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There Is A Case For Stricter Supervision Of India’s Financial Sector, Says IMF

IMF asks India to improve supervision of its financial sector.

Signage is displayed outside the IMF headquarters in Washington, D.C. (Photographer: Alex Wroblewski/Bloomberg)
Signage is displayed outside the IMF headquarters in Washington, D.C. (Photographer: Alex Wroblewski/Bloomberg)

Amid an unfolding crisis in India’s non-banking financial sector and the recent collapse of Punjab & Maharashtra Cooperative Bank, there is a case for higher and stricter supervision in the country, according to the International Monetary Fund.

There is also a need for India to “aggressively privatise public sector banks”, Evan Papageorgiou, deputy division chief at the IMF’s monetary and capital markets department, said while responding to BloombergQuint’s questions in Washington DC after releasing the fund’s Global Financial Stability Report. That could help these banks depend less on government resources for capital, he said, adding that it would lead to better credit appraisal and improve lending capacity.

India’s banking system, especially public sector lenders, have seen a large pile of bad loans bog down balance sheets in the last four years. Provisioning ate into their capital base and led to slower lending. Non-bank lenders have also been facing liquidity constraints following the collapse of Infrastructure Leasing & Financial Services group about a year ago. The stress pushed mortgage lenders Dewan Housing Finance Corporation Ltd. and Reliance Home Finance Ltd. into restructuring, while real estate lender Altico Capital Ltd. is in talks with lenders.

That comes when the nation’s economy grew at its slowest pace in six years in the quarter ended September amid slowing consumption. On Tuesday, IMF’s latest World Economic Outlook cut the nation’s growth estimate by 120 basis points over the April forecast to 6.1 percent for the current financial year. In 2020-21, however, the agency expects it to improve to 7 percent.

“There has been a negative impact on growth that’s come from vulnerabilities in the non-bank financial sector, and the impact that it has had on consumer and small and medium enterprises’ borrowings,” Gita Gopinath, chief economist at IMF, said in response to a question by BloombergQuint on the reasons behind the sharp revision.

“Some measures have been taken, but there's still a lot more that needs to be done including cleaning up of the balance sheets of the regular commercial banks,” said Gopinath, adding that the projections for 2020 are based on the premise that these particular bottlenecks will clear up.

WATCH | Key highlights from the IMF’s Global Financial Stability Report

Global Risk

Yet, stress in the non-banking financial sector is not limited to India. According to the IMF’s assessment in its financial stability report, about 80 percent of the economies where the financial sector is systemically important with respect to the gross domestic product, these stresses are building up fast.

Vulnerabilities building up in the non-banking sector in these economies are now at levels close to where they were during the global financial crisis a decade ago, according to IMF. To improve the situation, it would be pertinent to improve regulation of these entities and ensure better lending practices, it said.

Another area that the agency flagged is the rising vulnerability in corporate debt. With a prolonged period of lower interest rates across major economies, the corporate sector leverage has been rising and vulnerabilities are on the upswing, it said. The IMF estimates that in a credit risk event even half as severe as the global financial crisis, the debt-at-risk position could go up to $19 trillion, which is about 40 percent of all corporate debt in major economies.

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