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Weaknesses & Challenges of Indian Financial System

Introduction

Despite rapid growth, the Indian Financial System faces structural bottlenecks that hinder its full potential.

1. Major Weaknesses

1. Non-Performing Assets (NPAs)

  • Public Sector Banks (PSBs) have historically struggled with high bad loans.
  • This "Twin Balance Sheet" problem (Stressed Banks + Stressed Corporates) slows down fresh lending.

2. Lack of Financial Literacy

  • A large population still invests in physical assets (Gold, Real Estate) rather than financial assets due to lack of knowledge.
  • Susceptibility to Ponzi schemes.

3. Cyber Security Threats

  • With digital boom comes digital fraud. Phishing, Hacking, and Data theft are major risks for digital banking.

4. Lack of Transparency (Shadow Banking)

  • NBFCs often take risks that banks avoid.
  • This leads to the "Shadow Banking Crisis" when they default.

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  • The collapse of IL&FS and DHFL exposed vulnerabilities in the NBFC sector.
  • Liquidity crunches in NBFCs affect lending to auto and real estate sectors.

5. Dominance of Public Sector

  • While improving, government interference in PSBs often leads to inefficient capital allocation.

2. The Road Ahead

  • Strengthening Cyber Security.
  • Improving Financial Education.
  • Privatization / Consolidation of PSBs.
  • More autonomy for regulators.

Summary

  • Legacy Issue: High NPAs.
  • User Issue: Low Literacy.
  • Tech Issue: Cyber Crime.
  • Structural Issue: NBFC Liquidity.

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