Why in news?
The World Bank recently released its Financial Sector Assessment (FSA) report on India under the joint IMF–World Bank Financial Sector Assessment Programme. The report notes that India’s financial system has become more resilient, diversified and inclusive due to reforms and digital innovation. However, it urges the country to intensify reforms and mobilise private capital to achieve its goal of becoming a USD 30‑trillion economy by 2047.
Background
The Financial Sector Assessment Programme (FSAP) was launched in 1999 by the International Monetary Fund and the World Bank to evaluate the stability, soundness and developmental needs of national financial systems. An FSA is the summary report produced through the FSAP. It assesses the health of banks, non‑bank financial companies, insurance firms, capital markets and payment systems; examines the legal and regulatory framework; and makes recommendations to address systemic risks. India’s latest assessment was conducted in 2023–24.
Highlights of the report
- Improved resilience: The report acknowledges that India’s banking system has strengthened its capital and liquidity buffers. Non‑performing assets have declined, and reforms such as insolvency and bankruptcy codes have improved asset recovery.
- Digital financial inclusion: Programmes like Jan‑Dhan bank accounts, Aadhaar biometric identification and the Unified Payments Interface (UPI) have expanded access to banking and digital payments. The FSA credits these initiatives with deepening inclusion and boosting economic activity.
- Growing capital markets: India’s capital markets have grown from around 144 percent of GDP a decade ago to about 175 percent today. The report notes increased corporate bond issuance and institutional investment but warns that government securities still dominate.
Key recommendations
- Strengthen risk management: Improve governance, risk‑management and supervision of banks and non‑bank financial institutions. Enhance early‑warning systems and stress testing to address credit, market and climate‑related risks.
- Develop the corporate bond market: Deepen secondary market liquidity, diversify the investor base and simplify issuance to reduce reliance on bank loans.
- Encourage private capital: Promote private sector participation by reducing the dominance of state‑owned banks and easing foreign investment norms. Mobilising private capital is seen as essential for funding infrastructure and the energy transition.
- Strengthen resolution frameworks: Create an independent resolution authority for banks and non‑bank financial companies, speed up insolvency proceedings, and expand deposit insurance coverage to bolster confidence.
- Address emerging risks: The report urges India to prepare for cyber‑security threats, climate‑related financial risks and the potential impact of global economic shocks.
Source: Business Standard; RBI Press Release