The financial sector reforms were introduced in India with a view to preventing excessive regulation of the financial structure and to provide an impetus towards the development of infrastructure and productive assets in the country. However the question that easily comes to mind is whether the reforms have been a whitewash or whether the reform process has achieved at least some of the objectives that they set out to.

In the last decade (barring 1995-96), the RBI has been following an expansionary credit policy in the Indian economy-the chief instruments being the cash reserve ratio and the statutory liquidity ratio. The cash reserve ratio has been reduced from peak levels of 15% to around 4.5% currently. The statutory liquidity ratio has been reduced to 25% and the bank rate to 6%. The basic objective has been to release funds for developmental projects and help in balanced economic growth particularly in the high priority sector. Interest rates have been deregulated and banks have been given the freedom to lend at different rates to projects having different risk profiles. A large number of private banks have entered into the sphere of retail and corporate banking offering a host of value added services to their clients. Banks have been provided functional autonomy with respect to opening of branches, recruitment of staff etc. Even a number of Debt Recovery Tribunals have been set up in order to facilitate quicker settlement of dues from errant customers.

However, all this appears to be good on paper. The financial sector has been beset with it's own set of problems. Advent of globalization has resulted in the possibility of arbitrage on account of interest rate differentials between India and the developing countries. Although RBI has tried to curb this by capping return on NRI time deposits at 50 basis points above LIBOR. However NRI savings accounts continue to enjoy the facility of arbitrage. Big Companies have shown an increasing tendency to go for foreign borrowings to finance their investments thereby taking advantage of the low interest rates in foreign countries.

It is also important to note the PLR continues to remain at 10 to 11% although the rates of time deposits have halved thereby providing better spread to the banks. The banks have been freely committing legalized fraud by lending at high PLR rates to the high priority sector and lending at sub PLR rates to the big corporates. It makes no sense that small socially advantageous projects have to pay an interest of 12% whereas big corporates like reliance pay only 6 to 8%.

The RBI directive that banks as well as acquirers have to take prior permission of the RBI before acquisition of shares in banks in excess of 5% has the potential of reducing FDI and FII in the banking sector to down to a trickle. Moreover with inflation persisting at 5% together with reduction of return on time deposits, there is always a possibility that the real interest rates may become negative.

A lot has been done in the financial sector. But it is imperative to understand that it is essential to continue with the favorable policies and at the same time undo the wrongs.

* Contributed by -
Pinak Rudra Bhattacharyya,
Ist Year,
IMT Ghaziabad.