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Finance sector reforms development finance-b.v.raghunandan

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Finance sector reforms development finance-b.v.raghunandan

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Deals with reforms of finance sector in India and its impact on development finance and industrial development

Deals with reforms of finance sector in India and its impact on development finance and industrial development

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Finance sector reforms development finance-b.v.raghunandan

  1. 1. Finance Sector Reforms -B.V.Raghunandan National Conference, St.Mary’s College, Shirva May 6, 2016
  2. 2. Development Finance : Pre-reform Period • Provided by Term Lending Institutions like IFCI Ltd., ICICI and IDBI • Long Term Financial Assistance through subscription to equity shares, preference shares, debentures of industrial units • Long Term Loans at a low rate of interest • Specialists in project evaluation and had representation on the Board of Directors
  3. 3. Commercial Banking: Pre- reforms • Short-term and Medium-term Deposits • Financing the working capital needs through Overdraft, Cash Credit and Bills Discounting • Loans were also granted for short and medium term • Finance was only through creation of debt and not through subscription to long term securities
  4. 4. Mixed Banking • A system of banking whereby the commercial banks themselves provided short-term and long-term finance • Germany follows the system and all other countries avoid it to be risky • In 2003, by allowing ICICI Bank to take over its parent ICICI through reverse merger, RBI unwittingly allowed the transition from commercial banking to mixed banking with no discussion
  5. 5. Reverse Merger of ICICI • A micro event brought out a paradigm shift in the banking policy at the macro level without anyone being conscious of it • By this move, all the functions of ICICI became the functions of ICICI Bank including providing financial services • Other banks also had to be allowed to expand their foot-prints
  6. 6. Impact •The concept of development financial institution regressed •IDBI took a commercial banking license and is in search of identity •Banks started providing long-term finance in the form of loans •Since then, most of the new big industrial undertaking including Kingfisher Airlines have become financial disasters •Banks have become an NPA mess Impact
  7. 7. Financial Illiteracy • Not on the part of common man, but on the part of policy planners, analysts, opinion makers • Acceptance of the benchmarks of international financial institutions • Institutions like RBI allowing the reverse merger • No one is wondering how suddenly the Indian banks health is affected all pervasively
  8. 8. Entrepreneurship Illiteracy • On the part of the government and the media • Big projects require longer gestation period during which equity is the best form of finance • Civil Aviation is a high cost and high risk business. Troubles can happen • The government should realise all big projects are assets of the nation whether in private sector or in public sector • Govt. should extend a helping hand
  9. 9. Banking Sector Reforms • Do away with Basel Norms as loan is a day-to-day activity and raising equity capital is an elaborate and time-consuming activity • Lesser equity capital is not a symptom of weakness or disease • They can set up a subsidiary for providing long term finance on the model of IFCI Ltd • Definition of NPA should have reference to the collateral and not merely payment of instalment
  10. 10. Existing NPAs • It is not right that borrowers are selling their assets to repay the loans • Covert the loans into preference shares or equity shares • Rejig their business model for better working • Any new financial assistance should be in the form of equity or preference shares
  11. 11. THANK YOU

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