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Sme Sector Challanges

India's Financial System
Franklin Allen Rajesh Chakrabarti Sankar De*
Finance Department Finance Area Centre for Analytical Finance
The Wharton School Indian School of Business Indian School of Business
University of Pennsylvania Hyderabad 500 032, India Hyderabad 500 032, India
allenf@wharton.upenn.edu rajesh_chakrabarti@isb.edu Sankar_De@isb.edu
October 27, 2007
Abstract
With recent growth rates among large countries second only to China’s, India has
experienced nothing short of an economic transformation since the liberalization process
began in the early 1990’s. In the last few years, with a soaring stock market, significant
foreign portfolio inflows including the largest private equity inflows in Asia, and a
rapidly developing derivatives market, the Indian financial system has been witnessing an
exciting era of transformation. The banking sector has seen major changes with
deregulation of interest rates and the emergence of strong domestic private players as
well as foreign banks. At the same time, there is some evidence of credit constraints for
India’s SME firms that rely heavily on trade credit. Corporate governance norms in India
have strengthened rapidly in the past few years. Family businesses, however, still
dominate the landscape and investor protection, while excellent on paper, appears to be
less effective owing to an overburdened legal system and corruption. In the last few years
microfinance has contributed in a big way to financial inclusion and is now attracting
venture capital and for-profit companies – both domestic and foreign.
*We are grateful to Manpreet Singh for his able research assistance for this paper. All remaining flaws are
our responsibility. This paper will be forthcoming in the Nomura Occasional Series on Contemporary
Capital Markets. We are grateful to the Tokyo Club Foundation for Global Studies for financial support.
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Table of Contents
1. Overview………………………………………………………………….. 1
2. The Institutional...