THE CONTEXT: Countries with corporate-bond stocks above 60 % of GDP grow faster and suffer fewer credit crunches. India’s stock is barely 18 % of its GDP. Almost 58 % of Indian household wealth sits in bank deposits. Confusing nomination rules or opaque non-bank lenders erode trust, lower savings mobilisation, and ultimately raise the economy-wide cost of capital. Non-banking financial companies (NBFCs) now hold credit assets of about ₹ 52 trillion. Global watchdogs—from the International Monetary Fund to the European Banking Authority—warn that opaque linkages between “shadow banks’’ and the formal system can trigger the next crisis.
CURRENT LANDSCAPE:
| Segment | Recent data point | Why it matters |
|---|---|---|
| Nomination | The Banking Laws (Amendment) Act 2024 now permits up to four nominees per bank account and requires banks to record the email address and phone number of each nominee. | Patchy harmonisation—mutual funds still cap nominees at three; insurance allows unlimited percentage splits |
| Corporate bonds | Outstanding stock ≈ ₹ 67 trillion (18 % of GDP); average daily turnover ₹ 7,645 crore in FY 2024-25 | Illiquidity keeps yields 50–80 bps higher than sovereign curve despite AAA rating |
| UBO disclosure | SEBI’s 2024 circular seeks granular beneficial-owner data when any single investor group tops 50 % of assets or 25 % of Indian equity in a company | Mauritius-based funds resisted disclosures, delaying enforcement. |
| Retirement finance | RBI’s STRIPS framework (May 2018) enables sovereign zero-coupon bonds up to 40 years | Could replace costly annuities that shave ~2 % a year off long-term returns |
| Shadow banking | NBFC credit expected to exceed ₹ 60 trillion by FY 2026; retail book already 58 % of NBFC assets | Retail leverage, algorithmic margin funding and repo trades exposing small investors to > 20 % effective rates |
GLOBAL PERSPECTIVE: LESSONS FOR INDIA
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- United States: The Dodd-Frank Act tightened oversight of shadow banking, requiring comprehensive data on non-bank financial activities. India can adopt similar data-driven regulation.
- European Union: The EU’s Markets in Financial Instruments Directive (MiFID II) enhances bond market transparency through mandatory trade reporting. India could implement analogous measures.
- Singapore: A unified nomination framework across financial products simplifies succession planning, reducing disputes. India can emulate this model.
- South Korea: A vibrant corporate bond market, supported by tax incentives and electronic trading platforms, reduces funding costs. India can adopt similar incentives.
POLICY FRAMEWORK AND GOVERNMENT INITIATIVES
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- Banking: The 4R strategy (Recognition, Resolution, Recapitalization, Reforms) reduced NPAs from 14.6% in 2018 to 3.2% in 2024. The EASE (Enhanced Access and Service Excellence) reforms promote digital banking and governance.
- Bond Market: SEBI’s 2024 framework for ESG debt securities (green, yellow, blue bonds) aims to deepen the bond market, but implementation is slow.
- Retirement Planning: The National Pension System (NPS) and Atal Pension Yojana (APY) target formal and informal sectors, respectively, but coverage remains limited.
- Shadow Banking: RBI’s 2022 scale-based regulation for NBFCs categorizes them by risk, but enforcement is weak.
- Regulatory Compliance: The RBI’s RegTech sandbox and SEBI’s KYC automation guidelines promote compliance efficiency, but adoption is uneven.
- Union Budget 2025-26: Proposals include ₹500 crore for an AI Centre of Excellence in BFSI, a High-Level Committee for Regulatory Reforms, and an Investment Friendliness Index for states, signaling a trust-based regulatory approach.
STRUCTURAL FRICTIONS:
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- Nomination Inconsistency: The lack of a unified framework stems from siloed regulation by RBI, SEBI, and IRDAI, reflecting bureaucratic inertia. This increases litigation costs, with over 10,000 succession disputes pending in Indian courts in 2024.
- Bond Market Stagnation: Vested interests in equity trading, high stamp duties (0.005% to 0.1% across states), and limited retail participation hinder bond market development. Only 5% of corporate bonds are traded on secondary markets, compared to 30% in the US.
- Retirement Planning Barriers: Low financial literacy (24% of adults, as per RBI’s 2023 survey) and a preference for traditional savings like fixed deposits limit NPS adoption. High annuity costs reduce real returns by 20-30% over 30 years.
- Shadow Banking Risks: The absence of comprehensive data on NBFC lending obscures systemic risks. The IL&FS crisis demonstrated how interconnectedness amplifies shocks, with 66 NBFCs facing liquidity issues in 2019.
- Regulatory Opacity: FATF compliance is hampered by outdated KYC processes and lax enforcement. SEBI’s 2024 action against Mauritius funds exposed delays in UBO identification, with 15% of foreign portfolio investments lacking clear ownership data.
- Digital Vulnerabilities: Cyberattacks on BFSI increased by 30% in 2024, with 1.2 million fraud cases reported. Manual compliance processes cost banks ₹10,000 crore annually in inefficiencies.
IMPLICATIONS FOR GOVERNANCE
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- Economic Growth: High funding costs and shadow banking risks constrain industrial growth, threatening India’s 7.6% growth target.
- Financial Inclusion: Inconsistent rules and costly products exclude marginalized groups, with only 27% of rural households accessing formal savings products in 2024.
- Investor Confidence: Opaque markets and regulatory delays deter foreign direct investment (FDI), which fell by 3% in FY 2024-25.
- Systemic Stability: Shadow banking and cybersecurity risks pose threats to financial stability, as highlighted in the RBI’s 2024 Financial Stability Report.
- Good Governance: Fragmented regulation undermines trust-based governance, a key focus of the Union Budget 2025-26.
THE WAY FORWARD:
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- Enact a Uniform Nomination Code (UNC): Amend the Banking Regulation Act (1949), the Insurance Act (1938), and the Securities Contracts (Regulation) Act (1956) to codify the nominee as a trustee for the legal heirs. Build a fully encrypted National Nomination Registry, interoperable with DigiLocker, the Central KYC Registry, and the Account Aggregator framework. Mandate settlement within seven working days of receiving the death certificate; e-KYC of the nominee auto-triggers payout through the Public Tech Platform for Frictionless Credit, recently piloted by the Reserve Bank of India (RBI).
- Launch an Electronic Bond Dealing System: Retail (EBDS-R): Layer a mobile application—built on the existing Request-for-Quote (RFQ) engine—where a small saver can post bids in multiples of ₹10,000 and settle instantly using Unified Payments Interface (UPI) “Collect.” a) All new issuers above ₹100 crore to list on EBDS-R compulsorily; b) insurance, pension and mutual-fund schemes to route at least 20 percent of secondary trades through the electronic order-book in Year 1, rising to 50 percent by Year 3.
- Deep Beneficial-Ownership Transparency: Lower trigger from 10 percent (companies) and 15 percent (partnerships) to 5 percent across all structures and apply a concert-party test so split holdings in multiple vehicles are aggregated. Create an encrypted, permissioned blockchain where every Foreign Portfolio Investor (FPI) upload shareholder tables. Real-time regulatory nodes (SEBI, Directorate of Enforcement, Financial Intelligence Unit) can query without requiring manual affidavits, thereby preserving investor privacy through the use of zero-knowledge proofs.
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- Implement Dynamic Risk-Based Regulation for NBFCs: Replace asset-size categories with activity-based thresholds (e.g., broker-financed leverage > 12× equity triggers bank-like liquidity coverage ratio). Institute a unified “client suitability” test for all leveraged retail products, including margin funding. RBI’s supervisory technology (SupTech) should auto-escalate outliers for on-site inspection.
THE CONCLUSION:
“A resilient financial sector is the backbone of a fast-growing economy”. The time for incrementalism is over; India needs a transformative strategy to unlock its financial potential.
UPSC PAST YEAR QUESTION:
Q. The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify. 2013
MAINS PRACTICE QUESTION:
Q. India’s financial sector reforms must move from incrementalism to structural boldness. Examine.
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