Development of the Banking System in India and China - Coursework Example

Analyse and compare the development of the banking system in China and India highlighting the key changes that have taken place in the last 15 years. Introduction Comparing the banking system of India and china is both challenging and exciting, and may lead to considerations in policy implication targeting both countries. The paper will focus on comparing the robustness and structure of the banking system in china and India as well as the essence and effectiveness of the banking supervisory systems (Swamy, V. Banking Sector Reforms 3.0 for India, 2010). Comparing the development of the banking system in India and China Both India and china are large, expanding economies with huge number of citizens, which support their economic weight in the globe. The transformation of India and china has led to strong implications to the other countries in the world. The emergence of both countries as economic giants serves as a wakeup call for the states that are already developed. It is indeed true that both countries posses reform minded government and cheap labor in favor of huge domestic markets and market oriented economies. China and India have proved to be capable of maintaining and managing strong economies as well as maintaining high growth rate that is roughly eight percent for India and nine percent for china over the past years (Tan, 2009). It is essential to note that high rate of growth for the two countries are critical, since the government depends on it to generate employment to millions of people that joining the labor force every year. Such are some of the limitations both economies are facing as they strive toward becoming world economic giants. It is therefore unfair for developed nations to enact trade barriers targeting the two emerging nation and should work towards integrating and engaging them into global economies. Basing on the banking industry, it is true that china and India share many attributes, especially in terms of the structure of the industries. In addition, both countries depend on banking system as a source of finance to support the growth of the economy since the capital markets are less developed. The Chinese banking sector for example, represent more than ninety percent of the assets present in the financial sector. India, on the other hand, is represented by only seventy four percent based on the total financial assets. The balance is topped up by the non bank financial institutions in India in which 15.4 are investment institutions while 8.6 percent are term lending institutions. In china, however, such institutions can be considered as banking institutions in some ways. Additionally, the commercial banking sector proportion is expected to be on the rise in the coming years (Roland, C. Banking Sector Liberalization in India, 2012). Dominant state ownership is another common attribute of the system of banking in both countries. The approach is however different compared to the systems found in most of the developed countries in the world as a result of its negative implication on the performance and conduct of the sector. All major commercial banks in china, until recently, were controlled by the local and central governments expect may be two or three. The same also applied to other small commercial banks (Vadhar, 2011). The banking sector in china is highly concentrated. The bank of communication which is owned by the central government together with the four large banks in the country that are known as state owned commercial banks until the ownership was diversifies recently account for two three quarters of the commercial bank assets. It is indeed true that the foreign institutions investor’s equity participation and the public listing overseas as in the case of BoCom and bank of china , the ownership structure of the state owned banks in the countries has tremendously changed. However, there exists a perception that the Chinese government will continue keeping majority in the said banks to more than half. . The Indian government decreased the lending rate of RBI to other banks leading to a decline in the lending rate of banks. Repo rate is the percentage at which the national bank of India lends money to other banks. The table below indicates the changes in India and Chinese central banks’ interest rates 1987 1990 1991 1992 1997 2001 2007 2011 2014 Central bank interest rate( India) 10 14.6 11 22.00 25.00 9.00 6.50 7.75 8.00 Central bank of china interest rate 11 15 21 24.00 26 5.4 6.2 5.9 6.00 A graph showing the central bank’s interest rate in India and China A strong emphasis on lending between the state ownership banks in China to the state owned enterprise has continued to exist. The large banks which are controlled by the state has concentrated heavily on lending to the state owned enterprises whereas the 2nd and 3rd tier, city commercial banks and joint stock are oriented toward those enterprises that are not owned by the state. India however is characterized by a large number of banks with mixed ownership. Moreover, the 27 public sector banks are controlled and owned by the state. The banks that are owned and controlled by the state have continued to dominate the Indian commercial banking landscape. Despite the public sector banks accounting for nearly quarter of the shares in the market, the state policy has ensured the equity interest does not go below 51 percent. As in case with many developing and developed countries, the efficiency of banks owned by the state has continued to be a concern for both Indian and Chinese government (Manjusha Goel, 2012). India has for many times admitted that the private sector banks outshine those that are owned by the state. However, the effort to restructure the banking system in both economies is still in progress. Both countries have continued to promote progress in the banking sector though initiation and enactment of various policies (Ma, 2007). The Chinese government for example has been at the forefront in reforming the state owned banks. Although against such background, the Chinese government has injected money aimed at recapitalizing the central bank of china, the bank of china, commercial bank of china and BoCom with an intention of paving way to ensure restructuring as well as restoring their solvency. Other elements of reform package includes, offering shares to strategic foreign investors, recovering of government investments, disposal of non performing loans, retreat of government holdings and restructuring into joint stock limited companies. In conclusion, India and china have both accomplished a great deal in improving and reforming their banking industries in the recent years. Since state ownership will continue to dominate the banking system in both nations, the major challenge for both nations will be to ensure the banks are able to operate just like other banks while at the same time balance the government’s role as supervisors and owners (Demetriades & Luintel, 2010). The corporate governance of the Chinese state owned banks for example, is dramatically changing as a result of foreign equity participation. Despite the supportive policies of the government towards the banking sector in the two nations, state owned banks have a task of demonstrating that they are the right mechanisms to maximize and deliver the shareholders’ values. References Demetriades, P., & Luintel, K. (2010). Financial Development, Economic Growth and Banking Sector Controls: Evidence from India. The Economic Journal, 106(435), 359. doi:10.2307/2235252 Ma, J. (2007). China's banking sector: From administrative control to a regulatory framework. Journal Of Contemporary China, 5(12), 155-169. doi:10.1080/10670569608724247 Manjusha Goel, M. (2012). Impact of Technology on Banking Sector in India. IJSR, 2(5), 380-383. doi:10.15373/22778179/may2013/130 Roland, C. Banking Sector Liberalization in India. 2012. SSRN Journal. doi:10.2139/ssrn.877811 Singh, K. India-EU Free Trade Agreement: Should India Open Up Banking Sector?. SSRN Journal. doi:10.2139/ssrn.1576404 Subramanian, U. A Comparative Study on Banking Sector Profitability, Credit Risk and Determinants in India and China. SSRN Journal. doi:10.2139/ssrn.2139839 Swamy, V. Banking Sector Reforms 3.0 for India. SSRN Journal. doi:10.2139/ssrn.2265174 Tan, M. (2009). Foreign investments in China's local banking sector – the Australian experience. China Economic Journal, 2(2), 209-217. doi:10.1080/17538960903083525 Vadhar, D. (2011). Corporate Governance in Banking Sector. IJAR, 3(11), 264-267. doi:10.15373/2249555x/nov2013/87 Read More