Home / Business and Economy / Regulatory Gaps Raise Alarms in India's Financial Sector, Multilateral Reports Find
Regulatory Gaps Raise Alarms in India's Financial Sector, Multilateral Reports Find
16 Nov
Summary
- World Bank and IMF reports highlight critical regulatory weaknesses across India's financial system
- Finance ministry's power to override RBI decisions and control other regulators is a major concern
- Differentiated regulatory framework favors state-owned banks over private institutions
In October and February 2025, the World Bank and International Monetary Fund (IMF) released their latest assessments of India's financial sector, painting a concerning picture. While the reports acknowledge the system has become more resilient, diversified and inclusive, they also identify critical regulatory weaknesses across different segments.
A key issue raised is the lack of power and independence of financial regulators like the Reserve Bank of India (RBI). The World Bank cites a 2019 case where the finance ministry overturned an RBI decision to cancel a bank's license, highlighting the ministry's role as an appellate authority with the power to override supervisory actions. The reports recommend transferring this appellate function to an independent agency.
Concerns were also raised about the differentiated regulatory framework that affords more leniency to state-owned financial institutions compared to private players. Unlike private banks, RBI has limited powers to force mergers of weak public sector banks, vet board appointments or supersede their management. This regulatory imbalance is seen as an inhibiting factor.
Additionally, the oversight of financial conglomerates with diverse businesses remains inadequate, with the inter-regulator Financial Stability Development Council lacking legal teeth to enforce group-level supervision. Experts have long demanded more transparency around the council's activities and regulatory outcomes.
Overall, the multilateral assessments have raised multiple red flags, urging the Indian authorities to address these strategic regulatory gaps through legislative and institutional reforms to strengthen the financial system's resilience.
