Financial Sector Reforms

The financial sector is the part of the economy made up of institutions that mobilise and channel funds. It includes commercial banks, investment banks, stock exchange operations and the foreign exchange market. In India this sector is regulated by the Reserve Bank of India (RBI). All banks and other financial institutions function within the various norms and regulations laid down by the RBI.

The wide powers the RBI traditionally held:

The RBI decides how much money banks must keep in reserve with themselves, fixes interest rates, and lays down the nature of lending to different sectors of the economy, among other things. In effect, banks had limited freedom of their own; most important decisions were shaped by the central bank.

The main thrust of the reforms:

One of the chief aims of the financial sector reforms was to change the RBI's role from that of a regulator to that of a facilitator. This means the financial sector was to be allowed to take many of its own decisions without having to consult the RBI at every stage.

Specific changes introduced:

• The reforms permitted the establishment of new private sector banks, both Indian and foreign, breaking the earlier dominance of public sector banks.
• The limit on foreign investment in banks was raised to around 74 per cent, letting in more foreign capital and participation.
• Banks that meet certain conditions were given the freedom to set up new branches without prior approval of the RBI and to reorganise or rationalise their existing branch networks.
• Banks were allowed to raise resources both from within India and from abroad.

Safeguards retained: …