India's financial system is now more resilient and diverse

The International Monetary Fund (IMF) has released a report on India’s financial system, highlighting its resilience and diversity. This assessment is part of the Financial Sector Assessment Program (FSAP) conducted in 2024. The report shows that India's financial system has strengthened since the last assessment in 2017, aided by the country's rapid economic growth. The Indian financial sector has weathered challenges well, including the impact of the pandemic. The report notes that the system has recovered from past economic difficulties and has become more interconnected with the growth of non-bank financial institutions (NBFIs). Although state-owned financial institutions continue to have a significant role, the overall financial landscape is evolving. Stress tests indicate that major lending sectors are generally robust against macro-financial shocks, but some vulnerabilities remain. While banks and NBFIs have adequate capital to support lending, certain public sector banks (PSBs) may need to enhance their capital base to handle severe situations. Some smaller, non-systemic NBFCs and urban cooperative banks reported capital issues, posing risks to stability. The report praises India's regulatory framework for NBFCs, particularly its scale-based approach and the introduction of a Liquidity Coverage Ratio for larger institutions. Improvements have also been noted in the regulation of securities markets, with measures like the Corporate Debt Market Development Fund established to manage emerging risks. In the insurance sector, the IMF finds it to be strong and growing, bolstered by good regulations and digital advancements. The report also assesses cybersecurity measures in banking and financial infrastructure. Although progress is evident, the IMF recommends enhancing cybersecurity simulations for broader market scenarios. Overall, the report emphasizes the need for continued improvements in the financial system, with many suggestions aligning with the plans of Indian authorities and regulators.