briefly explain the financial sector reforms
Answers
Answer:
The process of increasing capital accumulation through institutionalisation of savings and investment fosters economic growth. The main objectives of the financial sector reforms are to allocate the resources efficiently, increasing the return on investment and accelerated growth of the real sectors in the economy.
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Explanation:
Financial sector reforms refer to the reforms in the banking system and capital market.
An efficient banking system and a well-functioning capital market are essential to mobilize savings of the households and channel them to productive uses. The high rate of saving and productive investment are essential for economic growth. Prior to 1991 while the banking system and the capital market had shown impressive growth in the volume of operations, they suffered from many deficiencies with regard to their efficiency and the quality of their operations.
The weaknesses of the banking system was extensively analyzed by the committee (1991) on financial sector reforms, headed by Narasimham. The committee found that banking system was both over-regulated and under-regulated. Prior to 1991 system of multiple regulated interest rates prevailed. Besides, a large proportion of bank funds was preempted by Government through high Statutory Liquidity Ratio (SLR) and a high Cash Reserve Ratio (CRR). As a result, there was a decrease in resources of the banks to provide loans to the private sector for investment.
This preemption of bank funds by Government weakened the financial health of the banking system and forced banks to charge high interest rates on their advances to the private sector to meet their needs of credit for investment purposes. Further, the lack of transparency in the accounting practice of the banks and non-application of international norms by the banks meant that their balance sheets did not reflect their underlying financial position.