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Examine how the agricultural sector’s liberalization—which includes the deregulation of agricultural markets, the elimination of subsidies, and the encouragement of contract farming—affects farmers’ income and standard of living. Also, evaluate the measures taken by the government to address issues with ...
Examine the effects of the financial sector’s liberalization—which includes the deregulation of interest rates, the entry of foreign and private banks, and the growth of capital markets—on the accessibility of credit, the effectiveness of financial intermediation, and the stability of ...
The liberalization of the financial sector has had profound effects on the availability of credit, the efficiency of financial intermediation, and the stability of the financial system. Here is an analysis based on recent developments: Availability of Credit Deregulation of Interest Rates: The deregRead more
The liberalization of the financial sector has had profound effects on the availability of credit, the efficiency of financial intermediation, and the stability of the financial system. Here is an analysis based on recent developments:
Availability of Credit
Deregulation of Interest Rates: The deregulation of interest rates has significantly enhanced the availability of credit. By allowing banks to set their own interest rates, competition has increased, leading to better terms for borrowers. For instance, the Repo Rate Framework introduced by the Reserve Bank of India (RBI) in 2016 has allowed banks to pass on policy rate changes more effectively, impacting loan rates.
Entry of Private and Foreign Banks: The entry of private and foreign banks into the Indian market has broadened the range of financial products available. Institutions like HDFC Bank and ICICI Bank have expanded their reach, providing loans to previously underserved areas. Foreign banks, such as HSBC and Citibank, have also introduced advanced financial products, further increasing credit availability.
Development of Capital Markets: The development of capital markets, exemplified by initiatives like The National Pension System (NPS) and the Securities and Exchange Board of India (SEBI) reforms, has improved access to finance for businesses and individuals. The growth of Initial Public Offerings (IPOs) and Real Estate Investment Trusts (REITs) has provided new avenues for raising capital.
Efficiency of Financial Intermediation
Technological Advancements: Technological advancements have transformed financial intermediation. The Pradhan Mantri Jan Dhan Yojana (PMJDY) has facilitated financial inclusion through digital banking, and Unified Payments Interface (UPI) has revolutionized payment systems, reducing transaction costs and increasing efficiency.
Increased Competition: The entry of private and foreign banks has heightened competition, prompting existing public sector banks to improve their services and operational efficiency. This has led to a more dynamic financial ecosystem where banks innovate to attract and retain customers.
Market-Based Mechanisms: The liberalization has led to the development of market-based mechanisms like Credit Default Swaps (CDS) and Derivatives, which enhance the efficiency of risk management in financial intermediation.
Stability of the Financial System
Increased Risk and Volatility: While liberalization has its benefits, it has also introduced increased risk and volatility. The 2008 Global Financial Crisis and the Yes Bank crisis (2020) highlight how deregulated financial systems can lead to systemic risks. The rapid expansion of credit and complex financial products can create vulnerabilities.
Regulatory Reforms: To address these risks, regulatory frameworks have evolved. The Basel III norms, implemented by the RBI, aim to strengthen bank capital requirements and introduce stringent liquidity standards. The Financial Resolution and Deposit Insurance (FRDI) Bill is another measure designed to enhance financial stability.
Government Policies for Balancing Financial Deepening and Inclusion with Prudential Regulation
Financial Inclusion Initiatives: The government has launched several initiatives to promote financial inclusion while ensuring stability. Digital India and PMJDY are designed to bring the unbanked population into the financial system, while MUDRA (Micro Units Development & Refinance Agency) provides microfinance to small businesses.
Prudential Regulation: To balance financial deepening with stability, the government has reinforced prudential regulations. The RBI’s Prompt Corrective Action (PCA) framework is a preventive measure to address the financial health of banks. SEBI has also tightened regulations to protect investors and ensure market integrity.
Public Sector Bank Reforms: Reforms in public sector banks, including capital infusion plans and bad loan resolution frameworks like the Insolvency and Bankruptcy Code (IBC), aim to strengthen the sector while enhancing its efficiency and resilience.
In conclusion, while the liberalization of the financial sector has greatly improved credit availability and economic efficiency, it has also introduced challenges related to stability. The government’s policies strive to balance these aspects by promoting inclusion and ensuring robust regulatory oversight.
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