Financial Deepening Need of the Hour

Financial deepening is certainly the need of the hour. Though the banking sector and the financial market witnessed a huge transformation with the economy’s liberalisation in the early 90’s, there is still much scope on that front, opines Gagan Rai

01 July, 2010 Opinion, Finance
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Gagan Rai, Managing Director & CEO,
National Securities Depository Limited

Financial deepening implies the ability of financial institutions to effectively mobilise savings of the masses for their benefit. One of the key features of financial deepening is that it accelerates economic growth through the expansion of access to those who do not possess adequate finance themselves. It presupposes active operations of financial institutions in the financial markets, which in turn, entail the supply of quality financial products and financial services. Financial deepening ensures that financial products and services are made available not only to select groups but to all those in need. It is this availability of external finance to budding entrepreneurs and small firms that enables new entry, while also providing competition to incumbents and consequently, encouraging entrepreneurship and productivity.

In order to ensure financial deepening, a robust banking system and a developed capital market are imperative. With the economy’s liberalization, early 1990’s saw the financial markets transform in India. The banking sector too witnessed sweeping changes, including the elimination of interest rate controls, flexibility in reserve and liquidity requirements and overhaul of lending norms. Today, the Indian stock market is among the most advanced markets of the world in terms of automation, settlement systems, dematerialization, cost of transactions etc. Even though various initiatives have been undertaken by the regulators and policy makers for modernising and strengthening our capital markets, there is large enough scope for the capital market to widen its reach. Poverty, lack of financial literacy, lack of access to financial services due to geographical reasons or affordability and nonavailability of suitable products to the requirements of the investors are some of the roadblocks. This calls for the expansion of retail participation. There is huge economic disparity between urban, semi urban and rural areas in the country and market participation is concentrated only in big and medium cities, which clearly defeats the goal of financial deepening.

The following measures can be undertaken to improve the depth in the Indian capital markets:

Financial Education and Literacy

A lot of initiatives have been taken by policy makers and market participants for increasing the financial literacy among the people. However, there is still enough scope for enhancing its reach and effectiveness. Intensive awareness, education and promotion drives can create an in-depth impact on the masses. In this direction, National Securities Depository Limited (NSDL) has been conducting investor depository meets (IDMs) all over the country for creating awareness about the depository system among various users. These IDMs are aimed at providing first-hand information about new features and facilities to the investors and get their feedback about depository services. Stock exchanges, broking entities and mutual funds are also working on similar lines. Special focus is needed on rural and semiurban areas.

Product Innovation

More investment options suiting the requirements of different classes of investors need to be provided. Also, the products need to be simple and easy to understand by the common man.

Expanding the Network of Distribution and Servicing the Investors

As per market information, four cities viz., Mumbai, Delhi, Ahmedabad and Kolkata account for over 80 per cent of trading in cash segment. Considering the minuscule contribution of other urban centres, there is a huge opportunity to deepen the investor base in India. Intermediaries need to tap the available potential in smaller towns and cities to further deepen the market. NSDL has been taking several initiatives to enable the participants to spread their services in different locations. NSDL’s certification programme in depository operations (NCDO) is one such initiative. It enables participants to serve their clients in a better way and enhances the pool of certified and trained personnel to expedite their future expansion plans. In line with the priority sector lending being encouraged in the banking system, some regulatory measures can also help in spreading the network of service centres by capital market intermediaries. For instance, service centres need to be expanded in lesser penetrated areas. Mutual Funds can be mandated to get minimum assets under management (AUM) from semi urban and rural areas. Various entities can also work together to facilitate cross selling of products. For instance, bank branches could be selling mutual fund units too.

Simplifying Procedures

Procedures and compliances for entering the market need to be simplified so that it does not act as a barrier for investors coming from remote locations. A uniform approach towards KYC norms should be there so as to ease investments in other instruments or avenues. The advent of UID could be helpful in this direction.

Financial deepening ensures that financial products and services are made available not only to select groups but to all those in need. It is this availability of external finance to budding entrepreneurs and small firms that enables new entry, while also providing competition to incumbents and consequently, encouraging entrepreneurship and productivity.

Cost Effective Services

Liquidity and depth in the market diminishes with higher cost of transactions. The regulator has been taking measures to rationalise the cost of transactions in the capital market. In this direction, the settlement fee charged to the participants has been reduced several times by NSDL.

Enhancing Investor Protection

There is a constant need to spread awareness about various investor protection measures implemented by SEBI, exchanges and depositories so that the reluctance of prospective investors can be addressed. A robust grievance redressal system, an interactive investor relations team and building and maintaining investors’ confidence should be the primary objectives of all market intermediaries.


Financial deepening is an essential precondition for uniform economic development and ushering in greater economic and social equity. Deepening the financial system and widening its reach is crucial for both accelerating growth and equitable distribution. Our efforts need to be focused on widening the stock market base; increasing liquidity and reducing transaction costs; expanding the universe of traded instruments and upgrading technology; raising retail investor confidence by increasing the effectiveness of surveillance and increasing investor protection; promoting greater selfregulation; transparency; disclosure and healthy competition amongst market intermediaries. Last but not the least, investor education campaigns need to be carried out aggressively by all segments of the financial markets to enable investors to understand the financial products and benefit by being part of the financial system.

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