Financial Sector Development

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PLANNING COMMISSION

Vision 2020 for India

The Financial Sector

Rohit Sarkar

Special Consultant,

Planning Commission

Introduction

A financial system, which is inherently strong, functionally diverse and

displays efficiency and flexibility, is critical to our national objectives of creating a

market-driven, productive and competitive economy. A mature system supports

higher levels of investment and promotes growth in the economy with its depth

and coverage. The financial system in India comprises of financial institutions,

financial markets, financial instruments and services. The Indian financial

system is characterised by its two major segments - an organised sector and a

traditional sector that is also known as informal credit market. Financial

intermediation in the organised sector is conducted by a large number of financial

institutions which are business organisations providing financial services to the

community. Financial institutions whose activities may be either specialised or

may overlap are further classified as banking and non-banking entities. The

Reserve Bank of India (RBI) as the main regulator of credit is the apex institution

in the financial system. Other important financial institutions are the commercial

banks (in the public and private sector), cooperative banks, regional rural banks

and development banks. Non-bank financial institutions include finance and

leasing companies and other institutions like LIC, GIC, UTI, Mutual funds,

Provident Funds, Post Office Banks etc.

The banking system is, by far, the most dominant segment of the financial

sector, accounting as it does, for over 80 per cent of the funds flowing through

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the financial sector. The aggregate deposits of the scheduled commercial banks

(SCBs) rose from Rs.5,05,599 crore in March 1997 to Rs.11,03,360 crore in

March 2002 representing a rise of 17 per cent. During the same period, the

credit portfolio (food and non-food) of SCBs grew from...