Economic Survey suggests need for activity-based financial norms

The Economic Survey has suggested regulations shift from being entity based to activity-based, focusing on the risk and function of transactions rather than institutional labels to avoid regulatory arbitrage, inconsistencies and enforcement blind spots.

The report said that India's development aspirations require a diversified ecosystem where well-managed banks compete with NBFCs, fintechs, and market-based lenders.

But though diversification distributes risk and builds resilience, a diversified financial ecosystem calls for regulatory coordination, as India's financial system is currently supervised by domain-specific regulators.


"Financial innovation increasingly blurs these boundaries. Banks distribute insurance and mutual funds; NBFCs perform functions similar to those of banks; fintechs intermediate credit and payments...when entities engage in similar activities, they should face proportionate regulatory oversight based on their risk exposure. This promotes equality of treatment, competition, and innovation while ensuring systemic stability," the survey said.

Better inter-agency coordination is crucial for effective oversight of increasingly complex and interconnected financial entities, said the survey.

The report said that so far India's regulatory framework has emphasised stability and systemic safety but from here on the goal must be to proportionality-calibrate regulation to risk and contestability, ensuring fair competition across entities and activities.

"Banks will remain central, but they must be seen as one part of a richer ecosystem that includes non-bank intermediaries and markets. Such a system reduces capital costs, expands financing options, facilitates structural transformation, and enhances the economy's adaptive capacity," the survey said.