Financial sector regulator in India

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Context: India’s financial sector regulators should stop hindering ideas in the financial technology sector and instead opt for a regulatory sandbox approach to nurture innovative financial technology applications, Niti Aayog CEO Amitabh Kant said recently.

Financial sector of India – An overview

  • Financial sector is the backbone of any economy and it plays a crucial role in the mobilization and allocation of resources.
  • Financial system of any country consists of financial markets, financial inter-mediation and financial instruments or financial products.

Financial sector regulators in India: In India, the financial system is regulated with the help of independent regulators, associated with the field of insurance, banking, commodity market, and capital market and also the field of pension funds.The Indian Government is also known for playing a significant role in controlling the field of financial security and influencing the roles of below mentioned financial regulators.

  1. Reserve Bank of India (RBI):
  • Reserve Bank of India is the apex monetary Institution of India.
  • It is also called the Central Bank of India.
  • The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
  • The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.
  • Though originally privately owned, since nationalization in 1949, the Reserve Bank of India is fully owned by the Government of India.
  • RBI is the financial regulator of all the financial institutions like public sector banks, private sector banks, RRBs, Cooperative banks and all type of non-banking financial companies.
  • The main function of RBI is to control the inflation of the country keeping in mind the growth of the country.
  1. Securities and Exchange Board of India (SEBI):
  • SEBI also form a major part under the financial body of India.
  • This is a regulator associated with the security markets in Indian Territory.
  • Established in the year 1988, the SEBI Act came into power in the year 1992.
  1. Insurance Regulatory and Development Authority of India (IRDAI):
  • The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India.
  • It was formed by an Act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements.
  • It headquarter is located in Hyderabad
  • It comprised of the Indian Parliamentary Act and was passed duly by the Indian government.
  • Insurance Regulatory and Development Authority of India is the regulator of all private sector insurance business and public sector insurance business in India.
  • IRDA issues guidelines for various insurance companies.
  • It regulates the functioning of insurance companies to direct them to work in the public interest.
  1. Pension Fund Regulatory and Development Authority (PFRDA):
  • Pension Fund regulatory is a pension related authority, which was established in the year 2003 by the Indian Government.
  • It is authorized by the Finance Ministry, and it helps in promoting income security of old age by regulating and also developing pension funds.
  • This group can also help in protecting the interest rate of the subscribers, associated with the schemes of pension money along with the related matters.
  • PFRDA is also responsible for the appointment of different other intermediate agencies like Pension Fund managers.
  1. Forward Markets Commission:
  • It is the chief regulator of the commodity (MCX, UCX, NMCE etc) of the Indian future market
  • It’s headquarter is located in Mumbai
  • Working in collaboration with the Finance Ministry.
  • The main objective of this body is to advise the Central government on matters of the Forwards Contract Act, 1952.

Other financial regulatory bodies : National Stock Exchange of India ·In the year 1991 Pherwani Committee recommended to establish National Stock Excahnge (NSE) in India.

·In 1992 the Government of India authorized IDBI for establishing this exchange.

·In National Stock Exchange there is trading of equity shares, bonds and government securities.

·National Stock Exchange has achieved world standards. ·Both MIBOR (Mumbai Inter Bank Offer Rate) and MIBID (Mumbai Inter Bank Bid Rate) are two new references rates of the National Stock Exchanges. These two new reference rates were launched on June 15, 1998 for the loans of interbank call money market.

Bombay stock exchange of India:

  • Bombay stock Exchange is one of the oldest stock exchanges in Asia was established in year 1875 in the name of “The Native Share and Stock Broker Association”.
  • BSE is located in Mumbai.
  • It got recognition in 1956 from the Government of India under Securities Contracts (Regulation) Act, 1956.

Foreign Investment Promotion Board ·The Foreign Investment Promotion Board is a special agency in India dealing with the matters relating to Foreign Direct Investment.

·It was set up with a view to raise the volume of investment to the country. ·The objective of the board is to create a base in the country by which a larger volume of investment can be drawn to the country.

·On 18 February 2003, the board was transferred to the Department of Economic Affairs (DEA) Ministry of Finance.

Global recognition:

  • The Financial Stability Board (FSB), an international body for global financial system, has placed India in the league of countries that are ‘compliant or largely compliant’ on implementation of priority area reforms.
  • Other countries that have been found to be ‘compliant or largely compliant’ include Argentina, Australia, Brazil, Canada, China, Hong Kong, Indonesia, Japan, Mexico, South Korea, Russia, Singapore, South Africa, Switzerland, Turkey and the US.
  • The FSB also pointed out that the jurisdictions that have not had an IMF-World Bank Financial Sector Assessment Programme(FSAP) in the last five years are undergoing one in 2017-19 and the countries include India.

Financial sector reforms in India:

  • Financial sector is the mainstay of any economy and it contributes immensely in the mobilization and distribution of resources.
  • Financial sector reforms have long been viewed as a significant part of the program for policy reform in developing nations.
  • The main objective of the financial sector reforms are to allocate the resources efficiently, increasing the return on investment and accelerate growth of the real sectors in the economy.
  • Financial sector reforms were initiated by the government since the early 1990’s have been meet the challenge of a complex financial structure.
  • The Union Government has proposed last year setting up Financial Data Management Centre (FDMC) based on recommendation of a committee set up under the Department of Economic Affairs (DEC). The Committee was headed by Ajay Tyagi, Additional Secretary in Union Finance Ministry and has submitted its report and a draft bill titled The Financial Data Management Centre Bill 2016
  • The Narasimham Committee was established under the former RBI Governor M. Narasimham in August 1991 to look into all aspects of the financial system in India.
  • Forex market reform: Forex market reform took place in 1993 and the successive adoptions of current account convertibility were the acmes of the forex reform introduced in the Indian market.
  • The Government initiatives to priorities the JAM Trinity- Jan Dhan, Aadhaar and mobile-holds the key to one of the biggest reforms aimed at transforming India.
  • Government’s million towards a cashless economy is the significant move in this direction.


  • In India, cryptocurrencies are not officially recognized, virtual currencies stored in e-wallets are exposed to hacking and users are exposed to a lack of recourse in case of any problem or disputes.
  • The RBI has been cautioning users about the risk of dabbling in virtual currencies that it does not recognise, since 2013.
  • The finance ministry has set up a panel to study regulation of virtual currencies

Factors affecting financial system of India:

  • Demand and supply side factors.
  • The lack of taking a more consultative approach to rule-making
  • Financial and digital literacy
  • Challenging business economics
  • Supporting public good investments like the unified payments interface (UPI), etc

Solutions to improve financial sector in India

  • Creation of an efficient, productive and profitable financial sector.
  • Removal of the erstwhile existing financial repression
  • Enabling the process of price discovery by the market determination of interest rates that improves allocate efficiency of resources.
  • Providing operational and functional autonomy to institution
  • Preparing the financial system for increasing international competition.
  • Promoting financial stability in the wake of domestic and external shocks.
  • Strengthening the foundations of the banking system
  • Streamlining procedures, updating technology and human resource development
  • Structural changes in the financial sector


  • A regulatory sandbox is an experimental oversight mechanism for innovative products and services that do not fall into an existing regulatory regimes or cut across traditional regulators’ domains.
  • Such innovations are permitted to operate for a limited period of time at a limited scale to understand their efficacy and implications, so that the best alternatives for regulation can be evolved based on concerns that emerge.
  • The sandbox needs to be designed to adopt this unified consumer-centric lens through a single integrated sandbox serving all four financial sector regulators.
  • The sandbox option can be a great way to unlock innovations for mass public adoption, because a regulatory sandbox balances the twin objectives of nurturing financial innovation and safeguarding consumer interests

Financial sector growth: The financial sector of India witnessed growth due to the following reasons:

  • The Indian financial sector (banking, insurance and capital markets) opened up to new private players including foreign companies.
  • The last decade witnessed a significant broadening and deepening of financial markets with the introduction of several new instruments and products in banking and insurance sector.
  • The new players adopted international best practices and modern technology to offer a more sophisticated range of financial services to corporate, retail and institutional customers.
  • Financial sector regulators too have been proactive in ensuring the new regulations and guidelines are more or less in tandem with the growth in the financial sector.
  • The consequent competition in the market brought in innovation, better customer service and efficiency in the financial sector in India.

Key points:

  • There are over 600 start-ups in the country in the financial technology (fintech) space, letting them operate in a ‘live, but controlled environment with some regulations will provide a solid evidence base’ on their strengths and weaknesses.
  • More than 30 of those start-ups are focused on the peer-to-peer lending space alone and their market potential is expected to reach $5 billion by 2020.
  • Several start-ups are working in areas such as virtual currencies like Bitcoins, Blockchain based settlements and so on.
  • The total fintech market in India is estimated to be worth $8billion and is expected to grow to about $14 billion by 2020.
  • With more than $ 17 billion funding and over 1,400 deals in 2016, FinTech is one of the most promising sector internationally, according to CII-Deloitte report on the subject released recently.
  • With nearly $270 million funding in 2016, India is ranked amongst the top ten FinTech markets globally.
  • Globally, regulatory sandboxes have been introduced in the UK, Singapore, Australia, Malaysia, and UAE.
  • Each country have a certain “target group” for which sandboxing is done.
  • All these countries have so far created a sandboxed environment to support financial institutions (FIs) and fintech firms, according to CII-Deloitte report on the subject released recently.


  • Financial sector is backbone of the Indian economy. India need to remain vigilant in maintain an open and integrated global financial system and the effects of reforms on emerging market and developing economies.
  • The role of India’s financial sector regulators need to be change from restrictors to facilitators and creators.They should act as facilitator of growth.
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