India needs greater financial supervision, liberalisation: IMF

WASHINGTON Wed Jan 16, 2013 3:17pm IST

A cashier (L) counts currency notes as customers wait inside a bank in Hyderabad March 22, 2010. REUTERS/Krishnendu Halder/Files

A cashier (L) counts currency notes as customers wait inside a bank in Hyderabad March 22, 2010.

Credit: Reuters/Krishnendu Halder/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:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared
People walk in the Wipro campus in Bangalore June 23, 2009. REUTERS/Punit Paranjpe/Files

Wipro Q4 net profit beats estimates, rises 29 percent

Wipro posted a 29 percent rise in its fourth-quarter net profit, beating expectations, helped by increased IT spending by its customers. For the quarter ended March 31, the company said it earned 22.27 billion rupees compared with 17.29 billion rupees a year earlier.  Full Article | Full Coverage 

REUTERS SHOWCASE

Election 2014

Election 2014

India holds biggest day of voting with BJP gaining strength  Read | Full Coverage 

Market Eye

Market Eye

Sensex jumps 351 points, snaps 3-day losing streak  Full Article 

Insider Trading Case

Insider Trading Case

Ex-Goldman director Rajat Gupta to surrender June 17 in insider case.  Full Article 

Expansion Plans

Expansion Plans

Reliance Industries, HPCL Mittal plan refinery expansions.  Full Article 

S&P on India

S&P on India

S&P: India's ratings to depend on next govt econ, fiscal policies.  Full Article 

Ambitious Aim

Ambitious Aim

In green car race, Toyota adds muscle with fuel-cell launch.  Full Article 

Deal Talk

Deal Talk

Piramal to buy 20 percent stake in Shriram Capital for $334 million.  Full Article 

Bond Market

Bond Market

A star abroad, RBI boss riles bond traders at home  Full Article 

Reuters India Mobile

Reuters India Mobile

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