Financial developments

Developments

1.55 Trends in disbursement of development financial institutions (DFIs) seem to reflect the investment slowdown in corporate industry. Disbursements grew by only 11.8 per cent during April-December 1999 compared to a growth of 14 per cent in April-December 1998. The picture is reversed if we include the Investment Institutions. Disbursements by All-India Financial Institutions (AIFIs) increased by 17.2 per cent during April-December 1999 as against 13.6 per cent during the corresponding period of 1998. Growth of Sanctions by DFIs has decelerated to 9.7 per cent in April-December 1999 from 27.5 per cent in April-December 1998, while that of AIFIs has decelerated to 15.5 per cent from 26 percent in the corresponding period.

1.56 Despite the industrial slowdown in the last few years, fears of sharp deterioration of non-performing asset (NPAs) in 1998-99 have not materialised. Net NPAs of Scheduled Commercial Banks declined marginally from 3.0 percent of their total assets on March 31,1998 to 2.9 per cent on March 31,1999. This was due to a decline of net NPAs of public sector banks from 3.3 percent to 3.1 percent and of foreign banks from 1 percent to 0.8 percent. The net NPAs of private banks, however, increased from 2.3 per cent to 2.8 per cent.

1.57 The stock market started picking up in January 1999, even before the Budget. It was strongly boosted by the Budget. This reflected increasing confidence in the recovery in industrial growth, which started in the last quarter of 1998-1999, and the policies and provisions in the budget. Despite the political uncertainty created by the dissolution of Parliament and the usual market fluctuations, stock prices have maintained a clear uptrend in 1999. The phenomenal spurt in Information Technology stocks witnessed in international markets was mirrored in the Indian market and contributed greatly to sustaining the rising trend. Market improvements such as the expansion of dematerialised scrips to 200 and the high proportion of deliveries in this form (90 %) has contributed to the rise. Primary issues have also started recovering, with a growth of 46 per cent in April-December 1999 over the corresponding period of last year.

1.58 During April-December, 1999, gross inflows into Mutual Funds were Rs.35915 crore as against Rs.16,288 crore in April-December 1998. Net inflows into mutual funds amounted to Rs.12194 crore over the same period as against an outflow of Rs.950 crore during the whole of 1998-99. Sector funds emerged for the first time, covering sectors such as information technology, pharmaceuticals, and fast moving consumer goods. Dedicated Gilt Funds with 100 percent investment in Government securities were introduced, increasing the accessibility of the gilt market to small investors.

Reforms

1.59 The Insurance Regulatory and Development Authority Act 1999 was passed by Parliament. This is a major milestone in liberalisation as it opens the way to private entry into the insurance business, which has been a government monopoly for decades. It also provides statutory backing to the Insurance Regulatory and Development Authority. Under this act foreign equity will be restricted to 26 per cent.

1.60 An ordinance was issued to amend the Recovery of Dues to the Banks and Financial Institutions Act, so as to strengthen the provisions for recovery of dues owed to them. A bill to amend the SIDBI Act 1989 was passed by the Lok Sabha. This bill proposes to de-link SIDBI from IDBI for greater functional autonomy and flexibility in operations. It also provides for enhancement of SIDBI’s authorised capital.

1.61 Prudential norms for banks were strengthened by requiring a risk weight of 2.5 per cent in all investments in approved securities (including securities outside the SLR), with effect from the year ending March 31, 2001.

1.62 Measures of de-control in credit and money markets included the following :

• Interest Rate Swaps and Forward Rate Agreements allowed.
• Access to repo markets to select non-bank institutional participants.
• Cheque writing facility to Money Market and Gilt Mutual Funds.
• Banks'' venture capital investment exempt from 5 per cent ceiling on investment in shares and securities.

1.63 A number of steps were taken to liberalise and upgrade the capital market.

• The Securities Laws (Amendment) Act, 1999 passed by the Parliament in December 1999 expands the definition of securities to include derivatives and units of Collective Investment Schemes. This will allow the introduction of index futures and other derivatives and strengthen the legal framework for regulating Collective Investment Schemes.
• SEBI notified the draft Regulations for Collective Investment Schemes.
• The Securities Laws (second amendment) Act, 1999 amends the SCRA, 1956, the SEBI Act 1992 and the Depositories Act 1996 to empower the Securities Appellate Tribunal to dispose of appeals under these Acts.
• The requirement of "actual payment" of dividends before an Initial Public Offer (IPO) was replaced by an "ability to pay" criterion.
• The "par value" concept was abandoned so that companies can now issue shares of any value. Companies with demat shares can alter the par value indicated in the Memorandum and Articles of Association. Existing companies with shares of Rs. 10 or Rs. 100 can avail of this facility by consolidating or splitting these shares.
• SEBI issued Regulations for Credit Rating Agencies.
• RBI issued 3 more Primary Dealer licenses taking the total to 14.
• 182-day Treasury bills were reintroduced.
• The first ever price based auction was conducted by RBI in May 1999.