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

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Financial Liberalisation in Semi-Industrialised Economies

Optimistic expectations about capital account liberalisation have not been borne out in reality in Mexico. There have been negative outcomes in a number of areas - overvaluation of the currency, worsening of the current account, decline in domestic savings and many others.

Managing the Transition to Convertibility

There is little doubt that moving towards a more open capital account would benefit the country enormously. The domestic foreign exchange market is providing a leading edge in the move to convertibility. The Tarapore Committee should ensure that residual controls on foreign direct investment and external commercial borrowings are removed and sectoral imbalances in the economy are addressed.

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.

Is the Role of Banks as Financial Intermediaries Decreasing?

The capital structure of Indian corporates reflects a churning, with a preference for internal financing over external financing. This behavioural pattern is the essence of the pecking order theory. In this context, is the role of banks as financial intermediaries decreasing? This exploratory article throws up lots of questions and provides a few answers.

Financial Liberalisation in India

The Indian experience with reform in the financial sector indicates that, inter alia, there are three important outcomes of such liberalisation. First, there is increased financial fragility, which the "irrational boom" in India's stock market epitomises. Second, there is a deflationary macroeconomic stance, which adversely affects public capital formation and the objectives of promoting employment and reducing poverty. Finally, there is a credit squeeze for the commodity producing sectors and a decline in credit delivery to rural India and small-scale industry. The belief that the financial deepening that results from liberalisation would in myriad ways neutralise these effects has not been realised.

Internal Credit Rating Practices of Indian Banks

The overarching goal of the second Basel accord is aligning the capital requirements of banks with risk sensitivity. The accord emphasises the quantification of capital requirements on the basis of internal rating models. The internal credit rating models of banks are expected to produce the probability of default and loss given default to estimate the capital requirements of credit risk. This paper presents an analysis of the current status of internal credit rating practices of Indian banks. The survey reveals that the components of internal rating systems, their architecture, and operation differ substantially across banks. The range of grades and risks associated with each grade vary across banks analysed. This implies that lending decisions may vary across banks. There are differences among the rating systems of various banks. This paper presents a set of actions to improve the quality of internal rating models of Indian banks.

On Liberalising Foreign Institutional Investments

This paper critiques the approach and recommendations of the 2004 government of India expert group on foreign institutional investment flows. The groupâ??s approach raise several important analytical and policy issues. The most crucial of these relate to effects of FII flows on (a) aggregate and sectoral investment; (b) behaviour of financial, including foreign currency, markets with special reference to their volatility; and (c) efficacy of fiscal and monetary instruments in attaining the objectives of macrostabilisation and growth. The article examines the macroeconomic impact of FII flows in the light of the Indian experience, and draws some policy conclusions regarding the role of such flows. It also addresses the issue of volatility in the Indian context. It finds there is no coherent macroeconomic model behind the expert groupsâ??s analysis and recommendations; no appraisal either of the optimal scale of capital inflows or the relative merit of FII vis-Ã -vis other categories of capital receipts at the current juncture of the economy; and no examination of monetary/fiscal problems associated with FII or of the quantitative impact of such flows on investment and other macro variables.

Productivity Growth in Regional Rural Banks

This paper examines total factor productivity technical and scale efficiency changes in regional rural banks by using data from 192 banks for the period 1996 to 2002. Rural banks showed significant economies of scale in terms of assets and number of branches under each bank. Total factor productivity growth of rural banks was higher in profitability than in service provision during liberalisation. Banks located in economically developed as well as low banking density regions exhibited significantly higher productivity growth. Overall there is a convergence of efficiency of rural banks during the study period. Parent public sector banks have no influence on the efficiency and productivity growth of rural banks. There is a justification for opening new banks in low banking density regions as efficiency and productivity growth of rural banks in these areas are high. There is also a case for mergers and enlargement of the asset base and the number of branches under each rural bank.

Current State of the Indian Capital Market

In the early 1990s, India figured low in the global ranking of the state of capital markets. The adoption of sophisticated IT tools in trading and settlement mechanisms has now placed India in the lead. The National Stock Exchange has played an important role in this transformation. Shorter settlement periods and dematerialisation have been other major developments. But all is not entirely positive. The introduction of individual stock futures poses a major risk; so also the large inflow of funds through participatory notes.

Foreign Banks in Historical Perspective

This article views the operations of foreign banks in historical perspective, and taking a cue therefrom, provides an analysis of contemporary policy that has promoted their aggressive expansion. The paper begins with a brief overview of the genesis and development of foreign banks in India. This is followed by an account of their operations, relative to the concurrent growth of domestic banks, during the colonial period. It then moves on to an account of developments in the post-independence period, including legislation related to prudential regulation, demarcating the pre- and post-nationalisation phases, and the pre- and post-liberalisation phases. All along, the focus is on the changing dimensions of foreign banks relative to domestic banks.

Agricultural Credit in India

Agricultural credit has played a vital role in supporting farm production in India. Though the outreach and amount of agricultural credit have increased over the years, several weaknesses have crept in which have affected the viability and sustainability of these institutions. Following the shifts in consumption and dietary patterns from cereals to non-cereal products, a silent transformation is taking place in rural areas calling for diversification in agricultural production and value addition processes in order to protect employment and incomes of the rural population. In the changed scenario, strong and viable agricultural financial institutions are needed to cater to the requirements of finance for building the necessary institutional and marketing infrastructure. What is needed in agriculture now is a new mission mode akin to what was done in the 1970s with the green revolution. The difference now is that initiatives are needed in a disaggregated manner in many different segments of agriculture and agro-industry: horticulture, aquaculture, pisciculture, dairying, sericulture, poultry, vegetables, meat, food processing, other agro-processing and the like.

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