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INDIA FINANCE

The Reserve Bank formulated and administered monetary policy to promote stable prices and higher production. It was given increasing responsibilities for the development of banking and credit and to coordinate banking and credit with the five-year plans. The Reserve Bank had a number of tools with which to affect commercial bank credit.A credit guarantee corporation covered loans by commercial banks to small traders, transport operators, self-employed persons, and other borrowers not otherwise effectively covered by major institutions. The system effectively reached all kinds of savers and provided credit to many different customers.The government nationalized fourteen major private commercial banks in 1969 and six more in 1980. Nationalization forced commercial banks increasingly to meet the credit requirements of the weaker sections of the nation and to eliminate monopolization by vested interests of large industry, trade, and agriculture.

The banking system in India expanded rapidly after nationalization. The number of bank branches, for instance, increased from about 7,000 in 1969 to more than 60,000 in 1994, two-thirds of which were in rural areas. The deposit base rose from Rs50 billion in 1969 to around Rs3.5 trillion in 1994. Nevertheless, currency accounted for well over 50 percent of all the money supply circulating among the public. In 1992 the nationalized banks held 93 percent of all deposits.In FY 1990, twenty-three foreign banks operated in India. The most important were ANZ Grindlays Bank, Citibank, the Hongkong and Shanghai Banking Corporation, and Standard Chartered Bank.

Public-sector banks in India are required to reserve their lending based on 40 percent of their deposits for priority sectors, especially agriculture, at favorable rates. In addition, 35 percent of their deposits have to be held in liquid form to satisfy statutory liquidity requirements, and 15 percent are needed to meet the cash reserve requirements of the Reserve Bank. Both these percentages represent an easing of earlier requirements, but only a small proportion of public-sector banks' resources can be deployed freely. In late 1994, the rate of interest on bank loans was deregulated, but deposit rates were still subject to ceilings.

More than 50 percent of bank lending is to the government sector. With the onset of economic reform, India's banks were experiencing major financial losses as the result of low productivity, bad loans, and poor capitalization. Seeking to stabilize the banking industry, the Reserve Bank of India developed new reporting formats and has initiated takeovers and mergers of smaller banks that were operating with financial losses.

India has a rapidly expanding stock market that in 1993 listed around 5,000 companies in fourteen stock exchanges, although only the stocks of about 400 of these companies were actively traded. Financial institutions and government bodies controlled an estimated 45 percent of all listed capital. In April 1992, the Bombay stock market, the nation's largest with a market capital of US$65.1 billion, collapsed, in part because of revelations about financial malpractice amounting to US$2 billion. Afterward, the Securities and Exchange Board of India, the government's capital market regulator, implemented reforms designed to strengthen investor confidence in the stock market. In the mid-1990s, foreign institutional investors took greater interest than ever before in the Indian stock markets, investing around US$2 billion in FY 1993 alone.