We need a large number of financial institutions which offer safe and reasonably remunerative return on investment to protect investors’ interest. At most times, our regulators actually stifle the industry and drive out good players.
Look at what happened in 1998 in the aftermath of a few non-banking financial companies (NBFCs) such as CRB Capital Markets collapsing. The Reserve Bank of India (RBI) came out with a very stringent and unimaginative set of rules that almost finished off the sector. A lot of large companies such as the Tatas and others who were in the NBFC business till then chose to exit the sector.
Too much of micro management drove out good players (and continues to do so even now). Had that not happened we would have had over 50 large finance companies competing among themselves.
Nature abhors a vacuum and it is this vacuum that unscrupulous players come to occupy. Financial illiteracy is high in India and we need hundreds of strong institutions.
In the absence of this, more people fall prey to ponzi schemes. It is not the lack of regulation that is fostering such scams but unbridled RBI regulation.