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The Financial Sector & Liberalisation: The Indian Experience

The Financial Sector & Liberalisation: The Indian Experience. Economic backdrop. Demographic forces. GDP growth of about 8%. Resurgent industrial sector. Continued expansion of services sector. Untapped rural potential.

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The Financial Sector & Liberalisation: The Indian Experience

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  1. The Financial Sector & Liberalisation: The Indian Experience

  2. Economic backdrop Demographic forces GDP growth of about 8% Resurgent industrial sector Continued expansion of services sector Untapped rural potential …growing international linkages giving impetus to all sectors of the economy

  3. Indian economy till the 1980s... Extensive state control of economic activity Dominance of public sector Less focus on viability License regime Limited competition Inefficient operations Inward looking development strategy Import substitution Import restrictions Heavy regulation of products and players Regulated interest rates Regulated capital markets Minimal use of technology Largely generic products to customers Delivery using brick & mortar infrastructure Limited scope for innovation

  4. 1991: Economic reforms • Dismantling of licensing and easing of production, pricing and distribution controls • Greater thrust on private (domestic as well as foreign) investment in infrastructure (power, telecom, roads and ports) • Import liberalisation: removal of import licensing, reduction of customs duties • Liberalisation and rationalisation of exchange controls, current account convertibility

  5. Banking sector reforms • Deregulation of interest rates and reduction in statutory liquidity & reserve requirements • Licensing of new private banks in 1994 • Foreign banks permitted to set up 100% subsidiaries and foreign ownership ceiling in private sector banks raised from 49% to 74% • Increased autonomy accompanied by more stringent prudential norms for asset classification, income recognition & provisioning • Capital adequacy norms aligned with international standards • Manpower rationalization for cost efficiencies

  6. Impact of the reforms Sector Sectoral share of GDP(%) Growth 2005 (%) Services 57.6 8.6 Industry 21.9 8.3 Agriculture 20.5 1.1 GDP 6.9 One of the fastest growing economies in the world Source: RBI,CSO

  7. Comparison with China Sectoral composition of GDP …India’s services-led model is similar to western economies Services Industry Agriculture …vis-à-vis China’s traditional, capital intensive model…

  8. …resulting in greater efficiency …bank loans to GDP at about 30% in India compared to about 130% in China Source: E&Y Report

  9. Balanced growth phase (%) India is in a phase of high growth & low inflation Source: CEIC, ICICI Bank Research

  10. Stable exchange rate …India remains the least volatile of all Asian currencies

  11. Services as the key growth driver • Accounts for over 57% of GDP • Leveraging rich pool of human capital • Quality educational institutions • Large English speaking population • Globally-positioned software & IT services sector • 34% increase in exports from US$ 12.8 bn in FY2004 to US$ 17.2 bn in FY2005 • International services hub • Commenced with IT-enabled services : voice & data • Expanded to all knowledge sectors: pharmaceuticals, biotechnology, engineering design • Growth in financial services, travel & hospitality

  12. Consumer revolution • Changing demographic profile • Upper income segment CAGR of 40% in major cities • 69% of population under 35 years • Low penetration of finance • Retail credit at about 10-11% of GDP • Easier availability and improved affordability of credit • Entry of banks: increased competition and coverage • Increasing use of technology • Decline in interest rates: by half

  13. Renewed industrial growth • Prolonged period of restructuring and repositioning • Early 1990s: capitalising on domestic demand • Mid- to late 1990s: restructuring to achieve world-class efficiency • 2000: Articulation of international competitiveness • Key transformational trends • Increasing deployment of technology • Deleveraging and organic capital generation • Constantly improving quality standards • Internationally competitive across several sectors • Emergence of Indian multinationals …investment plans of over US$ 50 bn

  14. …with growing efficiency in operations…

  15. …and improvement in capital structures

  16. Progress in infrastructure development • Construction of Golden Quadrilateral and North-South, East-West corridors • 13,000 km long - world’s largest single highway project • Boosting demand for steel, cement, commercial vehicles Roads • Cellular subscriber base of about 54 million; CAGR of 87% over last five years • Improving telecom infrastructure has had a positive impact on efficiency of firms & services exports Telecom …missteps in power and urban infrastructure being addressed

  17. The internationalisation of India • International orientation of Indian businesses • Growth in foreign trade • 26% growth in exports in current year • Internationally competitive across several sectors • Emergence of Indian multinationals • Setting up production capacities overseas • Setting up international distribution • Consolidating supply chain • India’s emergence as a global manufacturing hub • Second-most favoured destination for FDI in manufacturing • Vast Indian diaspora: about 20 million • Inward remittances US$ 20 bn per year

  18. Opportunities in insurance and asset management Insurance • Wider range of products, adoption of technology and growth in premiums • Significant under-penetration of insurable population and low average sum assured • Insurance premium/GDP about 3.2%(1) Asset management • Private sector entry in the 1990s • Significant presence of leading international players • Robust growth potential – AUM of about Rs. 2.1 trillion, only about 10.5% of bank deposits(2) • Source: Swiss Re, Economic Research & Consulting (2005) • Source: Association of Mutual Funds of India and Reserve Bank of India

  19. Tapping rural India’s potential • Growing policy focus on sustainable development of the rural economy • Large credit needs • Micro-finance • Investment in agriculture/ food supply chain modernization and productivity improvement • Enhancing access to financial services • Scaling up availability of finance • Funding through micro-finance institutions • Securitisation of micro-finance portfolios • Using technology • Electronic farmer loan cards, internet kiosks and low-cost rural ATM

  20. Rural banking: The new growth horizon • Though agriculture constitutes only 20% of India’s GDP, rural economy (agri + non-agri) constitutes about 50% of GDP1 • Rural population of about 780 million2 withlimited access to financial services Opportunities • Nature of demand • Doorstep banking • Flexibility in timings • Low value and high volume of transactions • Require simple processes with minimum documentation • High costs of delivery through conventional channels Challenges • Source: CERG (Consumer & Economic Research Group) • Source: Tata Statistical Outline

  21. Improving corporate governance • Securities and Exchange Board of India has issued corporate governance guidelines under the Clause 49 of the Listing Agreement • At least 50% of the board of directors to be comprised of non-executive directors • A qualified and independent audit committee to be set up consisting of at least three non-executive directors • Additional disclosures about related party transactions and contingent liabilities to be made • Large companies already comply with these guidelines and all companies are required to comply by January 2006.

  22. Internationally benchmarked regulatory setup • Reserve Bank of India - Central banking and monetary authority in India • Alignment with global developments in banking supervision is a focus area for regulators and banks • Manages money supply and foreign exchange • Bank regulation entails: • Issuing guidelines on exposure standards • Income recognition • Asset classification • Provisioning for NPAs • Investment valuation • Outlining and monitoring capital adequacy norms

  23. Result - A stronger banking sector… • Low systemic risk • At 4%, India’s outstanding NPAs as a % of GDP is one of the lowest in its peer group (compared to 45% for China, 40% for Malaysia and 25% for South Korea) • Few weak banks • Growing focus on risk management and capital • Systemic move towards alignment with international practices • Understanding risk-based capital allocation • Focus on market risk

  24. We have made significant progress • Liberalisation has created a diversified, robust and resilient economy • Significant growth from private entrepreneurship in a liberal environment without government restrictions e.g. the information technology sector • Radical improvement in communications infrastructure with cellular subscriber growing at a CAGR of 87% in last five years – success of government policy and private enterprise • Public sector enterprises are also listed and focused on market demands and value creation

  25. A Summary Balanced growth based on industry and services Inflation under control Interest rates hinge on inflationary expectations High exports growth, capital account in surplus Stable exchange rate

  26. Thank you

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