Page 24 - DMGT401Business Environment

Unit 1: Indian Business Environment

Welch Centre. Similarly, many MNCs have established their R&D centres in India and Notes
many others are following suit.
7. Indian companies are earning laurels in terms of quality, earlier considered a major
drawback of Indian companies. But in the last few years India has won a good number of
Deeming Prizes for quality.

8. "Over the last seven years one country has been figuring prominently on the list of Deeming
Prize winners. It's not Japan, but India. Ever since Sundaram - Clayton became the first
Indian company to win the award in 1998, 11 more Indian firms have won it." (Business
Today, Jan 29, 2006, P.88)

Financial Environment

The major objectives of the financial sector reforms fall under the three broad categories:
1. Measures aimed at removing the external constraints bearing on the profitability of banks,

2. Measures aimed at improving the financial health of banks by introducing appropriate
prudential norms, and
3. Measures aimed at institutional strengthening including improving the competitiveness
of the financial system.
However, for convenience these measures can be related to issues of ownership, competition,
regulation and policy stance.
The thrust of reforms in this area relates to privatization and restructuring. Public sector banks
have been permitted diversified ownership by law subject to 51 per cent holding of Government/
RBI/SBI. IFCI and IRBI were converted into public limited companies. The Industrial Development
Bank of India Act, 1964 was amended to allow IDBI to raise capital up to 49 per cent of its paid up
capital from the public. Legal amendments have been made to induct private participation in
the Board of Directors. As a part of restructuring efforts, weak public sector banks were
recapitalised through budgetary support.
New private sector banks have been established and Local Area Banks have been licensed to
instill a greater element of competition in the financial system. There is a more liberal policy of
permitting branches of foreign banks. In the area of interest rate, the administered structures
were dismantled, both on the deposit and lending side. The lending rates were rationalized to
two categories and on the deposit side, the Reserve Bank of India (RBI) prescribes only one rate
in the 30 days to one year category and that too in the form of 'not exceeding 9.0 percent'.
Further, credit norms have been liberalized and banks now have more freedom to open new
branches/upgrade existing extension counters.
Prudential norms have been introduced based on objective criteria for income recognition, asset
classification and provisioning. The Basle Committee framework for capital adequacy has been
adopted. A Board for Financial Supervision has been set up for exercising integrated supervision
both, on-site and off-site over banks, financial institutions and finance companies. Besides,
several steps have been taken to improve the audit system in general. Non-banking financial
companies have been brought under more effective supervision of RBI.
The Indian banking system operated on a high level of reserve requirements for a long time.
Progressive reduction has brought down the Statutory Liquidity Ratio from 37.5 per cent to 25
per cent on an incremental basis and the Cash Reserve Ratio, including incremental CRR from
25.0 per cent and 10.0 per cent. As mentioned earlier, there is near full deregulation of both
deposit and advances interest rates. The financial sector is now operating in a more open and
more market oriented environment. Government debt is now mostly at market rates. Foreign
exchange rate is also market-determined.

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