The International Monetary Fund’s (IMF) Executive Board after discussing the Financial System Stability Assessment (FSSA) of India, has flagged a persistent risk to India’s banking system. In its report it has said that India's financial sector is facing considerable challenges with high non-performing assets and slow deleveraging and repair of corporate balance sheets testing the resilience of the banking system and holding back growth.
IMF said that India’s key banks appear resilient, but the system is subject to considerable vulnerabilities. Further 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 corporate, it said that financial system assets equal about 136 percent of GDP, close to 60 percent of which reflect banks’ assets. It added that 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 multilateral institution urged the Indian government to consider privatizing weak public sector banks (PSBs) by selling their viable assets rather than merging them with stronger banks, since that would undermine the viability of the acquirer. It also recommended increasing the central bank’s independence, expanding other financial regulators’ resources, introducing a risk-based solvency regime, and enhancing safety net measures such as deposit insurance and emergency liquidity assistance to improve financial stability.
The FSSA conducted jointly by a team of the IMF and the World Bank, aims at having a very comprehensive and in-depth view of the financial system in countries with big systemic financial systems. The last FSSA for India was done in 2011. The stress tests conducted by IMF experts covered the 15 largest banks, including 12 PSBs, which account for 71% of the banking sector assets.
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