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Financial Sector Reform in India: Time for a Second Wave?

Listed author(s):
  • Richard Herd


  • Vincent Koen


  • Ila Patnaik


  • Ajay Shah


The Indian financial system has changed considerably since the 1990s. Interest rates have been deregulated and new entrants allowed in the banking and the securities business. The Indian equity market has become world-class. New private banks have emerged that are more customer-oriented than the older state-owned banks. Meanwhile, the scale of saving within the economy has expanded considerably, much as in East Asian economies during their high-growth period. This adds to the need for further financial-sector reform. In particular, banks need much greater freedom in asset allocation. While public-sector banks did appear sounder to the public during the 2007/08 crisis due to implicit government backing, they ought to be privatised to improve their governance and minimise the recurrent need for recapitalisation. The remaining obstacles to new entry have to be reduced. Financial inclusion is an important priority and restrictions on microfinance should be avoided. The regulatory and legal framework also needs to be overhauled, consolidating the diverse legislation. While such reforms would improve financial sector efficiency they would also likely have positive spillover effects on the rest of the economy and help sustain rapid growth. This Working Paper relates to the 2011 OECD Economic Survey of India ( Le système financier indien : l'heure d'une deuxième vague de réformes a-t-elle sonné ? Le système financier indien a considérablement changé depuis les années 90. Les taux d'intérêt ont été déréglementés et de nouveaux acteurs ont été autorisés dans le secteur bancaire et celui des opérations de marché et de titres. Le marché d'actions indien est de classe internationale. De nouvelles banques privées sont apparues, plus axées sur la satisfaction du client que les banques publiques plus anciennes. Par ailleurs, l'épargne intérieure a connu une expansion considérable, très similaire à celle qu'avaient connue les économies d'Asie de l'Est pendant leur période de forte croissance. Cela renforce la nécessité de nouvelles réformes du secteur financier. Les banques doivent notamment disposer d'une latitude nettement plus grande en matière de répartition de leurs actifs. Si les banques du secteur public ont paru plus solides au public lors de la crise de 2007/08, en raison de la garantie implicite de l'État dont elles bénéficiaient, il convient de les privatiser afin d'améliorer leur gouvernance et de minimiser la nécessité récurrente de les recapitaliser. Les obstacles à l'entrée de nouveaux acteurs qui subsistent doivent être réduits. L'inclusion financière revêt une importance prioritaire et les restrictions relatives à la microfinance devraient être évitées. Il est également nécessaire de remettre à plat le cadre législatif et réglementaire, en consolidant les différentes dispositions juridiques en vigueur. De telles réformes permettraient des gains d'efficience dans le secteur financier et auraient sans doute des effets d'entraînement positifs sur le reste de l'économie, contribuant ainsi à entretenir une croissance rapide.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 879.

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Date of creation: 01 Jul 2011
Handle: RePEc:oec:ecoaaa:879-en
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