Despite reforms, strong growth in India, non-performing assets are a drag: IMF

The International Monetary Fund (IMF) has cautioned that the high volume of nonperforming assets (NPA) and the slow pace of mending corporate balance sheets are holding back investment and growth in India even though structural reforms have helped the nation record strong growth.

The IMF's Financial System Stability Assessment (FSSA) for India released on Thursday said that overall "India's key banks appear resilient, but the system is subject to considerable vulnerabilities".

"The financial sector is facing considerable challenges, and economic growth has recently slowed down," the report said. "High nonperforming assets and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system, and holding back investment and growth."

"Stress tests show that the while largest banks are sufficiently capitalized and profitable to withstand a deterioration in economic conditions, a group of public sector banks (PSBs) are highly vulnerable to further declines in asset quality and higher provisioning needs," the report said.

"Capital needs range from 0.75 percent of GDP in the baseline to 1.5 percent of GDP in the severe adverse scenario."

Marina Moretti, the IMF Mission Chief for India FSSA, said at the news conference releasing the report in Washington, that one of the recommendations is enhancing the supervisory role of the Reserve Bank of India over financial institutions, especially the public sector banks.

She called the recapitalisation plan for PSBs announced in October "extremely positive" and said the amount of finance for the plan is "adequate".

The report said recapitalisation plan for the PSBs amounts to approximately 1.3 percent of GDP and includes the establishment of a mechanism for consolidation of the banks.

There was a gradual structural shift in the financial sector "with a greater role for non-bank intermediaries and higher recourse to market funding for large corporates," the report noted. "Financial system assets equal about 136 percent of GDP, close to 60 percent of which reflect banks' assets."

The report also expressed concern over "risks from politically exposed persons and the gold sector".

"In the area of crisis management, the planned introduction of a special resolution regime for financial institutions is an important step toward aligning the financial safety net with international standards," the report said.

But, it added, "there is scope to enhance other elements of the safety net, including deposit insurance, emergency liquidity assistance, and crisis preparedness".

On the positive side, the report noted that overall "increased diversification, commercial orientation, and technology-driven inclusion have supported growth in the financial industry, backed by improved legal, regulatory, and supervisory frameworks".

(Arul Louis can be reached at arul.l@ians.in)

--IANS

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