Major reforms in the last decade

Over the past decade, the Indian financial system has undergone a period of significant transformation, driven by the need for greater financial inclusion, enhanced transparency, and increased resilience. This document outlines some of the most impactful reforms implemented during this period.

1. Payment Banks: Revolutionizing Financial Inclusion

• Overview: Payment banks are a novel banking category introduced by the Reserve Bank of India (RBI) in 2014. They are designed to offer a limited suite of banking services, focusing on deposit acceptance, remittance services, and digital banking solutions. Importantly, they cannot offer lending services like traditional banks.
• Objectives:
  • Financial Inclusion: The primary objective is to extend banking services to the unbanked and underbanked populations, particularly in rural and remote areas, bridging the gap in access to formal financial services.
  • Technology-Driven Services: Payment banks leverage technology to deliver low-cost financial services, including mobile wallets, UPI (Unified Payments Interface) payments, and other digital banking platforms, making banking more accessible and affordable.
  • Promoting a Cashless Economy: By encouraging digital transactions, payment banks contribute to the broader goal of reducing reliance on cash and fostering a more digital economy.
• Key Players: Prominent examples of payment banks in India include Airtel Payments Bank, India Post Payments Bank (IPPB), and Paytm Payments Bank.
• Regulatory Framework: Payment banks operate under a strict regulatory framework established by the RBI. A key requirement is a 100% reserve requirement for customer deposits. This means that payment banks must hold an equivalent amount of funds in safe and liquid assets for every deposit they receive, ensuring the safety of customer funds. This prevents them from lending out customer deposits like traditional banks.
• Impact: Payment banks have significantly contributed to financial inclusion by providing access to basic banking services to a wider segment of the population, particularly in rural and remote areas where traditional banking infrastructure is limited.

2. Goods and Services Tax (GST): A Unified Tax System for Economic Efficiency

• Overview: The Goods and Services Tax (GST) was implemented in India on July 1, 2017, marking a watershed moment in the country's tax reform journey. GST is a comprehensive, multi-stage, destination-based tax levied on every value addition. It replaced a complex web of multiple indirect taxes levied by the central and state governments, such as VAT, excise duty, service tax, and octroi.
• Objectives:
  • Simplification of Tax Structure: GST streamlined the indirect tax system by replacing multiple taxes with a single, unified tax, making it more transparent, predictable, and easier for businesses to comply with.
  • Boosting Economic Growth: By simplifying the tax process and reducing the cascading effect of taxes (tax on tax), GST aims to improve business compliance, reduce transaction costs, and promote economic growth. The elimination of double taxation makes Indian products more competitive in the global market.
  • Increase in Tax Revenue: GST ensures better tax compliance through a digital platform, minimizing tax evasion and expanding the tax base, thereby increasing government revenue.
• Impact on the Financial System: The introduction of GST has had a transformative impact on various sectors, including trade, logistics, and manufacturing.
  • Easier Movement of Goods: GST facilitated the easier and faster movement of goods across state borders by removing inter-state check posts and barriers, leading to reduced transportation costs and improved efficiency.
  • Reduced Costs: By eliminating the cascading effect of taxes, GST reduced the overall cost of goods and services, making them more affordable for consumers and businesses.
  • Improved Compliance: The GST system promotes better tax compliance through a comprehensive digital platform and matching of invoices, reducing opportunities for tax evasion.

3. Innovative Remittance Services: Transforming Cross-Border Transfers

• Overview: Over the last decade, India has witnessed a significant transformation in remittance services, driven by technological advancements and regulatory reforms. The focus has been on digitalizing remittance channels to make cross-border transfers faster, cheaper, and more secure.
• Objectives:
  • Lower Cost and Faster Transfers: Digital remittance platforms like Google Pay, Paytm, and Western Union, along with emerging technologies like blockchain-based services, have significantly reduced the cost and time required for sending money internationally. Traditional remittance channels often involved high fees and lengthy processing times.
  • Increased Financial Inclusion: Digital remittance platforms have made it easier for non-resident Indians (NRIs) to send money home to their families, particularly to those living in rural areas, thereby promoting financial inclusion and supporting household consumption.
  • Improved Transparency and Security: Digital remittance channels offer greater transparency and security compared to traditional methods, reducing the risk of fraud and money laundering.
• Key Reforms and Technologies:
  • IMPS (Immediate Payment Service): A real-time interbank money transfer service that allows for instant processing of transactions, enabling quicker transfer of funds between bank accounts.
  • UPI (Unified Payments Interface): A revolutionary payment system developed by the National Payments Corporation of India (NPCI) that has transformed how individuals and businesses make payments and transfer money. UPI allows for seamless and instant money transfers using a virtual payment address (VPA) or by scanning a QR code.
  • Aadhaar-Enabled Payment System (AEPS): AEPS enables financial transactions at micro ATMs using Aadhaar authentication, facilitating financial inclusion in remote areas.
• Impact: These innovative remittance services have benefited both NRIs and their families in India by reducing transaction costs, speeding up transfers, and promoting financial inclusion.

4. Insolvency and Bankruptcy Code (IBC): Addressing Corporate Insolvency and Promoting Credit Discipline

• Overview: The Insolvency and Bankruptcy Code (IBC), enacted in 2016, is a comprehensive law designed to address corporate insolvency and bankruptcy in India. It aims to resolve insolvencies in a time-bound and efficient manner, promote a transparent market for distressed assets, and improve the ease of doing business in India. The IBC replaced the previously fragmented and inefficient insolvency resolution framework, which often resulted in lengthy delays and low recovery rates.
• Objectives:
  • Timely Resolution of Insolvencies: The IBC introduced a fixed timeline (180 days, extendable by 90 days) to resolve insolvency cases, ensuring faster resolution compared to the previous processes. This time-bound approach helps to preserve the value of distressed assets and minimize losses for creditors.
  • Debt Recovery: The IBC aims to provide creditors with a better mechanism for recovering their dues in case of default. The code establishes a clear process for debt recovery, giving creditors more power to enforce their claims and recover their investments.
  • Corporate Restructuring: The IBC encourages corporate restructuring through mechanisms like debt restructuring and asset sale, which help distressed businesses to recover and continue operations. This allows viable businesses to restructure their debts and operations to become profitable again.
  • Improving the Ease of Doing Business: By providing a clear and efficient framework for resolving insolvency cases, the IBC improves the ease of doing business in India, making it more attractive for investors.
• Impact on the Financial System:
  • Improved Credit Discipline: Banks and financial institutions now have more recourse to deal with bad loans, which has helped improve the overall stability of the financial system. The IBC has incentivized borrowers to repay their debts on time, as they are now aware of the consequences of defaulting.
  • Attracting Investment: A robust insolvency framework increases investor confidence by ensuring that corporate defaults are dealt with efficiently. This has attracted more foreign and domestic investment into the Indian economy.
  • Increased Recovery Rates: The IBC has led to higher recovery rates for creditors compared to the previous insolvency resolution framework.
  • Creation of a Market for Distressed Assets: The IBC has fostered the development of a market for distressed assets, allowing specialized firms to acquire and manage these assets, leading to better outcomes for creditors.

Summary of Major Reforms:

These reforms collectively contribute to a more inclusive, transparent, and efficient financial system in India, laying the foundation for sustained economic growth and development. They address key challenges in the Indian financial landscape and create a more robust and resilient system.