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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
- 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 - Consider the following statements:
- India’s corporate bond market constitutes over 50% of GDP.
- The Ultimate Beneficial Owner (UBO) disclosure threshold is 10% for companies.
- 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
- 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
- Discuss the major structural challenges facing India’s BFSI sector. Suggest comprehensive reforms required to address them. (UPSC GS-3)
- 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. |
