What policy measures have been taken during the Post liberalisation period to enhance competitiveness of Indian financial markets? How far have these measures succeeded in this direction?

Banking Sector Reforms

The banking sector was the initial focus of liberalization. Key measures included:

• Deregulation of Interest Rates (1990s-2000s): Gradual removal of administered interest rates, allowing banks to determine rates based on market conditions.
• Prudential Norms (1992 onwards): Implementation of Basel I and subsequently Basel II & III norms, focusing on Capital Adequacy Ratio (CAR), Asset Classification, and Provisioning. This improved the solvency and stability of banks.
• Reduction in Statutory Liquidity Ratio (SLR) & Cash Reserve Ratio (CRR): Lowering these ratios freed up funds for banks to lend, increasing credit availability. SLR was reduced from 38.5% in 1991 to around 18% currently (as of 2023), and CRR from 15% to 4%.
• Entry of Private Sector Banks (1993 onwards): Allowing private sector banks to operate alongside public sector banks increased competition and innovation.
• Banking Regulation Act Amendments: Strengthening the regulatory framework and empowering the Reserve Bank of India (RBI) with greater supervisory powers.

Capital Market Reforms

Reforms in the capital market aimed to deepen and broaden market participation:

• Establishment of SEBI (1992): The Securities and Exchange Board of India (SEBI) was established as the regulator for the securities market, enhancing investor protection and market integrity.
• Dematerialization of Securities (1996 onwards): Transitioning from physical certificates to electronic form reduced transaction costs and improved efficiency.
• Introduction of National Stock Exchange (NSE) & Bombay Stock Exchange (BSE) modernization (1990s): These exchanges adopted modern trading systems and technologies, increasing liquidity and transparency.
• Foreign Portfolio Investment (FPI) Liberalization: Gradually increasing limits on FPI, attracting foreign capital and enhancing market depth.
• Derivatives Market Development: Introduction of futures and options trading in equities and commodities, providing risk management tools.

Insurance Sector Reforms

The insurance sector was opened to private participation:

• IRDAI Act (1999): Established the Insurance Regulatory and Development Authority of India (IRDAI) to regulate the insurance sector.
• Entry of Private Insurance Companies (2000 onwards): Allowing private companies to operate alongside LIC increased competition and product innovation.
• Foreign Investment in Insurance: Permitting foreign investment in insurance companies, bringing in capital and expertise.

Financial Technology (FinTech) & Recent Developments

Recent reforms have focused on leveraging technology to enhance financial inclusion and efficiency:

• Payment Banks & Small Finance Banks (2015 onwards): Introduction of these differentiated banks to cater to specific segments of the population.
• Unified Payments Interface (UPI) (2016): A real-time payment system that has revolutionized digital payments in India.
• Account Aggregator (AA) Framework (2021): Facilitating secure and consent-based data sharing between financial institutions.
• Digital Lending Guidelines (2022): Regulating digital lending platforms to protect borrowers and prevent predatory practices.

Successes and Limitations

The reforms have yielded several positive outcomes:

• Increased Financial Inclusion: Greater access to financial services, particularly through digital channels.
• Improved Efficiency: Reduced transaction costs and faster processing times.
• Enhanced Competition: Increased competition among financial institutions, leading to better products and services.
• Greater Market Depth: Increased liquidity and participation in financial markets.

However, challenges remain:

• Non-Performing Assets (NPAs): High levels of NPAs in the banking sector continue to be a concern.
• Financial Exclusion: Despite progress, a significant portion of the population remains financially excluded.
• Regulatory Arbitrage: Opportunities for regulatory arbitrage exist, particularly in the FinTech space.
• Cybersecurity Risks: Increasing cybersecurity threats pose a significant risk to the financial system.

Reform Area	Key Measures	Impact on Competitiveness
Banking	Prudential Norms, Private Sector Entry, Interest Rate Deregulation	Improved stability, increased competition, greater efficiency
Capital Markets	SEBI establishment, Dematerialization, Exchange Modernization	Enhanced investor protection, increased liquidity, improved transparency
Insurance	IRDAI Act, Private Sector Entry, Foreign Investment	Increased competition, product innovation, greater penetration
FinTech	UPI, Payment Banks, Account Aggregators	Financial inclusion, reduced costs, improved efficiency