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Focus Story

Next Generation securities can enhance liquidity and attract more investors. The However, while the existing reforms would help to uplift the

possibility of tax collected at source by issuers on interest on
sector, much more is required to address issues of value
long-term securities, to make the instruments tax-paid and,
creation, competition, technology, low penetration and
Financial Sector therefore, attractive for secondary market investors, is worth affordability.
looking into.
First, the country would benefit from a tiered framework
Secondly, steps should be taken towards strengthening NBFCs
which allows customisable insurance policies such as selecting
Reforms for by ensuring that it operates on a level playing field with banks. specific health or motor insurance components for consumers.
Regulatory measures should be tailored to allow
Such customised policies would offer more relevant and
well-performing NBFCs to access low-cost funds through
cost-effective coverage and improve the affordability and
controlled deposit-taking mechanisms with adequate liquidity
accessibility towards a specific insurance product. Hence,
reserve requirements. This is especially important for housing
Growth finance companies. Moreover, NBFCs should be permitted to regulators should establish guidelines to promote such
offerings, ensuring broader financial protection and inclusion,
offer a wider range of financial products, including payment
especially for the underserved "missing middle" population that
services and insurance distribution, thereby expanding their
often struggles to get access to insurance. There is a case for
market reach and profitability.
encouraging long-term health insurance through health savings
Further, to prevent unfair competition and maintain financial account to provide social security for the future generations at
stability, the government and the Reserve Bank of India (RBI) affordable cost.
should address regulatory arbitrage. This involves creating a
A well-functioning and vibrant financial sector serves as a complexities of global economic systems. The sectors in focus framework which allows the NBFCs to operate with greater Second, regulatory intervention to define industry-wide
bedrock for economic progress and is a key pillar which
are the non- banking financial institutions (NBFC) and the
functional autonomy while adhering to risk management
would help the country fulfil its economic ambitions of insurance sectors. standards comparable to those for banks. standards across healthcare and insurance parameters could
significantly improve service quality and drive greater health
becoming a US$5 trillion economy in near future. The sector insurance penetration in India. Standardized norms and pricing
has ably supported the country to achieve a remarkable Let us first take the NBFC sector. The sector has played a Third, the licensing requirements should be streamlined to
turnaround in growth and move up from being a US$320 pivotal role in complementing the banking sector in meeting facilitate ease of doing business. For this, an updated tiered frameworks would create a more structured and reliable
million economy in the 90s to over US$4.0 trillion economy the credit demands of small businesses, entrepreneurs licensing system, based on risk and operational scale, may be ecosystem, ultimately benefiting both insurers and
at present. and individuals. implemented, to differentiate between small-scale financial policyholders.
service providers and large, systematically important NBFCs
The sector is also undergoing a dynamic transformation, driven However, despite their growing significance, NBFCs face and for allowing for quicker approvals and lower compliance Third, there is a critical need to bring catastrophic events
by factors like innovation in technology, digitisation, financial multiple challenges such as regulatory limitations, funding burdens for smaller, emerging NBFCs while maintaining under the insurance umbrella. Introducing NAT-CAT insurance
deepening, etc. to suit the changing milieu and risk patterns. constraints, operational disparities with banks, etc. which come appropriate regulatory oversight. Minimum vintage at each within the regulatory framework could provide significant
in the way of their expansion. Addressing these challenges is lower tier of NBFC with satisfactory compliance and benefits, not only protecting consumers but also strengthening
BOLD REFORMS HAVE STRENGTHENED THE essential to unlock the full potential of NBFCs and ensure governance can be a structured way of ensuring the the overall economy. The possibility of creating a NAT-CAT
FINANCIAL SECTOR TO SUPPORT NATIONAL their sustained contribution to economic growth. A emergence of quality players. pool managed independently in the manner of Protection and
DEVELOPMENT comprehensive set of reforms, which would effectively Indemnity Clubs (P&I). But with appropriate adjustments, to
rejuvenate the NBFC sector and enhance its contribution to Furthermore, digital-first NBFCs may be encouraged with a tax regime can help create a sufficient pool for NAT-CAT loss
the India growth story, is given below. separate licensing mechanism for fintech-driven financial funding. There is scope for the International Financial Services
Over the last few years, the government has taken bold steps service providers. This will accelerate innovation, financial Centre such as GIFT City to initiate catastrophe bonds and
to build a robust financial sector that fits the unique The first suggestion relates to the diversification of its capital inclusion, and accessibility to credit in remote and rural areas. P&I Clubs specific to Indian risks.
development needs of the nation. The main thrust of reforms sources by encouraging alternative funding channels such as
has been on the creation of efficient and stable financial equity infusion, foreign investments, and securitization of assets. Let us now turn to the insurance industry. This sector plays a Lastly, there is also a need to address some basic constraints
institutions (IBC, NCLT etc), financial inclusion (DBT), creating Specifically, there are constraints in obtaining long-term debt critical role in providing financial protection to individuals and faced by insurance companies. General insurers are plagued by
technology stacks (UPI, AePS, e-KYC, online interoperable BCs finance for NBFCs engaged in long-duration financing such as businesses. It fosters economic stability, encourages investment, leakage of premium from uninsured vehicles specifically
/ Bank Mitras, e-Sign, digital locker etc) and for housing and infrastructure. The Government and the and facilitates long-term development.
development of money and securities markets. regulators may look at alternatives such as collateralised amongst commercial vehicles and two-wheelers which needs
refinance for long-term lending, platform for tapping the large RAISING FDI LIMITS IN INSURANCE TO 100 to be addressed by the Centre and States through digital
The government has also implemented several pool of NRI investments through quasi-equity & debt financing PER CENT HAS BOOSTED INNOVATION, platforms. For Life insurers, there is a need to free up
reforms for Non-Banking Financial Companies and channelising long-term funds with insurance companies COMPETITION, AND FINANCIAL SECURITY investment regulations to permit investments in start-ups and
(NBFCs) to enhance their functionality and and provident funds into long-term finance through unlisted entities as they provide pools of assets with long
stability. However, existing reforms have not credit-enhanced refinancing platforms. This would provide duration and greater ability to absorb volatility.
fully addressed the challenges of a rapidly stability and reduce dependence of NBFCs on limited The government has implemented several reforms in the
changing global landscape. Hence, a more traditional borrowing methods. insurance sector, primarily focused on increasing Foreign Direct To conclude, the financial sector has a critical role in taking
concerted push towards the next generation of Investment (FDI) and promoting competition. Lately, foreign India to the next phase of economic growth. Hence, it is
financial reforms assumes critical importance, to The government and regulatory bodies should also introduce Direct Investment (FDI) limit in insurance has been raised from important to simplify, streamline and reduce compliance costs.
ensure that the financial sector is policies that facilitate easy access to global capital markets and 74 per cent to 100 per cent for increasing the flow of foreign We should not forget that India’s ambitious goal to achieve
adaptable, efficient, and well venture capital investments. Additionally, the development of capital which should lead to greater innovation, increased developed nation status hinges significantly on the robustness
equipped to handle the a robust secondary market for NBFC-issued competition, and enhanced financial security. of its financial sector

Mr. Sanjiv Bajaj, Past President, CII; Chairman, CII Economic Affairs Council &
Chairman & Managing Director, Bajaj Finserv Limited

08 QUARTERLY JOURNAL OF ECONOMICS QUARTERLY JOURNAL OF ECONOMICS 09
APRIL 2025
APRIL 2025