Financial Sector has been
incrementally deregulated and
exposed to international financial
markets in the last 18 years;
...
Global financial market conditions
are favorable
Are we seizing the opportunity for
urgent reforms and greater
integrati...
 Increase competition and thereby enhance the
efficiency of financial intermediation and promote
overall savings;
 Widen...
• There should be an adequate number of buyers and
sellers such that all market participants are price-
takers
• The prima...
The depth of the financial sector is
relatively low
About two-thirds of private savings
are mobilized by the financial s...
Table 1
Stock of Financial Assets as % of GDP
(2008)
 
CountryCountry FinancialFinancial
AssetsAssets
IndiaIndia 160160
Ja...
• A gradualist approach to “Fuller Capital 
Account Convertibility” is in order. The 
risks stemming from potential demand...
 Domestic interest rates are not
adequately market determined i.e.
there is need for further
deregulation of interest rat...
CountrCountr
yy
Regulators of Financial ServicesRegulators of Financial Services
UKUK Financial Service Authority (FSA)Fin...
The banking sector has reformed
considerably since the early 1990s
but is excessively dominated by the
public sector whic...
DepositsDeposits LoansLoans
MarMar
20002000
MarMar
20092009
MarMar
20002000
MarMar
20092009
PubliPubli
cc
SectoSecto
rr
81...
CountryCountry Lending as percent ofLending as percent of
DepositsDeposits
ChinaChina 130130
UKUK 114114
MalaysiaMalaysia ...
Efficiency in the banking sector lags
international comparators in terms of
intermediation costs
Just two domestic priva...
A coordinated effort is needed to
hasten consolidation among and
international listings of public sector
banks and entry ...
 Indian equity and related exchange
traded derivatives markets and to some
extent the mutual fund industry compare
well w...
 The corporate debt market is miniscule
and needs a series of reforms including
stamp duty rationalization, repos in
corp...
Exchange traded interest rate
derivatives should be encouraged
since this will improve the market
determination of domest...
Commodity derivatives markets
should be regulated by SEBI
The Companies Act needs to be
amended and SEBI strengthened to...
The private equity market should be
courted and exit valuation
methodologies made transparent and
predictable.
The asset...
 In cross-country terms, the Indian
insurance industry is small in depth and
coverage and there is tremendous
potential f...
 The pension sector is almost entirely in the public
sector and covers only about 16% of the work-force.
Progress is hind...
The complex web of legislation that
applies to the financial sector needs
to be simplified. Further, there are
obvious an...
IndiaIndia 33
SouthSouth
KoreaKorea
174174
BrazilBrazil 7171
ChinaChina 6161
ThailandThailand 5454
MexicoMexico 4444
CountryCountry MarketMarket
CapitalisatiCapitalisati
onon
ValueValue
AddedAdded
ListedListed
DomesticDomestic
Cos.Cos.
Ind...
Country/Country/
RegionRegion
OTCOTC
DerivativesDerivatives
MarketsMarkets
Average dailyAverage daily
turnover*turnover*
E...
CountryCountry Mutual FundMutual Fund
AssetsAssets
% of% of
GDPGDP
IndiaIndia 6464 88
USAUSA 8,9058,905 7171
FranceFrance ...
YearYear EquityEquity
IssuesIssues
Rs.Rs.
CroresCrores
GOIGOI
SecuritieSecuritie
ss
Rs.Rs.
CroresCrores
Debt IssuesDebt Is...
CountryCountry % of% of
GDPGDP
IndiaIndia 22
USAUSA 145145
GermanyGermany 116116
UKUK 8383
MalaysiaMalaysia 7373
ThailandT...
IndiaIndia 33
USAUSA 5151
UKUK 5454
SouthSouth
KoreaKorea
1313
ThailandThailand 99
MalaysiaMalaysia 2323
GermanyGermany 48...
CountryCountry OTC CommodityOTC Commodity
DerivativesDerivatives
Trading (AverageTrading (Average
daily turnoverdaily turn...
CountryCountry 20062006 20072007 20082008
TotaTota
ll
LifeLife NonNon
-life-life
TotaTota
ll
LifeLife NonNon
-life-life
To...
CountryCountry 20072007 20082008
TotalTotal LifeLife Non-Non-
lifelife
TotalTotal LifeLife Non-Non-
lifelife
USAUSA 3637.3...
CountryCountry InsuranceInsurance
AssetsAssets
% of% of
GDPGDP
IndiaIndia 2222 33
USAUSA 5,4655,465 4444
JapanJapan 2,2642...
CountryCountry PensionPension
FundsFunds
% of% of
GDPGDP
IndiaIndia 60*60* 88
SwitzerlanSwitzerlan
dd
469469 127127
Nether...
CountryCountry DomesticDomestic
EquityEquity
InternationalInternational
EquityEquity
DomesticDomestic
BondsBonds
Internati...
20082008 205205
00
WorldWorld 1111 2525
G10G10 2323 4242
ChinaChina 1111 3737
LatinLatin
AmericaAmerica
99 2929
IndiaIndia...
Banking
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Banking

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Banking

  1. 1. 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.
  2. 2. 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?
  3. 3.  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
  4. 4. • 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
  5. 5. 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.
  6. 6. Table 1 Stock of Financial Assets as % of GDP (2008)   CountryCountry FinancialFinancial AssetsAssets IndiaIndia 160160 JapanJapan 420420 MalaysiaMalaysia 400400 South KoreaSouth Korea 235235 ChinaChina 220220    
  7. 7. • 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 
  8. 8.  Domestic interest rates are not adequately market determined i.e. there is need for further deregulation of interest rates
  9. 9. CountrCountr yy 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) GermaGerma nyny The Federal Financial Supervisory Authority (BaFin)The Federal Financial Supervisory Authority (BaFin) IndiaIndia Banking – RBIBanking – RBI Capital Markets – SEBICapital Markets – SEBI Insurance – IRDAInsurance – IRDA Pension – PFRDAPension – PFRDA ChinaChina Banking – China Banking Regulatory CommissionBanking – China Banking Regulatory Commission (CBRC)(CBRC) Capital Markets – State Council SecuritiesCapital Markets – State Council Securities Commission (SCSC)Commission (SCSC) Insurance – The China Insurance RegulatoryInsurance – The China Insurance Regulatory Commission (CIR)Commission (CIR) USAUSA Banking – Federal Reserve BankBanking – Federal Reserve Bank
  10. 10. 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
  11. 11. DepositsDeposits LoansLoans MarMar 20002000 MarMar 20092009 MarMar 20002000 MarMar 20092009 PubliPubli cc SectoSecto rr 81.981.9 7878 79.379.3 73.273.2 NewNew PrivatPrivat ee 5.25.2 10.910.9 5.05.0 13.813.8 OldOld 7.47.4 6.46.4 7.67.6 6.26.2
  12. 12. CountryCountry Lending as percent ofLending as percent of DepositsDeposits ChinaChina 130130 UKUK 114114 MalaysiaMalaysia 101101 USAUSA 9292 IndiaIndia 6161
  13. 13. 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
  14. 14. A coordinated effort is needed to hasten consolidation among and international listings of public sector banks and entry of new private sector banks Separate regulator for banking We should not mix up insolvency with illiquidity
  15. 15.  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)
  16. 16.  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
  17. 17. 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
  18. 18. 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
  19. 19. 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.
  20. 20.  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
  21. 21.  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
  22. 22. 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).
  23. 23. IndiaIndia 33 SouthSouth KoreaKorea 174174 BrazilBrazil 7171 ChinaChina 6161 ThailandThailand 5454 MexicoMexico 4444
  24. 24. CountryCountry MarketMarket CapitalisatiCapitalisati onon ValueValue AddedAdded ListedListed DomesticDomestic Cos.Cos. IndiaIndia 7171 5757 47634763 USAUSA 136136 172172 51435143 JapanJapan 104104 109109 32793279 UKUK 139139 189189 27592759 GermaGerma nyny 4444 6363 648648 ChinaChina 3535 2626 13871387 *Figures in percent
  25. 25. Country/Country/ RegionRegion OTCOTC DerivativesDerivatives MarketsMarkets Average dailyAverage daily turnover*turnover* Exchange-Exchange- tradedtraded DerivativesDerivatives MarketsMarkets AnnualAnnual turnover**turnover** IndiaIndia (2008)(2008) Not availableNot available 11 USAUSA (2008)(2008) 355355 819819 EUEU (2008)(2008) 10011001 487487 *US$ billion; ** US$ trillion
  26. 26. CountryCountry Mutual FundMutual Fund AssetsAssets % of% of GDPGDP IndiaIndia 6464 88 USAUSA 8,9058,905 7171 FranceFrance 1,3631,363 6565 SwitzerlaSwitzerla ndnd 117117 3232 UKUK 547547 2525 NetherlaNetherla ndsnds 9494 1515 GermanyGermany 297297 1111 (US$ billion end 2008)
  27. 27. YearYear EquityEquity IssuesIssues Rs.Rs. CroresCrores GOIGOI SecuritieSecuritie ss Rs.Rs. CroresCrores Debt IssuesDebt Issues PubliclyPublicly placedplaced PrivatelyPrivately placedplaced 2004-052004-05 28,20028,200 (0.9)(0.9) 1,06,501,06,50 1 (3.4)1 (3.4) 4,0944,094 55,40855,408 (1.8)(1.8) 2005-062005-06 36,53336,533 (1.0)(1.0) 1,60,011,60,01 8 (4.5)8 (4.5) ---- 81,84681,846 (2.3)(2.3) 2006-072006-07 (Apr-(Apr- Sep)Sep) 8,2058,205 BEBE 1,81,871,81,87 55 ---- 47,94547,945 Figures in () are percent of GDP
  28. 28. CountryCountry % of% of GDPGDP IndiaIndia 22 USAUSA 145145 GermanyGermany 116116 UKUK 8383 MalaysiaMalaysia 7373 ThailandThailand 2222 SouthSouth AfricaAfrica 1717 (2008)
  29. 29. IndiaIndia 33 USAUSA 5151 UKUK 5454 SouthSouth KoreaKorea 1313 ThailandThailand 99 MalaysiaMalaysia 2323 GermanyGermany 4848 2008 (Percent of GDP)
  30. 30. CountryCountry OTC CommodityOTC Commodity DerivativesDerivatives Trading (AverageTrading (Average daily turnoverdaily turnover 2007 – US$2007 – US$ billion)billion) Exchange TradedExchange Traded CommodityCommodity DerivativesDerivatives (Annual turnover(Annual turnover 2008 –2008 – US$ trillion)US$ trillion) IndiaIndia ---- 0.330.33 USAUSA 4.64.6 8282 EUEU 1313 4949
  31. 31. CountryCountry 20062006 20072007 20082008 TotaTota ll LifeLife NonNon -life-life TotaTota ll LifeLife NonNon -life-life TotaTota ll LifeLife NonNon -life-life USAUSA 9.589.58 4.64.6 4.94.9 88 9.619.61 4.254.25 5.155.15 9.179.17 4.124.12 5.055.05 UKUK 14.714.7 55 10.110.1 99 4.54.5 66 13.313.3 77 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 10.810.8 66 8.648.64 2.22.2 22 10.810.8 11 8.618.61 2.22.2 9.529.52 6.756.75 2.772.77 IndiaIndia 3.263.26 2.592.59 0.60.6 77 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 0.90.9 66 3.333.33 2.32.3 1.031.03 3.063.06 2.212.21 1.051.05
  32. 32. CountryCountry 20072007 20082008 TotalTotal LifeLife Non-Non- lifelife TotalTotal LifeLife Non-Non- lifelife USAUSA 3637.3637. 77 1657.1657. 55 1980.21980.2 3755.3755. 11 1692.1692. 55 2062.62062.6 UKUK 4058.4058. 55 2617.2617. 11 1441.41441.4 4508.4508. 44 3190.3190. 44 1318.01318.0 GermanyGermany 2051.2051. 22 930.4930.4 1120.81120.8 2286.2286. 66 1021.1021. 33 1265.31265.3 JapanJapan 3770.3770. 99 3002.3002. 99 768768 3874.3874. 88 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
  33. 33. CountryCountry InsuranceInsurance 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 NetherlanNetherlan dsds 385385 6161 SwitzerlanSwitzerlan 337337 9191
  34. 34. CountryCountry PensionPension FundsFunds % of% of GDPGDP IndiaIndia 60*60* 88 SwitzerlanSwitzerlan dd 469469 127127 NetherlanNetherlan dsds 693693 110110 USAUSA 12,11912,119 9797 JapanJapan 3,4193,419 7575 UKUK 1,6071,607 7373 FranceFrance 165165 88 * Estimate of EPFO, EPS and PF Funds.
  35. 35. CountryCountry DomesticDomestic EquityEquity InternationalInternational EquityEquity DomesticDomestic BondsBonds InternationalInternational BondsBonds CashCash OthersOthers JapaJapa nn 2929 1616 2626 1111 1111 77 UKUK 3939 2828 2323 11 22 77 USAUSA 4747 1313 3333 11 11 55
  36. 36. 20082008 205205 00 WorldWorld 1111 2525 G10G10 2323 4242 ChinaChina 1111 3737 LatinLatin AmericaAmerica 99 2929 IndiaIndia 88 2222
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