TOPIC: Financial Sector Reforms: Name: Khalid Hassan Submitted To: Dr. Tosib Alam
TOPIC: Financial Sector Reforms: Name: Khalid Hassan Submitted To: Dr. Tosib Alam
KASHMIR
ENROLLMENT NO:
1905CUKmr17
COURSE CODE: MEC-C 1943
Financial Sector Reforms in India Since 1991
• Financial sector reforms refer to the reforms in the
banking system and capital market.
• An efficient banking system and a well-functioning
capital market are essential to mobilize savings of the
households and channel them to productive uses.
• The high rate of saving and productive investment are
essential for economic growth.
Cont…
• Prior to 1991 while the banking system and the capital market
had shown impressive growth in the volume of operations, they
suffered from many deficiencies with regard to their efficiency
and the quality of their operations.
• The weaknesses of the banking system was extensively analyzed
by the committee (1991) on financial sector reforms, headed by
Narasimham.
• The committee found that banking system was both over-
regulated and under-regulated.
Cont…
• Prior to 1991 system of multiple regulated interest rates
prevailed. Besides, a large proportion of bank funds was
preempted by Government through high Statutory
Liquidity Ratio (SLR) and a high Cash Reserve Ratio
(CRR).
• As a result, there was a decrease in resources of the
banks to provide loans to the private sector for
investment.
Cont…
• This preemption of bank funds by Government
weakened the financial health of the banking system
and forced banks to charge high interest rates on their
advances to the private sector to meet their needs of
credit for investment purposes.
• This was prominently revealed by 1992 scarcity scam
triggered by Harshad Mehta.
Reasons for financial sector reforms in
India
• After independence, India inherited various deprivations and
problems due to colonial legacy. The country was lagging behind
in social as well as economic affairs.
• By 1991, To attain the goal of rapid economic development,
India adopted the system of planned economy based on the
Mahalanobis model, fiscal activism forthe policy of Fiscal
activism, but all failed. The war in the Middle East and the fall of
USSR had put pressure on the Foreign Exchange Reserves of
India. India was facing the balance of payment crisis and
reforms were now inevitable.
Types of Financial Sector Reforms: