Opinion - Editorials   

The banking system’s dominance

Across the world, in every economy, banks and capital markets have both played a critical role in connecting savers with investors and thereafter allocating resources among competing users efficiently. However, the relative importance of the two has varied. In countries such as the United Kingdom, the United States, and Australia, the capital market has been the main driver of the intermediation process, while in Germany, Japan, India, and a few other countries, it is the banks that have played a dominant role. This observation, endorsed recently by the Reserve Bank of India in its report on currency and finance, might seem counter-intuitive in India, given the enormous interest many segments of the capital market currently command. Thanks to capital market reforms, stock market governance and procedures have become more transparent and investor-friendly. The two principal stock exchanges, the BSE and the NSE, are ranked among the world’s leading exchanges. The benchmark share indices, the Nifty and the Sensex, though below their all-time highs, are still at impressive levels. The funds managed by domestic mutual funds crossed a record Rs.3,00,000 crore recently.

Despite all these commendable achievements, the capital market’s role in the intermediation process continues to be smaller than that of the banking system for various reasons. Their current popularity notwithstanding, the level of penetration by the mutual funds is well below that in many advanced economies and, surprisingly, even lower than in Brazil and a few other emerging economies. The new issue market’s growing depth should not obscure the fact that, by some conventional yardsticks — such as percentage of the GDP — the proportion of resources mobilised through it in 2005-06 was less than in 1990-91. The size of the equity market is considerably smaller than in the advanced countries. The banking system in India has been the traditional provider not only of working capital but — because of the absence of a vibrant debt market — of term loans too. In India as well as in other emerging economies the banking system is better equipped to protect the saving class because of its superior database about the borrowers. Perhaps the most important reason for its dominance is that the household sector, which contributes the most to gross domestic savings, has been showing a marked preference for bank deposits. According to the RBI, between 2001 and 2006, out of every Rs.100 saved by this sector, bank deposits accounted for almost Rs.41, while barely Rs.3.2 went into shares, debentures, and mutual fund instruments.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

A new perspective on HIV and AIDS
The banking system’s dominance
How Blair fell out of love with the media
A matter of style, sense and substance
Lining up to return home
If you need to fly, is it possible to go green?
The battle in the Palestinian territories
Sovereign funds set to rule the markets
Wise decision
Not improper
Unwanted manoeuvre
Unpleasant
Make them pay

Copyright © 2007, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu