What are the key regulatory concerns raised by the World Bank and IMF about India's financial sector?

The reports highlight the finance ministry's power to override RBI decisions, the differentiated regulatory framework favoring state-owned banks, and inadequate oversight of financial conglomerates.

How does the World Bank describe the finance ministry's control over India's financial regulators?

The Bank states the ministry is represented on the RBI board, can remove the governor and other officials without justification, give directions to the RBI, and supersede its board, among other powers.

What recommendations do the World Bank and IMF make to address the regulatory gaps in India's financial system?

The reports call for legislative and institutional changes to strengthen the independence and powers of financial regulators like the RBI.

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

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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

Regulatory Gaps Raise Alarms in India's Financial Sector, Multilateral Reports Find

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.

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