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India’s Banking, Financial Services and Insurance (BFSI) sector faces persistent structural issues—fragmented regulations, a shallow bond market, and rising shadow banking—prompting calls for deep reforms to ensure financial stability and sustainable growth.

Key Terms and Concepts

Term	Definition
BFSI	Banking, Financial Services, and Insurance sector forming the financial backbone of the economy.
NBFC	Non-Banking Financial Companies that offer banking-like services without a banking license.
Fintech	Financial technology companies offering innovative digital financial services.
Shadow Banking	Financial activities by non-bank entities that operate without full regulatory oversight.
UBO	Ultimate Beneficial Owner, the individual who ultimately owns or controls an investment.

Current Status of India’s BFSI Sector

Aspect	Details
Definition	The BFSI sector includes Banking, Financial Services, and Insurance, forming the financial backbone of the economy.
Components	Banks, NBFCs, insurance firms, mutual funds, pension funds, fintech companies.
Market Capitalisation Growth	Increased from ₹1.8 trillion (2005) to ₹91 trillion (2025); CAGR ~22%.
Changing Market Share	Banks’ market cap share fell from 85% to 57% as NBFCs and fintechs grew.
Fintech Growth	Valued at over ₹12 trillion as of 2025; rapid expansion since 2015.
NBFC Role	Helped bridge credit gaps in rural/informal sectors, improving financial inclusion.
Earnings Contribution (Nifty-50)	BFSI share rose from 16% (FY10) to 33% (FY24).
Net Worth (FY24)	Banks: ₹26 trillion; NBFCs: ₹12.4 trillion.
Resilience Indicators	Improved asset quality, strong credit demand, lower provisioning support sector strength.

Key Challenges in India’s BFSI Sector

Challenge	Details
Fragmented Regulatory Framework	Multiple regulators (RBI, SEBI, IRDAI) create overlapping jurisdictions and regulatory gaps, causing compliance complexities. NSE ignored RBI’s directive to develop a bond market due to more lucrative equity trading.
Underdeveloped Corporate Bond Market	Valued at ₹64 trillion, only 18–20% of nominal GDP. Illiquidity and opacity increase capital costs and hamper business growth.
Opacity in UBO Disclosure	Investors avoid disclosure by keeping holdings just below reporting thresholds (9.9%, 14.9%). Weak enforcement and resistance from some FPIs undermine SEBI oversight and transparency.
Weak Insurance Penetration	Insurance coverage at just 4.2% of GDP (2023), far below global standards. Indicates underutilization of insurance as a financial safety net.
Non-Performing Assets (NPAs)	Persistent NPA issues in public sector banks reduce lending efficiency. Despite IBC and recapitalization, NPA ratios remain a concern for sector stability.
Shadow Banking Risks	NBFCs and brokers engage in bank-like operations without adequate regulation. Retail investors pay >20% on margin loans. Scale of unregulated activity is unclear, raising financial stability concerns.
Cybersecurity Threats	Digital expansion has heightened cyber risks. Over 1.35 lakh phishing attacks were reported in 2024 alone, targeting online banking and payment systems.

What are the Key Committees Related to Financial Sector Reforms in India?  

Area	Committee	Key Focus
Banking Reforms	Narasimham Committee	Banking sector reform, Asset Reconstruction
Financial Sector Reforms	Raghuram Rajan Committee	Overall financial sector reform
Bank Licensing	Bimal Jalan Committee	New bank licenses
NBFC Regulation	A.C. Shah Committee	Regulation of NBFCs
Cooperative Finance	R.N. Mirdha Committee	Cooperative societies
	Marathe Committee	Licensing of Urban Cooperative Banks
Banking Technology	Rangarajan Committee	Computerization of banks
NPAs & Credit Issues	Khanna Committee	Non-performing assets (NPAs)
	S.S. Kohli Committee	Willful defaulters
Financial Inclusion	Nachiket Mor Committee	Payment banks
	H.R. Khan Committee	Business Correspondent (BC) model
Rural & Priority Sector Banking	M.L. Dantwala Committee	Regional Rural Banks (RRBs)
	Gadgil Committee	Lead banking scheme
Capital Markets & Investment	Sodhani Committee	Forex & NRI investments
	Y.V. Reddy Committee	Small savings reform

Measures to Revamp India’s BFSI Sector

Measure	Description
Development of a Deep Bond Market	Increase corporate bond market share (currently 18–20% of GDP) by improving liquidity, reducing capital costs, and promoting long-term industrial growth. India lags behind South Korea (80%) and China (36%).
Strengthening KYC and UBO Norms	Enforce strict Know Your Customer (KYC) and Ultimate Beneficial Ownership (UBO) disclosures to prevent misuse, ensure transparency, and build investor trust in capital markets.
Regulating Shadow Banking	Collect comprehensive data on NBFCs, brokers, and margin lenders. Use a regulatory model similar to the EU’s, starting with robust data collection and transparency before imposing tighter controls.
Integrated Financial Regulation	Harmonise regulations across RBI, SEBI, IRDAI, and PFRDA. A unified regulatory framework can eliminate loopholes caused by inconsistent KYC norms and overlapping jurisdictions.
Improving NPA Resolution Framework	Speed up recovery processes through enhanced Insolvency and Bankruptcy Code (IBC) implementation, strengthen NCLTs and DRTs, and incentivize timely asset sales to reduce the burden of bad loans.
Reimagining the Insurance Market	Expand micro-insurance to low-income groups, provide tax benefits to middle-income families, simplify claim processes, and ensure fast, transparent settlements to increase coverage and trust.
Promoting Digital Transformation & Cybersecurity	Implement AI, ML, and blockchain to boost fraud detection and efficiency. Strengthen cybersecurity frameworks to counter rising threats; example: RBI’s Mulehunter.ai for secure digital banking.

In a nutshell
Memory Code: “FINSURE”

F – Fintech rise
I – Insurance low
N – NBFC shadow banking
S – Structural fragmentation
U – UBO opacity
R – Regulatory gaps
E – Earnings up, but reforms essential

Prelims Practice Questions

1. Which of the following best describes the term “shadow banking”?
   A) Regulated banking by private sector banks
   B) Government-run micro-finance lending
   C) Lending and financial services outside the formal regulatory framework
   D) Peer-to-peer lending platforms under RBI regulation
2. Consider the following statements:
   1. India’s corporate bond market constitutes over 50% of GDP.
   2. The Ultimate Beneficial Owner (UBO) disclosure threshold is 10% for companies.
   3. Insurance penetration in India is above the global average.
      Which of the statements is/are correct?
      A) 1 and 2 only
      B) 2 only
      C) 1 and 3 only
      D) 2 and 3 only
3. Which committee is related to payment banks and financial inclusion?
   A) Narasimham Committee
   B) Rangarajan Committee
   C) Nachiket Mor Committee
   D) R.N. Mirdha Committee

Mains Practice Questions

1. Discuss the major structural challenges facing India’s BFSI sector. Suggest comprehensive reforms required to address them. (UPSC GS-3)
2. The rise of fintechs and shadow banking poses new risks and opportunities for India’s financial ecosystem. Critically evaluate.

Prelims Answers and Explanations

Q.No	Answer	Explanation
1	C	Shadow banking refers to unregulated or less-regulated financial activities performed by NBFCs and other entities.
2	B	Statement 1 is incorrect (bond market is only ~20% of GDP), statement 2 is correct (10% UBO threshold for companies), and statement 3 is incorrect (India’s insurance penetration is below global average).
3	C	The Nachiket Mor Committee focused on financial inclusion and recommended payment banks.