The IMF working paper on the Indian Financial Sector released on January 20, 2017 says that the future areas for development in the Indian financial sector would include further reduction of public ownership in banks and insurance companies, expansion of the contractual savings system through more rapid expansion of the insurance and pension systems, greater spread of mutual funds.
The report is prepared by Rakesh Mohan, a former RBI deputy governor and currently senior fellow at the Jackson Institute for Global Affairs (Yale University) and Partha Ray, Professor of Economics at the Indian Institute of Management Calcutta.
Here are some of the highlights of the report: 1. At the time of independence in 1947, India had 97 scheduled, four private banks, 557 “nonscheduled” (small) private banks organized as joint stock companies, and 395 cooperative banks. Thus, at the time of India’s independence, the organized banking sector comprised three major types of players, viz., the Imperial Bank of India, joint-stock banks (which included both joint stock English and Indian banks) and the foreign owned exchange banks.
2. The Post Office Savings Bank (POSB) has a customer base of about 330 million account holders as on March 2015 (Government of India, 2016) thereby contributing significantly to financial inclusion on the deposit side.
3. By the end of the 1980s, the financial sector in India was virtually owned by the government with nationalised banks and insurance companies and a single public sector mutual fund.
4. All these measures were designed to create an efficient, productive and profitable financial sector. There was a gradual reduction of CRR from 15 percent in 1991 to about 4 percent in 2015. There was a reduction in the SLR from nearly 40 percent to 21.5 percent between the early 1990s and the mid-2010s which has created lendable resources for the banking sector.
5. The Return on Equity (ROE) for Indian banks has fallen from 23.37 percent in March 1990 to 10.42 percent in March 2015 due to increased competition. The number of banks during the same period increased from 75 to 91. While ROEs may have fallen there was a marked improvement in terms of non-performing assets (NPA) from 1996 to 2009. The gross NPA as a percentage of gross advances came down steadily from 15.7 percent in 1996 to 2.4 percent in 2009. But the number steadily moved up to around 9 percent by 2015. Public sector banks have been the worst hit as compared to private sector banks.
6. In recent years, small industries as well as agricultural loans do not seem to have contributed the lion’s share of this formation of NPAs, as they used too in the past. It is the industrial sector—primarily the infrastructure and steel sectors that have experienced greater deterioration in asset quality.
7. With about 360 million policies, India's life insurance sector is perhaps the biggest in the world in terms of number—reflecting India's population size. The general insurance business in India is currently at Rs. 847 billion in 2014–15 or about 0.7 percent of GDP. In 2014, with a share of 2.1 percent in the global life insurance business, India has been ranked 11th among the 88 countries in life insurance business (Swiss Re, 2015). In non-life insurance while vehicle insurance accounted for nearly 40 percent of the gross direct premiums earned in 2015–16, penetration of health insurance is rather poor.
8. In fact, despite the absolute size of the insurance sector, penetration in this sector leaves much to be desired. Illustratively, while the rate of insurance penetration in life segment (measured by the ratio of premium to GDP) of India increased from 2.2 percent to in 2002 to 4.6 percent in 2010, it declined thereafter to reach 2.6 percent in 2014.
9. The All India Debt and Investment Survey of December 2013 indicated that during 2012–13, non-institutional sources (i.e. sources of credit other than government, banks, insurance companies, pension funds, financial companies, and so on) continued to play a major role in providing credit to the rural households—about 19 percent of all rural households have acquired credit from non-institutional sources while for urban households about 10 percent by non-institutional agencies. In 1951 institutional share in rural household debt was at 7.2 percent but in 2012 the same number is 60 percent.
10. In fact, the improvement in financial inclusion in the recent past can be associated with an activist stance of the authorities in ensuring financial inclusion. Some the key measures in this regard include opening of No-Frills accounts in commercial banks; introduction of a credit card specifically for the farmers' community (Kisan Credit Card); and engaging Business Correspondents (BC).
11. India’s equity market capitalization to GDP ratio stood nearly 70 percent at the end of 2016 but its share of global market capitalization was only 2.3 percent at the end of 2015.
12. The Employees’ Provident Fund (EPF) is the largest benefit program operating in India. Reflecting this state of affairs, the significance of pension funds in the Indian financial sector has been rather limited. In terms of size India’s pension funds stood at 0.3 percent of its GDP, as against China's 1 percent or Brazil's 13 percent (OECD, 2015).
13. The ratio of NBFCs’ assets in GDP increased steadily from just 8.4 percent as on March 31, 2006 to 12.9 percent as on March 31, 2015; while the ratio of bank assets increased from 75.4 percent to 96.4 percent during the same period.
14. Going forward, the future areas for development in the Indian financial sector would include further reduction of public ownership in banks and insurance companies, expansion of the contractual savings system through more rapid expansion of the insurance and pension systems, greater spread of mutual funds, and development of institutional investors. It is only then that the both the equity and debt markets will display greater breadth as well as depth, along with greater domestic liquidity.
15. India continues its journey towards a financially inclusive regime through innovative policies involving a multi-pronged approach. India has come a long way from a financially repressive regime to a modern financial sector where public sector financial institutions tend to compete with the private sector financial institutions. The Indian authorities while reforming the financial sector had to constantly keep the issues of equity and efficiency in mind.
The thoughts and opinions shared here are of the author.
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