Context:
India’s financial system has become stronger and more diversified since 2017, according to the latest Financial System Assessment Program (FSAP) report conducted jointly by the IMF and the World Bank. The IMF recently released this report, highlighting significant regulatory, structural, and operational improvements.
Key Highlights of the FSAP Report
a. Non-Banking Financial Companies (NBFCs)
- Better capitalized to withstand economic shocks.
- Lending growth remains moderate and sustainable.
- RBI’s scale-based regulatory framework and liquidity coverage requirements have strengthened oversight.
b. Banking and Financial Regulations
- Improved regulatory frameworks by RBI.
- Enhanced monitoring mechanisms for system-wide stability.
c. Public Digital Infrastructure
- Significant strides in digital financial access through platforms like UPI, Aadhaar, and DigiLocker.
- Financial inclusion has improved, but further legal and tax reforms are needed to sustain and deepen this progress.
d. Insurance Sector
- Stable and well-regulated, but growing risks from climate change and cybersecurity threats require enhanced risk management frameworks.
Challenges and Recommendations
| Area | Challenges Identified | Recommendations by IMF |
|---|---|---|
| Legal and Tax Frameworks | Need strengthening to support long-term growth | Implement robust legal reforms and consistent tax structures |
| Climate Change Risk | Emerging threat to financial stability | Develop climate risk guidelines for insurers and banks |
| Cybersecurity | Increasing risk to digital financial systems | Strengthen cyber-resilience frameworks |
| Public Digital Infrastructure | Risk of exclusion without proper safeguards | Broaden outreach, ensure equitable digital access |
India’s financial system is resilient, diverse, and well-regulated, with NBFCs and banks better capitalized to manage shocks. The RBI’s proactive regulatory reforms, along with public digital infrastructure, have significantly broadened financial access. However, climate risks, cybersecurity concerns, and the need for legal and tax improvements remain priority areas to ensure long-term financial system stability and growth.
Source: TOI
