1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Financial Sector Reform in India

Time for a Second Wave?

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 (www.oecd.org/eco/surveys/india)

English

Keywords: financial sector reform, bank privatisation, bank recapitalisation, interest rates, financial regulation, private banks, public-sector banks, financial inclusion, India
JEL: G28: Financial Economics / Financial Institutions and Services / Financial Institutions and Services: Government Policy and Regulation; G22: Financial Economics / Financial Institutions and Services / Insurance; Insurance Companies; Actuarial Studies; G23: Financial Economics / Financial Institutions and Services / Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors; N20: Economic History / Financial Markets and Institutions / Economic History: Financial Markets and Institutions: General, International, or Comparative; K22: Law and Economics / Regulation and Business Law / Business and Securities Law; G21: Financial Economics / Financial Institutions and Services / Banks; Depository Institutions; Micro Finance Institutions; Mortgages; K23: Law and Economics / Regulation and Business Law / Regulated Industries and Administrative Law; E65: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Studies of Particular Policy Episodes; D14: Microeconomics / Household Behavior and Family Economics / Household Saving; Personal Finance; H81: Public Economics / Miscellaneous Issues / Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts; E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy; H63: Public Economics / National Budget, Deficit, and Debt / National Debt; Debt Management; Sovereign Debt; Q14: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Agriculture / Agricultural Finance
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