The latest International Monetary Fund (IMF) report reveals that India’s financial system has evolved into a more resilient and diversified framework, driven by robust economic growth and a commendable response to recent global challenges.
The report, prepared under the Financial Sector Assessment Program (FSAP) – a collaborative initiative between the IMF and the World Bank – highlights substantial progress since the previous review in 2017. It underscores that the recovery from the distress episodes experienced during the 2010s and the effective handling of the pandemic have positioned India’s financial institutions on a firmer footing.
A notable transformation has been the increased diversity in financial services. Non-bank financial institutions (NBFCs) and market financing have expanded their footprint, making the financial ecosystem more interconnected. Although state-owned banks continue to play a significant role, the overall mix has diversified, offering a more balanced financial landscape. Stress tests conducted as part of the assessment indicate that major lending sectors have maintained robust resilience against macro-financial shocks, even under severe economic scenarios.
Despite the encouraging findings, the report flags some areas for improvement. Several public sector banks (PSBs) are advised to bolster their capital bases to support sustained lending, especially during challenging periods. Additionally, a few non-systemic NBFCs and urban cooperative banks have been found to operate with capital levels below the minimum requirement, highlighting pockets of vulnerability within the broader system.
The IMF also praised India’s regulatory advancements. It commended the nation’s systematic approach to the prudential regulation of NBFCs, including the introduction of a bank-like Liquidity Coverage Ratio (LCR) for larger players. Improvements in securities market regulations, such as the creation of the Corporate Debt Market Development Fund (CDMDF), have further aligned India with international best practices.
Furthermore, the insurance sector has shown impressive strength and steady growth. With a balanced presence in both life and general insurance, the sector remains buoyed by stronger regulatory oversight and rapid digital innovations.
Cybersecurity frameworks within the banking and financial market infrastructure were also a focal point of the analysis. While Indian authorities have made significant strides in overseeing cyber risks, especially within banks, the IMF recommends expanding comprehensive crisis simulations and stress tests. Such measures would prepare the system better for cross-sectoral and market-wide cyber events, reinforcing overall resilience.
The Reserve Bank of India welcomed the joint assessment, affirming its commitment to meeting the highest international standards in financial oversight. The detailed recommendations provided in the report align closely with the nation’s developmental plans, signaling continued efforts to refine the structure and performance of India’s financial system as it navigates an increasingly complex global landscape.
