Introduction Both India and China have introduced significant financial sector reforms with a view to improving efficiency

and enhancing stability of their financial systems. This report attempts a comparative study of financial systems in India and China, especially in the context of the financial sector reforms and identifies the challenges ahead. The study finds that although the financial systems in both the countries continue to be dominated by the public sector banks, there were significant differences in the initial conditions. At the time of initiation of reforms, while India had a reasonably well developed financial system, China had to start virtually from nothing. Not surprisingly, the nature of financial sector reforms undertaken in the two countries has been different in many respects. Initiation of various financial sector reforms has helped over the years in making the Indian financial system quite robust. The financial system of China has also witnessed some improvement, although several challenges remain. The future challenge for the Chinese authorities is to strengthen the banking system and further reform the capital market. The major challenge for the Indian financial system is to bring down the intermediation cost of the banking system. The financial system plays an important role in promoting economic growth not only by channelling savings into investments but also by improving allocative efficiency of resources. The recent empirical evidence, in fact, suggests that financial system contributes to economic growth more by improving the allocative efficiency of resources than by channelling of resources from savers to investors. An efficient financial system is now regarded as a necessary pre-condition for growth. This shift in the emphasis along with opening up of domestic economies to international competition has encouraged emerging market economies (EMEs) such as India and China to introduce financial sector reforms. It is now widely recognised that stability of the financial system is critical for a sustainable growth. China has been growing rapidly ever since it introduced structural reforms in 1978. With the real per capita income rising over five fold, China has been able to get over 200 million people out of poverty (Tseng, 2007). While Chinas macroeconomic performance has been quite robust, its financial system has accumulated nonperforming loans (NPLs) to a considerable extent. The macroeconomic performance of India has also improved significantly in the post-reform period. The Indian economy has become quite resilient over the years. Importantly, Indias improved macroeconomic performance has been associated with a significant improvement in its financial system. Emerging markets like India have exhibited a strong growth momentum, driven by a robust demand, consumption and savings rate. A study by World Bank supports this by forecasting that the share of the five big emerging economies India, China, Indonesia, Brazil and Russia in 2020 will double to 16.1% from 7.8% in 1992.

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Indian financial system The Indian financial system is reasonably well developed with both the banking system and the capital market which playing an important roles. There has been significant improvement in the profitability of the banking system. The capital market in India has also undergone the changes in the recent past and is now comparable to the best in the world. There are significant differences in the financial system of India and China. The Indian financial system is reasonably well developed with both the banking system and the capital market playing important roles, even as the financial system is dominated by the banking system. There has been significant improvement in the profitability of the banking system as a result of which the financial system, on the whole, has become relatively safe, sound and efficient. The capital market in India has also undergone the changes in the recent past and is now comparable to the best in the world. India has been one of the best performers in the world economy in recent years, but rapidly rising inflation and the complexities of running the world's biggest democracy are proving challenging. India's economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market. Like most of the world, however, India is facing testing economic times in 2008. The Reserve Bank of India had set an inflation target of 4%, but by the middle of the year it was running at 11%, the highest level seen for a decade. The rising costs of oil, food and the resources needed for India's construction boom are all playing a part. The report mentions the challenges faced by the banking industry, most importantly that of enhancing inclusive growth. Only 37% of bank branches of Scheduled Commercial Banks are present in rural areas, with only around 40% of the population holding a bank account. Moreover, out of the 600,000 villages in the country, only about 30,000 have a commercial bank branch. Promoting financial literacy, re-structuring of MFIs, support of technology, simple product offerings and regulating the self-help groups, are some of the steps that have been suggested to help increase the reach of banking services.

"Infrastructure financing has been featured in the report as a key pillar of growth, with banking sector having an increasing role to lend further momentum to this sector. The report lays emphasis on the role of the private sector towards funding infrastructure development, apart from strengthening the corporate bond market and increased participation from pension funds and insurance companies," PwC says.

The Indian capital market giving a snapshot of the current state of each segment of the capital market. The report highlights the fact that with a population of more than a billion, a mere 1% of the population participates in capital markets, and of that only a fraction is active.

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A huge challenge for financial institutions today is functioning and retaining their efficiency in such uncertain times. Business models are undergoing a structural change to accommodate the changing regulations and foster growth. There needs to be a well-defined framework which will withstand disruptions and lead the financial markets towards growth and progression.

Chinas financial system Several improvements have also taken place in the financial system of China. The level of NPAs over the years has declined significantly. The intermediation cost in China has also declined quite significantly. The capital market in China has grown rapidly. The Chinese financial market is still lacking in product varieties. Financial deepening is still inadequate and there are hardly any innovations

Several improvements have also taken place in the financial system of China. The level of NPAs over the years has declined significantly, even as it continues to be large by international standards. The intermediation cost in China has also declined quite significantly. The capital market in China has grown rapidly. Empirical evidence also suggests that firms stock prices do reflect their fundamentals to a significant extent indicating that stock prices play a role in giving information about issuers fundamentals. Notwithstanding several initiatives by the Chinese authorities to reform the financial system, there are several areas which merit attention. The banking system continues to be characterised by large nonperforming loans. Financial intermediation in China continues to be largely bank-based with the capital market playing only a peripheral role in the financial system. The share of capital market funding remains small in comparison with that in developed economies. In the first half of 2007, bank deposits constituted the largest source of funding (83 per cent) cornon-financial sector (including households, enterprises and government), followed by treasury bonds (12 per cent), stocks (4.6 per cent) and company bonds (0.4 per cent)( Li Wei, 2007). There is evidence to suggest the prevalence of excess capacity build-up in several manufacturing industries and real estate. One of the major reasons for this has been the large proportion of lending to the SOEs. The Chinese financial market is still lacking in product varieties. Financial deepening is still inadequate and there are hardly any innovations (Xiaochuan2007) Chinas monetary system is still dominated by direct control measures in the form of credit and interest rate ceiling and reserve requirements. The size of the primary capital market is small with limited number of new issuances of debt and equity. Also, the majority of shares (accounting for about two-third of stock market capitalisation) are not traded. It needs to be noted that unlike in India, reforms in the real sector in China preceded reforms in the financial sector. In comparison with the agricultural and industrial reforms, the reforms in the financial sector in China moved at a slow pace. It was perhaps due to this reason that the financial sector remains vulnerable. In India, on the other hand, financial sector reforms started early in the reform cycle which imparted in a significant way efficiency and stability to the financial sector (Reddy, 2003). The faster reforms in the other sectors of the economy call for quick reforms in the financial sector in China.

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Financial Intermediaries in China Category (As at end-December 2007) Assets % of Total Assets

1. Commercial Banks (i to iv) 20,511 74.2 i) State-owned commercial banks 15,194 55.0 ii) Joint-stock commercial banks 3,817 13.8 iii) City commercial banks 1,462 5.3 iv) Rural commercial banks 38 0.1 2. Co-operative Banks (v+vi) 2,798 10.1 v) Urban credit cooperatives 147 0.5 vi) Rural credit cooperatives 2,651 9.6 3. Policy Banks 2,125 7.7 4. Other institutions (vii to ix) 2,205 8.0 vii) NBFIs 910 3.3 viii) Postal Savings 898 3.3 ix) Foreign funded FIs 397 1.4 Total (1 to 4) 27,639 100.0 Source : China Banking Regulatory Commission (www.cbrc.gov.cn) This table indicate about the financial intermediaries in China which was of the year 2007. And on that the first is the Commercial Bank which asset were about 20,511 and which account for total assets was 74% and in that the State- owned commercial bank, Joint stock commercial bank, City commercial and rural commercial bank. While the second is the Co- Operative Bank which was about nearly 2800 assets and which account for total assets was 10% and in that include the urban credit cooperatives and rural credit cooperatives. Then third is the Policy Banks which include about 2125 total assets and which account for 7.7% of total assets. And the fourth is the other institution which about 2200 assets and which account for 8%, and which include NBFIs, Postal Savings and Foreign Funded FIs. Future of India and China Nobody can afford to ignore India and China these days: certainly not the CEOs of multinationals seeking to either leverage low-cost and increasingly skilled workforces or gain access for their products or services to the worlds largest and fastest-growing developing markets; not the US government, when China holds more than $1 trillion in treasuries and other foreign currency reserves; Western consumers who are having to cut back on cheap imported goods while at the same time worrying whether their jobs might be offshored to India or another low cost center.

Even without these credit crunch-driven concerns, the rapid rise of these two new economic superpowers, whos combined population of 2.4 billion represent 40% of humanity, compels attention. For what is happening is a huge shift of economic gravity from West to East. Or, if you take the extremely long view, a return to the global balance of 200 years ago, when China and India between them accounted for roughly half of the worlds economic activity.

If projections based on recent annual growth rates of around 11% for China and 9% for India hold good, then these two countries will generate half of global GDP by 2050. By that time China will be the worlds largest economy, with the US relegated to second place, followed closely by India. The two Asian giants will between them consume the lions share of the worlds additional energy production. And unless there is a radical move away from their dependence on coal combined with an introduction of clean technologies, they will become the worlds largest emitters of greenhouse gases.
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How much credit crunch affect to India and China

Those projections depend on a number of assumptions, the most crucial being the depth and extent of the current recession and whether recent momentum toward free trade and globalization continues. Until quite recently there was a strong body of opinion that the credit crunch and any resulting downturn would be restricted to the United States and other advanced economies while China, India and the other developing economies would motor onward. Their economies, it was argued, had decoupled. That was before this springs sell-off in Asian markets, which saw the Shanghai Composite index tumble by 43%admittedly from high valuations of an average price/earnings ratio of around 50 times earningswhile Bombays Sensex dropped by nearly a third.

While Villamin is unimpressed by arguments about the decoupling of emerging economies, he does not foresee the US slowdown causing a financial Armageddon. It will be felt in the emerging world, he says, but that need not translate into outright recession in either China or India. Rather, on the basis of the US economy achieving a modest 1% GDP growth this year, he sees Chinas growth rate slowing from 11.5% in 2007to a still respectable 9.8% this year and 9.3% in 2009. Similarly, Indias growth rate is forecast to slip from 8.7% to 7.8% in 2008 before picking up again to 8.3% next year. The difference, Villamin explains, is because with India the trade account is not so important a driver of the economy. As a result, he sees China as being more exposed to the global credit crunch. Apart from the fallout from a slowdown in global trade, future growth prospects will depend very much on how far the two countries governments and central banks are willing to go to curb rising inflation. Again, China, with inflation currently running at 8.7%, seems to be facing the tougher challenge, and premier Wen Jiao Bao has declared this a priority. However, both countries are faced with sharply higher commodities prices on international marketsespecially the recent surge in rice, which recently hit a 34-year record. Chinas top-down decision-making structure may be better placed to cope with this particular challenge. Its central bank is expected to attack inflation by freezing interest rates, tightening money supply and allowing the renminbis 6.7% appreciation so far against the US dollar (in which most commodities are priced) to continue. Yet one of the challenges that India faces in a world of sharply rising commodity prices, observes Villamin, is that as a fairly closed economy it continues to subsidize fuel and agricultural goods at prices which are well below those of the global market. And Indias democratically elected coalition government has nowhere liked the same leeway that the Chinese leadership has in imposing radical policy shifts from above. The inability of the government in Delhi to push through major infrastructure projects in the face of local interests, state governments and an independent but slow-moving judiciary that is capable of defending individuals rights may frustrate central policymakers and foreign investors alike, but at least it represents a system of checks and balances that is absent in China.

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Competition between India and China

The two Asian giants as inverted images of each other, arguing that what China is good at, India is not. The absence of overriding central authority in India may explain why China can build cities overnight while Indians have trouble building roads. And the fact that each country has developed quite separate strengthsChina as the worlds factory and India as its back officedid not occur because policymakers signed up to a non-compete clause but because each is hard-wired to excel in different fields. For instance, many Indians facility with English and soft skills make them supremely adapted to IT programming and staffing call centers, but the countrys inadequate transport infrastructure inhibits their competing in finished goods as the Chinese do. The opposite is true of China. As Villamin points out: Actual production costs in India are quite low, and on that basis alone it could be competitive in supplying finished manufactured goods such as motorcycles. That may explain why, until recently, both India and China have focused on selling their goods and services to the developed world rather than to each other. Bilateral trade has grown from just $5 billion in 2003 to around $38 billion over the past five years. But that is small change compared to their exports to the US, Europe and other developed countries.

Moreover, further growth in bilateral trade, expected to reach $60 billion by 2010, is likely to raise tensions between the two countries. The trade balance is skewed heavily in Chinas favor, the surplus rising from $4 billion to $9 billion last year, with Indian businessmen complaining that the renminbis link to the declining US dollar gives Chinese exporters an unfair advantage. Add to that the fact that Chinas exports are mainly manufactured goods, while bulk commodities such as iron ore still make up a large part of Indias trade with China, So it is hardly surprising that, during his recent visit to Beijing, Indian Prime Minister Mr. Manmohan Singh called for the dismantling of non-tariff barriers and tougher action protecting IT and other intellectual property rights. The rivalry now extends to the Indian Ocean, with Delhi pursuing defense and commercial engagement
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with countries such as the Seychelles, Mauritius and Mozambique in order to counter Chinese expansionism, according to a recent report by Chatham House, the London-based think tank, which points out that most of Indias trade and 89% of its oil arrives by sea, so keeping shipping lanes safe is a strategic priority. So which of the two, the elephant or the dragon, is set to achieve global dominance? As things stand, most of the money is backing China, though a question mark remains as to whether it can continue to combine market-driven growth with a system of social stability built around the absence of democratic freedoms and property rights over the long term. As for India, it has been slower off the blocks and certainly needs a firmer sense of direction. But it is more likely to stay the course.

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Recent Growth Trends in Indian Economy India's Economy has grown by more than 9% for three years running, and has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with 60% of India's 1.1 billion population living off agriculture and with droughts and floods increasing, poverty alleviation is still a major challenge. The structural transformation that has been adopted by the national government in recent times has reduced growth constraints and contributed greatly to the overall growth and prosperity of the country. However there are still major issues around federal vs. state bureaucracy, corruption and tariffs that require addressing. India's public debt is 58% of GDP according to the CIA World Fact book, and this represents another challenge. During this period of stable growth, the performance of the Indian service sector has been particularly significant. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% of the Indian economy.

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Growth in the manufacturing sector has also complemented the country's excellent growth momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year. Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period.

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US Financial Crisis: Effect on Indian Corporate The collapse of the USA financial markets has unleashed a wave of uncertainty, India don't know which bank or financial institution or mutual fund or insurance company might announce bankruptcy. For the Indian markets, this crisis of confidence is huge. They are still trying to ascertain the damage and like the rest of the world, do not know what more lies ahead. The day the news broke, there was a virtual meltdown across the board but the maximum brunt was borne by the banking, finance or NBFC stocks, realty and IT stocks. It was too early for the banks to come forth and state their damage but the markets knew that it would be substantial. Effect on Indian Banks The worst affected is the private sector bank, ICICI Bank, its exposure is to the tune of $80 million, which it invested in Lehman's senior bonds. The bank has issued a statement saying that it had already made provisions of $12 million on these bonds and a further $28 million worth of provisioning might be required if 50% recovery is assumed. SBI has an exposure of around $55 million (Rs256 crore) and PNB $5 million to Lehman. Bank of Baroda's exposure is less than $10 million. Effect on Realty/Infra Projects Lehman and Merrill have invested through FDIs in many projects in India, in realty and infrastructure. Those projects which have received the full amount earmarked for the project are safe. But what about those, who are yet to get the promised funds? Surely their projects lay in a lurch today. Unitech has also gone on record stating that it has received Rs.740 crore and has closed the deal with Lehman Brothers. DLF Assets raised US$200 million in 2007 as equity from Lehman Brothers, the company says that the money has been received but equity is yet to be transferred. Lehman had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million. Ashok Piramal's Peninsula Land has inked a JV with Lehman, which will have a stake of 75% is to bring in Rs.5 billion, to invest in various realty projects of Peninsula. Lehman has a 28.41% stake in KSK Energy. The above shares are locked in for a period of one year from July 05, 2008 (the date of IPO allotment) and cannot be sold in the stock market till the expiry of the said period.

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Effect on Pre-IPO Placements Apart from the projects, the biggest threat is for projects which currently seeking pre-IPO placements. With a fear psychosis gripping all, and FIIs yet to ascertain the losses on which they are sitting on, it is going to become difficult for companies, vying to set up mega projects but seeking pre-IPO placements with reputed FIIs. Lack of any takers for pre-IPO stakes would mean delays. Yes, there will be other investors who would be willing to buy stakes but would now expect it at far below the prevailing market rates. But will that again be economically viable? Adani Power is currently looking at placing 4.4-5% stake of its equity with private equity investors. Jet Airways had planned to raise $400 million from private placement with institutions. ICICI Securities planned to offload 15% of its stake to raise $1 billion. Morgan Stanley Private Equity is to pick up a 30.4% stake in Biotor Industries for Rs.240 crore ($53 million). Will that happen now? Tata's Ginger Hotel chain planned to offload 20% of its stake to raise $75-100 million for expansion of its no-frills hotel chain Ginger. Retail chain group Subhiksha which also nurtures plans of going public is seeking FII investment for its 9% stake and was hoping to raise $80-100 million (Rs.400 crore).

AIG might have been pulled back from the brink of bankruptcy but it indicates the deep rooted trouble in the US financial markets. The collapse of Lehman and Merrill is sure to have far reaching consequences in India. It can only hope that this is the end of the dark tunnel though the road to light is dark, long and winding.

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Major Challenges faced by the Financial Sector in China As part of its accession to the WTO, China has promised to open banking business in all places and in all currencies to foreign banks by2006. After December 2006, foreign and domestic banks should be able to Provide products to all customers in China throughout the country. With this, the banking system in China will face serious challenges; 1) There is a large stock of NPLs in comparison with the international standards. 2) There is still a gap between the management and operational capacity of the wholly state-owned commercial banks and that of the world's leading banks. 3) The regulatory and supervisory system is not yet prepared for the complexities of the new situation. The key focus of further reforms in the Chinese financial system is on resolution of NPLs problem. This requires concrete action plan on two fronts, i.e, to resolve the existing stock of NPLs and to avoid accumulation of further NPLs. Ceiling on interest rates as and when removed could also allow banks to price their products based on their risk-return perception. To overcome the stock problem, the authorities need to keep in view the experience of the four AMCs set up, which has not been satisfactory as their losses are expected to surpass the current financial contributions to the AMCs from both the Ministry of Finance and the PBC. Improvements in bankruptcy and foreclosures would also enable banks to recover NPLs. The further development of financial markets apart from imparting market discipline into the system would have several other advantages. A balanced financial system, where both banks and financial markets play important roles, not only helps in averting crises, but also creates competitive conditions which would benefit both savers and investors. The capital market could help in improving allocative efficiency of resources by putting competitive pressures on the banking system. The financing needs of the Chinese economy appear to be far more than the lending capacity of banks. Those enterprises, which are not able to raise funds from the banking system, could finance their requirements from the capital market. The capital market could, thus, help in spurring the growth of the private sector. In China, ownership of shares is based on the status of the investor as well as of that of the company. There is no transferability between A and B shares, even as they are identical in respect of shareholder rights. Because of segmentation, the Chinese capital market is also not much integrated with other capital markets. Further integration with the international capital market could help China in reaping the benefits. The convertibility of state and legal person shares into 'A' class shares and making them tradable along with B shares could also help in integrating its market further. Reforms of the capital market in China could also include the development of the private debt market, which could provide the financing choices to the borrowers and the opportunity to diversify risk to the savers. We draw four main conclusions about Chinas financial system and its future development. First, when we examine and compare Chinas banking system and financial markets with those of both developed and emerging countries, we find Chinas financial system is currently dominated by a large banking system. Even with the entrance and growth of many domestic and foreign banks and financial institutions in recent years, Chinas banking system is still mainly controlled by the four largest stateowned banks. All of these Big Four banks have become publicly listed and traded companies in recent years, with the government being the largest shareholder and retaining control. This ownership structure has served these banks well in terms of avoiding major problems encountered by major financial institutions in developed countries that are at the centre of the 2007- 2009 global financial crisis. Moreover, the level of non-performing loans (NPLs) over GDP has been steadily decreasing after reaching its peak during 2000- 2001. The continuation of the effort to improve the efficiency of the banking system, including further development of financial institutions outside the Big Four banks and extending more credit to productive firms and projects, is an important task of reforming Chinas financial system in the short run.
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The Second conclusion concerns Chinas financial markets. Two domestic stock exchanges, the Shanghai Stock Exchange (SHSE hereafter) and Shenzhen Stock Exchange (SZSE) were established in 1990. Their scale and importance are not comparable to the banking sector; and they have not been effective in allocating resources in the economy, in that they are highly speculative and driven by insider trading. Going forward, however, financial markets are likely to play an increasingly important role in the economy, and their further development is the most important task for Chinas financial system. We propose several measures that can increase their size and scope and help to improve the efficiency of the markets. Third, in an earlier paper, Allen, Qian and Qian (2005, find that the most successful part of the financial system, in terms of supporting the growth of the overall economy, is not the banking sector or financial markets, but rather a sector of alternative financing channels, such as informal financial intermediaries, internal financing and trade credits, and coalitions of various forms among firms, investors, and local governments. Many of these financing channels rely on alternative governance mechanisms, such as competition in product and input markets, and trust, reputation and relationships. Together these mechanisms of financing and governance have supported the growth of a Hybrid Sector with various types of ownership structures. The definition of the Hybrid Sector includes all non-state, non-listed firms, including privately or individually owned firms, and firms that are partially owned by local governments (e.g., Township Village Enterprises or TVEs).1 The growth of the Hybrid Sector has been much higher than that of the State Sector (state-owned enterprises or SOEs, and all firms where the central government has ultimate control) and the Listed Sector (publicly listed and traded firms with most of them converted from the State Sector), contributes most of the economic growth, and employs the majority of the labour force. Finally, it was a significant challenge for Chinas financial system is to avoid damaging financial crises that can severely disrupt the economy and social stability. China needs to guard against traditional financial crises, including a banking sector crisis stemming from an accumulation of NPLs and a sudden drop in banks profits; China also needs to guard against new types of financial crises, such as a twin crisis (simultaneous foreign exchange and banking/stock market crises) that struck chinas economy. Since its entrance to the World Trade Organization (WTO) in 2001, the integration of Chinas financial system and overall economy with the rest of the world has significantly sped up. This process introduces cheap foreign capital and technology, but we include firms partially owned by local governments in the Hybrid Sector for two reasons. First, despite the ownership stake of local governments and the sometimes ambiguous ownership structure and property rights, the operation of these firms resembles more closely that of a for-profit, privately-owned firm than that of a state-owned firm. Second, the ownership stake of local governments in many of these firms has been privatized. large scale and sudden capital flows and foreign speculation increase the likelihood of a twin crisis. At the end of 2007, Chinas foreign currency reserves surpassed US$1.5 trillion, overtaking Japan to become the largest in the world; it increased to US$2.5 trillion as of June 2010 with a large fraction of the foreign reserve invested in U.S. dollar denominated assets such as T-bills and notes.2 The rapid increase in Chinas foreign exchange reserves suggests that there is a large amount of speculative, hot money in China in anticipation of a continuing (possibly considerable) appreciation of the RMB, Chinas currency, relative to all other major currencies, especially the US dollar. Depending on how the government and the central bank handle the process of revaluation, especially when there is a large amount of capital outflow, there could be a classic currency crisis as the government and central bank try to defend the partial currency, which in turn may trigger a banking crisis if there are large withdrawals from banks.

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Challenges Faced by the Financial Sector in India The intermediation cost in India continues to be high in comparison with the international standards. Increased market risk, interest rate risk, liquidity risk, foreign exchange risk and this risk need to be managed effectively manner is a serious challenge for bank and the regulatory authority. Emergence of large and complex financial institutions as a result of consolidation could pose a supervisory challenge.

Financial sector reforms in India have undoubtedly brought about significant improvements in the profitability of the banking system. However, some issues in the Indian financial system would have to be addressed in the near future. Furthermore, as a result of deregulation, financial integration and advances in information technology, several new challenges have emerged which merit attention in India. Notwithstanding some improvements, the intermediation cost in India continues to be high in comparison with the international standards. In fact, intermediation cost of scheduled commercial banks changed only marginally from 3.0 per cent as at end March 2003 to 2.9 per cent by end- March-07. In contrast, intermediation cost in China declined significantly from 2.6 per cent in 2003 to 2.0 per cent in 2007. The high intermediation cost in India is a cause of concern and it needs to be brought down. Banks are now exposed to increased market risk. With the increasing financial integration, banks are also exposed to serious asset and liability mismatch with serious implications for interest rate risk, liquidity risk, foreign exchange risk. These risks need to be managed in a proactive manner as they pose a serious challenge for the banks and the regulatory authority. Distinctions among providers of various financial services are getting increasingly blurred which have the potential to lead regulatory gaps. This, along with the emergence of large and complex financial institutions as a result of consolidation could pose a supervisory challenge and call for quick and coordinated responses on the part of all the regulatory authorities. Although the capital market in India has become modern, safer and more transparent, the lack of interest by the retail investor in the market is a cause for concern. The new capital being raised from the market for the last several years has remained insignificant both in absolute and relative terms. As a result, the relative significance of the primary capital market in the financial system has declined In the secondary market, although there are about 9000 companies listed in the stock exchanges, bulk of the trading is confined to a few large companies. It is estimated that about 50 stocks make up for as much as 75 per cent of the total turnover in the Indian stock exchanges as against 15 each in the case of the US and the UK and 25 per cent in the case of Japan. There has also not been any significant progress in the private corporate debt market. With the major DFIs disappearing from the scene and banks having difficulties to undertake project finance in a big way, a gap has emerged in financing the long-term requirements of funds, especially for the infrastructure sector. This could have serious implications for the real sector in the future.

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Conclusion Financial sector reforms in India and China were introduced more or less at the same time. However, there were significant differences in the level of development in two systems at the time of introduction of reforms. Whereas, the structure of the financial system in India was already reasonably well developed and market-based with private sector and foreign banks operating along with the public sector banks, China, on the other hand, had to migrate from a totally command economy to a market oriented economy. As a result, the financial system in China continues to face a number of challenges, especially poor asset quality of the banking system. Future reforms in China need to focus on strengthening the financial system and further reforming the capital market. It is significant to note that in terms of size, the Chinese banking system has emerged significantly larger than that of India. In a globalised world, the size can matter a lot. In order to take advantage of its size, China could focus on quick qualitative improvements, especially in the asset quality of the banking system. The strengthening of the banking system would also enable China to pursue further reforms in area of external sector and monetary policy. Financial sector reforms in India have resulted in significant improvement, especially in the asset quality of the banking system. On the whole, the Indian financial system has emerged much stronger in the post reform period. However, the major challenge for the Indian authorities lies in bringing down the intermediation cost of the banking system, while at the same time maintaining its profitability. And It can be finally says that Financial system of India is better than China but China is improving more and fast on it compared to India.

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References Global Finance, Archives May 2008

China Banking Regulatory Commission (www.cbrc.gov.cn).

(www.imf.org). (www.pbc.gov.cn ).

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