IMF Executive Board Approves Indias 2017 Financial System Stability Assessment

Stocks and Financial Services Press Releases Friday December 22, 2017 08:48
IMF--22 Dec--International Monetary Fund
On November 17, 2017, the Executive Board of the International Monetary Fund (IMF) discussed the Financial System Stability Assessment (FSSA) of India.[1]

Since the 2011 Financial Sector Assessment Program (FSAP), India has recorded strong growth in both economic activity and financial assets, supported by important structural reforms and terms of trade gains. Increased diversification, commercial orientation, and technology-driven inclusion have supported growth in the financial industry, backed by improved legal, regulatory, and supervisory frameworks. Yet, the financial sector is facing considerable challenges, and economic growth has recently slowed down. High nonperforming assets (NPAs) and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system, and holding back investment and growth.

The Indian financial system is undergoing a gradual structural shift, with a greater role for nonbank intermediaries and higher recourse to market funding for large corporates. Financial system assets equal about 136 percent of GDP, close to 60 percent of which reflect banks' assets. The state retains an important footprint in the system via ownership of large financial institutions, captive government financing, and directed credit to priority sectors.

India's key banks appear resilient, but the system is subject to considerable vulnerabilities. Stress tests show that the while largest banks are sufficiently capitalized and profitable to withstand a deterioration in economic conditions, a group of public sector banks (PSBs) are highly vulnerable to further declines in asset quality and higher provisioning needs. Capital needs range from 0.75 percent of GDP in the baseline to 1.5 percent of GDP in the severe adverse scenario.

The authorities have been pursuing policies to accelerate the process of NPA resolution. The 2016 Insolvency and Bankruptcy Code introduced a modern framework that aims at reorganization and insolvency resolution in a time-bound manner, and the Reserve Bank of India (RBI) was empowered with directing restructuring cases to the insolvency process. This approach shows promise to deliver progress in NPA resolution, particularly if accompanied by sufficient upfront provisioning and capital buffers in the PSBs; broader restructuring of the PSB sector, including improvements in governance; more flexible out-of-court debt restructuring mechanisms; and increased capacity and resources for the insolvency courts. The authorities recently announced a recapitalization plan for the PSBs amounting to approximately 1.3 percent of GDP, as well as the establishment of a mechanism to seek consolidation across these banks.

The FSAP took stock of the considerable progress made in strengthening financial sector oversight, and identified areas where scope for further improvement remains. Notably, these include strengthening the RBI's de jure independence as well as its powers over the PSBs; expanding other financial regulators' resources; introducing a risk-based solvency regime and extending risk-based supervision for insurers; and unifying the oversight of commodities markets. Other gaps include risks from politically exposed persons and the gold sector. In the area of crisis management, the planned introduction of a special resolution regime for financial institutions is an important step toward aligning the financial safety net with international standards, although there is duplication of supervisory responsibility for going-concern institutions between supervisor and resolution authority; also, the proposed new framework does not ensure equal treatment of domestic and foreign liability holders in resolution. There is scope to enhance other elements of the safety net, including deposit insurance, emergency liquidity assistance, and crisis preparedness.

Executive Board Assessment[2]

Executive Directors broadly agreed with the findings and recommendations of the Financial System Stability Assessment (FSSA). They welcomed the important progress made by the authorities in strengthening financial sector oversight, deepening markets, and fostering financial inclusion. Directors commended the authorities for the major reforms undertaken since the 2011 FSAP, notably in introducing Basel III standards and risk?based supervision of banks and securities firms, improving interagency cooperation under the auspices of the Financial Stability and Development Council, and introducing a modern insolvency framework for companies.

Directors encouraged the authorities to implement the recommendations of the FSSA to accelerate the resolution of nonperforming assets and the repair of corporate balance sheets. The recently announced measures to recapitalize the public?sector banks (PSBs), including through government contributions, will foster consolidation in the sector and support effective resolution of nonperforming assets. They encouraged a broad?based restructuring of PSBs, including improvements in governance, to avoid a resurgence of asset quality problems. Going forward, greater participation of the private sector in bank capital, a smaller footprint of the public sector in the financial system, a cautious reduction in statutory liquidity requirements, and assessing the effectiveness of directed lending, would boost the system's capacity to support credit to the economy, while reducing moral hazard and contingent fiscal liabilities.

Directors underscored the importance of adequate resources, de jure independence, and a full set of supervisory powers—including over PSBs—in underpinning the Reserve Bank of India's effective supervision and regulation of financial institutions. There is also a need to introduce risk?based solvency and supervision of insurers, and to continue moving toward a market?based environment for the sector. Unifying the oversight of all commodities markets would promote more efficient market functioning, in line with the authorities' intention to modernize the sector.

Directors welcomed the planned introduction of a special resolution regime for financial institutions, which will improve incentives and reduce the potential risks to public resources that could arise from the failure of financial institutions. They urged the authorities to continue with efforts to further align the proposed resolution framework and other components of the safety net with international standards and best practices.

Directors welcomed the important progress in enhancing the framework for anti-money laundering and combating the financing of terrorism, and called on the authorities to overcome the remaining gaps.
[1] The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth

assessment of a country's financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 29 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA), which is discussed by the IMF Executive Board. In cases where the FSSA is discussed separately from the Article IV consultation, at the conclusion of the discussion, the Chairperson of the Board summarizes the views of Executive Directors and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in a summing up can be found here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm.

[2] At the conclusion of the discussion, the Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.


Latest Press Release

USD120,000 at stake in CIMBs 3D Conquest to unearth ASEANs top #digital talents Competition sets path for nurturing crucial skills in data science, FinTech and coding among tertiary students

CIMB Group Holdings Berhad ("the Group" or "CIMB") has launched the CIMB 3D Conquest, a competition that aims to identify and attract ASEAN's top creative, young digital talent with an agile and entrepreneurial mindset. Open to all tertiary students, the...

Allianz to become Worldwide Olympic Insurance Partner

The International Olympic Committee (IOC) and Allianz today announced that the insurer will join the "Worldwide Olympic Partner" (TOP) Programme in 2021. Through this sponsorship agreement, Allianz will work with the IOC to provide innovative and...

BYFX Global Co., Limited Announces Business Launch

BYFX Global Co., Limited (BYFX Global) today announced the launch of its retail and institutional business -- offering clients around the globe top-tier liquidity and online OTC trading for Spot FX and Spot Bullion[1]. Striving towards financial...

2018 Robot World to Suggest Direction for the Fourth Industrial Revolution

Showcasing the latest robot technologies from around the world, the 2018 Robot World will be held at KINTEX, Korea from October 10-13, 2018. The Robot World (eng.robotworld.or.kr/wp), celebrating its 13th anniversary this year, consists of four main...

ชวนผู้ประกอบการเรียนรู้เส้นทางความสำเร็จของสตาร์ทอัพแอปพลิเคชัน เคลมดิ อังคาร 25 ก.ย. นี้

ตลาดหลักทรัพย์ฯ ขอเชิญผู้ประกอบการ Social Enterprise (SE) SMEs และ Startup ร่วมอบรมครั้งพิเศษในโครงการ SET Social Impact Gym หัวข้อ "Fintech vs Social Startup... Lesson Learned..." พบกับสตาร์ทอัพเจ้าของแอปพลิเคชัน "เคลมดิ" (Claim Di)...

Related Topics