Financial Services Reforms in India

8/14/2019 Financial Services Reforms in India

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Alliance Business SchoolBangalore, India

San Jose State University, USA

Summer Study Tour : July 24, 2008

Financial Services in India

Prof Chowdari Prasad
http://www.absindia.org/index.html


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Financial Services : IFS 203/30/09

Flow of Presentation

Indian Rupee, US Dollar, Savings Five Year Plans in India Indian Financial System

RBI, SBI, Public, Private and Foreign Banks Financial Sector Reforms 1991, 1993 . WTO and Financial Services 1995

Financial Savings & Market Share Data Financial Services Products References


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The Indian Rupee in 9 Denominations

(1,000 / 500 / 100 / 50 / 20 / 10 / 5 / 2 / 1) The Rupee is relatively

confined to India, and is notused extensively in any othercountry

Later years of British colonialrule: Pegged to gold standardb/w of Great British Pound

1966: de-pegged from theBritish Pound; pegged to theUS Dollar

1971: de-pegged from USDollar (b/c US$ was tanking) Today, the RBI conducts a

managed float on the INR /USD exchange rate; INR / EURand INR / JPY are marketdetermined


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Distribution of Financial Savings

- Household Sector in India Currency .. .. .. 13 % Bank Deposits . .. .. 28 %

Non Banking Deposits .. 14 % LIC Policies & UTI .. .. 11 % PF & Pension Funds.. .. 20 % Claims on Government .. 9 % Shares and Debentures ... 5 % T O T A L .... 100%


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Rupee, Dollar and Values

1 USD = 40 INR (approx) 1 K = 1,000 (One Thousand)

1 Lac = 1,00,000 (One Hundred Thousand)

1Million = 10 Lacs (10,00,000) 1 Crore = 100 Lacs or 10 Million ( or 1,00,00,000)

1 Billion = 100 Crores (1,000 Mn or 1,00,00,00,000)

So, USD 1 Bn = INR 4,000 Crores or

INR 1 Crore = USD 250,000 (approx)
http://images.google.co.in/imgres?imgurl=http://www.gold-prices.biz/wp-content/img/2007/08/us-dollar-index-2-16-august-2007.JPG&imgrefurl=http://www.gold-prices.biz/the-us-dollar-index-is-what/&h=482&w=460&sz=55&hl=en&start=18&tbnid=m4YQrpnNm7qIXM:&tbnh=129&tbnw=123&prev=/images%3Fq%3DUS%2BDollar%26gbv%3D2%26hl%3Den%26sa%3DGhttp://www.freefoto.com/images/04/28/04_28_47---US-Dollar-Bills_web.jpg


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Five Year Plans in India

I Plan (1951 - 1956)

II Plan (1956 - 1961) III Plan (1961 1966)

Plan Holiday 1966-69

IV Plan (1969 1974) V Plan (1974 1979)

Break 1979 - 1980

VI Plan (1980 1985)

VII Plan (1985 1990) Break 1990 - 1992

VIII Plan (1992 1997)

IX Plan (1997 2002) X Plan (2002 2007)

XI Plan (2007-2012)


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Growth of GDP and major Sectors

(% per year)


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Indian Financial System

MoF,GOI, New Delhi

RBI/

SIDBI/NABARD

SEBI / NHB /

IRDA / PFRDA

DevelopmentFinance Institutions

IFCI, IDBI, ICICI,IIBI, IDFC

EXIM Bank, IL&FS,

Banks SB Group,Public / RRBs /

Private-Old & New/Foreign / LAB / Coop

NBFCs, Chit Funds,

Nidhi Cos, Postal /

Natl Small Savings /Ins Cos/HFCs/CRAs/

Credit Card Cos


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Reserve Bank of India

Scheduled Banks

Commercial Banks Co-operatives

RRB's (96) & LABs (4)Foreign Banks

(29)

Public Sector Banks(28)

StateCO-operatives

(16)Urban

Co-operatives(52)

Private Sector Banks(25)

New (8)Old (17)

IDBI BankState Bank of India& Associates (8)

Nationalised Banks (19)


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The Banking Regulator - RBI Reserve Bank of India

(RBI): The Central Bank Controls Currency (Rupee) Manages Foreign Exchange

Supervises and regulates theFinancial System Promotes Economic

Development Banker to the Central

Government Headquarters in Mumbai,

and 22 regional branches URL www.rbi.org.in
http://www.rbi.org.in/http://www.rbi.org.in/


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Reserve Bank of India Central Bank of the country

Imperial Bank of India handled the functions earlier

Hilton Young Commission recommendations

The Reserve Bank of India Act, 1934

Started as Share Holders Bank : Apr 01,1935

The Banking Regulation Act, 1949

RBI was nationalised in 1949

Accounting Year July 01 to June 30 Regulator, Adviser, Banker, Lender, etc

Set up DICGC,UTI, IDBI, NABARD, SIDBI, EXIM


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Indian Financial System

Commercial Banks28 Public Sector (8 SB Group,19 Nationalised & IDBI Bank)

25 Private Sector (17 Old and 8 New)2,800 plus Co-operative Banks !96 RRBs, 4 Local Area Banks !!

29 Foreign BanksMore than 70,000 bank branches Average popln served per branch : 15,000 !!!

Over 30,000 ATMs on-site, off-site & Bio-Metric


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Indian Financial System (2)

Development Finance InstitutionsLIC, GIC & its 4 SubsidiariesUTI, DICGC, ECGC, EXIM Bank, ICICI,

IFCI, IDBI, IIBI, NABARD, SIDBI, NHB,

SHCIL, NSDL, CDSL, IIFCL, IRFCSFCs, SIDCs, ITCOs, AFC, etcSTCI, DFHI, IDFC, IL & FS, etc


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Government SectorNational Savings Organisation

(NSCs, NSS, IVPs, KVPs, PPF etc)

Post Office Savings, RD Accounts

Employees Provident Fund Orgn., etc.


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Non Banking Financial CompaniesNidhi Companies

Chit Fund Companies

Investment CompaniesHire Purchase Companies

Lease Finance Companies

Housing Finance Companies

Stock Exchanges,., Broking Cos

Credit Rating Agencies, RNBCs., MFIs.,

Mutual Funds, CIBIL, ARCs, Insurance Cos


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State Bank Group

STATE BANK OF INDIA 1955 Seven Subsidiaries in 1957

STATE BANK OF HYDERABADSTATE BANK OF MYSORESTATE BANK OF BIKANER & JAIPURSTATE BANK OF TRAVANCORESTATE BANK OF INDORESTATE BANK OF PATIALASTATE BANK OF SAURASHTRA


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20 Public Sector Banks

14 (July 1969) + 6 (February 1980) 1 (New Bank of Indiamerged with PNB in 1993) = 19 NATIONALISED BANKS

4. ANDHRA BANK5. ALLAHABAD BANK6. BANK OF BARODA7. BANK OF INDIA8. CANARA BANK9. CENTRAL BANK OF INDIA

10. DENA BANK11. INDIAN BANK 20. IDBI Bank


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17 Old Private Sector Banks

Bank of Rajasthan Catholic Syrian Bank City Union Bank Ltd

Devment Credit Bank Dhanalakshmi Bank Federal Bank J & K Bank Ltd

Karnataka Bank Ltd Karur Vysya Bank Ltd

10. Lakshmi Vilas Bank

11. Nainital Bank Ltd

12. Ratnakar Bank Ltd

13. Sangli Bank Ltd

14. SBI Comml & Intl Bank

15. South Indian Bank Ltd

16. TN Mercantile Bank Ltd

17. ING Vysya Bank Ltd.


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New Private Sector Banks - 1994

1. Centurion BANK OF PUNJAB Ltd.***2. ICICI Bank (taken over Bank of Madura and ICICI, etc)3. IDBI Bank (merged with IDBI in March 2005; taken over United Western

Bank in 2006)4. INDUSIND BANK (taken over Ashok Leyland Finance Ltd 04)5. HDFC BANK (taken over Times Bank)

6. UTI BANK LTD (now named as AXIS Bank)7. KOTAK MAHINDRA BANK (NBFC converted in Mar03)8. YES BANK (off shoot of Rabo Finance Corporation : commenced

operations in September 2004; IPO in Apr 05)

----------------------------------------------------------------------------------------------------------------

* TIMES BANK (Since merged with HDFC Bank-2000)** GLOBAL TRUST BANK (since merged with OBC 2004)

-----------------------------------------------------------------------------------------------------------------------------

*** Centurion Bank and Bank of Punjab Ltd merger in 2005 (CBOP)

**** Lord Krishna Bank Ltd merged with CBOP in 2007

***** CBOP (with Lord Krishna Bank) merged with HDFC Bank in 2008


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Foreign Banks in India 29 Foreign Banks having 273 Branches from 21

Countries; The Top 4 banks being Standard Chartered Bank (UK) 83 brs

HSBC Bank (Hong Kong) 47 branches Citibank NA (USA) 39 branches ABN AMRO Bank NV (Netherlands) 28 brs

Remaining 25 Foreign Banks 80 Branches http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/814
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/81450.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/81450.pdf


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Financial Sector Reforms 1991

Geographical spread of Bank branches Directed Investments / Credit Programs

Administered Rates of Interest

Problems of Recovery of Loans

Deterioration in Quality of Assets/Loans

Erosion of Profits

Low level of Computerisation

Trade Union Issues


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Indian Banking Sector - Reforms


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Banking Reforms 1993 2 L-P-G Policy of GOI since 1991 Technological Changes all over New Products and Services : Competition Narasimham Committees - I / II on Financial / Banking

Sector Reforms (1991 & 1997) Capital Adequacy : IRAC Norms : NPAs Priority Sector Loans: Reduce from 40 to 10% Reduced SLR (from 40% to 25%); CRR (15% to 4%) Provisioning for all types of Assets (Standard & NPAs)? Benchmark Prime Lending Rates Enactment / Amendments to various laws Ombudsman Scheme, 1995


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Banking Sector Reforms 3 Market determined Rates of Interest

No directed lending or investments Organisational Changes : Transparency 4 way classification of Loan Accounts Provisioning for Losses o/a NPAs DRTs and DRATs and enactment, Lok Adalat

System and now Corporate Debt Reconstruction ALM and Risk Management (1999) Know Your Customer (KYC) in Banks (2002) Non Performing Assets definition revised from 4

(four) quarters (1993) dues in Principal & Interestto 3 (three) (1994) to 2 (1995) quarters and nowfrom April 01, 2004 just 90 days / 1 quarter !


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Banking Sector Reforms .4

SARFAESI Act in 2002 Asset Reconstruction Cos Credit Information Bureau in 2005, SMERA in 2006 Raghuram Rajan Committee on Financial Sector

Reforms in 2007 Basel II norms for Bank Supervision from 2008 ! More Foreign Banks / Branches from 2009 Cross Selling, CRM, DSAs, Outsourcing, Internet Banking, Retail Banking, Mobile Banking Customer Service, Customer Care, Customer Delight Outsourcing, Franchisees, Recovery Agents,

Business Correspondents, allowed


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WTO & Financial Services-1995

Opening up for Foreign Banks NBFCs in collaboration with MNCs

Privatisation of Insurance Industry etc

Gradual reduction in rates of Interest Greater inflow of FDI in Banking Sector

Increase in inflow of FII investment

Greater use of Technology &Competition


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Rs.15,610Rs.66NAPER CAPITA CREDIT

Rs.21,388Rs.88NAPER CAPITA DEPOSIT

NANA9.6DEPOSITS AS % OFNATIONAL INCOME

19,49,5673,599547ADVANCES (IN CRORES)

25,98,8234,646881DEPOSITS (IN CRORES)

1664153POPULATION PER BRANCH(THOUSANDS )

30,4611,833NARURAL BRANCHES

70,711*8,2622335BRANCHES* (+ >30,000 ATMs)

2008993NO OF COMMERCIAL BANKS

March - 07June-691950-51PARAMETERS

PROGRESS OF COMMERCIAL BANKING


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7445,17,45119,23,19225,94,2592006-07

5314,74,0525,11,4349,62,6182000-01

603,08,8421,16,3011,92,5411990-91

6663,35925,37137,9881980-81

7910,5904,6845,9061970-71

773,0721,3361,7361960-61

621,4295478821950-51

Credit/Deposit

Ratio (%)

Total Business(Rs. in Crores)

Credit(Rs. inCrores)

Deposits(Rs. in Crores)

Year

EVOLUTION OF BANKING SINCE 1950


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601,54,785

(8.1%)2,58,128(10.3%)

30,461(44%)

Rural Centres

531,89,783(9.73%)

3,56,827(13.7%)

16,035(22%)

Semi-urban cenres

8116,04,999

(82%)

19,83,868

(76%)

24,215

(34%)

Urban Centres inclusiveof metro & other

Centres

8415,08,095(77.3%)

17,89,500(68.8%)

17,578(24.8%)

Top 100 Centres(inclusive of metroCentres)

8812,88,833

(66%)

14,52,599

(56%)

11566

(16.3%)

Metro Centres

9311,03,937

(56%)11,89,536

(45%)6,795

(9.62%)*

Top 6 metros

7519,49,56725,98,82370,711All India

Credit/Deposit

ratio(%)

Credit(Rs. In Crores)

Deposits(Rs. In Crores)

No of bankbranches

Geographical Segment

BANKING PROFILE AT METRO / URBAN / SEMI URBAN / RURAL (AS ON 31-3-2007)


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60401,54,785

(8.1%)59,293

(10.4%)2,58,128(10.3%)

1,47,950(14.6%)

30,461(44%)

32,538

(49%)

RuralCentres

53321,89,783

(9.7%)64,318(11%)

3,56,827(13.7%)

1,98,631(19.6%)

16,035(22%)

14,608

(22%)

Semi-urbancenres

816616,04,999

(82%)

4,44,095

(78%)

19,83,868

(76%)

6,64,879

(66%)

24,215

(34%)

19,109

(29%)

UrbanCentres

inclusiveof metro& others

847115,08,095

(77%)4,27,630

(75%)17,89,500

(68%)5,95,794

(59%)17,578(24%)

14,866

(22%)

Top 100Centres(inclusive ofmetros)

888112,88,833

(66%)3,47,772

(61%)14,52,599

(56%)4,29,960

(42%)11,566(16%)

8,617(13%)

MetroCentres

755619,49,5675,67,70625,98,82310,11,46070,71166,25

5

All India

Mar2007

Sept2001

March2007

Sept.2001

March2007

Sept.2001

March2007

Sept.2001

% of CDRatio

Credit(Rs. in Crores)

Deposits(Rs. in Crores)

No. of BranchesGeographica

lSegment

Growth of Banking Industry over the last five and half years


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Electronic

Banking

ATMs

Head Office

BranchBanking

Branch 1

Branch 2Branch 3

Branch 4

Branch 5

Branch 6

Branch n


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Cheque Truncation


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TECHNOLOGY & DEVELOPMENTS

ALPMs CLEARING HOUSE CAR, CRR, SLR, PS, NPAs CREDIT/DEBIT CARDS NICNET, I-NET, RABMN

INFINET, RBINET BANKNET, NDS, SFMS MICR, ATMs, SWIFT DEMAT, IT ACT-2000 INTERNET BANKING

ECS, EFT, SEFT, RTGS CROSS SELLING SECURITISATION

ALM & RM, MIS CRM, KYC, AML Core Banking Solutions KISAN /SME CARD CREDIT INFO BUREAU

DISASTER MANAGEMENT CREDIT RATING CYBER LAWS CYBER CRIMES HACKING,

PHISHING, PHARMING, TROJAN,

SKIMMING, ETC SMART CARDS Cheque Truncation


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ICICI Bank A Case Study


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Market Shares in Banking (excluding R R Bs)

6.6011.3218.824.94Foreign (34)

10.9013.139.518.24New Private (9)

5.967.182.716.51Old Private (21)

44.8937.2754.9749.02Nat Banks (19)

28.0328.104.3327.85SB Group (8)

TotalAssetsReservesCapitalDepositsType of Banks


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Financial Services / Products

Deposits, Loans and Remittances Letters of Credit, Bank Guarantees Credit (Debit, Smart, Charge, Combo) Cards

Insurance Life and Non-Life, Term Insurance Safe Deposit, Safe Custody and SD Lockers Portfolio Management, Sale of Gold, Micro Fin

NRI / Tax Advisory Services, WealthManagement, Personal Finance to HNIs

Rail ticket booking, payment of Utility bills


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Financial Services...2

Lease, Hire Purchase, Bill Discounting Factoring, Forfaiting, Securitisation, etc

Asset Reconstruction Companies

Car / Consumer Loans, Housing finance etc Demat facility, e-Stock Broking, IPO Fin., etc

Forex Broking, Merchant Banking, M & A

Mutual Funds, Infrastructure Funding

Private Equity, Venture Capital

Credit Rating, Credit Info, Bancassurance


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Bank Credit (% to GDP)


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B ki A t Q lit


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Banking Asset Quality


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References...Books

Avadhani, VA - Marketing of Financial Services Guruwamy S - Financial Services and System -Thomson Learning, Asia

Jessica Keyes, Editor - Handbook of Technology in

Financial Services 1999 John Marsh - Managing Financial ServicesMarketing : 1988 /1992

Khan, M Y - Financial Services, TMH

Meiden A - Marketing Financial Services Ravi Shanker- Services Marketing : (2002) Trend and Progress of Banking in India : RBI - 2007


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References...Papers/Articles...(2) Chowdari Prasad - Impact of Economic Reforms on Indian

Banking Jan 2002 Chowdari Prasad & KSS Rao Can Public Sector Banks

compete with Foreign / Private Banks in India? A StatisticalAnalysis December 2003

Chowdari Prasad Functioning of Foreign Banks in India February 2004 Chowdari Prasad & KSS Rao Private Sector Banks in

India A SWOT Analysis Dec 2004 Chowdari Prasad, Biswajeet Mohanty & Umesh Nazkani

Problems and Prospects in Retail Banking in India April2005

Chowdari Prasad & KSS Rao Sustainability of ForeignBanks in India A Statistical Analysis December 2005


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Questions please?

THANK YOU EVERY ONE


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CHALLENGES AND POTENTIAL OFINDIAS BANKING SYSTEM

R B k f I di


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Reserve Bank of India

Scheduled Banks

Commercial banks Co-operatives

RRB's (96)Foreign Banks

(29)

Public Sector Banks(28)

StateCO-operatives

(16)Urban

Co-operatives(52)

Private Sector Banks(25)

New (7)Old (18)

State Bank of India& associates (8)

Nationalised & PSB(20)


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49.52.6530.14.1635.56.8

No. of HHs which

use bankingservices

285.367213.8319.19Total No. of HHs

% ofTotal

HHs

URBAN% of

Total

HHs

RURAL% of

HHsTotal

No.

Source: CENSUS OF INDIA 2001 Figures in Crore

USAGE OF BANKING SERVICES BY INDIAN HOUSE HOLDS (HHs)


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51.346.551.32.60.22.4Delhi

21.318.647.21412.71.3Bihar

4035.249.010.36.73.6Karnataka

36.827.659.415.811.24.6West Bengal

44.141.953.025.820.65.2UP

37.829.950.39.75.93.8Gujarat

48.139.460.019.1118.1Maharashtra22.83017.714.28.35.9Tamil Nadu

3133.130.416.912.74.2AP

49.530.149.5192138.353.7India

TotalRuralUrbanTotalRuralUrban

Households Having BankAccounts (Per Cent)

No. of House Holds (inMillions)

Area

STATE-WISE USAGE OF BANKING BY HOUSEHOLDS


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?609.6DEPOSITS AS % OF NATIONALINCOME

19,00,00019,49,567547ADVANCES (IN CRORES)

35,00,00025,98,823881DEPOSITS (IN CRORES)

?16153POPULATION PERBRANCH(THOUSANDS

?70,7112335BRANCHES

?20093NO. OF COMMERCIAL BANKS

VISION2010

March

2007

1950-51PARAMETERS

THE PAST & FUTURE TRENDS OF COMMERCIAL

BANKING

SECTOR WISE GROWTH RATES OF REAL GDP ( at 1999-2000 Prices)


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Financial Services : IFS 5403/30/09 9.409.007.50Real GDP at Factor Cost4

10.7014.2014.10Construction3.4

7.807.707.90Community ,Social andpersonal Services3.3

10.6010.908.70Financing, Insurance, Real Estate

and Business Services3.2

13.0010.4010.90

Trade ,Hotels, Restaurants,Transport ,Storage andcommunication3.1

61.8(11.00)

60.90(10.30)

60.20(10.00)Services3

7.405.307.50Electricity, Gas, and Water Supply2.3

12.309.108.70Manufacturing2.2

5.103.607.50Mining and Quarrying2.1

19.70

(11.00)19.40(8.00)

19.60(8.40)Industry2

18.50(2.70)

19.70(6.00)

20.20(0)Agriculture1.1

Agriculture and alliedActivities1

2006-072005-062004-05ParticularsS.No

(Percent)

SECTOR WISE GROWTH RATES OF REAL GDP ( at 1999 2000 Prices)


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45271718194995338923366Thailand

62577017837357270969

SouthAfrica

15151154447958346127482714

RussianFederation

113268849115421952240Philippines

187721894115256190442714217773Mexico

39146332-28266Mauritius

39664624247332035543788Malaysia

52601896-597145-2977-4550Indonesia

79127549364307493084424138399China

6667717347077255042004860Chile

151931816610144165902245732779Brazil

4730427416522149216610418Argentina659854744585562654623584India

200520042003200220012000Country

FOREIGN DIRECT INVESTMENT($ millions)

FOREIGN PORTFOLIO INVESTMENT


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566513191787539352901Thailand

72306661685-388-9624169

SouthAfrica

-2152334222626542150

RussianFederation

1461518501227125-202Philippines

3353-2522-123-104151447Mexico

36198-1-9-4Mauritius

-120042391340-5500Malaysia

-16520431131877442-1021Indonesia

2034610923772922498496912China

16358318-320-217-427Chile

645120812973198124813076Brazil

-48-8665-11631-3227Argentina1196888358216102228532345India

200520042003200220012000Country

FOREIGN PORTFOLIO INVESTMENT($ millions)


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2,51,3305th October-07

1,99,1792007

1,51,62220061,41,5142005

1,12,9592004

54,7162002

38,6942000

22,5171995

10,1281993

TOTALAS AT END OF MARCH

US $ million

FOREIGN EXCHANGE RESERVES


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At about $900 billion, India's stock of financialassetsincluding bank deposits, equities, anddebt securitiesis one-fifth the size of China's.

By 2010, China's financial stock will reach $9trillion, while India's will remain around $ 1.9

trillion.


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India's financial system is more effective than China's,

because the market share of more efficient foreign and

privately owned banks in India has crept up to 25

percent.

Many nonperforming loans have been cleaned up,

and while the true figure is hard to determine, they are

now estimated at around 9 percent of all lending,

compared with up to 40 percent in China.


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14.00USA25.6JAPAN

15.60TURKEY27.8RUSSIA

18.20MEXICO30.5CHILE

20.10ITALY31.9SOUTH KOREA

21.10FRANCE32THAILAND

22.10GERMANY42.6MALASIA

32.40INDIA46.7SINGAPORE

25.10BRAZIL47.6CHINA

DOMESICSAVINGS

AS% OFGDPCOUNTRY

DOMESICSAVINGS

AS% OFGDP

COUNTRY


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224UNITED STATES144MALAYSIA

168UNITEDKINGDOM

319JAPAN

57TURKEY47INDONESIA

111THAILAND136GERMANY

51INDIA110FRANCE

185SOUTH AFRICA86CHINA

21RUSSIANFEDERATION

206CANADA

35MEXICO83BRAZIL

DOMESICCREDIT AS% OF GDP

(2005)

COUNTRY

DOMESICCREDIT AS% OF GDP

(2005)

COUNTRY


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DISTRIBUTION OF HOUSEHOLD SAVINGS

DISTRIBUTION OF HOUSEHOLD

SAVINGS

PERCENTAGE OF SHARE

SAVINGS IN PHYSICAL ASSETS

55%LAND

HOUSES

CATTLE

GOLD

SAVINGS IN FINANCIAL ASSETS

45%

NET DEPOSITS

NET CLAIMS ON GOVT

PROVIDENT FUND & PENSIONS

LIC FUNDS

CURRENCY

SHARES


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Why is the stock of financial assets so small?

Not because we save too little: although the country's

gross national savings rate is half of China's, it isn'tbad by international standards.

Despite the fact that we should save more, the main

challenge is to capture more of the existing savings


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Instead of putting money into financial assets, Indianhouseholds invest more than half of their savings in physical ones

such as land, houses, cattle, and gold . In rural areas, theproportion is even higher. In fact, India's peopledenied ofaccessibility to formal financial systemare the world'slargest consumers of gold at 800 tonnes per annum.

They possess $200 billion of it, equal to nearly half of thecountry's bank deposits, and last year bought $10 billion worth,nearly the amount of the foreign direct investment India(13 Billion$ in 2006)received. Households could earn higher returns byinvesting in financial assets, and the country would bebetter off if savings were pooled to finance more productive

investments.


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The government reckons that $500 billionwill be needed over the 11th Five Year Plan to

upgrade the country's crumblinginfrastructure.

To sustain the GDP growth at above 9

percent and given today's investment rate of32 percentan additional $40 billion savingsper annum are required for infrastructurerequirements.


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Domestic savings are the only plausible source ofextra funding, so more of them must be mobilized.

Foreign direct investment alone won't fill the gap:although China is the world's largest recipient, forexample, the $60 billion FDI it received in 2004 wasonly 10 percent of domestic savings. Indias policy, in

contrast to China, remains still ambivalent about FDIin most sectors and FDI alone would not bridge thegap.


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More of the savings that India's financial systemcaptures could finance investment if banks reducedtheir cut from matching savers and users of capital.Intermediation costs remain high mainly because

productivity of most of Indian Banks is 10 percent of USlevels. India's new private banks achieved an averageproductivity of 55 percent of US levels.


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Domestic savings are the only plausible source ofextra funding, so more of them must be mobilized

Moving all Indian banks toward their productivity

potential of 90% of US levels - ambitious butachievable goal would unleash $2.5 billion a year insavings. Interest rates could fall by 1 percent

With full reform, it could generate up to 7.5 percent

of GDP and employ 1,500,000 people, as well asboost investment and growth throughout theeconomy.

Wh t ld b th f t lli


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What would be the factors propelling

changes in financial system?

Enhanced Customer Awareness

Growing contribution of Services to GDP

Infrastructural Requirements

Impact of WTO & Globalisation

Basel II Norms

Consolidation through M & As

Micro Finance Financial Inclusion

More Foreign Competition in 2009

Demands of Young Population


70/70

Documents

Financial Services Reforms in India