India’s BFSI (Banking, Financial Services, and Insurance) sector, though growing rapidly, faces structural bottlenecks such as:
- Fragmented regulation
- Shallow corporate bond market
- Rising shadow banking risks
- Low insurance penetration
- These challenges necessitate comprehensive reforms to ensure sustainable financial sector development and support India’s growth aspirations.
Current Status of India’s BFSI Sector:
- BFSI comprises banks, NBFCs, insurance companies, pension funds, mutual funds, and fintechs—integral to India’s financial infrastructure.
- Growth & Market Capitalization:
- Market cap surged 50x from ₹1.8 trillion (2005) to ₹91 trillion (2025) (CAGR ~22%).
- Banks’ share declined from 85% to 57% as NBFCs and fintechs gained ground.
- Fintech & NBFC Expansion:
- Fintech sector now valued over ₹12 trillion.
- NBFCs filled credit gaps in underserved regions, boosting financial inclusion.
- Resilience Indicators:
- BFSI share in Nifty-50 earnings rose from 16% (FY10) to 33% (FY24).
- Bank net worth reached ₹26 trillion; NBFCs at ₹12.4 trillion.
Key Challenges in India’s BFSI Sector
- Fragmented Regulation:
- Multiple regulators (RBI, SEBI, IRDAI, PFRDA) lead to regulatory overlaps and compliance complexity.
- Example: RBI’s directive to build bond market ignored in favour of equity profits.
- Shallow Corporate Bond Market:
- Valued at ₹64 trillion (~18–20% of GDP); lags South Korea (80%), China (36%).
- Illiquidity keeps cost of capital high and impairs funding access.
- Opaque Ownership & UBO Gaps:
- Disclosure thresholds (10%/15%) exploited to evade UBO norms.
- Some FPIs resist disclosure, undermining SEBI oversight and FATF obligations.
- Low Insurance Penetration:
- Insurance coverage at just 4.2% of GDP (2023); below global average.
- Indicates lack of awareness, affordability, and trust in claim processing.
- Persistent NPAs:
- Public Sector Banks still suffer from high NPAs, despite reforms like IBC and recapitalisation.
- NPAs impair lending capacity and overall banking efficiency.
- Shadow Banking Risks:
- Unregulated margin loans and NBFC lending distort risk assessments.
- Example: Margin loans with 20%+ interest, misusing investor capital.
- Regulators lack full visibility into operations, echoing 2008 crisis patterns.
- Cybersecurity Threats:
- BFSI digitisation raises cyber vulnerabilities.
- Over 1.35 lakh phishing attacks reported in 2024 (Kaspersky).
Measures to Strengthen BFSI Sector
- Develop a Robust Bond Market:
- Incentivise participation, enhance transparency.
- Align with global peers to reduce borrowing costs.
- Tighten UBO and KYC Norms:
- Reduce thresholds for disclosure.
- Integrate centralised ownership databases for FPIs and companies.
- Regulate Shadow Banking:
- Enforce real-time reporting for NBFCs and margin lenders.
- Follow EU-style risk surveillance
- Integrated Regulatory Framework:
- Harmonise RBI, SEBI, IRDAI rules under unified compliance norms.
- Introduce ‘One KYC for All Financial Services’
- Improve NPA Resolution:
- Strengthen IBC/NCLT capacity, enforce time-bound resolutions.
- Create a bad bank-like structure for stressed NBFC assets.
- Boost Insurance Penetration:
- Promote micro-insurance and tax incentives.
- Simplify claim processes and improve consumer education.
- Digital and Cybersecurity Upgrades:
- Mandate cyber audit frameworks for all BFSI entities.
- Use AI/ML in fraud detection (e.g., RBI’s ai initiative).
Key Committees on BFSI Reforms
| Area | Committee | Focus |
| Banking Reforms | Narasimham Committee | Bank restructuring, asset quality |
| Financial Sector | Raghuram Rajan Committee | Broad financial reform |
| NBFC Regulation | A.C. Shah Committee | NBFC norms |
| Financial Inclusion | Nachiket Mor, H.R. Khan Committees | Payment banks, BC models |
| NPA Management | Khanna, S.S. Kohli Committees | Bad loan resolution |
| Insurance & Capital Markets | Y.V. Reddy, Sodhani Committees | Small savings, forex |
| Tech Adoption | Rangarajan Committee | Bank computerisation |
India’s BFSI sector has demonstrated robust growth and innovation, but systemic inefficiencies and regulatory fragmentation threaten its long-term stability. Comprehensive reforms—targeting bond market depth, UBO transparency, shadow banking oversight, and integrated regulation—are essential. A resilient and inclusive BFSI ecosystem is pivotal for India’s Amrit Kaal vision and Viksit Bharat 2047 aspirations.
