Context : Key Findings from IMF’s Report (“India Financial System Stability Assessment”)
Relevance : GS 3(Economy )
- NBFC Overexposure to Power & Infrastructure:
- 63% of power sector loans in FY24 came from three large infrastructure financing NBFCs (up from 55% in 2019–20).
- 56% of their lending was financed by market instruments, with increasing reliance on bank borrowings since 2019.
- State-owned NBFCs like IREDA face higher risk.
- Systemic Risk Concerns:
- NBFC stress could spill over into the broader financial system.
- High exposure to infrastructure loans makes them vulnerable to economic shocks.
PSBs’ Vulnerability in a Stagflation Scenario
- IMF stress test results:
- Public Sector Banks (PSBs) may struggle to maintain 9% Capital Adequacy Ratio (CAR) in a recession.
- PSBs should retain earnings instead of paying dividends to strengthen their capital base.
- Geopolitical risks & monetary policy misalignment could trigger higher interest rates, slowing growth.
Policy Recommendations & Outlook
- Strengthening PSBs’ capital reserves to withstand economic downturns.
- Better risk management for NBFCs, especially in the power & infrastructure sectors.
- Need for regulatory oversight to manage interconnections between NBFCs, banks, and financial markets.
Significance
- Highlights systemic financial risks from concentrated lending in critical sectors.
- Calls for prudential regulation to safeguard economic stability.
- Emphasizes the need for capital buffers in case of economic shocks.
