Indian Financial System

Facilitated by reforms, financial markets have become freer and institutions more independent operationally.
Dr. Y.V.Reddy, Governor, Reserve Bank of India 1

Financial reforms of the 1990s were initiated with an objective to eliminate the financial despotism and create an efficient, productive and profitable financial sector. The Economic reforms best describe the post-1991 consequences of various economic practices, as it ushered in substantial transformation and liberalization of the Indian financial system. In November 2009, India purchased 200 tonnes of gold valued at Rs. $6.7 billion (Rs.31,380 crore) from the International Monetary Fund(IMF)2. RBI bought nearly half of the gold sold by IMF under the latters limited gold sales programme. By purchasing the gold, RBI now has more gold than the European Central Bank, thus becoming the 11th largest gold holder among various Central Banks, marking a remarkable turnaround from the crisis of 1991, when India had to airlift its gold to pledge for a loan. In 1991, when India faced its worst ever balance of payment (BoP) crisis, it had no alternative but to pledge 67 tonnes of gold to the Union Bank of Switzerland and Bank of England to raise a loan of $605 million. It intended to shore up its dwindling foreign exchange reserves, which were at a low of $1.2 billion in January 1991. Foreign exchange reserves of the country in November 2009 were at $285.5 billion with foreign currency assets accounting for $268.3 billion, followed by gold for $10.3 billon, and SDRs3 for $5,267 million; the reserve position in the IMF is $1,589 million (Annexure I). Since the BoP crisis of 1991, the process of liberalization and globalization has seen a series of steps undertaken, especially in banking and financial sectors. This had a favorable impact on the overall growth of the economy and brought resilience in economy too. In the past two decades, Indias economy performed extraordinarily well and withstood even the most severe global financial crisis of 2008, while rest of the global economies were sent into a tailspin. The resilience in the Indian financial system is due to the policy framework modeled to formulate the structure of Indian banks and financial institutions, prepared with wise regulations and meticulous supervision of the Reserve Bank of India (RBI) and the Government of India (GoI). India has emerged from a country which pledged its gold to one that bought gold to shore up its foreign exchange reserves.
This case was written by B Sravana Kumar, Academic Wing (Finance). It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of management situation. 2010 Academic Wing (Finance). All rights reserved. No part of this publication may be reproduced, stored in retrieval, used in a spreadsheet, or transmitted in any form or by any means electronic or mechanical, without permission.

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Dr. Y.V.Reddy, Governor, Reserve Bank of India at the 12th International Conference on The Future of Asia- The Road to an Asian Community Concepts and prospects, organized by Nihon Keizai Shimbun, Inc (Nikkei) in Tokyo on May 25, 2006 IMF UN specialized agency established in 1944 under Bretton Woods system. SDRs Special Drawing Rights an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves.

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 primary emphasis was on increasing the domestic savings rate by suppressing consumption, high taxation, and by appropriating profits through public ownership of commercial enterprises and heavy industries. The public ownership had a substantial presence in industries such as steel, fertilizers, chemicals, machine tools and infrastructure. Later, the state-owned enterprises were given monopoly positions in banking, insurance and bulk consumer goods sectors. Alongside this public sector dominance, the country followed a system of stringent controls on private economic activity, implemented through an investment-licensing regime that dictated choice of scale and technology. By the late 1970s and 1980s, it became obvious that the strategy of public sector dominance was overmanned and inefficient; controls over the private sector had also greatly impeded economic efficiency and growth of the country. Although, the inward looking policy of the government did not result in any significant acceleration in the economic growth; it laid a strong foundation for industrialization between 1956 and 1966, resulting in high industrial growth. The Indian economy, during the first three decades of independence, grew at an average annual rate of 3.5% (Annexure II). In terms of per capita income, the growth was a mere 1.4% per annum. The average annual growth rate was lower when compared to the developing world, including the Sub-Saharan Africa. (Annexure III) Prior to financial reforms (in pre-1990 era), Indian government had assumed that the generation of public saving could be used for higher levels of investment. On the contrary, instead of being a generator of savings, the public sector became a consumer of communitys savings. The Government began borrowing not only to meet its own revenue expenditure but also to finance public sector investments. Later, in the early 1980s to encourage business, attempts were made to shift from direct physical controls to indirect financial incentives, which gathered momentum in the Indian economy. Although the growth rate of Indian economy accelerated to more than 5%, the fiscal expansion was unsustainable, as by mid-1980s, Indias fiscal deficit4 rose (Annexure IV) from 7.5 % of GDP in 1989 1990 to 9.4 % in 19901991. Total external debt more than tripled, from $19 billion in 1980 to $69 billion in 1990, with debt to private creditors rising tenfold (from $2.4 billion to $25 billion) and shortterm debt rising fivefold (from $0.9 billion to $4.5 billion)5. The rise in the fiscal deficit represented not merely the excess of government investment over its saving, but also borrowing to finance current expenditure that yielded no financial return. The total expenditure of the central government increased from 16.23% of GDP to 19.26% during 198590. This was mainly due to the increase in non-plan

Fiscal Deficit: When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). The difference between the total expenditure of the government by way of revenue, capital and loans (net of repayments) and revenue receipts and capital receipts which are not in nature of borrowing but which, finally accrue to the government. Dani Rodrik and Arvind Subramanian, Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition, IMF Working Paper, May 2004.

expenditure6, which climbed from 9.26% of GDP during 198085 to 12.62% during 198590. This increase was due to an increase on account of interest payment, defense expenditure and agricultural subsidies. The continued rise in fiscal expenditure and borrowings from internal and external sources of funds resulted in rising debt service commitments leading to deterioration of the current account situation. The Gulf Crisis of 1990 too contributed to the large current account deficit in 199091. The fall in exports to US (Indias largest export destination), and the collapse of the Soviet Union (Indias major trading partner), further deteriorated the current account deficit resulting in a severe balance of payment crisis in 1991(Annexure V, Balance of payment indicators). An increased dependence on foreign oil imports (Annexure VI, Indias Foreign Trade), vulnerability to oil price fluctuations, declining remittances from abroad, strong domestic demand, deteriorating fiscal balances and raising interest payments on external debt contributed to inflation rising to 13% and forex reserves declining to cover less than two weeks of imports. The government faced serious difficulties in rolling over of short term credit which was of around US $ 5 billion. Under these circumstances, India had to approach the IMF for loan and pledge its gold reserves. The country resorted to post-crisis adjustment programme featured at macroeconomic stabilization and structural reforms. Structural Reforms in Indian Financial Sector Policy makers in India responded to the 1991 crisis by undertaking a series of stabilization and structured reforms that dramatically reversed the previous policy framework followed in the country. The Stabilization Policies The stabilization component in the 90s 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. The focus of structural reforms was on external sector reforms. Import licenses for most items were abolished, tariffs reduced, quantitative restrictions on imports were completely phased out by 2001 and Foreign Direct Investments (FDIs) were actively encouraged. Later, structural reforms shifted to tax reforms, further trade liberalization and financial sector reforms, disinvestment, and privatization policies for attracting FDIs. Similarly, financial markets were liberalized with an aim to removing financial repression, improving efficiency, productivity and profitability, allowing market forces to determine the interest rates, providing operational and functional autonomy to institutions and opening the sector for international players. Following the recommendations of the Committee on the Financial System (CFS), which submitted its report in November 1991 (Annexure VII and Annexure VIII), the government moved towards globalization of Indian financial system by bringing reforms into the banking sector, government securities market, foreign exchange, and the capital markets.
6 Non-Plan Expenditure: government expenditure can be classified into plan and non-plan expenditures. Plan expenditure refers to expenditure incurred planned projects and programmes. Non-Plan expenditure covers all expenditure incurred by the government not included in the plan.

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 deficit7. Also, financial repression was through pre-emption of banks resources both in terms of the statutory holding of Government Securities (Statutory Liquidity Ratio8 (SLR) and Cash Reserve Ratio9 (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. The banks did not follow global accounting standards and by the end 199293, non-performing assets (NPAs) of 27 public sector banks amounted to 24% of total credit and half of the public sector banks faced negative net worth. Reforms in the banking sector were aimed at bringing in international best practices in a phased manner in the areas of capital adequacy requirement10, accounting, income recognition and provisions for risk exposure. Rather than privatizing the public sector banks, they were allowed to increase capital by disinvesting up to 49% of the paid-up capital. Banks were also allowed to go for public listing. This was designed to bring in greater transparency through enhanced disclosure norms. To enhance competition among banks, new private sector banks were allowed to enter the market and restrictions on the number of foreign bank branches were removed. Tight capital adequacy, prudential and supervision norms were applied equally to all banks, regardless of ownership. In consonance with the Narasimham Committee-I (1991) and Narasimham CommitteeII (1998)11, major reforms were brought in the areas of operational flexibility and financial autonomy in the banking sector in order to enhance their efficiency, productivity and profitability. The reforms in early 1990s aimed at elimination of automatic monetization12, reduction of the CRR and SLR, interest rate deregulation and entry deregulation and adoption of prudential norms. Further, in April, 1992 the RBI issued guidelines for income recognition, asset classification and provisioning, and also adopted the Basel Accord13 for capital adequacy standards. The government also established the Board of Financial Supervision in the RBI and recapitalized public-sector banks in order to give banks sufficient financial strength and to enable them to gain access to capital markets. In 1993, the RBI permitted private entry into the banking sector and at the same time prohibited cross-holding practices with industrial groups14. As a major step towards enhancing competition, FDI in the private sector banks was allowed up to 74%. And also, for enabling private shareholding in public sector banks, the government shareholding
7 8 9 Mohan, R. (2006): Economic Reforms in India: Where are We and Where do We Go? RBI Bulletin, December 2006 SLR: Statutory Liquidity Ratio is the percentage of deposits the bank has to maintain in form of gold, cash or other approved securities. CRR: Cash Reserve Ratio is a central bank regulation that sets the minimum reserves each commercial bank must hold out of customer deposits and notes. If Central bank (RBI) decides to increase the percent of this, the available amount with the banks comes down. Central Bank us this method (increase of CRR rate), to drain out the excessive money from the banks. Capital Adequacy Ratio: (CAR) It is ratio of capital fund to risk weighted assets expressed in percentage terms. Constituted in 1991, RBI proposed the committee chaired by M. Narasimham, former RBI Governor to review the Financial System. The Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of thrust on enhancing the efficiency and viability of the banking sector. Automatic Monetization: Central Bank financing the Government Deficit financing through issuing treasury bills. Basel Accord: A set of agreements set by the Basel Committee on Bank Supervision, which provides recommendations on banking regulations in regard to capital risk, market risk and operational risk. Sayuri Shirai, Assessing the Impact of Financial and Capital Market Reforms on Firms Corporate Financing Patterns in India, South Asia Economic Journal, September, 2004 vol. 5 no.2189-208.

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was limited to 51%. Banks were allowed to diversify into various financial services and offer a whole range of financial products. The Clearing Corporation of India Limited (CCIL) was also set up to act as a central counterparty for facilitating payments and settlement systems related to trade in foreign exchange, government securities and other debt instruments. The banking sector reforms started in the early 1990s essentially followed a two-pronged approach. Firstly, it introduced international best practices in the banking system and the level of competition was gradually increased within the banking system. Special emphasis was place on building risk management system, while measures were initiated to ensure flexibility and operational autonomy in the Indian banking sector. Secondly, measures were taken to improve the legal framework and technological system. (Annexure IX for major institutional and legal measure in the banking sector and Annexure X for major reforms in Banking Sector). Deregulation of Lending Rates and BPLR Till late 1980s, lending rates and allocation of bank credit were closely regulated by the RBI. With the initiation of financial sector reforms, steps were taken to regulate the lending rates of commercial banks. The credit limit size classes of scheduled commercial banks, on which administered rates were prescribed, were reduced into three slabs in April 1993. Prior to 1990 six slabs existed and was later reduced to four in the year 1992. The slabs or credit limit size class under the revised guidelines consisted of three categories: (i) advance up to and inclusive of Rs.. 25,000; (ii) advance over Rs. 25,000 and up to Rs. 2 lakh; and (iii) advance over Rs. 2 lakh15. In a major step towards deregulation of lending rates, it was decided in October 1994 that banks would determine their own lending rates for credit limits over Rs.2 lakh in accordance with their risk-reward perception and commercial judgment. At the same time banks were required to declare their Prime Lending Rate (PLR), the rate charged for the prime borrowers of the bank, with the approval of their boards taking into account their cost of funds, transaction cost, etc. To bring in transparency and for better utilization of bank credit and gain better control over credit flow RBI introduced a loan system of delivery of bank credit in April 1995, whereby the banks were given the freedom to charge interest rate on the cash credit and loan components with reference to the PLR approved by their Boards. Further, in February 1997, in order to encourage borrowers to switch to loan delivery system, banks were allowed to prescribe separate PLRs and spreads (over PLRs) for both loan and cash credit components. In October 1997 it was made mandatory for banks, to announce the maximum spread over the PLR for all advances other than consumer credit while announcing the PLR. Banks were also given freedom to announce separate Prime Term Lending Rate (PTLR), with regard to term loans of 3 years and above. RBI in April 1999 Tenor-linked Prime Lending Rates (TPLRs) was introduced in April 1999 to provide banks with freedom to operate different PLRs for different maturities, provided the transparency and uniformity of treatment that were envisaged under the PLR system was also maintained. The Benchmark Prime Lending Rate (BPLR) was introduced with aim of introducing transparency and ensuring appropriate pricing of loans, wherein the lending rate truly reflects the actual costs. The BPLR was computed after taking into consideration the cost of funds, operational expenses and a minimum margin to cover regulatory requirement of provisioning and capital charge, and profit margin16. However, due to

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http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=565 http://www.sify.com/finance/how-the-benchmark-prime-lending-rate-works-news-bank-kcpr1Hjgcaj.html

competition, banks have been offering loans to first class borrowers with high credit rating at rates much below the BPLR in a non-transparent manner. RBI opines that banks lending at sub-BPLR rates are not in tune with the Central banks objective of bringing transparency to the loan rates. BPLR fell short of RBIs expectations to work as a reference rate or benchmark rate. In order to make loan pricing transparent, in its annual policy 200910, it formed a committee headed by Executive Director Deepak Mohanty to review the system. Based on the committee recommendation, BPLR was replaced with base rate17, which would be computed after taking into account all costs, including the cost of deposits, the negative carry on CRR and SLR, overheads and employee expenses. Banks cannot lend to any category of borrowers below the base rate with effect from July 1, 2010. (Annexure XI for Evolution of BPLR in India). Prudential Regulation One of the most important components of prudential regulation of banks is the maintenance of minimum capital ratios. The Basel Committee on Banking Regulation and Supervisory Practices,1988 known as Basel I, appointed by the Bank of International Settlements18 (BIS) recommended adoption of a common capital adequacy standard known as the Cook Ratio19. For the purpose of calculation capital, BIS classifies capital into two broad categories Tier I capital, constituting share capital and disclosed reserves and Tier II capital, consisting of undisclosed and latent reserves, general provision, hybrid capital and subordinated debt. BIS recommends that Tier II capital must not exceed Tier I capital. The Capital to Risk Asset Ratio (CRAR)20 suggested by BIS in 1992 was 8%, i.e., Tier I and Tier II capital21 should be equal to minimum of 8% of the total assets of the bank. Basel I proposals forced the bank to look at credit risk and regulatory capital more closely than they had done earlier. Subsequently, some weaknesses in Basel I framework came up and the Basel committee finally came up with International Convergence of Capital Measurement and Capital Standards: A Revised Framework, popularly known as Basel II in June 2004. Basel II rests on three pillars, Pillar I minimum capital requirements, Pillar II supervisory reviews, and Pillar III market discipline. The RBI had announced in its annual policy statement in May 2004 that banks in India should examine in depth the options available under Basel II and draw a roadmap by end-December 2004 for migration to Basel II. Banks have also been advised to formulate and operationalize the Capital Adequacy Assessment Process (CAAP) within the banks as required under Pillar II of the New Framework. Impact of Reforms on the Banking Industry The Indian banking industry had made sufficient progress during the reforms period. The most important and far reaching impact of banking liberalization in India has been the deregulation of the interest rate. The Indian banks are now adopting a completely market driven interest rate structure which earlier was a
17 RBI constituted a working committee and the Chairmanship of Deepak Mohanty in 2009, to examine the related issues of BPLR and suggest a transparent credit pricing mechanism with an objective to ensure effective transmission of the Monetary Policy signals from time to time. Bank of International Settlement (BIS): Established on May 17, 1930, is one of the worlds oldest financial institutions, and serve central banks in their pursuit of monetary and financial stability and to foster international cooperation. It also acts as bank for central banks. The Cook Ratio is a risk-weighted approach to capital adequacy so that institutions with a higher risk profile maintain higher levels of capital. Capital Adequacy ratio or Capital Adequacy Asset Ratio is the ratio of capital fund to risk weighted assets expressed in percentage terms. The objective CRAR is to strengthen the soundness and stability of the banking system. Minimum requirement of capital fund in India Already existing banks -9%; New Private Sector Banks-10%; Banks under taking insurance business -10% and Local Area Banks- 15%. In India Tier I capital should at no point be less than 50% of the total capital which implies that Tier II capital cannot be more than 50% of the total capital.

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government-driven interest rate structure. Interest rate deregulation has resulted in the integration of lending rates across spectrum. The PLR of each bank is now synchronized with the bank rate. The bank rate was revived by the RBI to serve as the reference rate for the banking sector. In India, interest rate deregulation has contributed to a downward movement of the domestic interest rates and a narrowing of the domestic-foreign rates differential. Indias high budget deficits have kept domestic borrowing cost high, a factor that serves to attract foreign equity capital. Interest rate deregulation enables to alter the borrowing cost for the domestic borrowers. Till 1993, borrowing from abroad was costlier than domestic loans but foreign loans became cheaper than domestic loans from 1994. This was partly because resident firms were selectively allowed to access international capital markets after 1990 as part of capital account liberalization. While adopting the regulatory framework for banks, either in implementing Basel-I norms and framing the guidelines for implementing Basel-II norms, RBI has always focused on the financial stability objective. The minimum Capital to Risk Asset Ratio (CRAR) for banks in India is at 9%, which is higher than the Basel norm of 8%. Banks are also required to ensure minimum Tier I capital ratio of 6% from April 1, 2010. Importantly, Tier I capital does not include items such as intangible assets and deferred tax assets that are now sought to be deducted internationally. The CRAR for the scheduled commercial banks improved to 13.2% as at end of March 2009 while Tier I ratio is about 9%22. Indian banks have a significant holding of liquid assets as they are required to maintain Cash Reserve Ratio CRR23 at 5.75% and Statutory Liquidity Ratio SLR24, at 25%25 both, as a proportion to their net liabilities (Annexure XII). Central bank liquidity support for managing day-to-day liquidity needs of the banks is available only against SLR securities held over and above the statutory minimum of 24%. Thus, the excess SLR maintained is always available as a source of liquidity buffer. Besides, the Reserve Bank can also lower the SLR requirement in a distress scenario, to make liquidity available to the banks against their resulting excess SLR. Measures are also in place to mitigate liquidity risks at the very short end, at the systemic level by limiting inter-connectedness, especially in the uncollateralized money market, and at the institutional level. More than a decade ago the RBI had issued Asset-Liability Management (ALM)26 guidelines to banks, covering liquidity risk measurement, reporting framework and prudential limits. On Derivatives front, in December 2002, the banks exposure to derivatives was brought under the capital adequacy regime by prescribing credit conversion factors linked to the maturities of interest rate contracts and exchange rate contracts. Accordingly, since April 1, 2003 banks were advised to adopt, either original exposure method based on original maturity or current exposure method based on residual maturity,

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http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CHP04201009.pdf. Cash Reserve Ratio (CRR) - refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI on fortnightly basis. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money. Statutory Liquid Ratio (SLR) banks are required to invest a portion of their deposits in government securities as a part of their SLR requirements. The objective of SLR is restricting banks leverage in pumping more money into the economy. Under Section 42 of the RBI Act, 1934 all scheduled commercial banks are required to main SLR in cash or in gold valued at current market price or in approved securities valued at price as specified by the RBI from time to time. The CRR and SLR as on April 15, 2009 Handbook of Statistics on Indian Economy 2009-10. Asset And Liability Management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank.

consistently for all derivative products, in determining individual/group borrower exposure. After the banks gained sufficient expertise in the area, the option of original exposure method was withdrawn and since August 2008 banks were required to compute their credit exposures, arising from the interest rate and foreign exchange derivative transactions using the current exposure method. The conversion factors were increased and doubled for certain residual maturities with a view to improve the capital cushion available for such derivative products. During the global financial crisis, the RBI responded by providing ample rupee liquidity and comfortable forex liquidity to ensure that credit and financial markets functioned normally. It also gave regulatory guidance for restructuring of viable loan accounts for ensuring continued flow of credit to productive sectors of the economy with a view to arresting growth deceleration. Reforms in Debt Market Debt markets in India have suffered from chronic neglect. Though there is a clear evidence of fairly strong debt preference among households, for their investment portfolio, very little has been done to create a platform for efficient and developed debt markets. The secondary debt market in limited to a few brokers and institutional investors and the active participation from the small investor is quite negligible. By and large Indian debt markets are dominated by G-Secs (Government Securities). Despite, its enormous potential, both in the primary- and secondary market, corporate debt markets in India are all still in stages of infancy. Reforms in G-Secs debt market were initiated to essentially move from a strategy of pre-emption of resources from banks at administered interest rates to a more market oriented system. During the initial stage the reforms were intended to facilitate market borrowing and price discovery was made through auctions. Automatic monetization was restricted by fixing a cap on the during-the-year and end-yearamount and automatic monetization of fiscal deficit through the issue of ad-hoc treasury bills was phased out. Automatic monetization was restricted by fixing a cap on the during-the-year and end-year amount. Transparency of prices in government securities was made by daily publication of transactions. Repurchase agreement (repo) was introduced as a tool of short-term liquidity adjustment. Subsequently, the Liquidity Adjustment Facility (LAF)27 was introduced in June 2000. LAF operates through repo and reverse repo auctions and provide a corridor for short-term interest rate. Market Stabilization Scheme (MSS) has been introduced, which has expanded the instruments available to the RBI for managing the enduring surplus liquidity in the system. RBI withdrew from participating in primary market auctions of government papers. The government also increased instruments in the government securities market. 91-day Treasury bill was introduced for managing liquidity and benchmarking. Zero Coupon Bonds, Floating Rate Bonds, Capital Indexed Bonds were issued and exchange traded interest rate futures were introduced. OTC interest rate derivatives like IRS/ FRAs were introduced. Foreign Institutional Investors (FIIs) were allowed to invest in government securities subject to certain limits. Later the reforms were focused on the market microstructure. The emphasis has been introducing a system of primary dealers; establishing Ways and Means Advances (WMA) to the central government to bridge temporary mismatches in its receipts and payments; strengthening the government cash
27 The LAF enables the Reserve Bank to modulate short-term liquidity under varied financial market conditions in order to ensure stable conditions in the overnight (call) money market. The LAF operates through daily repo and reverse repo auctions

management system to facilitate government borrowing in cost-effective manner and permitting foreign institutional investors to invest in government securities including treasury bills, both in primary and in secondary market. Significant reforms were also taken in corporate debt market. Clearing Corporation of India Limited (CCIL) was set up for debt instruments to facilitate risk-free payments and settlement systems in government securities and also for dematerialization. A Wholesale Debt Market (WDM) segment has been set up by the National Stock Exchange and automated screen-based trading in government securities and corporate securities was facilitated through Negotiated Dealing System (NDS)28. Trading in government securities on stock exchanges was allowed for promoting retailing in securities and permitting non-banks to participate in repo market. The recent measures include introduction of NDS+OM and T+1 settlement norms. As regards the foreign exchange market, reforms focused on market development with inbuilt prudential safeguards so that the market would not be destabilized in the process. The move towards a market-based exchange rate regime in 1993 and the subsequent adoption of current account convertibility were the key measures in reforming the Indian foreign exchange market. Banks are increasingly being given greater autonomy to undertake foreign exchange operations. In order to deepen the foreign exchange market, a large number of products have been introduced and entry of new players has been allowed in the market. Foreign Exchange Market Reforms Indias foreign exchange market was strictly controlled since the 1950s. Both the current and capital accounts were closed to foster import substitution. Foreign exchange was made available by the RBI, through a complex licensing system. In the face of balance of payment crisis, the rupee was devalued twice in July 1991 leading to 19.5% depreciation in its value. The partial convertibility of rupee on the trade account was announced during 1992-93, and subsequently broadened to full convertibility of rupee on current account. The exchange rate regime moved from a single currency fixed-exchange rate system to fixing the value of rupee against a basket of currencies and further to market-determined floating exchange rate regime. Foreign Exchange Regulation Act (FERA) 1973, was replaced by the market friendly Foreign Exchange Management Act (FEMA) 1999. Authorized dealers of foreign exchange have been given considerable powers by the RBI to release foreign exchange for a variety of purposes. Authorized dealers are permitted to use innovative products like cross-currency options, interest rate and currency swaps, caps/collars and Forward Rate Agreements (FRAs) in the international forex market. Foreign exchange earners are permitted to maintain foreign currency accounts. The major foreign exchange market reforms are: Exchange Rate Regime 1. Evolution of exchange rate regime from a single-currency fixed-exchange rate system to fixing the value of rupee against a basket of currencies and further to market-determined floating exchange rate regime. Adoption of convertibility of rupee for current account transactions with acceptance of Article VIII of the Articles of Agreement of the IMF. Allowed full capital account convertibility for non-residents.
Negotiated Dealing System an electronic trading platform, operated by the Reserve Bank of India, used to facilitate the exchange of government securities and other money market instruments.

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The institutional frameworks reform include Replacement of the FERA, 1973, by the market friendly, FEMA, 1999 and delegation of considerable powers by RBI to authorized dealers to release foreign exchange for a variety of purposes. Increase in Instruments in the Foreign Exchange Market 1. 2. Development of rupee-foreign currency swap market. Introduction of additional hedging instruments such as foreign currency-rupee options. Authorized dealers permitted to use innovative products like cross-currency options; Interest Rate Swaps (IRS) and currency swaps, caps/collars and FRAs in the international forex market.

Liberalization Measures 1. Authorized dealers permitted to initiate trading positions, borrow and invest in overseas markets subject to certain specifications and ratification by respective Banks Boards. Banks are also permitted to fix interest rates on non-resident deposits, subject to certain specifications, use derivative products for asset-liability management and fix overnight open position limits and gap limits in the foreign exchange market, subject to ratification by the RBI. Permission to various participants in the foreign exchange market, including exporters, Indians investing abroad, FIIs, to avail forward cover and enter into swap transactions without any limit subject to genuine underlying exposure. FIIs and NRIs permitted to trade in exchange-traded derivative contracts subject to certain conditions. Foreign exchange earners permitted to maintain foreign currency accounts. Residents are permitted to open such accounts within the general limit of US $ 25, 000 per year.

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Reforms in the Capital Market Prior to 1991, the Indian capital market was regulated by the Capital Issues (Control) Act 1947. The Ministry of Finance controlled the price and quantity of initial public offerings through the powers of the Controller of Capital Issues (CCI). The Act was designed to check the access of private sector to capital markets. It approved all aspects of private companies issuances of capital, the instruments, the volumes and the offer price. The price was based on historical earnings, a practice which often resulted in underpricing of public offerings of equity shares. The Ministry of Finance set interest rates on fixed income products, which limited the access to capital and financial services. There were few private banks and they faced significant limitation on business expansion. Entry barriers throughout the financial sector limited opportunities to start banks, mutual funds and stock exchanges. The government-owned Unit Trust of India (UTI) was the significant participant in Indias mutual fund industry and a pillar of the Indian capital market. Large government institutions such as the Industrial Development Bank of India (IDBI) and Life Insurance Corporation (LIC), remained marginal players, either because prudential regulations did not permit them to invest in equities, or because they were not actively trading the equities in their portfolios. Insurance companies and pension funds were government-owned institutions and government controls funneled these agencies to invest in government bonds and bank deposits.

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Speculators and retail investors dominated the market. The oldest and largest Indian stock exchange was the then member owned Bombay Stock Exchange (BSE). It traded for only two hours with an open outcry system. It was managed in the interest of its member brokers who had inherited the membership. During the pre-reforms period, BSE dominated the trading volume of the country; it accounted for more than 75% of the total trade. It operated as an unregulated market and murky trade practices were prevalent. The operations were often small, undercapitalized and non-transparent and there was rampant price rigging and insider trading in the stock market. There was no formal approach towards risk containment in the settlement process. The BSE practiced badla system that allowed positions to be rolled from one settlement period to another. It witnessed payment crisis from time to time, which were resolved through negotiation and coalition formation. Capital Market Reforms and Creation of New Institutions The New Economic Policy (1991) led to a major change in the regulatory framework of the capital markets in India. The Capital Issues (Control) Act 1947 was repealed and the Securities Exchange Board of India (SEBI) was set up, in 1988 and given statutory powers in 1992, as a watchdog for regulating the functioning of the capital market. The creation of the SEBI was a major milestone in Indian economic policy thinking. The creation of a new and independent regulator led to focused reforms of the equity markets as well as on market modernization. During the 1990s, SEBI and the government brought a series of profound changes in the market Online trading and dematerialized trading were introduced along with a series of reforms to improve investor protection, automation of stock trading, integration of national markets and efficiency of market operations that shaped market operations. The major reforms are: Allowing FII investment in Capital Markets: In September 1992, the government allowed foreign investment in Indian capital markets. Foreign Institutional Investors (FIIs) were allowed to invest in all types of securities traded on the primary and secondary markets with full repatriation benefits without restrictions on either volume or trading or lock-in-period. Indian companies were allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). Foreign portfolio investments in Indian companies are limited to individual foreign ownership at 10% of the total issued capital of any one company and to aggregate foreign ownership at 30% of the total issued capital of any one company (Annexure XIII and Annexure XIV for Foreign investments). Incorporation of National Stock Exchange: In 1994, the policy makers pushed for more fundamental reforms in the capital markets and shifted their focus onto creation of a new exchange that would compete with the BSE. The National Stock Exchange (NSE), incorporated in 1992, recognized as stock exchange in 1994, provided a nationwide trading facility for all types of securities ensuring equal access to investors all over the country. It established satellite communication which gave its members equal access to the market, providing a fair, efficient and transparent securities market using electronic trading system. NSE introduced shorter settlement cycles with orders matched electronically on the basis of price-time priority. The electronic order matching system increased the speed and the transparency of the price discovery process. As opposed to being an association of brokers, NSE was the nations first demutualized stock exchange with a professional management team running the operations of the exchange. This structure of NSE predated a widespread interest and the SEBI forced other stock exchanges in the country including BSE to go for demutualization. NSE started trading bonds in June

11

1994 and equities in November 1994. The impact of NSE on Indian capital market was tremendous. A year after NSE started trading equities, the trading volumes increased by more than 100% and brokerage fee dropped from 2.5% to less than 0.5%. To compete with NSE, BSE transformed itself by shifting from open outcry to electronic limit order book in March 1995 and in 2004 the exchange became demutualized. Depositories Act: India took a major step towards market modernization with the enactment of the Depositories Act of 1996. This act established the rights and obligations of depositories, participants, issuers, and beneficial owners. The act requires all securities held by a depository to be in dematerialized and in fungible form. The depository Act ensured free transferability of securities with speed, accuracy, and security. The act allowed the market to move form a slow, risky, paper-based settlement to electronic dematerialized securities eliminating many of the pre-exiting impediments to swift and safe settlement. Dematerialization allowed real-time gross settlement and electronic funds transfer that led to the securities market achieving T+2 Settlement. Derivatives Trading: The Securities Contracts Regulation Act (SCRA) was amended in December 1999, to include derivatives within the ambit of securities enabling trading of options and futures in equity markets. Derivatives trading in India began in June, 2003 with trading in stock index futures contracts. Since the commencement of derivatives trading in India, the NSE has become one of the largest exchanges in trading single stock futures and index futures in the world. At present BSE and NSE allows trading of equity trade futures, futures and options for individual stocks, and futures and options on respective stock exchanges, Gold Exchange Traded Funds and also interest rate futures and currency futures on their exchanges. Interest Rate Futures (IRF) were allowed to trade on NSE in June 2003. NSE introduced three underlying contracts of IRF on three underlying contracts notional 10 year coupon bearing bond, notional 10 year zero coupon bond and 91-treasury bill. Earlier banks and companies had only Over-The Counter (OTC) market to hedge their risks, which proved to be disadvantageous and risk for smaller companies and banks. To remove the counterparty risk and disadvantages the IRFs were introduced. At the time of introduction, it was believed that IRF would provide scientific risk management techniques and protect small investors interest. However, the participants response was unenthusiastic and it failed to take-off in the derivatives market, as banks, a major player in this instrument, were not allowed to hedge interest rate risk. Though present in the market, they failed to attract participants and literally no trading took place. To address the problem, the RBI appointed a Technical Advisory Committee (TAC) on Money, Foreign Exchange and Government Securities Market to review the experience and recommendation for activating the IRFs. One of the main reasons of IRF failure, according to the committee report, was deficiency in the product design of the bond futures contract which was required to be cash-settled and valued off a Zero Coupon Yield Curve (ZCYC)29. The committee also opined that, instead of cash-settlement, the bond futures contracts would have to be physically settled as is the case in all the developed, matured financial markets. The TAC suggested to introduce a futures contract bade on a notional coupon bearing 10-year bond, settled by physical delivery and for introducing contacts based on 2-year, 5-year and 30-year
29 Report on Interest Rate Futures, Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets, RBI, August 2008.

12

Government of India securities/other maturities or coupons. Interest rate futures on 10-Year Notional Coupon-bearing GOI security, was reintroduced in August 2008 to provide investors with a hedging tool against interest rate fluctuations. Along with NSE, Multi-Commodity Exchange (MCX) was also allowed to trade interest rate futures on its exchange. After SEBI giving the nod NSE commenced trading currency futures on August 29, 2008 in US Dollar Indian Rupee (USD-INR). It also commenced trading in other currency like Euro-INR, Pound SterlingINR, and Japanese Yen-INR in March 2010. At present only Indian investors are allowed to trade in currency derivatives, while NRIs and FIIs are not permitted. Commodity Futures Market After the Securities Laws (amendment) Bill was passed in 1999, the Central Government allowed trading of commodity futures in three exchanges namely Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCEDX). National Multi Commodity Exchange (MMCE). India has five national level commodities exchanges and the commodity futures trading volumes, taken as a whole, have risen at a compounded annual growth rate of 97.9% between 2003-04 and 2009-10. The turnover in the commodities grew by 48% in the fiscal year 2009-10 to Rs.77.65 lakh crore A Dynamic Capital Market Structural reforms combined with SEBI regulations ushered in expansion of primary- and secondary capital markets rapidly. SEBI regulatory reforms ensured wider participation of individual investors. Reforms brought transparency in the areas of trading, clearing and settlement, and risk management system. The biggest impact on Indian capital market is the unique stock price across the country for the firms listed on the stock exchanges. Prior to the reforms, equity markets were fragmented across multiple local exchanges. High costs of telecommunications and physical settlement meant that the price of a stock that traded widely could vary on different exchanges. The technology-based systems helped minimize systematic and settlement risk, increased the accountability of professional market participants and helped detect and discourage insider trading, manipulations and scams. The equity market reforms raised the confidence in reform processes throughout the financial market, strengthening the regulator and building market institutions to improve competition in the capital markets. The emergence of SEBI as a credible market regulator with greater investigative and enforcement powers enhanced investor protection, accountability and transparency in the equity markets, enabling competitive forces to shape an efficient market in which many systemic and infrastructure risks that existed earlier are greatly reduced. The efficiency in the markets and transparency in conduct of the business enabled the flow of foreign funds into the markets thereby increasing market valuations. The flow of funds enabled the firms to venture into global markets through acquisitions, further expansions by investing in domestic projects, and raising additional capital in domestic and foreign markets. Driven by large capital and global liquidity including inbound and outbound deals, the mergers and acquisitions in 2007 stood at US $68.32 billion. The financial reforms were undertaken propelled by globalization and to attract foreign direct and portfolio investment. With this the Indian capital markets moved towards greater transparency and full convergence. In the course of the reforms, the stock markets did face some critical moments such as the

13

Harshad Mehta stock scam, price manipulation of stocks, Ketan Parekh scam, Yes IPO scam, etc. However, timely regulations for strengthening the market institutions enhanced the confidence in the reforms process and effectiveness of the equity markets. The reforms process saw India moving from paper based scrip trading to electronic trading, transformation of BSE from an unregulated institution to a regulated institution. The Indian capital markets transformed from inward markets to globally competitive ones by bringing in transparency, adopting international accounting standards, and developing derivatives markets. In the last 15 years, SEBI emerged as the statutory regulator of Indias securities markets. India now has a developed regulatory environment, a modern market infrastructure, and a steadily increasing market capitalization. The investments by international financial institutions in Indian exchanges signify the strength of the Indian capital market and reinforce its presence in the global markets. In June 2007, Deutsche Brse and Singapore Exchange Ltd. (SGX) bought 5% stake each in NSE by paying about Rs. 200 crore each while the NYSE Group, owner of the NYSE, and three international investment groups General Atlantic, Goldman Sachs, and Softbank Asia Infrastructure Fund (SAIF) purchased a 20% stake in NSE. Investments by globally prominent financial institutions, that are strongly positioned in North America, Europe and Asia, in Indian stock exchanges bring along capital resources, experience, and improved network. These investments will significantly strengthen the Indian exchanges, reinforce ties with global markets and improve the BSE and NSEs strategic positions, enabling India to develop as an international financial centre that will integrate with global markets. Economic Reforms and Impact on India The impact of reforms on Indias economic performance has been a subject of much debate in and outside India. As the reforms were implemented at a time of crisis when the economy was in depression and India had to resort to IMF financing and a structural adjustment loan from the World Bank, they were criticized as being driven by the IMF and World Bank which on the contrary were carried out after considerable internal thinking. Although the reforms were broadly in line with what was considered sensible policy by international institutions, this was more a reflection of a genuine convergence of views on development policy than of pressure exerted by the IMF and the World Bank. The initial response to the reforms was an impressive acceleration in annual GDP growth, which averaged 6.7% in the first half of the reform period (199297). This acceleration was widely viewed as vindicating the government's approach. But in the second half of the reforms period (19982003), the growth rate decelerated to an average of about 5.7%. The deceleration in the growth was explained under two factors the slowing down of the global economy in the wake of the East Asian crisis and the collapse of the technology boom in the U. S. However, the growth rate again rose and averaged well above 6%. India, like most other emerging market economies, has so far, not been seriously affected by the recent financial turmoil witnessed in the developed economies. The relatively little impact of the global financial crisis on Indian financial markets could be due to the more calibrated approach followed in opening up of the financial sector and also the opening of the capital account. The difference between many other countries that took the same path is bringing reforms in a phased manner, either by phasing out import licensing or capital account liberalization. The gradual liberalization of the capital account did save India from being swept during the Asian Crisis. The East Asian economies with relatively more open capital account were swept in a capital-outflow leading to financial and currency crisis of 1997. India too was

14

affected, but mostly due to loss of export demand and loss of confidence throughout the whole region. Nonetheless, it did provide for interesting conditions. The Capital Convertibility Committee, highlighting the benefits of a more open capital account, recommended three significant pre-conditions like having fiscal deficit less than 3.5% of the GDP, inflation within the band of 36% and having at least six months of import cover. The Indian economy is now a relatively an open economy, despite the capital account not being fully open. According to RBI statistics, the current account, as measured by the sum of current receipts and current payments, stood at 53% of the GDP in 2007-08, up from 19% of the GDP in 1991. The capital account, measured as the sum of gross capital inflows and outflows, increased from 12% of the GDP in 1990-91, to around 64% in 2007-08. The fiscal management in the country has significantly improved with the combined fiscal deficit of Centre and States declining from 9.5% of the GDP in 2000 2001 to 2.7% in 2007-08. Economists opine that the gradualism and the slow pace of reforms saved India from the global financial crisis. The global financial crisis that began in the U.S spread abroad through two channels finance and trade. Countries that absorbed in a lot of foreign capitallike those in Eastern Europesuffered huge disruptions to their exchange rates, asset prices, and financial systems when this capital fled to safety. Arvind Subramanian30, Fellow at Peterson Institute for International Economics, opines that India survived the two crises because it followed a strategy of goldilocks globalization31 relying neither on foreign finance nor too much on exports. He argues that unlike the Eastern European countries that ran a current account deficit of more than 10% of GDP, India kept its own at about 2 to 3% of GDP. India also cannily insured itself against turmoil by building a healthy cushion of foreign exchange reserves. As a result, when crisis hit, India was able to provide dollars to investors selling rupee assets and demand dollars in return. This reassured investors, leading many to keep their money in India. On the trade side, India's exports of goods and services never accounted for more than about 20% of its economy, compared with about 45% for China. Thus, when foreign demand for products and services fell, it did not affect India much. Between March 2008 and March 2009, India managed to grow at 6.7%, well above the growth rate of most industrial and developed countries. Economists argue that, Indian financial system was saved due to the policy approach of gradual and calibrated integration of the domestic financial system with overseas markets, especially the debt markets through capital controls as also well-modulated regulatory policies to contain bank exposure to sensitive sectors, which are more prone to asset bubbles such as real estate and capital markets. Further, ensuring that banks maintained adequate capital and liquidity while containing undue volatility in the forex and debt markets helped in preserving financial stability while promoting growth. In understanding the Indian perspective on banking regulation, it would be useful to look at the regulatory framework prior to the crisis and the measures initiated to strengthen it in the wake of the crisis.

30 31

http://www.iie.com/ publications/ opeds/print.cfm?researchid=1238&doc=pub India's Goldilocks Globalization by Arvind Subramanian, Peterson Institute for International Economics Op-ed in Newsweek June 15, 2009

15

References
1. MRs.. Usha Thorat, Indian Perspective on Banking Regulation, Reserve Bank of India, February 8, 2010. 2. Mohan, Rakesh, Financial Sector Reforms and Monetary Policy: The Indian Experience, Lecture delivered at the Conference on Economic Policy in Asia at Stanford, June 2, 2006.

3. The Economist, Special Report on International Banking May 20-26, 2006. 4. Mohan, Rakesh, Recent Trends in the Indian Debt Market and Current Initiatives, Reserve Bank of India Bulletin, April 2006. 5. Mohan, Rakesh, Reforms, Productivity and Efficiency in Banking: The Indian Experience, Reserve Bank of India Bulletin, March 2006. 6. Mohan, Rakesh, Coping with Liquidity Management in India: Practitioner's View, Reserve Bank of India Bulletin, April 2006.
7.

Reddy, Y.V, Global Imbalances-An Indian Perspective, 2006, www.rbi.org.in

8. Reddy, Y.V, Challenges and Implications of Basel II for Asia, 2006, www.rbi.org.in

9. Mohan, Rakesh, Evolution of Central Banking in India, 2006, www.rbi.org.in. 10. Reddy, Y.V. Global Imbalances-An Indian Perspective, 2006, www.rbi.org.in
11. Reddy, Y.V., Challenges and Implications of Basel II for Asia, 2006, www.rbi.org.in

12. Mohan, Rakesh, Evolution of Central Banking in India, 2006, www.rbi.org.in. 13. Mohan, Rakesh (2005), 'Some Apparent Puzzles for Contemporary Monetary Policy, Reserve Bank of India Bulletin, December 2005. 14. Dr Y V Reddy, Governor of the Reserve Bank of India, at the Institute of Bankers of Pakistan, Karachi, 18 May 2005. 15. McKinsey & Company, Indian Banking 2010: Towards a High Performing Sector New Delhi, 2005. 16. Mohan, Rakesh, Financial Sector Reforms in India: Policies And Performance Analysis, Reserve Bank of India Bulletin, October 2004. 17. Mohan, Rakesh, Challenges to Monetary Policy in a Globalising Context, Reserve Bank of India Bulletin, January, 2004. 18. Report on Currency and Finance, 2003-04, Reserve Bank of India, 2004. 19. Ahluwalia, M. S., Reforming Indias Financial Sector: An Overview, Oxford University Press, 2002. 20. Kapila, Raj & Uma Kapila, Ongoing Developments in Banking and Financial Sector, vol. 03, 2000. 21. Sen, Kunal, and R. R. Vaidya, The Process of Financial Liberalisation in India, Oxford University Press, 1997. 22. RBI Annual Report 2004-05. 2005-04, 2006-07, 2008-09 23. Report on Trend and Progress of Banking in India, RBI, various issues

16

ANNEXURE I Foreign Exchange Reserves

End of Financial Year SDRs## Rupees crore USD million Gold# Rupees crore 118 118 118 118 118 118 118 118 118 118 118 134 116 183 183 183 92 112 194 226 230 229 211 192 170 381 545 497 444 291 248 181 161 232 125 161 184 200 233 123 148 269 297 296 293 234 217 200 470 662 603 473 291 230 145 131 179 97 103 107 102 90 183 183 183 183 183 183 183 188 193 220 225 226 226 226 226 246 274 274 274 274 281 6828 9039 USD million 247 247 247 247 247 247 247 247 247 247 247 281 243 243 243 243 243 243 264 293 293 304 281 290 319 377 375 370 335 324 320 325 417 471 508 473 487 3496 3499 Foreign Currency Assets* Rupees crore 792 774 785 563 303 261 245 186 180 177 188 116 182 296 356 394 546 438 480 479 581 610 1492 2863 4500 5220 5164 4822 3355 4265 5498 6817 7384 7645 7287 6605 5787 4388 14578 USD million 1664 1626 1648 1184 637 548 515 390 377 372 395 243 383 395 475 526 728 584 661 629 736 782 1657 3240 5305 6421 6324 5850 3582 4281 5099 5482 5972 5924 5618 4226 3368 2236 5631 Reserve Tranche Position Rupees crore USD million Total Rupees crore 910 892 903 681 421 379 363 304 298 295 306 250 298 479 539 577 821 733 857 888 994 1022 1886 3243 4863 5821 5934 5545 4025 4782 5972 7243 7819 8151 7686 7040 6252 11416 23850 USD million 1911 1873 1895 1431 884 795 762 637 624 619 642 524 626 638 718 769 1094 975 1194 1219 1325 1379 2172 3747 5824 7268 7361 6823 4390 4896 5649 5952 6520 6574 6223 4802 3962 5834 9220

1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92

17

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

55 339 23 280 7 4 34 16 11 50 19 10 20 12 8 74 6 22596

18 108 7 82 2 1 8 4 2 10 4 2 5 3 2 18 1 5006

10549 12794 13752 15658 14557 13394 12559 12973 12711 14868 16785 18216 19686 25674 29573 40124 48793 81188

3380 4078 4370 4561 4054 3391 2960 2974 2725 3047 3534 4198 4500 5755 6784 10039 9577 17986

20140 47287 66005 58446 80368 102507 125412 152924 184482 249118 341476 466215 593121 647327 836597 1196023 1230066 1149650

6434 15068 20809 17044 22367 25975 29522 35058 39554 51049 71890 107448 135571 145108 191924 299230 241426 254685 3190 5688 6289 3374 2044 1744 5000 6231 672 1311 1438 756 469 436 981 1380

30744 60420 79780 74384 94932 115905 138005 165913 197204 264036 361470 490129 619116 676387 868222 1237965 1283865 1259665

9832 19254 25186 21687 26423 29367 32490 38036 42281 54106 76100 112959 141514 151622 199179 309723 251985 279057

* : FCA excludes US $ 250.00 million (as also its equivalent value in Indian Rupee) invested in foreign currency denominated bonds issued by IIFC (UK) since March 20, 2009. # : Includes Rupees 31463 crore(US $ 6699 million) reflecting the purchase of 200 metric tonnes of gold from IMF on November 3, 2009. ## : Includes SDRs 3082.5 million allocated under general allocation and SDRs 214.6 million allocated under special allocation by the IMF done on August 28, 2009 and September 9, 2009, respectively.

Source: Compiled from Reserve Bank of India and Handbook of Statistics on Indian Economy 2009-10.

18

ANNEXURE II
(At Constant Prices)

Macro-Economic Aggregates - Growth Rates and Investment Rates

(%) Year GDP at Factor Cost 2.3 2.8 6.1 4.2 2.6 5.7 -1.2 7.6 2.2 7.1 3.1 2.1 5.1 7.6 -3.7 1.0 8.1 2.6 6.5 5.0 1.0 -0.3 4.6 1.2 9.0 1.2 7.5 5.5 -5.2 7.2 5.6 2.9 7.9 4.0 4.2 4.3 3.5 10.2 6.1 5.3 NDP at Factor Cost 2.1 2.8 6.3 4.3 6.3 5.5 -1.7 7.6 1.9 7.2 2.9 1.8 5.6 7.5 -4.4 0.5 8.1 3.0 6.4 4.9 0.6 -0.9 4.4 0.7 9.3 0.9 7.6 5.5 -6.2 7.3 5.7 2.7 8.1 3.8 4.0 4.2 3.3 10.6 6.1 5.5 Annual Growth Rate GNP at Factor Cost 2.5 2.9 6.1 4.2 2.7 5.7 -1.3 7.5 2.0 7.0 3.0 2.0 5.1 7.5 -3.7 1.0 8.0 2.7 6.5 5.0 1.0 -0.3 4.7 1.3 9.1 1.3 7.6 5.5 -5.0 7.2 5.5 2.6 7.8 3.8 4.2 4.3 3.3 9.8 6.1 5.0 NNP at Factor Cost 2.3 2.8 6.4 4.2 6.5 5.5 -1.8 7.6 1.7 7.2 2.7 1.8 5.7 7.4 -4.5 0.6 8.0 3.1 6.4 4.9 0.6 -0.8 4.5 0.9 9.5 0.9 7.7 5.5 -6.0 7.4 5.5 2.3 8.1 3.6 4.0 4.1 3.0 10.3 6.1 5.2 Rate of Rate of Per Capita GDCF NDCF NNP New Series (Base : 1999-2000) 10.4 2.6 0.6 12.9 5.1 0.9 9.2 1.1 4.4 9.9 2.1 2.3 10.6 2.9 4.6 13.9 9.6 3.4 15.9 11.6 -3.7 14.9 10.1 5.3 13.8 9.0 -0.2 13.4 8.3 5.2 15.0 10.0 0.4 14.2 9.1 -0.5 15.7 10.5 3.4 16.1 11.3 5.2 16.3 11.5 -6.6 18.8 13.6 -1.5 20.4 15.0 5.7 17.7 12.1 0.7 16.7 11.3 4.2 17.9 12.5 2.6 17.4 11.8 -1.8 17.9 12.1 -3.1 18.0 11.7 2.2 20.7 14.4 -1.3 18.3 11.5 6.9 17.4 10.8 -1.2 19.4 12.7 5.3 20.0 13.4 3.2 22.8 16.5 -8.2 21.8 14.5 5.0 21.5 14.3 3.5 19.6 12.2 -0.1 18.9 11.3 5.8 18.5 11.0 1.3 19.2 11.7 1.8 20.0 12.5 2.0 19.2 11.6 0.8 21.1 13.5 7.9 21.9 14.6 3.9 22.1 14.8 3.1 24.4 17.5

1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91

19

Year

GDP at Factor Cost 1.4 5.4 5.7 6.4 7.3 8.0 4.3 6.7 6.4 4.4 5.8 3.8 8.5 7.5 9.5 9.7 9.0 6.7

NDP at Factor Cost 0.9 5.3 5.6 6.4 7.3 8.1 4.0 6.6 6.2 4.1 5.6 3.4 8.6 7.3 9.5 9.7 8.8 6.4

Annual Growth Rate GNP at Factor Cost 1.4 5.4 5.9 6.5 7.3 8.1 4.5 6.7 6.4 4.0 6.0 4.0 8.5 7.5 9.6 9.8 9.3 6.7

NNP at Factor Cost 0.9 5.4 5.9 6.5 7.3 8.2 4.3 6.6 6.2 3.7 5.8 3.6 8.6 7.3 9.6 9.8 9.1 6.4

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Note :

Rate of Rate of Per Capita GDCF NDCF NNP New Series (Base : 1999-2000) -1.1 20.4 12.7 3.4 21.2 13.5 3.5 21.5 13.7 4.4 24.6 17.1 5.2 24.6 17.2 6.2 22.7 15.2 2.3 24.5 16.9 4.6 23.1 15.3 4.3 25.9 18.3 1.8 24.1 16.0 3.7 22.2 13.8 2.0 25.0 16.6 7.0 27.1 19.0 5.6 30.5 22.7 8.0 33.3 25.8 8.2 34.4 27.0 7.6 36.2 28.9 4.9 -

(1) Data for 2006-07 are provisional. (2) Data for 2007-08 are quick estimates. (3) Data for 2008-09 are revised estimates. (4) Rate of GDCF is %age to GDP at market prices. (5) Rate of NDCF is %age to NDP at market prices.

Source: Central Statistical Organization.

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ANNEXURE III Average Annual GDP Growth in India, China, and Developing Regions, 1971-2003
Country/region India China Sub-Saharan Africa Developing Asia excl. China and India Middle East and North Africa Latin America and Caribbean All developing countries 1971-80 3.2 6.3 3.3 5.8 6.3 6.1 5.5 1981-90 5.7 9.3 2.2 5.0 2.4 1.5 4.1 1992-97 6.7 11.5 2.3 6.2 3.3 3.9 6.3 1998-2003 5.7 7.7 3.0 2.7 4.3 1.3 4.5

Source: IMF, World Economic Outlook.

21

ANNEXURE IV Fiscal Indicators for India

Year
1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Gross Fiscal Deficit 3.04 3.49 3.99 2.61 2.94 3.60 4.19 3.58 5.13 5.23 5.71 5.07 5.56 5.86 6.99 7.77 8.37 7.56 7.28 7.31 7.84 5.55 5.34 6.96 5.68 5.05 4.84 5.82 6.47 5.36 5.65 6.19 5.91 4.48 3.99 4.08 3.45 2.69 6.14 6.85 Net Fiscal Deficit 1.69 2.46 1.81 1.16 1.10 1.62 1.73 1.76 1.91 2.56 3.52 2.69 3.13 3.49 4.40 4.81 5.41 5.15 4.89 4.86 5.39 3.76 4.02 5.31 3.97 3.56 3.37 4.13 4.57 4.61 5.13 5.40 5.45 4.20 4.01 4.06 3.66 2.56 6.05 6.71 Gross Primary Deficit 1.74 2.13 2.57 1.28 1.66 2.14 2.55 1.98 3.35 3.36 3.92 3.20 3.50 3.70 4.59 5.10 5.43 4.41 3.92 3.67 4.06 1.49 1.21 2.72 1.34 0.86 0.53 1.53 2.03 0.74 0.93 1.47 1.11 -0.03 -0.04 0.38 -0.19 -0.93 2.51 3.00 Net Primary Deficit 1.62 2.31 1.70 0.94 0.82 1.27 1.31 1.56 1.41 1.80 2.96 2.11 2.56 2.54 3.59 3.78 4.17 3.61 3.17 2.96 3.15 1.37 1.55 2.81 1.19 0.91 0.65 1.49 1.84 1.72 1.97 2.24 2.19 1.09 1.01 0.98 0.57 -0.62 2.79 3.19 Revenue Deficit -0.35 0.20 0.03 -0.36 -0.98 -1.05 -0.33 -0.42 -0.26 0.57 1.40 0.23 0.68 1.14 1.69 2.09 2.47 2.55 2.48 2.44 3.26 2.48 2.47 3.78 3.05 2.49 2.37 3.04 3.82 3.46 4.05 4.40 4.40 3.57 2.49 2.57 1.94 1.11 4.53 4.83 Primary Revenue Deficit -1.66 -1.15 -1.39 -1.68 -2.25 -2.51 -1.97 -2.02 -2.04 -1.31 -0.39 -1.64 -1.38 -1.01 -0.70 -0.58 -0.47 -0.59 -0.89 -1.20 -0.52 -1.58 -1.66 -0.46 -1.28 -1.70 -1.95 -1.26 -0.62 -1.16 -0.67 -0.32 -0.40 -0.94 -1.54 -1.12 -1.70 -2.51 0.91 0.98 (As %age to GDP) Draw Down of Cash Net RBI Balances Credit to Centre 0.62 1.05 1.59 0.49 0.92 0.44 0.14 0.91 1.35 1.99 1.70 0.82 0.87 0.64 1.50 1.89 2.62 1.63 1.33 2.17 1.99 1.05 1.64 1.27 0.09 0.82 0.96 -0.06 -0.01 0.04 -0.06 -0.07 0.08 -0.14 -0.26 -0.58 0.11 0.56 -1.13 0.48 1.18 2.22 0.95 0.67 -0.34 0.90 -0.25 1.97 2.17 2.44 1.88 1.76 1.77 2.43 2.20 2.25 1.83 1.53 2.83 2.59 0.84 0.57 0.03 0.21 1.67 0.14 0.85 0.67 -0.29 0.32 -0.23 -1.16 -2.76 -1.91 0.79 -0.07 -2.47 3.31 -

Source:www.rbi.india.org.

22

ANNEXURE V Balance of Payments Indicators

(%) Trade Year Exports/ GDP 3.1 3.2 3.7 3.5 4.1 5.0 5.7 5.3 5.0 5.2 4.6 4.5 4.8 4.6 4.8 4.1 4.2 4.6 4.9 5.8 5.8 6.9 7.3 8.2 8.3 9.1 8.8 8.7 8.2 8.3 9.9 9.4 10.6 11.0 12.1 13.0 14.1 14.2 15.1 Imports/ GDP 3.9 4.1 4.0 4.3 5.7 6.4 6.0 5.9 7.0 8.0 8.9 8.3 8.3 7.7 7.5 7.5 7.2 7.2 8.1 8.3 8.8 7.9 9.6 9.7 11.1 12.3 12.6 12.5 11.4 12.3 12.6 11.8 12.7 13.3 16.9 19.4 20.9 22.0 25.5 Receipts/ GDP 1.1 1.1 0.9 3.4 1.3 2.2 2.4 2.7 2.9 3.6 3.9 3.3 3.2 3.1 3.3 2.8 2.6 2.6 2.6 2.6 2.4 3.6 3.6 4.1 4.8 5.0 5.5 5.6 6.2 6.7 7.0 7.7 8.3 8.9 9.9 11.1 12.5 12.7 14.0 Invisibles Payments/ GDP 1.2 1.2 1.2 1.0 0.8 1.0 1.1 1.0 1.1 1.2 1.2 1.2 1.4 1.5 1.8 1.5 1.5 1.8 2.1 2.3 2.4 2.9 3.0 3.1 3.1 3.4 2.9 3.2 4.0 3.8 4.9 4.6 4.9 4.3 5.5 5.9 6.8 6.3 6.3 Net/ GDP 0.1 0.1 0.3 2.5 0.4 1.2 1.3 1.7 1.8 2.4 2.8 2.1 1.8 1.6 1.5 1.3 1.1 0.8 0.5 0.2 -0.1 0.7 0.6 1.0 1.8 1.5 2.6 2.4 2.2 2.9 2.1 3.1 3.4 4.6 4.4 5.2 5.7 6.4 7.7 Current Receipts/ GDP 3.9 4.0 4.4 4.3 5.1 6.5 7.7 7.6 7.4 8.3 8.1 7.6 7.8 7.5 7.9 6.8 6.7 7.0 7.3 8.2 8.0 10.3 10.7 12.2 13.0 14.0 14.2 14.2 14.4 15.0 16.9 16.9 18.8 19.9 21.9 24.0 26.6 26.8 29.1 Current Account Current Receipts/ Current Payments 75.7 75.0 84.7 82.0 78.5 89.3 107.7 110.3 91.4 90.6 80.7 79.8 80.2 81.8 85.1 74.8 76.8 78.6 71.5 76.4 71.5 94.3 87.7 95.6 91.7 88.8 91.6 90.9 93.2 93.0 96.4 103.8 106.6 112.8 98.0 94.8 95.9 94.6 91.7 CAD/ GDP 1.0 1.0 0.6 1.7 1.2 0.2 1.0 1.1 0.2 0.5 1.5 1.7 1.7 1.5 1.2 2.1 1.9 1.8 2.7 2.3 3.0 0.3 1.7 0.4 1.0 1.6 1.2 1.4 1.0 1.0 0.6 0.7 1.2 2.3 0.4 1.2 1.1 1.5 2.6 Capital Account Foreign Investment/ Exports 2.5 2.7 1.6 2.2 2.2 0.2 0.5 -0.2 0.4 1.1 0.0 0.0 0.0 0.0 0.0 0.0 1.9 3.4 2.5 2.4 0.6 0.7 3.0 18.7 18.3 14.9 18.0 15.1 7.0 13.8 14.9 18.2 11.2 23.7 18.0 20.3 23.0 38.3 12.1 Foreign Investment/ GDP 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.1 0.1 0.0 0.1 0.2 1.5 1.5 1.4 1.6 1.3 0.6 1.2 1.5 1.7 1.2 2.6 2.2 2.6 3.3 5.4 1.8 Import Cover of Reserves (in months) 4.8 5.2 5.2 4.4 2.9 4.2 7.4 9.9 9.2 7.3 5.0 3.3 3.6 4.1 4.5 4.5 4.4 3.8 2.4 1.9 2.5 5.3 4.9 8.6 8.4 6.0 6.5 6.9 8.2 8.2 8.8 11.5 14.2 16.9 14.3 11.6 12.5 14.4 10.3

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Note : 1) Current receipt is defined as current account receipts minus official transfer receipts.

Source: Reserve Bank of India.

23

ANNEXURE VI Indias Foreign Trade - US Dollars

(US $ million) Year Oil 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 11.3 14.1 37.7 15.7 17.2 21.7 20.8 18.3 17.2 23.3 31.5 246.3 1278.0 1535.8 1529.4 527.0 321.8 500.4 348.7 418.4 522.7 414.7 476.2 397.8 416.9 453.7 481.8 352.8 89.4 38.9 Exports Non-Oil 2020.0 2137.8 2531.0 3222.6 4174.9 4627.0 5707.6 6280.3 6943.1 7903.1 8453.2 8457.6 7829.6 7913.6 8348.7 8377.5 9422.9 11588.1 13621.7 16194.1 17622.5 17450.7 18061.0 21840.5 25913.6 31341.2 32987.9 34653.7 33129.3 36783.5 Total 2031.3 2151.9 2568.7 3238.3 4192.1 4648.7 5728.4 6298.6 6960.3 7926.4 8484.7 8703.9 9107.6 9449.4 9878.1 8904.5 9744.7 12088.5 13970.4 16612.5 18145.2 17865.4 18537.2 22238.3 26330.5 31794.9 33469.7 35006.4 33218.7 36822.4 Oil 179.8 259.8 265.9 719.0 1457.0 1411.7 1574.3 1806.4 2038.2 4034.7 6654.9 5786.2 5816.2 4673.1 4549.8 4078.0 2199.5 3118.1 3009.0 3767.5 6028.1 5324.8 6100.0 5753.5 5927.8 7525.8 10036.2 8164.0 6398.6 12611.4 Imports Non-Oil 1982.5 2181.7 2167.2 3073.6 4233.6 4652.0 4077.4 5205.4 6240.5 7255.9 9211.6 9386.7 8970.4 10637.8 9862.5 11988.9 13527.2 14037.6 16488.2 17451.7 18044.4 14085.7 15781.6 17552.7 22726.5 29149.5 29096.2 33320.5 35990.1 37059.3 Total 2162.3 2441.5 2433.1 3792.6 5690.6 6063.7 5651.7 7011.8 8278.7 11290.6 15866.5 15172.9 14786.6 15310.9 14412.3 16066.9 15726.7 17155.7 19497.2 21219.2 24072.5 19410.5 21881.6 23306.2 28654.4 36675.3 39132.4 41484.5 42388.7 49670.7 Oil -168.5 -245.7 -228.2 -703.3 -1439.8 -1390.0 -1553.5 -1788.1 -2021.0 -4011.4 -6623.4 -5539.9 -4538.2 -3137.3 -3020.4 -3551.0 -1877.7 -2617.7 -2660.3 -3349.1 -5505.4 -4910.1 -5623.8 -5355.7 -5510.9 -7072.0 -9554.4 -7811.2 -6309.2 -12572.5 Trade Balance Non-Oil 37.5 -43.9 363.8 149.0 -58.7 -25.0 1630.2 1074.9 702.6 647.2 -758.4 -929.1 -1140.8 -2724.2 -1513.8 -3611.4 -4104.3 -2449.5 -2866.5 -1257.6 -421.9 3365.0 2279.4 4287.8 3187.1 2191.7 3891.7 1333.1 -2860.8 -275.8 Total -131.0 -289.6 135.6 -554.3 -1498.5 -1415.0 76.7 -713.2 -1318.4 -3364.2 -7381.8 -6469.0 -5679.0 -5861.5 -4534.2 -7162.4 -5982.0 -5067.2 -5526.8 -4606.7 -5927.3 -1545.1 -3344.4 -1067.9 -2323.8 -4880.4 -5662.7 -6478.1 -9170.0 -12848.3

24

Year Oil 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Note : 1869.7 2119.1 2576.5 3568.4 6989.3 11639.6 18634.6 26903.8 .

Exports Non-Oil 42690.6 41707.6 50142.9 60274.1 76546.6 91450.9 107779.5 136228.3 . Total 44560.3 43826.7 52719.4 63842.6 83535.9 103090.5 126414.1 163132.2 168704.2 Oil 15650.1 14000.3 17639.5 20569.5 29844.1 43963.1 56945.3 79715.0 93176.0

Imports Non-Oil 34886.4 37413.0 43772.6 57579.6 81673.3 105202.6 128790.0 171939.0 194583.4 Total 50536.5 51413.3 61412.1 78149.1 111517.4 149165.7 185735.2 251654.0 287759.4 Oil -13780.4 -11881.2 -15063.0 -17001.1 -22854.8 -32323.5 -38310.7 -52811.2 .

Trade Balance Non-Oil 7804.2 4294.6 6370.3 2694.5 -5126.7 -13751.7 -21010.5 -35710.6 . Total -5976.2 -7586.6 -8692.7 -14306.5 -27981.5 -46075.2 -59321.2 -88521.8 -119055.2

Data for 2007-08 are revised and for 2008-09 are provisional.

Source: Directorate General of Commercial Intelligence and Statistics.

25

ANNEXURE VII Major Recommendations by Narasimham Committee I

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Establishment of a four-tier hierarchy for the banking structure consisting of three to four large banks with SBI at the top. The private sector banks should be treated equally with the public sector banks and the government should contemplate to nationalize any such banks. The ban on setting up of new banks in the private sector should be lifted and the licensing policy regarding branch expansion must be abolished. The government has to be more liberal in the expansion of foreign bank branches and also foreign operations of Indian banks should be rationalized. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be progressively brought down from the levels of 199192. The directed credit program should be re-examined and the priority sector should be redefined to comprise small and marginal farmers, the tiny industrial sector, small business operators and weaker sections. Banking industry should follow BIS/Basel norms for capital adequacy within three years. Interest rates should be deregulated to suit the market conditions. The government should tighten the prudential norms for commercial banks. The competition in lending between DFIs and banks should be increased and a shift from consortium lending to syndicated lending should be made. In respect of doubtful debts, provisions should be created to the extent of 100 % of the security shortfall. The governments share in public sector banks should be disinvested to a certain percentage like in case of any other PSU. Public sector banks should set up at least one rural banking subsidiary and they should be treated at par with RRBs.

Source: Compiled From Reserve Bank of India.

26

ANNEXURE VIII Major Recommendations of the Narasimham Committee II

1. 2. 3. 4. 5. 6. 7. 8. The committee favored the merger of strong public sector banks and closure of some weaker banks if their rehabilitation was not possible. It recommended corrective measures like recapitalization to be undertaken for weak banks and if required such banks should be closed down. The committee had also suggested an amicable golden handshake scheme for surplus banking sector staff. Suggesting a possible short term solution to weak banks, the report observed that the narrow banks could be allowed as a means of facilitating their rehabilitation. Expressing concern over rising non-performing assets, the committee provided the idea of setting up an asset reconstruction fund to tackle the problem of huge non-performing assets (NPAs) of banks in the public sector. The report emphasized the need for enhancement of capital adequacy norms from the present level of 8 % but did not specify the amount to which it should be raised. The Banking Sector Reforms Committee further suggested that existence of a healthy competition between public sector banks and private sector banks was essential. The report envisaged flow of capital to meet higher and unspecified levels of capital adequacy and reduction of targeted credit.

Source: Compiled From Reserve Bank of India.

27

ANNEXURE IX The Major Institutional and Legal Measures in the Banking Sector
The major institutional and legal measures undertaken in the banking sector: 1. 2. 3. 4. 5. 6. 7. 8. Debt Recovery Tribunals were established to tackle the issue of high-level non-performing assets (NPAs). Asset Reconstruction Companies have been allowed to acquire non-performing assets form any financial entity and restructure and rehabilitate or liquidate them with a stipulated time period. Promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its subsequent amendments to ensure creditor rights. Setting up of Clearing Corporation of India Limited (CCIL) to act as counterparty for facilitating payment and settlement system relating to fixed income securities and money market instruments. Setting up of Credit Information Bureau of India Limited (CIBIL) for information sharing on defaulters as also other borrowers. Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks with other banks and NBFCs. Instructions and guidelines on ownership and governance in private sector banks. Setting up of Indian Financial Net (INFINET)32 as the communication backbone for the financial sector, introduction of Negotiated Dealing System (NDS) for screen based trading in government securities and Real Time Gross Settlement System (RTGS). (Annexure IX for major reform in banking sector)

Source: Compiled From Reserve Bank of India.

32

INFINET a satellite-based Wide Area Network (WAN) using VSAT (Very Small Aperture Terminals) technology, was jointly set up by the Reserve Bank and Institute for Development and Research in Banking Technology in 1999.

28

ANNEXURE X Reforms in the Banking Sector

Competition Enhancing Measures Granting of operational autonomy to public sector banks, reduction of public ownership in public sector banks by allowing them to raise capital from equity markets up to 49 % of paid-up capital. Transparent norms for entry of Indian private sector, foreign and joint-venture banks and insurance companies, permission for foreign investment in the financial sector in the form of Foreign Direct Investment (FDI) as well as portfolio investment, permission to banks to diversify product portfolio and business activities. Roadmap for presence of foreign banks and guidelines for mergers and amalgamation of private sector banks and NBFCs. Guidelines on ownership and governance in private sector banks. Measures Enhancing Role of Market Forces Sharp reduction in pre-emption through reserve requirement, market determined pricing for government securities, disbanding of administered interest rates with a few exceptions and enhanced transparency and disclosure norms to facilitate market discipline. Introduction of pure inter-bank call money market, auction-based repos-reverse repos for short-term liquidity management, facilitation of improved payments and settlement mechanism. C. Prudential Measures Introduction and phased implementation of international best practices and norms on risk-weighted capital adequacy requirement, accounting, income recognition, provisioning and exposure. Measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending, risk concentration, application of marked-to-market principle for investment portfolio and limits on deployment of funds in sensitive activities. 'Know Your Customer' and 'Anti Money Laundering' guidelines, roadmap for Basel II, introduction of capital charge for market risk, higher graded provisioning for NPAs, guidelines for ownership and governance, securitization and debt restructuring mechanisms norms, etc. D. Institutional and Legal Measures Setting up of Lok Adalats (peoples courts), debt recovery tribunals, asset reconstruction companies, settlement advisory committees, corporate debt restructuring mechanism, etc., for quick recovery and restructuring. Promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its subsequent amendment to ensure creditor rights. Setting up of Credit Information Bureau of India Limited (CIBIL) for information sharing on defaulters as also other borrowers. Setting up of Clearing Corporation of India Limited (CCIL) to act as central counterparty for facilitating payments and settlement system relating to fixed income securities and money market instruments. E. Supervisory Measures Establishment of the Board for Financial Supervision as the apex supervisory authority for commercial banks, financial institutions and non-banking financial companies. Introduction of CAMELS supervisory rating system, move towards risk-based supervision, consolidated supervision of financial conglomerates, strengthening of off-site surveillance through control returns. Recasting of the role of statutory auditors, increased internal control through strengthening of internal audit. Strengthening corporate governance, enhanced due diligence on important shareholders, fit and proper tests for directors. F. Technology Related Measures Setting up of INFINET as the communication backbone for the financial sector, introduction of Negotiated Dealing System (NDS) for screen-based trading in government securities and the Real Time Gross Settlement (RTGS) System.

Source: Compiled from Reserve Bank of India.

29

ANNEXURE XI Evolution of BPLR in India

October 1994 February 1997 October 1997 April 1998 April 1999 October 1999 April 2000 April 2001 April 2002 Lending rates for loans with credit limits of over Rs. 2 lakh deregulated. Banks were required to declare their Prime lending rates (PLRs). Banks allowed to prescribe separate PLRs and spreads over PLRs, both for loan and cash credit components. For term loans of 3 years and above, separate Prime Term Lending Rates (PTLRs) were required to be announced by banks. PLR converted as a ceiling rate on loans up to Rs.2 lakh. Tenor-linked Prime Lending Rates (TPLRs) introduced. Banks were given flexibility to charge interest rates without reference to the PLR in respect of certain categories of loans/credit. Banks allowed to charge fixed/floating rate on their lending for credit limit of over Rs.2 lakh. The PLR ceased to be the floor rate for loans above Rs. 2 lakh. Commercial banks allowed to lend at sub-PLR rate for loans above Rs.2 lakh. A system of collection of additional information from banks on the (a) maximum and minimum interest rates on advances charged by the banks; and (b) range of interest rates with large value of business and disseminating through the Reserve Banks website was introduced. The Reserve Bank advised banks to announce a benchmark PLR (BPLR) with the approval of their boards. The system of tenor-linked PLR discontinued. Base Rate System of loan pricing implemented from 1st July 2010

April 2003 April 2010

Source: http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=571

30

ANNEXURE XII Interest Rate Deregulation - Bank Rate, LAF (Repo-Reverse Repo), CRR & SLR
Effective Date Bank Rate Fix Range LAF Rates Repo 29-04-2005 26-10-2005 24-01 -2006 08-06-2006 25-07-2006 31-10-2006 23-12-2006 06-01-2007 31-01-2007 17-02-2007 03-03-2007 31-03-2007 14-04-2007 28-04-2007 04-08-2007 10-11-2007 26-04-2008 10-05-2008 24-05-2008 12-06-2008 25-06-2008 05-07-2008 19-07-2008 30-07-2008 30-08-2008 11-10-2008 20-10-2008 25-10-2008 03-11-2008 08-11-2008 6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00 8.50 9.00 8.00 7.50 Reverse 5.00 5.25 5.50 5.75 6.00 5.25 5.50 5.75 6.00 6.25 6.50 7.00 7.50 7.75 8.00 8.25 8.50 8.75 9.00 6.50 6.00 5.50 24.00 Cash Reserve Ratio Statutory Liquidity Ratio

31

08-12-2008 05-01-2009 17-01 -2009 05-03-2009 21-04-2009 07-11-2009 13-02-2010 27-02-2010 19-03-2010 20-04-2010 24-04-2010 02-07-2010 27-07-2010

6.50 5.50 5.00 4.75 5.00 5.25 5.50 5.75

5.00 4.00 3.50 3.25 3.50 3.75 4.00 4.50

5.00 5.50 5.75 6.00 -

25.00 -

Note :"-" Indicates No change. Source: Handbook of Statistics on Indian Economy 2009-10

32

ANNEXURE XIII Net Investments by FIIs in the Indian Capital Market

(Rupees crore)
Year / Month 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Note : Apr 4.71 525.39 186.58 1472.59 624.74 169.17 814.61 2438.06 1694.76 -82.11 572.38 4207.86 -946.29 722.07 4752.88 1475.95 8122.99 May 41.39 882.00 203.03 1036.27 889.14 -557.45 1523.52 172.17 1030.83 -153.89 1232.95 -3151.29 -586.82 -8930.32 3242.17 -3378.41 21114.76 Jun 95.95 816.37 360.58 1041.79 1403.88 -896.30 504.27 -985.51 808.64 -182.90 2592.95 511.00 5699.47 1781.87 7210.02 -10429.39 4331.55 Jul 148.54 328.23 647.88 874.45 1002.80 104.68 1508.49 -1569.19 773.45 305.19 2495.89 1292.83 7390.55 1073.16 19515.29 -1653.81 Aug 298.67 424.65 548.19 148.38 493.66 -390.82 -11.70 1626.01 270.00 192.29 2058.07 2850.25 4084.87 3998.05 -6476.32 -2808.24 Sep 166.76 442.94 409.87 364.66 598.59 111.09 -877.84 -454.20 -228.91 421.67 4047.69 2815.61 3258.00 4624.13 19823.40 -7548.91 Oct 195.27 544.30 320.87 365.81 641.59 -552.46 -734.90 76.32 604.98 -443.53 6939.72 3952.04 -3808.31 5805.01 16375.64 -13461.39 Nov 1087.27 61.88 191.05 402.64 -289.87 47.37 1196.83 1090.11 161.64 342.34 3282.39 6344.57 4559.07 7028.59 -3052.11 -2607.45 Dec 565.30 26.16 412.30 422.23 -182.38 307.46 1571.33 -461.78 278.54 457.12 6290.59 5890.00 9615.32 -1869.49 5054.92 2207.88 Jan 0.56 1233.60 232.32 737.98 339.74 -374.97 370.38 184.31 3971.58 370.47 1087.63 2492.86 1324.24 5177.18 3184.86 -13000.98 -3897.01 Feb 0.29 787.13 293.10 1613.39 424.08 629.05 354.11 2726.58 1574.14 2024.04 432.55 3182.74 7493.76 7859.26 4279.07 7784.26 -1758.84 Mar 3.42 820.01 199.26 1089.18 493.56 472.22 203.67 1359.63 2204.80 484.23 292.54 8811.80 7885.58 6347.74 2057.05 1354.39 521.87 Total 4.27 5444.60 4776.60 6720.90 7386.20 5908.45 -729.10 9765.13 9682.51 8272.67 2668.90 44000.03 41416.45 48650.04 23754.05 62583.56 -43337.75 33569.30

(i) Data for the year 2009-10 is provisional. (ii) FIIs were allowed to invest in the Indian capital market securities from September 1992. However, investments by them were relate to investment in equities only.

first made in January 1993. The data

Source : Reserve Bank of India.

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ANNEXURE XIV Foreign Investment Inflows

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Note : A. Direct investment Rs. crore 174 316 965 1838 4126 7172 10015 13220 10358 9338 18406 29235 24367 19860 27188 39674 103367 138276 161481 US $ million 97 129 315 586 1314 2144 2821 3557 2462 2155 4029 6130 5035 4322 6051 8961 22826 34362 35168 B. Portfolio investment Rs. crore 11 10 748 11188 12007 9192 11758 6794 -257 13112 12609 9639 4738 52279 41854 55307 31713 109741 -63618 US $ million 6 4 244 3567 3824 2748 3312 1828 -61 3026 2760 2021 979 11377 9315 12492 7003 27271 -13855 Rs. crore 185 326 1713 13026 16133 16364 21773 20014 10101 22450 31015 38874 29105 72139 69042 94981 135080 248017 97863 Total (A+B) US $ million 103 133 559 4153 5138 4892 6133 5385 2401 5181 6789 8151 6014 15699 15366 21453 29829 61633 21313

(i) Data for 2007-08 and 2008-09 are provisional. (ii) Data from 1995-96 onwards include acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999. Data on such acquisitions are included as part of FDI since January 1996. (iii) Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are not comparable with FDI data for earlier years. (iv). Negative (-) sign indicates outflow. (v). Direct Investment data for 2006-07 include swap of shares of 3.1 billion.

Source: www.rbi.org.in.

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