ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Banking and Financial Policy: An Independent View

The Independent Commission on Banking and Financial Policy has produced an excellent report that puts the banking and financial policies of India under a microscope. The analysis is not always on the mark but the report needs to be studied and debated in detail.

Microfinance Development Strategy for India

Due to the nature of the expansion of banking services in the country and constraints on banking entities, microfinance and microfinancing institutions have gained immense relevance today. The microfinance activities of banks have grown to new heights.

How Do We Assess Monetary Policy Stance?

This paper develops a measure of the monetary policy stance from the detailed reading of various monetary policy announcements in India from 1973 to 1998. According to the proposed measure, the stance of monetary policy has been mildly contractionary over this period with its emphasis on inflation control. The constructed measure of monetary policy stance is then linked to output and prices in a three-variable vector autoregression framework, which indicates that, for the period of study, the potency of monetary policy seemed to have been more effective in price control vis-a-vis stimulating output growth.

Private Equity: A New Role for Finance?

India's experience with private equity is illustrative of the rush of this form of finance to the developing world. The acquisition of shares through the foreign institutional investor route today paves the way for the sale of those shares to foreign players interested in acquiring companies as and when the demand arises and/or FDI norms are relaxed. This trend of transfer of ownership from Indian to foreign hands would now be aggravated by the private equity boom. Private equity firms can seek out appropriate investment targets and persuade domestic firms to part with a significant share of equity using valuations that would be substantial by domestic wealth standards.

Commercial Bank Lending to Small-Scale Industry

It is believed that the working capital support extended by commercial banks to small-scale industry is far from adequate. Although the SSI is a part of the priority sector, its share in total priority sector advances of all scheduled commercial banks has been falling consistently from around 39 per cent in 1992 to around 24 per cent in 2004. This paper examines the trends in sectoral allocation of bank credit to the SSI vis-Ã -vis the non-SSI sector in the post-reform period. The paper also makes an attempt to understand the variations in bank credit to the SSI sector across bank groups, and also the influence of the size and performance of banks on credit to the SSI sector. The results indicate that the high incidence of bad loans arising out of SSI advances could be one of the reasons for the declining share of SSI loans of the commercial banks.

Macroeconomic Fundamentals and Exchange Rate Dynamics in India

The present study investigates the relative importance of macro (interest rates, inflation, etc) and micro (order flows, information, etc) variables in determining the short-run exchange rate movements. Empirical analysis is based on a primary survey of the Indian foreign exchange dealers. It finds from a survey that a majority of the dealers feel short-term changes in the Indian rupee/US dollar market are basically influenced by the micro variables such as information flow, market movement, speculation, central bank intervention, etc. One of the findings of this study, which has policy implications, is that the dealers feel speculation would increase volatility, liquidity and efficiency in the market and, central bank intervention reduces volatility and market efficiency.

Monetary Policy and Operations in Countries with Surplus Liquidity

Monetary policy in most developed countries is conducted with the system being kept marginally short of liquidity. In contrast, many emerging market monetary authorities have been facing surplus liquidity due to factors such as capital inflows, privatisation programmes or fiscal surpluses. This paper provides a cross-country experience of monetary policy and operations conducted in some of these countries and attempts to draw policy inferences concerning policy stances, operating frameworks and procedures in this regard.

Stock-Flow Norms and Systemic Stability

We offer a dynamical systems translation of the Godley and Cripps (1983) framework. Stability of an economy is shown to depend on the concatenation of four parameters: a steady-state money income ratio, a speed-of-adjustment-of-assets coefficient, an inventory accumulation index, and the share of government in aggregate income.

Basel II and Bank Lending Behaviour

The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks' balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

A Review of Bank Lending to Priority and Retail Sectors

The surge in bank credit in the last couple of years has been an encouraging phenomenon in Indiaâ??s banking sector. This reflects as much the turnaround in the economy as the improved balance sheets of the banks themselves. However, though overall credit growth has been of a high order, the expansion of agricultural credit and credit to small-scale industries sector has not kept pace with it. Retail credit, which is growing from a very low base, has expanded rapidly during this period. While consumption-led growth can help improve the growth rates in the economy, it would also result in increasing risks.

Life Insurance and the Macroeconomy

It has been observed that there is a significant relationship between the demand for life insurance and various macroeconomic variables. High growth of GDP induces an economic effect through higher per capita and disposable income and savings, which in turn create a favourable market demand for life insurance. On the other hand, life insurance also provides support to the capital market and savings data pertaining to Indian life insurance and macroeconomic variables broadly indicate a close relationship and interdependence between macroeconomic variables and life insurance demand.

Universal Banking: Solution for India's Financial Challenges?

Faced with pressures of international financial liberalisation, it is natural that Indian policy-makers want intermediaries to consolidate and improve their competitive position in both domestic and global marketplaces. Acquisition of a "universal banking" structure could be perceived as a strategic reaction of certain players to these changed circumstances. In an emerging economy like India where volatility is large, emergence of universal banks can contribute to faster economic growth as it assists in strengthening the alliance between companies and banks. A movement into universality is likely to promote consolidation in a healthy manner and hence should be encouraged.

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