India: Financial Sector Assessment Program-Financial System Stability Assessment

FINANCIAL SECTOR ASSESSMENT PROGRAMFINANCIAL SYSTEM STABILITY ASSESSMENT This paperonIndiawas prepared by a staff team of the International Monetary Fund. It isbased on the information available at the time it was completedinJanuary 2025. Copies of this report are available to the public from International Monetary Fund•Publication ServicesPO Box 92780•Washington, D.C. 20090Telephone: (202) 623-7430•Fax: (202) 623-7201E-mail:publications@imf.org Web:http://www.imf.orgPrice: $18.00per printed copy International Monetary FundWashington, D.C. INDIA FINANCIAL SYSTEM STABILITY ASSESSMENT February 6, 2025 KEY ISSUES Context:India’s financial system has withstood the pandemic well and has becomemore resilient since the 2017 FSAP. Nonbank financial institutions (NBFIs)—especiallynonbank financial companies (NBFCs) providing credit with wholesale financing—andmarket financing have grown, making the financial system more diverse andinterconnected. The role of the state has diminished, yet it remains significant, includingin using the financial system to pursue social and public finance goals. Findings:Banks and NBFCs are generally resilient to severe macrofinancial solvency andliquidity shocks, but some banks, particularly public sector banks (PSBs), may need tostrengthen their capital base to support lending in such situations. More importantly,NBFCs’ concentrated exposures, especially to the power and infrastructure sectors—thecause behind the 2016 bank distress—could trigger systemic issues through theirlinkages with banks, corporate bond markets, and mutual funds. Financial stability risksfrom climate change appear manageable, but they warrant careful monitoring, especiallyregarding climate change impact on the agriculture and power sectors. Policies:The authorities should manage potential systemic risks from concentratedexposures. The regulations of state-owned NBFCs should be aligned with those of theprivate sector, especially given that state-owned NBFCs are currently exempt from largeexposure limits. Data and tools for systemwide and contagion risk analysis should beenhanced, and broader macroprudential policy could be implemented. The central bankshould be ready to expand crisis-time liquidity policy options to include tools moresuited for systemic liquidity events among NBFIs and markets. The authorities shouldalso continue efforts implementing long-standing policy recommendations to alignIndia’s financial sector policy framework in line with international standards, includingenhancing the independence and power of regulators, particularly over state-ownedinstitutions; implementing pillar 2 capital charges and the International FinancialReporting Standard (IFSR) 9 for banks and risk-based supervision of insurers; improvingconglomerate supervision; and establishing a comprehensive resolution regime.Financial stability objective should be prioritized over social and developmental goals.Directed lending and public finance requirements should be further relaxed and, instead,the government should establish broad infrastructure to support digital lending,introduce state-of-the-art credit enhancement tools, and promote safe securitization. This report is based on the work of the Financial SectorAssessment Program (FSAP) mission that visited India in Marchand June 2024 and virtually concluded in October 2024. The FSAPfindings were discussed with the authorities during the Article IVconsultation mission in December 2024. Approved ByMay Khamis and SanjayaPanthPrepared ByMonetary and CapitalMarkets Department The FSAP was led by Hiroko Oura (IMF) and Eva Gutierrez (WB). The IMF team included SiphoMakamba (deputy mission chief), Ebru Sonbul Iskender, Tanai Khiaonarong, Vina Nguyen, TracyRichardson, Béatrice Sagna, Thierry Tressel, Suzette Jeanne Vogelsang, Sha Yu, Yuchen Zhang (allMCM), Nujin Suphaphiphat (APD), and Diarmuid Murphy (IMF expert). Additional technical supportwas provided by Mátyás Farkas, Zoltan Jakab, Ruy Lama, and Javier Uruñuela (all MCM), RoshaAnjum (LEG), and Hugo Rojas-Romagosa (RES). Francisca Fernando and Kathleen Kao (LEG)undertook a desk review of the anti-money laundering and counter-financing of terrorism(AML/CFT) based on the 2024 mutual evaluation by the Financial Action Task Force (FATF). TheWorld Bank team included, Laurent Gonnet (WB deputy mission chief), Sebastian Boitreaud, TusharAurora, Giovanni Bandi, Sergio Merino Gomez, Emma Dalhuijsen, Martin Luis Alton, Natalie Nicolau,Antonia Preciosa Menezes, Venkat Shreedhara, Charles Michael Grist, Srinivas Gynedi, Fredesvinda F.Montes Herraiz, Rekha Reddy, Davit Babasyan, Juan Ortiz,Guillermo Galicia Rabadan, and PasqualeDi Benedetta. The mission met with senior officials of the Ministry of Finance (MoF), Reserve Bank of India (RBI),Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority ofIndia (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA), including Dr.Saksena (