INDICATORS OF FINANCIAL DEVELOPMENT

INDICATORS OF FINANCIAL DEVELOPMENT

Financial development of the sector is indicated by system wide indictors of size, breadth and composition. It also include indicators of key attributes like competition, concentration, efficiency, access and the measures of the scope, coverage and outreach of financial services. 

System-Wide Indicators 

When we evaluate financial structure, we cover the role of central bank, commercial and cooperative banks, insurance companies, mutual funds companies and financial market institutions. It should also create link between financial markets and other markets. 

    The following ratios can be helpful in size and depth of financial sector: 

(a) Ratio of broad money to GDP; 

(b) Private Sector credit to GDP; 

(c) Ratio of bank deposits to GDP. 

    

    However, we need to be cautious while interpreting these ratios. Therefore, when we make cross-country comparisons, it can be useful. In some of the markets Non-Bank Financial Intermediaries (NBFI) play a dominating role in financial system rather than banks? We also need to see what role is being played by hedge funds and derivative market instruments. It will enable assess to make a quick judgement on effectiveness of the financial system. Overall growth of the financial system can be judged by looking at the changes in the number and types of financial intermediaries, as well as the growth of financial assets in each sector over time in real as well as nominal terms. We not only need to observe quantitative changes but also need to find the driving forces behind observed changes in institutions and their asset positions and the number of and growth rates of available financial resources and capital market instruments. Financial liberalization has brought changes in financial sector in many countries. Changes in prudential regulation and accounting standards often have provided incentives for developing new ways to manage risks. 

Breadth of the Financial System 

If there is a well developed financial system, it will provide a wide variety of financial services and financial products to invest in different instruments with varied risk levels, returns, maturity dates should be available in the market. For indentifying breadth of financial system we first need to identify the existing financial institutions, the existing markets of financial instruments, and the range of available products and services. It should also make a comparison between bank and nonbank form of financial intermediation. We need to consider the share of different classes of asset holders like households, non-financial banking institutions, mutual funds, pension funds etc. 

    We can also make a comparison between rural-urban divide of financial services. Sectoral indicators can be used to assess diversity of the system. Leasing penetration can be judged by value of leased assets as a percentage of total domestic investment. Given below is a table which is indicating few sub-sectors of the financial sector and relevant indicators of their size and development.