Indian Financial System
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Code : FCF0019
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Region : India
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Financial System during the Pre-Liberalized Period The Indian financial system after independence followed an inward looking strategy with the state assuming an important role for more than four decades. During 1950s, 1960s and 1970s the financial system was over-controlled and rigid, highly interventionist, consequently entrepreneurship was heavily constrained. Import substituting industrialization was deemed to be the major engine of growth and implemented through a highly restrictive trade regime characterized by import licensing, quantitative restrictions and high tariffs... The Stabilization Policies The stabilization component in the 90's was aimed at reducing the balance of payment deficit. The steps were towards reducing the rate of fiscal growth, monetary tightening and curbing the excess demand on Indian foreign exchange reserves, which was supported by devaluation of India currency... Reforms in the Banking Sector During the early 1970s and 1980s, monetary policy had become almost non-existent. India followed a system of credit allocation, administered and differential interest rates for different purposes and automatic monetization of fiscal deficit . Also, financial repression was through pre-emption of banks' resources - both in terms of the statutory holding of Government Securities (Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)). These mechanisms distorted the interest rate mechanism and adversely affected the profitability of the banks by the end of 1980 and also their viability. The average returns on assets in the second half of the 1980s was only about 0.15%, while capital and reserves averaged about 1.5% of assets... |
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