Context

• India’s financial sector stands at a critical juncture, where incremental reforms have yielded limited results in the face of deep-seated structural inefficiencies.
• Despite efforts by the government and regulators, the financial ecosystem, spanning banking, financial services, and insurance (BFSI), continues to grapple with fundamental frictions that deter savings, discourage investment, and delay economic growth.
• To unlock its full potential, India needs not just more reform, but smarter, systemic restructuring focused on transparency, efficiency, and inclusivity.

Key Areas Requiring Urgent Attention

• Inconsistent Nomination Frameworks: Legal Ambiguity and Public Inconvenience
  • One of the most glaring inefficiencies in India’s financial architecture lies in the disjointed and confusing nomination rules across the BFSI domain.
  • A single citizen encounters different nomination regimes for bank accounts, mutual funds, and insurance policies, ranging from singular to multiple nominees with varying rights and legal standings.
  • This inconsistency not only bewilders consumers but also fuels legal disputes and facilitates exploitation through litigation.
  • The absence of a harmonised nomination framework results in significant ambiguity regarding the nominee’s legal authority versus the rights of legal heirs.
  • There is little justification for maintaining three separate systems, and unless the government can present compelling evidence to support such a setup, the status quo appears to serve no public interest.
  • A unified, transparent framework that clarifies these roles would reduce legal confusion and enhance consumer protection.
• India’s Shallow Corporate Bond Market: A Missed Economic Opportunity
  • India’s corporate bond market remains underdeveloped, illiquid, and opaque despite numerous policy initiatives over the years.
  • This shortfall is economically significant. A robust bond market would lower the cost of capital by 2% to 3%, making businesses more viable and spurring job creation.
  • However, efforts to build this market, such as the Reserve Bank of India’s directive to the National Stock Exchange (NSE) to develop a secondary bond platform, have seen minimal follow-through, largely due to a preference for more lucrative equity trading practices, often enabled by algorithmic strategies.
  • The opacity of these operations undermines financial integrity and accountability.
  • When journalists exposed malpractices at the NSE, the institution responded with a defamation suit rather than corrective action, a response later criticized by the High Court.
  • Such episodes highlight the need for greater regulatory transparency and accountability in capital markets, particularly in light of India’s global obligations as a member of the Financial Action Task Force (FATF).
• Ultimate Beneficial Ownership (UBO) Disclosure: Loopholes and Regulatory Evasion
  • A key concern in capital market transparency is the inadequate disclosure of Ultimate Beneficial Ownership (UBO).
  • Although India adheres to FATF norms, current thresholds, 10% for companies and 15% for partnerships, allow entities to structure investments just below these levels, thereby skirting disclosure requirements.
  • This loophole was evident in the case of two Mauritius-based foreign portfolio investors, Elara India Opportunities Fund and Vespera Fund, who resisted multiple regulatory requests for shareholder data.
  • Opaque ownership structures hinder effective regulatory oversight and threaten the long-term integrity of India’s markets.
  • Without accurate and accessible UBO data, regulators are unable to determine who truly controls or benefits from specific financial transactions.
  • To restore trust and attract sustainable investment, India must tighten disclosure norms and enhance enforcement capabilities.

Some Other Areas of Concern

• Retirement Planning: A High-Cost System in Need of Innovation
  • India’s current approach to retirement planning disproportionately relies on annuity-based products offered by insurance companies, which are expensive due to intermediation costs.
  • These fees, although seemingly small (typically around 2%), accumulate significantly over time, eroding returns for savers.
  • A compelling alternative lies in long-dated, zero-coupon government securities, low-cost, sovereign-backed instruments already supported by existing technology.
  • These products eliminate the need for costly intermediation and provide a straightforward solution for long-term savings.
  • Despite the clear advantages, both the government and the RBI have been slow to act.
  • By overlooking these instruments, India is missing a crucial opportunity to build a sustainable, efficient retirement ecosystem for its growing working population.
• Shadow Banking: An Unseen Threat to Financial Stability
  • The most urgent and potentially dangerous blind spot in India’s financial system is the unregulated growth of shadow banking.
  • Non-Banking Financial Companies (NBFCs), margin lenders, and brokers often provide bank-like services without being subject to equivalent regulatory scrutiny.
  • This segment is no longer fringe, it is systemic, and it poses a real threat to financial stability.
  • A prime example is the margin funding mechanism used by brokers, where retail investors are offered disguised loans with effective interest rates exceeding 20%.
  • Investors unknowingly become entangled in high-risk, high-cost credit arrangements that mimic traditional banking practices without the safeguards.
  • This type of opaque financial engineering was a major contributor to the 2008 global financial crisis, and experts warn that history may repeat itself if such activities are not checked.
  • The European Union has already taken steps to collect comprehensive data on shadow banking, and India must follow suit.

Conclusion

• The issues of inconsistent nominations, a fragile bond market, ineffective retirement instruments, and opaque shadow banking practices cannot be resolved in isolation.
• What is required is a coherent, forward-looking regulatory blueprint that harmonises rules, prioritises transparency, leverages technological innovation, and ensures financial inclusion.
• In an era of rapid economic change and global interdependence, India must act decisively to transform its financial sector from a maze of legacy inefficiencies into a dynamic, resilient ecosystem.
• Only then can it support the country’s aspirations for inclusive growth, global investment leadership, and long-term financial security.