Indian Financial System Before and After Planning

INDIAN FINANCIAL
SYSTEM BEFORE AND

AFTER PLANNING
Stages of Financial System Planning
Pre-Independence Post Liberalization

Pre 1951 ERA Post 1991
Post 1951 and Pre 1991

Mid Term Planning
Closed Circle Industrial Finance
Semi-organized and Narrow Industrial

Phase1: Pre Securities Market
1951
Organization Devoid of Issuing Institutions
Virtual Absence of any Intermediaries

and Long-term Financial Institutions
Phase1: Pre 1951 Organization…
◦Traditional economy, per capital output is low and constant,
restricted access to outside savings
◦Financial system not responsive to opportunities for industrial
investment
◦Financial system incapable of sustaining a high rate of industrial
growth
Planned Economic Development was initiated in 1951
Phase II: Post Adoption of Mixed Economy to industrial development
1951 to 1990
Need for an alignment of the financial mechanism with the
priorities laid down by the Government’s economic policy
Distribution of resources by the financial system to be in

conformity with the priorities of the five-year plans
Governmental control over distribution of credit and finance
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Phase II: Post
1951 to 1990,
Main Elements
◦ 1948 formation of RBI
◦ 1956 formation of SBI
◦ 1956 formation of LIC
Phase II: ◦ 1969 Nationalization of Banks (14 Major Banks)
Nationalization ◦ 1972 formation of GIC

◦ 1980 Second round of Nationalization of Banks (6 banks)
◦ 1963 Formation of Unit trust of India
Public sector occupied a commanding position in the

industrial financing system in India, and virtually the entire
institutional structure was owned and controlled by the
Government
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◦ Planning and formation of Development Banks, like
IDBI (1964), ICICI (1955), IFCI (1948) etc.
◦ The Most Outstanding Development, backbone of the
system of industrial financing
Phase II: ◦ Qualitative dimension
Fortification of ◦ IFCI, in 1948, the first Development Bank

◦ State Financial Corporation SFCs
Institutional ◦ ICICI, Industrial Credit and Investment Corporation of

India Ltd, in 1955 provided diversification in
Structure (1) development banking such as underwriting of issues of

capital, channelization of foreign currency loans from the
World Bank to private industry
◦ In 1964, IDBI was established as a subsidiary of the
Reserve Bank of India (financing and coordination role),
delinked from RBI in 1976
◦ Diversification of Forms of Financing, especially
from Short Term to Long-Term Financing (Term
Lending) and Underwriting of new issues of
corporate securities
◦ Enlargement of Functional Coverage like, Small
Phase II: Scale Industries, Exports and Agricultural
Finance (neglected sectors)
Fortification of ◦ (Post 1964) Promoting Innovative Banking like,
Institutional Social Banking, Nationalised Banking and lending
to priority section, due to the problem of
Structure (2) concentration of economic power in few hands
and widening economic disparities
◦ Formation of National Credit Council (1968)
◦ Formation of Agricultural Finance Corporation a
joint venture by the leading banks for financing priority
agricultural projects
Savings mobilization for industrial investment depends, apart from
the development of specific financial facilities, on the confidence of
the investing public which, in turn, is dependent on the safeguards
and protection available to them
◦ Companies Act 1956
◦ To protect the interests of shareholders
Phase II: ◦ Capital Issues (Control) Act 1947
Protection of ◦ The Act as a potent tool in the hands of the Government to
prevent investment in nonessential activities.
Investors ◦ Implemented through the Controller of Capital Issues (CCI) in

the Ministry of Finance.
(Legal ◦ Securities Contracts (Regulation) Act, 1956

◦ Reforms in stock exchange trading methods and practices
Reforms) which were the subjects of controversy
◦ The main objective of this Act was to have a healthy and
strong investment market in which the public could invest
their savings with full confidence
◦ Regulation included the provision that only recognised
stock exchanges were permitted to function, and that the
Government was empowered to withdraw the recognition
in the interest of trade or in public interest
◦ Monopolies and Restrictive Trade Practices Act, 1970
Phase II: ◦ To ensure that the functioning of the economic system did not
result in concentration of economic power and
Protection of ◦ To control such monopolistic and restrictive trade practices
Investors that were injurious to the public welfare.
◦ Foreign Exchange Regulation Act (FERA 1973)
(Legal
Reforms)
◦ Institutional Structure:
(i) Commercial banks, LIC, GIC, and UTI which were normal
constituents of the institutional financing mechanism and
obtained their resources by mobilising savings from saving
surplus economic units, and
(ii) Development finance institutions, namely, IDBI, IFCI,
ICICI, SFCs, and so on, which were like artificial limbs, created
Phase II: to compensate for the lack of growth of normal channels, and
derived most of their funds from their sponsors like the RBI,
Organizational and the Government.
◦ Small and Medium Enterprises did not flourish because of less
Deficiencies competition in the financial sector.
◦ Inability to meet the financing needs of small and new enterprises.
◦ Two monolithic institutions, namely, the LIC and the UTI dominated
the scene
◦ New Issues in Market could not be launched due to lack of
institutional structure
◦ Practically no institutional arrangement for the origination of issues
of capital and limited underwriting facilities
Phase III: Post
1990
Phase III:
Primary Market
Reforms
Phase III:
Secondary
Market Reforms
◦ Privatisation of Financial Institutions
◦ Reorganisation of Institutional Structure
◦ Commercial Banks
◦ Money Markets
Phase III: ◦ Control of Macroeconomic Variables
◦ Regional Rural Banks
Highlights ◦ Debt Recovery Tribunals
◦ Protection to Investors: Securities and Exchange
Board of India (SEBI)

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INDIAN FINANCIAL

SYSTEM BEFORE AND

Pre-Independence Post Liberalization

Post 1951 and Pre 1991

Semi-organized and Narrow Industrial

Virtual Absence of any Intermediaries

Distribution of resources by the financial system to be in

Governmental control over distribution of credit and finance

Nationalization ◦ 1972 formation of GIC

Public sector occupied a commanding position in the

Fortification of ◦ IFCI, in 1948, the first Development Bank

Institutional ◦ ICICI, Industrial Credit and Investment Corporation of

Structure (1) development banking such as underwriting of issues of

Investors ◦ Implemented through the Controller of Capital Issues (CCI) in

(Legal ◦ Securities Contracts (Regulation) Act, 1956

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