NPL) of Scheduled Commercial Banks(%)
Gross NPL/ Gross NPL/ Net NPL/ Net NPL/
advances Assets advances Assets
1 2 3 4 5
1996-97 15.7 7 8.1 3.3
1997-98 14.4 6.4 7.3 3.0
1998-99 14.7 6.2 7.6 2.9
1999-00 12.7 5.5 6.8 2.7
2000-01 11.4 4.9 6.2 2.5
2001-02 10.4 4.6 5.5 2.3
2002-03 8.8 4 4.4 1.9
2003-04 7.2 3.3 2.9 1.2
2004-05 5.2 2.6 2 0.9
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
Select Productivity Indicators of Scheduled Commercial Banks
(Rs. million at 1993-94 prices)
Year Business Profit perBusiness
per employee Employeeper branch
1992 5.4 0.02 109.9
1996 6.0 0.01 119.6
2000 9.7 0.05 179.4
2005 17.3 0.13 267.0
September 9, 2009
The financial Sector Reforms
43
Select Productivity Indicators of Scheduled Commercial Banks
(Rs. million at 1993-94 prices)
Year Business Profit perBusiness
per employee Employeeper branch
1992 5.4 0.02 109.9
1996 6.0 0.01 119.6
2000 9.7 0.05 179.4
2005 17.3 0.13 267.0
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
Select Productivity Indicators of Scheduled Commercial Banks
(Rs. million at 1993-94 prices)
Year Business Profit perBusiness
per employee Employeeper branch
1992 5.4 0.02 109.9
1996 6.0 0.01 119.6
2000 9.7 0.05 179.4
2005 17.3 0.13 267.0
September 9, 2009
The financial Sector Reforms
43
Select Productivity Indicators of Scheduled Commercial Banks
(Rs. million at 1993-94 prices)
Year Business Profit perBusiness
per employee Employeeper branch
1992 5.4 0.02 109.9
1996 6.0 0.01 119.6
2000 9.7 0.05 179.4
2005 17.3 0.13 267.0
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
44
Despite record high international crude oil prices, inflation remains low
and inflation expectations also remain stable.
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
44
Despite record high international crude oil prices, inflation remains low
and inflation expectations also remain stable.
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
45
Fresh issuances under the MSS were suspended between November 2005 and April 2006
due to tight liquidity. Redemptions of securities/Treasury Bills issued earlier–along with
active management of liquidity through repo/reverse repo operations under Liquidity
Adjustment Facility-provided liquidity to the market and imparted stability to financial
markets. With liquidity conditions improving, it was decided to again start issuing
securities under the MSS from May 2006 onwards.
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
45
Fresh issuances under the MSS were suspended between November 2005 and April 2006
due to tight liquidity. Redemptions of securities/Treasury Bills issued earlier–along with
active management of liquidity through repo/reverse repo operations under Liquidity
Adjustment Facility-provided liquidity to the market and imparted stability to financial
markets. With liquidity conditions improving, it was decided to again start issuing
securities under the MSS from May 2006 onwards.
Forex Reforms :Forex Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
46
Exchange rate exhibiting reasonable two-way movement
September 9, 2009
The financial Sector Reforms
46
Exchange rate exhibiting reasonable two-way movement
Financial Sector and MonetaryFinancial Sector and Monetary
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
47
Credit Delivery increased from 30 per cent during 1999-00 to 41 per cent
during 2004-05 and further to 48 per cent during 2005-06.
Policy Reforms :Policy Reforms :An AssessmentAn Assessment
September 9, 2009
The financial Sector Reforms
47
Credit Delivery increased from 30 per cent during 1999-00 to 41 per cent
during 2004-05 and further to 48 per cent during 2005-06.
ConclusionConclusion
•Financial system in India, through a measured,
gradual, cautious, and steady process, has
undergone substantial transformation
•Reasonably sophisticated, diverse and resilient
system through well-sequenced and coordinated
policy measures aimed at making the Indian financial
sector more competitive, efficient, and stable
•Effective monetary management has enabled price
stability while ensuring availability of credit to
support investment demand and growth in the
economy.
September 9, 2009
The financial Sector Reforms
48
•Financial system in India, through a measured,
gradual, cautious, and steady process, has
undergone substantial transformation
•Reasonably sophisticated, diverse and resilient
system through well-sequenced and coordinated
policy measures aimed at making the Indian financial
sector more competitive, efficient, and stable
•Effective monetary management has enabled price
stability while ensuring availability of credit to
support investment demand and growth in the
economy.
•Financial system in India, through a measured,
gradual, cautious, and steady process, has
undergone substantial transformation
•Reasonably sophisticated, diverse and resilient
system through well-sequenced and coordinated
policy measures aimed at making the Indian financial
sector more competitive, efficient, and stable
•Effective monetary management has enabled price
stability while ensuring availability of credit to
support investment demand and growth in the
economy.
September 9, 2009
The financial Sector Reforms
48
•Financial system in India, through a measured,
gradual, cautious, and steady process, has
undergone substantial transformation
•Reasonably sophisticated, diverse and resilient
system through well-sequenced and coordinated
policy measures aimed at making the Indian financial
sector more competitive, efficient, and stable
•Effective monetary management has enabled price
stability while ensuring availability of credit to
support investment demand and growth in the
economy.
ConclusionConclusion
•The multi-pronged approach towards managing
capital account in conjunction with prudential and
cautious approach to financial liberalisation has
ensured financial stability in contrast to the
experience of many developing and emerging
economies
•Monetary policy and financial sector reforms in India
had to be fine tuned to meet the challenges
emanating from all global and domestic shocks.
•Viewed in this light, the success in maintaining price
and financial stability is all the more creditworthy.
•The overall objective of maintaining price stability in
the context of economic growth and financial stability
will remain
September 9, 2009
The financial Sector Reforms
49
•The multi-pronged approach towards managing
capital account in conjunction with prudential and
cautious approach to financial liberalisation has
ensured financial stability in contrast to the
experience of many developing and emerging
economies
•Monetary policy and financial sector reforms in India
had to be fine tuned to meet the challenges
emanating from all global and domestic shocks.
•Viewed in this light, the success in maintaining price
and financial stability is all the more creditworthy.
•The overall objective of maintaining price stability in
the context of economic growth and financial stability
will remain
•The multi-pronged approach towards managing
capital account in conjunction with prudential and
cautious approach to financial liberalisation has
ensured financial stability in contrast to the
experience of many developing and emerging
economies
•Monetary policy and financial sector reforms in India
had to be fine tuned to meet the challenges
emanating from all global and domestic shocks.
•Viewed in this light, the success in maintaining price
and financial stability is all the more creditworthy.
•The overall objective of maintaining price stability in
the context of economic growth and financial stability
will remain
September 9, 2009
The financial Sector Reforms
49
•The multi-pronged approach towards managing
capital account in conjunction with prudential and
cautious approach to financial liberalisation has
ensured financial stability in contrast to the
experience of many developing and emerging
economies
•Monetary policy and financial sector reforms in India
had to be fine tuned to meet the challenges
emanating from all global and domestic shocks.
•Viewed in this light, the success in maintaining price
and financial stability is all the more creditworthy.
•The overall objective of maintaining price stability in
the context of economic growth and financial stability
will remain
September 9, 2009
The financial Sector Reforms
50
Thank You
The financial Sector Reforms
50
Thank You
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