Overview of the Finance Sector in India
The liberalization of the financial sector in India began in 1991, and this helped to revolutionize the finance industry in this country. This is the reason why the banking and financial sectors are so stable, and why the subprime crisis had such a small effect on the financial sector in India. The government realized from the beginning that the best way to survive an economic crisis is to shift policies away from debt creation to non-debt creating flows. Furthermore, strict regulations on external commercial borrowing were enforced. The government also worked hard to liberalize outflows while discouraging unstable flows from individuals who were not Indian residents. As a result, the country was able to prevent an overreliance on foreign borrowing or the dollarization of its economy. There are a number of reasons why the financial sector in India is so resilient and stable. They include:
Most of the Financial Sector is Locally Owned
About 70% of the assets belonging to the banking sector are kept in public sector banks. Most of the banks in India are locally owned. The fact that there are very few foreign banks helped to minimize the impact of the global financial crisis on the domestic economy of India. This is because foreign banks are very vulnerable to capital flow reversal as a result of financial issues in their host countries, in the parent bank, or in the home country.
The Government's Regulations to Reduce Liquidity Risks
During crisis, most banks face liquidity risks. The government of India put in place a number of regulations that helped to minimize these risks. For starters, Indian banks are discouraged from relying on borrowed money. Other stable sources of capital are promoted, and the Reserve Bank of India, or RBI, limits the inter-bank liabilities that a bank can purchase, and links the limit to the bank's net worth.
Regulation of Investment in Non Government Securities
All security investments that are not offered by the government have to undergo credit ratings. Furthermore, a bank's investment on government securities that are not listed is limited to ten per cent and it requires the bank to practice full disclosure.
Strengthening the Capital Requirements
The RBI in India has been strengthening the capital requirements by reviewing risk weights, provisioning norms and reviewing other credit-conversion factors. Complex structures including synthetic securitization are not allowed in India. This has helped to strengthen the economy, and to cushion it from collapse in case of a global economic crisis.
Prescribing Prudential Norms
This is aimed at cushioning the banks from the effects of asset price volatility. The exposure of a bank to the capital markets has been capped at around forty per cent of its net worth. The direct investment of the bank in capital markets has been capped at twenty per cent of its consolidated net worth.
The RBI has enforced a lot of regulatory measures that have helped to keep the economy afloat. This is the reason why the financial system in India ranks just slightly below the World Economic Forum's median rankings. The finance industry is still undergoing a number of transformations that promise continued growth of the economy in the coming years.
Most of the Financial Sector is Locally Owned
About 70% of the assets belonging to the banking sector are kept in public sector banks. Most of the banks in India are locally owned. The fact that there are very few foreign banks helped to minimize the impact of the global financial crisis on the domestic economy of India. This is because foreign banks are very vulnerable to capital flow reversal as a result of financial issues in their host countries, in the parent bank, or in the home country.
The Government's Regulations to Reduce Liquidity Risks
During crisis, most banks face liquidity risks. The government of India put in place a number of regulations that helped to minimize these risks. For starters, Indian banks are discouraged from relying on borrowed money. Other stable sources of capital are promoted, and the Reserve Bank of India, or RBI, limits the inter-bank liabilities that a bank can purchase, and links the limit to the bank's net worth.
Regulation of Investment in Non Government Securities
All security investments that are not offered by the government have to undergo credit ratings. Furthermore, a bank's investment on government securities that are not listed is limited to ten per cent and it requires the bank to practice full disclosure.
Strengthening the Capital Requirements
The RBI in India has been strengthening the capital requirements by reviewing risk weights, provisioning norms and reviewing other credit-conversion factors. Complex structures including synthetic securitization are not allowed in India. This has helped to strengthen the economy, and to cushion it from collapse in case of a global economic crisis.
Prescribing Prudential Norms
This is aimed at cushioning the banks from the effects of asset price volatility. The exposure of a bank to the capital markets has been capped at around forty per cent of its net worth. The direct investment of the bank in capital markets has been capped at twenty per cent of its consolidated net worth.
The RBI has enforced a lot of regulatory measures that have helped to keep the economy afloat. This is the reason why the financial system in India ranks just slightly below the World Economic Forum's median rankings. The finance industry is still undergoing a number of transformations that promise continued growth of the economy in the coming years.
Source...