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2022 | Book

Revisiting the Indian Financial Sector

Recent Issues and Perspectives

Editor: Ph.D. Paramita Mukherjee

Publisher: Springer Nature Singapore

Book Series : India Studies in Business and Economics

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About this book

This book provides perspectives on the latest developments and pertinent issues in the Indian financial sector in current times. The reforms initiated in the nineties in the financial sector have transformed the way financial markets and institutions function today. However, certain sectors like banking, and markets like the capital market have undergone sea changes. The research contributions in this book focus on the issues pertaining to such sectors like banking, NBFCs and the stock market.

The opening up of financial markets and emergence of institutional investors have been a significant phenomenon in the Indian context. At this backdrop of increasing financial integration, the impact of financial liberalisation on the overall development of the sector, and how the global policies and events influence the Indian financial sector, are analysed in the book. The emergence of new regulations in the capital markets to instill more discipline and transparency, have also changed the way corporates take financing decisions. For example, regulatory authorities are continuously reviewing norms pertaining to issues like promoters’ shareholding owing to risks arising from excessive leverage and the linkages between financial intermediaries. Corporate governance, environmental aspects are some important additions in corporate financing norms in the recent past. The book incorporates a discussion on this, too. Apart from these, the book also has incorporated several aspects on an emerging concept called financial inclusion, its measurement and constraints to achieve the same. And finally, at the backdrop of the disruption created by the COVID-19 pandemic, the impact on the Indian capital market is also discussed.

Contributions are based on rigorous empirical research and incorporate the perspectives of renowned academicians in the field of finance and financial economics across the country. Apart from the research community, this book will also be helpful for financial analysts working in the financial sector to have some idea about the current issues, the direction of research on those issues and different perspectives on them.

Table of Contents

Frontmatter
Introduction
Abstract
Reforms in the Indian financial sector have transformed both financial institutions and markets in more ways than one in the last three decades. In the process, significant changes have taken place, and some new issues and challenges have come up. This chapter presents some pertinent issues and important questions related to the financial sector that needs to be discussed, debated and researched. The chapter also provides an outline of the issues dealt by the chapters in this book.
Paramita Mukherjee

Financial Inclusion

Frontmatter
Measuring Financial Inclusion: A Survey
Abstract
It is widely agreed that to be effective and acceptable, economic growth itself is not sufficient. The process of growth should be inclusive: a growth process that offers equality of opportunity to different segments of population and maintains equality in the distribution of the fruits of economic growth. Financial inclusion is undeniably an important factor in ensuring inclusive growth. One of the main hurdles the deprived section of population faces is fund constraint, the lack of access to fund at appropriate time and at acceptable terms. So, access to fund is a very important component of financial inclusion. But financial inclusion is not only about fund constraint, but also about provision of access to financial services at an affordable cost. Definition adopted by the Rangarajan Committee on Financial Inclusion (Rangarajan in Report of the committee on financial inclusion. NABARD, 2008) shows that there is an element of multidimensionality in the concept of financial inclusion. On a similar vein, (Rajan in A Hundred Small Steps: Report of the Committee on Financial Sector Reforms, 2009) also defines financial inclusion as the process that involves provision of financial products other than affordable credits. The present chapter aims at providing a critical survey on how the different researchers have perceived financial inclusion and quantified it. The studies that have quantified financial inclusion can be classified into two sets: the studies that adopt individual indicator approach and the studies that develop and use an index of financial inclusion. It is understandable that in both cases measuring the financial inclusion plays a very important role. The present chapter will cover both types of studies, while focusing on issues related to measurement of financial inclusion, the potentials and limitations of alternative measurements.
Malabika Roy
Financial Inclusion: Measurement and Comparative Analysis of Countries from Europe and Asia
Abstract
The study intends to measure and subsequently compare the degree of financial inclusion across the economies of Europe and Asia. Using exploratory factor analysis and the inverse of Euclidean distance for 24 countries from the continent of Europe and Asia in the recent past, the study estimates the achievement in financial inclusion. The findings show a significant presence of countries from the continent of Europe in the top order of index of financial inclusion (IFI) rankings. Further, among the rank holders, majority belongs to the countries in high-income group. Trivial differences are found while comparing the mean IFI values between the continents. However, IFI values have significantly changed over time within a country, and country differences in financial inclusion are significant when they are compared across income groups.
Shantanu Ghosh, Tarak Nath Sahu

Financial Liberalization, Development and the Economy

Frontmatter
Financial Constraints and Export Participation: A Case Study of Indian Textile Industry
Abstract
Domestic firms that decide to enter the foreign markets face various non-recoverable fixed costs in acquiring knowledge about target markets, setting up new marketing and distribution channels and customising their products according to foreign demand patterns. Hence, only firms which are in a financially healthy position can pay for the considerable upfront costs associated with foreign market entry. Firms which are constrained by the lack of availability of internal finance can raise external capital, the probability and amount of which, however, depends on several firm-specific factors. The present study takes the example of the Indian textile industry, one of the major export-oriented industries in the country, to provide micro-level evidence of the impact of financial factors on export participation. Using extensive firm-level data, the study finds that financial factors have a significant impact on the extensive margin of exports but not on the intensive margin. The findings of the study make a compelling case for government intervention in supporting the entry of the domestic textile firms into foreign markets by enhancing their access to external capital.
Puneet Kumar Arora, Jaydeep Mukherjee
Global Monetary Policies and Implications for Financial Flows to India and Other Emerging Markets
Abstract
This chapter reviews the experience of monetary easing by the central banks of advanced economies, which included large-scale purchases of financial assets and close to zero or negative policy interest rates, to counter the effects of the Global Financial Crisis (GFC) in 2008–09 and the COVID-19 health crisis in 2020. It then considers the spillover effects of quantitative easing (QE) in the period spanning 2008–2019, as well as the impact of the recent monetary easing related to COVID-19, on developing countries in general and on India in particular. The implications of these developments are examined for private capital flows, exchange rates, and the conduct of monetary and external sector policies during the GFC and post-GFC period and during the COVID-19 health crisis.
Sanket Mohapatra
Financial Liberalization and Convergence of Financial Development Among BRICS Economies
Abstract
Financial liberalization is now embraced by most of the emerging market economies (EMEs) as a step toward financial development. BRICS are no exception. The greater access to external financial markets and better risk-sharing possibilities are among the various benefits of financial liberalization. Nonetheless, there are theories and empirical evidences that countries get exposed to unpredictable adverse scenarios upon gradual removal of financial market restrictions, and not all countries can reap benefits at equal pace and levels. Financial development is a broad concept, and this chapter tries to examine whether the pace of financial development across BRICS economies is same or it depends on the initial level of financial development. Is there an observable ‘convergence’ in the overall growth process in the financial sector, especially after liberalization, within the BRICS? This chapter, based on a panel dataset from 1980 to 2018, examines beta convergence. The results suggest the existence of both unconditional and conditional beta convergence for overall financial development and for development of financial institutions and markets. The convergence is the fastest in case of financial markets, more specifically, access to financial markets followed by depth and efficiency of financial markets. Convergence is slowest in case of access to financial institutions. Notably, the effect of financial liberalization on financial development is found to be negative when it comes to capital account openness, but trade openness has a positive impact. Most interestingly, results imply that India, the only lower middle income country among BRICS is catching up quite fast with the rest of them in terms of financial development, more through development of financial markets, rather than institutions.
Paramita Mukherjee, Poulomi Bhattacharya, Sahana Roy Chowdhury

Financial Intermediation: Banks and NBFCs

Frontmatter
Sectoral Growth and Sectoral Credit: Panel Evidence from Indian States
Abstract
The chapter examines the relationship between sectoral growth and sectoral credit across Indian states during last four decades. Findings based on system generalized method of moments estimations reveal that in the decades of 1980 and 1990, different credit components hardly had any effect on Indian states’ sectoral growth. However, in the 2000s, financial intermediation exerts a positive and significant effect on economic growth, given that service sector credit witnessed the most significant spurt. Contrary to expectations, industrial credit did not affect sectoral growth in the 1990s following a significant deceleration in the industrial sector. However, following the revival of industrial sector in the decade of 2000 and the subsequent period under investigation, industrial credit played a significant role in growth process of states. The rapid growth in Indian economy in the 1990s has been primarily supported by service sector rather than industry. However, major policy concern lies in an optimal allocation of resources through efficient credit delivery mechanism and investment in infrastructure for sustained and balanced growth across sectors.
Samaresh Bardhan, Rajesh Sharma
Are SHG Loans Demand Constrained in Backward Areas?
Abstract
Group lending has been less successful in backward areas compared to more advances area. In this chapter, we argue that group formation eases the supply constraints on loan as the banks’ probability of getting back loan increases, but as expected joint liability payment of the risky borrowers increases their demand for loans. As a result, it is possible that the equilibrium level of loans declines if the proportion of risky borrowers is disproportionately high in any area and their probability of success is low. We argue that people living in backward areas are more risk prone due to low level of infrastructural support such as road, electricity, water supply, healthcare centres and low level of educations, and hence, the result can be used to explain why group lending might have been less successful in backward areas. In backward regions, the proportion of safe borrowers and the probability of success of projects are expected to be low. Our model with adverse selection shows that lending under group contracts in that case may come down in backward areas. We prove that if the conditions are such that both proportion of safe borrowers and probability of success of projects are low, demand for loans may come down outweighing the favourable effects of increase in loan availability due to group contracts. The demand side argument is the innovation we have introduced to show that group lending may not necessarily lead to higher lending.
Bibek Ray Chauhduri, Ranajoy Bhattacharyya
The Effect of Changes in the Policy Rates on Borrowing and Lending of Banks in India
Abstract
This study examines the effect of central bank’s repo rate changes on commercial bank balance sheet items, borrowing, lending, investment, and deposits. More specifically, it explains the relationship between the change of repo rate on bank borrowings and lending at individual bank level. Further, it also examines the more immediate impact of repo rate changes on aggregate bank lending and borrowing with the help of breakpoint tests, which has not been addressed sufficiently by earlier researches. This study is carried out in two parts—firstly, a panel data analysis has been performed with generalized methods of moments (GMM) using data from 43 Indian banks over the period of 12 years, and secondly, a Chow breakpoint analysis has been done with fortnightly bank business data. The findings from panel data analysis suggest that monetary policy decisions have highly significant and positive impact on banks’ annual borrowings and loans. Results of breakpoint study indicate that the effects of policy-level announcements are more impactful and sustaining for bank credit but do not affect banks’ interbank liabilities. Overall, this study explains how monetary policy decisions of the central bank in India are transmitted to the commercial banks.
Aditya Banerjee, Samit Paul
Shadow Banking and Non-banking Financial Companies in India: An Overview
Abstract
Shadow banking as a phenomenon has been around for about two decades and has made its presence felt in the Indian markets as well. This article looks at shadow banking in the Indian financial markets context. It also considers the role that Non-Banking Finance Companies play in the Indian markets as a complimentary lending mechanism to banks and highlight some of the challenges and issues that have been generated due to it. The article also highlights some of the recent problems in this sector in the Indian market and suggests some potential solutions.
Sankarshan Basu, Jaslene Bawa

Issues in Corporate Finance

Frontmatter
The Impact of the Largest Shareholder on Dividend Payout Policy: Evidence from Indian Business Groups
Abstract
This study initially tries to explore the effect of the largest shareholder on dividend payout policy. Next, this study endeavors to examine whether the presence of other shareholders, especially the second-largest shareholder, makes any difference in the existing dividend payout policy through active monitoring over the largest shareholder. Using a sample of Indian business group firms for the period from 2006 to 2019 and applying the linear dynamic panel data estimation technique for 356 listed firms, this study finds that the largest shareholder and the dividend payout show a convex relationship. Applying the same estimation technique for 258 listed firms belong to the Indian business groups during the same period, our study negates the possible monitoring role of the second-largest shareholder when the both largest and second-largest shareholders belong to a promoter group. To maintain a good reputation to the minority shareholders and in order to increase the value of the firm, the largest and the second-largest shareholders as a block are willing to distribute higher dividends when they have other possible ways of rent extractions. Further, the monitoring role of the second-largest shareholder is not found in Indian business groups when the largest shareholder is the promoter and the second-largest shareholder is the non-promoter. Finally, partitioning the non-promoter sample further into institutional and non-institutional categories, our study does not provide any support to the monitoring role of the second-largest shareholder for the sample of all together 98 listed firms for the same period.
Poulomi Lahiri
Regime Switching Dynamic Currency Exposure of Indian Stock Market
Abstract
The study explores the nature of time-varying currency exposure for Indian stock market. It considers a period of twenty-one years from January 1999 to July 2020 that covers some major crisis periods in Indian market including the recent pandemic. Using a Markov switching model, the study finds currency exposure to be significantly volatile and varying over regimes. Exposure shows significant persistence, particularly in the high-risk regime. Results of discrete threshold regression suggest that, historically, the impact of foreign exchange market on time-varying exposure has been stronger than that of the stock market. Risks escalate as the latter plunges into crisis. Mere fluctuations around trend are least likely to increase exposure. Any currency appreciation, however, has been associated with sharp increase in exposure. This raises the risks of having significant and persistent escalation in currency exposure even in a tranquil period. Such behaviour might add to non-idiosyncratic risks of investment making hedging difficult. The issue has bearing for the policy-makers too. The recent pandemic situation is witnessing significant increases in exposure. This calls for adopting suitable monetary policy and providing stimulus to boost up financial markets. As pointed out by IMF, emerging nations might find the situation difficult to cope with.
Gagari Chakrabarti
Measuring the Relationship Among Corporate Environmental Expenditure, Performance and Disclosure
Abstract
The purpose of the present chapter is to develop a sector-specific index that represents companies that fail to allocate sufficient resources towards sustainable environmental practices and as a result are not able to comply with desired level of environmental performances and disclosures. The index is based on minimum sufficiency approach. The chapter analyses the relationship between economic and environmental performances and then incorporates the disclosure aspect. The index at an aggregate level is able to report the intensity of such firms that fail to attain certain industry-specific benchmark requirements of environmental sustainability practices. The study is a novel attempt to formalize the relationship between corporate environmental performances and disclosures in relation to the allocation of resources for such purposes. The index provides new insights to understand the overall sustainability of an industry and add value to the future research in the field.
Abhijit Roy
Assessing the Impact of COVID-19 on Interactions Among Stock, Gold and Oil Prices in India
Abstract
This chapter explores the relationship between stock and commodity prices in the derivatives market, in the Indian context. In order to estimate the long-term relationship, ARDL model is employed on daily data during the period of 2017–2020. The chapter also incorporates the impact of market disruptions on the relationship, following the recent COVID-19 pandemic. The findings indicate that the stock returns and the prices of crude oil and gold are closely related. Interestingly, findings also suggest that the pandemic has altered the relationship. For example, there was no evidence of cointegration among the stock, gold and crude oil prices during the pre-COVID period. However, post-pandemic, evidence of cointegrating relationships exists. Apart from that, some interesting insights from the short-run relationship between the two markets include a mutual influence on each other in the pre-pandemic period; e.g. stock returns are determined by past values of gold and oil price, whereas stock market returns affect volatility in oil price. However, during the COVID period, volatility of gold prices, in addition to crude oil prices, seems to be driving the stock returns.
Paramita Mukherjee, Samaresh Bardhan
Metadata
Title
Revisiting the Indian Financial Sector
Editor
Ph.D. Paramita Mukherjee
Copyright Year
2022
Publisher
Springer Nature Singapore
Electronic ISBN
978-981-16-7668-0
Print ISBN
978-981-16-7667-3
DOI
https://doi.org/10.1007/978-981-16-7668-0

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