Financial System Stability Assessment (FSSA) Report

The International Monetary Fund (IMF) has released its Financial System Stability Assessment (FSSA) report for India, highlighting several key areas for improvement and noting the progress made since the last assessment in 2017.

Key Recommendations

• Indian banks should strengthen credit risk management by adopting International Financial Reporting Standards (IFRS 9).
• Enhance supervision of individual loans, collateral valuation, and connected borrower groups.
• Strengthen legal, tax, and informational infrastructure for asset-based and digital lending to enhance credit access for financially underserved sectors.

Financial Sector Improvements

• India's financial system has become more resilient and diverse due to rapid economic growth.
• The non-banking financial intermediary sector has evolved, becoming more diverse and interconnected.
• Banks and Non-Banking Financial Companies (NBFCs) have adequate capital to support moderate lending even during severe macro-financial scenarios.

Financial Inclusion

India's public digital infrastructure has significantly improved retail financial inclusion. The Financial Inclusion Index rose to 64.2 in March 2024, up from 60.1 in March 2023 and 43.4 in 2017.

• Under the Pradhan Mantri Jan-Dhan Yojana, over 548.4 million bank accounts have been opened, with a total balance of at least Rs 2.45 trillion.

Insurance Sector

The FSSA recognizes India’s insurance sector as robust and expanding, with a notable presence in both life and general insurance. The sector benefits from better regulations and digital innovations.

• The report advises further steps towards risk-based solvency/supervision frameworks and stronger group supervision to maintain stability.

Emerging Risks

• Attention required for cybersecurity, climate change, and system-wide contagion as emerging risks.
• While climate change financial stability risks are manageable, enhanced data coverage is suggested for mapping these risks.
• Cybersecurity oversight has advanced, but further enhancement in crisis simulations and stress tests across sectors is recommended.

Takeaways from IMF's FSSA Report

• Banks must adopt International Financial Reporting Standards (IFRS).
• The Non-Banking Financial Intermediaries sector is diverse but increasingly interconnected.
• Strengthening infrastructure for asset-based and digital lending can improve access to credit for underserved sectors.
• Banks and NBFCs have sufficient capital for lending even under adverse conditions.