## wp1707

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### Overview and historical evolution
- Three broad phases of Indian financial sector evolution:
  - 1950s–1960s: laissez faire but underdeveloped banking.
  - 1970s–1980s: financial development under government auspices with financial repression.
  - 1990s onward: gradual financial deepening and liberalization.
- Reserve Bank of India (RBI) founded in 1935: “...to regulate the issue of Bank Notes and keeping the reserves with a view to securing monetary stability in India and generally to operate the credit and currency system of the country to its advantage.”
- By end-1980s: financial sector largely government owned (nationalized banks and insurance companies, single public sector mutual fund), motivating comprehensive reforms in early 1990s.

### Financial institutions and market structure
- Bank types and counts at independence and consolidation:
  - 97 scheduled private banks; 557 non-scheduled private banks; 395 cooperative banks at independence.
  - Commercial banks operating: 566 in 1951; 89 survived by 1969.
  - Fourteen private sector banks nationalized on 20 July 1969; six more nationalized in 1980.
- Other institutions and status:
  - DFIs established in 1950s–1960s; many faced viability issues by 1990s.
  - IDBI and ICICI converted into commercial banks; IFCI effectively non-functional; NABARD, NHB and SIDBI continue largely as refinance institutions.
  - Cooperative banks (as of 2015): 1,579 urban co-operative and 94,178 rural cooperative banks.
  - RRBs: number fell from 196 in 1990 to 56 in 2015.
  - Post Office Savings Bank (POSB): customer base ~330 million account holders as on March 2015.
- Financial market segments identified:
  - Money market, credit market, bond market (G-Sec, corporate bonds), equity market, foreign exchange market.

### Banking reforms since the 1990s and objectives
- Foundational reports:
  - Report of the Committee on Financial System (RBI, 1991) chaired by M Narasimham.
  - Report of the Committee on Banking Sector Reforms (Government of India, 1998) chaired by M Narasimham.
- Principal reform themes and objectives:
  - Enhance operational freedom for commercial banks; reduce pre-emption of banks’ investible resources via reduction of CRR and SLR; gradual elimination of administered interest rates.
  - Introduce prudential norms, modernize regulation and supervision, review bank ownership.
  - Reduce financial repression; prepare system for international competition; open external sector in calibrated manner; promote financial stability.
- Goals: create an efficient, productive and profitable financial sector; enhance competition and modernization.

### Monetary policy framework, liquidity management and payment systems
- Operating framework (post-1990s):
  - Policy instrument: repo rate.
  - Operating target: weighted average call rate (WACR).
  - Day-to-day liquidity management aims to anchor the WACR around the repo rate via the Liquidity Adjustment Facility (LAF) corridor.
- Notable operational facts:
  - Call rates reached “52-54 per cent” on occasions during March 21–31, 2007.
  - SLR fell from “nearly 40 percent” in early 1990s to “21.5 percent” by mid-2010s (expressed as percent of Net Demand and Time Liabilities (NDTL) of Banks).
- Payments and technology:
  - Establishment of INFINET, RTGS, core banking solutions; Institute for Development and Research in Banking Technology (IDRBT) established in 1996.
  - New private banks adopted information technology from inception.

### Banking performance, indicators and structural facts
- Financial deepening: upward trend in aggregate deposit and credit as percent of GDP.
- Selected scheduled commercial banks indicators (excluding RRBs):
  - No. Of Banks: 75 (March 1980), 75 (March 1990), 101 (March 2000), 85 (March 2010), 91 (March 2015).
  - Credit - Deposit Ratio (%): 63.32 (March 1980), 61.64 (March 1990), 49.26 (March 2000), 73.66 (March 2010), 78.31 (March 2015).
  - Investment-Deposit Ratio (%): 31.50 (March 1980), 33.58 (March 1990), 45.97 (March 2000), 36.42 (March 2010), 33.59 (March 2015).
  - (Credit + Investment) - Deposit Ratio (%): 94.82 (March 1980), 95.22 (March 1990), 95.23 (March 2000), 110.09 (March 2010), 111.90 (March 2015).
  - Ratio Of Deposits To Total Liabilities (%): 73.78 (March 1980), 70.60 (March 1990), 81.08 (March 2000), 78.76 (March 2010), 78.40 (March 2015).
  - Ratio Of Net Interest Margin To Total Assets (%): NA (March 1980), 3.48 (March 1990), 5.24 (March 2000), 2.54 (March 2010), 2.64 (March 2015).
  - Ratio Of Intermediation Cost To Total Assets (%): NA (March 1980), 4.61 (March 1990), 4.79 (March 2000), 1.78 (March 2010), 1.77 (March 2015).
  - Ratio Of Wage Bills To Intermediation Cost (%): NA (March 1980), 65.68 (March 1990), 66.96 (March 2000), 55.23 (March 2010), 54.26 (March 2015).
  - Ratio Of Wage Bills To Total Expense (%): NA (March 1980), 19.77 (March 1990), 19.06 (March 2000), 14.85 (March 2010), 13.13 (March 2015).
  - Ratio Of Operating Profits To Total Assets (%): NA (March 1980), 0.39 (March 1990), 3.21 (March 2000), 2.17 (March 2010), 2.02 (March 2015).
  - Return On Assets (%): NA (March 1980), 0.39 (March 1990), 1.28 (March 2000), 1.05 (March 2010), 0.81 (March 2015).
  - Return On Equity (%): NA (March 1980), 23.37 (March 1990), 22.58 (March 2000), 14.31 (March 2010), 10.42 (March 2015).
- Capitalization and asset quality (September 2015):
  - Capital to risk-weighted assets ratio of scheduled commercial banks: “12.7 percent”.
  - Tier-I leverage ratio: “6.5 percent”.
- Historical GNPA dynamics:
  - Gross non-performing loans as percent of gross advances declined from “15.7 percent in 1996” to “2.4 percent in 2009.”

### Non-performing and stressed assets (mid-2010s)
- GNPA and stressed assets:
  - Gross NPA reached “5.1 percent by the end of 2015”.
  - Stressed assets (gross NPA plus restructured standard assets plus written off accounts): increased from “9.8 percent in 2012” to “14.5 percent in 2015”.
  - Stressed assets in public sector banks: increased from “11.0 percent to 17.7 percent” during 2012–2015.
- Sectoral sources of NPAs:
  - Industrial sector—primarily infrastructure and steel—major contributors to recent NPA formation.
- Contributing factors identified:
  - Post-NAFC regulatory forbearance: provisioning for standard assets reduced to 0.40 per cent; risk weights lowered; temporary treatment of restructured accounts as standard up to March 31, 2009.
  - Commodity price declines (e.g., steel) reduced profitability.
  - Government push for infrastructure via PPP led to large new debt by leveraged corporates.
  - Governance and political interference allegations in select public sector banks.

### Monetary and money market operations — turnover and segments
- Money market development:
  - Call money market evolved into inter-bank market; LAF anchors policy.
  - New segments: CBLO, market repo, widened access for non-banks.
  - CCIL established as central counterparty; provides guaranteed clearing/settlement and non-guaranteed settlement for some derivatives.
- Table 3 (selected Average Daily Turnover, Rs. billion) — preserved exact rows:
  - 2000-01: 322 - 105 427
  - 2001-02: 351 - 302 653
  - 2002-03: 294 - 470 764
  - 2003-04: 172 5 104 281
  - 2004-05: 142 67 171 380
  - 2005-06: 180 200 212 592 46 6 __  104
  - 2006-07: 217 324 337 878 47 6 __  104
  - 2007-08: 214 556 547 1317 28 4 __  231
  - 2008-09: 224 616 573 1413 77 6 __ 267 432 570
  - 2009-10: 159 1091 854 2104 45 4 __ 375 13 2054
  - 2011-12: 217 773 450 1441 63 6 __ 229 1642 65
  - 2012-13: 250 832 748 1831 74 11 __ 297 1709 23
  - 2013-14: 231 1196 953 2380 73 6 __ 500 1644 63
  - 2014-15: 190 1146 1120 2456 69 5 256 551 281 137
  - 2015-16: 224 1159 1257 2640 52 6 321 610 247 248

### Financial inclusion, priority sector lending and recent programs
- Priority sector lending:
  - Commercial banks required to lend 40 percent of credit to priority sector.
  - Sub-targets: 18 percent to agriculture; 7.5 percent to small and medium enterprises.
  - Foreign banks with 20 branches and above to meet 40 percent within a maximum period of five years over April 2013—March 2018 per approved action plans.
  - Instruments: Priority Sector Lending Certificates (PSLCs); shortfall investments in RIDF run by NABARD.
- Evidence on household borrowing (2012–13 NSS):
  - About 19 percent of rural households acquired credit from non-institutional sources in 2012–13.
  - About 10 percent of urban households acquired credit from non-institutional agencies.
- Pradhan Mantri Jan-Dhan Yojana (PMJDY), introduced August 2014:
  - By July 2016: over 230 million new bank accounts opened and Rs. 400 billion deposited under the scheme.
- Other inclusion instruments: No-Frills accounts; Kisan Credit Card; Business Correspondents (BC).

### New entrants and differentiated banking licenses
- Universal bank licenses granted to IDFC Ltd and Bandhan Financial Services in 2015.
- Differentiated banks introduced:
  - Payments banks:
    - Can raise deposits up to Rs. 100,000; cannot lend.
    - Business model: mobile technology, transfers/remittances, debit/ATM cards.
    - RBI issued licenses in August 2015 to 11 entities; three had surrendered licenses as of July 2016.
  - Small finance banks:
    - Aim to provide credit to small businesses and mobilize savings.
    - 50 percent of loans should be ticket sizes under Rs. 2.5 million.
    - Licenses issued to 10 entities, mostly micro-finance institutions.
- Open questions: deposit flight from larger banks; payments banks’ earning constraints given restriction to government securities investments.

### Capital markets, resource mobilization and turnover
- Corporate resource mobilization (selected monthly averages, Rs. Billion):
  - 2010-11: Equity Total 95.4; Debt Total 182.3; Resource Mobilization 285.5; Total (4+7) 190.3
  - 2011-12: Equity Total 33.9; Debt Total 217.7; Resource Mobilization 281.4; Total (4+7) 247.3
  - 2012-13: Equity Total 65.3; Debt Total 301.2; Resource Mobilization 315.3; Total (4+7) 380.6
  - 2013-14: Equity Total 61.2; Debt Total 230.3; Resource Mobilization 265.5; Total (4+7) 326.6
  - 2014-15: Equity Total 55.9; Debt Total 336.9; Resource Mobilization 344.7; Total (4+7) 400.6
  - 2015-16 (Till Dec 2015): Equity Total 86.7; Debt Total 379.3; Resource Mobilization 400.1; Total (4+7) 486.8
- Government securities market weekly average turnover (Face Value, Rs. Billion) — selected rows:
  - 2000-01: Central Government Dated Securities 195
  - 2009-10: Central Government Dated Securities 972
  - 2012-13: Central Government Dated Securities 2277
  - 2014-15: Central Government Dated Securities 3520
  - 2015-16: Central Government Dated Securities 3246
- Equity market infrastructure and turnover (selected):
  - NSE spot market turnover 2015-16: 41153 (Rs. Billion).
  - Derivatives (NSE) 2015-16: Stock Options 489519; Interest Rate Futures 5264.
  - Market capitalization to GDP ratio nearly 70 percent at end-2016; share of global market capitalization 2.3 percent at end-2015.

### Mutual funds, insurance and pension systems
- Mutual funds (March 2016):
  - 44 asset management companies; AUM ~ Rs. 13.5 trillion (or 10 percent of GDP).
  - Commercial bank deposits ~ Rs. 99 trillion (or 73 percent of GDP).
  - Investor composition: Retail 48.5 percent of AUM; Institutional 51.5 percent of AUM.
- Insurance (as of March 2015):
  - 24 life insurance companies and 28 general insurance companies; one national reinsurer.
  - LIC accounts for the lion’s share; about 360 million life insurance policies.
  - General insurance business Rs. 847 billion in 2014–15 (~0.7 percent of GDP).
  - Life insurance penetration (premium to GDP): 2.2 percent in 2002; 4.6 percent in 2010; 2.6 percent in 2014.
  - LIC share in total premium around 73 percent in 2014–15.
- Pensions and New Pension System (NPS):
  - Pension funds assets at 0.3 percent of GDP; New Pension System introduced January 2004.
  - As of March 2016: 8.7 million subscribers; AUM Rs. 1.18 trillion; 8 pension funds available.

### External account, exchange regime and capital flows
- Exchange rate regime: moved to market-determined but managed in 1993; current account convertibility in 1994; classified as "floating" with capital account management.
- Hierarchy in capital flows: favours equity over debt and FDI over portfolio investment; FDI almost fully open except for some sectors; debt flows more cautious with quantitative limits.
- Illustrative volatility:
  - Rupee-US dollar moved from 56.765 at beginning of June 2013 to 67.8787 on August 29, 2013.
  - Beginning of May 2016: spot plus swap inter-bank transactions together exceeded USD 8.6 billion.
- Foreign investment table entries preserved verbatim (selected rows):
  - 2003-04    23.72.6440
  - 2007-08    37.35.0626
  - 2009-10    35.94.81149 
  - 2014-15    24.53.855
  - 2015-16    15.52.048

### Non-Banking Financial Companies (NBFCs): structure, risks and trends
- As of March 2016:
  - 11,682 NBFCs registered with RBI; 202 deposit-accepting; 11,480 non-deposit accepting; 220 declared systemically important (asset size Rs one billion or more).
- Deposit-taking trends and public deposits (selected):
  - NBFC public deposits (Rs billion): 2005-06: 24.48; 2010-11: 40.98; 2014-15: 289.41; 2015-16: 356.53.
  - Total public deposits of NBFCs (Rs billion): 2005-06: 226.23; 2010-11: 120.00; 2014-15: 321.24; 2015-16: 372.11.
  - Public deposits of NBFCs as % of bank deposits: 1997-98: 4.0; 2014-15: 0.4; 2015-16: 0.4.
- NBFC assets to GDP (%) increased from “8.4 percent as on March 31, 2006” to “12.9 percent as on March 31, 2015”; Commercial Bank Assets to GDP increased from “75.4 percent to 96.4 percent” during the same period.
- Regulatory evolution: RBI given comprehensive powers in 1997; prudential norms and reporting for deposit-taking and systemically important NBFCs; notable irregularity: Saradha (2013) and Sahara case (SEBI barred Sahara in 2010; Supreme Court directed Sahara to pay RS 240 billion; case sub-judice).

### Concluding observations and policy priorities (as of mid-2016)
- Achievements:
  - Interest and exchange rates largely market determined; exchange rate a managed float.
  - Increased competition in banking via new private sector banks; public sector banks still dominant (>70 percent of assets).
  - Improvements in contractual savings systems, but provident and pension funds remain nascent.
  - Equity market “quite developed.”
- Remaining challenges and priorities:
  - Further reduction of public ownership in banks and insurance companies to improve governance and autonomy.
  - Expansion of contractual savings (insurance and pension systems) to deepen debt and equity markets.
  - Greater spread of mutual funds and development of institutional investors to provide breadth and depth to equity and debt markets.
  - Address deterioration in asset quality, especially in public sector banks; improve credit appraisal and governance.
  - Continue financial inclusion efforts via multi-pronged policies; monitor systemic implications of new differentiated bank entrants.

*Source: wp1707 - References.*

### References .............................................................................................................

### wp1707 - References

### Overview
- The chapter traces the evolution of the Indian financial sector from the post-independence period to mid-2010s, highlighting three broad phases: the 1950s–1960s (laissez faire but underdeveloped banking), the 1970s–1980s (financial development under government auspices with financial repression), and the 1990s onward (gradual financial deepening and liberalization).
- The Reserve Bank of India (RBI) was founded in 1935 “...to regulate the issue of Bank Notes and keeping the reserves with a view to securing monetary stability in India and generally to operate the credit and currency system of the country to its advantage.”
- By the end of the 1980s the financial sector was largely government owned (nationalized banks and insurance companies, single public sector mutual fund), motivating comprehensive reforms in the early 1990s.

### Indian financial sector, 1950–1990: from laissez faire to government control
- Banking structure at independence:
  - 97 scheduled private banks
  - 557 “non-scheduled” (small) private banks organized as joint stock companies
  - 395 cooperative banks
- Consolidation and failures:
  - As against 566 commercial banks operating in 1951, only 89 survived by 1969; the rest went into liquidation or amalgamation during 1951–1969.
- Nationalization:
  - Fourteen private sector banks nationalized on 20 July 1969.
  - Six more commercial banks nationalized in 1980.
- Characteristics of the nationalized period:
  - High pre-emption of banks' investible resources, administered interest rates, quantitative ceilings on sectoral credit under RBI direction.
- Other institution types and developments:
  - Development finance institutions (DFIs) were established in the 1950s–1960s, funded from domestic bond markets, multilateral institutions, RBI refinance, and government budgetary provisions; by the 1990s many DFIs faced viability issues due to stoppage of RBI refinance, government budgetary support, and accumulation of nonperforming assets.
  - Conversions and status:
    - IDBI and ICICI converted into commercial banks.
    - IFCI effectively non-functional.
    - NABARD, NHB and SIDBI continue largely as refinance institutions with government support.
  - Cooperative banks:
    - As of 2015, 1,579 urban co-operative and 94,178 rural cooperative banks.
    - Operate mostly within a single state; regulated by state-specific Registrars of Cooperative Societies (RCS) with overall RBI oversight, leading to dual control and governance problems.
  - Regional Rural Banks (RRBs):
    - Established in 1975 as commercial-structured local banks co-owned by Central and State Governments and sponsoring public sector banks.
    - Intended to supplement cooperative credit and enlarge institutional credit to rural/agriculture sectors.
    - High cost-income ratios and NPAs led to consolidations: number of RRBs fell from 196 in 1990 to 56 in 2015.
  - Post Office Savings Bank (POSB):
    - Customer base of about 330 million account holders as on March 2015.
    - Offers deposit and remittance facilities but not credit to account holders.
  - Equity and foreign exchange markets:
    - Bombay Stock Exchange founded in 1875; equity markets remained underdeveloped until late 1980s under regulatory control of the Controller of Capital Issues (CCI).
    - Draconian foreign exchange controls resulted in a virtually non-existent market for foreign exchange.
  - Insurance:
    - Life insurance nationalized in 1956 creating the Life Insurance Corporation of India (LIC), which held monopoly until the late 1990s.
    - LIC absorbed 154 Indian, 16 non-Indian insurers and 75 provident societies—245 Indian and foreign insurers in all.
    - General insurance nationalized in 1972 when 107 insurers were amalgamated into four government-owned companies.

### Financial institutions and markets (structure and instruments)
- Financial institutions (as listed):
  - Banks: Commercial Banks (including Regional Rural banks), Co-operative Banks, Newer Banks like Payments Banks & Small Finance Banks.
  - Non-banks: Development Banks (mostly wound up now), Insurance Companies, Mutual Funds, Non-Banking Financial Companies, Others (e.g., Pension Funds, Primary Dealers).
- Financial markets (segments identified):
  - Money market: Overnight, Call Money, Up to One year, CBLO, Market Repo, T bill.
  - Credit market.
  - Bond market: G-Sec (Government Securities), Corporate Bonds.
  - Equity market.
  - Foreign exchange market (virtually non-existent under prior controls; evolved with reforms).

### Banking reforms since the 1990s: towards modern competitive banking
- Foundational reports:
  - Report of the Committee on Financial System (Reserve Bank of India, 1991) chaired by M Narasimham.
  - Report of the Committee on Banking Sector Reforms (Government of India, 1998) chaired by M Narasimham.
- Key recommendations and reform objectives:
  - Narasimham Committee 1991: enhance operational freedom in commercial banking; reduce pre-emption of banks' investible resources via reduction of cash reserve ratio (CRR) and statutory liquidity ratio (SLR); gradual elimination of administered interest rate structure.
  - Narasimham Committee 1998: modernize banking through better regulation and supervision; introduce prudential norms; review bank ownership structure.
- Broader reform measures:
  - Significant reduction of financial repression (including removal of automatic monetization).
  - Dismantling of complex administered interest rate structures to enable price discovery.
  - Providing operational and functional autonomy to public sector institutions.
  - Preparing the financial system for increasing international competition.
  - Opening the external sector in a calibrated manner.
  - Promoting financial stability against domestic and external shocks.
- Reform goals: create an efficient, productive and profitable financial sector; enhance competition and modernization across banking and other financial institutions.

*Source: wp1707 - References.*

### 4. Forex5. Stock6. Commodities

### 4. Forex5. Stock6. Commodities

### Monetary policy framework, liquidity management and market development
- Transition in the 1990s to indirect, market-based instruments of monetary policy; RBI “aims at setting the policy (repo) rate... (where) repo rate changes transmit through the money market to alter the interest rates in the financial system”.
- Operating framework:
  - Policy instrument: repo rate.
  - Operating target: weighted average call rate (WACR).
  - Day-to-day liquidity management aims to anchor the WACR around the repo rate.
- Liquidity Adjustment Facility (LAF) corridor and call rate dynamics highlighted; note that “Call rates touched 52-54 per cent on occasions during the period March 21-31, 2007.”
- Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) evolution:
  - SLR fell from “nearly 40 percent” in the early 1990s to “21.5 percent” by the mid-2010s.
  - Note: CRR and SLR figures are expressed “as percent of Net Demand and Time Liabilities (NDTL) of Banks.”

### Institutional and legal reforms to strengthen credit culture and recovery
- Licensing of new private sector commercial banks in the mid-1990s to introduce competition, enhance efficiency and induce innovation.
- Legal and institutional measures:
  - SARFAESI Act passed in 2002 enabling debt-recovery tribunals and asset-reconstruction companies.
  - Credit Information Bureau Act passed in 2005; Credit Information Bureaus given legal status but “still in their infancy.”
  - Unique identification for every natural person expected to help expand coverage of credit bureaus and reduce transaction costs for small order lending.
  - Bankruptcy Act passed in May 2016.

### Technology, payments systems and banking connectivity
- Key technological initiatives:
  - Establishment of Indian Financial Network (INFINET) as communications backbone.
  - Introduction of Real Time Gross Settlement System (RTGS).
  - Core banking solutions across banks' branches.
  - Establishment of Institute for Development and Research in Banking Technology (IDRBT) by the Reserve Bank in 1996 to promote common IT standards and connectivity.
- New private sector banks adopted information technology from inception, spurring wider adoption across public sector banks.

### Select outcomes: financialization, banking structure and performance indicators
- Financial deepening:
  - Upward trend in aggregate deposit and credit as a percentage of GDP (aggregate deposit and credit refer to commercial and co-operative banks together).
- Banking sector structure:
  - Entry of new private banks and HDFC led to expansion of retail lending and housing finance from late 1990s; public sector banks followed with a lag.
  - Share of public sector banks in banking business declined gradually; a private sector bank emerged as the second largest bank in India over the last ten years or so (textual observation).
- Asset quality and capitalization improvements:
  - Gross non-performing loans as a percentage of gross advances declined from “15.7 percent in 1996” to “2.4 percent in 2009.”
  - Capital to risk-weighted assets ratio of scheduled commercial banks was “12.7 percent” (September 2015).
  - Tier-I leverage ratio stood at “6.5 percent” (September 2015). (Tier-I leverage ratio defined as ratio of Tier-I capital to total assets; total assets include the credit equivalent of off-balance sheet items.)
- Payment systems: increasing share of electronic payments over time.

### Select indicators of scheduled commercial banks (excluding Regional Rural Banks) — key values
- No. Of Banks: 75 (March 1980), 75 (March 1990), 101 (March 2000), 85 (March 2010), 91 (March 2015).
- Credit - Deposit Ratio (%): 63.32 (March 1980), 61.64 (March 1990), 49.26 (March 2000), 73.66 (March 2010), 78.31 (March 2015).
- Investment-Deposit Ratio (%): 31.50 (March 1980), 33.58 (March 1990), 45.97 (March 2000), 36.42 (March 2010), 33.59 (March 2015).
- (Credit + Investment) - Deposit Ratio (%): 94.82 (March 1980), 95.22 (March 1990), 95.23 (March 2000), 110.09 (March 2010), 111.90 (March 2015).
- Ratio Of Deposits To Total Liabilities (%): 73.78 (March 1980), 70.60 (March 1990), 81.08 (March 2000), 78.76 (March 2010), 78.40 (March 2015).
- Ratio Of Net Interest Margin To Total Assets (%): NA (March 1980), 3.48 (March 1990), 5.24 (March 2000), 2.54 (March 2010), 2.64 (March 2015).
- Ratio Of Intermediation Cost To Total Assets (%): NA (March 1980), 4.61 (March 1990), 4.79 (March 2000), 1.78 (March 2010), 1.77 (March 2015).
- Ratio Of Wage Bills To Intermediation Cost (%): NA (March 1980), 65.68 (March 1990), 66.96 (March 2000), 55.23 (March 2010), 54.26 (March 2015).
- Ratio Of Wage Bills To Total Expense (%): NA (March 1980), 19.77 (March 1990), 19.06 (March 2000), 14.85 (March 2010), 13.13 (March 2015).
- Ratio Of Operating Profits To Total Assets (%): NA (March 1980), 0.39 (March 1990), 3.21 (March 2000), 2.17 (March 2010), 2.02 (March 2015).
- Return On Assets (%): NA (March 1980), 0.39 (March 1990), 1.28 (March 2000), 1.05 (March 2010), 0.81 (March 2015).
- Return On Equity (%): NA (March 1980), 23.37 (March 1990), 22.58 (March 2000), 14.31 (March 2010), 10.42 (March 2015).

*Source: wp1707 - 4. Forex5. Stock6. Commodities*

### 3. Net Advances = Gross Advances -  Provisions for NPA Accounts – deposits insurance & export credit insurance

### 3. Net Advances = Gross Advances -  Provisions for NPA Accounts – deposits insurance & export credit insurance

### Definition / Components
- Net Advances = Gross Advances - Provisions for NPA Accounts – deposits insurance & export credit insurance claims received and held pending adjustment - Part payment received and kept in Suspense Account - Balance in Sundries Account in respect of NPA Accounts - Floating Provisions - Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs - Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets
- Source: Handbook of Statistics on Indian Economy, RBI

### Money Market: structure, evolution, and institutional infrastructure
- The money market is a key component of the banking sector and monetary policy in India.
- Historical constraints: ceiling on the over-night interbank money market (call money market) made the market archaic until the early 1990s.
- Post-reform evolution:
  - Call money market was developed into an inter-bank market to enable monetary policy transmission.
  - RBI’s policy rate is effectively the repo rate and acts as the anchor of the money market through the Liquidity Adjustment Facility (LAF).
  - The framework of the LAF has undergone various tweaks as monetary conditions and operational frameworks changed.
- Market deepening and new segments:
  - Emergence of segments such as CBLO (collateralized borrowing and lending obligations).
  - Introduction of market repo and CBLO widened and deepened the money market and provided avenues for non-banks to manage short-term liquidity mismatches.
  - Issuance norms and maturity profiles of commercial paper (CP) and certificate of deposits (CDs) have been modified over time to encourage wider participation.
- Institutional reform:
  - Establishment of the Clearing Corporation of India Limited (CCIL) as a central counterparty to provide guaranteed clearing and settlement for transactions in money, G-Secs, foreign exchange and derivative markets.
  - Benefits from CCIL: improved market efficiency, transparency, liquidity, risk management/measurement, reduced settlement and operational risk, savings on settlement costs.
  - CCIL also provides non-guaranteed settlement for Rupee interest rate derivatives and cross currency transactions through the CLS Bank.

### Table 3: Operations in different segments in Money Market — Average Daily Turnover (Rs. billion)
- Note: Turnover is twice the simple leg volumes in case of call money and CBLO to capture both borrowing and lending; in case of market repo (outside LAF) to capture the borrowing and lending of the two legs of a repo.
- Selected rows from Table 3 (Overnight Segment / Term Segment / Liquidity Adjustment Facility columns preserved exactly as in source):
  - 2000-01: 322 - 105 427
  - 2001-02: 351 - 302 653
  - 2002-03: 294 - 470 764
  - 2003-04: 172 5 104 281
  - 2004-05: 142 67 171 380
  - 2005-06: 180 200 212 592 46 6 __  104
  - 2006-07: 217 324 337 878 47 6 __  104
  - 2007-08: 214 556 547 1317 28 4 __  231
  - 2008-09: 224 616 573 1413 77 6 __ 267 432 570
  - 2009-10: 159 1091 854 2104 45 4 __ 375 13 2054
  - 2011-12: 217 773 450 1441 63 6 __ 229 1642 65
  - 2012-13: 250 832 748 1831 74 11 __ 297 1709 23
  - 2013-14: 231 1196 953 2380 73 6 __ 500 1644 63
  - 2014-15: 190 1146 1120 2456 69 5 256 551 281 137
  - 2015-16: 224 1159 1257 2640 52 6 321 610 247 248
- Sources for table: RBI Database on Indian Economy (http://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics); and Mohan (2011).

### Emerging Issues and key statistics on banking sector structure and asset quality
- Banking sector ownership and performance:
  - Indian banking sector continued to remain predominantly public in nature, with the public sector banks still accounting for more than 70 percent of total banking sector assets.
  - A recent official report argued for reduction in government shareholding to below 50 percent to allow more autonomy to banks as well as to create distance between the government and governance of banks (RBI, 2014).
  - During 2014–15, despite their substantive share in total assets, public sector banks accounted for only 42 percent in total profits (RBI, 2015), down from 74 percent in 2003–04.
  - The performance of public sector banks had converged to that of the new private sector banks by 2008–09, before deteriorating subsequently.
- Asset quality:
  - The issue of recent deterioration of asset quality in public sector banks is a key concern.
  - Historical GNPA trend cited: gross non-performing assets (GNPAs) of the Indian banking sector, as a percentage of gross advances, had come down from 15 percent in 1998 to 3.3 percent in 2009; since then GNPAs have increased steadily.

*Source: wp1707 - 3. Net Advances = Gross Advances -  Provisions for NPA Accounts – deposits insurance & export credit insurance (IMF PDF).*

### 5.1 percent by the end of 2015 (Figure 6). Taking a wider definition, the stressed assets (i.e.,

### wp1707 - 5.1 percent by the end of 2015 (Figure 6). Taking a wider definition, the stressed assets (i.e.,

### Non-performing assets and stressed assets: levels and composition
- Gross NPA of the banking system reached 5.1 percent by the end of 2015 (Figure 6).
- Stressed assets (gross NPA plus restructured standard assets plus written off accounts) for the banking system as a whole:
  - increased from 9.8 percent in 2012 to 14.5 percent in 2015.
  - stressed assets in public sector banks increased from 11.0 percent to 17.7 percent during the same period (Mundra, 2016a, 2016b).
- Sectoral contributors to recent NPA formation:
  - Small industries and agricultural loans did not provide the lion’s share of recent NPAs.
  - The industrial sector—primarily infrastructure and steel—experienced greater deterioration in asset quality.

### Explanations for NPA accumulation (identified factors)
- Post-NAFC regulatory forbearance by RBI:
  - Measures included: (a) provisioning requirements for most standard assets reduced to 0.40 per cent; (b) risk weights on exposures to certain sectors revised downward; (c) limited-period modifications permitting restructured accounts to be treated as standard assets for applications up to March 31, 2009.
- Structural factors and commodity price declines:
  - Sharp fall in commodity prices led to declines in profitability of sectors such as steel, contributing to unpaid debt.
- Government push for infrastructure via PPP:
  - Huge new debt contracted by highly leveraged corporate entities investing in infrastructure.
  - Government pressure and private enthusiasm for PPPs may have weakened banks’ credit appraisal and due diligence.
- Governance and political interference allegations in select public sector banks:
  - Possible lending decisions divorced from standard credit evaluation and due diligence (Credit Suisse, 2015).

### Financial inclusion: historical context and recent initiatives
- Historical efforts: postal savings bank, rural and urban co-operative banks, regional rural banks, nationalisation of banks—aimed at financial inclusion; evidence persists that poorer sections have not accessed organized financial services adequately (NABARD, 2008).
- Priority sector lending framework:
  - Priority sector includes: agriculture; micro, small and medium enterprises; export credit; education; housing; social infrastructure; renewable energy; and others (weaker sections).
  - Indian commercial banks are required to lend 40 percent of their credit to the priority sector.
  - Sub-targets: 18 percent to agriculture; 7.5 percent to small and medium enterprises.
  - Foreign banks with 20 branches and above must achieve the 40 percent total within a maximum period of five years over April 2013—March 2018 per approved action plans.
  - Instruments to meet targets: Priority Sector Lending Certificates (PSLCs); commercial banks can invest shortfalls in the Rural Infrastructure Development Fund (RIDF) run by NABARD.
- Evidence on rural household borrowing sources (All India Debt and Investment Survey of December 2013; 2012–13 data):
  - About 19 percent of all rural households acquired credit from non-institutional sources in 2012–13.
  - For urban households about 10 percent acquired credit from non-institutional agencies.
- Table 4 (selected figures from Outstanding Debt of Rural Household: Institutional versus Non-Institutional Sources (%)):
  - Non-institutional share in 2012*: 40.2
  - Institutional share in 2012*: 59.8
  - Within institutional in 2012*: Co-operative societies 27.3; Commercial banks 24.5
  - Note: comparability issues between 59th round (2002) and 70th round (2012) NSS.

### Recent financial inclusion programs and outcomes
- No-Frills accounts; Kisan Credit Card; Business Correspondents (BC) used as intermediaries.
- Pradhan Mantri Jan-Dhan Yojana (PMJDY), introduced August 2014:
  - Envisages universal access to banking with at least one basic banking account per household.
  - Benefits include access to credit, insurance and pension; a Debit card with inbuilt accident insurance cover of Rs 100,000.
  - By July 2016, over 230 million new bank accounts were opened and Rs. 400 billion was deposited under the scheme.

### New entrants and differentiated banking licenses
- 2015: Licenses granted to IDFC Ltd and Bandhan Financial Services to become universal commercial banks.
- New differentiated bank types:
  - Payments banks:
    - Narrow banks without lending activity.
    - Can raise deposits up to Rs. 100,000 and pay interest on balances.
    - Business model centered on mobile technology, transfers/remittances, debit/ATM cards.
    - RBI issued licenses in August 2015 to 11 entities to establish payments banks; three had surrendered licenses as of July 2016.
  - Small finance banks:
    - Aim to promote inclusion via savings mobilization and credit to small businesses (small and marginal farmers; micro and small industries; other unorganised sector entities).
    - 50 percent of their loans should be of ticket sizes under Rs. 2.5 million.
    - Small banking licenses issued to 10 entities, mostly micro-finance institutions.
- Competitive and model considerations:
  - Differentiated licenses mark departure from past universal-only licensing.
  - Payments banks licenses issued to some big industry houses (acceptable since they cannot lend).
  - Open questions: potential flight of retail deposits from larger banks; effectiveness in raising overall financial savings; payments banks’ earning constraints due to restriction to investments in government securities.

### Sectoral summary and system-wide observations
- Trends highlighted:
  - Commercial banks recorded all-round improvement in key indicators (capital adequacy, asset quality, earnings), yet recent trends raise disquieting developments.
  - Co-operative banking structure shows vulnerability, though not systemically large (RBI, 2009).
  - New entrants (payments banks and small finance banks) are “unknown unknowns” at this juncture.
  - Financial inclusion efforts have shown progress but substantial further work remains.

### Insurance sector since the 1990s: opening up and current structure
- Reforms started by a 1993 high-powered committee (Chair: R. N. Malhotra), recommended private entry and creation of Insurance Regulatory and Development Authority (IRDA).
- IRDA constituted as autonomous body in 1999 and as statutory body in April 2000; mission: protect policyholders’ interests and ensure orderly growth of insurance industry.
- Foreign investment limit increased from 26 to 49 percent under the automatic route.
- As of March 2015:
  - 24 life insurance companies and 28 general insurance companies, and one national reinsurer.
  - LIC is the sole public sector life insurer and accounts for the lion’s share of business.
  - Among non-life insurers, six public sector insurers; GIC is sole national re-insurer.
  - Five private-sector non-life players deal exclusively in health, personal accident and travel insurance.
- Size and penetration:
  - About 360 million life insurance policies.
  - General insurance business at Rs. 847 billion in 2014–15 or about 0.7 percent of GDP.
  - India ranked 11th among 88 countries in life insurance business in 2014 with a 2.1 percent share in global life insurance business (Swiss Re, 2015).
  - Life insurance penetration (premium to GDP):
    - 2.2 percent in 2002
    - 4.6 percent in 2010
    - 2.6 percent in 2014
- Market structure and challenges:
  - Despite initial robust growth (around 31 percent in new business premiums in 2001–2010), growth slowed subsequently.
  - 2014–15: LIC share in total premium around 73 percent.
  - Non-life insurance: private and public sector companies approximately equal share.
  - Life insurance fund’s share of changes in gross financial assets of household sector has hovered around 20 percent in recent years.
- Key issues:
  - Need for much greater expansion of life insurance and health insurance for social protection and to expand institutional investor base for capital markets (corporate debt market).
  - Challenges include distribution channel efficiency and spread, level of government control, regulatory constraints, consumer education and protection.
  - Archaic agent-based distribution channels have led to allegations of mis-selling and low persistency of policies.
  - Significant untapped potential in health insurance.

### Capital markets: resource mobilization and market orientation
- Question: Is India bank-based or market-based? Evidence of significant change and increased role for non-bank sources.
- Resource mobilization by the commercial sector (Table 6 excerpt):
  - Indian corporates’ recourse to non-bank sources hovered between 40–50 percent during 2009–10 through 2015–16.
  - Non-bank funding includes both domestic and foreign sources; private placement featured heavily and had lower costs (Table 7 referenced).
- Market indicators:
  - Price discovery reflected in yield on 10-year benchmark government security and equity indices like NSE Nifty 50 (Figure 7).
- Selected table data (A. Adjusted Non-Food Bank Credit, Rs. billion):
  - 2007-08: 4,448 (44.1)
  - 2008-09: 4,211 (47.3)
  - 2009-10: 4,786 (45.0)
  - 2010-11: 7,110 (56.9)
  - 2011-12: 6,773 (55.7)
  - 2012-13: 6,849 (48.3)
  - 2013-14: 7,627 (54.0)
  - 2014-15: 5,850 (45.5)
  - 2015-16: 7,754 (52.4)

*Italic: Source — wp1707 (canonical PDF content provided).*

### 1. Non-Food Credit

### 1. Non-Food Credit

### Aggregate flows and components
- Non-Food Credit series (row of values):
  - 4,328 4,118 4,670 6,815 6,527 6,335 7,316 5,464 7,024
- Non-SLR Investment by commercial banks:
  - 120 93 117 295 246 514 311 386 731

### B. Flow from Non-Banks (B1+B2)
- Total flow from Non-Banks:
  - 5,646 4,686 5,850 5,392 5,383 7,335 6,505 7,005 7,052
- Shares (parentheses as presented):
  - (55.9) (52.7) (55.0) (43.1) (44.3) (51.7) (46.0) (54.5) (47.6)

### B1. Domestic Sources
- Domestic sources totals:
  - 2,552 2,984 3,652 3,011 3,079 4,212 4,302 4,740 4,593
- Shares (parentheses as presented):
  - (25.3) (33.5) (34.3) (24.1) (25.3) (29.7) (30.4) (36.9) (31.0)

- Detailed domestic components:
  1. Public issues by non-financial entities:
     - 515 142 320 285 145 119 199 87 378
  2. Gross private placements by non-financial entities:
     - 682 779 1420 674 558 1,038 1,314 1,277 1,095
  3. Net issuance of CPs subscribed to by non-banks:
     - 107 56 261 68 36 52 138 558 320
  4. Net Credit by housing finance companies:
     - 418 266 285 428 539 859 737 954 1,145
  5. Total gross accommodation by 4 RBI regulated Financial Institutions*:
     - 223 314 338 400 469 515 436 417 446
  6. Systematically important non-deposit taking NBFCs (net of bank credit):
     - 365 768 607 795 912 1,188 1,124 1,046 840
  7. LIC's net investment in corporate debt, infrastructure and Social Sector:
     - 243 658 422 361 419 441 354 401 369

### B2. Foreign Sources
- Foreign sources totals:
  - 3,093 1,702 2,198 2,381 2,304 3,123 2,203 2,265 2,459
- Shares (parentheses as presented):
  - (30.6) (19.1) (20.7) (19.0) (19.0) (22.0) (15.6) (17.6) (16.6)

- Detailed foreign components:
  1. External Commercial Borrowings / FCCB:
     - 912 380 120 539 421 466 661 14 -388
  2. ADR/GDR Issues excluding banks and financial institutions:
     - 118 48 151 92 27 10 1 96 0
  3. Short-term Credit from abroad:
     - 689 -312 349 426 306 1,177 -327 -4 -96

*Italic line:* _Source: wp1707 - 1. Non-Food Credit (PDF)._

### 4. Foreign Direct Investment to India

### 4. Foreign Direct Investment to India

### Resources Mobilized by Corporate Sector (Public, Rights and Private Placements): Monthly Averages
- Table framework (Rs. Billion) shows monthly averages for:
  - Equity: Public, Private Placements, Total
  - Debt: Public, Private Placements, Total
  - Total Resource Mobilization (4+7)
- Reported rows (selected years and values):
  - 2010-11: Equity Total 95.4; Debt Total 182.3; Resource Mobilization 285.5; Total (4+7) 190.3
  - 2011-12: Equity Total 33.9; Debt Total 217.7; Resource Mobilization 281.4; Total (4+7) 247.3
  - 2012-13: Equity Total 65.3; Debt Total 301.2; Resource Mobilization 315.3; Total (4+7) 380.6
  - 2013-14: Equity Total 61.2; Debt Total 230.3; Resource Mobilization 265.5; Total (4+7) 326.6
  - 2014-15: Equity Total 55.9; Debt Total 336.9; Resource Mobilization 344.7; Total (4+7) 400.6
  - 2015-16 (Till Dec 2015): Public Equity 23.1; Private Placements Equity 63.4; Equity Total 86.7; Public Debt 20.8; Debt Total 379.3; Resource Mobilization 400.1; Total (4+7) 486.8

### Bond / Debt Market: Structure and Evolution
- Government bond market:
  - Shift from ad-hoc Treasury bill deficit financing to market-driven auction process on an electronic platform by late 1990s.
  - Primary dealers (PDs) created since 1995 to function as market makers in primary and secondary markets (Mohan and Ray, 2011).
  - Increased transaction volumes associated with higher liquidity (see Table 8).
- Corporate debt market:
  - Predominantly a private placement market with limited liquidity; transactions concentrated in bonds of blue-chip corporates.
  - Reasons cited:
    - Large corporates often borrow abroad for longer-term needs.
    - Pension and insurance industries are in their infancy, limiting institutional investor demand.
    - Limited availability of other investors.
  - Market size comparisons:
    - Debt market ~15 percent of GDP.
    - Bank assets ~89 percent of GDP.
    - Equity markets ~80 percent of GDP.

### Turnover in Government Securities Market (Face Value): Weekly Average (Rs. Billion)
- Table 8 entries (selected years and instruments):
  - 2000-01: Central Government Dated Securities 195; Treasury bills 2; 14-Day 3; 91-Day 2; 182-day 16; 364-Day 6
  - 2001-02: Central Government Dated Securities 435; Treasury bills 8; 14-Day 1; 91-Day 18; 182-day 8
  - 2002-03: Central Government Dated Securities 496; 14-Day 13; 91-Day --; 182-day 16; 364-Day 10
  - 2003-04: Central Government Dated Securities 597; 14-Day 19; 91-Day 26; 364-Day 8
  - 2004-05: Central Government Dated Securities 340; 14-Day 51; 91-Day 46; 364-Day 1
  - 2005-06: Central Government Dated Securities 218; 14-Day 24; 91-Day 41; 364-Day 1
  - 2006-07: Central Government Dated Securities 95; 14-Day 13; 91-Day 23; 364-Day 1
  - 2007-08: Central Government Dated Securities 338; 14-Day 20; 91-Day 26; 364-Day 4
  - 2008-09: Central Government Dated Securities 752; 14-Day 43; 91-Day 18; 364-Day 22
  - 2009-10: Central Government Dated Securities 972; 14-Day 105; 91-Day 25; 364-Day 20
  - 2010-11: Central Government Dated Securities 996; 14-Day 73; 91-Day 16; 364-Day 21
  - 2011-12: Central Government Dated Securities 1190; 14-Day 73; 91-Day 34; 364-Day 32
  - 2012-13: Central Government Dated Securities 2277; 14-Day 96; 91-Day 80; 364-Day 34
  - 2013-14: Central Government Dated Securities 3086; 14-Day 125; 91-Day 118; 364-Day 19
  - 2014-15: Central Government Dated Securities 3520; 14-Day 160; 91-Day 98; 364-Day 21
  - 2015-16: Central Government Dated Securities 3246; 14-Day 185; 91-Day 88; 364-Day 45

### Equity Market: Reforms, Institutions, and Turnover
- Reforms objectives (RBI, 2007):
  - "(i) creating growth-enabling institutions; (ii) boosting competitive conditions in the equity market through improved price discovery mechanism; (iii) putting in place an appropriate regulatory framework; (iv) reducing the transaction costs; and (v) reducing information asymmetry, thereby boosting the investor confidence"
- Key reforms and infrastructure:
  - Repeal of the Capital Issues (Control) Act, 1947 in 1992 liberalized capital raising.
  - Stricter norms for public issues in April 1996 and enhanced disclosure requirements.
  - Introduction of fixed price mechanism and book building; on-line electronic trading; move towards T+2 settlement.
  - Establishment of NSDL (1996) and CDSL (1999) enabling paperless trading.
  - Introduction of derivatives: stock index futures, stock index options, stock futures and options.
- Institutions:
  - SEBI established in 1988 and given statutory powers in April 1992 under SEBI Act, 1992.
  - NSE established in 1992 as the first demutualized electronic exchange; has become dominant, especially in derivatives.
  - BSE established 1875; later modernized.
- Turnover in Equity Market (Rs Billion) — selected entries from Table 9:
  - BSE Spot Market:
    - 1990-91: 360
    - 1995-96: 501
    - 2000-01: 10000
    - 2007-08: 15789
    - 2015-16: 7195
  - NSE Spot Market:
    - 1996-97: 2945
    - 1999-00: 8391
    - 2006-07: 19453
    - 2007-08: 35510
    - 2015-16: 41153
  - Derivative segments (selected):
    - Index futures introduced June 2000; Index options June 2001; Stock options July 2001; Stock futures November 2001; Interest rate futures on NSE June 2003.
    - 2013-14 (NSE): Index Futures 90552; Index Options 546; Stock Futures 30831; Stock Options 277673; Interest Rate Futures 302
    - 2014-15 (NSE): Index Futures 201292; Index Options 98; Stock Futures 41072; Stock Options 399227; Interest Rate Futures 4215
    - 2015-16 (NSE): Index Futures 43863; Index Options 13; Stock Futures 45571; Stock Options 489519; Interest Rate Futures 5264
- Market metrics:
  - Market capitalization to GDP ratio stood nearly 70 percent at the end of 2016.
  - Share of global market capitalization was 2.3 percent at the end of 2015.

### Mutual Funds (MFs) — Development and Flows
- Industry evolution:
  - 1963–1988: Unit Trust of India (UTI) monopoly; UTI AUM ~ Rs. 67 billion by 1988.
  - 1988: entry of non-UTI public sector mutual funds.
  - 1993: private sector funds allowed.
  - 1996: SEBI (Mutual Fund) Regulations issued.
  - Post-2001: UTI bifurcated following US-64 difficulties.
- Asset management landscape (as of March, 2016):
  - 44 asset management companies.
  - Assets under management (AUM) around Rs. 13.5 trillion (or 10 percent of GDP).
  - Commercial bank deposits about Rs. 99 trillion (or 73 percent of GDP) (ICRA, 2016).
- Investor composition of MF AUM:
  - Retail investors (retail and high net-worth individuals) share 48.5 percent of AUM.
  - Institutional investors (corporates, Banks/FI’s and the FII’s) share 51.5 percent of AUM.
- Net Resources Mobilized by Mutual Funds (Rs. Billion) — selected annual values (Table 10):
  - 1990-91: Unit Trust of India 45.53; Bank-sponsored 23.52; Financial Institution-sponsored 6.04; Private Sector -; Total 75.09
  - 1999-00: Unit Trust of India 45.48; Bank-sponsored 3.36; Financial Institution-sponsored 2.96; Private Sector 169.38; Total 221.18
  - 2003-04: Unit Trust of India 10.50; Bank-sponsored 45.26; Financial Institution-sponsored 7.87; Private Sector 415.10; Total 478.73
  - 2007-08: Unit Trust of India 106.78; Bank-sponsored 75.97; Financial Institution-sponsored 21.78; Private Sector 1382.24; Total 1586.77
  - 2008-09: Unit Trust of India -41.12; Bank-sponsored 44.89; Financial Institution-sponsored 59.54; Private Sector -305.38; Total -242.08
  - 2009-10: Unit Trust of India 156.53; Bank-sponsored 98.55; Financial Institution-sponsored 48.71; Private Sector 479.68; Total 783.47
  - 2010-11: Unit Trust of India -166.36; Bank-sponsored 13.04; Financial Institution-sponsored -169.88; Private Sector -162.81; Total -486.00
  - 2011-12: Unit Trust of India -31.79; Bank-sponsored 3.89; Financial Institution-sponsored -30.98; Private Sector -395.25; Total -454.13
  - 2012-13: Unit Trust of India 46.29; Bank-sponsored 67.08; Financial Institution-sponsored 22.41; Private Sector 652.84; Total 788.62
  - 2013-14: Unit Trust of India 4.01; Bank-sponsored 48.45; Financial Institution-sponsored 25.72; Private Sector 467.61; Total 545.79
  - 2014-15: Unit Trust of India -12.78; Bank-sponsored -7.00; Financial Institution-sponsored -10.35; Private Sector 1123.9; Total 1093.77

*Source: Annual Report, Reserve Bank of India, various Issues; NSE website; RBI database on Indian Economy.*

### 1. Data for 2014-15 are provisional.

### wp1707 - 1. Data for 2014-15 are provisional.

### Data notes and definitions
- "Data for 2014-15 are provisional."
- For Unit Trust of India (UTI), data are gross values (with premium) of net sales under all domestic schemes.
- Data for UTI for 2003-04 relates to UTI Mutual Fund for the period from February 01, 2003 to March 31, 2004, being the first year in operation after the bifurcation of the erstwhile UTI into UTI Mutual Fund and Specified Undertaking of the Unit Trust of India. Subsequent annual data (from 2004-05 onwards) pertain to UTI Mutual Fund only.
- Source for UTI data: UTI and Respective Mutual Funds.

### Pension funds: status, reforms, and potential
- Context and size
  - India lacks a universal social security system; pensions have largely catered to the organized segment of the labor force.
  - Provident fund has been the dominant private-sector instrument providing lump-sum benefits at retirement; the Employees’ Provident Fund (EPF) is the largest program.
  - India’s pension funds stood at 0.3 percent of its GDP, versus China's 1 percent and Brazil's 13 percent (OECD, 2015).
- Reforms and institutional arrangements
  - Government moved from a defined-benefit pension system to a defined-contribution "New Pension System" (NPS) in January 2004.
  - Interim regulator (Interim PFRDA) constituted in 2003; statutory regulator for NPS started functioning in 2014.
  - As of March 2016:
    - 8.7 million subscribers
    - Assets under management (AUM) amounting to Rs. 1.18 trillion
    - Subscribers may select any one of the 8 pension funds, primarily floated by public sector banks and/or insurance companies.
- Demographic and market potential
  - India’s population is around 1.25 billion.
  - Share of the old (i.e., 60 years and above) is around 10 percent.
  - Pension funds have large potential to: (a) provide social security; (b) deepen debt and equity markets; (c) become sources of funds for infrastructure and long-gestation projects; (d) absorb stocks from government disinvestment programs.

### External account, exchange regime, and capital account opening
- External financing pattern
  - India has generally incurred a current account deficit financed by foreign direct and portfolio investment and by various debt flows (external commercial borrowing, portfolio flows, official borrowing).
- Exchange rate and capital account management
  - Exchange rate regime moved from basket-based pegged to market-determined but managed in 1993; paved way for current account convertibility in 1994.
  - India's exchange rate arrangement classified as "floating" but with significant degree of capital account management (IMF, 2014).
  - Indian approach recognizes a hierarchy in capital flows; favored equity over debt, and FDI over portfolio investment. Exact quoted policy description:
    - "In its approach to opening of the capital account, Indian clearly recognized a hierarchy in capital flows. It has favoured equity flows over debt flows and foreign direct investment over portfolio investment. The Indian capital market has been opened to institutional portfolio flows, but with some limits on shares of domestic companies that can be held by foreign portfolio investors, both individually and collectively. Apart from some limits on the proportion of equity held by non-residents in certain sensitive sectors, FDI is now almost fully open.
    A more cautious approach was followed with regard to debt flows. Portfolio investment in both corporate and government debt are governed by overall quantitative limits; the non-financial corporate sector’s access to external debt was liberalized gradually, but is subject to adherence to criteria related to purpose, interest rate spreads and magnitude of borrowing. These controls have been modified from time to time depending on the volume of capital flows. The access of financial sector intermediaries has been subject to more prudential restrictions in recognition of the greater hazards associated with such external borrowing.
    Capital outflows were also been liberalised progressively. All inflows by non-residents are freely repatriable. Resident non-financial companies have been enabled to invest abroad relatively freely with few restrictions. Individuals can also invest abroad but within specified quantitative limits. Individuals are, however, not permitted to borrow abroad" (Mohan and Kapur, 2011).
  - Foreign players have greater presence in equity markets than debt markets; pace of convertibility seen as slow/conservative by some (Shah and Patnaik, 2008).
- Forex market development and volatility
  - Reforms simplified procedures and introduced new instruments; infrastructure improved for trading and settlement.
  - Turnover experienced a "quantum jump" and bid-ask spreads declined; derivatives segment emerged.
  - Example: in beginning of May 2016, the spot as well as swap inter-bank transaction together exceeded USD 8.6 billion.
  - Example of volatility: rupee depreciation during June–August 2013 primarily triggered by outflow of FII investment; rupee-US dollar exchange rate moved from 56.765 in the beginning of June 2013 to 67.8787 on August 29, 2013.

### Foreign investment and portfolio flows
- Since 1992, foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) were allowed to invest in equity and debt instruments.
- Indian corporates allowed to access international capital markets via ADRs, GDRs, FCCBs and ECBs.
- FIIs emerged as key players in debt, equity and forex markets, with considerable volatility.
- Table 11: Foreign Investment in India (as presented)
  - Columns shown: Year | Foreign Exports (%) | Foreign Investment/GDP (%) | Net Investments by FII (Rs. Billion)
  - Selected rows (verbatim as in source):
    - 1992-93    3.00.20
    - 1993-94    18.71.555
    - 1994-95    18.31.548
    - 1995-96    14.91.367
    - 1996-97    18.01.674
    - 1997-98    15.11.359
    - 1998-99    7.00.6-7
    - 1999-00    13.81.298
    - 2000-01    14.91.597
    - 2001-02    18.21.783
    - 2002-03    11.21.227
    - 2003-04    23.72.6440
    - 2004-05    18.02.1414
    - 2005-06    20.32.6487
    - 2006-07    23.13.1238
    - 2007-08    37.35.0626
    - 2008-09    14.82.3-433
    - 2009-10    35.94.81149 
    - 2010-11    23.63.51108
    - 2011-12    16.32.8499
    - 2012-13    17.83.01406
    - 2013-14    11.21.90
    - 2014-15    24.53.855
    - 2015-16    15.52.048
  - Source for table: Database on Indian Economy, RBI
- Policy and regulatory stance
  - Little restriction on FDI except in print & media and real estate; some restrictions remain on Foreign Portfolio Investment (FPI).
  - Portfolio equity investment has virtually unrestricted access, but aggregate limits exist on FPI in sovereign and corporate debt; limits progressively increased.
  - Recent policy objective: channelize FPI into debt instruments of a certain minimum maturity to manage credit and interest rate risks.
  - External borrowing regulatory components included:
    - (a) restriction on short term (less than three years) borrowing;
    - (b) a loosely monitored overall aggregate limit on foreign currency liability;
    - (c) discriminatory regime channeling flow into priority sectors and disallowing flow into sensitive sectors such as real estate;
    - (d) a cap on the overall cost of borrowing to address adverse selection (Padmanabhan, 2015).

### Non-Banking Financial Companies (NBFCs): structure, regulation, and trends
- Distinguishing features vs banks
  - NBFCs cannot accept demand deposits.
  - NBFCs do not form part of the payment and settlement system and cannot issue checks drawn on itself.
  - Deposit insurance facility is not available to depositors of NBFCs.
- Diversity and regulatory coverage
  - NBFCs include diverse entities (from housing finance to equipment leasing).
  - As of March 2016:
    - 11,682 NBFCs registered with the RBI
    - 202 were deposit-accepting
    - 11,480 were non-deposit accepting NBFCs
    - 220 were declared as systemically important (i.e., those with an asset size of Rs one billion or more)
  - Regulatory fragmentation: housing finance companies regulated by National Housing Bank; Chit Funds by State Governments; Mutual Benefit companies by Ministry of Corporate Affairs.
- Historical trends and regulatory tightening
  - Deposit share of NBFCs relative to bank deposits:
    - 0.8 percent during 1985–86 to 1989–90 (average)
    - shot up to 9.5 percent by 1996–97
  - Spike attributed largely to high interest rates offered on NBFC deposits (RBI, 2003).
  - RBI given comprehensive powers to regulate NBFCs in 1997; mandatory minimum net owned funds (NOF) and certificate of registration required.
  - Cleaning process since 1998; presently all deposit-taking NBFCs and systemically important non-deposit taking NBFCs subject to prudential regulations (capital adequacy, provisioning norms, reporting).
  - Incidence of financial irregularity involving NBFCs declined and became largely state/district-level; notable scandal: Saradha (predominantly in West Bengal) in 2013 prompted further tightening of norms on deposit-taking NBFCs.
- Role and risks
  - NBFCs useful for sectors excluded from formal banking.
  - Some deposit-taking NBFCs have been sources of localized financial irregularity, raising consumer protection issues.
  - Regulatory oversight varies by NBFC type, reflecting diversity in size and activities.

*Source: wp1707 - 1. Data for 2014-15 are provisional.*

### 8.4 percent as on March 31, 2006 to 12.9 percent as on March 31, 2015; while the ratio of

### wp1707 - 8.4 percent as on March 31, 2006 to 12.9 percent as on March 31, 2015; while the ratio of

### Deposit-taking activities of NBFCs: key statistics and trends
- NBFC assets to GDP (%) increased from 8.4 percent as on March 31, 2006 to 12.9 percent as on March 31, 2015; while the ratio of Commercial Bank Assets to GDP (%) increased from 75.4 percent to 96.4 percent during the same period.
- Public deposits of NBFCs (selected yearly figures, in Rs billion):
  - NBFCs public deposits: 2005-06: 24.48; 2006-07: 20.77; 2007-08: 20.42; 2008-09: 19.71; 2009-10: 28.31; 2010-11: 40.98; 2011-12: 57.35; 2012-13: 70.85; 2013-14: 108.08; 2014-15: 289.41; 2015-16: 356.53.
  - RNBC public deposits: 2005-06: 201.75; 2006-07: 226.22; 2007-08: 223.58; 2008-09: 195.95; 2009-10: 145.21; 2010-11: 79.02; 2011-12: 42.65; 2012-13: 38.17; 2013-14: 35.82; 2014-15: 31.83; 2015-16: 15.58.
  - Total public deposits of NBFCs: 2005-06: 226.23; 2006-07: 246.99; 2007-08: 244.00; 2008-09: 215.66; 2009-10: 173.52; 2010-11: 120.00; 2011-12: 100.00; 2012-13: 109.02; 2013-14: 143.90; 2014-15: 321.24; 2015-16: 372.11.
- Public deposits of NBFCs as % of bank deposits:
  - 1997-98: 4.0; 1998-99: 2.9; 1999-00: 2.4; 2000-01: 1.9; 2001-02: 1.7; 2002-03: 1.6; 2003-04: 1.3; 2004-05: 1.2; 2005-06: 1.1; 2006-07: 0.9; 2007-08: 0.8; 2008-09: 0.6; 2009-10: 0.4; 2010-11: 0.2; 2011-12: 0.2; 2012-13: 0.2; 2013-14: 0.2; 2014-15: 0.4; 2015-16: 0.4.
- Number of reporting companies (NBFCs / RNBCs) for selected years:
  - 2005-06: NBFCs No of Reporting Companies: 428; RNBC No of Reporting Companies: 3.
  - 2010-11: NBFCs: 297; RNBC: 2.
  - 2014-15: NBFCs: 220; RNBC: 2.
  - 2015-16: NBFCs: 202; RNBC: 1.
- Notes on RNBCs and data coverage (verbatim):
  - "RNBC (Residuary Non-Banking Company) is a class of NBFC which is a company and has as its principal business the receiving of deposits. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also."
  - "Data format has changed after 1996-97 due to new reporting format following changes in the regulatory framework in1998."
  - "NBFCs include Deposit taking NBFCs (NBFCs-D), Mutual Benefit Financial Companies (MBFCs), Mutual Benefit Companies (MBCs) till 2004-05 and only NBFCs-D thereafter."

### Notable financial irregularity involving an NBFC conglomerate
- A major financial irregularity involved Sahara India Pariwar:
  - Sahara was barred by SEBI in 2010 from raising money from the public through optionally fully convertible debentures which SEBI deemed illegal.
  - Subsequently, the CEO of the Company was arrested and the Supreme Court of India has directed the Company to pay up RS 240 billion.
  - "The case is still sub-judice."

### Concluding observations on the Indian financial sector (as of mid-2016)
- Broad trends and reform outcomes:
  - "As a consequence of successive reforms over the past 25 years, there has been significant progress in making interest and exchange rates largely market determined, though the exchange rate regime remains one of managed float, and some interest rates remain administered."
  - "Considerable competition has been introduced in the banking sector through new private sector banks, but public sector banks continue have a dominant share in the market."
  - "Contractual savings systems have been improved, but provident and pension funds in India are still in their infancy."
  - "Despite the introduction of new private sector insurance companies coverage of insurance can expand much further, which would also provide greater depth to the financial markets."
- Segment development and policy priorities going forward:
  - Equity market: "quite developed."
  - Private debt market: "predominantly confined to private placement form and continued to be limited to the blue-chip companies."
  - Future areas for development identified: further reduction of public ownership in banks and insurance companies; expansion of the contractual savings system through more rapid expansion of the insurance and pension systems; greater spread of mutual funds; development of institutional investors.
  - Expected outcomes if priorities are achieved: "both the equity and debt markets will display greater breadth as well as depth, along with greater domestic liquidity."
- Financial inclusion and institutional balance:
  - "India continues its journey towards a financially inclusive regime through innovative policies involving a multi-pronged approach."
  - "India has come a long way from a financially repressive regime to a modern financial sector where public sector financial institutions tend to compete with the private sector financial institutions."
  - "The Indian authorities while reforming the financial sector had to constantly keep the issues of equity and efficiency in mind."

*Source: RBI Database on Indian Economy; Vijay Bhaskar (2014); and authors’ calculations.*

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_Source: https://www.imf.org/-/media/files/publications/wp/wp1707.pdf_