Table of Contents
BA LLB 2nd semester economics notes pdf: Discuss the specific reforms initiated by the government
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(a) Banking
(b) Government Securities Market
(c) Foreign Exchange Market.
(a) Reforms in Banking Sector
(1) Prudential Measures :
(i ) Introduction and phased implementation of international best practices and norms on risk-weighted capital adequacy requirement, accounting, income recognition, provisioning, and exposure.
(ii) Measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending, risk concentration, application of marked-to-market principle for an investment portfolio, and limits on the deployment of the fund in sensitive activities.
(2) Competition Enhancing Measures :
(i) Granting of operation autonomy to public sector banks, reduction of public ownership in public Sector banks by allowing them to raise capital from equity market up to 49% of paid-up capital.
(ii) Transparent norms for entry of Indian private sector, foreign and joint-venture banks and insurance companies, permission for foreign investment in the financial sector in the form of Foreign Direct Investment (FDI) as well as portfolio investment, permission to banks to diversify product portfolio and business activities.
(3) Measures Enhancing Role of Market Forces:
(i) Sharp reduction in pre-emption through reserve requirement, market-determined pricing for government securities, disbanding of administered interest rates with a few exceptions, and enhanced transparency and disclosure norms to facilitate market discipline.
(ii) Introduction of pure inter-bank call money market, auction-based Repos-reserve for short-term liquidity management, facilitation of improved payments, and settlement mechanism.
(4) Institutional and Legal Measures:
(i) Setting up Lok Adalats, debt recovery tribunals, asset reconstruction companies, settlement advisory committees, corporate debt restructuring mechanism, etc. for quicker recovery/restructuring. Promulgation of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act and its subsequent amendment to ensure creditor rights.
(ii) Setting up of Credit Information Bureau for information sharing on defaulters as also other borrowers.
(iii) Setting up of Clearing Corporation of India Limited (CCIL) to act as a central counterparty for facilitating payments and settlement systems relating to fixed income securities and money market instruments.
(5) Supervisory Measures :
(i) Establishment of the Board for Financial Supervision as the apex supervisory authority for commercial banks, financial institutions, and non-banking financial companies.
(ii) Introduction of CAMELS supervisory rating system, move towards risk-based supervision, consolidated supervision of financial conglomerates, strengthening of off-site surveillance through control returns.
(iii) Recasting of the role of statutory auditors, increased internal control through the strengthening of internal audit.
(iv) Strengthening corporate governance, enhanced due diligence on important shareholders, fit and proper tests for directors.
(6) Technology Related Measures: Setting up of the Indian Financial Network (INFINET) as the communication backbone for the financial sector, the introduction of Negotiated Dealing System (NDS) for screen-based trading in government securities, and Real-Time Gros Settlement (RTGS) system.
(b) Reforms In Government Securities Market
Institutional Measures:
(i) Administered interest rates on government securities were replaced by an auction system for price discovery.
(ii) Automatic monetization of fiscal deficit through the issue of ad hoc Treasury Bills was phased out.
(iii) Primary Dealers (PD) were introduced as market makers in the government securities market.
(iv) For ensuring transparency in the trading of government securities. Delivery Versus Pay (D Vs. P) settlement system was introduced.
(v) Repurchase agreements (repo) were introduced as a tool of short-term liquidity adjustment. Subsequently, the Liquidity Adjustment Facility (LAF) was introduced. LAF operates through repo and reverse auctions to set up a corridor for short-term interest rates. LAF has emerged as the tool for both liquidity management and also signaling devices for interest rates in the overnight market.
(vi) Market Stabilisation Scheme (MSS) has been introduced, which has expanded the instruments available to the Reserve Bank for managing the surplus liquidity in the system.
Increase in Instruments in Government Securities Market: 91-day Treasury bill was introduced for managing liquidity and benchmarking. Zero-Coupon Bonds, Floating Rate Bonds, Capital Indexed Bonds were issued and exchange-traded interest rate futures were introduced. OTC interest rate derivatives like IRS/FRAs were introduced.
Enabling Measures:
(i) Foreign Institutional Investors (s) were allowed to invest in government securities subject to certain limits.
(ii) Introduction of automated screen-based trading in government securities through Negotiated Dealing System (NDS). Setting up or risk-free payments and settlement system in government securities through Clearing Corporation of India Limited (CCIL). Phased introduction of Real-Time Gross Settlement System (RTGS).
(iii) Introduction of trading of government securities on stock exchanges for promoting retailing in such securities, permitting non-banks to participate in the repo market.
(c) Reforms in Forex Market
Exchange Rate Regime:
(i) Evolution of exchange rate regime from a single-currency fixed-exchange-rate system to fixing the value of rupee against the basket of currencies and further to market-determined floating exchange rate regime.
(ii) Adoption of convertibility of rupee for current account transactions with acceptance of Article VIII of the Articles of Agreement of the IMF. Defacto full capital account convertibility for non-residents and calibrated liberalization of transactions undertaken for capital account purposes in the case of residents.
Institutional Framework: Replacement of the earlier Foreign Exchange Regulation Act (FERA), 1973 by the market-friendly Foreign Exchange Management Act, 1999. Delegation of considerable powers by RBI to Authorised Dealers to release foreign exchange for a variety of purposes.
Increase in Instruments in Forėx Market :
(i) Development of rupee-foreign currency swap market.
(ii) Introduction of additional hedging instruments, such as foreign currency-rupee options. Authorized dealers permitted to use innovative products like cross-currency options, interest rate and currency swaps, cap/collars, and forward rate agreements (FRAs) in the international forex market.
Liberalization Measures:
(i) Authorised dealers permitted to initiate trading positions, borrow and invest in overseas markets subject to certain specifications and ratification by respective Banks’ Boards. Banks are also permitted to fix interest rates on non-resident deposits Subject to certain specifications, use derivative products for asset-liability management and fix overnight open position limits and gap limits in the foreign exchange market, subject to ratification by RBI.
(ii) Permission to various participants in the foreign exchange market, including exporters, Indian investing abroad, FIIs, to avail forward Cover and enter into swap transactions without any limit subject to genuine underlying exposure.
(iii) FIIs and NRIs permitted to trade in exchange-traded derivative contracts subject to certain conditions.
(iv) Foreign Exchange earners permitted to maintain foreign currency accounts. Residents are permitted to open such accounts within the general limit of US $ 25,000 per year.
Conclusion:-
In the above post, you will learn
BA LLB 2nd semester economics notes pdf: Discuss the specific reforms initiated by the government
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