case study of indian financial system

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India has experienced a prolonged period of strong economic growth since it embarked on major structural reforms and economic liberalization in 1991, with real GDP growth averaging about 6.6 percent during 1991–2019. Millions have been lifted out of poverty. With a population of 1.4 billion and about 7 percent of world economic output (in purchasing power parity terms), India is the third largest economy—after the US and China (see Annex Table 1.1.1, and Figure 1.1) and projected to be the most populous country in 2023 (see United Nations 2022). As such, developments in India have significant global and regional implications, including via spillovers through international trade and global supply chains. The Indian financial sector, the topic of the ten chapters in this volume, plays a critical role in the country’s economic development and has provided an important foundation for strong and sustainable economic growth over the past three decades.

• Introduction

India has experienced a prolonged period of strong economic growth since it embarked on major structural reforms and economic liberalization in 1991, with real GDP growth averaging about 6.6 percent during 1991–2019. Millions have been lifted out of poverty. With a population of 1.4 billion and about 7 percent of world economic output (in purchasing power parity terms), India is the third largest economy—after the US and China (see Annex Table 1.1.1 , and Figure 1.1 ) and projected to be the most populous country in 2023 (see United Nations 2022 ). As such, developments in India have significant global and regional implications, including via spillovers through international trade and global supply chains. The Indian financial sector, the topic of the ten chapters in this volume, plays a critical role in the country’s economic development and has provided an important foundation for strong and sustainable economic growth over the past three decades.

India’s Share of Global GDP

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At the same time, India’s economic development has not been linear and has been impacted by external and domestic shocks, some directly related to the financial sector. Indeed, India was not spared from external regional and global shocks, such as the Asian financial crisis (1997), the global financial crisis (2008), and more recently, the devastating impact of the COVID-19 pandemic (from 2020) and the war in Ukraine (2022). The economy has also been hit by domestic shocks. These included, for example, a period of excessive bank credit growth resulting in misallocation of credit and a subsequent and much-needed tightening of banking regulation (2014 and 2015) and the broader financial sector fallout from the default of a few nonbanking financial companies (NBFCs) (2018) (see Figure 1.2 ).

Key Shocks and Reforms

(Credit and GDP growth, percent)

Not all shocks to India’s economy have been adverse, however. Economic development has been supported by important reforms, from increasing the role of the private sector in the banking sector (from 1993 onward) to the introduction of flexible inflation targeting and the Insolvency and Bankruptcy Code (IBC) (both in 2016). These reforms have contributed to financial deepening (see Figure 1.3 ) As such, the 30 years since 1991 highlight that even though external shocks are outside the direct control of domestic policymakers, continued structural reforms and maintaining the health of the financial sector are critically important for India’s growth performance (see Annex Table 1.1.2 ).

Financial Deepening

(Credit to GDP, percent)

Developments over the past few years illustrate this point. India’s economy was already slowing prior to the COVID-19 pandemic, reflecting a decline in private sector demand. The pandemic and the initial, relatively stringent, lockdown caused a deep and broad-based economic downturn in 2020, followed by a further temporary slowdown in activity during the second pandemic wave in 2021, with potential for adverse social and longer lasting impact. To minimize the economic and social consequences of the pandemic shock, policymakers responded with fiscal support—including scaled-up support to vulnerable groups—wide-ranging monetary policy easing, liquidity provision, and accommodative financial sector and regulatory policies. Important financial sector measures included a temporary loan moratorium, financial support to firms through measures such as the Emergency Credit Line Guarantee Scheme, and the temporary suspension of firm resolution through the IBC (see Chapter 9 on addressing corporate sector vulnerabilities). Most pandemic-related support measures have by now expired.

The pandemic-related downturn has been followed by a strong rebound in economic activity, with output in most sectors (except for contact-intensive services) recovering to pre-pandemic levels by end-FY2021/22. Credit growth has increased, thus strengthening financial sector support to economic activity, and credit quality indicators have improved, reflecting stronger corporate and financial sector balance sheets. Despite the expiration of the pandemic-related support measures, banks have seen their nonperforming asset ratio decrease and capital ratio increase. The balance sheets of NBFCs have also improved.

India’s long-term growth outlook is positive. Strong population growth in recent decades has delivered a young labor force with the promise of significant economic dividends. And India’s lower-middle income status suggests the possibility of a significant catch-up in the years ahead. Realizing its medium-term growth potential (currently estimated at about 6 percent) and further growing that potential depend, however, on steadfast implementation of a broad structural reform agenda. For example, long-standing reform priorities include infrastructure investment to overcome bottlenecks, land and labor reforms, better governance, and improved education outcomes. Each of these will help maximize long-term growth. Structural reforms would need to be accompanied by a strengthening of social safety nets and adequate support to those that may be adversely impacted during the transition.

Alongside the above-mentioned reforms, further financial development and increasing financial sector efficiency and strength would also be needed to further expand India’s growth potential. A well-functioning financial sector would help channel resources to their most productive uses, supporting the creation of physical capital and the buildup of human capital, thereby raising growth. This book digs deeper into the various facets of India’s financial sector to understand its strengths and opportunities and to elicit policy actions that could help the financial sector better support India’s growth potential.

• India’s Financial System: An Overview

In line with India’s strong growth performance, the country’s financial system has grown. At the same time, the structure of India’s financial system has also changed, as reflected, among other things, in the growth of NBFCs, greater reliance on market-based financing, and the emergence of digital money and financing.

Financial intermediaries , especially public sector banks, still dominate India’s financial system (see Figure 1.4 ). Twelve public sector banks accounted for 60 percent of total bank assets. The remaining 40 percent includes 22 domestic private sector banks and 46 foreign banks operating in India. There were also some 100,000 regional rural, urban cooperative, and rural cooperative banks, reflecting the regional diversity of the country.

Financial Intermediaries

(Share of nominal GDP)

Following the asset quality review and tightening of banking regulation in 2015 to deal with risks after years of strong bank credit growth, less regulated NBFCs grew rapidly. This resulted in NBFC credit growth in 2018 of about 30 percent, partly filling the gap created by slower bank credit growth. 1 Especially, micro, small, and medium enterprises (MSMEs) benefited from NBFC loans.

In 2018, however, Infrastructure Leasing and Financial Services, a systemically important NBFC, defaulted, representing an important shock to the sector that led to further defaults and negative spillovers to the rest of the financial system and the real economy. 2 Since then, regulation and supervision has been tightened, with the new scale-based regulatory framework bringing regulation of NBFCs closer to bank regulation, especially for the 25–30 largest institutions. Given the nonsystemic position of smaller NBFCs and associated regulatory burden, the regulation for these institutions remains less onerous. The banking sector remains closely connected to, and has been an important source of financing for, the NBFC sector (see Chapter 3 on the development of bank and NBFC sectors). Ongoing NBFC regulatory reform agenda focuses on tighter capital, provisioning, and large exposure requirements for the largest NBFCs.

Market-based financing is also playing an increasingly important role in India’s financial system. From a low base, the bond market has grown rapidly over the past 10 years and total outstanding debt amounted to about 80 percent of GDP at the end of 2021. The attractiveness of India’s bond market for international investors has also increased, given the prospect of the inclusion of the country’s bonds in global bond indices such as the Bloomberg, FTSE, and JPMorgan Chase & Co. bond indices, which by some estimates could lead to a passive inflow of $30–$40 billion. 3 While foreign bond holdings of 2 percent are currently low, that share could rise quickly, as China’s inclusion in global bond indices a few years earlier has demonstrated. At the same time, the corporate debt market currently accounting for about 18 percent of GDP still has a lot of room for development (see Chapter 5 on the development of the private debt market) (see Figures 1.5 and 1.6 ). India’s equity market capitalization has also grown significantly, albeit with fluctuations, and recently became the fifth largest in the world in March 2022, after the US, China, Japan, Hong Kong SAR, and China, and ahead of the UK and Canada (see Figure 1.7 ). 4

Outstanding Government and Corporate Debt Securities

(Percent of GDP)

Equity Market Capitalization

Measures of financial sector development, such as bank-credit-to-GDP ratios, equity market capitalization, and the value of outstanding bonds, however, do not fully capture India’s financial sector development. 5 For example, measures to foster financial inclusion, including by strengthening the digital payment infrastructure, have significantly contributed to India’s financial sector development. India has developed a sophisticated and efficient digital payments infrastructure. Among important innovations, the Unified Payments Interface, an interoperable payments platform, has fostered innovation and attracted the private sector with new technologies and products to different segments of the population, thus enhancing financial inclusion (see Chapter 7 on fintech and financial inclusion). Furthermore, the framework for payments is integrated into a broader digital platform that combines elements such as digital identity, data, and payments (known as the India Stack). Ongoing efforts, such as innovations that allow the use of low-tech cell phones to engage in financial transactions, will further strengthen financial inclusion. Progress has been achieved in a relatively short period of time, with strong synergies between the public and private sectors. Looking ahead, the Reserve Bank of India (RBI) is planning to begin the phased implementation of a central bank digital currency (CBDC) by March 2023, with potential to further enhance the digital payments landscape. More than 100 other countries are researching or piloting CBDCs in some manner. While CBDCs offer benefits, they may also raise risks, including risks to financial stability, so it is important to manage these risks with appropriate design of CBDC and within legal and regulatory systems that maximize its benefits and minimize its risks.

India’s last financial sector assessment (FSAPs) in 2018 highlighted the rapidly changing structure and development of the system. 6 It also listed recommendations to (1) reduce vulnerabilities, (2) further strengthen the framework for financial sector oversight, and (3) foster market development. Since then, the country has made several advances in addressing the recommendations (see IMF 2018 and IMF 2021 ). For example, in the banking sector, the number of public sector banks was reduced from 20 to 12, and in 2021 the government announced plans to privatize two additional banks. Important progress has also been made in improving public sector bank governance; bank recapitalization; corporate debt restructuring; regulation, supervision, and oversight of financial market institutions; and crisis management.

In 2019, the government announced stronger governance measures allowing banks to recruit chief risk officers from the market, making management more accountable to boards of directors, increasing the role of externally appointed board directors, and increasing flexibility in adjusting compensation of management. To deal more effectively with nonperforming loans, new regulation was introduced in 2019 giving banks more flexibility in the loan resolution process, detailed restructuring schemes were reintroduced during COVID-19, and the authorities established National Assets Reconstruction Company Limited to deal with distressed assets (see Chapter 10 on strengthening private debt resolutions frameworks). Also, both public and private sector banks increased their capital. Despite these measures, the financial sector reform agenda remains substantial.

As in other countries, India’s financial sector is also confronted with new challenges, including the impact of climate change and the need to adapt. Further digitalization of financial systems, in turn, brings many opportunities to build on progress in improving access to financial services to economically disadvantaged populations. Financial innovations and rapid financial sector development, however, also present continuous challenges for financial sector regulation and supervision, which constantly need to be upgraded to allow the healthy development of the financial sector while avoiding risk buildup.

• Strengthening India’s Financial System

What should be done to strengthen the financial system to support growth and reduce vulnerabilities? This book sets itself to answer that question through discussing the linkages between the financial sector and growth, how to improve bank lending to foster productivity, and measures to further develop India’s corporate bond market. The book also reflects on India’s success in leveraging digitalization to foster financial inclusion and highlights how the financial system can be helpful in addressing climate issues through the development of India’s environmental, social, and governance (ESG) financial markets.

Chapter 2 discusses linkages between India’s financial sector and growth . A country’s financial sector plays a key role in the allocation of scarce resources and impacts the economy in the short and long term. Economic fluctuations can be amplified and directly linked to the financial sector given relationships (comovements) among credit, asset prices, and the real economy. Also, the health of the banking sector can constrain bank lending. Having a good understanding of these relationships can guide policymakers in increasing financial sector resilience and reducing bottlenecks to foster economic growth.

Two approaches are used to analyze the linkages between India’s financial sector and growth. The first approach uses a framework—Growth-at-Risk—to relate contemporaneous macro-financial variables to future growth. The results suggest that higher credit and lower nonperforming loans are associated with higher real GDP growth. In fact, a negative shock to credit and leverage could imply lower growth in the short and medium term, as well as higher tail risks. Furthermore, policies to support credit growth and to strengthen balance sheets would be particularly important during periods of low economic growth.

The second approach focuses on whether bank capitalization plays a role in determining banks’ ability to provide credit to the economy. Indeed, the results suggest that the level of capitalization is critical for credit and thus economic growth, especially for private sector banks. The relationship is weaker, however, for public sector banks, possibly reflecting a perception of implicit guarantees— that is, the government would step in to bail those banks out—as well as directed lending.

Both approaches, however, highlight the importance of resolving nonperform-ing loans (the focus of Chapter 10 on strengthening private debt resolution frameworks) and strengthening capital buffers to foster credit growth and, ultimately, real economic growth.

Chapter 3 discusses financial sector development and presents an overview of non-banking financial companies . The importance of public sector banks in India’s financial sector goes back to the nationalizations of 1969 and 1980. Since then, public sector banks have played a key role in the sector, including support for lending to priority sectors and efforts to foster financial inclusion. Following strong credit growth during the 2000s related to corporate lending to support infrastructure—which continued throughout the 2008 global financial crisis when domestic private and foreign bank credit growth slowed—public sector bank asset quality started to deteriorate. The RBI’s Asset Quality Review in 2015 led to a sharp increase in nonperforming loans, a deceleration in credit growth, and a decline in profitability and capital. Subsequent banking reforms and recapitalizations facilitated balance sheet cleanup and mergers, which saw the number of public sector banks decline from 27 to 12.

The tightening of bank regulation and a slowdown in bank credit growth during the first half of the 2010s in turn were associated with regulatory arbitrage and a surge in lending by NBFCs. In 2021, the almost 10,000 NBFCs accounted for about 25 percent of commercial bank loans. NBFCs tend to rely more on bank borrowing and market funding. Given their specialization within a few loan segments, including real estate and infrastructure, NBFCs have less-diversified portfolios. Most NBFCs are private, while government-owned entities account for about 40 percent of assets.

The default of two NBFCs in 2018 highlighted the risk of spillovers and contagion, with negative feedback loops from NBFCs to financial intermediaries, a credit crunch, corporate defaults, and subsequent further weakening of NBFC balance sheets. Since 2019 and the subsequent COVID-19 shock, the RBI has taken steps to strengthen NBFC regulation and supervision. These included guidelines to enhance liquidity risk management and the introduction of a scale-based framework classifying NBFCs by characteristic, including size and whether they were deposit taking. This led to a regulatory convergence between banks and certain types of NBFCs. Given that today NBFCs play an important role in the financial sector, including financing to segments of micro, small, and medium-size enterprises, it is important to increase the resilience of NBFCs and to minimize potential spillovers to the banking sector. This calls for further strengthening of regulation to facilitate diversification of NBFC funding sources as well as limits on bank borrowing by NBFCs.

Chapter 4 examines whether banks deliver on their mandate to channel credit to productive activities . To maximize India’s long-term growth potential, efficient allocation of factors of production (capital and labor) is paramount. Indeed, income and productivity gaps between advanced and emerging economies are frequently attributed to capital misallocation and related factors. Given the large role of banks in India’s financial system, it is thus important to understand whether bank credit flows to the most productive sectors and firms.

Because India’s banking sector is dominated by public sector banks, the empirical analysis focuses on the link between credit growth, firm productivity, and bank ownership. It uses firm-level data from the Centre for Monitoring Indian Economy’s Prowess database and bank-level financial information from the Reserve Bank of India’s Database on Indian Economy from 2005 to 2020. Key variables of interest include the stock of bank credit and sales scaled by physical capital (plant, property, and equipment) to measure firm capital productivity. The regression analysis controls for firm size, age, sector, asset quality, interest coverage, leverage, and whether banks are owned privately or publicly.

The analysis reveals that the link between productivity and bank credit growth is weaker for firms with significant ties to public sector banks, especially in years when public sector banks represent a large share of new credit. These results are driven by large firms, which account for the lion’s share of credit in India. Large flows of credit to unproductive firms represent important missed growth opportunities for more productive firms. These insights suggest that in addition to important policies to strengthen India’s public sector banks—such as continued recapitalization and the establishment of the National Asset Reconstruction Company Limited to alleviate problems with bad loans—further bank privatization, as envisaged by the government, and measures to improve governance of public sector banks would be important to reduce capital misallocation.

Chapter 5 takes a close look at India’s corporate debt market . India’s financial system is still largely bank based, and further reforming the banking system by improving governance and privatizing banks will foster access to credit to under-served sectors and companies. At the same time, India’s capital markets are increasingly important in allocating savings and investment. Its corporate bond market in particular still has significant room to develop, which would increase competition, foster access to long-term financing, allow better risk management, and support lending to innovative sectors.

Government bonds accounted for 68 percent of the fixed-income market in 2021 and corporate bonds accounted for 20 percent. Prior to the failure of an NBFC in 2018 and the ensuing credit squeeze, and before the COVID-19 shock in 2020, the corporate bond market grew at an average annual rate of 17 percent (2011–18). The uncertainty triggered by these two shocks and the significant increase in issuance of government debt, however, contributed to a decline in corporate bond issuance as a share of the total fixed-income market in 2019 and 2020.

The Indian corporate bond market has several features that are worth mentioning. It is dominated by private placements rather than by public offerings. Smaller firms especially are likely to be challenged in meeting disclosure requirements for public issuance and listing of their debt and greater difficulties in absorbing the implied cost of credit rating agencies. Yet at the same time, concentration risk seems to have increased, in that larger issues are becoming more systemic. While the COVID-19 pandemic led to an unsurprising shortening of maturities, average maturities had increased in the decade leading up to the pandemic. India’s bond market is dominated by local currency issuance (70 percent), but offshore issuance has been rising steadily, broadly in line with other emerging markets.

While much progress has been made over the past decade in strengthening legal and regulatory frameworks, scope exists for further improvements, including on implementation and enforcement. The corporate bond market would particularly benefit from better creditor rights, stronger market and rating infrastructures, measures to improve bond liquidity and credit risk management, and efforts to broaden the investor base. 7

Looking at the sectors for corporate bond issuance highlights the potential for India’s bond market to support growth. Almost 70 percent of all corporate bond issuance now takes place in the financial sector and, even within the industrial sector, almost 90 percent of issuance is related to financial services such as banking and housing finance. Hence, the potential for the nonfinancial sector to grow is large both in absolute and relative terms. Comparisons with emerging market peers also suggest significant potential for the market to grow. Further developing India’s corporate bond market will increase access to finance and foster economic growth.

Chapter 6 documents the evolution of green finance in India . Climate change is anticipated to have large economic and social costs, calling for policymakers and the private sector to react decisively in adapting to and mitigating its impacts. For the financial sector, climate-related events can undermine stability, yet the sector can also play a critical role in channeling resources to sustainable sectors. By considering ESG factors, for example, asset managers can be crucial to efforts combatting climate change and reducing carbon footprints. Although efforts to promote ESG in finance started some three decades ago, they have accelerated over the past few years, including in India.

India is highly vulnerable to the effects of climate change. In 2022, India pledged to reduce the emissions intensity of its GDP—that is, the amount of emissions produced per unit of output—by 45 percent by 2030 (from 2005 levels) and to achieve carbon neutrality by 2070. In this context, India’s ESG market (equity and bonds) could play an important role in helping finance climate mitigation efforts. While ESG-related bond issuance surged in 2021, it is still only a small fraction of India’s total bond issuance (accounting for about 2 percent). The same is true for assets under management of ESG-related equity funds. Within the universe of ESG bonds, green bonds accounted for 80 percent of issuance in 2019–2021, while social and sustainability-linked bonds accounted for the remaining 20 percent, a share that is broadly in line with other emerging markets. About 90 percent of Indian green bonds are issued in US dollars, which compares to 60 percent in other emerging markets (excluding China and India). This is quite notable given that, for the overall corporate bond market, most bonds are issued in local currency. In addition, Indian green bonds tend to have shorter maturities and higher coupon rates than other emerging markets, reflecting the weaker fundamentals of corporates (i.e., lower credit ratings) and more limited investor base.

How can India deepen and broaden the development of the sustainable finance market? Promoting the adoption of principles, in line with the International Capital Market Association green bond principles, would provide information about the environmental impact of investment. Critically important is the availability of reliable data for financial sector stakeholders to assess financial stability risk, properly price and manage ESG-related risks, and take advantage of opportunities arising from the transition to a green economy. Guidelines issued by the Securities and Exchange Board of India are likely to address some of the issues related to disclosure, such as India’s relatively low ESG disclosure score (25 percent compared to 40 percent in the US).

Chapter 7 presents India’s impressive progress in advancing financial inclusion, largely aided by digitalization . Both the theoretical and empirical literature suggests that financial inclusion—improved access to finance via payment systems, loans, savings, insurance, and wealth management—helps boost economic growth and reduce inequality. In this, India is a useful case study in how to leverage digital technology to foster financial inclusion and thus economic growth.

As recently as 2011 only 35 percent of the population had bank accounts, significantly below the average of other emerging markets. However, several important policies focusing on digitalization changed this significantly. Some of the measures included the following:

1. Introducing a biometric digital identification system (Aadhaar) in 2010

2. Rolling out a scheme to provide all households with bank accounts with convenient access through a debit card (RuPay) in 2014 (called Pradhan Mantri Jan Dhan Yojana or PMJDY, which in turn could be linked to Aadhaar and was subsequently also used for the transfer of government social benefits)

3. Launching the Unified Payments Interface in 2016, allowing interoperable and real-time interbank transactions through various payment platforms

The large scale and low unit cost of operating Aadhaar led to the enrollment of 1 billion people and increased access to financing. The PMJDY scheme has resulted in more than 450 million new bank accounts (33 percent of the population).

Despite the progress, the reform agenda remains large. A large share of the population, especially those who are economically disadvantaged and those in rural areas, still do not have access to financial services, and usage remains a major challenge. Based on the IMF Financial Access Survey, India had among the lowest mobile and internet transactions and debit card use among peers in Asia and the Pacific region in 2020. 8 A Reserve Bank of India subindex also shows low usage of digital services and limited progress for the period 2017–2021. A likely factor here is the lack of financial and digital literacy. Also, the digital divide remains large: men are more likely to own mobile phones than women (20 percentage points), digital penetration is largely limited to urban areas, and almost 57 percent of the poorest households do not own a smartphone. Estimates suggest that an increase in the adoption of digital financial payments to the level in China, for example, could increase India’s GDP per capita by 3–4 percentage points. The impact is likely even greater given that other components of digital finance (such as savings, credit, and insurance) could positively impact growth.

Hence, it is of paramount importance to continue efforts to ensure equal access to digital infrastructure and to support reforms to foster usage, including by improving financial and digital literacy. These need to go hand in hand with the strengthening of policy frameworks for digital finance, including consumer protection, data privacy, and cybersecurity, to ensure financial stability.

• Linkages and Supporting Reforms

Apart from reducing financial sector vulnerabilities, increasing the system’s resilience, and fostering its development, an efficient allocation of savings and investment calls for supporting reforms. These include measures to reduce vulnerabilities that originate in the private sector and the resolution of debt overhangs stemming from private companies and households. Also, to reduce financial market volatility, it is important to have a good understanding of spillovers and the role of policy frameworks, including monetary policy communication.

Chapter 8 reviews trends and risks in capital flows . Given India’s still relatively low per-capita income, favorable growth prospects, demographic trends, and development needs, the country continues to benefit from foreign capital inflows supplementing domestic investment and allowing households to smooth consumption. Stable capital inflows can also alleviate any funding pressure stemming from higher COVID-19-related public debt levels.

Initially, India has been gradually focusing capital account liberalization on foreign direct investment (FDI) and equity. Recent FDI and portfolio inflows into equity markets have amounted to about 2.5 percent of GDP annually 9 and have been historically less volatile than regional peers. At the same time, foreign inflows into debt markets remain relatively small compared with peers. More recently though, authorities have gradually eased restrictions on debt flows, accompanied by more favorable investment regimes for government and corporate debt. The prospect of India’s inclusion in global bond indices could lead to sizable passive inflows, with additional scope for ESG-related inflows.

Although capital inflows can bring benefits, they could also carry risks given that portfolio flows are more volatile and susceptible to changes in global risk appetite, with implications for financial system stability. Surges in inflows can arise during domestic credit booms and asset price bubbles. Sudden reversals in turn can lead to abrupt financial sector tightening, lower asset prices, and tighter bank lending conditions. Indeed, India has experienced episodes of strong inflows and sharp reversals, such as during the 2008 global financial crisis, the 2013 taper tantrum, the 2020 COVID-19 shock, and in 2022 the impact of the war in Ukraine and tightening on global financial conditions. Thus, it is important to analyze the level of flows as well as the cycle, that is, the nature of “extreme” flows, especially because domestic and external shocks impact them differently. Signs exist that since the global financial crisis, capital flow cycles in India have shortened and have been associated with greater capital flow volatility.

While some degree of capital flow volatility is unavoidable in times of shocks or stress, policies can help contain such volatility. To minimize adverse spillovers from external shocks, it is crucial that the authorities continue to strengthen domestic policy frameworks and communication about the direction of reforms and policies. For example, a clearly communicated medium-term fiscal consolidation strategy combined with enhancements in expenditure efficiency, improved public financial management, and revenue-enhancing measures, as well as the privatization agenda, would foster confidence in the financial markets. The government’s plans to liberalize FDI policies related to strategic sectors are important steps to attract stable capital inflows. Finally, monetary policy communication, which can enhance the RBI’s policy toolkit, improve predictability, and reduce uncertainties (see below) can also help.

To assess the resilience of a financial system, it is useful to analyze the impacts of shocks via macro-financial linkages. Chapter 9 takes a closer look at the corporate sector, which lies at the center of these linkages . Here, stress testing the corporate sector can play a critical role. For example, the COVID-19 pandemic and related lockdowns and social distancing measures constituted a severe shock to corporate sector balance sheets and hence to the financial system. Such analysis can identify areas for reforms and provide insights into calibrating policies to maximize benefits while minimizing adverse implications in the future.

Following the 2008 global financial crisis and prior to the COVID-19 pandemic, India’s corporate sector went through a gradual deleveraging process, with improvement in profitability. The median return on assets, for example, improved from 0.9 percent in 2009 to 2.2 percent in 2019. At the same time, the median interest coverage ratio increased to 2.8, almost reaching levels seen before the global financial crisis. The improvement was most noticeable in the manufacturing and contact-intensive trade, transport, and hospitality service sectors. By firm size, however, profits among micro firms (with sales below 50 million rupees) were persistently low throughout the period.

To assess the COVID-19 impact on the corporate sector, a series of sensitivity and stress tests (baseline, moderately adverse, and severely adverse) was conducted. The stress tests highlighted that without borrower relief measures and monetary easing, the COVID-19 shock would have led to a significant increase in the share of corporate debt issued by firms with earnings insufficient to cover their debt interest payments (that is, with an interest coverage ratio below 1). Sectors most affected include construction, manufacturing, and contact-intensive trade, transport, and hospitality services. The share of debt among micro, small, and medium enterprises with an interest coverage ratio below 1, consistent with their weaker pre-pandemic liquidity positions, would have increased more than large firms under the baseline and two adverse scenarios. Forward-looking multiyear analysis suggests that the overall impact of the COVID-19 shock would crucially depend on the speed of the economic recovery.

Borrower relief measures to firms and monetary easing provided in 2020 are found to have been effective in mitigating the liquidity impact of the COVID-19 shock. At the same time, the effects of policy measures on corporate solvency are found to be less pronounced, reflecting the focus of the implemented policy measures on supporting corporate liquidity.

Corporate stress could have a sizable impact on bank and nonbanking financial companies’ balance sheets, particularly on public sector banks, due to their relatively weak starting capital positions. The results show that the policy support measures taken by the government have played an important role in mitigating the impact of the pandemic on the financial sector.

Chapter 10 looks at ways to strengthen private debt resolution frameworks . Effective resolution frameworks for corporate and household debt are particularly important for the financial system to ensure efficient allocation of credit and financial sector stability. Given that investment decisions are made under uncertainty and an economy can be hit by unanticipated shocks such as the COVID-19 pandemic, it is critically important to have frameworks in place that deal with issues of overindebtedness expeditiously to minimize costs and maximize reallocation of scarce economic resources to their most productive uses.

Such frameworks usually include procedures for debt enforcement, restructuring, and liquidation. They can be in the form of: (1) in-court processes , that is, through judicial supervision of creditors and debtors; (2) out-of-court debt restructurings that provide greater flexibility, are cheaper, and require voluntary compromises between parties; (3) e nhanced out-of-court procedures, which use mechanisms such as creditor committees and arbitration/mediation under ex-ante framework agreements to facilitate the restructuring; and (4) hybrid procedures, which provide for negotiations and majority voting to take place out of court, with a plan then submitted for judicial ratification at the final stage.

The establishment of the IBC in 2016 was a milestone aimed at modernizing India’s insolvency procedures. This has been complemented with the more recent introduction of the so-called “pre-pack” insolvency process, designed to address the overindebtedness of MSMEs. Prior to these reforms, India only had an antiquated and fragmentary insolvency legislation. As a result, debt recovery was time consuming, expensive, uncertain, and prone to abuse by debtors, hindering bank lending and depriving small and medium enterprises of credit. Also, in the case of a default, creditors had incentives to evergreen loans or to enforce collateral without any assessment of the viability of the debtor’s business. Bank officials hesitated to write down loans out of fear of liability under anticorruption laws. Key components of the IBC are consistent with international best practices, and it has also introduced important improvements in the institutional framework, such as the establishment of an insolvency regulator as well as professional agencies and specialized commercial courts.

A number of areas can be strengthened further. 10 These include encouraging the use of out-of-court processes, especially for cases that require only adjustments of debt. For in-court restructurings, current timelines for corporate resolutions are ambitious and need additional resources and adjustments to be observed. Also, the corporate resolution process should include mechanisms for the participation of operational creditors and ensure that creditors are classified according to their position in the hierarchy of claims. These changes would also result in better decision making over resolution plans and more effective safeguards for dissenting minorities. In the institutional framework, a key component is staffing and capacity development, including filling vacancies at the National Company Law and the National Company Law Appellate Tribunals, increasing the number of insolvency judges, and specialized training for judges and court officials. Further reform could be beneficial for micro and small enterprises, since pre-pack processes only cover incorporated MSMEs. The implementation of insolvency procedures for natural persons should include provisions for both unincorporated MSMEs and consumer debtors.

Chapter 11 examines the impact of RBI’s monetary policy communications on financial markets . Financial markets provide important information to policymakers about market expectations and are an important conduit of monetary policy signals to the real economy. Reforms that improve the functioning of financial markets will therefore make macroeconomic management more effective. In this, monetary policy communication can play an important role in reducing market volatility, which in turn makes financial markets more attractive to savers and investors.

Forward-looking monetary policy communication has become a key element of flexible inflation-targeting regimes across advanced and emerging market economies. In India, the RBI’s flexible inflation targeting framework, introduced in 2016, has been associated with improved anchoring of inflation expectations and more predictable monetary policy. A set of communication tools, including monetary policy statements and minutes, press releases, and the governor’s press conference, supports the RBI’s implementation of this framework, aided by policy innovations such as forward guidance on policy rates and, more recently, asset purchases.

Indeed, a review of recent innovations in monetary policy communications suggests forward guidance on the monetary policy stance likely helped moderate uncertainty and support some asset prices during the pandemic. For example, the RBI’s monetary policy committee decision on October 9, 2020 and the governor’s statement on forward guidance, which introduced time-based forward guidance about the duration of the accommodative stance, contributed to a decline in 10-year rates on the same day. In line with the results for other emerging markets, the relationship between monetary policy surprises and yields for government and corporate securities across all maturities is found to be positive and statistically significant in India, but it is less so for exchange rate and equity prices.

The results support an important role for monetary policy communication in guiding market expectations about the role of policies impacting market liquidity and the central bank balance sheet, as well as the likely path of policy interest rates. At the same time, as in other emerging market economies, room exists to further refine communication tools, including forward-looking communication about the economic outlook and the RBI’s policy reaction function. Monetary policy communication can and should help calibrate policy normalization amid the ongoing economic recovery and elevated domestic and global inflationary pressures.

India’s economy expanded rapidly for long periods since it began a reform drive back in 1991. And even though growth had already slowed prior to the COVID-19 shock and was hit hard by the pandemic and corresponding severe lockdowns, India’s economy is rebounding and its growth potential remains high. To fully realize this potential, the financial sector will play a critical role. The following chapters analyze key financial sector issues in depth to highlight progress made and identify important reform areas to foster growth.

• Annex 1.1. Selected Economic and Financial Sector Indicators

India: Selected Economic Indicators, 1980/81–2021/22

1 Fiscal year is April to March (e.g., 2019/20 = Apr. 2019 to Mar. 2020).

India: Financial Soundness Indicators, 2014/15–2020/21

(Percent, unless indicated otherwise)

1 Gross nonperforming assets less provisions.

2 Net profit (1)/loss (2) in percent of total assets. Data for 2020/21 for NBFCs is as of September 2020.

3 Data for 2020/21 are as of July 2021.

4 As of July 31, 2022, there were 9,640 nonbanking financial companies (NBFCs), of which 49 were deposit-taking (NBFCs-D) and 415 systemically non-deposit-taking NBFCs (NBFCs-ND-SI).

International Monetary Fund (IMF) . 2018 . Financial System Stability Assessment . Washington, DC .

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International Monetary Fund (IMF) . 2021 . India. Staff Report for the 2021 Article IV Consultation . Washington, DC .

Morgan Stanley . 2021 . “ India: Primed for Bond Index Debut .” October 13, 2021 . https://www.morganstanley.com/ideas/india-global-bond-indices

United Nations (UN) . 2022 . World Population Prospects 2022 . https://www.un.org/development/desa/pd/content/World-Population-Prospects-2022

As of January 2021, 9,507 NBFCs were registered with the Reserve Bank of India, of which 64 were deposit-taking (NBFCs-D) and 292 systemically non-deposit-taking NBFCs (NBFCs-ND-SI). Nonfood credit excludes credit provided (to state agencies) to ensure deep food distribution and is widely used to monitor credit growth in the Indian economy.

Infrastructure Leasing and Financial Services default was followed by default of Dewan Housing Finance Corporation, resulting in broader concerns about the health of the NBFC sector as a whole.

Estimates vary; see, for example, Morgan Stanley 2021 : India: Primed for Bond Index Debut .

India breaks into world’s top five club in terms of market capitalization | Business Standard News (business-standard.com), https://www.business-standard.com/article/markets/india-breaks-into-world-s-top-fve-club-in-terms-of-market-capitalisation-122031200004_1.html#:~:text=India%27s%20equity%20market%20has%20broken,and%20Canada%20(%243.18%20trillion) .

The discussion in this book does not cover a broader set of nonbanking financial companies, such as insurance companies, pension funds, and investment funds.

IMF conducts FSAPs in G20 countries about every five years. The last FSAP was conducted in 2017 with the report published in January 2018. India’s next assessment is currently planned for 2024.

In January 2023, the RBI issued its inaugural sovereign green bond in local currency raising about $1 billion.

This may reflect in part the use of the Unified Payments Interface, which facilitates payments, for example, by scanning QR codes.

As reflected in the IMF External Sector Assessment ( IMF 2021 ), current account deficits of about 2.5 percent of GDP should be financeable over time.

As this book went to press, the Ministry of Corporate Affairs had released a proposal to make the insolvency regime significantly more efficient and transparent.

Other IMF Content

• PART I Setting the Stage and Overview
• PART II Changing Structure of India’s Financial System
• Chapter 1 Global Financial Stability Overview: A Delicate Balancing Act
• Chapter 1 Global Financial Stability Overview
• Chapter 1 Global Financial Stability Overview: Markets in the Time of COVID-19
• PART I Overview and Global Setting
• PART III Linkages and Supporting Reforms
• Chapter 1 Bridge to Recovery

Other Publishers Content

Asian development bank.

• Asia Bond Monitor: 'March 2022
• Redefining Strategic Routes to Financial Resilience in ASEAN+3
• Asia Bond Monitor: 'September 2020
• Asia Bond Monitor - March 2021
• A Study of Nonbanking Financial Companies in India
• Asia Bond Monitor: March 2023
• Promoting Social Bonds for Impact Investments in Asia
• Fintech to Enable Development, Investment, Financial Inclusion, and Sustainability: Conference Highlights
• Promoting High-Quality Growth Through Financial Reform in the People's Republic of China
• Asia-Pacific Financial Inclusion Forum 2021: Emerging Priorities in the COVID-19 Era

Inter-American Development Bank

• Macro-Critical Issues and Implications for the Financial Sector in CARICOM
• On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies
• Financial Crises and Macro-Prudential Policies
• Optimal Policy for Macro-Financial Stability
• Review of Financial Development and Inclusion for Guyana: Assessment and Options for Reform
• Financial Access and Inclusion: A Diagnostic for Barbados

The World Bank

• Monitoring Macro-Financial Vulnerability: A Primer
• Financial Inclusion in Africa: An Overview
• Macro-Financial Aspects of Climate Change
• Access to financial services and the financial inclusion agenda around the world: A cross-country analysis with a new data set
• Ethiopia Financial Sector Development: The Path to an Efficient Stable and Inclusive Financial Sector
• Corporate Financial Reporting in Austria: An Overview
• Are all the sacred cows dead?: Implications of the financial crisis for macro and financial policies
• Indonesia Diagnostic Review of Consumer Protection and Financial Literacy: Volume 1. Key Findings and Recommendations.
• The Experience with Macro-Prudential Policies of the Central Bank of the Republic of Turkey in Response to the Global Financial Crisis
• Malaysia: Islamic Finance and Financial Inclusion
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India’s financial system has improved dramatically in the past decade

There is much more change to come .

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Editor’s note : This is the second of  a six-chapter article  on the economy of India, published this week.

I n “lombard street” , published in 1873, Walter Bagehot, then editor of The Economist, wrote that the City of London’s success was based on taking funds that elsewhere were kept under floorboards, and putting them to use. He might have found what is unfolding in modern India to his liking.

But for those dormant funds to be used, the system first had to be repaired. In 2013, the year before Narendra Modi became prime minister, Morgan Stanley, a bank, had grouped India with other financially troubled countries—Brazil, Indonesia, South Africa and Turkey—into what it called the “fragile five”. India’s weak capital markets were contributing to three big problems: financial and balance-of-payments instability; no way for ordinary people to save; and a high cost of capital for business. There was also high inflation and a growing problem of non-performing loans at state-run banks.

Ten years on, inflation is stable (if a little high) and India is less dependent on capital flows from abroad. It has large foreign-exchange reserves, strong domestic savings, and adequate exchange-rate management. More change is needed. But reforms have moved it to a position of comparative strength. Indian finance, and thus India itself, is becoming more credible.

In 2010 state-run banks, then the largest component of the financial system, were rotten and threatened to drag down the rest. But in 2013, the previous government brought in a professor from the University of Chicago, Raghuram Rajan, to run the Reserve Bank of India ( rbi ). He initiated an “asset quality review” that put an official stamp on the country’s “twin-balance-sheet problem”, the holes on both bank and corporate balance sheets. In 2016 a new bankruptcy code was introduced. Bad loans worth $106bn were written off, and there was an injection of government money, forced financial consolidation and new rules.

Between 2017 and 2019, the government merged 27 government-run banks into 12. Rules were changed to allow dbs , a Singaporean bank, to acquire Lakshmi Vilas bank in 2020, allowing an outsider to have a large branch network for the first time. The tighter reporting regime brought revelations which led to the failure of five major Indian financial institutions.

It looked like India might fall off a financial cliff. In retrospect, an inflection point had been reached. Non-performing loans at state-controlled banks have since declined from 15% in 2018 to 4% of assets.

As the weakest components of the system were strengthened, other aspects that had been seeded decades before came into their own, starting with a handful of new private banks. hdfc Bank, founded in 1994, is now the world’s tenth-most valuable bank by market capitalisation. It returns 16% on equity. JPMorgan, America’s leading bank, returns 12%; European banks, on average, just over half that.

The new healthier system has enabled credit to be available for consumption, housing and industry. The private banks have boosted the number of branches by 60% since 2015 to 163,000 (America has 78,000). This has had a huge effect in villages, as consumer finance has shifted from local lenders charging 10% per week to bank loans at annual rates of 15% or below.

The big push to help poor people open basic bank accounts—520m have been opened since 2014, and they now hold $28bn—has been crucial, helping to transform India’s masses into savers, providers of capital and, possibly, entrepreneurs. Since the accounts are linked to India’s new digital payment and identification system, they are records that can be used to evaluate and grant credit. This may explain a recent increase in lending to small businesses.

Stockmarkets, too, are booming, reflecting the success of Indian business and the expansion of available capital. Ten years ago, capitalisation of India’s stockmarkets was smaller than Spain’s. Now neck and neck with Hong Kong’s, only America’s, China’s and Japan’s surpass them. Based on long-term growth rates, bcg , a consultancy, says India’s will become the second-largest in 2036. The proportion of the population owning shares of some sort has risen from 7% to 20% since 2019. Small monthly payments into mutual funds through “systematic investment plans” have risen sharply.  From 2013 to 2023, fund assets under management rose by over 600%. They now account for 9% of equity holdings in the Indian market. Money flowing into the stockmarket is not idle. A record number of firms has gone public already in 2024.

In developed markets, this kind of growth could seem like a bubble, and that may be part of the story. It may also just be catch-up. A study by Deepak Parekh, one of the architects of India’s private financial system, found that fund assets equate to only 17% of gdp , compared with an average of 80% in developed markets. This “under-penetration” is clear in other areas such as consumer credit, totalling 37% of gdp compared with 62% in China and 80% in America.

The Indian financial system is slowly reconfiguring itself to deal with these imbalances. In 2006, 56% of assets were in the banking system. In 2022 the proportion was 48% and bcg predicts that will shrink to 36% by 2030 (see chart). In place of the banks will come components of more mature capital markets: funds, pensions, insurance companies, private equity and more venture capital.  Life Insurance Company of India, listed by the government in 2022, was the world’s fourth-largest life insurer in 2023 by market value. A common theme in these expanding sectors is their desire to use capital to foster growth.

Not everything is rosy. A surge of foreign venture capital starting in 2020 has imploded as a result of some big tech startup failures, from a record $42bn in 2021 to $2.5bn in the first quarter of 2024. Commonly published valuations of private firms are being written down; many will crash. But none of this seems to affect the general public or the domestic stockmarket.

The bond market, too, is still in an early stage of development. It has grown and become more free, but it is still run to finance the government and is largely unavailable for all but the largest firms. Even for them, the long-term debt that is best suited for the big capital investments that India needs is often unavailable, and must be obtained overseas, with additional costs. However, a healthier system creates its own opportunities. India has asked all the big global ratings agencies to upgrade its borderline junk status, which has been left unchanged since the mid 2000s.

An upgrade would signal India’s rising stature. It would also help to lower the capital costs which impede investment and growth. The most solvent companies pay 8% or more on bank loans, compared with under 6% in Singapore or America and under 2% in Japan. What is more, a high sovereign rating would provide an underpinning for the issuance of long-term corporate debt.

In September, JPMorgan will be adding India to a government-bond index, in January Bloomberg indicated it will do the same.  Foreign portfolio investment hit a record $40bn in the year to March. Money is being put to better use. Bagehot might applaud. ■

This article appeared in the Special report section of the print edition under the headline “Surprise winner”

From the April 27th 2024 edition

Discover stories from this section and more in the list of contents

Shaktikanta Das: Future-proofing the Indian financial system

Inaugural address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the Global Conference on Financial Resilience, organised by the College of Supervisors, Mumbai, 27 April 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

I am very happy to be here among researchers and practitioners to participate in the Global Conference on Financial Resilience organised by the College of Supervisors of the Reserve Bank of India. I would like to convey my appreciations to the College of Supervisors (CoS) for organising this conference. I also congratulate the CoS for its accomplishments over the last two years.

2. In the context of the overall impact of the COVID-19 pandemic, the war in Ukraine and the recent banking sector events in the US and Europe on the financial sector, there is now renewed focus on issues of financial resilience and stability. Regulators and Governments across the world are now looking at these aspects with greater intensity. Adequacy of the existing regulations and supervisory systems are under fresh assessment. In this background, a global conference on financial resilience is very appropriate and timely.

3. The financial sector in a country and the individual entities therein like banks, non-banking financial companies (NBFCs) and other entities have to be resilient at all times. They should have the inner strength to withstand even the most stressful times. So far as India is concerned, the Reserve Bank of India has significantly strengthened its regulations and supervision of banks and other regulated entities in recent years. Our approach has been to enhance the resilience as well as the robustness of the financial sector so that individual entities effectively withstand stressful situations and continue to contribute to the process of economic development of the country. In my address today, I propose to highlight the expectations of the Reserve Bank of India from the stakeholders in the Indian financial system.

4. In most economies, central banks act as custodians of financial stability. Central banks are also empowered to act as a lender of last resort during financial crises. This historical function of providing emergency liquidity assistance to banks and other financial market institutions necessitates that central banks keep a close watch on banks and financial markets for signs of instability, if any. Moreover, monetary policy is implemented largely through banks and financial markets. The transmission of monetary policy to the real economy depends crucially on the smooth functioning of the financial markets as well as financial intermediaries like banks and NBFCs. It is in this context that the key and complementary functions of central banks such as setting of interest rates, liquidity management, regulation and supervision over the banking and other segments of the financial sector become more pronounced. These functions work together to support economic growth by maintaining financial stability and promoting responsible behaviour among financial institutions.

5. Let me now specifically turn to the concept of 'resilience' which is the theme of today's conference. Systemic resilience depends both on the resilience of individual financial institutions as well as on the interdependencies among them.

6. A resilient future ready bank needs to be financially, operationally and organisationally resilient. To be financially resilient, a bank should have adequate capital buffers and be able to generate earnings even in times of severe macroeconomic shocks. It should also have adequate liquidity to meet its obligations in various situations. Therefore, financial resilience is closely linked to a bank's business model and strategy. The Reserve Bank has, therefore, started looking at the business models of banks more closely. Aspects or deficiencies in the business model itself can spark a crisis in due course. We have not only prescribed regulatory norms for capital adequacy and liquidity ratios, but even gone beyond to nudge banks to build up capital buffers in good times and times of plenty. We did this during the COVID-19 pandemic when there was plenty of liquidity, the interest rates were low and the full impact of the pandemic on the financial sector was still highly uncertain.

7. The Reserve Bank has also put in place various prudential regulatory frameworks. These include capital adequacy requirements, asset classification and provisioning requirements, dividend distribution framework and liquidity management framework. In addition, the Reserve Bank also periodically deploys macroprudential measures to address system level build-up of risks. As a consequence of the measures taken by both the Reserve Bank and the banks themselves, the Indian banking system has remained resilient and has not been affected adversely by the recent sparks of financial instability seen in some advanced economies. This also comes out clearly in our recent stress test results.

8. The Gross NPA ratio for the Scheduled Commercial Banks (SCBs) was 4.41 per cent at end December 2022, down from 5.8 per cent as on March 31, 2022 and 7.3 per cent as on March 31, 2021. The CRAR at 16.1 per cent at end December 2022 is also much above the minimum regulatory requirement. Macro stress tests for credit risk indicate that SCBs would be able to comply with the minimum capital requirements even under severe stress scenarios.

9. Nevertheless, the recent events in the banking landscape of the US and Europe suggest that risks for an individual bank could crop up from segments of its balance sheet which might have been considered relatively safer. Hence, we expect the management and Board of Directors of each bank to continually assess the financial risks and focus on building up adequate capital and liquidity buffers even beyond the regulatory minimum for continued resilience and sustainable growth.

10. Let me now focus on operational resilience. This would mean that a bank should be able to deliver critical services even in the face of disruptions. Cyber risks and possible cyber-attacks are on top of the list so far as such disruptions are concerned.

11. Cyber risk has been identified as the foremost in top ten operational risks for 2023 based on a global survey 1   of financial institutions. The Bank for International Settlements (BIS), while revising the Principles for Sound Management of Operational Risk in 2021, introduced a specific principle on 'Information and Communications Technology (ICT) risk management' reflecting the importance of this risk. Robust IT and information security governance would help in increased predictability and reduction of uncertainty in operations, minimise losses from information security related incidents and enhance operational resilience. Given the extensive level of outsourcing being done by the banks and also by other regulated entities, there is even greater need for ensuring that effective policies and practices are in place in this regard. Even the G20 finance ministers and central bank governors are focusing on risks arising from third party dependencies. The RBI has taken a slew of measures in the recent years with usage of advanced analytical and surveillance tools along with techniques like phishing simulation and cyber reconnaissance exercises to push for enhanced IT and cyber security governance processes in banks and other supervised entities. In the context of the growing exposure of Regulated Entities (REs) to various risks from dependency on third-parties which provide technology and IT-enabled services, the Reserve Bank has recently on April 10, 2023 issued comprehensive guidelines on Information Technology outsourcing 2   by banks, NBFCs, and other REs.

12. The third component of resilience for banks and other financial institutions is to be organisationally resilient so that they anticipate risks early and absorb them efficiently. Organisations must have the capacity and resilience to protect themselves from adverse incidents and shield their balance sheets. To achieve organisational resilience, REs need to continuously evolve by standardising policies, processes, organisational culture and governance. They must also be flexible enough to encourage diverse ideas and innovations within the organisation.

Pillars of Reserve Bank's Regulatory and Supervisory Strategy

13. An important element in our strategy of making the Indian financial system, including the banking system, future ready is the robust and enhanced regulatory and supervisory framework we have put in place in the last few years. Our present approach to regulation and supervision has been built essentially on three pillars.

14. First, one of our focus areas in recent years has been to strengthen governance and assurance functions within the Regulated Entities. The safety and soundness of the banking system relies critically on effective governance, so that the interest of all stakeholders, especially the depositors, are safeguarded. The essence of good governance is to build an environment of trust, transparency and accountability. Depositors, whose money represents an overwhelming part of banks' resources, keep their life savings and hard-earned money with the banks. Protection of depositors' money is, therefore, a sacred duty which has to be fulfilled through good governance. There cannot be any compromise on this. The Reserve Bank is very particular that the Regulated Entities have systems and processes that promote sound corporate governance. The assurance functions i.e. risk management, compliance and internal audits in banks are critical links between governance and business. Assurance functions assist the Board as well as the senior management in gauging whether the business operations of the bank or NBFC are being run in conformity with the policies and strategies laid down by the Board. The Reserve Bank has issued detailed guidelines for ensuring quality and independence of the governance and assurance functions. These areas are also subjected to intensive supervisory assessment.

15. Second, we have devoted our efforts to identifying and addressing the root causes of the vulnerabilities. Many a times, vulnerabilities arise from inappropriate business models adopted by banks and other financial entities. Over-aggressive growth strategies or mindless pursuit of bottomlines, for instance, are often a precursor to future problems. While we do not interfere with business decision making, Regulated Entities must demonstrate adequacy of internal controls and loss absorption capacity to match the risks that their business models may generate. Our approach is to flag deficiencies in this area to the senior management or to the Board of Directors of individual institutions for remedial action. We also remain engaged with external auditors and flag issues that are relevant for their role as the third line of defence. In recent times, our focus on 'root cause' has led us to mandate certain housekeeping hygiene such as automated identification of non-performing loans and provisioning, proper checks and balances in the use of Internal and Office accounts, implementation of Early Warning Systems (EWS) for preventing frauds and a host of IT and cybersecurity related controls, among others.

16. Third, within the Reserve Bank, we have considerably strengthened our supervisory analytics. We are increasingly employing data analytics – both macro and micro – to capture potential and emerging risks, identify outlier entities and the vulnerable large exposures of banks. Our onsite supervisors deep dive into areas red-flagged by offsite supervision teams. We are now focusing on the adoption of advanced analytical based technological solutions, including Artificial Intelligence/Machine Learning (AI and ML), for strengthening the internal supervisory processes.

17. We have a system of early warning signals that provide lead indications of risk build-up. Stress tests are also carried out on a continuous basis. These stress tests not only cover individual entities but also capture the system level stress.

18. While asset quality and capital position indicate resilience and robustness of financial institutions in the medium term, liquidity is often seen as the immediate cause of crisis. We monitor liquidity position of our entities very closely and aberrations, if any, are immediately taken up with the supervised entities for remedial measures. Thus, our whole approach to Supervision has been pro-active for minimising surprises, spotting concerns and addressing vulnerabilities early.

19. In essence, the unification of supervisory architecture within the Reserve Bank (i.e, combining the supervisory processes of commercial banks, NBFCs and urban cooperative banks (UCBs) into an integrated Department of Supervision); ownership-agnostic and risk-focused supervision; a shift from episodic to continuous supervision; enhanced off-site surveillance leveraging on data analytics and SupTech solutions; strengthened on-site supervision; root cause analysis of problems and identification of outlier entities; and deep-dive into vulnerable areas have been the major planks of our supervisory strategy.

20. The Reserve Bank has also taken several regulatory initiatives in recent years to strengthen governance, risk management, audit and compliance functions in NBFCs and UCBs. These include the new scale based regulatory framework for NBFCs issued in October 2021 and the revised regulatory framework for UCBs issued in July 2022. Even before these new regulatory frameworks were brought in, we had taken measures such as issuance of guidelines on appointment of Chief Risk Officers (CROs) and Chief Compliance Officers(CCOs) in large NBFCs; Liquidity coverage ratios for NBFCs with asset size of ₹5000 crore and above; risk-based internal audit (RBIA) norms for large NBFCs (with asset size of ₹5000 crore and above) and UCBs with asset size of ₹500 crore and above; and harmonising the guidelines on appointment of statutory auditors for NBFCs and UCBs with that of commercial banks.

Importance of Effective Internal and External Audits

21. I would now like to touch upon the criticality of effective internal and external audits for financial institutions. It is no secret that stability and growth of an economy and financial markets are dependent upon trust among stakeholders. To be future ready, banks and financial institutions need to earn the trust of their current as well as prospective customers. One cannot take the 'trust' for granted. With greater openness of the economy and faster transmission of information and capital flows on account of advent of technology, it has become even more necessary to ensure credibility and confidence in the system. Towards this cause, a robust assurance mechanism by way of internal audit is essential to provide independent evaluation and assurance to the stakeholders that the operations of a Regulated Entity are being performed in accordance with the prescribed policies and procedures. Statutory auditors also play a vital role in maintaining market confidence on audited financial statements. In banking industry, this public role is particularly relevant for financial stability, given that banks hold public deposits. Audit quality is key to the effectiveness of such public role. For these reasons, the Reserve Bank as the supervisor has a keen interest in the functioning of statutory auditors of the Regulated Entities. Wherever necessary, we engage with the external statutory auditors on issues of critical nature in individual banks and financial entities.

22. We have recently revised the guidelines for statutory branch audits of Public Sector Banks (PSBs) according to which a minimum of 70% of credit exposure of a bank is required to be covered. From FY 2023-24 onwards, the Board of Directors of PSBs will decide on the coverage of branch audit and selection of branches. While doing so, the Boards are required to keep in mind the specific characteristics of individual banks like the bank's business and risk profile, geographical spread, degree of centralisation of processes, etc. We expect the Boards of banks to exercise the highest level of diligence while deciding on these issues. As regards statutory branch audit of Private Sector Banks (PVBs), we are doing a fresh assessment of the quality and coverage of such audits.

Skill and capacity building in the Reserve Bank

23. In the Reserve Bank we attach a lot of importance to skill building and capacity development of our employees. We have been strengthening the Department of Supervision both in number and quality. This is important as effective supervision requires specialised skills and mature judgement. In this context, we expect the College of Supervisors to keep on improving its training methodologies, adopt more case study-based teaching, have more practical sessions in its training programmes, and develop objective assessment of the impact of its training interventions. The feedback received from trainees may be used to improve programme content and fill the gaps identified. The training programmes may also strike a balance between teaching hard technical skills and promoting soft skills such as leadership, decision making, time management and conflict resolution.

24. The rapid developments and innovations in the financial system, especially in the areas of fintech and digital products pose new opportunities as well as risks. These may affect financial intermediation, payment systems, cyber security and consumer protection. We have to continue monitoring and assessing the implications of these emerging trends, while also developing our own capabilities and frameworks to effectively respond to these challenges.

25. In recent times, we have seen a proliferation of digital lending by NBFCs, FinTechs and loan apps. Such lending also brought with it certain challenges, especially with regard to fair practices and consumer protection. To address these challenges, the Reserve Bank has laid down comprehensive guidelines for digital lending in September 2022. These guidelines aim to ensure that lending activities are conducted by the REs and their partners such as Loan Service Providers (LSPs) in a prudent, fair, transparent and responsible manner.

26. To sum up, the Reserve Bank remains committed to future-proofing the Indian financial system and provide the required support for sustainable growth. I am confident that this Global Conference on Financial Resilience organised by the College of Supervisors with participation of experts from India and abroad will add considerable value to the body of knowledge in the area of resilient financial systems. I have been informed that many research papers on identified themes have been received and select papers have been made part of the maiden issue of the   Journal of Financial Resilience , which was released today. I am sure the deliberations during the Conference would provide a lot of food for thought and bring new perspectives on the evolution of financial regulation and supervision.

I wish the conference all success !

1 Source:   Risk.Net

2 Master Direction on Outsourcing of Information Technology Services

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Accelerating India's growth through financial system reform

Although India's financial system has a number of bright spots, it falls short on several dimensions. The system intermediates only half of the country's total savings and investment, and it channels the majority of funding to the least productive parts of the economy. India's dynamic private sector receives just 43 percent of total credit, while the remaining 57 percent of credit goes to state-owned enterprises, agriculture, and tiny businesses in the unorganized sector. This pattern of capital allocation impedes growth because these sectors are 10-50 percent as productive as the private corporate sector.

MGI found that Indian banks amounted to just 61 percent of deposits, a much smaller fraction than banks in other countries, suggesting that they could play a far greater role in driving growth. In addition, the value of India's corporate bond market amounts to just 2 percent of GDP. Moreover, Indian companies pay significantly higher interest rates in every sector of the economy than Chinese or US companies.

These shortcomings, along with others documented in the report, impose a heavy cost on India's economy. MGI calculates that an integrated program of financial system reforms could free up $48 billion of capital per year, equivalent to 7 percent of GDP. Even more important, these reforms would raise real GDP growth to 9.4 percent a year. This would increase household incomes 30 percent above current projections by 2014, lifting millions more households out of poverty.

The report offers a roadmap of reforms to capture this opportunity, makes the case for significantly more liberalization of the financial sector, and discusses the political challenges of such liberalization.

Related Articles

The 'bird of gold': The rise of India's consumer market

India's urban awakening: Building inclusive cities, sustaining economic growth

India: the growth imperative.

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13 The Financial Sector in India: An Overview

• Published: November 2019
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Rajesh Chakrabarti gives an overview of the financial sector in India. For him a financial system is akin to the circulatory system in the human body, tapping and transporting savings throughout the economy, with markets and banks being the two competing and complementary arteries. The Indian financial system ranks slightly below the median in World Economic Forum rankings but has virtually re-booted since the still ongoing liberalization started in 1991. The four pillars of a financial system—laws, technology, creditors’ rights and corporate governance—have all undergone and are still undergoing major transformations. Financial access and inclusion remain key challenges despite serious efforts and experimentation. The banking system is stable, public-sector dominated, fragmented and heavily regulated. Financial markets have witnessed a sea-change but still have limited liquidity. The corporate bond market—key for much-needed infrastructure financing—remains seriously underdeveloped. The regulatory system is fragmented, rule-based and generally speaking quite conservative. Globalization of the financial system has been steadily increasing with time and while not the most innovation-friendly in the world, it has succeeded in providing stability and averting crises in an increasingly turbulent global financial environment. Aadhaar and big-data based fintech has the potential for inclusive innovations. The chapter’s focus on the institutional and legal base brings out the deep seated transformational changes taking place that perhaps need more time to fructify in increasing domestic savings, allocating them better while reducing the cost of credit, improving its availability and encouraging entrepreneurship.

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Indian Financial System

Last updated on September 7, 2024 by ClearIAS Team

In India, there are primarily two types of financial institutions: Banks and Non-Banking Financial Institutions (NBFIs).

The main distinction between a bank and an NBFI is that banks accept demand deposits, whereas NBFIs do not. Banks issue Cheques, however, NBFIs are not permitted to do so.

Also read: Nidhi Company

Table of Contents

Under the Indian Financial System, there are two types of banks: commercial and cooperative banks.

While cooperative banks function on cooperative principles like serving their members and the community/society, commercial banks operate according to commercial (profit) principles.

Compared to commercial banks, cooperative banks offer a higher rate of interest on deposits.

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Also read: Financialization of Indian Economy

Commercial Banks

There are two types of commercial banks: scheduled commercial banks and non-scheduled commercial banks.

A bank is referred to as a scheduled bank because it is listed in the second schedule of the RBI Act of 1934.

Other requirements for a scheduled bank include corporate status and a minimum paid-up share capital of 500 crores of rupees.

On the other hand, limited operations may be performed by a non-scheduled bank; for instance, non-scheduled banks are not permitted to transact in foreign exchange.

According to the Banking Regulation Act of 1949, non-scheduled banks must maintain reserve requirements but may not be with the RBI and according to the RBI Act of 1934, Scheduled Banks must maintain reserve requirements with the RBI.

For Commercial Banks, a license from RBI is required to

• To commence banking operations
• Opening of a New Bank Branch
• Closing of an existing Branch
• Change in location of existing branch

Scheduled Commercial Banks

Scheduled commercial banks are divided into:

Public Sector Banks

Banks where the government owns more than 51% of the bank, either at the central or state level.

For example, SBI and its affiliates, Punjab National Bank, Bank of India, etc.

Government ownership of more than 51%, which were private banks earlier that the government took over in 1969 and the 1980s during bank nationalization, makes them part of the public sector.

Private Sector Banks

Banks that are privately held, such as ICICI Bank, Axis Bank, etc.

Foreign Banks

Banks that are established in India but are owned by a foreign firm or entities, like Citi Bank. These are essentially private banks with foreign ownership.

Regional Rural Banks (RRB)

Under the provisions of the Regional Rural Banks Act of 1976, Regional Rural Banks were created in 1975 with the goal of boosting the rural economy by offering loans and other facilities, particularly to small and marginal farmers, agricultural laborers, artisans, and small businesses owners, for the growth of agriculture, trade, commerce, industry, and other productive activities in rural areas.

• RRBs are held by the Central government, the concerned State government, and the sponsor bank in the proportion of 50:15:35.
• Each RRB is sponsored by a particular bank.
• RRBs need to provide 75% of the lending to priority sectors. RRBs are under the supervision of NABARD.

Payment Banks

In August 2015, RBI approved licenses to 11 applicants as Payment Banks. The RBI has set a limit of Rs. 1 lakh on the amount of deposits that payment banks may accept from one customer. Only businesses that are really committed to serving the underprivileged and poor will be able to apply for a payment bank.

Therefore, migrant workers, independent contractors, low-income households, etc. will be the main target of payment banks.

Payment banks are not allowed to lend money or issue credit cards. Payment banks will only accept demand deposits i.e., only current and savings account options will be offered.

Small Finance Banks

• The RBI awarded licenses to numerous applications for Small Finance Banks in September 2015, which is a step toward advancing financial inclusion.
• The small finance banks will largely engage in basic banking activities, such as accepting deposits and lending to underserved and unserved groups, such as unorganized sector entities, small business units, small and marginal farmers, and micro and small businesses.
• There won’t be any limitations on the area of operation of small financing institutions.
• The small finance banks must lend 75% of their total credit to sectors that the RBI has designated as priority sectors for lending (PSL) .
• Its lending portfolio should consist of at least 50% loans and advances under Rs. 25 lakhs.

A Government of India Scheme announced in 1996 led to the establishment of Local Area Banks (LAB). The purpose of establishing local area banks was to make it possible for local institutions to mobilize rural savings and make them available for investments in the local regions.

Also read: Microfinance Institutions

Cooperative Banks

Under the Indian Financial System, Urban Co-operative Banks (UCB) and Rural Co-operative Banks are the two subcategories of cooperative banks. UCBs come under the supervision of RBI.

Urban Co-operative Banks

Urban Co-operative Banks, also known as Primary Co-operative Banks, are found in urban and semi-urban regions. They essentially made loans to small enterprises and borrowers. They now have a far wider range of operations.

UCBs are further classified into Scheduled and Non-scheduled categories, which are then further divided into single-state and multi-state.

Single State UCBs are governed by the Registrar of Cooperative Societies (RCS) of the state concerned and are registered as cooperative societies under the State Government Cooperative Societies Act.

Multi-State UCBs are governed by the Central Registrar of Cooperative Societies (CRCS) and are registered as cooperative societies under the requirements of the Multi-State Cooperative Societies Act of 2002.

Rural Cooperative Banks

India’s rural cooperative credit system is primarily responsible for ensuring credit flow to the agricultural sector. Both short-term and long-term cooperative credit systems are included in it.

State Cooperative Banks (StCBs) at the state level, (District) Central Cooperative Banks (DCCBs) at the district level and Primary Agricultural Credit Societies (PACS) at the village level make up the three-tier system that governs the short-term cooperative credit framework.

Long-term cooperative credit systems include the State Cooperative Agriculture and Rural Development Bank (SCARDB) and the Primary Cooperative Agricultural and Rural Development Bank (PCARDB).

About Non-Banking Financial Institutions (NBFIs)

Under the Indian Financial System, the Non-Banking Financial Institutions (NBFIs) industry is a key sector that is governed and regulated by the RBI.

All India Financial Institutions (AIFIs), Non-Banking Financial Companies (NBFCs), and Primary Dealers (PDs) fall under NBFIs in the Indian Financial System.

Credit Information Companies (CIC) are also a category of non-banking financial institutions that are subject to RBI regulation.

All India Financial Institutions (AIFIs)

AIFIs are an institutional mechanism entrusted with providing sector-specific long-term financing. Currently, the RBI regulates and supervises several AIFIs, also known as Development Financial Institutions (DFIs). Such AIF institutions are mentioned below.

By the National Bank for Agriculture and Rural Development Act of 1981, NABARD was established in 1982.

NABARD offers credit to promote rural areas’ linked economic activities, including small-scale enterprises, cottage industries, handicrafts, and rural crafts.

NABARD oversees and coordinates the activities of rural credit institutions like RRBs and Rural Cooperative Banks (RBI has delegated its supervisory powers in the case of the rural sector to NABARD while retaining its regulatory powers)

When it comes to issues of rural development, NABARD offers help to the government, RBI, and other organizations.

provides training and research facilities for banks, cooperatives, and organizations in areas related to rural development.

Although it does not offer direct credit to specific individuals, it does offer indirect financial help through refinancing (NABARD finances the organizations that offer financial assistance to the rural sector). Institutions that are approved by the central government may receive direct financing from NABARD.

b) National Housing Bank (NHB)

Under the National Housing Bank Act of 1987, NHB was founded in 1988. The main purpose of NHB’s operations is to assist and promote housing finance institutions through financial and other means at both the local and regional levels.

Although it does not provide direct credit to individuals, it does provide indirect financial help through refinancing (i.e. NHB finances those institutions that provide finance to individual borrowers, builders, etc.)

c) EXIM bank

The Export-Import Bank of India Act of 1981 led to the establishment of the EXIM bank in 1982.

The goal of the EXIM bank is to help exporters and importers with financial support and serve as the main financial institution for coordinating the operations of institutions engaged in financing the export and import of products and services to promote the nation’s international trade.

It offers direct financial support to exporters and importers as well as indirect support through refinancing.

d) Small Industries Development Bank of India (SIDBI)

Under the provisions of the Small Industries Development of India Act 1989, SIDBI was established in 1990.

SIDBI serves as the primary financial institution for the development, financing, and promotion of the Micro, Small, and Medium-Sized Enterprise (MSME) sector as well as for coordination of the operations of the institutions involved in related activities.

SIDBI primarily provides banking institutions with indirect financial support (via refinancing) to enable them to continue lending to MSMEs.

e) MUDRA Bank

The Government of India established MUDRA (Micro Units Development and Refinance Agency Ltd.) as a financial organization for the development and refinancing of micro-unit firms.

Under the Indian Financial System, a Non-Banking Finance Company named MUDRA Ltd has been established as a subsidiary of SIDBI.

The goal of MUDRA is to provide funding to the non-corporate (informal sector) small business sector, including small manufacturing units, store owners, fruit and vegetable vendors, hair salons, and craftsmen in both rural and urban areas with financial requirements up to Rs. 10 lakhs.

There are three different types of MUDRA loans. Loans up to Rs. 50,000 are available for small businesses under the “Shishu” category; loans beyond Rs. 50,000 and up to Rs. 5 lakhs are available under the “Kishor” category, and loans between Rs. 5 lakhs and Rs. 10 lakhs are available under the “Tarun” category.

Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies (NBFCs) , commonly referred to as Non-Banking Financial Institutions (NBFIs), are organizations that offer some financial services that resemble those offered by banks but do not have a banking license.

Under the Indian Financial System, a non-banking financial company (NBFC) is a company registered under the Companies Act of 1956 that engages in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the government or a local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, and chit business.

It excludes institutions whose main line of business is that of agriculture activity, industrial activity, and the purchase or sale of immovable property.

According to the RBI Act of 1934, no NBFC may operate without a certificate of registration from RBI. However, certain kinds of NBFCs that are subject to regulation by other agencies are free from the requirement of registration with the RBI, for example:

• Venture Capital Funds, Merchant Banking Institutions, and Stock broking companies registered with SEBI.
• Insurance Company with a current Certificate of Registration by IRDA.
• Chit firms, as outlined in the 1982 Chit Funds Act and governed by the respective State governments.

Micro Financial Institutions (MFIs) are also a type of NBFC, however, the amount of credit they can extend is restricted. The upper limit is Rs. 1.25 lakh for those living in rural areas, and Rs. 2 lakhs for those in urban and semi-urban areas.

Primary Dealers (PDs)

The RBI has granted primary dealers the right to buy and sell government securities. They are organizations that have registered with the RBI. As RBI releases these government securities on behalf of the government, PDs purchase them directly from the government in the primary market to resell them to other customers in the secondary market. As a result, they are essential in developing the primary and secondary markets for government securities.

Peer to Peer (P2P) Lender

Under the Indian Financial System, P2P intermediaries are a new class of NBFCs that offer a platform that connects independent lenders and borrowers. P2P lending allows borrowers to borrow money from private investors who are willing to lend their own funds at an agreed interest rate. Social lending or crowd lending are other names for peer-to-peer lending.

There are limits on how much a lender can lend (up to a total of Rs. 50 lakhs), how much a borrower can borrow, and for how long they can borrow it (limit on period).

• serve as an intermediary by offering a platform or online market to those taking part in peer-to-peer lending;
• not raise deposits and not end on its own
• not offer any sort of credit guarantee
• conduct a thorough investigation of the participants;
• carry out risk profiling and credit assessment of the borrowers and disclose the information to potential lenders;
• require the participant’s prior consent before accessing their credit information;
• provide aid with loan disbursement and repayment of the amount;

Credit Information Companies (CIC)

A CIC is an autonomous company that enlists banks, NBFCs, and financial institutions as members. From these members, the CIC collects data and identifying information for specific customers and companies. Based on a prospective borrower’s past payment history, CICS can tell banks whether or not he is creditworthy. The level of information determines how well lenders can assess risk and how easily consumers can get loans at affordable rates.

By the Credit Information Companies (Regulation) Act of 2005 , the RBI regulates and issues licenses to CICs. TransUnion Credit Information Bureau of India Limited (CIBIL), Equifax, Experian, and High Mark Credit Information Services are the four CICS currently operating in India.

Article Written By: Priti Raj

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Banking System in India: Developments, Structural Changes and Institutional Framework

• First Online: 01 January 2013

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• Sunil Kumar 3 &
• Rachita Gulati 4  

Part of the book series: India Studies in Business and Economics ((ISBE))

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This chapter provides a history of the Indian banking industry, and discusses the process of transformation of banking industry from a state of high degree of regulation to deregulation and liberalization. It has been noted that from the early 1970s through the late 1980s, the role of market forces in the Indian banking system was almost missing, and excess regulation in terms of high liquidity requirements and state interventions in allocating credit and determining the prices of financial products resulted in serious financial repression. Realizing the presence of the signs of financial repression and to seek an escape from any potential crisis in the banking sector, the Government of India embarked upon a comprehensive banking reforms plan in 1992 with the objective of creating a more diversified, profitable, efficient and resilient banking system. Subsequent to the implementation of the extensive financial liberalization programme implemented in 1992, the banking system of India witnessed visible structural changes and transformations during the past 20 years. Use of the state-of-the-art banking technology, increased availability of lendable resources, heightened competition, a trend towards the market-driven interest rate system, improvement in asset quality, imposition of capital market discipline, drive towards consolidation through mergers, greater exposures of non-traditional activities, etc. are the key structural changes and transformations that have taken place in Indian banking industry during the post-deregulation period. These structural changes transformed the Indian banking system from a weak and crisis prone system to a sound and efficient system, which is resilient to external shocks and able to play its vital role in the development of the economy.

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A type of business organisation recognisable as managing agency took form in a period from 1834 to 1847. Managing agency system came into existence when an agency house first promoted and acquired the management of a company. This system with no counterpart in any other country functioned as an Indian substitute for a well-organised capital market and an industrial banking system of western countries.

They were known as Presidency banks as they were set up in the three Presidencies that were the units of administrative jurisdiction in the country for the East India Company. The Presidency banks were governed by Royal Charters. These banks issued currency notes until the enactment of the Paper Currency Act, 1861, when this right to issue currency notes by the Presidency banks was abolished and that function was entrusted to the Government.

It comprises of 3 Presidency banks, 18 class ‘A’ banks (with capital of greater than INR 0.5 million), 23 class ‘B’ banks (with capital of INR 0.1 million to 0.5 million) and 12 exchange banks. Exchange banks were foreign-owned banks that engaged mainly in foreign exchange business in terms of foreign bills of exchange and foreign remittances for travel and trade. Classes A and B were joint-stock banks.

State Bank of Bikaner, State Bank of Hyderabad, State Bank of Indore, State Bank of Jaipur, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra and State Bank of Travancore are the eight associate banks of SBI. It is worth mentioning here that the State Bank of Bikaner and State Bank of Jaipur have been merged into one bank, namely, State Bank of Bikaner and Jaipur. Recently, in 2008 and 2010, State Bank of Saurashtra and State Bank of Indore have merged with State Bank of India.

The fourteen commercial banks that nationalised in 1969 were Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Overseas Bank, Indian Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank and Bank of India, and six that nationalised in 1980 were Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab & Sind Bank and Vijaya Bank.

The Government of India implemented three branch licensing policies (BLPs) between 1979 and 1990. The first covered the period January 1979 to December 1981, while the second BLP ran from April 1982 through March 1985. The third branch licensing policy guided branch expansion between April 1985 and March 1990.

Note that Table A.1 is given in the Appendix.

SLR indicates the minimum proportion of net demand and time liabilities (NDTLs) that the bank has to maintain in the form of gold, cash or other approved securities, while CRR refers to a portion of NDTLs (deposits) which commercial banks have to keep/maintain with RBI.

The Herfindahl-Hirschman index is defined as the sum of squares of market shares and varies between 0 and 10,000. In practice, markets in which HHI is below 1,000 are considered as ‘loosely concentrated’, between 1,000 and 1,800 as ‘moderately concentrated’ and above 1,800 as ‘highly concentrated’.

The GOI enacted the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, which provided for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. The act also provided for sale of financial assets by banks/FIs to securitization companies (SCs)/reconstruction companies (RCs).

The core banking solutions provides a host of benefits such as anywhere banking, anywhere access and quick funds movement at optimal costs and in an efficient manner.

In 2008, the number of associate banks has reduced to six from seven because of the merger of State Bank of Saurashtra with the State Bank of India. Further, the number has reduced to five with the merger of State Bank of Indore with State Bank of India itself in 2010.

Cities in India are categorised as Tier 1, Tier 2 and Tier 3 cities on the basis of the population of the city. Tier 1 cities are those cities where population is more than five million, Tier 2 are those cities where population is between one million and five million, and Tier 3 are those cities where population is less than one million.

This is evident from the fact that the share of public sector banks in deposits, advances and total assets of Indian banking industry has declined from 87.9 %, 89.3 % and 87.2 % during the financial year 1992–1993 to 76.6 %, 75.3 % and 71.9 % during the financial year 2008–2009, respectively.

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Kumar, S., Gulati, R. (2014). Banking System in India: Developments, Structural Changes and Institutional Framework. In: Deregulation and Efficiency of Indian Banks. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1545-5_2

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In India, Financial Literacy Programs Are Lifting Families Out of Debt and Fueling New Prosperity

Women borrowers participating in a financial literacy program. These literacy programs are assisting Indian families in improving their standard of living. Photo: ADB.

Project Result / Case Study 08 March 2022 Read time: 6 mins

Share this page, key takeaways.

•   Less than a third of the population of India are financially literate. Many lack access to banks or microfinance, but might resort to loan sharks, exposing them to cycles of debt.
•   Educating women about financial principles is key to breaking cycles of debt.
•   ADB’s private sector investment supported the expansion of RBL Bank’s Saksham and Unnati programs, which combines access to loans with financial inclusion and financial literacy improvement.

The Hindi words for “capable” ( Saksham) and “development” ( Unnati) , are helping to define financial inclusion in India. For Indians, developing capability is a call to action. This is why seminars on financial literacy skills are so effective. Financial literacy can be the difference between drowning in unregulated debt, often from loan sharks, or breaking free by building through successful small businesses.

  India has made great progress in improving financial inclusion by making loans and other financial services available to low-income borrowers, through support from the Government of India, microfinance institutions (MFIs), and NGOs. In 2014 the government launched Pradhan Mantri Jan-Dhan Yojana, a program aimed at providing a bank account for every household. The program generated a record 443 million accounts for India’s households since its August 2014 launch through to early January 2022.

However, closing the banking gap also requires at least a basic understanding of how the financial system works. Only 27% of Indian adults – and 24% of women – meet the minimum level of financial literacy as defined by the Reserve Bank of India.

Women are particularly responsive to financial literacy outreach. Traditionally they manage the household budget and are often eager to start home-based businesses. When armed with foundational knowledge, financial literacy tools, and small-scale business opportunities, women entrepreneurs can make a remarkable impact on their families and communities.

Financial literacy is helping Rekha Devi to improve her family’s living conditions and prospects. A mother of three living in Danapur, Bihar State, in eastern India, her modest household income comes from her husband’s job as a rickshaw driver. She manages daily household expenses and repayments for informal loans. More often than not, the family had very little left in the end of the day for savings. “Whenever we had a major expense, I resorted to taking out loans. The loan repayments often depleted our daily income.”

Financial literacy training taught Rekha how to start a small savings fund for her family. “I learned the importance of setting aside a small amount daily and consistently. I started setting aside 5 rupees every day until I was able to increase this to 20 rupees,” she says.

RBL Bank, one of India’s leading private sector banks, is helping to deliver this life-changing training. Its Saksham financial literacy training programs, launched in December 2013 in Gujarat, Maharashtra, and Rajasthan provinces, are classroom-based financial literacy courses tailored for women in lower-income communities.

Designed to cater to a wide range of needs, Saksham utilizes visual aids, stories, role-playing activities and exercises that resonate with the clients’ lives and experiences. Trainees are taught life skills alongside financial principles: while they learn how to access banking services and to repay loans responsibly, they also acquire planning skills, such as how to create investment and savings plans for their families.

“When you educate a woman, you educate the entire family and ensure the wellbeing of future generations.” Harjeet Toor, RBL Bank’s Head of Retail Lending, Inclusion and Rural Business

In 2016, RBL Bank launched Unnati , a blended virtual and in-person customer education program, to customers in Bihar state.

These programs were coupled with the innovation of the Swadhaar Saathi mobile application, which enables clients to digitally record their financial activities and allocate funds for household expenditures, children’s education, savings, and emergencies.

“When you educate a woman, you educate the entire family and ensure the wellbeing of future generations,” says Harjeet Toor, RBL Bank’s Head of Retail Lending, Inclusion and Rural Business. “Financial education helps many of our women customers understand the necessity of financial services, and from that they can become more productive citizens.”

  In 2015 ADB provided a five-year loan of $100 million, an equity investment of up to $50 million, and a capacity building technical assistance grant of $800,000 for RBL Bank’s financial inclusion projects. ADB’s assistance supported RBL Bank’s outreach to low-income customers in rural and semi-urban areas, and the expansion of its mobile technology and agricultural value chain lending efforts. ADB reinforced RBL Bank’s targets to ensure that loans benefited agricultural clients and micro, small, and medium enterprises (MSMEs), and helped RBL Bank to focus on women borrowers. ADB’s technical assistance helped RBL Bank to improve its risk management and information technology capacities.

“The impact of empowering mothers cannot be overstressed, particularly in rural communities in India,” said ADB’s Private Sector Department Senior Investment Specialist Doukas Doudikis.   By educating women, we not only give whole families the opportunity to help themselves, but provide a path to better lives for their children and families.

ADB’s loan and equity investment helped RBL Bank expand across the country, with most new locations in low-income areas. From the start of the Saksham and Unnati programs until December 2021, RBL Bank had provided financial literacy and customer education training to over 348,985 women across 46 branches in Rajasthan, Maharashtra, Gujarat, Bihar, and Haryana. And despite restrictions caused by the coronavirus disease (COVID-19) pandemic, RBL Bank was able to train 97,467 clients from April 2020 through December 2021, using both traditional classroom methods and telecalling. Mobile banking, like the app-based Swadhaar Saathi, have also proven very useful to customers, given the importance of limiting person-to-person contacts.

Rekha’s regular savings habit, while modest, has paid for large expenses such as her child’s tuition fee and her husband’s unexpected illness.

“Because my husband and I were able to save enough money to set up a bank account, we became eligible for retirement programs,” says Rekha. “Learning to save has improved our overall quality of life.”

• Finance sector development
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• India and ADB

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• Government Exam Articles

Indian Financial System

The Indian Financial System is one of the most important aspects of the economic development of our country. This system manages the flow of funds between the people (household savings) of the country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the parties.

This is an important topic with respect to the various  Government exams  conducted in the country, and aspirants must carefully consider going through this article and prepare themselves accordingly.

In this article, you shall know about what the Indian Financial system is, its components and how it helps in the economic growth of a country. Also, get some Sample Questions on the Indian Financial System further below in this article.

Indian Financial System PDF Notes:- Download PDF Here

Indian Financial System – An Overview

The services that are provided to a person by the various Financial Institutions including banks, insurance companies, pensions, funds, etc. constitute the financial system. 

Given below are the features of the Indian Financial system:

• It plays a vital role in the economic development of the country as it encourages both savings and investment
• It helps in mobilising and allocating one’s savings
• It facilitates the expansion of financial institutions and markets
• Plays a key role in capital formation
• It helps form a link between the investor and the one saving
• It is also concerned with the Provision of funds

Other Related links:

The financial system of a country mainly aims at managing and governing the mechanism of production, distribution, exchange and holding of financial assets or instruments of all kinds.

Further below in this article, we shall discuss the various components of the financial system in India.

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

• Financial Institutions
• Financial Assets
• Financial Services
• Financial Markets

Let’s discuss each component of the system in detail. 

1. Financial Institutions

The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised either directly or indirectly via the Financial Markets. 

The main functions of the Financial Institutions are as follows:

• A short term liability can be converted into a long term investment
• It helps in conversion of a risky investment into a risk-free investment
• Also acts as a medium of convenience denomination, which means, it can match a small deposit with large loans and a large deposit with small loans

The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two.

The financial institutions can further be divided into two types:

• Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need
• Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage companies fall under this category. They cannot ask for monetary deposits but sell financial products to their customers.

Further, Financial Institutions can be classified into three categories:

• Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
• Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB, PNB, etc. 
• Non Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD, SIBDI, etc. 

2. Financial Assets

The products which are traded in the Financial Markets are called Financial Assets. Based on the different requirements and needs of the credit seeker, the securities in the market also differ from each other. 

Some important Financial Assets have been discussed briefly below:

• Call Money – When a loan is granted for one day and is repaid on the second day, it is called call money. No collateral securities are required for this kind of transaction. 
• Notice Money – When a loan is granted for more than a day and for less than 14 days, it is called notice money. No collateral securities are required for this kind of transaction.
• Term Money – When the maturity period of a deposit is beyond 14 days, it is called term money.
• Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities with maturity of less than a year. Buying a T-Bill means lending money to the Government.
• Certificate of Deposits – It is a dematerialised form (Electronically generated) for funds deposited in the bank for a specific period of time.
• Commercial Paper – It is an unsecured short-term debt instrument issued by corporations.

3. Financial Services

Services provided by Asset Management and Liability Management Companies. They help to get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

• Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing debit/credit cards, opening accounts, etc. 
• Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages, etc. are all a part of the Insurance services
• Investment Services – It mostly includes asset management
• Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange services

The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing payments and settlements and lending and investing. 

4. Financial Markets

The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called a financial market. 

The financial market can be further divided into four types:

• Capital Market – Designed to finance the long term investment, the Capital market deals with transactions which are taking place in the market for over a year. The capital market can further be divided into three types:

         (a) Corporate Securities Market

         (b) Government Securities Market 

         (c) Long Term Loan Market 

• Money Market – Mostly dominated by Government, Banks and other Large Institutions, the type of market is authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly liquid instruments. The money market can further be divided into two types:

         (a) Organised Money Market

         (b) Unorganised Money Market

• Foreign exchange Market – One of the most developed markets across the world, the Foreign exchange market, deals with the requirements related to multi-currency. The transfer of funds in this market takes place based on the foreign currency rate.
• Credit Market – A market where short-term and long-term loans are granted to individuals or Organisations by various banks and Financial and Non-Financial Institutions is called Credit Market

Aspirants for various Government exams can check the syllabus for respective exams at the links mentioned below:

Sample Questions on Indian Financial System

Given below are a few sample questions for the candidates to have an idea about the type of questions asked in the Government exams on the topic: Indian Financial System:

Q 1. Which of these is a type of Capital Market?

• Corporate Securities Market
• Government Securities Market
• Long Term Loan Market 
• All of the Above
• None of the Above

Answer: (4) All of the Above

Q 2. Which of these is not a type of Financial Assets?

• Notice Money
• Treasury Bill
• Commercial Paper

Answer: (1) Cheque

Q 3. Which of these is not a fundamental objective of Indian Financial System?

• To give time value to money
• Offer Services that reduce risk of loss
• Issuing Bank Notes
• Provide a payment System
• All of the above

Answer: (3) Issuing Bank Notes

Q 4. When a loan is granted for only one day, it is called _________?

• Immediate Bill
• Commercial Bill

Answer: (4) Call Money

Questions for descriptive answers can also be asked from this topic. 

The various Financial Institutions help balance the economic growth of the country and mobilise the flow of debit and credit in the country. With the help of rural development, the overall financial system of the country can be improved.

Candidates who are looking forward to applying for the upcoming Government exams can visit BYJU’S for more information. 

Frequently Asked Question – Financial System in India

Q.1. what is the use of the financial system, q.2. what is the financial system, q.3. what are the important functions of a financial system, q.4. what are the objectives of a financial system, q 5. indian financial system is divided into how many categories.

Ans. Broadly there are two categories of Indian Financial System, i.e. Indian Money market and Indian capital Market:

• Indian Money Market – in which short term funds are lent and borrowed.
• Indian Capital Market – where medium and long term exchanges happen.

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Global data

Introduction

By Bill and Melinda Gates

Poverty is not just the lack of money. It’s also the lack of access to basic financial services that help the poor use what money they have to improve their lives.

So the development community has been trying to promote financial inclusion—that is, to connect almost 2 billion people who live completely outside the formal financial system to bank accounts and services like credit and insurance. The problem is, it’s been too expensive to do at any kind of scale.

Until now. With mobile phones, it’s orders of magnitude easier and cheaper to reach the poor with financial services. The number of people with accounts is going up quickly, and we’re starting to see the impact. In particular, there’s exciting new evidence that digital financial services like payments and savings do indeed help people lift themselves out of poverty.

India has been especially innovative about investing in the building blocks of digital financial inclusion. Aadhaar, a nationwide biometric identification system, makes it simpler and more secure for poor people to do business with banks. India’s regulators have implemented new rules that give financial institutions greater flexibility to provide a wider variety of services. For example, a new class of banks called payment banks has brought in new private-sector players to the market and opened millions of new accounts. In 2014, the government launched a program called PMJDY to help the poor open accounts in huge numbers, and it recently started providing benefits to them through these accounts.

One of the development community’s hypotheses has been that inclusion could be especially revolutionary for women, who traditionally have been excluded from making economic decisions. Now, researchers are starting to test it. Last year, a study 
in Kenya by Tavneet Suri and William Jack established a clear link between financial inclusion and women’s empowerment. This year, Rohini Pande and her colleagues added to the evidence base with fascinating results. Melinda talked to Dr. Pande about her research, what financial inclusion can do for Indians and India, and how to speed up progress.

In conversation

Melinda Gates

Co-chair, Bill & Melinda Gates Foundation

Rohini Pande

Mohammed Kamal Professor of Public Policy, Harvard Kennedy School

Melinda: What problem is your research on financial inclusion for Indian women trying to solve?

Rohini: As India has gotten richer, women have actually been working less in the formal labor force. That’s a problem for women, because when they don’t work they have less power in the household and, usually, less of a chance to live lives as fulfilling as they want. It’s also a problem for India, which fails to benefit from the talents of many women who want to work.

Melinda: Why are India’s women working less?

Rohini: One important reason—and one that our research focuses on—is social norms that block women’s mobility. Many Indian women need to ask permission just to leave the house. Working outside the home can be seen as shameful. These norms aren’t just imposed on women. In some places, men are considered bad providers if their wives work. We wanted to know whether connecting women to the financial system would help them transgress these norms. And perhaps, over time, even start to change them.

Melinda: How did you test your theory?

Rohini: The Government of India guarantees every rural household 100 days of work. This is an income security program, sometimes called workfare. Households can split up who does the work however they want, but historically the wages have been paid to the head of household, not the actual worker. So, usually, it’s men keeping most of the money and deciding how to spend it. We wanted to see what happened if wages for women’s work went directly into accounts they controlled.

Melinda: What was the most interesting thing you learned?

Rohini: Women who received wages in their own accounts earned more and saved more. The interesting thing was that they not only worked more in the government’s workfare program; they also worked more in the private sector. After the intervention, when we asked the women to tell us their occupation, they were more likely to say “worker” instead of “housewife.” That suggests a story of empowerment. Having and using a bank account changed her sense of self, or her ability to express her sense of self.

Melinda: You were able to do this study because India has invested in digital financial services. How does digital technology facilitate financial inclusion?

Rohini: Digital has changed the nature of banking and made it cheaper to reach the rural poor. The poor make very small and very frequent transactions—the two things that traditionally make it hard for banks to earn money. Now, though, you have a single person with a point-of-service machine who can sit in a room in the village and be the equivalent of the bank. Digital lowers the cost significantly. Moreover, bringing banking closer to villages is hugely important for women because of the mobility constraints we talked about.

Melinda: As India ramps up its efforts at financial inclusion, what does the country need to focus on to maximize its impact on women in particular?

Rohini: This world of digital banks is a very new world for women. An important finding from our study was that women need a lot of additional training to feel comfortable using digital financial services. Remember, in India, even if you’re in a digital world, you’re not in a world of internet banking where you have a smartphone app. If you own a phone and your bank is diligent, then you hopefully have an SMS that tells you when money turns up in your account, or, at best, an SMS on a regular basis that tells you what’s there. In reality, what we find is that an SMS typically gets sent only if you have a large enough account, and that is exactly what we don’t want. We want the people with the smallest accounts who are likely to be the furthest away to get the most information. Transparency is easier once you have a digital system, but you have to invest in it.

Melinda: What do you see that makes you most optimistic about the future?

Rohini: Generational change. When you go to a bank in a village right now, the people you see outside are school kids. Adolescent girls are well-versed in the financial system. You hear the bank tellers complaining that they’re always putting in one rupee at a time, and the tellers really don’t want to do it, but they can’t say no.

The stories behind the data

© 2017 Bill & Melinda Gates Foundation. All Rights Reserved.

Structure of Indian Financial System, Components, Functions

Structure of Indian Financial System is a complex network of financial institutions, markets and services. Read all about Indian Financial System Code, Components and Functions for the UPSC exam.

Table of Contents

The Indian financial system is a complex network of financial institutions, markets, instruments, and services that facilitate the flow of funds between savers and investors. It comprises various entities such as banks, non-banking financial companies (NBFCs), insurance companies, stock exchanges, mutual funds, pension funds, and other financial intermediaries.

The Indian Financial System plays a crucial role in mobilizing savings, allocating capital, and facilitating economic growth and development in the country.

Structure of Indian Financial System

 The structure of the Indian financial system can be broadly divided into two parts: the organized sector and the unorganized sector .

• Organized sector includes formal financial institutions such as banks, insurance companies, NBFCs, mutual funds, stock exchanges, and pension funds. These institutions are regulated by the Reserve Bank of India (RBI) and other regulatory bodies such as the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA).
• Unorganized sector , on the other hand, includes informal financial intermediaries such as moneylenders, chit funds, and other unregulated entities that cater to the financial needs of the unbanked and underserved sections of society.

Check here in detail the Difference Between Organized Sector and Unorganized Sector .

Components of Indian Financial System

The Indian Financial System is composed of various components, including:

Indian Financial System Code

The Indian financial system is governed by various laws, regulations, and codes issued by different regulatory bodies. For example, the Reserve Bank of India Act, of 1934 governs the functioning of the Reserve Bank of India, while the Securities and Exchange Board of India (SEBI) Act, of 1992 regulates the securities market in India. There have been proposals in the past to introduce a comprehensive financial code, but they are still in the drafting stages and have not been implemented yet.

Features of Financial System

The Indian financial system is a complex and interconnected network of institutions, markets, and instruments that facilitate the flow of funds between savers and borrowers. It plays a vital role in the economic development of the country by mobilizing savings and allocating them to productive investments. The Indian financial system is characterized by the following features:

• Dual structure system consisting of a formal sector and an informal sector.
• Intermediated, meaning that financial institutions play a key role in mobilizing savings and allocating them to borrowers
• Increasingly market-based
• Regulated by the government through a number of regulatory bodies
• Promote financial inclusion, through the Pradhan Mantri Jan Dhan Yojana and the Pradhan Mantri Mudra Yojana etc.
• Promoting economic growth

Functions of Indian Financial System

The Indian financial system has several functions that help to meet the financial needs of individuals and businesses. Here are some of the key functions of the Indian financial system:

• Mobilization of Savings: The Indian financial system helps to mobilize savings from various sectors of the economy and channel them towards productive investments. This is achieved through various financial intermediaries such as banks, mutual funds, and insurance companies.
• Allocation of Credit: The Indian financial system also plays a key role in allocating credit to different sectors of the economy. Banks and other financial institutions provide loans and credit facilities to businesses and individuals to help them meet their financial needs.
• Payment System: The financial system provides a safe and efficient payment mechanism to facilitate transactions between different individuals and businesses. This is achieved through various payment systems such as NEFT, RTGS, and IMPS.
• Risk Management: The financial system helps to manage risks associated with financial transactions. Financial intermediaries such as insurance companies provide risk management products such as life insurance, health insurance, and property insurance.
• Price Discovery: The Indian financial system also helps in the discovery of prices of financial assets such as stocks, bonds, and commodities. This is achieved through various financial intermediaries such as stock exchanges and commodity exchanges.
• Economic Development: The financial system plays a critical role in the economic development of the country. It provides financial resources for investment in infrastructure, industries, and other productive sectors of the economy.
• Financial Inclusion: The Indian financial system also strives to promote financial inclusion by providing access to financial services to individuals and businesses in remote and underdeveloped areas of the country.

Indian Financial System UPSC

The Indian financial system is an important topic for the UPSC exam as it is a critical component of the Indian economy. Knowledge of the Indian financial system is a part of the UPSC Syllabus 2024 and is frequently tested in the exam. It is also a key topic covered by StudyIQ UPSC Online Coaching and is included in the UPSC Mock Test . Understanding the structure and functions of the Indian financial system is essential for aspirants to score well in the economics and finance-related sections of the UPSC exam.

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Indian Financial System FAQs

What is the indian financial system.

The Indian financial system is a network of financial institutions, markets, and instruments that facilitate the flow of savings from individuals and businesses to investments in the economy.

What are the main features of Indian financial system?

The main features of the Indian financial system include the presence of various financial institutions such as banks, insurance companies, and mutual funds, a well-developed stock market, and a well-regulated regulatory framework.

What do you mean by financial system?

A financial system is a network of financial institutions, markets, and instruments that facilitate the flow of savings from individuals and businesses to investments in the economy.

What is the structure of the financial system?

The structure of the financial system includes financial institutions such as banks, insurance companies, and mutual funds, financial markets such as stock exchanges and bond markets, and regulatory bodies such as the Reserve Bank of India.

What are the 7 elements of the financial system?

The 7 elements of the financial system include financial institutions, financial markets, financial instruments, payment and settlement systems, regulatory bodies, credit rating agencies, and financial advisors.

What are the types of financial system?

The types of financial systems include market-based financial systems, bank-based financial systems, and mixed financial systems, depending on the role played by financial institutions and markets in the economy.

I, Sakshi Gupta, am a content writer to empower students aiming for UPSC, PSC, and other competitive exams. My objective is to provide clear, concise, and informative content that caters to your exam preparation needs. I strive to make my content not only informative but also engaging, keeping you motivated throughout your journey!

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