Financial System in India - RBI Grade B Exam

India is a developing country, so is the financial system in India, which is rapidly expanding. There are a number of financial institutions or companies in India, like, banks, insurance companies, non banking institutions, pension fund, mutual fund and many other. This is because we have a huge population and finance or money is another basic need to satisfy the day to day needs and wants of each and every individual in our country. This applies not only to our country but to any other economy.

Going into the deeper picture of India's finance system, our's is a bank dominated economy. Commercial banks are ruling the finance sector of India. After the banks, second in place is the insurance. We also have regional rural banks and cooperative banks. Other than banks and insurance, there are many other segments in the economy. Some of them include - leasing, factoring, micro finance, infrastructure finance etc. These are collectively called Non banking financial institutions. Of these some can accept deposits too.

RBI Grade B Officers mains exam


Regulators in the finance sector


A financial regulator is an organisation or a body, that has supreme power over the services and products of particular sector. As it regulates the functions and actions of the companies and institutions under it, it is called a regulator.
In India, there are different regulators for different financial services. Of all the regulators in India, RBI supervises the major part of the financial system. Commercial banks, urban cooperative banks, some financial institutions and non banking financial companies comes under the supervision of RBI.

Another regulator is NABARD - it supervises regional rural banks and cooperative banks, whereas the National Housing Bank supervises the housing finance companies. Another financial regulator in India is SEBI. It controls capital market and mutual funds, whereas insurance sector is controlled by IRDA, Insurance Regulatory Development Authority. While the pension funds are regulated by PFRDA, Pension Fund Regulatory and Development Authority.

But sometimes we can see dual control of some services, which means a single service is controlled by two regulators at the same time. Let's see an example, the deposit taking activities of corporates registered under Companies act are regulated jointly by the Department of company affairs along with RBI and NABARD as per the service involved. But this dual control doesn't apply to the Non banking finance companies and companies which are under separate statute.

Important features of the regulators of India


Currently, the financial regulators in India are more about product regulation. That is, each regulator focuses on regulating separate and particular product. Like we have, fixed deposits and banking related products are regulated by RBI. Government of India takes care of small savings products. Mutual funds and Equity markets are regulated by SEBI. Insurance is regulated by IRDA. PRDA regulates New pension scheme. Our regulators give more importance to customers like investors, policy holders or pensioners.

These regulators were not born as a part of a particular plan. But they were evolved from time to time, whenever the need showed up. As we know that, necessity is the mother of invention. Each and every regulator has its own set of rules and codes to be followed. Still, their functioning is not so east. They have to deal with a certain set of problems, when multiple regulators are functioning simultaneously.

Problems with multiple regulators in India


As we know that, each regulator has to deal with separate products and each of them have their own rules and codes, the problem comes up when these set of rules from two companies collides. Like, we have different financial products, there comes some situations when a single product falls into two different categories dealt by two different organisations or when two products from different organisations have similar properties or functions. These requirements may lead to problems in trade, markets, sales and foreign exchange.

We have an example, where there is similarity between mutual funds regulated by SEBI and ULIPs regulated by IRDA. Both regulators have different levels of standards which may sometimes leads to confusion. Also banks, which work under RBI can distribute insurance products and mutual funds which once again comes under IRDA and SEBI respectively.

There are also some schemes and products in India, which no regulator came forward to take care of. Those schemes that were left alone. Some of them include Ponzi schemes, Chit-funds etc.

There are also drawbacks like, the actions of the regulators overlapping with laws and causing conflicts between the regulators and causing trouble to economic policy makers.


Financial legislative structure in India


Today, India has over 60 acts, rules or regulations that are governing the financial sector. Most of them were framed between 1950s and 1960s after getting independence. These acts and laws are formulated at that time because, as the power was transferred from British to India, it became the whole responsibility of our leaders and government to start finding solutions to the problems and for tackling different responsibilities. To handle problems in such a huge economy is easy task. So there came need when new acts are to be formulated. We have RBI act 1934, Insurance act 1938, Securities contracts act 1956 and so on.

If we observe, RBI act and insurance act were made even before we got independence. And we are following those same acts and rules till today, but with some modifications and amendments. These amendments were made to the acts only to cope up with the fast growing technology and rapidly occurring changes in the economy. Many things happened after these laws were framed, like we got ATMs, Debit and Credit cards, Mobile banking, Internet banking, Online transactions and many more. To really rung along with the same speed as the increasing technology, these amendments were not just enough. The change should spread to the legal grounds too. This may in turn demands for the Reforms in the Financial sector in India.


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