PDF: 2962 pages, 5.2 MB - Bay Area Council Economic Institute

Banking/Financial Services
A: Banking/Financial Services
Key Findings:
• India is in no hurry to ease market entry for foreign banks, directly or as investors.
• Public sector banks hold 74% of bank assets but are shrinking relative to private banks.
• Indian consumers prefer debit cards to credit; 65% of farm credit is informal, rather
than with banks.
• Visa and Mastercard settle all India point-of-sale transactions, and issue most credit and
debit cards.
• Bay Area banks focus on remittances, trade and venture financing.
Market Overview
India’s banking and financial sectors were partially liberalized in 1991, but the process is far
from complete.
Prior to 1991, the 20 large public sector banks (PSBs) nationalized in 1969 during Indira
Gandhi’s administration, plus the State Bank of India and its seven affiliate banks, together held
91% of total bank deposits in India. They were required to maintain high reserves; deposit and
lending rates were government-controlled; and 40% of their total credit was earmarked for agriculture,
small-scale business and other “priority sectors.” PSB mergers and acquisitions required
approvals both from India’s central bank (the Reserve Bank of India) and from Parliament.
In 1991, the Indian government deregulated interest rates; imposed standards for credit evaluation,
asset classification, risk management, loan loss reserves and capital adequacy; reduced its
equity holding in the PSBs and encouraged them to raise up to 49% of their funds in the capital
markets; and relaxed entry restrictions for foreign banks. A mix of new private domestic and foreign
banks entered the market in the mid-1990s, offering low interest rates, new technology, and
a wide range of products, including credit and debit cards, electronic remittance and bill payment,
mortgages, auto loans, insurance and asset management.
Securities and Derivatives
Secondary markets for debt instruments and government securities were set up in the mid-1990s
under the newly-created Discount and Finance House of India (DFHI), Securities Trading Corporation
of India (STCI) and Securities and Exchange Board of India (SEBI). The 1993 Financial
Institutions Act provided a structure—including special recovery tribunals—for banks and
other institutions to accelerate debt collection.
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