IMF-World Bank report gave a thumbs-up to the government’s moves to clean up the banking sector and address bad loans, and said more steps were needed to be taken, including further strengthening the Reserve Bank of India’s independence and its powers over PSU Banks.
It also supported the Financial Resolution and Deposit Insurance Bill, 2017, but recommended further strengthening of the deposit insurance scheme.
“India’s key banks appear resilient, but the system is subject to considerable vulnerabilities,” said the IMF in its Financial System Stability Assessment (FSSA) report on India. The report is based on the work of the Financial Sector Assessment Program (FSAP) mission of the IMF and World Bank, which visited India in March 2017 and June-July 2017 and met with senior officials in the Finance Ministry, RBI and SEBI.
“The recapitalisation plan is extremely positive and will ensure that banks have adequate capital to address their non-performing assets,” Marina Moretti, Assistant Director and IMF Mission Chief for India FSSA, Monetary and Capital Markets Department told.
The report also noted that stress tests show that though the largest banks are sufficiently capitalised and profitable to withstand deterioration in economic conditions, a group of lenders is highly vulnerable to further declines in asset quality and higher provisioning needs.
“Capital needs range from 0.75 per cent of GDP in the baseline to 1.5 per cent of GDP in the severe adverse scenario,” said the report, while supporting the new recapitalisation plan for PSBs and the Insolvency and Bankruptcy Code.
It has also called for a clear plan to be developed to deal with PSBs that will not be able to attract private capital. Additionally, the provision of public capital should be complemented with improved governance and meaningful restructuring of PSBs as well as exit of weak banks.