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India's financial sector is vast and rapidly growing. It encompasses commercial banks, insurance companies, non-banking financial institutions (NBFCs), cooperatives, pension funds, mutual funds, and other financial entities. Banks dominate the sector, accounting for over 60% of total financial system assets, followed by insurance. Other intermediaries include regional rural banks and cooperative banks that serve underbanked rural and urban populations. Many NBFCs operate in specialized areas like leasing, factoring, microfinance, and infrastructure finance, although some can accept deposits. Pension coverage extends to 12% of the working population and consists of civil service arrangements, a mandatory scheme for formal private sector employees, and private plans offered through insurance companies.
Current Regulatory Bodies
The Reserve Bank of India (RBI) is the primary regulator and supervisor of the Indian financial system. Its purview includes commercial banks, urban cooperative banks (UCBs), select financial institutions, and some NBFCs. Other institutions regulate or oversee specific sectors:
National Bank for Agriculture and Rural Development (NABARD) supervises Regional Rural Banks and rural cooperatives.
National Housing Bank (NHB) regulates housing finance companies.
Department of Company Affairs (DCA) regulates deposit-taking activities of non-NBFC corporations registered under the Companies Act.
The Registrar of Cooperatives of various states, along with the central government, jointly regulates single-state and multi-state cooperative banks, respectively. The RBI and NABARD oversee their banking functions, while the state/central government maintains control over management. This "dual control" creates challenges in supervising and regulating cooperative banks.
Securities and Exchange Board of India (SEBI) governs the capital market, mutual funds, and other capital market intermediaries.
Insurance Regulatory and Development Authority (IRDA) regulates the insurance sector.
Pension Fund Regulatory and Development Authority (PFRDA) regulates pension funds.
Issues with the Current Regulatory Framework
India's financial regulation is currently product-based, meaning each product has a separate regulator. For instance, the RBI regulates fixed deposits and other banking products, the government regulates small savings products, SEBI regulates mutual funds and equity markets, IRDA regulates insurance, and PFRDA regulates the New Pension Scheme (NPS). All these regulators aim to protect customer interests, but this fragmented structure leads to inconsistencies and inefficiencies.
Regulatory Arbitrage: The multiple regulators create varying requirements, allowing for exploitation of these differences. For example, similarities exist between mutual funds and Unit Linked Insurance Plans (ULIPs). SEBI imposes stricter disclosure standards on mutual funds compared to IRDA's requirements for ULIPs. Additionally, bank employees can distribute financial products like mutual funds and insurance products without adhering to SEBI and IRDA regulations.
Regulatory Gaps: The current framework has gaps where no regulator takes responsibility. These include various ponzi schemes that periodically surface and are not regulated by any existing agency. Organizations like chit funds also seem to entirely bypass financial sector regulation.
Overlaps and Conflicts: Overlapping laws and agencies can lead to conflicts between regulators, hindering policy development and market growth. Examples include SEBI's extended litigation against the Sahara group and recent investigations into alleged money laundering by some banks using insurance products.
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