The New Role of Finance in India

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The economic liberalizations in 1991 have outlined the New Role of Finance in India. The finance sector experienced massive inflow of foreign direct investment, expansion as well as diversification of the individual units within various sectors.

The Indian companies on account of the liberalization procedure were made to face competition from foreign companies and were thus compelled to up grade quality of their products. The boom in the information technology sector aided the financial sector immensely.

Modifications in the financial sector:

In order to incorporate changes in the financial system, modifications in three significant aspects of the financial sector was necessary which comprises of the exchange rate policy, interest rate policy, capital transactions etc. The banking sector in any country serves as the most significant institution in the financial sector, experienced a sea of changes. Major development in the banking sector was witnessed in the year 1969, when most of the Indian banks were nationalized. Thus, the banking industry came under the public sector. The nationalization of the banks changed the entire scenario of banking activities throughout India, new policies were formulated and the hitherto challenged sectors were offered financial and advisory assistance to bring in simultaneous development in those sectors too. The agricultural sector was immensely facilitated by the nationalization of the banking sector. Plans were chalked out to improve the standards of the backward sections of the society by arranging for credit to start off new businesses and improve the existing ones. Therefore, the New Role of Finance in India was witnessed through the rapidly changing banking framework.

The new role of finance in India- Overview:

The nationalization of the banking system made the system more organized as well as strong and thus aided the banking sector in fighting successfully with the financial crisis that had effected a large fragment of the Asian population. The system had certain deficiencies. The Indian baking system did not maintain a planned cost structure and was also unable to match its steps with the changing market needs and the rising competition. The other drawback existing within the Indian banking system was the rigidity that lay within the decision making procedure. Thus, the role of finance as an accepted norm is to reflect the "real economy". The other significant cause behind the high cost of banking is that the percentage of the average cost of operation of banking activities out of the assets is much high compared to the development economies in the world. The changing market demands have again brought India at the face of a challenge and the new role of finance in India would be to accept this challenge and incorporate new policies again to meet the changing market demands. As a first step towards this goal, the banking system should be up graded to bring in reductions in the cost of operation.