The Indian financial system has become more resilient and diverse, driven by rapid economic growth and withstood the pandemic well, according to an IMF report. The Financial Sector Assessment Program (FSAP), a joint programme of the International Monetary Fund (IMF) and the World Bank (WB), undertakes a comprehensive and in-depth analysis of a country's financial sector. IMF has released the latest India-FSSA report, based on the assessment carried out during 2024, while WB's Financial Sector Assessment (FSA) report is due for publication.

IMF's FSSA report highlights that India's financial system has become more resilient and diverse since the last FSAP in 2017, driven by rapid economic growth. Financial Sector in India has shown recovery from various distress episodes of 2010s and withstood the pandemic well. In terms of evolution of financial sector landscape, Non-Banking Financial Intermediaries (NBFI) sector has become diverse but more interconnected. Banks and Non-Banking Financial Companies (NBFCs) have sufficient aggregate capital to support moderate lending even in severe macrofinancial scenarios.

On regulation and supervision of NBFCs, IMF acknowledged India's systematic approach for prudential requirements of NBFCs with scale based regulatory framework. IMF appreciated India's approach on introduction of bank-like Liquidity Coverage Ratio (LCR) for large NBFCs. For supervision of banks, IMF suggested strengthening credit risk management through IFSR 9 adoption and upgrading supervision over individual loans, collateral valuation, connected borrower groups, large exposure limits, and related-party transactions.

IMF acknowledges that the regulatory framework in securities markets has been enhanced in line with international practice to manage and prevent emerging risks. Notable improvements include establishing the Corporate Debt Market Development Fund (CDMDF), introducing swing pricing and liquidity requirements for bond mutual funds. The regulatory scope has also been expanded over emerging areas such as sustainability and investor protection measures for fast-growing equity derivatives products.

IMF has stated that public digital infrastructures have significantly improved retail financial inclusion and recommended that financially underserved sectors' access to credit can be enhanced by strengthening legal, tax, and informational infrastructures for asset-based and digital lending. The FSSA report acknowledges that India's insurance sector is strong and growing, with a significant presence in both life and general insurance. IMF recommends that financial stability should be the primary objective of the macroprudential authorities.

In terms of emerging risks, cybersecurity, climate change and system-wide contagion need attention. Financial stability risks from climate change appear manageable but warrant careful monitoring. The assessment suggested enhanced data coverage with better granularity for mapping climate-related financial risks, IMF noted.

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