India’s Financial Sector has Become Stronger, But More Reforms Needed for Future Growth

A new Financial Sector Assessment Report by World Bank has found that India’s financial system has become stronger, more diverse, and more inclusive since the last evaluation. The report says that India was able to recover from financial stress in the late 2010s and also withstand the impact of the COVID-19 pandemic because of major reforms in the financial sector.

According to the assessment, the total assets of India’s financial sector have now reached 187% of the country’s GDP. Non-Banking Financial Institutions (NBFIs) and market-based financing are growing much faster than the traditional banking sector. By 2024, these institutions accounted for 44% of all financial sector assets, compared to 35% in 2017.

The report highlights that account ownership in India is very high due to government programs and strong digital public infrastructure. Access to credit, insurance, and pension schemes has also improved. However, even though many people have bank accounts, actual usage of these accounts remains lower compared to other similar countries.

Declining but Important Role of State-Owned Institutions

State-Owned Financial Institutions (SOFIs)—including Public Sector Banks (PSBs), Development Financial Institutions (DFIs), Regional Rural Banks (RRBs), state-owned NBFCs, and public insurance companies—continue to play an important role in the financial system. But their share is slowly declining as private and market-based financing grows.

Financial System is Resilient, But Some Vulnerabilities Remain

Stress tests conducted for the assessment show that most credit institutions in India are strong enough to handle macroeconomic shocks. However, a few weak institutions still remain, and they may face difficulties if the economy slows down sharply.

Reforms Needed to Meet India’s 2047 Economic Goals

India aims to become a USD 30 trillion economy by 2047. To achieve this, the report says that India must modernize its financial system further and encourage more private investment.

Key recommendations include:

• Increasing the flow of both domestic and foreign savings into productive sectors.
• Reducing financial gaps between different regions and social groups.
• Deepening financial markets to improve access to long-term finance.
• Encouraging more foreign investment in government securities and infrastructure.
• Promoting financial innovation, including digital lending, especially for small businesses.

To reach these goals, the report says the State must reduce its direct involvement in the financial sector, allowing private capital to play a larger role. This will help improve efficiency and increase investment.

Need for Stronger Regulation and Oversight

The assessment also recommends strengthening India’s financial regulation and oversight systems. Authorities need to improve legal frameworks related to:

• Prudential rules
• Market conduct
• Financial safety nets

This will help manage risks as the financial system becomes larger and more complex.

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