After the introduction of planning, rapid industrialization has taken place. It has in turn led to the growth of the corporate sector and the Government sector. In order to meet the growing demand of the Government and Industries, many innovative financial instruments have been introduced. The Indian financial system is now more developed and integrated today than what it was few years ago. Yet it suffers from some weaknesses. Let us discuss these weaknesses in detail.
Lack of Coordination between different Financial Institutions: There are a large number of FIs. Most of the vital FIs are owned by the Government. At the same time, the Government is also the controlling authority of these institutions. In these circumstances, the problem of co-ordination arises. As there is multiplicity of institutions in the Indian Financial system, there is lack of coordination in the working of these institutions.
Monopolistic Market Structures: In India, some FI’s are so large that they have created a monopolistic market structure of financial system. For instance, almost entire life insurance business is in the hands of LIC of India. So large structures could retard development of financial system of the country itself.
Dominance of Development Banks in Industrial Financing: The development banks constitute the backbone of the Indian financial system occupying an important place in the capital market. The industrial financing today in India is largely through the FI created by the government, both at the national and regional levels. As such, they fail to mobilize the savings of the public.
However, in recent times attempts have been made to raise funds from public through the issue of bonds, units, debentures and so on.
Inactive and Erratic Capital Market: The Indian capital market is not strong and dependable. Because of regular scams and frauds, general public is not having faith in the Capital Markets. The weakness of the capital market is a serious problem in our financial system.
Imprudent Financial Practices: The dominance of development banks has developed imprudent financial practice among corporate customer. The development banks provide most of the funds in the form of term loans. So there is a predominance of debt capital has made the capital structure of the borrowing concerns uneven and lopsided.
However in recent times, all efforts have been made to activate the capital market. Integration is also taking place between different FIs. Similarly, the refinance and re-discounting facilities provided by the IDBI aim at integration. Thus, the Indian Financial System is undergoing fast changes, to become a well developed one.