Financial Sector Reforms : A Summary

1074 WordsMar 26, 20175 Pages
2. FINANCIAL SECTOR REFORMS: A SUMMARY Indian Financial sector reforms aimed towards economic liberalization were initiated in 1991, in the backdrop of- a) The possibility of insolvency of the banking system which had been covering its problems with accounting practices b) The Balance of Payment (BoP) crisis influencing India’s credibility in foreign markets c) Various Economic Problems like that of the financial repression induced by very low levels of interest rates, the huge fiscal deficit, overregulation and excess of transaction costs, underdeveloped money markets and debt markets, inadequate level of regulation in the financial sector and also because of outdates technological and institutional structures. Hence, much has been done…show more content…
The phased introduction of new banks in the private sector and expansion in the number of foreign banks provided for a new level of competition. Furthermore, increasingly tight capital adequacy norms, prudential and supervision norms were to apply equally across all banks, regardless of their ownership. [34] 3.2 Government Debt Market Reforms A myriad of reforms have been introduced in the government securities debt market. [35] Only in the 1990s a proper G-Sec debt market had been initiated which had progress from strategy of pre-emption of resources from banks at administered rates of interest to a system that is more market oriented. The main instrument of pre-emption of bank resources in the pre-reform period was through the prescription of a Statutory Liquidity Ratio i.e. the ratio at which banks are required to invest in approved securities. It was initially introduced as a prudential measure. [38] The high SLR reserve requirements lead to the creation of a captive market for government securities which were issued at low administered interest rates. [39] After the introduction of reforms, the SLR ratio has been brought down to a statutory minimum level of 25 per cent. Numerous measure have been taken to broaden the G-Sec market and to increase the transparency. Automatic monetisation of the government 's deficit has been given a go-by. At
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