{"id":44333,"date":"2025-05-29T19:04:05","date_gmt":"2025-05-29T13:34:05","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=44333"},"modified":"2025-05-29T19:04:06","modified_gmt":"2025-05-29T13:34:06","slug":"india-financial-sector-reforms","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/editorial-analysis\/29-05-2025\/india-financial-sector-reforms","title":{"rendered":"India\u2019s Financial Sector Reforms Need a Shake-up"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>In Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India\u2019s financial sector, particularly the <strong>Banking, Financial Services and Insurance (BFSI)<\/strong> <strong>space<\/strong>, is standing at a critical juncture. While reforms have been ongoing, there are still structural problems that need to be addressed.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Key Structural Issues in India\u2019s Financial Sector<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Inconsistent Nomination Rules Across BFSI: <\/strong>No uniformity between banks, mutual funds, and insurance companies. Multiple nomination formats lead to legal ambiguities and litigation. Lack of clarity between nominee rights vs legal heir rights.<\/li>\n\n\n\n<li><strong>Underdeveloped Corporate Bond Market:<\/strong> Despite policy pronouncements, India&#8217;s corporate bond market remains shallow, illiquid, and opaque.\n<ul class=\"wp-block-list\">\n<li>This increases the cost of capital for businesses (potentially by 2-3%), hindering industrial growth and employment. The RBI&#8217;s past directive to NSE to develop a secondary bond market was reportedly &#8220;quietly ignored,&#8221; possibly due to higher profits in equity trading.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Weak Ultimate Beneficial Ownership (UBO) Framework:<\/strong> India is a FATF member but struggles with UBO (Ultimate Beneficial Ownership) transparency.<\/li>\n\n\n\n<li><strong>Shadow Banking:<\/strong> NBFCs, brokers, and margin lenders mimic banks without full regulation.\n<ul class=\"wp-block-list\">\n<li>They offer margin funding at effective interest rates &gt;20%, often without clear borrower knowledge.<\/li>\n\n\n\n<li>RBI introduced a scale-based regulation (2022), but data collection and transparency remain weak.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Fragmented Financial Consumer Protection: <\/strong>No single integrated financial consumer protection authority (unlike the U.S. Consumer Financial Protection Bureau (CFPB)).\n<ul class=\"wp-block-list\">\n<li>Investors\/savers face hurdles in grievance redressal across SEBI, RBI, IRDAI, PFRDA.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Digital Financial Inclusion &amp; Cyber Risk:<\/strong> UPI has transformed digital finance, but digital financial frauds have also spiked. RBI reported 13,530 fraud cases in FY23, involving \u20b930,252 crore.\n<ul class=\"wp-block-list\">\n<li>Many rural investors are still digitally excluded from mutual funds, bonds, insurance.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Government Initiatives and Reforms<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Banking Reforms:<\/strong> Reforms like EASE 2.0 and EASE 3.0 (Enhanced Access and Service Excellence) were introduced to improve operational efficiency, credit delivery, and customer service in public sector banks.<\/li>\n\n\n\n<li><strong>Corporate Bonds: <\/strong>To reduce the overdependence on bank credit and deepen debt markets, the government launched the <strong>Credit Enhancement Scheme through SIDBI<\/strong>, intended to improve the credit rating of lower-rated bonds and attract investors.\n<ul class=\"wp-block-list\">\n<li>The <strong>BSE Bond platform<\/strong> was established to facilitate online bond issuance and trading. SEBI also issued norms mandating that large corporates raise at least 25% of their borrowing through bonds.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Retirement Finance:<\/strong> National Pension System (NPS), Atal Pension Yojana (APY), proposed pension reforms by PFRDA.\n<ul class=\"wp-block-list\">\n<li>PFRDA is a <strong>statutory regulatory body<\/strong> that comes under the jurisdiction of the <strong>Ministry of Finance.<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Nomination:<\/strong> Recent SEBI 2024 circular of mandatory nomination or opt-out declaration for demat and mutual fund accounts.<\/li>\n\n\n\n<li><strong>Shadow Banking: <\/strong>RBI\u2019s scale-based regulatory framework for NBFCs (2022), crackdown on high-risk NBFCs.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Way Forward<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Harmonise Nomination Rules Across BFSI:<\/strong> One uniform nomination law for all financial instruments.\n<ul class=\"wp-block-list\">\n<li>Clear distinction between nominee (trustee) vs legal heir (beneficiary) in law.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Deepen Bond Markets:<\/strong> Incentivise corporates to issue bonds; develop market-makers and improve credit rating transparency.\n<ul class=\"wp-block-list\">\n<li>Build a retail-friendly bond platform with RBI\/NSE\/BSE collaboration.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Tighten UBO Disclosure and FATF Compliance: <\/strong>Lower UBO disclosure thresholds to 5% or even 1% in sensitive sectors.\n<ul class=\"wp-block-list\">\n<li>Strict penalties for non-disclosure and delayed reporting.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Enable Cost-Effective Retirement Products:<\/strong> Issue zero-coupon government bonds of 30+ years via online channels.\n<ul class=\"wp-block-list\">\n<li>Integrate NPS with UPI-like auto-debit system for informal workers.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Rein in Shadow Banking: <\/strong>Mandate comprehensive data collection on margin lending and NBFC transactions.\n<ul class=\"wp-block-list\">\n<li>Integrate NBFC lending into CRILC database (RBI\u2019s credit info platform).<\/li>\n\n\n\n<li>Introduce risk-based capital norms for brokers offering financing.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background has-fixed-layout\" style=\"background-color:#fff2cc\"><tbody><tr><td><strong>Daily Mains Practice Question<\/strong><br><strong>[Q] <\/strong>Examine the challenges posed by India&#8217;s underdeveloped corporate bond market and opaque Ultimate Beneficial Ownership (UBO) norms.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Source: TH<\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/www.nextias.com\/ca\/wp-content\/uploads\/2025\/05\/UPSC-Editorial-Analysis-29-May-2025.PDF.pdf\">Download pdf <\/a><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>India\u2019s financial sector, particularly the Banking, Financial Services and Insurance (BFSI) space, is standing at a critical juncture. While reforms have been ongoing, there are still structural problems that need to be addressed.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[22],"tags":[],"class_list":["post-44333","post","type-post","status-publish","format-standard","hentry","category-editorial-analysis"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/44333","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=44333"}],"version-history":[{"count":2,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/44333\/revisions"}],"predecessor-version":[{"id":44350,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/44333\/revisions\/44350"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=44333"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=44333"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=44333"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}