India Financial System Stability Assessment

The IMF report titled “India Financial System Stability Assessment” highlighted stress in the NBFC sector due to overexposure to power and infrastructure loans and interconnectedness with other markets.

• About India Financial System Stability Assessment: It is an evaluation of India's financial system that assesses its stability and vulnerabilities. 

o 63% of power sector loans were from the three largest Infrastructure Financing Companies (NBFCs) in fiscal 2024, up from 55% in 2019-20.

o State-owned NBFCs like IREDA face higher risks.

o In case of stagflation, Public Sector Banks (PSBs) may struggle to maintain a Capital Adequacy Ratio (CAR) of 9%, the minimum required by RBI for Scheduled Commercial Banks.

o The IMF recommends that PSBs should strengthen their capital base by retaining earnings instead of paying dividends to the government.

• About IMF: Established in 1944, headquartered in Washington D.C.

o Publishes reports like World Economic Outlook, Global Financial Stability Report, and Financial System Stability Assessment.

o Functions: Provides financial assistance, policy advice, and economic surveillance to member countries.