Transcript Document

• Financial Sector has been
incrementally deregulated and
exposed to international financial
markets in the last 15 years;
• Consequently, elements of the Indian
financial sector are close to
international standards.
• Global financial market conditions
are favourable
• Are we seizing the opportunity for
urgent reforms and greater integration?
• How do we decide what is an optimal
rate to integrate with global financial
markets?
OBJECTIVES
• Increase competition and thereby enhance the
efficiency of financial intermediation and promote
overall savings;
• Widen and deepen the reach of the formal
financial sector;
• Ensure that the country’s savings are utilized most
productively; and
• Manage the risks stemming from disturbances in
global markets to insulate the financial sector and
the Indian economy.
CRITERIA FOR COMPETITIVE MARKETS
• There should be an adequate number of buyers and
sellers such that all market participants are pricetakers
• The primary market (for all issuance) should have
a large number of participants
• Valuations in the secondary market should be
transparent and liquid enough to allow easy exit
• The bid-ask spreads in the secondary markets
should be narrow.
ISSUES
• The depth of the financial sector is
relatively low
• About two-thirds of private savings
are mobilized by the financial sector.
• Productivity of investments should be
given greater weightage in allocation
of credit.
Table 1
Stock of Financial Assets as % of GDP
(2004)
Country
Financial Assets
India
160
Japan
420
Malaysia
400
South Korea
235
China
220
• A gradualist approach to “Fuller Capital
Account Convertibility” is in order. The
risks stemming from potential demand for
investments in foreign assets (including
real-estate) are not quantifiable and may be
unmanageable in times of domesticinternational stress
• Domestic interest rates are not
adequately market determined i.e. there
is need for further deregulation of
interest rates
Table 3
Financial Sector Regulators
Country
Regulators of Financial Services
UK
Financial Service Authority (FSA)
Japan
Financial Service Agency (FSA)
Germany The Federal Financial Supervisory Authority (BaFin)
India
Banking – RBI
Capital Markets – SEBI
Insurance – IRDA
Pension – PFRDA
China
Banking – China Banking Regulatory Commission (CBRC)
Capital Markets – State Council Securities Commission (SCSC)
Insurance – The China Insurance Regulatory Commission (CIR)
USA
Banking – Federal Reserve Bank
Capital Markets – Securities and Exchange Commission (SEC)
Derivatives – Commodities and Futures Trading Commission
(CFTC)
• The banking sector has reformed
considerably since the early 1990s but is
excessively dominated by the public
sector which receives 78% of the
deposits and makes about 73% of the
loans
Table 4
Indian Banks – Market shares (in percent)
Deposits
Loans
Mar 2000 Mar 2005 Mar 2000 Mar 2005
Public
Sector
New
Private
Old
Private
Foreign
81.9
78
79.3
73.2
5.2
10.9
5.0
13.8
7.4
6.4
7.6
6.2
5.5
4.7
8.0
6.8
Table 5
Bank Lending as percentage of Deposits
(2004)
Country
Lending as percent of Deposits
China
130
UK
114
Malaysia
101
USA
92
India
61
• Efficiency in the banking sector lags
international comparators in terms of
intermediation costs
• Just two domestic private banks have
entered this sector in the last ten years
• A coordinated effort is needed to hasten
consolidation among and international
listings of public sector banks and entry
of new private sector banks
• Separate regulator for banking
• We should not mix up insolvency with
illiquidity
• Indian equity and related exchange traded
derivatives markets and to some extent the
mutual fund industry compare well with
international markets
• The over the counter (OTC) interest rate and
currency swap markets cannot grow without
better market determination of domestic
interest rates and further capital account
convertibility (FCAC)
• The corporate debt market is miniscule and
needs a series of reforms including stamp
duty rationalization, repos in corporate
bonds, settlement and clearing of corporate
bonds through the same clearing system as
government securities, introduction of credit
derivatives, lifting of limits for FII purchases
of corporate bonds
• Exchange traded interest rate derivatives
should be encouraged since this will
improve the market determination of
domestic interest rates and help the
corporate bond market to grow
• Exchange traded currency derivatives
can wait for next steps towards FCAC
• Commodity derivatives markets should
be regulated by SEBI
• The Companies Act needs to be
amended and SEBI strengthened to take
over the regulatory responsibilities
under this Act
• The private equity market should be
courted and exit valuation methodologies
made transparent and predictable.
• The asset backed securities market will not
develop without considerable preparatory
work particularly on the legal issues
involved. Hence, special efforts need to be
directed to this end.
• In cross-country terms, the Indian insurance
industry is small in depth and coverage and
there is tremendous potential for growth.
Premiums should be deregulated, the
requirement to hold at least 50% of assets in
government securities should be gradually
relaxed as also the ceiling of 26% ceiling for
foreign ownership
• The pension sector is almost entirely in the public
sector and covers only about 16% of the workforce. Progress is hindered by a multiplicity of
Acts, administered by several GoI Ministries,
which have subdivided the sector. The pay-as-yougo government administered pension systems
should be gradually replaced by defined
contribution schemes in which pension assets are
invested in securities, both debt and equity. The
pension sector needs to be comprehensively
reviewed, at a GoI wide level, in the light of the
potential for it to help boost the equity and bond
markets and thereby the entire financial sector
• The complex web of legislation that
applies to the financial sector needs to
be simplified. Further, there are obvious
anomalies in certain Acts e.g. those
which provide for RBI representation on
the boards of public sector banks such
as State Bank of India (SBI), National
Housing Bank (NHB).
Table 6
Debit and Credit Card Penetration
2004
(percent of population)
India
3
South Korea 174
Brazil
71
China
61
Thailand
54
Mexico
44
Table 7
Equity Market Capitalisation and Traded Values
(2005)
Country
Market
Capitalisation
Value Added
Listed
Domestic
Cos.
India
71
57
4763
USA
136
172
5143
Japan
104
109
3279
UK
139
189
2759
Germany 44
63
648
China
26
1387
35
*Figures in percent
Table 8
OTC and Exchange Traded Derivatives
Country/
Region
OTC Derivatives
Markets
Average daily
turnover*
India (2005) Not available
Exchange-traded
Derivatives
Markets
Annual turnover**
1
USA (2004) 355
819
EU (2004)
487
1001
*US$ billion; ** US$ trillion
Table 9
Mutual Fund Assets Under Management
(US$ billion end 2005)
Country
India
USA
France
Switzerland
UK
Netherlands
Germany
Japan
Mutual Fund Assets
64
8,905
1,363
117
547
94
297
470
% of GDP
8
71
65
32
25
15
11
10
Table 10
Issuance of Equity and Debt
Year
Equity
GOI
Issues
Securities
Rs. Crores Rs. Crores
Debt Issues
Publicly
placed
Privately
placed
2004-05
28,200
(0.9)
1,06,501
(3.4)
4,094
55,408
(1.8)
2005-06
36,533
(1.0)
1,60,018
(4.5)
--
81,846
(2.3)
2006-07
(Apr-Sep)
8,205
BE
1,81,875
--
47,945
Figures in () are percent of GDP
Table 11
Corporate Bond Markets
(2004)
Country
India
USA
Germany
UK
Malaysia
Thailand
South Africa
China
% of GDP
2
145
116
83
73
22
17
1
Table 12
Mortgage Balances Outstanding
2005
(Percent of GDP)
India
3
USA
51
UK
54
South Korea
13
Thailand
9
Malaysia
23
Germany
48
Table 13
OTC and Exchange Traded Commodity Derivatives
Country
India
OTC Commodity
Derivatives Trading
(Average daily
turnover 2004 – US$
billion)
--
Exchange Traded
Commodity
Derivatives (Annual
turnover 2005 –
US$ trillion)
0.33
USA
4.6
82
EU
13
49
Table 14
International Comparision of Insurance Penetration
Country
2002
2003
2004
Total
Life
Non- Total
life
Life
Non- Total
life
Life
Nonlife
USA
9.58
4.6
4.98
9.61
4.25
5.15
9.17
4.12
5.05
UK
14.75
10.19
4.56
13.37
8.62
4.75
12.6
8.92
3.68
Germany
6.76
3.06
3.7
6.99
3.17
3.82
6.97
3.11
3.86
Japan
10.86
8.64
2.22
10.81
8.61
2.2
9.52
6.75
2.77
India
3.26
2.59
0.67
2.88
2.26
0.62
3.17
2.53
0.65
China
2.98
2.03
0.96
3.33
2.3
1.03
3.06
2.21
1.05
World
8.14
4.76
3.38
8.06
4.59
3.48
7.99
4.55
3.43
Table 15
International Comparision of Insurance Density
Country
2003
Total
Life
USA
3637.7
1657.5
UK
4058.5
Germany
Japan
2004
Non-life
Total
Life
Non-life
1980.2
3755.1
1692.5
2062.6
2617.1
1441.4
4508.4
3190.4
1318.0
2051.2
930.4
1120.8
2286.6
1021.3
1265.3
3770.9
3002.9
768
3874.8
3044
830.8
India
16.4
12.9
3.5
19.7
15.7
4.0
China
36.3
25.1
12.2
40.2
27.3
12.9
World
469.6
267.1
202.5
511.5
291.5
220
Table 16
Insurance Assets Under Management
(US$ billion end 2005)
Country
Insurance Assets % of GDP
India
22
3
USA
5,465
44
Japan
2,264
50
UK
1,907
87
France
1,527
72
Germany
1,370
49
Netherlands 385
61
Switzerland 337
91
Table 17
Pension Assets Under Management
(US$ billion end 2005)
Country
Pension Funds % of GDP
India
60*
8
Switzerland 469
127
Netherlands 693
110
USA
12,119
97
Japan
3,419
75
UK
1,607
73
France
165
8
Germany
114
4
* Estimate of EPFO, EPS and PF Funds.
Table 18
Asset Allocation of Pension Funds
(2005)
Country Domestic International Domestic International Cash
Equity
Equity
Bonds
Bonds
Others
Japan 29
16
26
11
11
7
UK
39
28
23
1
2
7
USA
47
13
33
1
1
5
Table 19
Old-dependency ratio
(population above 64 years of age divided by the
population between 14-64)
2005
World
11
G10
23
China
11
Latin America 9
India
8
2050
25
42
37
29
22