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How to reform India’s financial sector

Implementation of the Indian Financial code will provide the momentum that the country’s ailing financial system requires

A well-functioning financial sector is crucial to growth but, as India’s ailing banks demonstrate, India’s financial sector is far from efficient. To address this, in 2013, the Financial Sector Legislative Reforms Commission (FSLRC) drafted the India Financial Code (IFC) a comprehensive blueprint for wide-scale financial sector reforms. In a new study, Radhika Pandey and Ila Patnaik of the National Institute of Public Finance and Policy highlight exactly how the IFC can help India’s financial sector and describe the current status of its implementation.

The IFC lays out a comprehensive approach to the financial sector which replaces archaic regulations and drafts new regulations to cover various aspects of the financial sector including banking, pensions, insurance and securities. At the heart of all this is a focus on consumer protection. To address the issues of information asymmetry and unfair contract terms when consumers choose a financial product, the IFC had recommended that a financial redress agency be established. However, this is yet to be formed. Similarly, the IFC had suggested creating a Financial Data Management Centre to host all financial regulatory data and inform risk management policies - but this too is yet to be established.

On other recommendations, there has been some progress. For instance, an interim Public Debt Management Cell has been formed to better manage public debt. On monetary policy, the IFC had suggested introducing an inflation-targeting framework which the Reserve Bank of India adopted in 2016. Finally, the authors highlight the importance of a multi-pronged approach to financial sector reform. They argue that the current piecemeal approach only addresses one problem at a time which results in a financial regulatory system that struggles to keep pace with financial market growth.

Also read: Financial sector reforms in India

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