[Answered] “India’s financial sector reforms necessitate a ‘shake-up’ through harmonized regulations, a deep bond market, vibrant retirement finance, and reining in shadow banking.” Analyze how these proposed reforms are critical for enhancing financial stability, fostering capital formation, and ensuring inclusive economic growth in India’s evolving financial landscape.

Introduction

India’s financial sector is undergoing transformation amid rapid economic growth, digitization, and expanding investor participation. However, legacy inefficiencies, fragmented regulations, and unregulated segments threaten the sector’s ability to effectively mobilize capital, maintain financial stability, and foster inclusive growth. A comprehensive overhaul — not piecemeal tinkering — is now imperative.

1. Harmonized Regulations across BFSI: The lack of regulatory harmony, especially in nominee rules across banking, insurance, and mutual funds, has created legal ambiguities. Fragmented norms not only confuse consumers but also cause delays in asset transmission and open the door to litigation.

• Implications: Uniform nomination rules would increase legal certainty, reduce disputes, and enhance trust in formal financial systems — crucial for financial inclusion.
• Policy Need: A unified Financial Consumer Protection Framework under the Financial Stability and Development Council (FSDC) could streamline regulations and empower savers.

2. Developing a Deep Corporate Bond Market: India’s bond market remains shallow, contributing just 17% to GDP (compared to over 70% in countries like South Korea). Most corporate financing still relies on banks, leading to asset-liability mismatches and credit concentration.

• Benefits: A vibrant bond market would reduce the cost of capital, diversify risk, and enable infrastructure funding via long-duration debt.
• Key Reforms:
  • Enhance secondary market liquidity through electronic platforms.
  • Mandate large corporates to meet part of their financing needs via bonds (as SEBI recommended).
  • Strengthen investor protection and transparency, especially in relation to Ultimate Beneficial Owners (UBOs), to align with FATF norms.

3. Retirement Finance Innovation: Current retirement products, especially annuities, are inefficient and costly due to high intermediation fees. With India’s young population entering the workforce, there’s an urgent need for low-cost, scalable instruments.

• Reform Opportunity: Promote long-dated, zero-coupon government securities for retirement saving — an option with sovereign backing and minimal costs.
• Impact: Enhances long-term financial security, increases domestic savings, and provides a stable source of government borrowing.

4. Containing Shadow Banking Risks: The rise of NBFCs, margin lenders, and unregulated fintech credit platforms poses a systemic threat. The 2018 IL&FS and 2021 DHFL crises illustrated how excessive risk-taking by shadow banks can destabilize the financial system.

• Risks:
  • Excessive leverage.
  • High-cost loans disguised as margin funding.
  • Poor disclosure norms.
• Global Best Practice: The EU’s approach to mapping and regulating non-bank credit intermediaries offers a roadmap for India.
• Policy Steps:
  • Comprehensive data collection on off-balance-sheet lending.
  • Uniform prudential norms across NBFCs and banks under RBI oversight.

Conclusion

India’s ambition to become a $5 trillion economy hinges on a robust financial system. Harmonized regulations would improve ease of doing business. A deep bond market would catalyze infrastructure finance. Innovative retirement products would secure the demographic dividend. And regulating shadow banking would safeguard financial stability.