India needs greater financial supervision, liberalization - IMF

WASHINGTON Wed Jan 16, 2013 3:47am IST

The IMF nameplate is displayed on a wall at the headquarters in Washington April 11, 2008. REUTERS/Jonathan Ernst/Files

The IMF nameplate is displayed on a wall at the headquarters in Washington April 11, 2008.

Credit: Reuters/Jonathan Ernst/Files

Related Topics

WASHINGTON (Reuters) - India needs to improve its financial system supervision and crisis preparedness while at the same time liberalising some sectors to reduce distortions and risks created by heavy state involvement in banking, the International Monetary Fund said on Tuesday.

The IMF's Financial System Stability Assessment Update said India had improved its supervision and regulations in the 20 years since it started liberalising its economy and that its financial system fared well in the global financial crisis.

"Despite these recent successes, India's financial sector still confronts longstanding impediments to its ability to support growth as well as new challenges to stability," said the 116-page study.

These challenges were mostly medium- to longer-term, while stress tests of banks and other indicators showed that the financial system vulnerabilities were manageable in the near term, it said.

But the large role of the state - which owns big financial institutions, directs credit to priority sectors, and controls the range of permitted activities and the availability of foreign capital - "contributes to a build-up of fiscal contingent liabilities and creates a risk of capital misallocation that may constrain economic growth," it said.

The financial sector's capacity to support sustainable economic growth would be boosted by "gradually reducing mandatory holdings of government securities by financial institutions, and allowing greater access to private - domestic and foreign - sources of capital," the Fund suggested.

India should also allow "more room for private initiative and competition" in micro finance and other efforts to reach poor borrowers who are under served by existing financial institutions, the study said.

One problem the study noted in particular was an inherent risk of the Reserve Bank of India facing "conflicting goals," because some RBI officers are directors on the boards of public banks that are also supervised by the RBI.

"Using the banking system rather than government programs in meeting the needs of priority sectors - agriculture, small and micro credit, education, health - and underserved areas may conflict with RBI's supervisory role," the Fund said.

RBI, in its supervisory role, would benefit from more attention to crisis preparedness, and stronger resolution powers and contingency planning for the insurance sector and the payment system, it said.

Despite an oversight regime that largely met international standards, "a common issue across the sectors is the lack of de jure independence, which can be rendered more challenging by the intricate relationship with state-owned supervised entities and their business decisions," the IMF noted.

The study is based on data and conditions as of February 2012, the Fund said. Such periodic studies are mandatory assessments of countries' financial systems to ensure they're in compliance with international standards.

(Reporting by Paul Eckert; Editing by Nick Zieminski)

FILED UNDER:

REUTERS EXCLUSIVE

Reuters Showcase

Documents' Leak

Documents' Leak

India widens oil leaks probe to defence ministry  Full Article 

Jim O’Neill Interview

Jim O’Neill Interview

'India can become world’s fifth-largest economy by decade’s end'  Full Article 

Food Security

Food Security

India will not cut multi-billion dollar food handout programme - PM  Full Article 

Ola's Expansion Drive

Ola's Expansion Drive

Taxi group Ola steps up expansion drive  Full Article 

Sahara Saga

Sahara Saga

Sahara's Grosvenor House hotel in London put up for sale   Full Article 

Suzlon Energy

Suzlon Energy

Suzlon expects to turn profitable in fiscal 2016: chairman   Full Article 

Eicher Motors Stake

Eicher Motors Stake

Volvo selling up to $300 mln worth of Eicher shares  Full Article 

Beef Trade

Beef Trade

Maharashtra clamps down on beef trade through new act  Full Article 

Budget 2015

Budget 2015

Budget announcements and reactions from the industry  Full Coverage 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage