Impact of Monetary & Banking Reforms- Post Liberalization period (1991)

1. MALAVIYA NATIONAL INSTITUTE OF TECHNOLOGY JAIPUR
IMPACT OF MONETARY & BANKING REFORMS
POST LIBERALSIATION (1991)
25-02-2015
Presented by:
Aakash Bhatia Kuldeep Singh Bhati Gagan Gothwal Mayank Mehta
2011UCH4002 2011UCH1759 2011UCH1023 2011UCH1590

2. OVERVIEW
 MONETARY POLICY & ITS OBJECTIVE
 TRADE OFF IN MONETARY GOALS
 EVOLUTION OF MONETARY POLICY
 INSTRUMENTS OF MONETARY POLICY IN INDIA
 MONETARY REFORMS
 BANKING REFORMS
 OUTCOMES OF THESE REFORMS
 DEMERITS
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3. MONETARY POLICY & ITS OBJECTIVE
Monetary policy is defined as comprising of such measures which lead to
influencing the cost, volume and availability of money and credit so as to achieve
certain set objectives.
The main objectives or goals of monetary policy are:-
(1) Price stability
(2) Economic growth
(3) Full employment and
(4) Maintenance of balance of payments equilibrium
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4. WHY THESE OBJECTIVES ?
 Price Stability
Fluctuations in prices bring about uncertainty and instability in the
economy.
Price stability keeps the value of money stable, eliminates cyclical fluctuations,
brings economic stability, helps in reducing inequalities of income and wealth,
secures social justice and promotes economic welfare.
Innovations may reduce the cost of production but a policy of stable prices may
bring larger profits to producers at the cost of consumers and wage earners.
 Economic Growth
Economic growth implies raising the standard of living of the people, and
reducing inequalities of income distribution.
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5.  Full Employment
Full employment is a situation in which everybody who wants to work gets work.
Full employment can be achieved in an economy by following an expansionary
monetary policy.
 Balance of payment’s Equilibrium
A balance of payments deficit reflects excessive money supply in the economy. As
a result, people exchange their excess money holdings for foreign goods and
securities.
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6. MONETARY POLICY :KEYNESIAN VIEW
EXPANSIONARY MONETARY POLICY TIGHT MONETARY POLICY
Problems : Recession & Unemployment
Measures :
1. Central bank buys securities through open market
operation
2. It reduces CRR ( Instrument of Monetary Policy )
3. It lowers bank rate
Problem : Inflation
Measures :
1. Central bank sells securities through open market
operation
2. It raises CRR & SLR bank rate
3. It raises maximum margin against holding of stocks of
goods
Money supply increase
Interest rate falls
Investment increase
Aggregate demand increase
Aggregate output increase
Money supply decrease
Interest rate decrease
Investment expenditure declines
Aggregate demand declines
price level falls
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7. EVOLUTION OF MONETARY POLICY
 The evolution of monetary policy framework in India can be seen in phases.
 In the formative years during 1935–1950, the focus of monetary policy was to
regulate the supply of and demand for credit in the economy through the bank
rate, reserve requirements and open market operations (OMO).
 In the development phase during 1951–1970, monetary policy was geared towards
supporting plan financing. This led to introduction of several quantitative control
measures to contain consequent inflationary pressures. While ensuring credit to
preferred sectors, the bank rate was often used as a monetary policy instrument.
 During 1971–90, the focus of monetary policy was on credit planning. Both the
statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) were used to
balance government financing and the attendant inflationary pressure.
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8. TRADE OFF IN MONETARY GOALS
 Economic growth and Price stability
 Full employment and price stability
 Full employment and Balance of payments
 Full Employment and Economic Growth
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9. INSTRUMENTS OF MONETARY POLICY IN
INDIA
QUANTITATIVE TOOLS
 BANK RATE
The interest rate at which a nation's central bank lends money to domestic
banks.
Often these loans are very short in duration.
Bank Rate serves as a reference rate for other rates in the financial markets.
From 2004-10, it was kept constant at 6 per cent.
Bank Rate is 8.75% which is in effect from 15 January 2015.
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10.  CASH RESERVE RATIO (CRR)
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total
deposits of customers, which commercial banks have to hold as reserves
either in cash or as deposits with the central bank.
CRR is set according to the guidelines of the central bank of a country.
The Narasimham Committee in its report submitted in November 1991, was
of the view that a high cash Reserve Ratio (CRR) adversely affects the bank
profitability.
Thus, government decided to reduce the CRR over a four year period to a
level below 10 per cent.
As per the policy announced on April 24, 2010, the CRR in India was 6.00 per
cent.
Currently it is at 4%.
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11.  STATUTORY LIQUIDITY RATIO (SLR)
Statutory liquidity ratio (SLR) is reserve requirement that the commercial banks in
India requires to maintain in the form of gold, cash or government
approved securities before providing credit to the customers.
There are two reasons for raising statutory liquidity requirements by the Reserve
Bank of India:
(1) To reduce commercial bank’s capacity to create credit and thus help to check
inflationary pressures.
(2) To make larger resources available to the government.
Currently SLR is 21.50%.
0
5
10
15
20
25
30
35
40
45
April,1992 Jan, 1993 Sept, 1993 Oct, 1993 Sep,1994 Oct,1994 Oct,1997 Nov,2008 Nov,2009
SLR Rate(%)
SLR Rate(%)
Source : RBI Publications
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12.  OPEN MARKET OPERATIONS
The open market operation policy is that policy by which the central bank contracts
or expands the credit by sale or purchase of securities in the open market.
Open market operations is an effective instrument for liquidity management in
economy.
 REPO RATE
Bank sells the security to RBI to raise money. When banks sell security , banks
promise to buy back the same security from RBI at a predetermined date with an
interest at the rate of REPO .
Currently Repo rate is 7.75%.
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13. 25-02-2015 13MNIT Jaipur

14. 0
2
4
6
8
10
12
14
16
18
Repo Rate (%)
Repo Rate (%)
Source : RBI Publications
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15.  REVERSE REPO RATE
Reverse repo rate is the rate at which banks park their short-term excess liquidity
with the RBI.
The RBI uses this tool when it feels that there is too much money floating in the
banking system.
An increase in the reverse repo rate means that the RBI will borrow money from the
banks at a higher rate of interest.
Currently reverse repo rate is 6.75%.
0
2
4
6
8
10
12
14
16
18
Reverse Repo Rate (%)
Reverse Repo Rate (%)
Source: RBI Publications
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16. LENDING RATE
0
2
4
6
8
10
12
14
16
18
20
Lending Rate after 1991 (%)
Source: RBI Publications
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17. DEPOSIT RATE
0
2
4
6
8
10
12
14
Deposit Rate(%) after 1991
Source: RBI Publications
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18. ANNUAL GROWTH RATE
0
2
4
6
8
10
12
Annual growth rates of GDP
GDP
Source: RBI Publications
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19. FISCAL DEFICIT
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21. QUALITATIVE TOOLS
While the quantitative tools controls relate to the total volume of credit (changing
High-powered money) and the cost of credit, qualitative tools operate on the
distribution of total credit.
Measures can be used to encourage greater channelling of credit into particular
sectors, as is being done in India in favour of designated priority sectors, is the
positive aspect.
 Varying Margin Requirement
It is an important qualitative method of credit control. This method was initially
used in America in 1929. The banks keep a certain margin while lending money
against securities.
Banks do not advance money to the full value of the security pledged for the loan. .
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22.  Regulation of Consumer Credit
It helps to regulate the terms and conditions under which the credit repayable in
instalments could be extended to the consumers for purchasing the durable goods
The central bank can control the consumer credit
1. by changing the amount that can be borrowed for the purchase of the consumer
durables and
2. by changing the maximum period over which the instalments can be extended.
 Rationing of Credit
The central bank can also adopt the rationing of credit as a selective measure.
Under this method, the central bank can fix a limit for the credit facilities available
to commercial bank.
This is to control and regulate the purpose for which the credit is granted by the
banks.
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23.  Direct Action
Direct action refers to direct dealings with the individual bank which adopt policies
against the policies of the central bank.
Under this system,
(1) the central bank may refuse to rediscount the bills of exchange of the
commercial banks .
(2) it may charge a penal rate of interest over and above the bank rate and
(3) the central bank may refuse to grant more credit to the particular banks.
 Moral Persuasion
Moral suasion means advising, requesting and persuading the commercial banks to
co-operate with the central bank in implementing its general monetary policy.
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24. MONETARY REFORM: a gradual process
 Reduced CRR and SLR
 CRR:15% (1991) to current 4% level.
 SLR: 38.5% (1991) to current minimum of 21.5% level.
 more loanable funds with commercial banks.
0
2
4
6
8
10
12
14
16
1990 1995 2000 2005 2010 2015 2020
CRR(%)
Year
CRR (%)
Series1
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25. Banking Reforms
 Fixing prudential norms: for professionalism
 recognition of income sources and classification of assets
 maintaining international standards in accounting practices.
 re-structuring of Non-performing assets (NPAS)
 Introduction of CRAR (1992) : new ratio
 Almost all the banks in India has reached the CAR above the
statutory level of 9%.
 Operational autonomy
 satisfies the CAR then freedom in opening new branches.
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26.  Increased Micro Finance
 RBI focused on SHG (self-help group) to strengthen the Rural Finance.
 Micro Finance Institutions (MFIs) kept under priority sector lending,
 Like Urban Co-operative banks: small and marginal farmers,
Agriculture and Non-Agriculture Labour, Artisans and Rural sections
of the society.
 still only 30% of the target population has been benefited.
 Improved profitability and efficiency by
 reducing non-performing loans
 use of technology
 New generation banks
 Bank such as ICICI Bank, UTI Bank have given a big challenge to the
Public Sector Banks leading to a greater degree of competition.
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27.  Changes in accordance to the external reforms
 controls on imports, reduce tariffs, etc.
 Diversification of banking
 banks started new services and new products.
 Some bank established subsidiaries in Merchant Banking, mutual
funds, insurance, venture capital etc.
 Access To Capital Market
 Supervision Of Commercial Banks
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28. Banking Reforms in India: Phase II in 1998
 Strengthening Technology
 Increase Inflow Of Credit
 Increase in FDI Limit: From 49% to 74%
 Adoption Of Global Standards
 Mergers And Amalgamation
 Guidelines For Anti-Money Laundering
 Base Rate System Of Interest Rates
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29. OUTCOMES OF THESE REFORMS
 Business per Employee (Rs. in Lakhs)
 Profit per Employee (Rs. In Lakh)
Source : New Century Publications, 2008
Source : New Century Publications, 2008
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30. SECTORIAL GDP
Agriculture
24%
Industry
20%
Service
56%
2000-01
Agricultur
e, 14.4
Industry,
27.9
Service,
57.7
2010-11
Agriculture,
12
Industry,
28.2Service,
59.8
2014-15 forecast
Source: RBI Publications
Agriculture,
31.4
Industry,
19.8
Service,
48.8
1990-01
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31. Foreign Institutional Investment
Source: RBI Publications 25-02-2015 31MNIT Jaipur

32. Recent Banking Reform
 RBI to issue licences for private ‘Payment Banks’ and ‘Small Banks’.
 Payments banks
 services to people who do not have a bank account, including millions of migrant
workers. Almost half of India’s population is unbanked.
 ATM and debit cards, but not credit cards.
 distribute simple financial products such as mutual fund units and insurance products.
 Account balances in such banks will be limited to a maximum of Rs.1 lakh.
 Such banks will not lend money.
 Small banks
 will provide savings products and credit to small businesses and to small & marginal
farmers.
 75% loan to priority sector (agriculture and small businesses)
 And half the loan portfolio of the banks should be loans and advances of up to Rs.25
lakh.
 RIL, Bharti, Birla, Vodafone, SKS microfinance Ltd. In the race.
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33. DEMERITS
 Monetary Policy fails to tackle Budgetary Deficit-
 Higher level of budget deficit made Monetary Policy ineffective
 Automatic monetization of deficit let to high Monetary expansion
 The coverage area of Monetary Policy is limited-
 covered commercial banking sector only & Other non-banking institutions remains
untouched. Which limits the effectiveness of the Policies.
 Money market is not organized-
 huge size of money market , not in control of RBI. So, any tools of the Monetary Policy
does not affect the unorganized money market making Monetary Policy less affective.
 Predominance of cash transaction-
 a huge dominance of the cash in total money supply
 It is one of the main obstacles in the effective implementation of the Monetary Policy.
Because monetary policy operates on the bank credit rather on cash.
 Increase volatility–
 As the Monetary has adopted changes in accordance to the changes in the external
sector in India, It could lead to high amount of the volatility.
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34. ANNUAL GROWTH RATE
0
2
4
6
8
10
12
Annual growth rates of GDP
GDP
Source: RBI Publications
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35. INDIAN ECONOMY: STABLE, LARGE BUT SLOW !
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36. Reference
 http://www.livemint.com/Companies/rsKzX09TVyRCkA4FSDGOHP/Future-
Group-applies-for-payments-bank-licence.html
 MONETARY POLICY IN INDIA IN THE POST LIBERALISATION SCENARIO, Asia
Pacific Journal of Research:Vol: I Issue XII, December 2013 ISSN: 2320-5504,
E-ISSN-2347-4793
 Secondary data were collected from the
 RBI bulletin, RBI occasional papers, RBI Annual Reports,
 Report on Currency and Finance, Economic Survey,
 Economic and Political Weekly (EPW).
 Impact of monetary policy on indian economy in the post reform period by
Smita .T.H. PHD Thesis (2010)
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37. IMPACT OF MONETARY & BANKING REFORMS
POST LIBERALSIATION (1991)
25-02-2015
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