Tag: Financial Inclusion

The Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned subsidiary of the Reserve Bank of India (RBI) that provides insurance coverage to depositors in the event of a bank failure. Its primary objective is to safeguard the interests of small depositors and ensure public confidence in the Indian banking system.

Historical Background:

India was among the first few countries to introduce a deposit insurance system. The Deposit Insurance Corporation (DIC) was established in 1962 under the Deposit Insurance Act, 1961, following the collapse of several banks in the 1950s. Its formation aimed to protect depositors and promote financial stability.

In 1971, the Credit Guarantee Corporation of India Ltd. (CGCI) was set up to provide credit guarantees to small borrowers. Recognizing the overlap in their functions, the two entities were merged in 1978 to form the Deposit Insurance and Credit Guarantee Corporation (DICGC) under the DICGC Act, 1961. Since then, the DICGC has been working under the control of the RBI.

Objectives of DICGC

1. To protect small depositors in the event of a bank failure by insuring their deposits.
2. To enhance the confidence of the public in the banking system.
3. To support credit facilities for small and medium enterprises (historically, through credit guarantees).
4. To contribute to financial stability by minimizing panic during banking crises.

Functions of DICGC:

1. Deposit Insurance

The DICGC provides deposit insurance cover for:

• Savings accounts
• Fixed deposits
• Recurring deposits
• Current accounts

It ensures that depositors do not lose their entire savings if their bank collapses. As of now, the maximum insured amount is ₹5 lakh per depositor per bank, including both principal and interest.

2. Credit Guarantee (Discontinued)

Earlier, the DICGC also provided credit guarantees for loans to small and marginal borrowers. However, this function has been phased out since 2003, and the Corporation now focuses entirely on deposit insurance.

Coverage Scope

• All commercial banks including foreign bank branches in India
• Regional Rural Banks (RRBs)
• Local Area Banks (LABs)
• Cooperative Banks in all states and UTs

Banks are mandatorily required to be members of the deposit insurance scheme to operate in India.

However, the DICGC does not cover:

• Deposits of foreign governments
• Inter-bank deposits
• Deposits of central/state governments
• Deposits outside India
• Amounts due under deposit schemes not complying with DICGC rules

Premium and Funding

• Banks pay a premium to DICGC for the insurance cover.
• The current premium rate is 12 paise per ₹100 of assessable deposits.
• The entire premium is borne by the banks and not charged to depositors.
• The DICGC maintains a Deposit Insurance Fund (DIF) to meet its insurance liabilities. This fund is built from premiums and interest income.

Claims and Payout Mechanism

In the event of a bank failure:

• The RBI imposes a moratorium on the bank.
• Within 90 days, the DICGC is required to settle the insured amount up to ₹5 lakh per depositor.
• Banks must submit the depositor data within the first 45 days, and DICGC disburses the claims within the following 45 days.

The DICGC (Amendment) Act, 2021 has greatly improved this payout timeline, making the process faster and more efficient, especially for distressed depositors.

Recent Developments

1. Increase in Coverage Limit:

   The insurance limit was raised from ₹1 lakh to ₹5 lakh in 2020, after nearly 27 years. This was a significant move, benefiting over 98% of deposit accounts.

2. Faster Claims Settlement (2021):

   The 2021 amendment mandates timely reimbursement within 90 days, offering better protection to depositors.

3. Enhanced Transparency:

   Banks are now required to publicly disclose their DICGC membership and the insurance coverage available.

Challenges Facing DICGC:

• The ₹5 lakh limit may not be sufficient for high-value depositors.
• DICGC covers only a part of total bank deposits (around 50% by value).
• Co-operative banks often lack transparency, leading to delays in settlement.
• There is a lack of public awareness about the insurance mechanism and limits.

Role in Financial Stability:

The DICGC plays a pivotal role in maintaining public trust in the banking system. By ensuring that small depositors are protected, it:

• Prevents bank runs in times of distress,
• Strengthens the safety net for vulnerable depositors, and

• Complements RBI’s regulatory framework for bank supervision.

Deposit insurance is a crucial element of a stable financial system. It protects depositors, especially small savers, by assuring that a portion of their deposits is safe even if a bank fails. In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), manages this function. With rising concerns over banking failures and financial security, several reforms have been introduced in the deposit insurance system to enhance depositor confidence, expedite payouts, and align with global best practices.

Historical Background of Deposit Insurance in India:

India introduced deposit insurance in 1962, becoming the second country in the world to offer it, after the USA. The Deposit Insurance Corporation (DIC) was established under the Deposit Insurance Act, 1961, to protect small depositors. In 1978, it was merged with the Credit Guarantee Corporation to form the DICGC. Over time, the insurance coverage increased gradually—from ₹1,500 in 1962 to ₹1 lakh in 1993, and most recently, ₹5 lakh in 2020. However, real-time responsiveness and speedy compensation remained issues until recent reforms addressed them.

Reform: Increase in Insurance Coverage (2020):

One of the most significant reforms was the increase in deposit insurance coverage from ₹1 lakh to ₹5 lakh in the Union Budget 2020. This reform came in the wake of major banking crises such as the Punjab and Maharashtra Co-operative Bank (PMC) collapse, where depositors were locked out of their funds. The increase enhanced depositor confidence and aligned the coverage better with the average deposit size in Indian banks. It now covers 98% of all deposit accounts, though only around 50% of the value of total deposits.

Introduction of Time-Bound Payouts (2021 Amendment):

Earlier, depositors faced long waits—sometimes years—before receiving insured amounts after a bank’s failure. To address this, the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 was passed.
Key features include:

• Mandating payout within 90 days of imposition of moratorium on a bank.

• Ensuring interim payments if final data is unavailable.

• Applicable to commercial banks, small finance banks, payment banks, and regional rural banks.

This reform made the deposit insurance framework more agile and depositor-friendly, especially during emergencies.

Coverage Scope and Conditions:

The insurance cover applies to:

• Savings, fixed, current, and recurring deposit accounts.

• Across all types of banks: public sector, private sector, foreign, cooperative, and regional rural banks.
  However, coverage is capped at ₹5 lakh per depositor per bank, including principal and interest. Deposits held in different capacities (e.g., individual vs. joint) are treated separately. This structure encourages deposit diversification while providing safety to small and medium depositors.

Risk-Based Premium Mechanism:

Traditionally, all banks paid a flat premium to DICGC. A major reform under consideration is to move toward a risk-based premium model, where banks with higher risk profiles (e.g., poor asset quality or low capital adequacy) would pay more. This approach:

• Encourages better risk management in banks.

• Helps in better allocation of DICGC’s funds.

• Aligns with global norms followed by countries like the USA and UK.

Though not fully implemented, it remains a key recommendation for the future of deposit insurance in India.

Pre-Funding the Insurance Pool:

The DICGC operates a pre-funded insurance pool by collecting annual premiums from insured banks. With reforms, the fund has become more robust and well-capitalized. Banks now pay a higher premium—12 paise per ₹100 of deposits, raised from earlier 10 paise—ensuring that DICGC is better prepared to respond to contingencies. As of 2023, DICGC’s fund corpus has grown significantly, reflecting the resilience of the system.

Inclusion of Cooperative Banks and Financially Weak Institutions:

The PMC crisis highlighted the need to include urban cooperative banks and other financially stressed institutions more actively under the deposit insurance umbrella. Reforms have enhanced surveillance and reporting requirements from such banks, enabling DICGC and RBI to act early in crisis situations. Monitoring mechanisms have been improved to detect signs of bank stress in advance and prepare the insurance payout process proactively.

Communication and Transparency Improvements:

Recent reforms emphasize better public communication regarding deposit insurance:

• Banks must display DICGC coverage details prominently at branches and websites.

• Awareness campaigns have been launched to inform depositors of their rights and the coverage mechanism.
  This builds trust and ensures that depositors make informed decisions while choosing banking institutions.

Micro Insurance is a type of insurance specifically designed to serve low-income individuals and families who typically lack access to conventional insurance products. It provides protection against specific risks such as illness, accidental death, disability, crop failure, or property loss at affordable premiums. The coverage amounts are modest but adequate to mitigate the financial impact of unexpected events. Micro insurance is often bundled with microfinance or offered through NGOs, cooperatives, and self-help groups. Its goal is to promote financial inclusion by helping vulnerable populations manage risks and avoid falling deeper into poverty due to unforeseen emergencies.

Functions of Micro insurance:

• Risk Protection

Micro insurance provides essential financial protection to low-income individuals against life uncertainties such as illness, accidents, death, or property loss. It ensures that people in vulnerable communities are not pushed deeper into poverty due to unexpected events. By covering specific risks for a nominal premium, micro insurance helps policyholders mitigate the financial burden and recover more easily. This function plays a critical role in maintaining economic stability for families with limited income and access to traditional insurance mechanisms.

• Promoting Financial Inclusion

Micro insurance encourages financial inclusion by offering affordable insurance products tailored to low-income groups who are typically excluded from formal financial services. It bridges the gap between the formal insurance sector and underserved populations by building trust and accessibility. As people engage with micro insurance schemes, they become more financially literate and are introduced to other services like savings, credit, and pensions, thus gradually integrating into the mainstream financial ecosystem.

• Encouraging Savings

Certain micro insurance products are linked with savings components. These allow policyholders to build a small corpus over time while still enjoying insurance coverage. This dual benefit helps individuals develop a saving habit, improve long-term financial planning, and accumulate funds that can be used for emergencies, education, or future investments. Encouraging savings through micro insurance not only secures the present but also empowers policyholders to aim for improved economic opportunities and financial independence.

• Supporting Health and Livelihoods

Micro insurance often includes health insurance, which supports access to medical care for low-income individuals. It prevents catastrophic out-of-pocket expenses, enabling timely treatment and reducing the long-term impact of illness. Additionally, livelihood-related insurance (like crop or livestock insurance) protects income sources. By covering health and work-related risks, micro insurance ensures that individuals remain productive and economically active, even after facing setbacks, thus securing household livelihoods and preventing financial distress.

• Stabilizing Household Economy

By reducing the financial impact of unforeseen events, micro insurance helps stabilize household income and consumption. When families face risks like natural disasters, accidents, or crop failure, insurance payouts provide immediate support to cope with losses. This stabilization prevents asset depletion or taking high-interest loans, which can lead to long-term financial distress. Thus, micro insurance ensures consistency in living standards and offers a financial safety net to keep families from falling into deeper poverty.

• Empowering Women and Vulnerable Groups

Micro insurance often targets women, informal workers, and rural communities, giving them a tool to secure their lives and income. With access to insurance, women can manage health risks, secure loans, and invest in small businesses more confidently. This empowerment promotes gender equity and strengthens the economic position of marginalized groups. Tailored products also improve their resilience, enabling them to participate more actively in community development and decision-making processes.

Types of Micro insurance:

• Life Micro Insurance

Life micro insurance offers coverage in the event of the policyholder’s death. It ensures financial protection for the surviving dependents, covering funeral expenses or outstanding debts. These policies may also include term plans or savings-linked components to provide maturity benefits. Offered with affordable premiums and simple documentation, this insurance is critical for families where the breadwinner’s loss could mean economic collapse. It is particularly useful for daily wage earners, farmers, and informal workers, offering them a safety net against life’s uncertainties.

• Health Micro Insurance

Health micro insurance provides coverage for medical expenses, including hospitalization, surgeries, doctor consultations, and sometimes outpatient treatments. Designed for low-income individuals, these plans help prevent financial distress due to health emergencies. Premiums are nominal and benefits may be fixed or cashless through a network of partnered hospitals. By enabling access to quality healthcare, health micro insurance contributes to improved health outcomes and reduces the burden of out-of-pocket medical expenditures for economically vulnerable populations, especially in rural and semi-urban areas.

• Crop Micro Insurance

Crop micro insurance protects small and marginal farmers from financial loss due to crop failure caused by natural calamities like floods, droughts, pests, or diseases. The insurance ensures continuity of farming operations by compensating for the income loss. This type of insurance often functions under government schemes and uses weather indices or yield data to determine payouts. It plays a vital role in stabilizing rural income and encouraging sustainable agriculture practices among farmers who are highly exposed to climate-related risks.

• Livestock Micro Insurance

Livestock micro insurance provides coverage for the death or illness of animals like cows, goats, or poultry, which are crucial income sources for many rural households. The policy compensates the owner for the market value of the lost animal, helping them to recover their livelihood. It may also include coverage for veterinary care and theft. This type of insurance supports rural farmers and women entrepreneurs by protecting their assets and ensuring financial continuity in case of unexpected animal-related losses.

• Asset Micro Insurance

Asset micro insurance covers physical assets like huts, small shops, equipment, tools, or carts used for livelihood. This insurance helps low-income individuals recover from losses due to theft, fire, floods, or other damages. Asset protection is crucial for street vendors, artisans, and small entrepreneurs whose daily income depends on these assets. The insurance enables them to replace or repair essential property without falling into debt, thereby reducing economic vulnerability and sustaining their income-generating activities despite external disruptions.

Challenges of Micro insurance:

• Low Awareness

Many low-income individuals are unaware of micro insurance products or their benefits. Limited literacy, especially in rural areas, contributes to a lack of understanding of policy terms, coverage, and claim processes. This leads to poor participation and mistrust in insurance. Additionally, people may confuse micro insurance with government welfare schemes or scams, further hampering its acceptance. Effective outreach, financial literacy programs, and community engagement are essential to address this awareness gap and increase penetration of micro insurance.

• High Administrative Costs

Micro insurance typically involves small premiums collected from a wide, scattered population, increasing administrative and operational costs. Activities like policy servicing, claim processing, and client verification become disproportionately expensive. These high costs make it difficult for insurers to maintain profitability or expand outreach. Additionally, the cost of educating and training local agents and ensuring regulatory compliance adds to the burden. Technology adoption and partnerships with local organizations can help streamline operations and reduce expenses.

• Inadequate Distribution Channels

Reaching remote and underserved populations poses a significant challenge due to poor infrastructure and weak distribution networks. Traditional agents often avoid such markets due to low commission potential. As a result, many people lack access to micro insurance despite the demand. Without efficient channels like self-help groups, MFIs, NGOs, or digital platforms, insurers struggle to scale operations. Strengthening grassroots partnerships and leveraging mobile technology are essential to improve accessibility and efficiency.

• Complex Claim Settlement Process

Lengthy and complicated claim procedures discourage people from buying or renewing micro insurance. Many potential policyholders perceive that claims will not be paid or are difficult to file, especially in rural areas with limited documentation. Long waiting times, bureaucratic hurdles, and lack of transparency often result in dissatisfaction and low trust. Simplifying claim procedures, using mobile-based verification, and offering real-time tracking can improve the customer experience and build confidence in the system.

• Product Design Mismatch

Micro insurance products often fail to match the actual needs and income cycles of the target population. Many plans are standardized and do not consider regional risks, seasonal income patterns, or cultural factors. As a result, policies may provide inadequate or irrelevant coverage. This mismatch reduces the perceived value and limits adoption. Customizing products based on community feedback, local risks, and affordability can significantly improve relevance and uptake among low-income groups.

• Regulatory and Policy Barriers

The micro insurance sector faces challenges due to inconsistent regulations and limited policy support. Regulatory frameworks may not be flexible enough to accommodate innovative products, community-based models, or digital solutions. Additionally, insurance providers often face burdensome compliance requirements that increase operational costs. Lack of government incentives or clarity on public-private partnerships can also hinder growth. A supportive policy environment with simplified guidelines and risk-sharing mechanisms is crucial for the sector’s development and outreach.

Unit Linked Insurance Plans (ULIPs) are hybrid financial products that combine life insurance with investment. A portion of the premium paid is allocated towards providing life cover, while the remaining is invested in market-linked instruments such as equity, debt, or balanced funds, based on the policyholder’s preference. ULIPs offer flexibility to switch between funds, depending on one’s risk appetite and market outlook, making them suitable for both conservative and aggressive investors.

In addition to insurance and investment benefits, ULIPs provide tax advantages under Sections 80C and 10(10D) of the Income Tax Act. They come with a lock-in period of five years, which encourages disciplined long-term investing. ULIPs are ideal for individuals with long-term financial goals like children’s education, marriage, or retirement. However, returns are subject to market risks, and policyholders must review fund performance and charges periodically to ensure optimal benefits.

History of ULIPs:

Unit Linked Insurance Plans (ULIPs) were first introduced in India by Unit Trust of India (UTI) in 1971, offering a unique blend of insurance and investment. However, their popularity surged only in the early 2000s when private insurers entered the market post-liberalization, offering more flexible and transparent ULIP products. Initially, ULIPs faced criticism for high charges and complex structures, which led to customer dissatisfaction. In response, the Insurance Regulatory and Development Authority of India (IRDAI) implemented major reforms in 2010 to standardize charges, improve transparency, and enhance policyholder benefits. These reforms made ULIPs more investor-friendly and boosted trust in the product. Over time, ULIPs evolved into a preferred long-term investment-cum-insurance tool, catering to diverse financial goals of Indian consumers.

Features of ULIPs:

• Dual Benefit of Insurance and Investment:

ULIPs provide a unique combination of life insurance and investment. A portion of the premium goes toward providing life cover, while the remaining is invested in equity, debt, or balanced funds based on the policyholder’s choice. This dual structure helps in securing the policyholder’s family financially while also growing wealth over time. It makes ULIPs an efficient tool for individuals looking to build corpus for long-term goals such as education, marriage, or retirement.

• Flexibility in Investment Options:

ULIPs offer flexibility to switch between various fund options—like equity, debt, or hybrid—depending on the policyholder’s risk appetite and market performance. These switches are usually free for a limited number of times in a year. This feature helps investors adjust their portfolio according to changing market conditions or life stages. It also encourages active participation in managing one’s investment, giving ULIPs an edge over traditional life insurance plans that lack this versatility.

• Tax Benefits:

ULIPs offer tax benefits under Section 80C of the Income Tax Act, allowing deductions up to ₹1.5 lakh annually on premium payments. Additionally, the maturity proceeds are tax-free under Section 10(10D), provided the premium-to-sum-assured ratio meets the prescribed limits. This dual exemption enhances the overall returns from the investment. Furthermore, the tax advantage makes ULIPs a preferred choice for salaried individuals seeking both life cover and tax-efficient long-term investment in one integrated financial product.

• Lock-in Period:

ULIPs come with a mandatory lock-in period of five years, which encourages long-term financial discipline. During this period, partial withdrawals and fund switches are limited or restricted. This ensures that policyholders stay invested for a longer duration, allowing their funds to grow and compound. Unlike mutual funds or other open-ended investments, this feature promotes stability and discourages impulsive redemptions. While the lock-in might seem restrictive, it aligns well with long-term goals like retirement or children’s education.

• Partial Withdrawal Facility:

After the five-year lock-in period, ULIPs allow policyholders to make partial withdrawals from the accumulated fund value. This feature provides liquidity to meet unplanned financial needs such as medical emergencies, education expenses, or temporary income shortfalls. These withdrawals are generally tax-free and do not affect the policy’s continuity, provided a minimum balance is maintained. The flexibility to withdraw funds without surrendering the policy makes ULIPs suitable for those who want both insurance protection and emergency fund access.

Challenges of ULIPs:

• High Initial Charges

ULIPs often come with high initial charges such as premium allocation charges, policy administration fees, fund management charges, and mortality charges. In the first few years, a significant portion of the premium may be deducted towards these expenses, leaving only a small amount for investment. Although these charges have been capped by IRDAI in recent years, they still reduce early returns. For investors seeking short-term gains, ULIPs might not be ideal as the product is designed for long-term financial goals and requires time to offset the impact of these upfront costs.

• Market-Linked Risks

Since a major part of the ULIP premium is invested in equity, debt, or hybrid funds, the returns are subject to market volatility. If the markets perform poorly, the investment component may yield lower returns or even losses, affecting the maturity value of the policy. Unlike traditional life insurance plans that offer guaranteed returns, ULIPs do not assure any fixed corpus. This makes them unsuitable for highly risk-averse individuals who prioritize capital preservation over market-linked growth, especially if they are close to retirement or saving for non-negotiable financial goals.

• Complex Structure for New Investors

ULIPs combine insurance and investment, making them more complex than standalone life insurance policies or mutual funds. New investors may find it difficult to understand fund options, switching facilities, various charges, and the tax implications. Choosing the wrong fund type or failing to monitor performance regularly can reduce potential gains. Moreover, terms like NAV, sum assured, and surrender value can confuse those unfamiliar with financial jargon, leading to suboptimal decisions. The learning curve can be steep, which might discourage individuals from actively managing their ULIP investments.

• Limited Liquidity

ULIPs have a mandatory five-year lock-in period, during which withdrawals or surrenders are heavily restricted or penalized. This limits liquidity and makes ULIPs unsuitable for people who might need funds for short-term emergencies or goals. Even after the lock-in, frequent withdrawals can impact the fund’s compounding benefit and reduce the insurance cover. Compared to mutual funds or other liquid investment options, ULIPs offer less flexibility in accessing funds. For individuals who value liquidity, especially during uncertain times, this rigidity can be a significant drawback.

• Performance Depends on Fund Management

The returns from ULIPs are directly linked to how effectively the underlying funds are managed by the insurer’s fund managers. Poor fund selection, underperformance relative to benchmarks, or bad timing in asset allocation can lead to low returns despite consistent premium payments. Moreover, policyholders often lack transparency in understanding how the funds are being managed. While ULIPs offer switching options, most investors may not have the expertise to take advantage of market opportunities. As a result, subpar fund management can diminish the potential wealth-building advantage of ULIPs.

Future of ULIPs:

• Increasing Digital Adoption

The future of ULIPs is expected to be significantly influenced by digitization. Online platforms now allow investors to compare, purchase, and manage ULIPs with greater transparency and convenience. Insurers are offering digital dashboards for fund performance tracking, automated fund switching, and AI-powered advisory. This tech-driven accessibility will attract younger, tech-savvy investors who prefer managing their finances online. Enhanced user experience through mobile apps and instant support services will further fuel ULIP adoption. As fintech and insurtech evolve, ULIPs are set to become more user-friendly and accessible than ever before.

• Product Simplification and Transparency

Regulatory bodies like IRDAI are focusing on simplifying ULIP structures and making charges more transparent. Future ULIPs will likely come with fewer hidden costs, better disclosures, and clearer illustrations of potential returns. The shift toward standardization and customer education will build greater trust. Additionally, insurers are expected to create products that are easier to understand, especially for first-time investors. This simplification will bridge the gap between insurance and investment goals, making ULIPs a more attractive option for retail investors seeking both protection and long-term wealth creation.

• Customization and Goal-Based Planning

ULIPs of the future are expected to offer greater customization tailored to individual life goals—such as children’s education, retirement planning, or wealth creation. Insurers may allow dynamic switching between equity and debt based on investor age or market cycles. Riders and add-ons will become more personalized. Also, ULIPs will increasingly be integrated into comprehensive financial planning tools. As financial literacy grows and customers seek personalized products, ULIPs will be positioned not just as policies, but as flexible instruments for long-term goal achievement with insurance backing.

• Tax Efficiency Amid Policy Changes

Despite some recent changes in tax treatment, ULIPs will remain a tax-efficient product when planned correctly. The exemption under Section 10(10D) for policies with premiums under ₹2.5 lakh continues to provide an edge over mutual funds for many investors. Going forward, insurers may develop ULIPs that specifically meet new tax criteria, helping individuals optimize their tax liability. Moreover, ULIPs with embedded long-term health or term cover might gain favor under revised tax regimes. With increasing scrutiny on high-premium investments, tax-smart ULIP structuring will play a central role.

• ESG and Sustainable Investment Options

As investor interest in ethical and sustainable investing grows, ULIPs will begin offering ESG (Environmental, Social, and Governance) fund options. Policyholders may get the choice to invest in socially responsible companies without compromising on returns. Insurers will likely integrate sustainability metrics into fund portfolios, especially to attract younger investors and align with global investment trends. This shift will not only meet market demand but also position ULIPs as forward-thinking financial products aligned with India’s climate and sustainability goals. ESG-focused ULIPs can become a future-ready investment alternative.

General Insurance refers to all types of insurance other than life insurance. It provides financial protection against unforeseen risks and damages to assets such as vehicles, homes, health, travel, and businesses. Unlike life insurance, which covers human life, general insurance policies offer compensation for losses due to accidents, theft, fire, natural disasters, illnesses, and liabilities. These are usually short-term contracts that need to be renewed annually or as specified. Common types of general insurance include health insurance, motor insurance, property insurance, marine insurance, and liability insurance. The primary purpose is to protect individuals and businesses from financial losses arising from unexpected events. In India, general insurance is regulated by the Insurance Regulatory and Development Authority of India (IRDAI), ensuring transparency and policyholder rights. General insurance plays a crucial role in promoting risk management and financial stability in the economy.

History of General Insurance in India:

The history of general insurance in India traces back to the 19th century during British rule. The first general insurance company was the Triton Insurance Company Ltd., established in 1850 in Kolkata by British nationals. It primarily catered to European interests in India. Over the years, several foreign insurance companies set up operations, including Oriental Fire & General Insurance and Northern Insurance. Indian promoters also began entering the market in the early 20th century.

After independence, the sector saw considerable growth, but concerns about unethical practices and lack of regulation led to the nationalization of the general insurance industry in 1972. The General Insurance Business (Nationalisation) Act, 1972 came into effect, consolidating 107 insurers into four subsidiaries under the newly formed General Insurance Corporation of India (GIC): National Insurance, New India Assurance, Oriental Insurance, and United India Insurance.

With economic liberalization in 1991, reforms in the insurance sector were proposed. In 1999, the IRDAI (Insurance Regulatory and Development Authority of India) was established, allowing private and foreign players into the general insurance space. Since then, the sector has witnessed rapid innovation, technology adoption, and competitive growth, making insurance more accessible and efficient for the Indian population.

Reforms of General Insurance in India:

• Nationalisation of General Insurance (1972)

The General Insurance Business (Nationalisation) Act, 1972 was a landmark reform that unified 107 private insurers into four public sector companies under the General Insurance Corporation of India (GIC). This move aimed to bring order, transparency, and customer protection to the fragmented and often unregulated insurance market. The reform enabled centralized governance, standardised policy terms, and increased public confidence. By focusing on social welfare and expanding insurance to underserved areas, it laid the groundwork for future developments. However, lack of competition hindered innovation and efficiency in the long term, ultimately necessitating further liberalisation.

• Establishment of IRDAI (1999)

The creation of the Insurance Regulatory and Development Authority of India (IRDAI) under the IRDA Act of 1999 marked the beginning of liberalisation in the insurance sector. It was established to protect policyholders’ interests and promote a healthy insurance market. IRDAI opened up the sector to private and foreign players, ending the monopoly of public sector insurers. It introduced transparent licensing, solvency norms, grievance redressal mechanisms, and standardised product guidelines. As a result, the general insurance market became more competitive, customer-centric, and innovative. The regulatory oversight of IRDAI also enhanced consumer trust and market credibility.

• Entry of Private and Foreign Insurers (Post-2000)

Post-liberalisation, private and foreign insurers were allowed to enter the Indian general insurance market, initially with a 26% FDI cap. This marked a major shift from state monopoly to a mixed-market structure. Joint ventures like ICICI Lombard and Bajaj Allianz entered the fray, bringing international best practices, improved technology, and customer service innovations. Product diversity increased, and digital platforms emerged to enhance user convenience. The competition also compelled public sector insurers to improve efficiency. In 2015, the FDI cap was raised to 49%, further boosting foreign interest and capital inflow into the Indian general insurance space.

• Detariffication of General Insurance (2007)

Until 2007, the Tariff Advisory Committee (TAC) regulated premiums for several general insurance products, especially fire, engineering, and motor insurance. In January 2007, detariffication was introduced, allowing insurers to price products based on their own risk assessment and underwriting standards. This reform encouraged competition and product innovation, as insurers began using data analytics to offer customised pricing. It also empowered customers with varied options and better pricing. However, detariffication also brought pricing pressure and required insurers to enhance risk management frameworks and maintain profitability through strategic underwriting and operational efficiency.

• Merger of Public Sector Insurers (Proposed in 2018)

To improve operational efficiency and reduce financial strain, the Government of India proposed merging three public sector general insurers: National Insurance, United India Insurance, and Oriental Insurance. The objective was to create a stronger, more capitalised entity that could compete effectively with private players. Though the merger has been delayed due to operational and fiscal challenges, it remains a significant reform initiative. The move is aimed at reducing redundancies, improving claim settlement capacity, and increasing the global competitiveness of Indian public insurers. If executed properly, it could bring substantial improvements in service delivery and fiscal health.

Companies of General Insurance in India:

Public Sector General Insurance Companies:

Private Sector General Insurance Companies:

Standalone Health Insurance Companies:

Challenges of General Insurance in India:

• Low Insurance Penetration

General insurance penetration in India remains low due to lack of awareness, cultural factors, and financial constraints. Many individuals do not see insurance as a priority unless mandated (like vehicle insurance). The rural and semi-urban population, which constitutes a large portion of India’s demographic, remains underserved. Efforts to promote financial literacy and distribute insurance through digital or grassroots channels have been slow, limiting the spread. Insurers face difficulty in convincing people of the value of general insurance, especially in health and property segments.

• Fraudulent Claims

The general insurance sector in India struggles with a significant volume of fraudulent claims. Fake documents, exaggerated losses, and collusion between claimants and intermediaries result in financial losses for companies. This increases claim ratios, forcing insurers to increase premiums or limit coverage, affecting genuine policyholders. Fraud is more prevalent in motor and health insurance sectors, where verifying claims is challenging. The lack of advanced fraud detection tools, slow legal redressal, and weak data sharing between insurers worsen the situation.

• Lack of Skilled Workforce

There is a shortage of trained professionals in actuarial science, underwriting, risk assessment, and claims management in the Indian general insurance industry. This hampers product innovation, pricing accuracy, and efficient servicing. While technology adoption is growing, it cannot fully replace the need for skilled human resources. Public sector insurers particularly suffer from outdated HR policies and limited talent retention strategies. The industry’s talent gap leads to slower response times, customer dissatisfaction, and overall inefficiency in policy delivery and claim settlement.

• Poor Distribution and Reach

Despite advancements, the insurance industry’s distribution network is still weak, especially in remote regions. Agents remain concentrated in urban areas, while rural populations lack access. Digital platforms, though promising, have not achieved the desired reach due to limited internet literacy and language barriers. Bancassurance and micro-insurance models have shown potential but remain underutilized. Without effective last-mile connectivity and localized engagement, insurers find it difficult to penetrate India’s vast and diverse market, leaving millions uninsured or underinsured.

• Regulatory Challenges

The general insurance industry operates under a strict regulatory environment governed by IRDAI. While essential for policyholder protection, frequent changes in guidelines regarding solvency margins, product pricing, or distribution norms create operational disruptions. Insurers must continuously adapt to maintain compliance, which adds to administrative overheads. Smaller and newer players may struggle more, impacting competition and innovation. Further, unclear guidelines on emerging areas like cyber insurance and climate-related risks leave insurers in a gray area, delaying product development and risk coverage expansion.

• Underwriting and Pricing Difficulties

Inaccurate risk assessment and outdated actuarial data hamper effective underwriting and pricing in general insurance. Often, premiums do not adequately reflect the real risk associated with a policy, especially in health and property insurance. Adverse selection and moral hazard worsen claim ratios. With limited access to granular data, insurers rely on assumptions or industry averages. This leads to underpricing or overpricing, impacting profitability or competitiveness. As risk profiles evolve (e.g., due to climate change), insurers struggle to adapt quickly with adequate premium adjustments.

Future of General Insurance in India:

• Digital Transformation

The future of general insurance in India is deeply tied to digital innovation. Insurers are increasingly leveraging AI, machine learning, and blockchain to streamline underwriting, claims processing, and fraud detection. Mobile apps, chatbots, and self-service portals will make policy management more accessible. This tech-driven approach will improve efficiency, reduce turnaround time, and enhance customer satisfaction. With rising smartphone penetration and UPI adoption, digital channels will likely dominate policy sales and renewals, especially among younger and tech-savvy consumers.

• Customized and Usage-Based Products

India’s insurance market is shifting from generic to personalized offerings. Usage-based models like pay-as-you-drive (motor insurance) and health insurance with wellness-linked premiums will grow. Insurers will harness data from wearables, IoT devices, and driving behavior to tailor policies. This trend not only improves risk assessment but also promotes preventive habits among policyholders. As customers demand flexibility and relevance, insurers will focus on modular and micro-insurance products catering to specific needs like travel, electronics, or rural risks.

• Rural and Semi-Urban Expansion

With urban markets nearing saturation, the future lies in tapping rural and semi-urban India. Government initiatives like PMFBY (crop insurance) and Ayushman Bharat are pushing insurers to penetrate deeper. Micro-insurance and parametric insurance products designed for low-income groups will see increased adoption. Insurers will partner with local agents, NGOs, and digital fintech platforms to improve accessibility. Expanding reach in these underserved areas will not only support financial inclusion but also provide a huge untapped market for long-term growth.

• Climate and Catastrophe Risk Insurance

India’s exposure to floods, cyclones, and droughts has highlighted the need for climate-resilient insurance. The future will see growth in catastrophe risk cover, parametric insurance, and weather-indexed products. Insurance companies will integrate climate modeling and satellite data for better risk assessment. Regulatory nudges and global ESG frameworks will also push for sustainability-linked insurance offerings. As climate change impacts more regions and industries, insurers will play a key role in providing financial protection and promoting environmental resilience.

• Health and Cyber Insurance Growth

Post-COVID, awareness and demand for health insurance has surged and will continue rising, particularly in Tier 2 and Tier 3 cities. Custom wellness benefits, OPD cover, mental health inclusion, and family-focused plans will shape the market. Simultaneously, the digital economy’s rise brings cybersecurity threats, fueling growth in cyber insurance. MSMEs, startups, and even individuals will seek protection against data breaches, ransomware, and cyber fraud. These two sectors will dominate future product innovation and revenue generation for general insurers.

• Collaborations with InsurTechs and FinTechs

InsurTechs will become vital partners for traditional insurers. These tech-driven startups bring agility, customer insight, and digital capabilities that can transform distribution, claims, and pricing models. Collaborations will enhance customer experience through embedded insurance (like travel or device insurance at the point of purchase) and hyper-personalized offerings. APIs, open insurance, and real-time underwriting will become standard practices. The convergence of insurance with fintech ecosystems like UPI and credit platforms will enable seamless financial protection for millions of Indians.

Central Bank Digital Currencies (CBDCs) are digital forms of a country’s official currency, issued and regulated by the central bank. CBDCs are centralized and fully backed by the government, ensuring stability and legal recognition. They aim to combine the efficiency of digital payments with the trust and security of fiat money. CBDCs can streamline transactions, reduce costs, and enhance financial inclusion. Available in retail (for the public) and wholesale (for financial institutions) forms, CBDCs represent a modern evolution of currency in the digital age, maintaining sovereignty while adapting to fintech advancements.

Features of CBDCs:

• Centralized Issuance

CBDCs are issued and regulated exclusively by a nation’s central bank, such as the Reserve Bank of India (RBI) or the Federal Reserve. This ensures legal backing, currency stability, and state control over monetary policy. Unlike decentralized cryptocurrencies, CBDCs offer centralized governance, reducing the risk of speculation and volatility. This centralized issuance also allows governments to track money supply, enhance transparency, and enforce compliance with regulatory frameworks. As legal tender, CBDCs maintain public trust and can coexist with traditional cash and digital payment systems.

• Legal Tender Status

CBDCs hold the same legal status as physical currency, meaning they are recognized by law for payment of all debts and transactions. This legal tender status makes them universally acceptable across the country, unlike cryptocurrencies, which lack official recognition in many jurisdictions. With government backing, CBDCs ensure security, credibility, and seamless acceptance by businesses, individuals, and institutions. This feature promotes user confidence while allowing smoother integration into existing financial systems. Their legal tender nature also enables central banks to retain monetary sovereignty in the digital era.

• Digital and Programmable Nature

CBDCs are purely digital, offering instant, cashless, and contactless transactions. Their programmable nature allows features like automated tax payments, conditional transfers (smart contracts), and time-bound subsidies. Governments can embed rules into the currency, enhancing efficiency in welfare schemes, compliance, and auditing. Unlike cash or traditional bank transfers, programmable CBDCs provide more precise control and traceability of money flow. This feature supports advanced use cases such as targeted monetary policy tools or incentives, making CBDCs not just a digital form of currency but also a powerful governance instrument.

• Enhanced Financial Inclusion

CBDCs have the potential to increase financial inclusion by providing digital access to the unbanked and underbanked population. Through mobile wallets or basic apps, people without traditional bank accounts can store and transact money securely. In remote or rural areas, CBDCs reduce dependency on physical bank branches and cash availability. Their simplicity, low cost, and interoperability with existing digital infrastructure enable broader access to formal financial systems. This democratization of currency aligns with government goals of inclusive growth and reduced dependency on physical cash.

• Secure and Efficient Transactions

CBDCs support secure, real-time transactions with minimal intermediaries, reducing costs and delays typically seen in traditional banking. Transactions can be completed instantly across regions, even internationally if interoperable with other CBDCs. Their blockchain or distributed ledger-based architecture can ensure robust data integrity, reduce fraud, and improve traceability. Moreover, central banks can incorporate cybersecurity measures to prevent hacking and misuse. These secure systems enhance public trust and streamline both retail and wholesale payments, fostering a faster, more resilient financial ecosystem.

Example of CBDCs:

• Digital Rupee (e₹) – India

India’s Reserve Bank launched the Digital Rupee pilot in December 2022, in both wholesale and retail forms. The retail e₹ allows person-to-person and person-to-merchant payments through QR code-based wallets. The wholesale version targets settlement of interbank transactions. The digital rupee seeks to improve the efficiency of the payment system, reduce transaction costs, and offer a sovereign alternative to cryptocurrencies. Interoperable with UPI and other platforms, it supports financial inclusion, traceable transactions, and innovation in public service delivery. The RBI is gradually expanding its pilot cities and participants.

• eNaira – Nigeria

Launched in October 2021 by the Central Bank of Nigeria, eNaira is Africa’s first CBDC. It aims to promote financial inclusion, improve cross-border payments, and reduce cash dependency. Accessible via a digital wallet, it enables peer-to-peer transfers and merchant payments. The eNaira supports real-time, low-cost transactions and complements Nigeria’s existing banking system. Despite initial skepticism, the government has integrated eNaira into social programs to increase adoption. Its implementation showcases a developing economy’s approach to CBDC with emphasis on digital access and economic inclusivity.

• Digital Yuan (e-CNY) – China

The People’s Bank of China has been piloting the Digital Yuan (e-CNY) since 2020. As one of the most advanced CBDC projects, e-CNY enables offline payments and programmable features. It’s designed to increase payment system efficiency, reduce transaction costs, and counter private cryptocurrencies like Bitcoin. Used in retail transactions, public transport, and online shopping in pilot cities, the digital yuan is distributed through commercial banks. China aims to enhance monetary sovereignty and internationalize the yuan, making e-CNY a critical step in its digital economic strategy.

• Sand Dollar – Bahamas

The Sand Dollar is the world’s first fully operational retail CBDC, launched in October 2020 by the Central Bank of The Bahamas. It enhances financial access in the archipelago nation, especially in remote islands where banking infrastructure is limited. Residents use mobile wallets to make transactions, pay bills, and receive salaries. The Sand Dollar ensures secure, low-cost digital payments and includes KYC-compliant features. By integrating with local banks and mobile providers, it promotes inclusive finance and serves as a global model for small economies adopting digital currency.

• e-Krona – Sweden

Sweden’s Riksbank began testing the e-Krona in response to its society’s rapid shift away from cash. As one of the most cashless countries globally, Sweden sees the e-Krona as a complement to banknotes, ensuring access to central bank money. The e-Krona is designed for everyday payments and may be distributed via banks or digital wallets. The pilot explores offline usability, security, and resilience. It aims to maintain financial stability and public trust in a digital economy while preparing for scenarios where physical cash becomes obsolete.

Challenges of CBDCs:

• Threat to Traditional Banking

CBDCs may reduce the role of commercial banks by offering individuals a direct account with the central bank. In times of financial stress, people may quickly shift funds from banks to CBDC wallets, causing liquidity issues and potential bank runs. This disintermediation can disrupt traditional credit creation and affect financial stability. Banks might face difficulty in sourcing deposits, leading to increased reliance on borrowing from the central bank or capital markets. To mitigate this, central banks may need to impose holding limits or offer tiered interest rates on CBDCs to balance innovation and systemic stability.

• Privacy Concerns

One of the most debated challenges of CBDCs is ensuring user privacy. Unlike cash, CBDC transactions are traceable, which could lead to fears of mass surveillance and data misuse by the government or hackers. While traceability helps prevent illegal activities like money laundering, excessive monitoring may undermine civil liberties and erode public trust. Designing CBDCs with a balance between traceability for regulatory compliance and anonymity for user privacy is complex. Failure to address privacy issues effectively could deter public adoption, especially in countries with strong concerns about state overreach or lack of robust data protection frameworks.

• Cybersecurity Risks

CBDCs are fully digital and susceptible to cyber threats, including hacking, malware attacks, and system outages. A breach in the central bank’s digital infrastructure could compromise financial data, disrupt services, and erode confidence in the national currency. Additionally, large-scale cyberattacks targeting CBDC platforms could destabilize the economy and affect national security. Ensuring resilient, tamper-proof systems requires significant investment in advanced cybersecurity measures, real-time monitoring, and regular audits. The risk of cyberattacks makes operational security a top priority and a major challenge in implementing CBDCs at both national and cross-border levels.

• Technology and Infrastructure Gaps

The rollout of CBDCs demands robust digital infrastructure, including secure servers, fast internet, and user-friendly interfaces. In countries with low digital literacy, poor connectivity, or outdated systems, implementing CBDCs equitably is a major challenge. A lack of smartphone access, especially in rural and underprivileged areas, may exclude vulnerable populations. Additionally, central banks may face difficulties ensuring interoperability with existing financial systems. Addressing these technological gaps requires substantial investment in infrastructure development, public-private collaboration, and targeted education programs to ensure digital inclusion and avoid widening the financial divide.

• Monetary Policy Complexities

CBDCs can significantly alter the transmission of monetary policy. While they offer opportunities like programmable interest rates or direct stimulus distribution, their actual impact remains uncertain. Excessive use of CBDCs could affect the demand for bank deposits and change the effectiveness of traditional policy tools such as repo rates and reserve requirements. Central banks may find it difficult to calibrate interest rates and liquidity management in an environment where money demand shifts rapidly. Balancing innovation with economic stability will require new frameworks and empirical studies to understand the full macroeconomic implications of CBDC deployment.

Sustainable Bonds are fixed-income financial instruments specifically issued to raise funds for projects that have positive environmental or social impacts. These bonds include green bonds (for environmental initiatives), social bonds (for projects like affordable housing or education), and sustainability bonds (a mix of both). Issuers can be governments, corporations, or financial institutions. Investors are increasingly drawn to sustainable bonds due to growing awareness of climate change, social responsibility, and ethical investing. These bonds follow specific frameworks, such as the ICMA’s Green and Social Bond Principles, ensuring transparency and accountability in fund usage. In India, regulatory bodies like SEBI have issued guidelines for green debt securities to promote sustainable finance and align with global Environmental, Social, and Governance (ESG) goals.

Features of Sustainable bonds:

• Purpose-Driven Financing

Sustainable bonds are issued to finance or refinance projects that deliver measurable environmental and/or social benefits. These may include renewable energy, clean transportation, affordable housing, healthcare, and education. The purpose must be clearly defined in the bond’s framework. Issuers must disclose how the funds will be used and ensure that the projects align with sustainability goals. This targeted approach makes sustainable bonds distinct from traditional bonds, as investors know their capital is directly contributing to global sustainability objectives, in line with UN Sustainable Development Goals (SDGs).

• Transparency and Reporting

A key feature of sustainable bonds is their emphasis on transparency and continuous reporting. Issuers are expected to provide detailed disclosures about the use of proceeds, project selection criteria, and anticipated environmental or social impact. Regular updates and annual reports—including third-party audits or impact assessments—build trust among investors. This transparency ensures that funds are not misused or diverted to unrelated activities. The emphasis on clear communication aligns sustainable bonds with Environmental, Social, and Governance (ESG) investing standards, helping investors track both financial performance and societal impact.

• Alignment with Global Frameworks

Sustainable bonds are typically structured in alignment with globally recognized frameworks like the Green Bond Principles (GBP), Social Bond Principles (SBP), or Sustainability Bond Guidelines (SBG) issued by the International Capital Market Association (ICMA). These frameworks guide issuers on project eligibility, transparency, reporting, and evaluation. By adhering to these standards, issuers increase their credibility in global markets. This alignment ensures uniformity across borders, attracting international investors who prioritize ESG compliance, ethical investing, and alignment with the UN Sustainable Development Goals (SDGs).

• Third-Party Certification and Verification

To enhance investor confidence and prevent “greenwashing,” sustainable bonds often undergo independent third-party review. External reviewers assess whether the bond’s objectives, project selection process, and fund utilization meet sustainability standards. These certifications may include second-party opinions, ESG ratings, or post-issuance audits. Independent verification ensures that proceeds are genuinely used for environmental or social causes. This practice improves transparency and accountability, and can positively influence investor decisions, particularly those who follow responsible investment mandates or manage ESG-focused portfolios.

• Attractive to ESG Investors

Sustainable bonds are particularly appealing to Environmental, Social, and Governance (ESG)-focused investors. With increasing awareness around climate change, social justice, and responsible corporate governance, investors are prioritizing ethical financial instruments. Sustainable bonds offer a dual benefit: steady financial returns and measurable societal or environmental impact. Many pension funds, insurance companies, and sovereign wealth funds now include ESG criteria in their investment decisions. Sustainable bonds, by aligning with these values, offer a viable option for institutions seeking both long-term value and reputational integrity in their portfolios.

Example of Sustainable bonds:

• World Bank Sustainable Development Bonds

The World Bank regularly issues Sustainable Development Bonds to fund a broad range of projects aligned with the UN SDGs. These include clean water, education, healthcare, and climate action initiatives. Investors are attracted to their AAA-rated credit and strong impact transparency. The proceeds directly support poverty reduction, environmental protection, and inclusive economic growth. World Bank bonds are widely regarded as benchmarks for sustainability in global capital markets due to their credibility, disclosure, and development impact.

• European Investment Bank (EIB) Sustainability Awareness Bonds

The EIB’s Sustainability Awareness Bonds (SABs) fund environmental and social projects, such as climate resilience, water sanitation, education, and public health. These bonds are aligned with EU Taxonomy and contribute to Europe’s Green Deal objectives. The EIB ensures transparent impact reporting and rigorous due diligence. SABs attract institutional investors seeking credible green and social returns. As one of the first major issuers in this space, the EIB has helped shape sustainable finance standards globally.

• Indian Railway Finance Corporation (IRFC) Green Bonds

IRFC issued Green Bonds to raise capital for low-emission and electrified rail transport infrastructure across India. These bonds help reduce carbon emissions, promote sustainable mobility, and align with India’s climate goals under the Paris Agreement. The IRFC bonds are certified under the Climate Bonds Standard and are listed on international exchanges like the London Stock Exchange. Their global listing has attracted ESG-focused investors, showcasing India’s commitment to sustainable transport infrastructure and green financing.

• Apple Inc. Green Bonds

Apple has issued several Green Bonds, raising billions to finance energy efficiency, renewable energy, green buildings, and recycling innovation. These include powering global operations with 100% renewable energy and developing recycled materials like aluminum. Apple publishes detailed impact reports annually, offering transparency to ESG investors. Its bonds align with ICMA Green Bond Principles and reflect the company’s climate commitments. Apple’s strong brand and sustainability record make these bonds attractive to both retail and institutional ESG investors.

• Government of France Sustainability Bonds

France was one of the first countries to issue sovereign Green and Sustainability Bonds. These bonds fund climate initiatives, biodiversity conservation, renewable energy, and energy efficiency programs. France ensures transparency through annual allocation and impact reports verified by independent parties. The bonds are aligned with both national climate policy and EU sustainability frameworks. France’s leadership in sustainable finance has inspired other nations to issue sovereign ESG bonds, strengthening the global green bond market and funding climate adaptation at scale.

Challenges of Sustainable bonds:

• Greenwashing Risk

One major challenge is greenwashing, where issuers label bonds as “sustainable” without genuinely using proceeds for green or social purposes. This misleads investors and dilutes the credibility of sustainable finance. Lack of rigorous standards or enforcement mechanisms allows questionable projects to be funded under the sustainable banner. As a result, investor confidence may waver, and the integrity of the market may suffer unless robust verification, independent audits, and transparent impact reporting become mandatory across issuers and regions.

• Lack of Universal Standards

There is no globally uniform regulatory framework governing sustainable bonds. Different countries and organizations follow varying definitions, taxonomies, and certification requirements. This creates confusion for investors and challenges in comparing bonds across markets. The inconsistency can result in reduced transparency, diminished investor trust, and difficulty in evaluating actual impact. Harmonization of standards, such as alignment with the EU Green Bond Standard or ICMA Principles, is necessary to ensure comparability and foster wider acceptance in global financial markets.

• Verification and Reporting Issues

Ensuring the credibility of impact reporting is a persistent challenge. Many issuers lack the resources or expertise to conduct third-party verifications or publish regular impact assessments. This raises concerns about fund allocation and environmental or social performance. Without consistent post-issuance disclosure, investors may be unable to verify whether the bond is achieving its intended objectives. Improving impact reporting practices, making assurance processes mandatory, and involving external reviewers are essential steps to strengthen investor confidence.

• Limited Market Depth

The market for sustainable bonds, especially in developing countries, remains limited. Fewer issuers, lower liquidity, and a smaller investor base can reduce demand and inhibit growth. Smaller issuers often struggle with the cost and complexity of issuing sustainable bonds due to lack of technical support. This challenge restricts the reach of sustainable financing, particularly for smaller enterprises and local governments. Strengthening market infrastructure, offering incentives, and building investor awareness are crucial to expand participation and issuance.

• High Issuance Costs

Issuing a sustainable bond often involves additional costs compared to conventional bonds. These include expenses for third-party verification, environmental assessments, impact reporting, and compliance with frameworks like the Green Bond Principles. These costs may deter small issuers or first-time participants. Without public subsidies or technical assistance, the cost-benefit ratio may not appear favorable. Reducing procedural complexity, offering tax benefits, or creating pooled issuance platforms could help make sustainable bonds more accessible and cost-effective.

• Difficulty in Measuring Impact

Quantifying the actual environmental or social impact of funded projects is inherently complex. Outcomes like reduced carbon emissions or improved public health often unfold over long periods and are influenced by multiple external factors. There may be a lack of reliable data, inconsistent metrics, or methodological challenges in calculating impact. This uncertainty can hinder investor trust and accurate pricing of sustainability-linked returns. Developing standardised metrics and tools for transparent impact measurement is essential for long-term credibility.

Neo-banks are fully digital-only financial institutions that offer banking services without any physical branches. Unlike traditional banks, neo-banks operate through mobile apps or websites, providing services like savings accounts, money transfers, budgeting tools, loans, and spend analytics. They typically partner with licensed banks to ensure regulatory compliance and deposit safety, since most neo-banks are not independently licensed by central banks like the RBI. Neo-banks focus on delivering a seamless user experience, quick onboarding, lower fees, and innovative features such as instant credit, automated savings, and financial insights. In India, examples include Fi Money, Jupiter, and Niyo. Neo-banks aim to serve tech-savvy customers and underserved segments, contributing to financial inclusion through technology-driven solutions.

Features of Neo-Banks:

• 100% Digital Operations

Neo-banks operate entirely online without physical branches. They provide banking services via mobile apps and web platforms, allowing customers to open accounts, transfer money, apply for loans, or invest—all digitally. This eliminates paperwork and long wait times, offering faster and more efficient banking. Neo-banks are built using cloud-based infrastructure, which allows them to scale quickly and integrate with other fintech services. Their 24/7 availability ensures convenience, particularly for tech-savvy users. The digital-only model also reduces operating costs, making neo-banks more agile than traditional banks. However, the lack of physical presence may be a drawback for customers who prefer face-to-face service or need help with complex financial issues.

• Seamless User Experience

Neo-banks prioritize user-friendly interfaces and intuitive mobile apps. They emphasize customer-centric design, enabling smoother navigation, real-time transaction updates, personalized dashboards, and easy-to-understand financial reports. Services such as automated budgeting, bill reminders, and instant notifications help users manage their money better. Neo-banks often integrate with UPI, wallets, and third-party apps, allowing users to handle multiple tasks without switching platforms. This seamless experience is particularly attractive to millennials and Gen Z users who value speed, customization, and accessibility. Regular app updates based on user feedback ensure continuous improvement. This feature positions neo-banks as smart, lifestyle-driven alternatives to traditional banking interfaces that often feel outdated.

• Low Operational Costs

Since neo-banks do not maintain costly branch networks or legacy systems, their overhead expenses are significantly lower. These cost savings are passed on to customers in the form of lower fees, better interest rates, and cashback offers. They often charge zero account maintenance fees, provide free debit cards, and offer fee-free transactions, making them attractive for cost-conscious users. Moreover, lean operations allow neo-banks to adapt quickly, launch new features, and remain competitive. Their technology-driven backend also enables automation of processes like customer onboarding, fraud detection, and loan approval, reducing the need for manual intervention and lowering human resource expenses.

• Focused Financial Products

Neo-banks often cater to specific user segments such as freelancers, small businesses, students, or digitally active individuals. They offer targeted financial products like instant salary advances, invoice financing, expense trackers, and goal-based savings. Their services are often curated to support digital lifestyles, including subscription tracking, investment tools, and crypto-friendly wallets. Neo-banks also collaborate with NBFCs and traditional banks for underwriting and compliance while handling the front-end digital experience. This focus enables them to design better solutions than one-size-fits-all banking models. Their niche offerings often address pain points that traditional banks overlook, making them highly personalized and user-relevant.

• Real-Time Services and Insights

Neo-banks provide instant banking services like immediate account creation, real-time balance updates, and instant payment notifications. They also offer financial insights and analytics, such as monthly spending patterns, category-wise breakdowns, and savings suggestions. Using AI and machine learning, some platforms can predict future expenses or recommend smarter ways to budget. Real-time credit scoring, risk profiling, and personalized recommendations make the banking experience highly dynamic and proactive. These features help users take better financial decisions on the go, empowering them with actionable data, unlike traditional banks which typically lack real-time personalization in their core operations.

• Integration with Fintech Ecosystem

Neo-banks are well-integrated with the larger fintech ecosystem, often collaborating with payment gateways, mutual fund platforms, tax filing services, and insurance aggregators. This provides users with a one-stop financial platform, combining banking, investments, and other money management tools. Open APIs and modular technology stacks enable them to plug into multiple services, offering a holistic financial experience. Many also offer embedded finance options, allowing businesses to provide banking services directly to customers through neo-bank infrastructure. This fintech-driven integration sets them apart from conventional banks and makes them a versatile tool for modern personal and business finance.

Traditional Banks

Traditional banks are brick-and-mortar financial institutions licensed and regulated by a country’s central authority—such as the Reserve Bank of India (RBI). They offer a wide range of services including savings and current accounts, fixed deposits, loans, credit cards, remittances, and more. Customers interact with traditional banks through physical branches, ATMs, and increasingly, online platforms. These banks include public sector banks (e.g., SBI, PNB), private sector banks (e.g., HDFC, ICICI), and foreign banks operating in India. Traditional banks play a critical role in monetary transmission, economic development, and financial inclusion. They follow strict regulatory norms related to capital adequacy, risk management, and asset classification. Though slower to innovate than neo-banks, they offer trust, legacy, and full-service reliability, catering to both individuals and institutions.

Features of Traditional Banks:

• Physical Presence

Traditional banks have an extensive network of physical branches and ATMs across urban and rural areas. This infrastructure allows customers to conduct transactions, seek personal assistance, and access various banking services in person. The physical presence builds trust and familiarity, especially for customers uncomfortable with digital platforms. It also helps in catering to rural populations and small businesses that require manual banking support. Though costly to maintain, branch networks help banks deliver inclusive financial services, promote financial literacy, and build long-term relationships with clients through face-to-face interactions.

• Regulatory Compliance

Traditional banks operate under strict regulations laid down by the Reserve Bank of India (RBI) and follow international norms like Basel III. They must maintain specific capital adequacy ratios, statutory liquidity ratios, and follow protocols for KYC (Know Your Customer), risk assessment, and asset classification. This regulatory framework ensures stability, transparency, and risk mitigation in banking operations. Compliance also helps protect depositors’ interests and ensures accountability. Regular audits, disclosures, and inspections are part of their governance, which makes traditional banks trustworthy and reliable institutions in the eyes of the public and investors alike.

• Wide Range of Services

Traditional banks offer a comprehensive suite of services such as savings and current accounts, fixed deposits, recurring deposits, loans (personal, home, vehicle), credit cards, remittances, insurance, and investment products. They cater to both retail and corporate customers, enabling financial support at individual and organizational levels. In addition, banks provide trade finance, foreign exchange, treasury management, and government bond sales. Their ability to offer bundled services under one roof enhances customer convenience and encourages long-term banking relationships. This variety makes them essential to individuals, businesses, and government bodies.

• Risk Management and Security

Traditional banks are equipped with robust risk management systems to safeguard against credit, operational, and market risks. They employ detailed due diligence, credit appraisal mechanisms, and asset classification norms to assess borrower credibility and monitor loan quality. These banks also invest in cybersecurity infrastructure, internal audits, and fraud detection technologies to protect customer data and funds. RBI mandates periodic stress tests and provisioning for bad loans, ensuring financial stability. This structured approach makes traditional banks more resilient during economic shocks or financial crises, maintaining public trust in the system.

• Large and Diverse Customer Base

Traditional banks serve a wide spectrum of customers, including individuals, SMEs, corporations, and government bodies. Their established brand image, long history, and trusted presence attract millions of customers across urban and rural areas. Banks provide tailored services such as priority banking for high-net-worth individuals (HNIs), MSME loans, and agricultural credit. Their large customer base not only generates diverse revenue streams but also enables economies of scale. This diversity helps them absorb shocks from specific segments and sustain operations during economic downturns, contributing to the financial stability of the banking sector.

• Trust and Legacy

Traditional banks enjoy strong public trust, built over decades of service and stability. Many are public sector banks (e.g., SBI, PNB) with government backing, reinforcing their credibility. Their long-standing legacy reflects in strong customer loyalty, intergenerational relationships, and a perception of safety. Unlike newer digital entrants, traditional banks are viewed as secure custodians of savings. Their proven ability to weather financial crises adds to their reputation. This trust is crucial in encouraging people—especially in semi-urban and rural India—to participate in the formal financial system and maintain long-term banking relationships.

Key differences between Neo-Banks and Traditional Banks

Non-Banking Financial Companies (NBFCs) play a vital role in advancing financial inclusion in India, especially in underserved rural and semi-urban areas. Unlike traditional banks, NBFCs offer flexibility, faster processing, and customized financial products, enabling them to bridge the credit gap for individuals and small businesses. With simplified documentation and doorstep services, they provide credit to sectors often excluded by mainstream banks such as micro-enterprises, small traders, and low-income households. By leveraging technology, NBFCs also deliver insurance, pensions, and digital payments, aligning with India’s broader goal of inclusive economic growth. Their presence helps promote entrepreneurship and financial resilience in remote regions.

• Microcredit Access for the Unbanked:

NBFCs are key providers of microcredit to individuals and businesses who lack formal income documentation or credit history. By offering small-ticket loans with minimal paperwork and flexible repayment schedules, they enable marginalized populations—such as daily wage earners, women entrepreneurs, and informal workers—to access funds for income-generating activities. NBFC-MFIs (Microfinance Institutions) have played a particularly important role in empowering rural women by facilitating self-help groups and entrepreneurship. Their field agents and local partnerships help reduce barriers to access, trust, and financial literacy. In regions where banks are absent or unwilling to lend due to risk concerns, NBFCs ensure credit reaches the last mile, thereby enhancing economic participation.

• Tailored Products for Diverse Needs

NBFCs design and deliver financial products tailored to the specific needs of underserved communities. For example, they offer vehicle loans to small transport operators, gold loans to households without collateral, and consumer durables financing to low-income families. Unlike banks with rigid criteria, NBFCs assess borrowers based on alternate data—such as business turnover or cash flows—rather than credit scores. Their agility in creating sector-specific products, such as loans for farmers, artisans, or small shopkeepers, addresses the unique challenges these groups face. NBFCs also provide financing for affordable housing, education, and health-related emergencies, making essential services accessible. These targeted offerings make NBFCs a critical instrument in deepening financial inclusion across economic strata.

• Expanding Reach Through Technology

NBFCs leverage digital tools and mobile technology to extend financial services to remote areas. With mobile apps, SMS alerts, e-KYC, and biometric authentication, they streamline loan approval, disbursement, and recovery processes—even in regions lacking physical infrastructure. Fintech NBFCs offer online onboarding, digital lending, and wallet-based services that improve convenience and transparency. This technological adoption reduces cost-to-serve, improves credit assessments through alternative data (e.g., mobile usage, payment history), and enhances user experience. Such digital-first strategies allow NBFCs to scale quickly, penetrate rural markets, and serve customers previously excluded due to geographic or documentation barriers. As a result, they help bridge the urban-rural financial divide and drive digital inclusion.

• Supporting MSMEs and Informal Sector:

NBFCs play a pivotal role in supporting Micro, Small, and Medium Enterprises (MSMEs) and informal sector workers, who often struggle to obtain funding from traditional banks. They offer working capital loans, machinery finance, and invoice discounting to small businesses with limited credit history. By providing timely credit, NBFCs help these enterprises manage cash flows, expand operations, and weather economic fluctuations. Many NBFCs adopt relationship-based lending, allowing for trust and flexibility in underwriting. They also support gig workers, vendors, and home-based entrepreneurs—segments critical to India’s economy. As enablers of employment and productivity, NBFCs strengthen local economies and contribute to inclusive growth by promoting self-reliance and business resilience in underserved regions.

Punjab and Maharashtra Cooperative Bank was established in 1984 and grew into one of India’s top 10 urban cooperative banks. It had over 137 branches across 6 states and served thousands of depositors. The bank catered to both retail and institutional clients and had earned trust over the years through its aggressive growth and high deposit interest rates. By 2019, it had deposits worth over ₹11,000 crore and a loan book exceeding ₹8,000 crore.

Discovery of Financial Irregularities

In September 2019, the Reserve Bank of India (RBI) imposed operational restrictions on PMC Bank after uncovering a ₹6,500+ crore scam, where the bank fraudulently hid and underreported its bad loans. The fraud came to light when a whistleblower informed RBI about the misreporting of loan exposures to a bankrupt real estate firm – Housing Development and Infrastructure Ltd. (HDIL).

Undisclosed Exposure to HDIL

PMC Bank had illegally lent over 73% of its total loan book (~₹6,226 crore) to HDIL and related entities, which had already been declared bankrupt. Bank officials used 21,000 fake accounts to hide the bad loans from regulators and auditors. These dummy accounts masked non-performing assets (NPAs), giving the illusion of a healthy loan portfolio.

Management’s Role in the Scam

Top executives at PMC Bank, including the Managing Director Joy Thomas and Chairman Waryam Singh, were directly involved in sanctioning and hiding loans to HDIL. Internal systems and software were manipulated to conceal the real numbers from auditors and the RBI. The auditors also failed to detect the deception, pointing to lapses in checks and balances.

RBI’s Immediate Action

On 23rd September 2019, RBI put PMC Bank under Section 35A of the Banking Regulation Act, restricting withdrawals for depositors initially to ₹1,000, later increased in phases. The bank was not allowed to offer new loans or renew existing ones, and the Board of Directors was superseded. An administrator was appointed to manage the crisis.

Public Outcry and Depositor Hardship

The sudden restrictions caused widespread panic among account holders. Many customers had life savings in the bank and couldn’t access funds for medical emergencies, education, or business needs. Emotional distress led to several deaths reportedly due to shock or suicide, highlighting the deep financial and psychological impact on the common public.

Legal and Investigative Proceedings

The Mumbai Police’s Economic Offences Wing (EOW) and Enforcement Directorate (ED) launched investigations. Multiple arrests were made, including PMC officials and HDIL promoters Rakesh and Sarang Wadhawan. ED attached HDIL’s properties worth crores under the Prevention of Money Laundering Act (PMLA). Investigations revealed that PMC gave loans despite HDIL defaulting on repayments for years.

Loopholes in Cooperative Banking Regulation

The crisis exposed serious regulatory gaps in India’s dual control structure over cooperative banks – RBI oversees banking operations, while state governments regulate administration. PMC operated with weak internal controls, and regulatory supervision was inadequate. The case led to demands for comprehensive reform in cooperative banking regulation, especially on audit and oversight.

RBI’s Corrective Measures and Policy Changes

Post-PMC crisis, the RBI and government took various steps:

• Amended Banking Regulation Act (2020) to bring cooperative banks under stricter RBI control.

• Enhanced guidelines on audit quality and loan exposure limits.

• Issued advisories on whistleblower mechanisms and stricter internal audits to detect frauds early.

Resolution Through Merging with Unity Small Finance Bank:

In November 2021, the RBI approved the merger of PMC Bank with Unity Small Finance Bank (USFB), backed by Centrum Group and BharatPe. Under the resolution plan:

• Depositors were to receive back their full deposits in a staggered manner.

• Unity took over assets and liabilities, with the goal to revive operations and restore trust.

• Large depositors had to wait longer, while smaller depositors got quicker access.

Impact on Banking Sector and Financial Confidence:

The PMC Bank debacle led to loss of public confidence in cooperative banks. Even strong urban cooperative banks saw withdrawal pressures. The crisis triggered debates around:

• Deposit insurance coverage (enhanced later to ₹5 lakh).

• Need for timely financial disclosures and audits.

• Greater oversight on urban cooperative banks to protect depositors.

Lessons Learnt and Way Forward:

The PMC crisis taught regulators, banks, and customers several lessons:

• Importance of transparency in reporting loan exposures.

• Need for robust governance and accountability mechanisms.

• Strengthening whistleblower protection and digital monitoring systems.

• Depositors also became more aware of risks associated with high-return promises.
  The crisis pushed RBI and the government to tighten norms for the cooperative banking sector and enhance trust in India’s financial system.