INDIA’S BFSI SECTOR

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.

Leave a Reply