ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Universal Banking:Some Issues

The proposed conversion of development finance institutions into universal banks will be a major event in Indian banking and raises several important issues. It will be wise to ponder some of these issues right at this stage.

Financial Exuberance

There have been significant financial sector reforms through the 1990s. One of the major policy changes affecting the financial markets has been reduction in government's recourse to claims on loanable funds through statutory liquidity ratio as well as high levels of Cash Reserve Ratios. The central government has switched to market borrowing to finance its fiscal deficit on a larger scale than before. There is a general move towards market determined rates and flows in the financial sector. One area where administered rates are still important is the small saving instruments. The government sets these interest rates and mobilises funds for meeting the fiscal deficits at the centre and more so at the state level. If these rates were to be determined by the markets, what would happen to the interest rates in general. One argument is that the small saving rates act as a floor to the deposit rates of the banking sector and hence also determine the lending rates. If the overall balance of demand and supply of loanable funds is such that interest rates can be lower, the small saving rates do not let that emerge. Further, as interest rates decline, there would be significant gains in economic growth. This paper is an attempt to examine this viewpoint. We develop a monetarist model of the economy and assess the implications of alternative methods of financing the fiscal deficit of the government, central and states combined. The results support the view that overall interest rates would decline if the small saving rates were to be liberalised but the gains in economic growth would not be dramatic.

Aspects of Banking Sector Reforms in India

This paper examines some of the consequences of the banking sector reforms in India which were an integral part of the liberalisation process of the economy initiated in 1992. In particular, the data show that, in the post-reform period, investment in government securities by banks has remained persistently high and there has been a significant reduction in the flow of credit (as a proportion of deposits) to the real sectors of the economy. There have also been significant changes in the flow of credit to various groups and sectors within the economy, some of which might be thought not to be in conformity with the stated social goals of the government.

Setting Small Savings and Provident Fund Rates

This paper recommends an inflation adjustment formula for setting the interest rate on all Small Savings and Provident Funds and discusses the rationale for the suggested formula.

Dotty about the Markets

After floundering with measures, all more or less well known and much talked about, to step up the growth of the real economy, the government is now exercised with the task of pumping up the stock market. This is misplaced activism. Apart from ensuring transparent operations and preventing malpractice and any artificial liquidity squeeze, the government has little legitimate role to play in the stock market.

Macroeconomic Policy and Asset Markets

Bank-based and stock market-based systems are compared from the viewpoint of macroeconomic policy. The author suggests that the former has desirable properties with reference to the objective of increasing output and employment.

Institutionalising Microfinance in India

There has been an increasing tendency to use the term microfinance - seen to be the most effective intervention towards poverty alleviation, to refer solely to formalised institutions - leaving aside a large informal section, that could include individuals and informal associations as well. Current efforts to mainstream microfinance operations in the non-financial sector of the country, while acknowledging the failure of state-owned credit institutions, should also take into account, among others, the programmatic success of several intermediary developmental institutions like the small savings and credit groups that have proved not only profitable but an effective poverty alleviation measure.


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