Financial sector is backbone of the Indian economy.

Topic for  UPSC Commerce and Accountancy Optional Paper 1

Financial sector is backbone of the Indian economy.

There are various factors affecting financial system of India

Factors affecting financial system in India :-

• The inability of banks to quickly enforce security and access to collateral, and the capital constraints in recognizing large loan losses.
• Volatility in global commodity prices has had a major impact on Indian companies. This has led to non-performing loans and provisioning for credit losses becoming a key area of concern for the Indian financial system.
• Multiple regulators and their overlapping functions.
• Lack of Autonomy
• Financial Literacy:
  • Indian masses are still finding it difficult to understand the technicalities of the market.
• Financial Inclusion:
  • Still significant portion of population is outside the banking net.
• Obsolete & Complex laws:
  • Financial sector is still carrying the legacy of British rule such As RBI still functions based on RBI act 1934 , Banking Rules ,1949
    Lack of Vibrant Bond Market in India causing adverse impact.
• Growing NPA challenge & Chakravyuh challenge due to global slowdown.
• People not ready to invest their savings in equity and bond markets, which provides good boost to our companies.
• Despite the absolute size of the insurance sector, penetration in this sector leaves much to be desired.

Solutions to improve financial sector in India :-

• Reducing the fiscal deficit, to reduce the risk of macroeconomic instability and to increase the availability of finance to the private sector
• improving the legal, regulatory and supervisory frameworks, in order to improve banks’ credit and risk management
• improving systems for dealing with weak banks
• developing capital markets further. Expansion of Bond markets , Masala Bond is a good step towards this.
• developing pensions and insurance to increase finance for long term investments, including infrastructure
• improving financial services to improve the welfare of customers and meet the challenge of globalization of financial services
• managing links to external capital markets.
• Financial Regulators should be given autonomy to flourish the sector
• Financial Literacy should be promoted. PMDISHA, VISAKA, FLCC  need to be implemented effectively.
• Jan dhan Yojana , Payment Bank, JAM trinity to achieve financial inclusion and efficiency,
• Implemention of SaiKrishna committee recommendation for UFC (uniform financial code)
• Implementation of HR khan committee for bond market
• Implementation of RBI initiated prompt corrective actions recently.
• The banks and financial institutions should adopt uniform accounting practices. This is particularly required with regard to income recognition and provisioning against doubtful debts. Valuation of investments should be done on the lines suggested by Ghosh Committee on financial accounts
• The balance sheets of banks and financial institutions should be made transparent. Full disclosure be made as per international accounting standards committee norms. This may be done after implementing income recognition and provisioning norms.

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