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.

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?

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

• 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

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.

Table 1

Stock of Financial Assets as % of GDP(2008)

 

CountryCountry Financial Financial AssetsAssets

IndiaIndia 160160

JapanJapan 420420

MalaysiaMalaysia 400400

South KoreaSouth Korea 235235

ChinaChina 220220

 

 

• 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

Domestic interest rates are not adequately market determined i.e. there is need for further deregulation of interest rates

CountrCountryy

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)

GermaGermanyny

The Federal Financial Supervisory Authority (BaFin)The Federal Financial Supervisory Authority (BaFin)

IndiaIndia Banking – RBIBanking – RBICapital Markets – SEBICapital Markets – SEBI

Insurance – IRDAInsurance – IRDAPension – PFRDAPension – PFRDA

ChinaChina Banking – China Banking Regulatory Commission Banking – China Banking Regulatory Commission (CBRC)(CBRC)Capital Markets – State Council Securities Capital Markets – State Council Securities Commission (SCSC)Commission (SCSC)Insurance – The China Insurance Regulatory Insurance – The China Insurance Regulatory Commission (CIR)Commission (CIR)

USAUSA Banking – Federal Reserve BankBanking – Federal Reserve BankCapital Markets – Securities and Exchange Capital Markets – Securities and Exchange Commission (SEC)Commission (SEC)Derivatives – Commodities and Futures Trading Derivatives – Commodities and Futures Trading Commission (CFTC)Commission (CFTC)

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

DepositsDeposits LoansLoans

Mar Mar 20002000

Mar Mar 20092009

Mar Mar 20002000

Mar Mar 20092009

PubliPublic c SectoSectorr

81.981.9 7878 79.379.3 73.273.2

New New PrivaPrivatete

5.25.2 10.910.9 5.05.0 13.813.8

Old Old PrivaPrivatete

7.47.4 6.46.4 7.67.6 6.26.2

ForeiForeigngn

5.55.5 4.74.7 8.08.0 6.86.8

CountryCountry Lending as percent of Lending as percent of DepositsDeposits

ChinaChina 130130

UKUK 114114

MalaysiaMalaysia 101101

USAUSA 9292

IndiaIndia 6161

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

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 bankingWe should not mix up insolvency with illiquidity

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)

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

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

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

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.

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

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

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).

IndiaIndia 33

South South KoreaKorea

174174

BrazilBrazil 7171

ChinaChina 6161

ThailandThailand 5454

MexicoMexico 4444

CountryCountry Market Market CapitalisatiCapitalisationon

Value Value AddedAdded

Listed Listed Domestic Domestic Cos.Cos.

IndiaIndia 7171 5757 47634763

USAUSA 136136 172172 51435143

JapanJapan 104104 109109 32793279

UKUK 139139 189189 27592759

GermaGermanyny

4444 6363 648648

ChinaChina 3535 2626 13871387*Figures in percent

Country/ Country/ RegionRegion

OTC OTC Derivatives Derivatives Markets Markets Average daily Average daily turnover*turnover*

Exchange-Exchange-tradedtradedDerivatives Derivatives MarketsMarketsAnnual Annual turnover**turnover**

India India (2008)(2008)

Not availableNot available 11

USA USA (2008)(2008)

355355 819819

EU (2008)EU (2008) 10011001 487487

*US$ billion; ** US$ trillion

CountryCountry Mutual Fund Mutual Fund AssetsAssets

% of % of GDPGDP

IndiaIndia 6464 88

USAUSA 8,9058,905 7171

FranceFrance 1,3631,363 6565

SwitzerlaSwitzerlandnd

117117 3232

UKUK 547547 2525

NetherlaNetherlandsnds

9494 1515

GermanyGermany 297297 1111

JapanJapan 470470 1010

(US$ billion end 2008)

YearYear Equity Equity IssuesIssues

Rs. Rs. CroresCrores

GOI GOI SecuritieSecuritiess

Rs. Rs. CroresCrores

Debt IssuesDebt Issues

Publicly Publicly placedplaced

Privately Privately placedplaced

2004-052004-05 28,200 28,200 (0.9)(0.9)

1,06,501 1,06,501 (3.4)(3.4)

4,0944,094 55,408 55,408 (1.8)(1.8)

2005-062005-06 36,533 36,533 (1.0)(1.0)

1,60,018 1,60,018 (4.5)(4.5)

---- 81,846 81,846 (2.3)(2.3)

2006-072006-07

(Apr-(Apr-Sep)Sep)

8,2058,205 BE BE 1,81,8751,81,875

---- 47,94547,945

Figures in () are percent of GDP

CountryCountry % of GDP% of GDP

IndiaIndia 22

USAUSA 145145

GermanyGermany 116116

UKUK 8383

MalaysiaMalaysia 7373

ThailandThailand 2222

South South AfricaAfrica

1717

ChinaChina 11

(2008)

IndiaIndia 33

USAUSA 5151

UKUK 5454

South KoreaSouth Korea 1313

ThailandThailand 99

MalaysiaMalaysia 2323

GermanyGermany 4848

2008(Percent of GDP)

CountryCountry OTC Commodity OTC Commodity Derivatives Derivatives Trading (Average Trading (Average daily turnover daily turnover 2007 – US$ 2007 – US$ billion) billion)

Exchange Traded Exchange Traded Commodity Commodity Derivatives Derivatives (Annual turnover (Annual turnover 2008 – 2008 – US$ trillion) US$ trillion)

IndiaIndia ---- 0.330.33

USAUSA 4.64.6 8282

EUEU 1313 4949

CountryCountry 20062006 20072007 20082008

TotaTotall

LifeLife NonNon-life-life

TotaTotall

LifeLife NonNon-life-life

TotaTotall

LifeLife NonNon-life-life

USAUSA 9.589.58 4.64.6 4.984.98 9.619.61 4.254.25 5.155.15 9.179.17 4.124.12 5.055.05

UKUK 14.714.755

10.110.199

4.564.56 13.313.377

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 10.810.866

8.648.64 2.222.22 10.810.811

8.618.61 2.22.2 9.529.52 6.756.75 2.772.77

IndiaIndia 3.263.26 2.592.59 0.670.67 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 0.960.96 3.333.33 2.32.3 1.031.03 3.063.06 2.212.21 1.051.05

WorldWorld 8.148.14 4.764.76 3.383.38 8.068.06 4.594.59 3.483.48 7.997.99 4.554.55 3.433.43

CountryCountry 20072007 20082008

TotalTotal LifeLife Non-Non-lifelife

TotalTotal LifeLife Non-Non-lifelife

USAUSA 3637.73637.7 1657.51657.5 1980.21980.2 3755.13755.1 1692.51692.5 2062.62062.6

UKUK 4058.54058.5 2617.12617.1 1441.41441.4 4508.44508.4 3190.43190.4 1318.01318.0

GermanyGermany 2051.22051.2 930.4930.4 1120.81120.8 2286.62286.6 1021.31021.3 1265.31265.3

JapanJapan 3770.93770.9 3002.93002.9 768768 3874.83874.8 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

CountryCountry Insurance Insurance 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

NetherlanNetherlandsds

385385 6161

SwitzerlanSwitzerlandd

337337 9191

CountryCountry Pension Pension FundsFunds

% of % of GDPGDP

IndiaIndia 60*60* 88

SwitzerlanSwitzerlandd

469469 127127

NetherlanNetherlandsds

693693 110110

USAUSA 12,11912,119 9797

JapanJapan 3,4193,419 7575

UKUK 1,6071,607 7373

FranceFrance 165165 88

GermanyGermany 114114 44

* Estimate of EPFO, EPS and PF Funds.

CountryCountry Domestic Domestic EquityEquity

International International EquityEquity

Domestic Domestic BondsBonds

International International BondsBonds

CashCash OthersOthers

JapaJapann

2929 1616 2626 1111 1111 77

UKUK 3939 2828 2323 11 22 77

USAUSA 4747 1313 3333 11 11 55

20082008 20520500

WorldWorld 1111 2525G10G10 2323 4242ChinaChina 1111 3737Latin Latin AmericaAmerica

99 2929

IndiaIndia 88 2222