India’s financial system has grown more resilient and diverse

India’s financial system has become more robust and varied, fueled by rapid economic growth and successfully navigating the challenges of the pandemic, according to a recent IMF report. It noted that the system has overcome the distress episodes of the 2010s. with NBFIs and market financing expanding diversity and interconnectedness, while state-owned institutions remain significant.

The International Monetary Fund (IMF) has released the latest India Financial Sector Stability Assessment (FSSA) Report for 2024, highlighting that India’s financial system has become more resilient and diverse, supported by rapid economic growth and the ability to withstand the pandemic’s impact. This assessment is part of the Financial Sector Assessment Program (FSAP), conducted jointly by the IMF and the World Bank (WB). The WB’s Financial Sector Assessment (FSA) Report is yet to be published.

“The system recovered from the distress episodes of the 2010s and withstood the pandemic well. NBFIs and market financing have grown, making the financial system more diverse and interconnected. State-owned financial institutions’ share remains significant,” the report noted.

Since the last FSAP in 2017, the Indian financial sector has strengthened, with stress tests confirming resilience in major lending sectors despite some weaknesses. Banks and NBFCs (Non-Banking Financial Companies) hold sufficient capital to support lending, even under severe macro-financial stress. However, some public sector banks (PSBs) may require additional capital buffers to maintain lending during adverse economic conditions. Certain non-systemic NBFCs and urban cooperative banks (UCBs) show capital shortfalls, but overall short-term liquidity risks remain controlled.

Regarding NBFC regulation, the IMF commended India’s scale-based regulatory framework and the implementation of a bank-like Liquidity Coverage Ratio (LCR) for large NBFCs. Similarly, the securities market regulatory framework has improved in line with global standards, with notable progress such as the Corporate Debt Market Development Fund (CDMDF).

The insurance sector has also grown significantly, with life and general insurance markets remaining stable due to stronger regulations and digital innovations.

On cybersecurity, the IMF acknowledged India’s progress in overseeing risk management in banking, financial market infrastructure (FMI), and securities markets. However, it recommended expanding cybersecurity crisis simulations and stress tests across sectors to enhance market-wide resilience against cyber threats.

The FSAP recommendations focus on further improving the financial system’s structure and efficiency. Many of these suggestions align with India’s regulatory authorities’ developmental goals, reinforcing ongoing financial sector reforms.