V. V. Bhatt
In both Japan and India the financial system was used after World War II as an instrument for rapid economic development, particularly through the accelerated pace of industrialization. The financial systems in both countries—in Japan until 1970 and in India until 1985—were largely bank-oriented. New projects and enterprises with no track record to facilitate financing through a market-oriented system, which can function only on the basis of detailed information about the actual performance of entrepreneurs and enterprises, therefore had to rely on bank financing. Further, in the initial post-war years in India, saving rates were low and, because of considerable uncertainty, savers were unwilling to assume the risk attached to market instruments. The policy environment in Japan also was not favourable for the functioning of a capital market. One of the mechanisms for making adequate finance available to new entrepreneurs and enterprises was the main bank system in Japan and the lead bank systems in India.
The objective of this chapter is to give a brief account of the lead bank systems in India and review their performance. These systems are, in the nature of financial innovations, somewhat similar to the universal banking system in Germany during the late nineteenth century and the main bank system in Japan with regard to their objectives (see Bhatt, 1988).
The plan of this chapter is as follows. A synoptic overview of the financial system in India is presented in the first section. The Indian lead bank systems and their characteristics are presented in the second section, and the reasons for their relative ineffectiveness are indicated in the third section. The relevance of the innovations represented by the lead bank systems in India and the main bank system in Japan for other developing countries and transforming socialist economies, and the pre-conditions for their effectiveness as an instrument for rapid industrialization, are discussed in the concluding section.
The Indian financial system as it has evolved is comparable in many respects with the financial systems of the most advanced developing countries