An IMF and World Bank assessment of India's financial system produced power and independence of financial regulators like the RBI, SEBI, and IRDAI through legislative reforms

Financial Regulators in India

India's financial system is overseen by a range of authorities that ensure transparency, stability, and accountability within the markets. These regulators play a vital role in fostering a fair, orderly, and efficient financial landscape, which is essential for the economic growth and development of the country.

Key Regulators

The Securities and Exchange Board of India (SEBI): This is the principal regulator for the securities market in India, responsible for protecting investor interests and facilitating the advancement of the securities market.

The Insurance Regulatory and Development Authority (IRDA): The IRDAI oversees and promotes the insurance sector in India, ensuring its growth while safeguarding the interests of policyholders.

The Reserve Bank of India (RBI): As the central bank of India, the RBI is responsible for formulating the country's monetary policy and serves as the main regulator of the banking system.

Pension Funds Regulatory and Development Authority (PFRDA): The PFRDA regulates the pension sector in India, with a particular emphasis on the National Pension Scheme (NPS) and various pension products.

The Ministry of Corporate Affairs (MCA): The MCA governs corporate affairs in India through the Companies Act of 1956 and 2013, along with other related Acts, Bills, and Rules. It also works to protect investors and provides essential services to stakeholders.

The Ministry of Finance: This ministry manages the nation's economic affairs, acting as the Treasury of India. Its responsibilities include taxation, financial legislation, oversight of financial institutions, capital markets, and the management of both central and state finances, including the Union Budget.

Issues and Concerns

Government influence on regulatory decisions: Existing legislation allows the Ministry of Finance to exert control over the boards and senior management of regulatory agencies.

Limited independence of the RBI: The Ministry of Finance serves as the appellate authority for the RBI, possessing the ability to overturn its supervisory decisions. A notable instance occurred in 2019 when the government reversed the RBI's decision to revoke the license of a small urban cooperative bank.

The RBI's power over state-owned banks and insurance companies is limited; it faces challenges in enforcing changes to boards or facilitating mergers within these entities.

Governance deficiencies in insurance: The IRDAI lacks sufficient tools to take decisive action against state-owned insurers, which impedes necessary reforms and efficiency improvements.

Recommendations

The IMF-World Bank report recommends transferring the appellate authority of the Ministry of Finance to an independent body, empowering the IRDAI to take assertive measures against state-owned life insurers, and separating the roles of an insurer's board from its executive management to enhance corporate governance.

The RBI should provide clearer guidance regarding board oversight and work to eliminate conflicts of interest, such as the placement of its personnel on bank boards.

Furthermore, the report advocates for bolstering the capital base of public sector banks (PSBs) to better manage liquidity shocks and suggests improved supervision of financial conglomerates, including addressing risks related to climate change. Stress tests indicate that scheduled commercial banks (SCBs) possess adequate capital for moderate credit growth, whereas PSBs demonstrate less capacity.

While mutual funds and bond funds show resilience, the risks associated with asset liquidations in the corporate debt market warrant further scrutiny. SEBI's initiatives to mitigate risks in the securities markets are commendable, and it is recommended to enhance macro prudential oversight and bolster cyber security resilience beyond the banking sector.