Impact of Financial Policy on India

A sound developed financial system drives healthy and sustained economic growth. Post the liberalisation of the Indian economy in 1991, the development in the financial sector has taken huge strides which includes financial markets, banking and non-banking finance companies, capital market and mutual funds. Entry of private and foreign players and increase in competition in the financial sector has led to diversification in the financial system. A progressive policy environment is needed to develop a financial system that would support high economic growth as well as extend the benefits across the society.

The Indian banks have grown manifold in the past years. Due to minimal exposure to toxic wastes, the banks were relatively less affected by the global financial crisis. The increasing NPAs is a matter of huge concern. Small private banks are expected to have high deposit and lending capabilities under strict regulatory supervision which would focus on small and mid-size investors and encourage financial literacy among them. Transparency should be introduced in allocation of funds and benefits to the priority sector. RBI should introduce Priority Lending Certificate which can be issued through an organisation, to all the banks that lag in meeting priority sector lending norms, thereby transferring the risk of lending to the organisation while the banks continue receiving the perks of priority sector lending.

The policies of the existing co-operative bank structure must be strengthened as it’s the backbone of the Indian banking system. Co-operative banks don’t enjoy most of the benefits which large private or public sector banks do. Financial literacy is poor among most of the people in India and the government’s Jan Dhan Yojana scheme, wherein every family living in India must have a bank account, was the first step to combat financial untouchability. The scheme also offers various profits to poor families. The families are a part of the economic cycle and having a bank account would connect them to the economy, which would ultimately lead to a better economy country. So far 15 crore bank accounts have been opened and the government has also taken initiatives to provide insurance covers to the people.

More Asset Reconstruction Companies can be encouraged to enter India to help the banking sector in case of distress. At present, ARCs face obstacles to raise funds from the domestic market in buying NPAs from banks as they are high-risk enterprises. More foreign players can be encouraged in the ARC sector, as they have the experienced and the capability to take risk.

As the financial players of the future emerge larger in size, with better capital base and superior technology, the regulatory mechanisms will have to ensure that the health of the Indian financial system is stable and its ability to combat volatility remains strong. RBI can tighten the bank exposure norms as Indian banks are exposed to high risk. The bond market can used as an alternative source to raise funds so that banks don’t have to fund the risk-exposed entities.

There are areas of great concern that need to be looked into the Indian financial system. There is a huge concern at the structure of the financial services to make investible resources available to the future investors in the years to come. Emphasis must be given to improve how quickly the banks can access the collateral in case of large loan losses.  The inconsistency in the prices of global commodities has adversely affected numerous Indian companies. This has caused an increase in NPAs (non-performing assets) and provisioning for credit losses has become the key concern area.

This blog post is inspired by the blogging marathon hosted on IndiBlogger for the launch of the #Fantastico Zica from Tata Motors. You can  apply for a test drive of the hatchback Zica today.