Revamping India’s BFSI Sector

• 14 Jun 2025

For Prelims: Reserve Bank of India, Capital formation, Sustainable development,Financial inclusion, Bank privatisation, Equities markets, Corporate bonds 

For Mains: State of Banking, Financial, Services and Insurance (BFSI) Sector in India, Challenges Related to BFSI sector, Steps to be Taken to Address Challenges in India’s BFSI Sector 

Source: TH 

Why in News? 

India's Banking, Financial, Services and Insurance (BFSI) sector faces ongoing structural challenges, including fragmented regulations, a shallow corporate bond market, and unregulated shadow banking, highlighting the need for comprehensive reforms to strengthen and stabilize the financial system for sustainable growth. 

What is the Current Status of India’s BFSI Sector? 

• About: The BFSI sector refers to Banking, Financial Services, and Insurance, which collectively form the backbone of a country’s financial infrastructure.  
  • It includes institutions such as banks, non-banking financial companies (NBFCs), insurance firms, mutual funds, pension funds, and fintech companies that provide financial products and services to individuals and businesses. 
• State of India’s BFSI Sector: 
  • Rapid Expansion and Changing Sector Dynamics:  India’s BFSI sector saw a 50-fold surge in market capitalisation, from Rs 1.8 trillion in 2005 to Rs 91 trillion in 2025, with a CAGR of around 22%.  
    • While banks remain foundational, their share in total market cap dropped from 85% to 57%, as Non-Banking Financial Companies (NBFCs) and fintechs gained ground through agility, innovation, and targeted financial solutions. 
  • Rise of Fintechs and NBFCs:  Since 2015, the fintech sector has grown exponentially, now valued at over Rs 12 trillion.  
    • Alongside, NBFCs have expanded significantly, bridging credit gaps for underserved populations, particularly in rural and informal sectors, thereby enhancing financial inclusion. 
  • Resilience & Financial Strength: The BFSI sector’s contribution to Nifty-50 earnings (share of profits made by companies in the BFSI industry within the total earnings of the top-50 companies listed on the stock market) increased from 16% in FY10 to 33% in FY24, supported by better asset quality, strong credit demand, and lower provisioning.  
    • By FY24, banks’ net worth reached Rs 26 trillion and NBFCs’ Rs 12.4 trillion, strengthening the sector’s resilience. 

What are the Key Challenges Related to India’s BFSI Sector? 

• Fragmented Regulatory Framework: India’s BFSI sector faces challenges due to a fragmented regulatory structure, with different regulators like RBI, SEBI, and IRDAI overseeing various segments.  
  • This leads to overlapping jurisdictions, regulatory gaps, and inconsistent supervision, resulting in compliance complexities and operational inefficiencies for financial institutions. 
    • The RBI’s directive to the National Stock Exchange (NSE) to build a secondary bond market was ignored, as equity trading offers higher profits—often through opaque algorithmic strategies that have drawn scrutiny. 
• Underdeveloped Corporate Bond Market: India’s corporate bond market remains shallow, illiquid, and opaque which keeps the cost of capital high, hampering business viability and economic growth.  
  • India’s domestic corporate bond market, valued at around Rs 64 trillion, represents only 18–20% of the country’s nominal GDP. 
• Opacity in Ownership and UBO Disclosure India faces challenges in ensuring transparency of capital flows and ownership in its financial markets due to lack of effective disclosure of the Ultimate Beneficial Owner (UBO).  
  • Current thresholds for UBO disclosure (10% for companies and 15% for partnerships) allow investors to structure their holdings just below the limit to avoid reporting.  
    • Investors often keep holdings just below disclosure limits (e.g., 9.9%) to evade UBO rules, hindering SEBI's ability to trace actual control. 
  • Some Foreign Portfolio Investors (FPIs) resist sharing detailed ownership data, weakening SEBI’s oversight. Despite India’s Financial Action Task Force (FATF) commitments, poor implementation hampers enforcement, transparency, and investor trust. 
• Weak Insurance Penetration: Despite rising awareness, insurance penetration in India remains low by global standards. As of 2023, it stood at just 4.2% of GDP, indicating limited coverage and underutilization of insurance as a financial safety net. 
• Non-Performing Assets (NPAs): Despite recent declines, Non-Performing Assets  remain a key challenge for Indian banks, especially public sector banks. High levels of bad loans constrain their lending capacity to productive sectors.  
  • Measures like the Insolvency and Bankruptcy Code (IBC) and bank recapitalization have been undertaken, yet the NPA ratio continues to affect the overall efficiency and stability of the banking system. 
• Shadow Banking Risks: Shadow banking (where NBFCs, margin lenders, and brokers provide banking-like services without comprehensive regulation), poses a significant threat to India’s financial stability.  
  • Retail investors frequently end up paying high interest rates (over 20%) on margin loans, as brokers lend back the investor’s own funds and charge interest on the entire amount. 
  • The scale of such unregulated lending remains unclear to regulators, raising concerns about financial stability akin to the 2008 global financial crisis triggered by unregulated derivatives. 
• Cybersecurity Threats: With growing digital adoption in the BFSI sector, cybersecurity risks have intensified. The rise in online banking and digital payments has increased vulnerability to data breaches, fraud, and cyber-attacks.  
  • In 2024, over 1.35 lakh phishing attacks targeting India’s financial sector were reported by cybersecurity firm Kaspersky. 

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

What Measures can be Implemented to Revamp India’s BFSI Sector? 

• Development of a Deep Bond Market:  India’s corporate bond market, at just 18-20% of GDP, lags significantly behind countries like South Korea (80%) and China (36%). 
  • Strengthening this market can lower borrowing costs, improve access to long-term capital, and support industrial growth and employment.  
• Strengthening KYC and UBO Norms:  Ensure accurate and accessible data on ownership and control of financial investments. Enforcing strict KYC and Ultimate Beneficial Ownership (UBO) compliance by SEBI will curb misuse, enhance transparency, and build investor trust in capital markets. 
• Regulating Shadow Banking:  Mandate comprehensive data collection and transparency in shadow banking operations, especially among NBFCs, brokers, and margin lenders.  
  • India should adopt a regulatory approach similar to the European Union’s, using data as a foundation before enforcing tighter oversight. 
• Integrated Financial Regulation: India needs harmonised regulation among RBI, SEBI, IRDAI, and PFRDA to address oversight gaps and regulatory inconsistencies. 
  • Different KYC norms across financial sectors cause inefficiencies and loopholes. A unified framework can enhance regulatory efficiency, transparency, and compliance. 
• Improving NPA Resolution Framework: To improve asset quality, NPA resolution must be faster and more efficient.  
  • Strengthening the IBC with support for quicker resolutions and incentivized asset sales, along with enhancing the capacity of NCLTs and DRTs, can significantly boost recovery rates and reduce the burden on financial institutions. 
• Reimagining the Insurance Market: Promote micro-insurance for low-income groups and offer tax incentives to middle-income segments.  
  • Simplify claim procedures, enhance transparency, and ensure timely settlements to build trust and expand insurance coverage. 
• Promoting Digital Transformation & Cybersecurity: As digital adoption grows, strengthening cybersecurity is crucial. Financial institutions should implement robust security frameworks and adopt AI, ML, and blockchain for better fraud detection and efficiency.  
  • Initiatives like RBI’s Mulehunter.ai highlight the move towards secure and intelligent digital banking.

Drishti Mains Question:

What are the key factors behind the growth of India’s BFSI sector? Examine the major challenges it faces in ensuring financial stability and inclusive growth. 

UPSC Civil Services Examination, Previous Year Question (PYQ) 

Prelims:

Q1. With reference to ‘Urban Cooperative Banks’ in India, consider the following statements: (2021) 

1. They are supervised and regulated by local boards set up by the State Governments. 
2. They can issue equity shares and preference shares. 
3. They were brought under the purview of the Banking Regulation Act, 1949 through an  Amendment in 1966. 

Which of the statements given above is/are correct? 

(a) 1 only  

(b) 2 and 3 only 

(c) 1 and 3 only  

(d) 1, 2 and 3 

Ans: (b) 

Q. Which one of the following links all the ATMs in India? (2018)

(a) Indian Banks’ Association 

(b) National Securities Depository Limited 

(c) National Payments Corporation of India 

(d) Reserve Bank of India 

Ans: (c) 

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Mains:

Q. Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. (2016)