Page 18 - India Insurance Report 2023- BIMTECH

6 India Insurance Report - Series II

Towards a More Robust Financial

Services Architecture

- Arun Agarwal
2 Author, Trainer, Media Columnist and former CEO

An aspirant India needs all its sectors to be transforming, especially the financial sector, which is the
most leveraged of all. This sector requires capacity building to grow entrepreneurship while managing
risks. Despite improvements, and notwithstanding visible improvements in the payment systems, India
continues to be underbanked, underinsured and inadequately covered by old age income security measures.

Viewed from global best practices, India has ratcheted up a policy framework that over-emphasizes
compliance at the expense of competition, outcome and innovation in financial services. The financial
regulation in India is fragmented and rule-based. It is (over) prescriptive. Experts paint a picture of the
fiscalisation of the banking infrastructure with inherent conflicts involving the state owning the banks
that control about three-fourths of total banking assets in India. The government ownership of Public
Sector Banks (PSBs) hinders the ability of the Reserve Bank of India (RBI) to regulate the sector, according
to a report by the National Council of Applied Economic Research (NCAER). The underperformance
of PSBs has persisted despite a number of policy initiatives aimed at bolstering their performance, including
recapitalization, the constitution of the Bank Board Bureau to streamline and professionalize hiring and
governance practices, prompt corrective action plans, and consolidation through mergers. NCAER
makes the case that the Centre should privatize all PSBs except the State Bank of India (SBI).

Financial stability and innovation are not contradictory; the regulatory barriers between banks,
non-banks, and fintech must be overcome, and the regulatory administration in terms of process,
technology, and human capital needs to be more nuanced. Apart from the health of PSBs, the extent of
commercial finance should provide a sobering corrective. One also needs organized arrangements for
non-corporate enterprises and households. Also needed are domestic venture funds to fund MSME
vendors and technology or business-model-driven start-ups in manufacturing and in socially desirable
activities like education, health, and environmental management.

In most major economies, bond-market volumes far exceed those of equity. The Insolvency and
Bankruptcy Code (IBC) has started but is mired in long-winding processes and legal callisthenics.
Regulation technology (RegTech) is becoming increasingly important for compliance and risk
management. A probabilistic, performance-based approach - entertaining the evolution of new economic
or social scenarios, new technologies and new business models - is required to future-proof regulation
and the technologies deployed. Moreover, financial inclusion is a critical issue. This necessitates a continued
push to the digital economy with an enabling e-commerce ecosystem and the adaptation of laws and
institutions to the digital revolution in areas such as competition policy, regulatory regimes, innovation
ecosystems, workforce development, social protection frameworks, and tax policies.