Indian debt market: Realities and issues

Abstract

Traditionally Indian banking system provided the much-needed financial support to industry and commerce. Till the onset of financial sector reforms in early 1990s the Indian industry depended heavily on banks and development financial institutions for their working capital and long-term projects respectively. Capital was scarce and hence, needed rationing to areas and sectors where the government wanted and prioritized. The existence of Controller of Capital Issues was the guiding force behind investment where public support was needed. At the time of its liberation from the British in 1947 India had only the traditional commercial banks and these banks were small and owned by private companies who had other interests in business and promoted banks to channelize resources to their activities. It was no different from earlier fragmented banking system of the USA. These banks supplied shorter maturity credit for working capital needs of the industry and commerce as major infrastructure, manufacturing facilities, etc. were financed by the Government through priorities in Five Year Plans. Public sector undertakings were set up to achieve the industrial self reliance objective of the nation. The role of creating capital formation was shifted primarily to the PSUs. The banks were willing to fund basically the working capital requirements of the credit-worthy borrowers on the security of tangible assets. These PSUs were funded through budgetary support as well as support from the DFIs. Thus emerged a well-knit structure of national and state level development financial institutions (DFIs) for meeting requirements of medium and long-term finance of all range of industrial units, from the smallest to the very large ones. Government as well as Reserve Bank of India nurtured DFIs through various types of financial incentives and other supportive measures.