Flash Back
In a historic move to cut the whopping fiscal deficits, the Indian economy was opened up to foreign investments in 1991-92. This marked a crucial phase in the financial sector reforms focused on modification of the policy framework, improvement in financial health of the entities and creation of a competitive environment. These reforms targeted three prime issues viz.
(i) Strengthening the foundations of the banking system
(ii) Streamlining procedures, upgrading technology and human resource development
(iii) Structural changes in the system.
Indian financial sector (banking, insurance and capital markets) having been opened up to new private players including foreign companies brought in competition to improvise, adapt and overcome operational loggerheads. Adoption of international best practices and modern technology to offer a more sophisticated range of financial services to corporate, retail and institutional customers resulted in innovation, better customer service and efficiency in our financial sector.
The 2008 US sub-prime mortgage crisis, followed by Euro crisis across European Union, proved a turning point of the World Economy. Like most other developing economies, Indian banks were not overtly exposed to sub-prime lending. This not only reasoned to avoiding the adverse effects of the Global financial meltdown but also contributed to Indian banks announcing encouraging results and impressive jump in profitability during the 3rd in Global markets following the collapse of Lehmann brothers led to stimulated outflow of FII from Indian markets, ultimately resulting in credit crunch for Indian Banks. Recessionary conditions in the West forced a collapse of Indian exports in its major markets. These coupled with a slew of populist subsidiary measures (viz. MNREGA, Food Security scheme etc.) by the Centre rung a warning bell of the deteriorating financial health of the Economy. Before the situation could get any worse, there was a unified mandate on a stable Centre that promised a healthier economy. Greater political stability with a supportive policy framework drew a silver lining to the stagflationary clouds looming over the economy.
Positive Indicators
A major initiative for financial inclusion drive under Pradhan Mantri Jan Dhan Yojana by the PM this Aug 15th is affirmative of breaking the link between poor public services, patronage and corruption. Eventually, the reach of financial services market is set to extend to semi-urban and rural areas as well.
Rising Incomes across individuals has shot up the demand for financial services across various income brackets. Inclusion of new and inexperienced bank account holders shall require protection, and, hence, the RBI is beefing up 'consumer protection code' that shall emphasize the need for simple and easy to understand banking products.
Relaxation of the norms by RBI now allows NBFCs registered under RBI act, 1934, to take part in insurance agency business on a fee basis and without risk participation or approval from banks. However, these NBFCs need to seek permission from the Insurance Regulatory and Development Authority and comply with IRDA regulations for acting as a "composite corporate agent" with insurance
quarter of FY08-FY09. However, the liquidity squeeze companies. These conciliatory measures triggered a phenomenal growth in NBFC managed credit at a CAGR of 35% over FY07-FY12, with retail credit registering 36% growth in FY12. Recently, many NBFCs suffered significantly on account of a series of rash selloffs of several small and midcap shares as Bhushan Steel and Kingfisher. This eventually forced the RBI to tighten norms on extending loans against shares as collaterals. In the revised circular, NBFCs can’t lend more than 50% of the pledged shares while extending loans of Rs.5 lac and above. With the stocks having entered into a hyper bull market in the current fiscal, this move of the RBI is a welcome one to contain the risk in Equity markets. Strengthening of the NBFC and MFIs can serve a supporting base to the mammoth Financial Inclusion framework of the Central Bank, owing to their widespread network.
Seven MFIs in India feature amongst the Forbes Global top 50 MFIs. 3 of the 7 viz. Bandhan, Micro Credit Foundation of India (13th Grameen Bank of Bangladesh (which along with its founder Mohd. Yunus received Nobel Prize in 1975) in the Global rankings. Many MFIs go for NBFC license to widen their capital base. Having an NBFC status, according to Veena Mankar, director of Mumbai-based urban MFI, Swadhaar Finances, shall allow them to be regulated by RBI rather than facing accountability issues from other quarters. Corporate governance norms also lend a great deal of transparency and credibility to the prospective lending institutions.
To cut low on NPAs and tighten its grip on willful defaulters, Govt. has drafted a new legislation that gives banks more muscle to reconstitute the management board of defaulting companies. In a gesture of diversification to manage credit risks, RBI proposes to cap bank’s group exposure limit by 15 percentage points to 25% of a bank’s capital. These measures mark a shift to Global best practices on Group Exposure norms suggested by Basel Committee on Banking Supervision after the Global Credit crisis exposed fault lines in financial system.
The Investment starved Insurance sector has been given a boost by increasing the composite cap on FDI from current 26% to proposed 49% through FIPB. With the opening of the market, foreign and private Indian players shall compete to convert untapped market potential into opportunities leading to the introduction of several innovative insurance based products, value add-ons, and services.
The RBI has eventually grown speculative and ascertains positive hopes on economic recovery. The RBI annual report of 2013-14 released this June is indicative of the economy poised to make a shift to higher growth trajectory, following the various fiscal consolidation measures undertaken by the Centre. Additionally, strengthening the customer grievance redressal mechanism, in tandem with supervision, market intelligence, and coordination with law and order to reduce the proliferation of fly-by-night
operators, can ensure systemic improvement in health of the Indian financial system.
Testimonial Evidence to reviving financial health
First ever BrandZ rankings, released by Millward Brown and WPP Group’s market research on the most valuable Indian brands, is a stark indicator of the improving health of Indian financial Sector(viz. banking, Insurance and Capital Markets). Top notch players in Service businesses such as banking, telecom and insurance acquired prominent spots in the rankings. Financial services stand out, with the 12 banks and insurers in the rankings, holding the largest proportion (37%) of total brand value, with HDFC and SBI shooting for the 1st and 3rd spot respectively http://www.wpp.com/wpp/press/2014/aug/19/hdfc-bank-named-indias-most-valuable-brand-in-brandz-ranking-as-service-sector-brands-dominate/.
Veteran ad-mogul and WPP Group CEO Martin Sorrell pointed out that there is a “direct correlation between strong brands and strong investment behind them”. Sorrell further opined that the brands that faced some challenges in the last two years, “With the new government in place, action will be taken to strengthen these brands in and outside India,”
Financial services firms seem to have invested significantly towards creating a brand recall in the minds of customers, with 12 banks and insurers accounting for 30% of the total value of $70 billion ascribed to the 50 brands in the BrandZ survey — given the financial services sector’s fall from grace in the developed world, this should be reassuring.
Veteran ad-mogul and WPP Group CEO Martin Sorrell pointed out that there is a “direct correlation between strong brands and strong investment behind them”. Sorrell further opined that the brands that faced some challenges in the last two years, “With the new government in place, action will be taken to strengthen these brands in and outside India,”
Financial services firms seem to have invested significantly towards creating a brand recall in the minds of customers, with 12 banks and insurers accounting for 30% of the total value of $70 billion ascribed to the 50 brands in the BrandZ survey — given the financial services sector’s fall from grace in the developed world, this should be reassuring.
Conclusion
Dating back to liberalization of the Indian Economy, it’s quite evident that the changes in the financial services landscape have taken place against a wider backdrop of easing of controls on interest rates and their realignment with market rates, gradual reduction in resource pre-emption by the government, relaxation of stipulations on concessional lending and removal of access to concessional resources for financial institutions. The financial regulatory system in India today is far more conscious and better equipped, institutionally and legally, to demand and enforce necessary disclosures and compliance with laid norms for protection of the users of the system as well as the credibility and efficacy of the system itself to withstand shocks that are inevitable with global integration.
