India’s financial sector is facing considerable challenges with high non-performing assets and repair of corporate balance sheets testing the resilience of the banking system and holding back investment and growth, the International Monetary Fund said in its Financial Sector Assessment Programme (FSAP) report on Thursday.
After its Executive Board discussed the Financial System Stability Assessment (FSSA) of India, the IMF report said that India’s largest banks appear resilient, but a group of public sector banks are subject to considerable vulnerabilities.
“The financial sector is facing considerable challenges, and economic growth has recently slowed down. High non-performing assets (NPAs) and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system, and holding back investment and growth,” it said.
The last FSSA for India was done in 2011. Conducted jointly by a team of the IMF and the World Bank, the FSAP aims at having a very comprehensive and in-depth view of the financial system in countries with big systemic financial systems.
“Stress tests show that while largest banks are sufficiently capitalised and profitable to withstand a deterioration in economic conditions, a group of public sector banks (PSBs) are highly vulnerable to further declines in asset quality and higher provisioning needs. Capital needs range from 0.75 percent of GDP in the baseline to 1.5 percent of GDP in the severe adverse scenario,” the IMF said.
Noting that the country’s financial system is undergoing a gradual structural shift, with a greater role for non-bank intermediaries and higher recourse to market funding for large corporates, the IMF said financial system assets equal about 136 per cent of GDP, close to 60 per cent of which reflect banks’ assets.
The state retains an important footprint in the system via ownership of large financial institutions, captive government financing, and directed credit to priority sectors, the IMF said.
The FSAP took stock of the considerable progress made in strengthening financial sector oversight and identified areas where scope for further improvement remains.
Notably, these include strengthening the RBI’s de jure independence as well as its powers over the PSBs; expanding other financial regulators’ resources; introducing a risk-based solvency regime and extending risk-based supervision for insurers; and unifying the oversight of commodities markets.