India’s Financial Sector Reforms: Beyond Slogans and Cosmetic Changes

India's financial sector is at a crucial juncture, requiring deeper reforms beyond current incremental changes to enhance efficiency, transparency, and growth potential.

Key Issues in India's Financial Sector

• Nomination Conundrum:
  • Existing nomination rules across banks, mutual funds, and insurance are inconsistent and lack legal clarity.
  • This inconsistency confuses savers, leading to potential exploitation through litigation.
  • A harmonized nomination framework clarifying nominee rights versus legal heir claims is necessary.
• Corporate Bond Market:
  • The bond market remains underdeveloped, affecting business viability due to high capital costs.
  • An efficient bond market could reduce funding costs by 2% to 3%, benefiting industry and employment.
  • Efforts to develop a secondary bond market have been overshadowed by the focus on equity trading.
• Regulatory Transparency:
  • India is committed to FATF norms but faces challenges in implementing ownership data transparency.
  • UBO disclosure thresholds create loopholes for avoiding identification, weakening market integrity.
• Retirement Planning:
  • Annuities are costly due to insurance company intermediation margins.
  • Long-dated zero-coupon government securities offer a cheaper alternative, enhancing saver gains.
• Shadow Banking:
  • NBFCs and brokers offer bank-like services without full oversight, posing financial system risks.
  • Opaque lending practices with high-interest rates are prevalent, similar to the 2008 financial crisis triggers.
  • Transparency and data collection on shadow banking activities are crucial for future regulation.

Conclusion

India's financial sector reforms must embrace a comprehensive, forward-looking approach that aligns regulations across verticals, cultivates a robust bond market, innovates retirement finance, and manages shadow banking effectively.