Indian Financial Systems and Global Trade Dynamics
Unit III: Financial Institutions and Markets
Development Banking and Current Developments
Development banking refers to financial institutions that provide long-term capital for industrial, agricultural, and infrastructure development. Institutions like SIDBI, NABARD, and EXIM Bank support sectors that require large investments and patience for returns. They offer project financing, technical assistance, promotional services, and policy support.
In recent years, development banks have modernized through digital tools, improved risk management, and increased partnerships with private institutions. Their focus has expanded to:
- MSMEs and rural development
- Green financing
- Export promotion
Development banking continues to play a crucial role in balanced growth, innovation, and strengthening India’s industrial base.
Regulation of Stock Exchanges and the Role of SEBI
Stock exchanges are regulated to ensure transparency, investor protection, and fair trading practices. The Securities and Exchange Board of India (SEBI) acts as the main regulatory authority. It oversees the listing of companies, monitors market activities, prevents fraud, and ensures timely disclosure of financial information.
SEBI sets rules for:
- Brokers and mutual funds
- Insider trading
- Corporate governance
It also introduces reforms such as digital trading systems, faster settlement cycles, and investor education initiatives. By maintaining market integrity and reducing risks, SEBI helps build investor confidence and supports the smooth functioning of India’s capital markets.
Banking Sector Reforms
Banking sector reforms aim to improve efficiency, stability, and customer service in the financial system. Since 1991, India has introduced reforms such as:
- Deregulation of interest rates
- Private bank licensing
- Strengthened capital norms
- Improved asset classification and risk management
Reforms encouraged competition, transparency, and technological modernization like ATMs, online banking, and UPI systems. Banks also adopted stricter norms to reduce Non-Performing Assets (NPAs) and improve credit discipline. These reforms helped create a more robust, customer-friendly, and globally competitive banking system. However, challenges like rising NPAs and governance issues still require continuous improvement.
Challenges Facing Public Sector Banks
Public Sector Banks (PSBs) face several challenges, including high NPAs, slow decision-making, excessive regulation, and limited technology adoption. Political interference, outdated systems, and weak credit appraisal often affect their efficiency. PSBs also struggle with competition from private and digital banks, which offer faster services and better customer experiences.
To address these issues, the government has focused on:
- Recapitalization and mergers
- Stricter governance
- Digital transformation
Strengthening PSBs is important for India’s financial stability, as they handle a significant share of deposits, lending, and government transactions.
Growth and Structure of NBFIs
Non-Bank Financial Institutions (NBFIs) include NBFCs, housing finance companies, microfinance institutions, and pension funds. Their growth has increased due to flexible lending, quicker processing, and the ability to serve sectors ignored by banks. NBFCs support retail loans, infrastructure projects, vehicle finance, and MSME credit.
The structure of NBFIs is changing with stronger regulations, digital platforms, and improved risk management. After crises like IL&FS, the government tightened norms to ensure stability. Today, NBFIs complement banks by expanding credit access, promoting financial inclusion, and supporting specialized financial services.
Unit IV: Foreign Trade and Global Integration
India’s Foreign Trade and Balance of Payments
India’s foreign trade has expanded significantly over the years, with major growth in exports of IT services, pharmaceuticals, engineering goods, and textiles. Imports mainly include crude oil, machinery, electronics, and gold. The Balance of Payments (BOP) reflects these trade movements along with capital flows like foreign investment and remittances.
While India often faces trade deficits due to high import needs, strong remittances and capital inflows help stabilize the overall BOP. Globalization, trade agreements, and policy reforms have shaped India’s trade pattern, increasing competitiveness and diversifying export markets across Asia, Europe, and North America.
Latest Foreign Trade Policy
The latest foreign trade policy focuses on promoting exports, supporting MSMEs, simplifying procedures, and boosting manufacturing under the “Make in India” initiative. Key areas include:
- Digital documentation
- Incentives for high-value exports
- Improved logistics and sector-specific support
The policy encourages exporters to use global value chains, adopt new technologies, and explore emerging markets. Special focus is given to sunrise sectors like electronics, green energy, defense exports, and services. The objective is to make India a major global trading hub and strengthen foreign exchange earnings.
India’s Overseas Investments
India’s overseas investments have grown steadily as companies expand to global markets for higher profits, strategic assets, and new technologies. Indian firms invest in sectors such as IT services, pharmaceuticals, manufacturing, energy, hospitality, and telecommunications. These investments help companies gain an international presence and diversify operations.
The government supports overseas investment through regulatory easing, financial assistance, and diplomatic partnerships. Outward investments also strengthen India’s global economic influence and create opportunities for collaboration and innovation.
Policy Towards Foreign Direct Investment (FDI)
India’s FDI policy aims to attract global capital, technology, and expertise. The government has liberalized most sectors, allowing up to 100% FDI under the automatic route in areas like manufacturing, e-commerce, and infrastructure. Restrictions remain in sensitive sectors like defense, media, and insurance.
FDI contributes to job creation, export growth, competition, and modernization. India continues to refine its FDI framework to maintain a balance between national interests and global integration.
Globalization Trends in the Indian Economy
Globalization has deeply influenced India through increased trade, investment, technology transfer, and cultural exchange. Since the 1991 reforms, India has integrated with global markets, attracting foreign companies and expanding its own businesses abroad. Sectors like IT, telecom, automobiles, retail, and finance have grown rapidly due to global linkages.
However, globalization also brings challenges such as competition, dependence on global markets, and exposure to international crises. Overall, it has accelerated growth and modernization in the Indian economy.
The Role of Multinational Corporations (MNCs)
Multinational Corporations (MNCs) play a major role in India’s economy by bringing investment, technology, modern management, and global best practices. They operate in sectors like automobiles, FMCG, IT, and pharmaceuticals. MNCs create jobs, support supply chains, and enhance productivity.
Their presence increases competition, pushing domestic firms to innovate. However, MNCs may also dominate markets, influencing pricing and local industry stability. India regulates MNC operations to balance national interest with economic benefits.
Impact of Multilateral Institutions
Multilateral institutions influence India through financial assistance, policy guidance, and trade regulations:
- IMF: Supports India during Balance of Payments crises and provides macroeconomic advice.
- World Bank: Funds development projects in infrastructure, education, health, and rural development.
- WTO: Sets global trade rules affecting tariffs, subsidies, and market access.
These institutions encourage reforms and promote transparency, though their policies may sometimes limit domestic flexibility. They shape India’s business environment by promoting stability and international cooperation.
Detailed Role and Objectives of SEBI
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in 1988 and granted statutory powers on January 30, 1992, through the SEBI Act, 1992. Initially, SEBI was a non-statutory body; however, it was later empowered to promote orderly growth and provide protection to investors.
Objectives of SEBI
The main objective is to create an environment that facilitates the efficient mobilization and allocation of resources. This environment serves three main groups:
- Issuers: Providing a marketplace to raise funds efficiently.
- Investors: Protecting rights by providing accurate and authentic information.
- Intermediaries: Offering a competitive and professionalized market with efficient infrastructure.
Mechanics and Functions of Stock Exchanges
The secondary tier of the capital market is the stock exchange. It is a virtual market where buyers and sellers trade existing securities such as shares, stocks, debentures, bonds, futures, and options. In India, the most prominent exchange is the Bombay Stock Exchange (BSE). There are a total of twenty-one stock exchanges in the country.
Functions of the Stock Exchange
- Liquidity and Marketability: Enables securities to be converted to cash at a moment’s notice.
- Price Determination: Prices are determined via the laws of supply and demand, tracked through indices like the Sensex.
- Safety: Transactions occur within a legal framework governed by SEBI, ensuring investor protection.
- Contribution to the Economy: Mobilizes idle funds into productive economic activities.
- Speculation: Provides a platform for healthy speculative trading within legal limits to maintain liquidity.
Linkages Between Banks and Non-Banks
Non-bank and informal credit institutions are both competitive and complementary to banks. The distinction between the two has blurred as both engage in similar activities. Banks often function as wholesale credit institutions, while non-banks serve as their retail arm. This creates a working synergy in the financial ecosystem.
The Reserve Bank of India (RBI) is vested with powers to supervise the deposit-taking activities of all NBFCs. Under the Reserve Bank of India Act (amended in 1997), NBFCs must:
- Maintain a minimum entry point norm (₹20 million).
- Obtain certificates of registration from the RBI.
- Maintain liquid assets and create a reserve fund (transferring at least 20% of net profits).
Unincorporated entities are strictly banned from taking deposits from the public to ensure financial stability.