India needs greater financial supervision, liberalization: IMF

WASHINGTON Wed Jan 16, 2013 3:39am IST

Related Topics

WASHINGTON (Reuters) - India needs to improve its financial system supervision and crisis preparedness while at the same time liberalizing 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 liberalizing 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, India's central bank, 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:

Religion and Politics

REUTERS SHOWCASE

Fund Raising

Fund Raising

Flipkart raises $700 million in fresh funding.   Full Article 

Reforms Push

Reforms Push

Modi may order insurance, coal reforms if vote delayed - officials.  Full Article 

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

Hacking Attack

Hacking Attack

N.Korea says did not hack Sony, wants joint probe with U.S.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

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