Churn in the financial services ecosystem

In 2024, regulatory oversight was strengthened, digital public infra enhanced, and fintech innovation encouraged

Year 2024 was like any other, starting with hope and aspirations, and more so within financial services. It was a year that hoped for inflation to be controlled, interest rates to be low — in fact, some were even so optimistic as to hope for ultra-low interest rates — peace to be brokered around Ukrainian conflict and better Sino-American relations, all of that translating to a turnaround in the muted global growth scenario.

Interestingly, only very few of the expectations translated into reality and a lot of them not only did not translate, but added new complexities along the way. It is in this global context that India has been operating, with its own growth story being a shining spot in an otherwise sombre world.

The financial services ecosystem went through various changes in 2024 to adjust to the realities of the world outside and within.

Here is a thematic view of some interesting changes the sector experienced during the year.

Anchoring inflation expectations: The RBI not only kept a razor-sharp focus on managing inflation but also explained to the market how anchoring inflation expectations is key, which emanates more from headline inflation than core inflation — a message dexterously delivered by the RBI, despite rate reductions globally.

Difficult regulatory positions by the financial services regulator: There were tough regulatory stands taken by the banking and securities market regulators, around asset quality, financial crime, conduct risk, and operational resilience of the IT infrastructure with a focus on enhancing compliance culture through “REGTECH” within each of the regulated entities.

This resulted in many investors questioning the theme of “ease of doing business”, but financial stability, which makes an investment destination viable, had been the focus of the regulator.

Continued focus on digital public infrastructure: Initiatives such as the unified lending interface (ULI) of NPCI, enhancing coverage of the ULI to include small finance banks, focus on building a public cloud infrastructure for financial institutions, leverage of AI tools for mule accounts monitoring, initiatives around central bank-backed digital currency, were some of the initiatives of the regulators indicating a continued focus in enhancing the digital public infrastructure.

Rationalising the number of regulated entities under supervision specifically by RBI: The central bank focused on effective supervision to manage financial stability risk, asking regulated entities to look at consolidation and growth. This not only brings synergies and enhanced results to regulated entities but also helps reduce the number of regulated entities and prioritise their supervisory activities while rationalising the cost of compliance, which could be seen with some of the reverse merger announcements during the year.

Balancing innovation and growth for fintech ecosystem: The regulator has encouraged the formation of self-regulatory organisations (SROs) to encourage innovation and growth in the fintech ecosystem, while building the right building blocks of compliance culture of which self-accountability by regulated entities is the key principle. The Fintech Association of Consumer Empowerment was the first SRO to be granted licence by the RBI, with many more in the pipeline.

Renewed focus on energising insurance as a sector: The Insurance Regulatory and Development Authority of India has been focusing on initiatives such as composite licence, risk-based capital, IFRS-17 (a revenue recognition approach for insurance contracts) and 100 per cent FDI in insurance to name a few which have found an audience in the Finance Ministry and the Insurance Bill under discussion, establishing the commitment of the government and the regulator to drive growth in this space.

With Budget 2025 around the corner, we expect the government to continue with its growth focus with thrust on investment, infrastructure and technology, while building on some of the themes from the past, including 2024.

This article first appeared in The Hindu BusinessLine on 8 January 2025.