Five trends in the financial sector

Book Review: Financial Services. Author: Dr. R. Shanmugam. Photo: Special Arrangement

Book Review: Financial Services. Author: Dr. R. Shanmugam. Photo: Special Arrangement  

Reforms, crisis, convergence, engineering, and inclusion are the five recent trends in the financial sector, says R. Shanmugham in ‘Financial Services’ (

Indian financial reforms started with the Narasimham Committee recommendations, the author traces. “The Committee proposed a wide range of proposals which laid the strong foundation for the strength and the resilience of the financial system today. Reforms were focused on the banking sector, financial institutions (FIs), capital market, and money market.”

As a result of the Committee’s recommendations, SEBI (Securities and Exchange Board of India) was made a statutory body, and the Capital Issues Control Act was repealed to pave the way for an era of free pricing, he reminisces. “SEBI issued guidelines for each of the market intermediaries and made the market micro-structures ready for a more transparent and orderly growth of the market. Global depository receipts (GDRs) were launched in 1992, and investment norms for NRIs (non-resident Indians) and OCBs (overseas corporate bodies) were also prescribed. FIIs (foreign institutional investors) were permitted to invest in the Indian capital market.”

Financial crisis, the second trend listed in the book, is a topic that is fresh in the minds of most of us. Through a timeline, therefore, Shanmugham plots the happenings of recent times, beginning with the surfacing of the US sub-prime crisis in mid 2007, followed by the collapse of Bear Stearns, and the avalanche of failures thereafter.

The spill-over to other economies, or the contagion effect, manifested as reverse capital flows and non-availability of credit, leading to financial turbulence, he rues. “The crisis has affected the real economy. Growth prospects of emerging economies have been affected by the financial crisis.”

Under ‘financial convergence,’ the author discusses ‘universal banking,’ whereby all financial services are made available to customers under one roof. For example, a bank, apart from its ordinary business of accepting deposits and lending money, may also offer investment banking, credit card services, or sell insurance policies.

“Commercial banks in India also market the mutual fund schemes. India Post sells a whole range of saving schemes, gold coins, etc. in addition to its postal services.” Subtle differences in the lines of business of different entities in the system have narrowed down, he notes.

‘Financial engineering,’ the next trend, is about the development and creative application of financial technology for solving financial problems, exploiting financial opportunities, and for otherwise adding value, as Shanmugham explains. The phrase, however, came under a cloud when derivative securities such as CDS (credit default swap) and CDO (collateralised debt obligation) were behind the excessively speculative positions that caused the downfall of many FIs. Hence the caution sounded by Warren Buffett, that these instruments could be ‘financial weapons of mass destruction’!

The fifth and the final trend, ‘financial inclusion,’ is what has repeatedly been mentioned in policy pronouncements of many nations. “Financial inclusion is the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost,” reads a quote from the report of the Rangarajan Committee (2008).

Another definition cited in the book is from the UN, and it speaks of a financial sector that provides ‘access’ to credit to all ‘bankable’ people and firms, insurance to all ‘insurable’ people and firms, and to savings and payment services for everyone.

Good beginner material.

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Printable version | Aug 3, 2020 6:02:02 AM |

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