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October 01, 2013

Defects or Problems of Indian Money Market

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Friends, in our last post we have discussed the introduction and characteristics of Indian Money Market. In this post we shall discuss about Defects or Problems of Indian Money Market.

The money market in India is not only underdeveloped but it is also a heterogeneous entity. As we have already discussed in our last post, due to dichotomy of Indian money market into organized and unorganized sectors resulted in number of drawbacks. Some of which are given below.
  1. Existence of Both Organized and Unorganized Markets : The first and foremost defect of Indian money market is existence of both organized and unorganized money markets. Indigenous bankers and money lenders plays an important role in unorganized money market. The main problem with indigenous bankers is that they don't distinguish bbetween short-term and long term credit. the unorganized money market is not controlled by R.B.I. These features of unorganized money market, makes the whole Indian money market weak.
  2. Absence of Integration between Various Sectors :  There is no proper coordination between the various sectors of Indian money market. There is no mutual understanding between the banking institutions of organized sector and indigenous bankers of unorganized sector. with in the organized sector there is no proper coordination of activities of different banking institutions.
  3. Predominance of Unorganized sector : The third important drawback of Indian money market is its predominance of unorganized sector. The indigenous bankers and money lenders occupies significant role in rural finance.  In this unorganized sector there is no clear cut distinction between short and long term credit.  They will not come under direct control of Reserve Bank of India and remains outside the organized sector. Therefore, they seriously restrict the Reserve Bank control over money market.
  4. Differential Interest Rates : Due to lack of homogeneity in the composition of Indian Money Market there is wide range not only in the interest rates but also in lending policies, of the different institutions. Money lenders charges exorbitant rates of Interest ranging from 24 per cent to 40 pre cent. Even commercial banks also charges different rates of interest ranging from 12 percent to 18 percent. The interest rates also varies from place to place.
  5. Inadequate Control by the Reserve Bank of India : The unorganized sector of Indian Money Market is not under direct control of Reserve Bank of India. The Reserve Bank of India has no adequate control on the functioning of unorganized sector financial institutions which is quite large in size playing very important role in financing short term funds.
  6. Crunch of Loanable Funds : Indian money markets always experience a shortage of loanable funds, mainly due to less per capital income, low saving rate and higher consumption expenditure due to inflation and increase in standard of living. Specially with the invest of multichannel TVs with massive advertisements and the penetration of credit cards among the middle class had further increased consumption expenditure resulting in reduced savings.
  7. Seasonal Scarcity of Funds : There is shortage of funds in money market during some seasons. Ours is an agricultural country requiring heavy finance during agricultural season. Due to lack of sufficient funds during particular season, the interest rates are growing.
  8. Underdeveloped Bill Market : The bill market which plays an important role in organized sector of money market, is also underdeveloped in India as compared to developed countries. There is a lot of shortage of sound and first class commercial bills of exchange in our country. Most of the Indian traders resort to hundies rather than draw Bills of exchange. Further, there is lack of standardization in drawing of bills and hundies in India.
  9. Underdeveloped Banking Habits : The banking habit is not much developed in India which is one of the most important characteristics of a developed money market. Cash transactions are more popular in India rather than bank transactions, as a consequence of this the banking system in India has not much developed.
  10. Lack of Call Money Market : Call market means a market which provides money at call and short notice ranging a period 24 hours to one week. These loans are generally granted to stock brokers and discounting houses. In India very rarely such loans are granted.
  11. Scarcity of Credit Instruments : Till late 1980's, the Indian money market was suffering from scarcity of credit instruments. The only instruments available were the money at call and short notice and treasury bills. Moreover, there were no specialists dealers and brokers to handle the function in different segments of money market and to handle different kinds of credit instruments.
  12. Improper Care of Rural Finance : An important weakness of the Indian Banking system is that till recently agricultural finance was divorced from the organized sector of the money market.
  13. No Banker's Acceptance : There is no development of bankers' acceptance or acceptance of credit by the banks in India.
  14. Blending of Lending and Trading Activities : In the unorganized sector, the financial agencies do not resort to money dealings only. They usually carry on retail trade agriculture and other business activities, along with lending operations.
  15. Banking Gap : Banking facilities are either entirely nonexistent or inadequate in the villiages of India. All though there has been rapid expansion of bank branches in recent years specially after nationalization of banks, yet vast rural areas still exists without banking facilities. Scientifically-run institutions like commercial banks have a largely urban-orientation in our country.
  16. Absence of All-India Money Market : Indian money market has not been organized into a single integrated all-indian market. It is divided into small segments mostly catering to the local financial needs.
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