IMF’s Latest Report Says India’s Financial System Has Become Stronger [PDF]

The International Monetary Fund (IMF) has published a report evaluating India’s financial system, stating that it has become more resilient and diverse over the years. The report, known as the Financial System Stability Assessment (FSSA), was released on February 28, 2025, based on an in-depth study conducted in 2024.

This assessment is part of the Financial Sector Assessment Program (FSAP), which the IMF and World Bank jointly run to analyze the financial health of different countries. The FSAP is mandatory for 32 major economies, including India, every five years. The last assessment for India was done in 2017.

The World Bank’s own Financial Sector Assessment (FSA) report is yet to be published.

Key Highlights from the IMF Report

1. India’s Financial System is Stronger Than Before

The IMF found that India’s financial system has recovered well from past economic difficulties and the impact of the COVID-19 pandemic. The country’s banks and non-banking financial institutions (NBFCs) now have enough capital to support economic growth, even in tough situations.

The report also noted that Non-Banking Financial Intermediaries (NBFIs), such as investment firms and lending institutions, have become more interconnected within the financial system.

2. NBFCs and Banks: Stronger Regulations in Place

The IMF praised India’s regulatory approach for non-banking financial companies (NBFCs). It highlighted:

• The scale-based regulatory framework, which ensures stronger rules for larger NBFCs.
• The introduction of Liquidity Coverage Ratio (LCR) rules for large NBFCs, similar to those for banks.

For banks, the IMF suggested further strengthening risk management, particularly in:

• Loan supervision (ensuring proper valuation of assets and collateral).
• Tracking related-party transactions and exposure limits.
• Adopting IFRS 9 (a global accounting standard for financial reporting).

3. Stock Market & Investor Protection Measures Improved

The IMF acknowledged India’s progress in strengthening stock market regulations to prevent financial risks. Some key reforms include:

• The creation of the Corporate Debt Market Development Fund (CDMDF) to support the bond market.
• New liquidity and pricing rules for bond mutual funds.
• Enhanced investor protection measures, especially in the growing equity derivatives market.

4. Public Digital Infrastructure Boosted Financial Inclusion

The report praised India’s digital financial infrastructure, which has helped bring more people into the formal banking system. However, it suggested that India can further improve access to credit for small businesses and underserved sectors by strengthening:

• Legal and tax frameworks for digital lending.
• Information systems for asset-based lending.

5. Insurance Sector is Strong & Well-Regulated

The IMF highlighted that India’s insurance sector is stable and growing, both in life and general insurance.

It recommended that India:

• Strengthen risk-based solvency and supervision frameworks for insurance firms.
• Improve group supervision (monitoring risks across entire business groups).
• Continue transitioning to a risk-based regulatory approach for better stability.

6. Cybersecurity & Climate Change: Areas to Watch

The IMF pointed out that cybersecurity, climate change, and financial contagion (risks spreading across the financial system) are emerging challenges that India needs to monitor closely.

While India has strong cybersecurity systems for banks, the IMF recommended:

• More frequent cybersecurity crisis simulations.
• Expanding stress tests to prepare for large-scale cyber threats affecting the entire financial sector.

On climate change, the IMF noted that financial risks are manageable for now but advised India to:

• Improve data collection and analysis for climate-related financial risks.
• Monitor long-term economic effects of climate change on financial stability.

7. India’s Commitment to Global Financial Standards

The IMF recognized that India is already working on many of the recommendations made in the report. The country is gradually adopting global financial standards, while also ensuring they fit India’s unique economic conditions.

Download the Full IMF Report PDF Here:

🔗 India Financial Sector Assessment Program (FSSA) – IMF