Need for Stronger Credit Risk Practices
- Indian banks need to adopt International Financial Reporting Standards (IFRS 9) for robust credit risk management.
- The IMF emphasizes enhanced supervision of individual loans, collateral valuation, and monitoring of connected borrower groups.
Key Findings from the FSSA Report
- India’s financial system has become more resilient and diverse since the last FSAP in 2017.
- The sector has recovered from multiple distress phases and navigated the pandemic well.
- Non-Banking Financial Intermediaries (NBFIs) are more interconnected, presenting both opportunities and risks.
- Banks and NBFCs hold sufficient aggregate capital to support moderate lending under severe macro-financial conditions.
Financial Inclusion and Infrastructure Growth
- India’s Financial Inclusion Index has risen from 43.4 in 2017 to 64.2 in March 2024.
- Over 548.4 million bank accounts have been opened under the Jan Dhan Yojana, with total balances exceeding ₹2.45 trillion.
- The IMF recommends strengthening legal, tax, and informational infrastructure to expand credit access for financially underserved sectors.
Insurance Sector and Regulatory Progress
- India’s insurance sector is strong, with significant presence in both life and general insurance.
- Supported by robust regulations and digital innovations, the sector remains stable.
- The IMF suggests transitioning towards risk-based solvency frameworks and stronger group supervision mechanisms.
Addressing Cybersecurity and Climate Risks
- Indian authorities have advanced cybersecurity risk oversight, especially for banks.
- Climate change-related financial risks are manageable but require continued monitoring with better data granularity.
- System-wide contagion and emerging vulnerabilities will need proactive supervision.
The IMF’s FSSA report acknowledges India’s progress in building a resilient and diverse financial system. However, the path forward requires continued focus on aligning with global standards, particularly IFRS 9, strengthening credit risk supervision, broadening financial inclusion, and addressing climate and cybersecurity challenges. These steps are vital to fortify India’s financial system and sustain its growth momentum.
Source: BS
