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Financial Sector has been incrementally deregulated and exposed to international financial markets in the last 18 years;
Consequently, elements of the Indian financial sector are close to international standards.
Global financial market conditions are favorable
Are we seizing the opportunity for urgent reforms and greater integration?
How do we decide what is an optimal rate to integrate with global financial markets?
Increase competition and thereby enhance the efficiency of financial intermediation and promote overall savings;
Widen and deepen the reach of the formal financial sector;
Ensure that the country’s savings are utilized most productively; and
Manage the risks stemming from disturbances in global markets to insulate the financial sector and the Indian economy.
OBJECTIVES
• There should be an adequate number of buyers and sellers such that all market participants are price-takers
• The primary market (for all issuance) should have a large number of participants
• Valuations in the secondary market should be transparent and liquid enough to allow easy exit
• The bid-ask spreads in the secondary markets should be narrow.
CRITERIA FOR COMPETITIVE MARKETS
The depth of the financial sector is relatively low
About two-thirds of private savings are mobilized by the financial sector.
Productivity of investments should be given greater weightage in allocation of credit.
Table 1
Stock of Financial Assets as % of GDP(2008)
CountryCountry Financial Financial AssetsAssets
IndiaIndia 160160
JapanJapan 420420
MalaysiaMalaysia 400400
South KoreaSouth Korea 235235
ChinaChina 220220
• A gradualist approach to “Fuller Capital Account Convertibility” is in order. The risks stemming from potential demand for investments in foreign assets (including real-estate) are not quantifiable and may be unmanageable in times of domestic-international stress
Domestic interest rates are not adequately market determined i.e. there is need for further deregulation of interest rates
CountrCountryy
Regulators of Financial ServicesRegulators of Financial Services
UKUK Financial Service Authority (FSA)Financial Service Authority (FSA)
JapanJapan Financial Service Agency (FSA)Financial Service Agency (FSA)
GermaGermanyny
The Federal Financial Supervisory Authority (BaFin)The Federal Financial Supervisory Authority (BaFin)
IndiaIndia Banking – RBIBanking – RBICapital Markets – SEBICapital Markets – SEBI
Insurance – IRDAInsurance – IRDAPension – PFRDAPension – PFRDA
ChinaChina Banking – China Banking Regulatory Commission Banking – China Banking Regulatory Commission (CBRC)(CBRC)Capital Markets – State Council Securities Capital Markets – State Council Securities Commission (SCSC)Commission (SCSC)Insurance – The China Insurance Regulatory Insurance – The China Insurance Regulatory Commission (CIR)Commission (CIR)
USAUSA Banking – Federal Reserve BankBanking – Federal Reserve BankCapital Markets – Securities and Exchange Capital Markets – Securities and Exchange Commission (SEC)Commission (SEC)Derivatives – Commodities and Futures Trading Derivatives – Commodities and Futures Trading Commission (CFTC)Commission (CFTC)
The banking sector has reformed considerably since the early 1990s but is excessively dominated by the public sector which receives 78% of the deposits and makes about 73% of the loans
DepositsDeposits LoansLoans
Mar Mar 20002000
Mar Mar 20092009
Mar Mar 20002000
Mar Mar 20092009
PubliPublic c SectoSectorr
81.981.9 7878 79.379.3 73.273.2
New New PrivaPrivatete
5.25.2 10.910.9 5.05.0 13.813.8
Old Old PrivaPrivatete
7.47.4 6.46.4 7.67.6 6.26.2
ForeiForeigngn
5.55.5 4.74.7 8.08.0 6.86.8
CountryCountry Lending as percent of Lending as percent of DepositsDeposits
ChinaChina 130130
UKUK 114114
MalaysiaMalaysia 101101
USAUSA 9292
IndiaIndia 6161
Efficiency in the banking sector lags international comparators in terms of intermediation costs
Just two domestic private banks have entered this sector in the last ten years
A coordinated effort is needed to hasten consolidation among and international listings of public sector banks and entry of new private sector banks
Separate regulator for bankingWe should not mix up insolvency with illiquidity
Indian equity and related exchange traded derivatives markets and to some extent the mutual fund industry compare well with international markets
The over the counter (OTC) interest rate and currency swap markets cannot grow without better market determination of domestic interest rates and further capital account convertibility (FCAC)
The corporate debt market is miniscule and needs a series of reforms including stamp duty rationalization, repos in corporate bonds, settlement and clearing of corporate bonds through the same clearing system as government securities, introduction of credit derivatives, lifting of limits for FII purchases of corporate bonds
Exchange traded interest rate derivatives should be encouraged since this will improve the market determination of domestic interest rates and help the corporate bond market to grow
Exchange traded currency derivatives can wait for next steps towards FCAC
Commodity derivatives markets should be regulated by SEBI
The Companies Act needs to be amended and SEBI strengthened to take over the regulatory responsibilities under this Act
The private equity market should be courted and exit valuation methodologies made transparent and predictable.
The asset backed securities market will not develop without considerable preparatory work particularly on the legal issues involved. Hence, special efforts need to be directed to this end.
In cross-country terms, the Indian insurance industry is small in depth and coverage and there is tremendous potential for growth. Premiums should be deregulated, the requirement to hold at least 50% of assets in government securities should be gradually relaxed as also the ceiling of 26% ceiling for foreign ownership
The pension sector is almost entirely in the public sector and covers only about 16% of the work-force. Progress is hindered by a multiplicity of Acts, administered by several GoI Ministries, which have subdivided the sector. The pay-as-you-go government administered pension systems should be gradually replaced by defined contribution schemes in which pension assets are invested in securities, both debt and equity. The pension sector needs to be comprehensively reviewed, at a GoI wide level, in the light of the potential for it to help boost the equity and bond markets and thereby the entire financial sector
The complex web of legislation that applies to the financial sector needs to be simplified. Further, there are obvious anomalies in certain Acts e.g. those which provide for RBI representation on the boards of public sector banks such as State Bank of India (SBI), National Housing Bank (NHB).
IndiaIndia 33
South South KoreaKorea
174174
BrazilBrazil 7171
ChinaChina 6161
ThailandThailand 5454
MexicoMexico 4444
CountryCountry Market Market CapitalisatiCapitalisationon
Value Value AddedAdded
Listed Listed Domestic Domestic Cos.Cos.
IndiaIndia 7171 5757 47634763
USAUSA 136136 172172 51435143
JapanJapan 104104 109109 32793279
UKUK 139139 189189 27592759
GermaGermanyny
4444 6363 648648
ChinaChina 3535 2626 13871387*Figures in percent
Country/ Country/ RegionRegion
OTC OTC Derivatives Derivatives Markets Markets Average daily Average daily turnover*turnover*
Exchange-Exchange-tradedtradedDerivatives Derivatives MarketsMarketsAnnual Annual turnover**turnover**
India India (2008)(2008)
Not availableNot available 11
USA USA (2008)(2008)
355355 819819
EU (2008)EU (2008) 10011001 487487
*US$ billion; ** US$ trillion
CountryCountry Mutual Fund Mutual Fund AssetsAssets
% of % of GDPGDP
IndiaIndia 6464 88
USAUSA 8,9058,905 7171
FranceFrance 1,3631,363 6565
SwitzerlaSwitzerlandnd
117117 3232
UKUK 547547 2525
NetherlaNetherlandsnds
9494 1515
GermanyGermany 297297 1111
JapanJapan 470470 1010
(US$ billion end 2008)
YearYear Equity Equity IssuesIssues
Rs. Rs. CroresCrores
GOI GOI SecuritieSecuritiess
Rs. Rs. CroresCrores
Debt IssuesDebt Issues
Publicly Publicly placedplaced
Privately Privately placedplaced
2004-052004-05 28,200 28,200 (0.9)(0.9)
1,06,501 1,06,501 (3.4)(3.4)
4,0944,094 55,408 55,408 (1.8)(1.8)
2005-062005-06 36,533 36,533 (1.0)(1.0)
1,60,018 1,60,018 (4.5)(4.5)
---- 81,846 81,846 (2.3)(2.3)
2006-072006-07
(Apr-(Apr-Sep)Sep)
8,2058,205 BE BE 1,81,8751,81,875
---- 47,94547,945
Figures in () are percent of GDP
CountryCountry % of GDP% of GDP
IndiaIndia 22
USAUSA 145145
GermanyGermany 116116
UKUK 8383
MalaysiaMalaysia 7373
ThailandThailand 2222
South South AfricaAfrica
1717
ChinaChina 11
(2008)
IndiaIndia 33
USAUSA 5151
UKUK 5454
South KoreaSouth Korea 1313
ThailandThailand 99
MalaysiaMalaysia 2323
GermanyGermany 4848
2008(Percent of GDP)
CountryCountry OTC Commodity OTC Commodity Derivatives Derivatives Trading (Average Trading (Average daily turnover daily turnover 2007 – US$ 2007 – US$ billion) billion)
Exchange Traded Exchange Traded Commodity Commodity Derivatives Derivatives (Annual turnover (Annual turnover 2008 – 2008 – US$ trillion) US$ trillion)
IndiaIndia ---- 0.330.33
USAUSA 4.64.6 8282
EUEU 1313 4949
CountryCountry 20062006 20072007 20082008
TotaTotall
LifeLife NonNon-life-life
TotaTotall
LifeLife NonNon-life-life
TotaTotall
LifeLife NonNon-life-life
USAUSA 9.589.58 4.64.6 4.984.98 9.619.61 4.254.25 5.155.15 9.179.17 4.124.12 5.055.05
UKUK 14.714.755
10.110.199
4.564.56 13.313.377
8.628.62 4.754.75 12.612.6 8.928.92 3.683.68
GermanyGermany 6.766.76 3.063.06 3.73.7 6.996.99 3.173.17 3.823.82 6.976.97 3.113.11 3.863.86
JapanJapan 10.810.866
8.648.64 2.222.22 10.810.811
8.618.61 2.22.2 9.529.52 6.756.75 2.772.77
IndiaIndia 3.263.26 2.592.59 0.670.67 2.882.88 2.262.26 0.620.62 3.173.17 2.532.53 0.650.65
ChinaChina 2.982.98 2.032.03 0.960.96 3.333.33 2.32.3 1.031.03 3.063.06 2.212.21 1.051.05
WorldWorld 8.148.14 4.764.76 3.383.38 8.068.06 4.594.59 3.483.48 7.997.99 4.554.55 3.433.43
CountryCountry 20072007 20082008
TotalTotal LifeLife Non-Non-lifelife
TotalTotal LifeLife Non-Non-lifelife
USAUSA 3637.73637.7 1657.51657.5 1980.21980.2 3755.13755.1 1692.51692.5 2062.62062.6
UKUK 4058.54058.5 2617.12617.1 1441.41441.4 4508.44508.4 3190.43190.4 1318.01318.0
GermanyGermany 2051.22051.2 930.4930.4 1120.81120.8 2286.62286.6 1021.31021.3 1265.31265.3
JapanJapan 3770.93770.9 3002.93002.9 768768 3874.83874.8 30443044 830.8830.8
IndiaIndia 16.416.4 12.912.9 3.53.5 19.719.7 15.715.7 4.04.0
ChinaChina 36.336.3 25.125.1 12.212.2 40.240.2 27.327.3 12.912.9
WorldWorld 469.6469.6 267.1267.1 202.5202.5 511.5511.5 291.5291.5 220220
CountryCountry Insurance Insurance AssetsAssets
% of % of GDPGDP
IndiaIndia 2222 33
USAUSA 5,4655,465 4444
JapanJapan 2,2642,264 5050
UKUK 1,9071,907 8787
FranceFrance 1,5271,527 7272
GermanyGermany 1,3701,370 4949
NetherlanNetherlandsds
385385 6161
SwitzerlanSwitzerlandd
337337 9191
CountryCountry Pension Pension FundsFunds
% of % of GDPGDP
IndiaIndia 60*60* 88
SwitzerlanSwitzerlandd
469469 127127
NetherlanNetherlandsds
693693 110110
USAUSA 12,11912,119 9797
JapanJapan 3,4193,419 7575
UKUK 1,6071,607 7373
FranceFrance 165165 88
GermanyGermany 114114 44
* Estimate of EPFO, EPS and PF Funds.
CountryCountry Domestic Domestic EquityEquity
International International EquityEquity
Domestic Domestic BondsBonds
International International BondsBonds
CashCash OthersOthers
JapaJapann
2929 1616 2626 1111 1111 77
UKUK 3939 2828 2323 11 22 77
USAUSA 4747 1313 3333 11 11 55
20082008 20520500
WorldWorld 1111 2525G10G10 2323 4242ChinaChina 1111 3737Latin Latin AmericaAmerica
99 2929
IndiaIndia 88 2222
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