India’s banking, financial services, and insurance (BFSI) sector forms the nervous system of its economy, transmitting capital, credit, and confidence across every productive activity. Yet, as the country prepares for its next phase of economic expansion, this vital ecosystem stands at an inflection point. The Reserve Bank of India, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority have all highlighted the need for structural reform to sustain the momentum of growth.
The sector’s promise is undeniable — fuelled by rising incomes, expanding digital access, and a growing middle class. But beneath this momentum lie persistent weaknesses: shallow insurance penetration, limited capital depth, and fragmented regulatory oversight. Without a coherent framework that links finance, risk management, and inclusion, India’s financial backbone could strain under the weight of its own ambitions.
READ | 8th pay commission: Fiscal challenge looms for states
Low penetration and capital shortfall
India’s insurance penetration is just about 4% of GDP, among the lowest in Asia. Even with steady premium growth, vast sections of the population remain uninsured. Insurance is not just a commercial product — it is a social safety net. For millions of Indians living on thin margins, a single medical emergency can push them below the poverty line.
The sector’s capital base also remains weak. The combined capital of life and non-life insurers is only about ₹3.5 trillion, with foreign direct investment (FDI) contributing ₹80,000–90,000 crore. Liberalising FDI may help but cannot by itself fill the gap. The pension and insurance ecosystems are interlinked. Unless pension savings are broadened through smaller players, lower entry thresholds, and deeper reach into Tier-III cities, domestic capital formation will remain shallow.
Fragmented oversight and regulatory gaps
India’s BFSI sector operates under multiple regulators — RBI for banks and NBFCs, IRDAI for insurance, PFRDA for pensions, and SEBI for capital markets. This fragmentation leads to overlapping jurisdictions and regulatory blind spots. Coordination is improving, but progress is uneven. At a recent Business Standard summit, regulators agreed that better consultation, data-sharing, and joint rule-making are critical to closing supervision gaps.
The outcome of regulatory fragmentation is evident: uneven enforcement and delayed responses to emerging risks. A unified approach is needed to align prudential regulation with innovation, especially in fintech, digital lending, and non-bank credit markets.
Growth without value
Insurance companies have seen strong growth in premiums and customer base, yet profitability lags. Many firms still chase volume through investment-linked policies instead of focusing on risk-based coverage. The result is slow movement from growth to value.
A recent McKinsey report described India’s insurance market as being at an “S-curve inflection,” yet stuck in a “low-efficiency equilibrium.” Health insurers face unstable margins as competition from alternative savings products intensifies. Growth is slowing and cost pressures are rising—symptoms of a system chasing expansion rather than sustainability.
Risks, liquidity stress, consumer protection
Banks and NBFCs face new pressures. Credit growth now exceeds deposit growth, forcing reliance on market borrowings and raising liquidity risks. The RBI has flagged the need for careful monitoring of asset-liability mismatches and digital-channel vulnerabilities.
Fintech, embedded finance, and third-party service providers have deepened access but also widened cyber-risk exposure. Climate disasters, gig-economy volatility, and rising digital fraud further complicate the landscape. Microfinance institutions, the last mile of inclusion, have also battled liquidity stress and delinquency.
Equally important is consumer protection. As digital lending and fintech platforms expand, instances of mis-selling, phishing, and data breaches are rising. Regulators are now tightening disclosure norms, setting up grievance redress systems, and mandating financial literacy programmes. Building digital trust will require not only advanced cyber-security but also informed consumers who can navigate products and risks confidently.
PSU banks and governance reform
Public sector banks (PSBs) continue to anchor India’s financial system, accounting for nearly two-thirds of total lending. Their balance-sheet repair through recapitalisation and consolidation has improved capital ratios, yet governance reforms remain incomplete. Empowering boards, professionalising management, and aligning incentives with risk-adjusted performance are essential for long-term stability.
The creation of the National Asset Reconstruction Company (NARCL) was a step toward resolving bad loans, but the next stage must focus on preventing stress, not just curing it. PSBs also need to accelerate digital transformation to compete with nimble private and fintech players. The government’s success in cleaning up PSB books will determine how smoothly credit flows to MSMEs and priority sectors.
Reform for resilience and climate finance
Reforms must focus on capital adequacy, governance, and consumer trust. Allowing 100% FDI can boost inflows but should be paired with domestic capital strengthening. Regulatory reforms such as risk-based solvency norms and IFRS adoption, highlighted by Swiss Re, could unlock capital and improve financial resilience.
The next frontier lies in climate finance and ESG integration. Indian banks and insurers are under growing pressure to align with sustainability goals. The RBI has issued draft guidelines for climate-risk management and stress testing. Green bonds, ESG-linked loans, and transition finance will soon define competitiveness in lending and underwriting. For insurers, parametric climate covers and renewable-energy products can open new markets while supporting India’s low-carbon ambitions.
Insurers and lenders must also design products for low-income and rural segments, as emphasised by ICRIER. New models—usage-based insurance, parametric coverage for climate risks, and embedded finance—can extend protection to underserved groups. Prudential regulators must deepen India’s corporate bond market to reduce dependence on banks and contain shadow-banking risks. Collaboration between regulators is no longer optional; it is essential for systemic stability.
India’s BFSI industry still operates on old assumptions of growth measured by premiums and assets. But the world is moving toward value creation through digital trust, risk coverage, and resilience.
The transition demands cultural and strategic change—from product-pushing to customer-centricity, from expansion to efficiency, and from regulation in silos to collective oversight. If reforms stay on course, the BFSI sector can evolve into the backbone of India’s $10-trillion economy.