Contents

Author's Note on the Book vii-xx

Part I: Financial System: An Introduction

1. Financial System and Economic Development 1-61.1 Meaning and Importance of Financial System1.2 Emerging Financial Paradigm

1.2.1 From Financial Neutrality to Financial Activism1.2.2 From Financial Volatility to Financial Stability1.2.3 Role of the Government in Financial Development

2. Financial System of India: Evolution, Present Status and Future 7-382.1 Pre-Independence Financial System2.2 Post-Independence Developments

2.2.1 Nationalisation of Imperial Bank of India (1955)2.2.2 Nationalisation of Life Insurance Business (1956)2.2.3 Nationalisation of Commercial Banks (1969 and 1980)2.2.4 Nationalisation of General Insurance Business (1973)2.2.5 Rethinking on Government Domination of Financial Sector2.2.6 From Financial Repression to Financial Liberalisation

(1991 onward)2.2.7 India's Approach to Financial Sector Reforms ;

A. Lessons from East Asian Crisis2.2.8 Strategy of Financial Sector Reforms

A. Developing and Strengthening Financial InfrastructureB. Financial Regulation and SupervisionC. Financial Openness

2.2.9 Achievements and Areas of Concern2.3 Reserve Bank of India (RBI): New Role2.4 Recent Initiatives to Strengthen Financial System

2.4.1 Payment and Settlement SystemsA. Importance of a Sound Payment and Settlement SystemB. Role of RBI in Payment and Settlement SystemC. Board for Regulation and Supervision of Payment and

Settlement Systems^BPSS)D. Modernisation of Payment and Settlement System

2.4.2 Technological Developments

xxii Banking and Financial Markets in India: 1947 to 2007

2.4.3 Legal ReformsA. Recent Acts Enacted by the ParliamentB. Bills Introduced in the ParliamentC. Bills under Consideration of the Government

2.4.4 Consultative Process in Policy FormulationA. Web-Based CommunicationB. Resource Management DiscussionsC. Standing Technical Advisory Committees

2.4.5 International Security Standards2.4.6 Migration to Basel II Norms

2.5 Future of India's Financial Sector2.5.1 Vision Document for Payment Systems, 2005-08

A. Action Points during 2005-06B. Action Points during 2006-07C. Action Points during 2007-08

2.5.2 Financial Sector Technology Vision Document2.5.3 Road Map for Foreign Banks in India

A. First Phase: March 2005 to March 2009B. Second Phase: April 2009 onward

2.6 Conclusion

Part I I : Central Banking: Global and Indian Experiences

3. Central Banking: Global Experience 39-573.1 Introduction3.2 Central Banking in Historical Perspective3.3 Central Banking: Changing Objectives3.4 Central Banking in Developed and Developing Countries3.5 Functions of a Central Bank

3.5.1 Monetary Policy FunctionsA. Currency Issue and ManagementB. Maintaining Internal Value of the CurrencyC. Maintaining External Value of the Currency

3.5.2 Banker to the Government3.5.3 Banker to the Banks

A. Lender-of-the-last-resortB. Financial Sector Regulation and SupervisionC. Financial StabilityD. Payment System Functions

Contents xsriii

3.5.4 Developmental FunctionsA. Sectoral PoliciesB. Development of Financial MarketC. Research ActivitiesD. Dissemination of InformationE. External Financial Relations Agent

4. Reserve Bank of India: History, Functions and Working 58-864.1 Establishment and Early History of RBI4.2 Pre-Independence Activities of RBI4.3 Functions of RBI

4.3.1 Sole Currency AuthorityA. Printing of Currency NotesB. Clean Note PolicyC. Anti-counterfeiting MeasuresD. Computerised Currency OperationsE. Coinisation of Lower Denomination Notes

4.3.2 Banker to the Governments4.3.3 Bankers' Bank and Lender-of-the-last-resort4.3.4 Controller of Money and Credit

A. Quantitative Credit ControlsB. Selective Credit Controls (SCCs)

4.3.5 Controller of Foreign Exchange4.3.6 Source of Economic Information4.3.7 Promotional Role of RBI

4.4 Post-Independence Review of the Role and Responsibilities of RBI4.4.1 Partition, Disruption and Devaluation4.4.2 Nationalisation of RBI in 19494.4.3 Five Year Plans and the RBI4.4.4 RBI as Institution Builder

A. Deposit Insurance Corporation (DIC)B. Specialised Financial InstitutionsC. National Bank for Agriculture and Rural Development

(NABARD)D. Export Import Bank of India (EXIM Bank)

4.4.5 Nationalisation of Banks in 1969 and 19804.4.6 Sukhamoy Chakravarty Committee and Monetary Policy

Initiatives during the 1980s4.5 Post-1991 Reforms and Responsibilities of RBI

xxiv Banking and Financial Markets in India: 1947 to 2007

4.5.1 Financial Sector ReformsA. Banking SectorB. Development Finance InstitutionsC. Capital MarketD. Debt Market

4.5.2 External Sector ReformsA. High Level Committee on Balance of Payments

{Chairman: C. Rangarajan), 1993B. Foreign Exchange Reserves: Cost and

Utilisation ConsiderationsC. Committee on Capital Account Convertibility

(Chairman: S.S. Tarapore), 19974.5.3 Deregulation of Interest Rates4.5.4 Short-term Liquidity Management4.5.5 Payment and Settlement Systems4.5.6 Regulation and Supervision

Part I I I : Financial Intermediaries

5. Commercial Banks: History and Post-1991 Reforms 87-1845.1 Meaning and Role of Commercial Banks5.2 Functions of a Commercial Bank5.3 Balance Sheet of a Commercial Bank

5.3.1 Liabilities of a Bank5.3.2 Assets of a Bank

5.4 Classification of Commercial Banks in India5.4.1 Scheduled and Non-scheduled Banks5.4.2 Indian and Foreign Banks5.4.3 Public Sector and Private Sector Banks5.4.4 Regional Rural Banks

5.5 Pre-Independence History of Commercial Banks in India5.5.1 Presidency Banks5.5.2 Paper Currency Act, 18615.5.3 Banking Crisis, 19135.5.4 Reserve Bank of India Act, 19345.5.5 Indian Companies (Amendment) Act, 19365.5.6 Bank Failures and Remedial Measures5.5.7 Regulation and Supervision

5.6 Post-Independence Developments in Commercial Banking

Contents xxv

5.6.1 Pre-nationalisation Period5.6.2 Post-nationalisation Period

5.7 Banking Sector Reforms since 19915.7.1 What Triggered Banking Sector Reforms?5.7.2 Objectives of Banking Sector Reforms5.7.3 Contents of Banking Sector Reforms

A. Cash Reserve Ratio (CRR)B. Statutory Liquidity Ratio (SLR)C. Structure of Interest RatesD. Organisation of Banking StructureE. Duality of ControlF. Abolition of Selective Credit Controls (SCCs)G. Other Measures

5.8 Credit Flow from the Banking System: Sector-wise Review5.8.1 Credit to Agriculture and Allied Activities

A. Committee on Flow of Credit to Agriculture and RelatedActivities from the Banking System (Chairman: V.S. Vyas), 2004

B. Expert Group on Investment Credit(Chairman: Y.S.P. Thorat), 2005

C. Group to Examine Issues Relating to Rural Credit andMicro-finance (Chairman: H.R. Khan), 2005

D. Working Group on Warehouse Receipts and CommodityFutures (Chairman: Prashant Saran), 2005

5.8.2 Credit Flow to Small-scale and Medium IndustriesA. Working Group on Flow of Credit to the SSI Sector

(Chairman: A.S. Ganguly), 2004B. Group to Review Guidelines on Credit Flow to SME

Sector (Chairman: C. S. Murthy), 2005C. Policy Package for Credit to Small and Medium Enterprises

5.8.3 Export CreditA. Working Group to Review Export Credit

(Chairman: Anand Sinha), 2005B. Expert Group on Credit-Deposit Ratio

(Chairman: Y.S.P. Thorat), 20055.9 Regulation and Supervision of Commercial Banks

5.9.1 Need for Regulation and Supervision5.9.2 Regulatory and Supervisory Policy during the 1950s5.9.3 Regulatory and Supervisory Policy during the 1960s5.9.4 Nationalisation of Banks and Shift in Focus

xxvi Banking and Financial Markets in India: 1947 to 2007

5.9.5 Regulatory and Supervisory Policy during the 1980s5.9.6 Post-liberalisation Period (1991 onwards)

A. Working Group to Review the System of On-site Supervisionover Banks (Chairman: S. Padmanabhan), 1995

B. Implementation of Basel NormsC. Modernisation of Banking Regulation and SupervisionD. Other Measures

5.10 Recent Initiatives Concerning Commercial Banks5.10.1 Strengthening of Prudential Framework

A. Ownership and Governance of Banks5.10.2 Road Map for Foreign Banks in India5.10.3 Payment of Dividends5.10.4 Managerial Autonomy for Public Sector Banks5.10.5 Mergers and Amalgamation of Banks5.10.6 Restructuring Regional Rural Banks (RRBs)5.10.7 Exposure Norms5.10.8 Implementation of the New Capital Adequacy Framework

(Basel II norms)5.10.9 Income Recognition, Asset Classification and Provisioning5.10.10 Investment Norms5.10.11 Capital Adequacy Norms5.10.12 Transparency and Disclosures5.10.13 Securitisation of Standard Assets5.10.14 Management of NPAs by Banks

A. Corporate Debt RestructuringB. Debt Recovery TribunalsC. Lok Adalats

5.10.15 Anti-Money Laundering Guidelines5.10.16 Customer Service

A. Customer Service Committee of the BoardB. Banking OmbudsmanC. Credit Card FacilitiesD. Collection and Processing of ChequesE. Grievances Redressal MechanismF. Settlement of Claims of Deceased DepositorsG. Door-step Banking

5.10.17 Banking Codes and Standards Board of India5.10.18 Remittance Facility to NRIs/PIOs5.10.19 Shifting of Branches/Offices: Procedural Rationalisation

Contents xxvii

A. Service Branch5.10.20 Board for Financial Supervision5.10.21 Implementation of Risk Based Supervision (RBS)5.10.22 Off-site Monitoring and Surveillance5.10.23 Supervision of Financial Conglomerates5.10.24 Credit Information Bureau of India Ltd. (CIBIL)5.10.25 Monitoring of Frauds5.10.26 Outsourcing by Banks5.10.27 Compliance Function

5.11 Indian Banking and Modern Technology5.11.1 Information Technology5.11.2E-Banking

A. E-Banking: Global ExperienceB. E-Banking and RBIC. Main Recommendations of the Working Group on

Internet Banking (Chairman: S.R. Mittal), 2001D. E-Banking: Challenges and ConcernsE. E-Banking Risks and Their Management

5.113 Electronic Money (E-Money)A. Meaning of E-MoneyB. Recommendations of the Working Group on

Electronic Money (Chairman: Zarir J. Camas), 20025.11.4 Ensuring e-security

5.12 Current Issues in Indian Banking5.13 Summing up

6. Co-operative Banks: Disquieting Performance 185-2106.1 Introduction6.2 Classification of Co-operative Banks

6.2.1 Urban Co-operative Banks (UCBs)6.2.2 Rural Co-operatives

A. Short-term Rural Co-operativesB. Long-term Rural Co-operatives

6.3 Urban Co-operative Banks (UCBs): Recent Policy Initiatives6.3.1 Vision Document and Medium-Term Framework

(MTF) for UCBs6.3.2 Strengthening of the Supervisory System Related to UCBs

A. Memorandum of Understanding (MoU) with the StateGovernments

xxviii Banking and Financial Markets in India: 1947 to 2007

B. Licensing of New Banks/BranchesC. Income Recognition, Asset Classification and

Provisioning NormsD. Exposure NormsE. InspectionsF. Off-site Surveillance

6.3.3 Know Your Customer (KYC) Guidelines6.3.4 Priority Sector Lending

A. Housing Loans under the Priority Sector6.3.5 Mergers/Amalgamations of UCBs6.3.6 Relaxation of Investment Portfolios of UCBs6.3.7 Disclosure Norms6.3.8 Restructuring of Scheduled UCBs with Negative Net Worth

6.4 Rural Co-operatives: History and Recent Policy Measures6.4.1 Asset Classification for State Government Guaranteed Advances6.4.2 Additional Provisioning Requirement for NPAs6.4.3 Task Force on Revival of Rural Co-operative Credit Institutions

(Chairman: A. Vaidyanathan), 20056.4.4 Prudential Guidelines on Agricultural Advances6.4.5 Inspections6.4.6 Management of Co-operatives

6.5 Primary Agricultural Credit Societies (PACS)6.6 Micro Credit Programme

6.6.1 Graduation of Mature SHGs into Micro-enterprises6.6.2 Micro-finance and the Government6.6.3 Micro-finance and the RBI

6.7 Kisan Credit Cards6.8 NABARD and the Co-operative Sector

6.8.1 Resources of NABARD6.8.2 Rural Infrastructure Development Fund (RIDF)6.8.3 Credit Extended by NABARD6.8.4 Interest Rates charged by NABARD

6.9 Summing up

7. Development Finance Institutions (DFIs): What Relevance? 211-2257.1 Introduction7.2 All-India Financial Institutions (AIFIs)

7.2.1 All-India Development Banks7.2.2 Specialised Financial Institutions

Contents xxix

7.2.3 Investment Institutions7.2.4 Refinance Institutions

7.3 State Level Institutions7.4 Working Group for Harmonising the Role and Operations of

Development Finance Institutions (DFIs) and Banks(Chairman: S.H. Khan), 1998

7.5 Development Finance Institutions (DFIs): The Changed Scenario7.6 Regulation and Supervision of Financial Institutions7.7 Recent Policy Initiatives Regarding DFIs7.8 Conclusion

8. Non-banking Financial Companies (NBFCs): New Regulations 226-2328.1 Meaning and Importance of NBFCs8.2 Regulation and Supervision of NBFCs

8.2.1 Guidelines for Mergers/Amalgamations8.3 NBFCs in Insurance Business8.4 Policy Initiatives Regarding NBFCs in Recent Years8.5 Conclusion

9. Mutual Funds: Crisis of Confidence 233-2369.1 Introduction9.2 Bifurcation of UTI9.3 Role of Mutual Funds in the Stock Market

Part IV: Financial Markets

10. Money Market: History and Post-1991 Developments 237-25610.1 Meaning and Functions of Money Market10.2 Reserve Bank of India (RBI) and the Money Market10.3 Evolution of Money Market in India

10.3.1 Pre-Independence Period10.3.2 Post-Independence Period

10.4 Developments in the Money Market since 199110.5 Components-wise Analysis of Money Market in India

10.5.1 Call/Notice Money Market10.5.2 Commercial Paper (CP)10.5.3 Certificates of Deposit (CDs)10.5.4 Repos

10.6 Report of the Technical Group on Money Market

xxx Banking and Financial Markets in India: 1947 to 2007

10.6.1 Follow-up Action10.7 Areas of Concern10.8 Conclusion

11. Government Securities Market:Legal and Institutional Initiatives 257-26511.1 Introduction

11.1.1 RBI and the Government Securities Market11.2 Evolution of Government Securities Market11.3 Post-1991 Measures to Promote Government

Securities Market11.3.1 Fiscal Responsibility and Budget Management (FRBM)

Act, 200311.3.2 Technical Group on Central Government Securities

Market, 200511.3.3 Negotiated Dealing System (NDS)11.3.4 Institutional Initiatives11.3.5 Measures to Improve Market Functioning11.3.6 Other Measures

11.4 Challenges for the Future11.5 Conclusion

12. Capital Market: Reforms since 1991 266-27612.1 Meaning and Importance

12.1.1 Stock Market12.2 Capital Market in the Pre-reforms (i.e. Pre-1991) Period

12.2.1 Establishment of Securities and Exchange Board ofIndia (SEBI)

12.3 Reforms in the Capital Market since 199112.3.1 New Capital Issues: Introduction of Free Pricing12.3.2 Disclosure Norms12.3.3 Transparency and Efficiency12.3.4 Shortening of Settlement Cycle12.3.5 Strengthening Regulatory Framework12.3.6 Derivatives Market12.3.7 Other Reforms

12.4 Portfolio Investment Flows: Global and Indian Experiences12.5 Capital Market in the 2007-08 Union Budget12.6 Conclusion

Contents xxxi

13. Insurance Market: From GovernmentMonopoly to Competition 277-28913.1 Nationalisation of Insurance Business in India

after IndependenceA. Nationalisation of Life InsuranceB. Nationalisation of General Insurance BusinessC. Reinsurance Business

13.2 Weaknesses of Insurance Industry Prior to Reforms ofLate 1990s13.2.1 Low Productivity13 .?1 Lack of Information Technology13.2.3 Limited Availability of Insurance Products13.2.4 Poor Quality of Insurance Services

13.3 Committee on Reforms in Insurance Sector(Chairman: R. N. Malhotra), 1994

13.4 Indian Insurance Business: Towards Competition13.5 Regulations and Controls13.6 Post-liberalisation Developments in Indian Insurance Business

13.6.1 New Initiatives13.6.2 From Monopolistic Exploitation to Customer-friendly

Products13.6.3 Flexibility of Unit-linked Products13.6.4 Pension Schemes13.6.5 Participation of Banks in Insurance Business13.6.6 Rising Service Levels

13.7 Towards a Broad-based Insurance Sector13.7.1 Commercial Banks in Insurance Business13.7.2 Non-banking Financial Companies (NBFCs) in

Insurance Business13.7.3 Co-operative Credit Institutions in Insurance Business

13.8 FDI in the Insurance Sector13.9 Conclusion

14. Foreign Exchange Market: From FERA to FEMA 290-31414.1 Introduction14.2 Evolution of Foreign Exchange Regulation/Management in India

14.2.1 Pre-Independence Period14.2.2 Post-Independence Period

A. Foreign Exchange Regulation Act (FERA), 1947

xxxii Banking and Financial Markets in India: 1947 to 2007

B. Sterling Area ArrangementC. Foreign Exchange Regulation Act (FERA), 1973D. Foreign Exchange Management Act (FEMA), 1999

14.3 Foreign Exchange Policy Initiatives since 199114.3.1 Rupee Rate Adjustment14.3.2 Introduction of Liberalised Exchange Rate Management

System (LERMS)A. Deficiencies of LERMSB. Modified LERMS

14.3.3 Current Account Convertibility14.3.4 Capital Account Convertibility (CAC)

A. Report of the Committee on Capital AccountConvertibility (Chairman: S.S. Tarapore), 1997

B. Recent Measures to Liberalise Capital Account in IndiaC. Impact of Capital Account Liberalisation on Indian

Financial System14.3.5 Foreign Exchange Exposure Norms of Commercial Banks14.3.6 Foreign Exchange Reserves

A. Motives for Holding Foreign Exchange ReservesB. Committee on Balance of Payments

(Chairman: C. Rangarajan), 1993C. India's Foreign Exchange Reserves

14.3.7 Technical Group on Foreign Exchange Market, 200514.4 Conclusion

Part V: Summary and Assessment

15. Summary and Assessment 315-32815.1 Financial System: An Introduction

15.1.1 Role of Financial System in Economic Development15.1.2 India's Financial System: An Overview

15.2 Central Banking15.2.1 Global Experience15.2.2 Reserve Bank of India

15.3 Financial Intermediaries15.3.1 Commercial Banks15.3.2 Co-operative Banks15.3.3 Development Finance Institutions (DFIs)15.3.4 Non-banking Financial Companies (NBFCs)

Contents xxxiii

15.3.5 Mutual Funds15.4 Financial Markets

15.4.1 Money Market15.4.2 Government Securities Market15.4.3 Capital Market15.4.4 Insurance Market15.4.5 Foreign Exchange Market

15.5 Issues and Outlook

Part VI: Year-wise Review of Banking and FinancialMarket Developments in India: 1947-48 to 2006-07

329-376

Part VII: Appendices

Appendix 1: Reserve Bank of India, Report on ForeignExchange Reserves, January 2007 377-385

Appendix 2: Main Features of the Annual Policy Statementof the Reserve Bank of India for the Year 2007-08 386-399

Appendix 3: Main Features of the Annual Policy Statementof the Reserve Bank of India for the Year 2006-07 400-407

Appendix 4: The Banking Ombudsman Scheme, 2006 408-420Appendix 5: Main Recommendations of the Committee on Banking

Sector Reforms (Chairman: M. Narasimham), 1998 421-423Appendix 6: Main Recommendations of the Committee on

Capital Account Convertibility(Chairman: S.S. Tarapore), 1997 424-425

Annexure 7: Major Recommendations of the Committee onReforms in the Insurance Sector(Chairman: R.N. Malhotra), 1994 426-429

Annexure 8: Insurance Regulatory and DevelopmentAuthority Act, 1999 430-434

Part VII I : Glossaries

Glossary of Financial Terms 435-462Glossary of E-banking 463-474

xxxiv Banking and Financial Markets in India: 1947 to 2007

Part IX: Time-series Financial Data on India475-490

Table 1: Gross National Product, Net National Product and Per Capita NetNational Product: 1950-51 to 2005-06

Table 2: Gross Domestic Savings, 1950-51 to 2005-06Table 3: Statistics Relating to Scheduled Commercial Banks in India:

1969-2006Table 4: Savings Deposits with Scheduled Commercial Banks:

19^1-5210 2004-2005Table 5: Regional Rural Banks (RRBs) in India: Select Aggregates:

1979-80 to 2004-2005Table 6: Components of Money Stock, 2006-07Table 7: Trends in Call Money Rate, Exchange Rate, BSE Sensex and

NIFTY: 1965 to 2007

Bibliography 491-500

Index 501-510