Deals with reforms of finance sector in India and its impact on development finance and industrial development

1. Finance Sector Reforms
-B.V.Raghunandan
National Conference,
St.Mary’s College, Shirva
May 6, 2016

2. Development Finance : Pre-reform Period
• Provided by Term Lending
Institutions like IFCI Ltd., ICICI and
IDBI
• Long Term Financial Assistance
through subscription to equity
shares, preference shares,
debentures of industrial units
• Long Term Loans at a low rate of
interest
• Specialists in project evaluation
and had representation on the
Board of Directors

3. Commercial
Banking: Pre-
reforms
• Short-term and
Medium-term Deposits
• Financing the working
capital needs through
Overdraft, Cash Credit
and Bills Discounting
• Loans were also
granted for short and
medium term
• Finance was only
through creation of
debt and not through
subscription to long
term securities

4. Mixed Banking
• A system of banking whereby the commercial banks
themselves provided short-term and long-term finance
• Germany follows the system and all other countries
avoid it to be risky
• In 2003, by allowing ICICI Bank to take over its parent
ICICI through reverse merger, RBI unwittingly allowed
the transition from commercial banking to mixed
banking with no discussion

5. Reverse
Merger
of ICICI
• A micro event brought out a paradigm
shift in the banking policy at the macro
level without anyone being conscious of
it
• By this move, all the functions of ICICI
became the functions of ICICI Bank
including providing financial services
• Other banks also had to be allowed to
expand their foot-prints

6. Impact
•The concept of development financial
institution regressed
•IDBI took a commercial banking license
and is in search of identity
•Banks started providing long-term finance
in the form of loans
•Since then, most of the new big industrial
undertaking including Kingfisher Airlines
have become financial disasters
•Banks have become an NPA mess
Impact

7. Financial
Illiteracy
• Not on the part of common
man, but on the part of
policy planners, analysts,
opinion makers
• Acceptance of the
benchmarks of international
financial institutions
• Institutions like RBI allowing
the reverse merger
• No one is wondering how
suddenly the Indian banks
health is affected all
pervasively

8. Entrepreneurship
Illiteracy
• On the part of the government and the media
• Big projects require longer gestation period during which
equity is the best form of finance
• Civil Aviation is a high cost and high risk business. Troubles
can happen
• The government should realise all big projects are assets of
the nation whether in private sector or in public sector
• Govt. should extend a helping hand

9. Banking Sector Reforms
• Do away with Basel Norms as loan is a day-to-day
activity and raising equity capital is an elaborate
and time-consuming activity
• Lesser equity capital is not a symptom of
weakness or disease
• They can set up a subsidiary for providing long
term finance on the model of IFCI Ltd
• Definition of NPA should have reference to the
collateral and not merely payment of instalment

10. Existing NPAs
• It is not right that borrowers are selling their assets
to repay the loans
• Covert the loans into preference shares or equity
shares
• Rejig their business model for better working
• Any new financial assistance should be in the form
of equity or preference shares

11. THANK YOU