2. Financial Sector has been incrementally deregulated and exposed to international financial markets in the last 15 years; Consequently, elements of the Indian financial sector are close to international standards.

3. Global financial market conditions are favourable Are we seizing the opportunity for urgent reforms and greater integration? How do we decide what is an optimal rate to integrate with global financial markets?

4. Increase competition and thereby enhance the efficiency of financial intermediation and promote overall savings; Widen and deepen the reach of the formal financial sector; Ensure that the country’s savings are utilized most productively; and Manage the risks stemming from disturbances in global markets to insulate the financial sector and the Indian economy. OBJECTIVES

5. There should be an adequate number of buyers and sellers such that all market participants are price- takers The primary market (for all issuance) should have a large number of participants Valuations in the secondary market should be transparent and liquid enough to allow easy exit The bid-ask spreads in the secondary markets should be narrow. CRITERIA FOR COMPETITIVE MARKETS

6. ISSUES The depth of the financial sector is relatively low About two-thirds of private savings are mobilized by the financial sector. Productivity of investments should be given greater weightage in allocation of credit.

7. Table 1 Stock of Financial Assets as % of GDP (2004) CountryFinancial Assets India160 Japan420 Malaysia400 South Korea235 China220

8. A gradualist approach to “Fuller Capital Account Convertibility” is in order. The risks stemming from potential demand for investments in foreign assets (including real-estate) are not quantifiable and may be unmanageable in times of domestic- international stress

9. Domestic interest rates are not adequately market determined i.e. there is need for further deregulation of interest rates

10. Table 3 Financial Sector Regulators CountryRegulators of Financial Services UK Financial Service Authority (FSA) Japan Financial Service Agency (FSA) Germany The Federal Financial Supervisory Authority (BaFin) India Banking – RBI Capital Markets – SEBI Insurance – IRDA Pension – PFRDA China Banking – China Banking Regulatory Commission (CBRC) Capital Markets – State Council Securities Commission (SCSC) Insurance – The China Insurance Regulatory Commission (CIR) USA Banking – Federal Reserve Bank Capital Markets – Securities and Exchange Commission (SEC) Derivatives – Commodities and Futures Trading Commission (CFTC)

11. The banking sector has reformed considerably since the early 1990s but is excessively dominated by the public sector which receives 78% of the deposits and makes about 73% of the loans

12. Table 4 Indian Banks – Market shares (in percent) DepositsLoans Mar 2000Mar 2005Mar 2000Mar 2005 Public Sector 81.97879.373.2 New Private 5.210.95.013.8 Old Private 7.46.47.66.2 Foreign 5.54.78.06.8

13. Table 5 Bank Lending as percentage of Deposits (2004) CountryLending as percent of Deposits China130 UK114 Malaysia101 USA92 India61

14. Efficiency in the banking sector lags international comparators in terms of intermediation costs Just two domestic private banks have entered this sector in the last ten years

15. A coordinated effort is needed to hasten consolidation among and international listings of public sector banks and entry of new private sector banks Separate regulator for banking We should not mix up insolvency with illiquidity

16. Indian equity and related exchange traded derivatives markets and to some extent the mutual fund industry compare well with international markets The over the counter (OTC) interest rate and currency swap markets cannot grow without better market determination of domestic interest rates and further capital account convertibility (FCAC)

17. The corporate debt market is miniscule and needs a series of reforms including stamp duty rationalization, repos in corporate bonds, settlement and clearing of corporate bonds through the same clearing system as government securities, introduction of credit derivatives, lifting of limits for FII purchases of corporate bonds

18. Exchange traded interest rate derivatives should be encouraged since this will improve the market determination of domestic interest rates and help the corporate bond market to grow Exchange traded currency derivatives can wait for next steps towards FCAC

19. Commodity derivatives markets should be regulated by SEBI The Companies Act needs to be amended and SEBI strengthened to take over the regulatory responsibilities under this Act

20. The private equity market should be courted and exit valuation methodologies made transparent and predictable. The asset backed securities market will not develop without considerable preparatory work particularly on the legal issues involved. Hence, special efforts need to be directed to this end.

21. In cross-country terms, the Indian insurance industry is small in depth and coverage and there is tremendous potential for growth. Premiums should be deregulated, the requirement to hold at least 50% of assets in government securities should be gradually relaxed as also the ceiling of 26% ceiling for foreign ownership

22. The pension sector is almost entirely in the public sector and covers only about 16% of the work- force. Progress is hindered by a multiplicity of Acts, administered by several GoI Ministries, which have subdivided the sector. The pay-as-you- go government administered pension systems should be gradually replaced by defined contribution schemes in which pension assets are invested in securities, both debt and equity. The pension sector needs to be comprehensively reviewed, at a GoI wide level, in the light of the potential for it to help boost the equity and bond markets and thereby the entire financial sector

23. The complex web of legislation that applies to the financial sector needs to be simplified. Further, there are obvious anomalies in certain Acts e.g. those which provide for RBI representation on the boards of public sector banks such as State Bank of India (SBI), National Housing Bank (NHB).

24. Table 6 Debit and Credit Card Penetration 2004 (percent of population) India3 South Korea174 Brazil71 China61 Thailand54 Mexico44

25. Table 7 Equity Market Capitalisation and Traded Values (2005) CountryMarket Capitalisation Value AddedListed Domestic Cos. India71574763 USA1361725143 Japan1041093279 UK1391892759 Germany4463648 China35261387 *Figures in percent

26. Table 8 OTC and Exchange Traded Derivatives Country/ Region OTC Derivatives Markets Average daily turnover* Exchange-traded Derivatives Markets Annual turnover** India (2005)Not available1 USA (2004)355819 EU (2004)1001487 *US$ billion; ** US$ trillion

27. Table 9 Mutual Fund Assets Under Management (US$ billion end 2005) CountryMutual Fund Assets% of GDP India648 USA8,90571 France1,36365 Switzerland11732 UK54725 Netherlands9415 Germany29711 Japan47010

28. Table 10 Issuance of Equity and Debt YearEquity Issues Rs. Crores GOI Securities Rs. Crores Debt Issues Publicly placed Privately placed 2004-0528,200 (0.9) 1,06,501 (3.4) 4,09455,408 (1.8) 2005-0636,533 (1.0) 1,60,018 (4.5) --81,846 (2.3) 2006-07 (Apr-Sep) 8,205BE 1,81,875 --47,945 Figures in () are percent of GDP

29. Table 11 Corporate Bond Markets (2004) Country% of GDP India2 USA145 Germany116 UK83 Malaysia73 Thailand22 South Africa17 China1

30. Table 12 Mortgage Balances Outstanding 2005 (Percent of GDP) India3 USA51 UK54 South Korea13 Thailand9 Malaysia23 Germany48

31. Table 13 OTC and Exchange Traded Commodity Derivatives CountryOTC Commodity Derivatives Trading (Average daily turnover 2004 – US$ billion) Exchange Traded Commodity Derivatives (Annual turnover 2005 – US$ trillion) India--0.33 USA4.682 EU1349

32. Table 14 International Comparision of Insurance Penetration Country200220032004 TotalLifeNon- life TotalLifeNon- life TotalLifeNon- life USA9.584.64.989.614.255.159.174.125.05 UK14.7510.194.5613.378.624.7512.68.923.68 Germany6.763.063.76.993.173.826.973.113.86 Japan10.868.642.2210.818.612.29.526.752.77 India3.262.590.672.882.260.623.172.530.65 China2.982.030.963.332.31.033.062.211.05 World8.144.763.388.064.593.487.994.553.43

33. Table 15 International Comparision of Insurance Density Country20032004 TotalLifeNon-lifeTotalLifeNon-life USA3637.71657.51980.23755.11692.52062.6 UK4058.52617.11441.44508.43190.41318.0 Germany2051.2930.41120.82286.61021.31265.3 Japan3770.93002.97683874.83044830.8 India16.412.93.519.715.74.0 China36.325.112.240.227.312.9 World469.6267.1202.5511.5291.5220

34. Table 16 Insurance Assets Under Management (US$ billion end 2005) CountryInsurance Assets% of GDP India223 USA5,46544 Japan2,26450 UK1,90787 France1,52772 Germany1,37049 Netherlands38561 Switzerland33791

35. Table 17 Pension Assets Under Management (US$ billion end 2005) CountryPension Funds% of GDP India60*8 Switzerland469127 Netherlands693110 USA12,11997 Japan3,41975 UK1,60773 France1658 Germany1144 * Estimate of EPFO, EPS and PF Funds.

36. Table 18 Asset Allocation of Pension Funds (2005) CountryDomestic Equity International Equity Domestic Bonds International Bonds CashOthers Japan 29162611 7 UK 392823127 USA 471333115

37. Table 19 Old-dependency ratio (population above 64 years of age divided by the population between 14-64) 20052050 World 1125 G10 2342 China 1137 Latin America 929 India 822