Deregulation of Banking System:
Prudential norms were introduced for income recognition. asset classification, provisioning for delin quent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms. substan¬tial capital were provided by the Govemment to PSBs.
Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash re¬serve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated.
New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed. aqd special recovery tribunals set up to facilitate quicker recovery of loan arrears.
Bank lending norms liberalised and a loan sys¬tem to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk manage¬ment systems in banks encompassing credit. market and operational risks.
A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IBSs) introduced.
Capital Market Developments
The Capital Issues (Control) Act. 1947. repealed. office of the Controller of Capital Issues were abol¬ished and the initial share pricing were decontrolled.' SEB!. the capital market regulator was established in 1992
Foreign institutional investors (FIls) were allowed to invest in Indian capital markets after registration with the SEB!. Indian companies were permitted to access intemational capital markets through euro is¬sues.
The National Stock Exchange (NSE), with nation¬wide stock trading and electronic display. clearing and settlement facilities was established. Several local stock exchanges changed over from floor based trading to screen based trading.
Private Mutual Funds Permitted
The Depositories Act had given a legal framework for the establishment of depositories to record own¬ership deals in book entry form. Dematerialisation of stocks encouraged paperless trading. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues ..
To reduce the cost of issue, underwriting by the issuer were made optional. subject to conditions. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEB!.
SEBI reconstituted goveming boards of the stock exchanges. introduced capital adequacy norms for bro¬kers. and made rules for making client or broker re¬lationship more transparent which included separa¬tion of client and broker accounts.
Buy Back of Shares Allowed:
The SEBI started insisting on greater corporate disclosures. Steps were taken to improve corporate governance based on the report of a committee.
SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies.
Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given the freedom to issue demateriahsed shares in any denomi¬nation.
Derivatives trading starts with index options and futures. A system of rolling settlements introduced. SEBI empowered to register and regulate venture capi¬tal funds.
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies 'as well as introducing a code of conduct for all credit rating agencies operating in India.
Consolidation Imperative
Another aspect of the financial sector reforms in Ind~a is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches allover India. A number of them can be merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the situation is different now. No one expected so many employees to take voluntary re¬tirement from PSBs, which at one time were much sought after jobs. Private sector banks will be self con~ solidated while co-operative and rural banks will be encouraged for consolidation, and anyway play only a niche role.
In the case of insurance, the Life Insurance Cor¬poration of India is a behemoth, while the four pub¬lic sector general insurance companies will probably move towards consolidation with a bit of nudging. The UTI is yet again a big institution, even though facing difficult times, and most other public sector players. are already exiting the mutual fund business. There are a number of small mutual fund players in the pri¬vate sector: but th~ business being comparatively new for the -private players, it will take some time.
, We' finally come to convergence in the financial sector, the new buzzword internationally. Hi-tech and the need to meet increasing consumer needs is en¬couraging convergence, even though it has not always been a success till date. In India organisations such as IDBI, ICICI, HDFC and SBI are already trying to offer various services to the customer under one um¬brella. This phenomenon is eXpected to grow rapidly in the coming years. Where mergers may not be pos¬sible, alliances between organisations may be effec¬tive. Various forms 'of bancassurance are being intro¬duced, with the RBI having already come out with de¬tailed guidelines for entry of banks into insurance. The LIC has bOl)ght into Corporation Bank in order To spreaa HS Insurance Distribution network. both banks and insurance companies have started enter¬ing the asset management business, as there is a great deal of synergy among these businesses. The pensions market is expected to open up fresh opportunities for insurance companies and mutual funds. ,
It is not possible to play the role of the Orade of Delphi when a vast nation like India is involved. How¬ever, a few trends are evident, and the coming decade should be as interesting as the last one.
