Paper: GS – III, Subject: Economy, Topic: Banking and financial intermediaries, Issue: Need for India’s financial sector reforms.
Context:
India’s financial sector is at a critical inflection point. Despite incremental India’s financial sector reforms across banking, financial services, and insurance (BFSI), systemic frictions remain.
Key Highlights:
Key Areas of Concern:
- Nomination Conundrum: Inconsistencies across BFSI sectors such as banks, mutual funds and insurance. For instance, a citizen can nominate one person per account, but rules vary which leads to confusion, litigation, and legal ambiguity.
- Underdeveloped Bond Markets: India’s corporate bond market lacks depth and transparency. Investors face opacity in regulations and nominee structures.
Shadow Banking risks:
| Shadow banking refers to non-banking financial activities by NBFCs, brokers, lenders, etc., outside formal regulatory frameworks. |
- High interest rates, up to 20%, with low investor contribution.
- Brokers lend money on behalf of investors (leverage-based), exposing the banking system.
SEBI’s recent actions:
- Asked Mauritius-based funds to disclose data on holdings aimed at improving Ultimate Beneficial Owner (UBO) transparency.
- Tightening norms and promote a vibrant debt market for retirement planning, infrastructure, etc.
Structural of India’s financial sector Reforms needed:
- Unified Regulatory Oversight: As multiplicity of regulators creates fragmentation, we must have a single-window regulatory interface.
- Data based approach: Adopting a data-driven approach to monitor UBOs, shell companies, and suspicious flows is needed
Enhancing transparency: FATF’s 2022 recommendations require:
- KYC compliance.
- Clear UBO disclosure.
India must align with those global norms to ensure safe, credible investment ecosystem and international trust in Indian markets.
Effective regulation:
- Map and regulate shadow banks.
- Enact legislation for transparency and data monitoring (like the EU) to avoid systemic crisis similar to 2008 global financial meltdown.
Low-Cost Sovereign Retirement Ecosystem: As Insurance-linked pension schemes have high intermediation costs, Government can issue zero-coupon bonds to:
- Eliminate 2% intermediary fee.
- Provide cost-effective retirement instruments.
Way ahead:
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