## 1indea2025002-print-pdf ## Source details **Canonical URL:** [1indea2025002-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025002-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1indea2025002-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1indea2025002-print-pdf.pdf.json) --- ### System resilience and structure - Total financial system assets: nearly 190 percent of GDP. - Banking sector share: about 60 percent of the system’s assets. - Capital markets composition (in percent of GDP): equity market around 130 percent of GDP; government securities (G-SECs) around 60 percent of GDP; corporate bond market around 16 percent of GDP. - State-owned financial institutions held about 55 percent of total financial sector assets in 2023 (down from 63 percent in 2017). - Statutory liquidity ratio (SLR): banks required to invest roughly 18 percent of liabilities in G-SECs (reduced from 20 percent in 2020). - Nearly half of private sector credit now comes from nonbanks; banks, NBFCs, NFCs, and households are comparable in size and highly interlinked. - Top three NBFCs are state-owned infrastructure financing companies (IFCs) and hold one-third of the sector’s assets. - Mutual fund AUM: grew from about 6 to 16 percent of GDP over the past decade. - Financial inclusion and digital infrastructure: nearly 80 percent of adults have financial accounts; UPI accounts for nearly 70 percent of all payments by number of transactions. ### Stress tests and sectoral resilience - Scope: solvency and liquidity stress tests for SCBs and UCBs; solvency and liquidity tests for NBFCs; liquidity stress tests for open-end bond mutual funds; systemwide liquidity analysis on bank-NBFC-mutual fund linkages; climate change impacts on SCBs. - Scenarios: - Baseline: Spring 2024 WEO forecast. - Two adverse scenarios: stagflation adverse scenario and a standard recession scenario; both reflect extreme tail events (less than 1 percent likelihood shocks to GDP). - Banks — solvency: - Aggregate CAR for banking system increased nearly 300 bps from FY18/19 to reach over 17 percent by FY23/24. - Regulatory thresholds cited: 9 percent minimum CAR; 11.5 percent minimum + capital conservation buffer (CCB) referenced. - Under adverse scenarios: - Private and foreign banks maintain CARs well above the 9 percent minimum and the CCB (assuming credit growth at the same rate as nominal GDP). - PSBs need to dip into CCBs in the stagflation scenario and their CAR falls below 9 percent in the recession scenario. - Estimated additional capital needs for affected banks: about 0.2 percent of GDP. - About 10 PSBs and PVBs (market share of 24-36 percent of SCBs total assets) would have CAR below 9 percent or CET1 ratio below 5.5 percent in adverse scenarios. - Banks — liquidity: - Aggregate LCR: 131 percent; NSFR: 125 percent (2024). - Scenario LCR outcomes: LCR declines to 111 and 99 percent in mild and adverse scenarios, respectively. - Severe adverse scenarios: LCRs of a few large PSBs and PVBs (70 percent of the system) fall below 100 percent, but all maintain 80 percent or more LCRs. - Cash-flow stress: all SCBs can withstand cash outflows for up to two months when using all HQLAs. - Urban Cooperative Banks (UCBs): - Aggregate CAR: 31 percent. - Vulnerabilities: some UCBs undercapitalized as of June 2024; in adverse scenarios about 20–22 UCBs (about 10 percent of the UCB sector’s assets) would have CARs below minimum requirements. - NBFCs — solvency and liquidity: - NBFC CAR rose from 23⅓ percent in FY19/20 to nearly 26½ percent in FY23/24 (minimum requirement 15 percent). - Up to 27 NBFCs need additional capital in adverse scenarios; estimated additional capital about 0.4 percent of GDP. - NBFC liquid assets are only 5⅓ percent of total assets. - NBFCs appear resilient to short-lived liquidity strains, but loan defaults could trigger liquidity shortages after three months. - Concentration risk: IFCs’ largest credit exposures can account for up to 60 percent of IFCs’ Tier 1 capital and 65 percent for government-owned NBFCs’ Tier 1 capital. - Mutual funds and systemwide liquidity: - Mutual fund fire sales of NBFI bonds in stress estimated at INR70-260 billion. - CDMDF capacity: net assets of INR38 billion and a government backstop of up to INR300 billion (as of September 2024); can offset mutual funds’ fire sales pressures if stress is limited to NBFC bonds but insufficient if dislocation spreads to broader corporate bond markets. - Most likely triggering scenario: significant rise in NBFC NPLs reducing cash inflows for a few months, causing inability to repay maturing CPs and prompting bond mutual fund runs and market dislocation. - Overall: systemwide liquidity stress would likely emerge in specific pockets rather than system-wide loss of liquidity; banks overall maintain ample liquid assets and can help bridge gaps, subject to collateral eligibility constraints. ### Concentrated exposures and contagion channels - Concentrated exposures to the power sector remain a key vulnerability: - Power sector structural issues: power purchase agreements, tariff disputes, coal price and availability, project delays, cost overruns. - Banks lend 30–35 percent of loans directly to carbon-intensive sectors (staff estimate based on MoEFCC and RBI data). - NBFCs—particularly large state-owned IFCs—have significantly increased exposures to the power sector and now rely more on bank borrowings, increasing SCB indirect exposures to the power sector. - Historical precedent: 2016 banking sector distress triggered by loan defaults of large power and infrastructure companies unrelated to macrofinancial conditions. - If major NBFCs become distressed, shocks could spill over to banks, corporate bond markets, and mutual funds and be amplified. ### Climate change risks - Physical risk: - India ranks fifth of 188 countries on climate-driven hazard and exposure (INFORM Risk Index). - Agriculture: 13 percent of SCB loans and about 66 percent of RRB loans go to agriculture; agricultural sector share in GDP slightly below 20 percent; employs over half the workforce. - Extreme cyclone one-in-500-year scenario may notably reduce bank capital ratios (aggregate CARs remain above hurdle rates), but localized impacts could be severe for smaller institutions. - Agricultural compound shocks (three consecutive years): agricultural loan default probability could increase by over 30 percentage points; expected losses could surpass 25 percent of total SCB agricultural loans. - Transition risk: - India was the world’s third-largest GHG emitter in 2022; coal-dependent power sector contributes to half of India’s total CO2 and nearly 40 percent of total GHG emissions. - Five transition scenarios up to 2040 considered: Current Policies, NDC, Below 2°C, Delayed Transition, Net-Zero 2070. - Aggregate growth impact: India can maintain high GDP growth under all scenarios; Net-Zero 2070 may lead to a 5 percent loss in GDP by 2040 compared to Current Policies. - Including indirect exposures through NBFCs could increase annual expected losses relative to Current Policies by approximately 50 percent by 2040 under Net-Zero 2070; five banks could account for 60 percent of additional expected losses in 2040. - Overall assessment: financial stability risks from climate change appear manageable up to the 2040s but rise significantly towards the end of the century and warrant careful monitoring, especially for agriculture and power sectors. ### Supervision, regulatory framework, and governance - Banks: - RBI strengthened supervision: expanded regulatory perimeter to include cooperative banks, tightened key prudential rules, reorganized regulatory and supervisory departments, established enforcement department. - Gaps: supervisory agencies lack sufficient independence compared to international best practices; powers over corporate governance in state-owned financial institutions constrained. - Immediate priorities: strengthen credit risk management by adopting IFRS 9 with prudential backstops and enforce Pillar 2 capital add-ons (currently set to zero for all banks). - Need for consolidated/group supervision: SPARC performed on solo basis; PCA framework lacks clear solo versus consolidated triggers. - NBFCs: - Scale-based regulation introduced in 2021 across four layers for about 9,500 entities. - Recommendation: eliminate exemptions for state-owned NBFCs from prudential standards and apply ownership-neutral oversight; ensure compliance with liquidity rules and consider additional liquidity requirements tailored to business models. - RBI should collect LCR returns for NBFCs and recalibrate behavioral parameters. - Insurance: - ICP assessment found overall sound observance with important gaps. - IRDAI should complete transition to a risk-based solvency regime and supervisory approach (targeted implementation by end 2025); move to economic valuation of assets and liabilities has progressed slowly. - IRDAI should be given legal powers for starting group supervision and for resolving insurers with business sustainability challenges to allow orderly voluntary exit. - Securities and mutual funds: - SEBI introduced CDMDF, swing pricing, and liquidity requirements for bond funds after 2018–19 disturbances. - Recommendation: SEBI to develop risk-based supervision, systemwide mutual fund stress test capacity, and integrate conduct risk monitoring. - Cybersecurity: - Authorities have advanced mapping and oversight for banks; recommend extending framework to systemically important NBFIs and FMIs, expanding crisis simulations, and benchmarking recovery time objectives. ### Crisis management, resolution, and liquidity support - Resolution: - Finalizing and enacting resolution legislation aligned with international Key Attributes (KAs) is essential; current powers limited to compulsory mergers or liquidation and entail higher contingent fiscal costs. - Draft Financial Sector Development and Regulation (Resolution) Bill (FSDR) under discussion; staff did not examine latest draft. - Recommendation: include explicit resolution triggers, streamline PCA to avoid forbearance, broaden membership of resolution coordination mechanisms (including DICGC), and develop insurer recovery and resolution planning. - Deposit insurance: - DICGC can borrow up to INR 50 million from the RBI; payout process should be streamlined and shortened; credible and sufficient backup government funding needed. - When using deposit insurance funds to support mergers, limit DICGC's power to delay repayment deadlines from the acquiring bank. - Systemic liquidity and ELA: - Continue reducing SLR to reduce fiscal-financing role and improve market liquidity. - Set ex-ante guidance to broaden policy options for systemic liquidity support and ELA, including being operationally ready to expand eligible collateral (with adequate risk controls) beyond G-SECs in crisis times. - RBI Act should be modified to address ambiguity and strengthen legal basis for ELA; develop internal policy separating monetary operations from ELA and consider publicly communicating a high-level summary of the ELA framework. ### Financial system development and market infrastructure - Priorities to enhance access to credit: - Strengthen legal, tax, and informational infrastructures for asset-based and digital lending, state-of-the-art credit enhancement tools, and securitization—especially covered bonds. - Introduce covered bond law and create securitization platforms with standardized features. - Improve insolvency and bankruptcy processes to reduce time for recovery; strengthen National Company Law Tribunals with specialized benches and expedited procedures; promote out-of-court enforcement and personal bankruptcy options for small businesses and individuals. - MSME financing: - Only 11 percent of small businesses have bank loans; collateralization requirements average 185 percent of loan amounts. - Encourage asset- and cashflow-based digital lending, equalize tax treatment between leasing and debt, and incentivize use of platforms like TReDS. - Market functioning: - Securitization market less than one percent of GDP; covered bonds and securitized products could deepen corporate bond markets and serve as eligible collateral for RBI repo facilities with less credit risk. ### Key quantitative findings and selected statistics - Financial system assets: nearly 190 percent of GDP. - Total assets (Mar-24): INR 553,571 billion; Percent of GDP 187. - Banks (Mar-24): No. of institutions 1,996; Assets INR 308,839 billion; Percent of total assets 56; Percent of GDP 105. - Scheduled Commercial Banks (incl. RRBs) (Mar-24): No. of institutions 137; Assets INR 289,207 billion; Percent of total assets 52; Percent of GDP 98. - Public Sector Banks (Mar-24): No. of institutions 12; Assets INR 154,932 billion; Percent of total assets 28; Percent of GDP 52. - Non-bank Financial Institutions (Mar-24): No. of institutions 595; Assets INR 240,036 billion; Percent of total assets 43; Percent of GDP 81. - Mutual Funds (Mar-24): No. of institutions 45; Assets INR 53,402 billion; Percent of total assets 10; Percent of GDP 18. - Real GDP growth (Fiscal years): 2023/24 Est. 8.2 percent; 2024/25 6.5 percent; 2025/26 6.5 percent. - Inflation, CPI-Combined: 2023/24 5.4 percent; 2024/25 4.8 percent; 2025/26 4.3 percent. - Public debt (% of GDP): 2023/24 82.7; 2024/25 83.0; 2025/26 82.4. - Credit to the private sector (% change): 2023/24 15.5; 2024/25 11.9; 2025/26 12.7. - Population (2023/24): 1.42 billion; Per capita GDP (2023/24 estimate): 2,534 USD. - Scheduled commercial banks CAR (selected): 2019/20 14.8; 2020/21 16.3; 2021/22 16.8; 2022/23 17.2; 2023/24 16.8. - Gross NPLs (SCBs): 2019/20 8.2 percent; 2020/21 7.3; 2021/22 5.8; 2022/23 3.9; 2023/24 2.8. - NBFC indicators (as of July 31, 2022): Risk-weighted CAR 23.7; 25.0; 26.8; 27.5; 26.6 (series); Gross NPLs 6.8; 6.4; 6.3; 4.3; 4.0 (series). - Insurance sector: insurance penetration 4 percent of GDP in premiums; life insurers account for three-quarters of premiums; around 60 percent of premiums go to the largest state-owned life insurer. - Insurance solvency (2023 averages): over 200 percent for life insurers and private general insurers; 32 percent for the four public general insurers (three of which had negative solvency ratios despite government capital injection). ### Selected FSAP key recommendations (high-level highlights) - Systemic risk monitoring and data: - Ease data sharing and collect more granular data of households, sectoral financial accounts, liquidity indicators of NBFCs, and exposures to climate change risks. — Agencies: RBI, SEBI, MoF — Timing: MT. - Improve/establish stress test tools for banks and NBFCs and sectoral and systemwide liquidity stress tests for banks, NBFCs, and mutual funds. — Agencies: RBI, SEBI — Timing: ST. - Macroprudential policy and governance: - Designate financial stability as the primary mandate of the FSDC and/or the FSDC-Subcommittee. — Agency: FSDC — Timing: ST. - Develop a centralized risk dashboard and assess systemwide risks periodically through FSDC. — Agencies: RBI, SEBI, MoF, IRDAI — Timing: MT. - Expand use of borrower-based measures to all lenders and all household loans; expand existing DSTI limit for microfinance loans to all loans. — Agency: RBI — Timing: ST. - Start building the (positive neutral) CCyBs. — Agency: RBI — Timing: ST. - Regulation and supervision: - Amend legislation to clearly prioritize financial stability and investor protection over developmental objectives. — Agencies: RBI, IRDAI, SEBI, MoF — Timing: MT. - Enforce bank-specific Pillar-2 capital add-ons (currently zero). — Agency: RBI — Timing: ST. - Adopt IFRS 9 with prudential backstops to enhance credit risk management. — Agency: RBI — Timing: ST. - Complete transition to a risk-based solvency regime for insurers and strengthen group supervision powers. — Agency: IRDAI — Timing: ST/MT. - Align regulations for state-owned and private-sector-owned NBFCs and enhance liquidity regulations for NBFCs. — Agency: RBI — Timing: ST/MT. - Crisis management and resolution: - Finalize the FSDR (resolution) bill in line with the Key Attributes and implement it. — Agencies: MoF, regulators — Timing: MT. - Reform insurance resolution to include orderly voluntary exit. — Agency: IRDAI — Timing: ST. - Broaden policy options for systemic liquidity support and ELA; operational readiness to expand eligible collateral beyond government securities in crisis times. — Agency: RBI — Timing: MT. - Financial system development: - Continue enhancing PSL flexibility; improve distressed credit restructuring; introduce covered bond law and create securitization platforms. — Agencies: MoF, RBI — Timing: ST/MT. *Source: EXECUTIVE SUMMARY and selected chapters, 1indea2025002-print-pdf* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### System resilience and structure - Since the last FSAP, India’s financial system has become more resilient and diverse, driven by rapid economic growth. - The system recovered from the distress episodes of the 2010s and withstood the pandemic well. - NBFIs and market financing have grown, making the financial system more diverse and interconnected. - State-owned financial institutions’ share remains significant. ### Stress tests and sectoral resilience - Stress tests show that the main lending sectors are broadly resilient to macrofinancial shocks, despite some weak tails. - Banks and NBFCs have sufficient aggregate capital to support moderate lending even in severe macrofinancial scenarios. - Several banks, particularly PSBs, may need to strengthen their capital base to support lending in such situations. - Weak tails include a few non-systemic NBFCs and urban cooperative banks (UCBs) that report below minimum or negative capital even in the baseline. - Vulnerability to short-term liquidity stress is generally contained. ### Concentrated exposures and contagion channels - Concentrated exposures, especially to the power sector with structural challenges, could lead to potential systemic stress. - The 2016 banking sector distress was triggered by loan defaults of large power and infrastructure companies that were unrelated to macrofinancial conditions. - Despite reforms, the power sector continues to show structural vulnerabilities, compounded by transition risks from climate change. - While banks reduced direct exposures to the power sector, NBFCs—particularly large state-owned infrastructure financing companies—have significantly increased theirs. - If major NBFCs were to become distressed, shocks could spill over to banks, corporate bond markets, and mutual funds that finance NBFCs, and be amplified in the process. ### Climate change risks - Financial stability risks from climate change appear manageable but warrant careful monitoring, especially in relation to the agriculture and power sectors. - Bank exposures to physical and transition risks are moderate, except for those to the monsoon-dependent agricultural sector and carbon-intensive industries including the power sector. - Physical and transition risks are projected to have only a moderate impact on India’s economic growth and financial stability up to the 2040s, though the impact rises significantly towards the end of the century. ### Systemwide analysis and macroprudential policy - The evolving systemic risks make systemwide risk analysis and the use of broader macroprudential tools essential. - Authorities should collect more granular data and improve their sharing among themselves to sharpen analysis of systemwide interconnectedness, household credit risks, and climate-related financial risks. - Financial stability should be the primary objective of the macroprudential authorities to ensure a willingness to act. - Relying on targeted borrower-based measures would enhance policy effectiveness. - Starting to build releasable countercyclical capital buffers before the next downturn would support faster recovery at a relatively low cost. ### Supervision and regulatory framework - The oversight framework for banks and insurers is generally robust, but faces longstanding and emerging challenges. - Compared to international best practices, supervisory agencies lack sufficient independence, and their powers over corporate governance in state-owned financial institutions remain constrained. - Establishing the primacy of the supervisor’s safety and soundness mandate in key legislation would help mitigate potential conflicts with developmental mandates. - The RBI has strengthened banking supervision: expanded regulatory perimeter to include cooperative banks, tightened key prudential rules, and reorganized regulatory and supervisory departments. - Immediate priorities for the RBI include strengthening the credit risk management framework by adopting IFRS 9 and enforcing Pillar 2 capital add-ons. ### Nonbank Financial Companies (NBFCs) - Regulation and supervision of NBFCs have improved significantly, with a new scale-based regulation across four regulatory “layers” for about 9,500 entities. - Exemptions for state-owned NBFCs from prudential standards should be eliminated to level the playing field and safeguard financial stability, particularly as some of the largest NBFCs are state owned and heavily exposed to the vulnerable power sector. - The RBI should ensure compliance with liquidity rules and consider additional liquidity requirements tailored to business models. ### Insurance sector - The Insurance Core Principles (ICP) assessment found a sound level of observance, with a few important remaining gaps. - Ensuring sector soundness requires shifting to a risk-based supervisory approach, especially regarding solvency-related requirements with economic valuation of assets and liabilities—an area where progress has been notably slow. - The IRDAI should be given legal powers for starting group supervision. ### Resolution, deposit insurance, and liquidity support - Finalizing and enacting resolution legislation aligned with international standards is essential to establish a comprehensive resolution regime. - Current resolution powers and tools are limited mostly to compulsory mergers or liquidation and entail higher contingent fiscal costs. - The deposit insurance framework should be strengthened by streamlining and shortening the payout process, and by ensuring credible and sufficient backup government funding. - Insurers with business sustainability challenges should be allowed to exit voluntarily in an orderly manner. - Authorities should broaden policy options regarding systemic and emergency liquidity support, given the growth of NBFIs and market financing and the potential for crises to arise from unexpected market segments. - Being operationally ready to expand eligible collateral, with adequate risk controls, beyond government securities for crisis-time RBI facilities is essential. ### Financial system development and infrastructures - Authorities should focus on developing infrastructures to adopt financial innovations and solicit more private-sector finance to improve access to credit. - Public digital infrastructures have significantly improved retail financial inclusion. - To enhance access to credit for financially underserved sectors, authorities should strengthen legal, tax, and informational infrastructures for asset-based and digital lending with state-of-the-art credit enhancement tools and for securitization, especially covered bonds. - Further enhancing insolvency and bankruptcy processes to reduce time for recovery is critical for managing credit risks better. ### FSAP Key Recommendations (select highlights from Table 1) - Systemic Risk Monitoring, Analysis, and Coordination, including Climate: - Ease data sharing and collect more granular data of households, sectoral financial accounts, liquidity indicators of NBFC, and exposures to climate change risks. ¶28 ¶32 ¶35-36 ¶41 — Agencies: RBI, SEBI, MoF — Timing: MT - Improve/establish stress test tools for banks and NBFCs and sectoral and systemwide liquidity stress tests for banks, NBFCs, and mutual funds. ¶27 ¶33 ¶41 — Agencies: RBI, SEBI — Timing: ST - System-wide oversight and macroprudential policy: - Designate financial stability as the primary mandate of the FSDC and/or the FSDC-Subcommittee. ¶42 — Agency: FSDC — Timing: ST - Develop a centralized risk dashboard and assess systemwide risks periodically through FSDC. ¶40 — Agencies: RBI, SEBI, MoF, IRDAI — Timing: MT - Expand use of borrower-based measures to all lenders and all household loans; expand existing DSTI limit for microfinance loans to all loans. ¶43 — Agency: RBI — Timing: ST - Start building the (positive neutral) CCyBs. ¶44 — Agency: RBI — Timing: ST - Common themes for regulation and supervision: - Amend legislation to clearly prioritize financial stability and investor protection over developmental objectives. ¶45 — Agencies: RBI, IRDAI, SEBI, MoF — Timing: MT - Strengthen powers and programs for supervising financial conglomerates and insurance groups. ¶48 ¶51 — Timing: MT - Amend legislation to limit/redesignate the MoF’s power to intervene in regulatory and supervisory decisions of the RBI and IRDAI and align corporate governance requirements of state-owned banks and insurers with private ones. ¶46-47 ¶52 ¶54 ¶56 — Timing: MT - Enhance cyber mapping and undertake cross-sectoral and market-wide crisis simulation exercises and stress tests. ¶64 — Agencies: MoF, RBI, SEBI — Timing: ST - Banks: - Enforce bank-specific Pillar-2 capital add-ons, which are currently set at zero for all banks. ¶53 — Agency: RBI — Timing: ST - Enhance credit risk management by adopting IFRS 9 with prudential backstops. ¶52 — Agency: RBI — Timing: ST - Insurers: - Complete the transition to a risk-based solvency regime and supervisory approach. ¶56 — Agency: IRDAI — Timing: ST - Non-bank Financial Companies: - Align regulations for state-owned and private-sector-owned NBFCs. ¶58 — Agency: RBI — Timing: ST - Enhance liquidity regulations and oversight of liquidity regulations for NBFCs. ¶59 — Agency: RBI — Timing: MT - Securities: - Incorporate risks-based analysis of emerging risk and develop an integrated approach to monitoring conduct risks and internal capacity to undertake systemic mutual fund stress tests. ¶62 — Agency: SEBI — Timing: ST - Crisis Management and Resolution: - Finalize the FSDR (resolution) bill in line with the Key Attributes and implement it. ¶69 — Agencies: MoF, regulators — Timing: MT - Reform the resolution framework for insurers to include requirements for (orderly) voluntary exit. ¶72 — Agency: IRDAI — Timing: ST - Systemic Liquidity and Emergency/ELA: - Continue reducing statutory liquidity ratio (SLR). ¶74 — Agency: RBI — Timing: MT - Set ex-ante guidance to broaden policy options to provide systemic liquidity support and ELA in a crisis, including being operationally ready to expand eligible collaterals with adequate risk controls. ¶75-76 — Agency: RBI — Timing: MT - Financial System Development: - Continue enhancing the flexibility of priority sector lending (PSL). ¶79 — Agency: RBI — Timing: MT - Improve the distressed credit restructuring framework by enhancing out-of-court enforcement processes and the Insolvency and Bankruptcy Code. ¶80 — Agencies: RBI, MoF — Timing: ST - Introduce covered bond law and create securitization platforms with standardized features. ¶81 — Agencies: MoF, RBI — Timing: MT *Source: EXECUTIVE SUMMARY, 1indea2025002-print-pdf* ### 1. India’s financial system is well developed and diverse, with total assets at nearly ### India’s financial system is well developed and diverse, with total assets at nearly 190 percent of GDP ### Financial system structure and size - Total financial system assets: nearly 190 percent of GDP. - Banking sector share: about 60 percent of the system’s assets. - Capital markets composition (in percent of GDP): equity market around 130 percent of GDP; government securities (G-SECs) around 60 percent of GDP; corporate bond market around 16 percent of GDP. - NBFIs include NBFCs, insurers, investment funds, and pension funds. ### State influence and regulatory features - State-owned financial institutions held about 55 percent of total financial sector assets in 2023, down from 63 percent in 2017. - Statutory liquidity ratio (SLR): banks required to invest roughly 18 percent of liabilities in G-SECs (reduced from 20 percent in 2020). - Directed lending requirements: priority sector loans (PSLs) for banks and investment requirements for insurers in housing and infrastructure. - PSL sectors currently include agriculture, micro- small- and medium-sized enterprises (MSMEs), education, housing, and renewables. ### NBFI/NBFC footprint and interconnectedness - Nearly half of the credit to the private sector now comes from nonbanks. - Banks, NBFIs, nonfinancial corporates (NFCs), and households have a roughly comparable size. - Domestic financial institutions—banks, NBFCs, and mutual funds—are highly interlinked. - Co-lending model: banks lend to priority sectors via NBFCs, splitting balance sheet exposures. - India’s restrictions on portfolio debt investment by nonresidents limit the role of foreign investors. ### NBFC sector composition and features - Top three NBFCs are state-owned infrastructure financing companies (IFCs) and hold one-third of the sector’s assets. - Main NBFC business models excluding HFCs: investment and credit companies (ICCs), IFCs, microfinance institutions (MFIs), and infrastructure debt funds (IDFs). - Legacy deposit-taking NBFCs (licensed before 1997), mostly ICCs, hold about 10 percent of NBFC assets. - Deposit-taking NBFCs can take term deposits but not demand deposits; their deposits are not covered by deposit insurance. - NBFCs are not part of the RBI’s payment and settlement system and do not have access to RBI liquidity facilities. - Most NBFCs are not subject to PSL, SLR, and cash reserve requirements; selected NBFCs face some liquidity requirements. - Industrial conglomerates can own NBFCs but not banks. - RBI’s scale-based regulation (introduced in 2021) separates NBFCs into four layers (top, upper, middle, base) by systemic importance. ### Insurance, capital markets, and mutual funds - Insurance penetration: 4 percent of GDP in premiums. - Life insurers account for three-quarters of insurance premiums; around 60 percent of premiums go to the largest state-owned life insurer. - Private sector dominates the general insurance market. - Capital markets: equities, OIS, and G-SECs are well-developed; corporate bond market is less liquid. - Securitization market: less than one percent of GDP. - Mutual fund AUM: grew from about 6 to 16 percent of GDP over the past decade. - Three major mutual fund redemption episodes since 2018 were triggered by corporate bond market distress. - Recent growth: equity funds have grown rapidly due to retail investor participation, surpassing AUM of bond funds. - Mutual funds’ bond fund exposures and redemptions have been sensitive to corporate bond market dislocations. ### Access to finance and digital public infrastructure - Financial accounts: nearly 80 percent of adults have financial accounts. - Household credit: nearly 40 percent of GDP. - UPI (unified payments interface) accounts for nearly 70 percent of all payments by number of transactions. - Digital public infrastructure includes biometric digital identity, UPI, and a data exchange. ### Market strains since 2017 (Box 1 summary) - NBFC and mutual funds distress of 2018-19: mutual funds reduced exposure to NBFC-issued CPs by over 60 percent after defaults of two large NBFCs. - COVID-19 (market episode March–April 2020): - Mutual funds cut -one-quarter of exposures to NBFCs’ CPs in March 2020. - An internationally reputable asset management company closed six debt funds in April 2020. - NBFC liquidity crunch intensified when mutual funds ceased refinancing NBFC borrowings; banks stepped in and RBI provided liquidity support; RBI also undertook a G-SEC purchase program. - Policy responses: SEBI introduced prudential liquidity and stress testing requirements to bond funds and swing pricing; establishment of the corporate debt market development fund (CDMDF) prefunded by the industry with additional government backstops. ### Macrofinancial developments and asset quality - GDP growth: over 8 percent in FY2023/24; moderated to 6 percent in the first half of FY2024/25. - Inflation: exceeded RBI’s tolerance band of 6 percent in FY2022/23; later eased with monetary tightening. - Public debt: remains elevated and noted as a key factor behind India’s sovereign rating of BBB-. - Banking sector improvements since last FSAP: - Capital adequacy ratio (CAR) for the banking system increased nearly 300 bps from FY18/19 to reach over 17 percent by FY23/24. - Nonperforming loans (NPLs) declined from over 9 percent of total loans to below 4 percent. - Liquidity coverage ratio (LCR) for SCBs above 100 percent. - NBFC sector recovery: - CAR rose from 23⅓ percent in FY19/20 to nearly 26½ percent in FY23/24 (minimum requirement 15 percent). - Non-performing asset ratio declined from 6.8 percent to 4 percent over the same period. - Insurance solvency: - Average solvency ratios in 2023: over 200 percent for life insurers and private general insurers; 32 percent for the four public general insurers (three of which had negative solvency ratios despite government capital injection). ### Credit cycle, asset markets, and household balance sheets - Private sector credit-to-GDP: 90 percent of GDP; banks contribute about 50 percent of GDP. - Real growth rate of credit to the private sector: rose from about zero during the pandemic to about 10 percent in 2023. - Household leverage relative to disposable income: broadly stable since 2017 FSAP and moderate compared to EM peers. - Equity market: outperformance since 2021 supported by higher earnings per share growth; India leads globally in equity option trading volume. - Real estate: house prices rebounded after COVID-19; affordability and overvaluation indicators remained stable. - IMF real estate risk scorecard: suggests less vulnerability for India than other EMs. ### Climate-related and power sector risks - Long-run projections: some studies indicate annual GDP losses of 3 to 10 percent by 2100 due to climate change impacts (extreme heat and humidity and lost labor hours). - Physical risk: - India ranks fifth of 188 countries on climate-driven hazard and exposure (INFORM Risk Index). - Cyclones concentrated in coastal states where banks have half of the credits. - Agriculture: 13 percent of SCB loans and about 66 percent of regional and rural bank (RRB) loans go to agriculture; agricultural sector’s share in GDP slightly below 20 percent; employs over half the workforce. - Transition risk: - India was the world’s third-largest GHG emitter in 2022. - Coal-dependent power sector contributes to half of India’s total CO2 and nearly 40 percent of total GHG emissions. - Banks lend 30–35 percent of loans directly to carbon-intensive sectors (staff estimate based on MoEFCC and RBI data). - Power sector vulnerabilities: - Structural issues include power purchase agreements, tariff disputes, coal price and availability, project delays, and cost overruns. - Large state-owned IFCs lend to the power sector and face concentration risks without comprehensive large exposure limits. - NBFCs, especially IFCs, have increased lending to the power sector more than SCBs recently and now rely more on bank borrowings, increasing SCB indirect exposures to the power sector. ### Systemic risk assessment and stress-testing framework - Scope: solvency and liquidity stress tests for SCBs and UCBs; solvency and liquidity tests for NBFCs; liquidity stress tests for open-end bond mutual funds; systemwide liquidity analysis on bank-NBFC-mutual fund linkages; climate change impacts on SCBs. - Scenarios used: - Baseline: Spring 2024 WEO forecast. - Two adverse scenarios: stagflation adverse scenario (higher global interest rates) and a standard recession scenario (monetary easing). Both reflect extreme tail events including less than 1 percent likelihood shocks to GDP. - Sensitivity analyses: concentration risks (e.g., exposures to large power and infrastructure companies), potential under-provisioning and under-estimation of NPLs (to proxy IFRS9 impacts), unrealized losses on held-to-maturity securities, and credit shocks to fast-growing retail loans. - Stress-testing elements: - Solvency tests: credit risk, market risk, interest rate risk. - Liquidity tests: liquidity coverage ratio stress test, net stable funding ratio analysis, cashflow analysis, systemwide liquidity analysis. - Specific tests: NBFC solvency and liquidity stress tests; mutual funds liquidity stress tests; climate risk analysis covering transition and physical risks. *Source: IMF staff analysis as presented in the provided content unit.* ### 20. Mutual fund liquidity and systemwide liquidity stress tests consider a scenario of acute ### 1indea2025002-print-pdf - 20. Mutual fund liquidity and systemwide liquidity stress tests consider a scenario of acute ### Mutual fund and market-dislocation scenario - Scenario: acute market dislocation originating from NBFCs driven by a substantial increase in NBFCs’ NPLs, reduced cash inflows, lender-triggered covenants that front-load repayments, defaults by some NBFCs, funding squeezes, and dislocation in corporate bond/CP markets. - Mechanism: mutual funds exposed to corporate bond/CP markets experience significant redemptions, may resort to fire sales and stop providing liquidity in repo markets, further intensifying funding squeezes and reducing debt rollover rates of distressed borrowers. - Bond mutual fund liquidity findings: - In adverse scenarios, all funds maintain sufficient liquid assets (after haircuts) to withstand historically calibrated redemption stress. - Relative vulnerability: shorter-term funds are relatively more vulnerable due to historically large redemption experiences (seasonal and tax-payment related), not necessarily due to stability concerns. - Estimated mutual fund fire sales of NBFI bonds in stress: INR70-260 billion. - CDMDF capacity: net assets of INR38 billion and a government backstop of up to INR300 billion (as of September 2024) can offset mutual funds’ fire sales pressures if stress is limited to NBFC bonds, but are insufficient if dislocation spreads to broader corporate bond markets. - Data and methodological caveats: - Asset haircut calibration limited by concentrated trading in a few representative G-SECs and infrequent corporate bond trading with stale pricing data. - Analysis assumes all assets can be liquidated at lower prevailing market prices; if markets freeze, even funds with sufficient securities may struggle to meet redemptions. - Detailed repo data needed to assess impacts on repo markets where mutual funds are key cash providers. *Source: IMF staff estimates and analysis.* ### Banks — solvency stress tests and key results - Aggregate resilience: - SCB sector retains enough aggregate capital to sustain moderate credit growth even in severe adverse scenarios, though PSBs’ capacity is more limited. - Capital adequacy thresholds cited: - 9 percent minimum CAR. - 11.5 percent minimum + capital conservation buffer (CCB) referenced. - Scenario outcomes: - Assuming credit growth at the same rate as nominal GDP, in both adverse scenarios private and foreign banks maintain CARs well above the 9 percent minimum and the CCB. - PSBs need to dip into CCBs in the stagflation scenario and their CAR falls below 9 percent in the recession scenario. - Assuming zero growth to their loan portfolio, PSBs can maintain barely the 9 percent CAR in the recession scenarios. - Tail risks and capital needs: - About 10 PSBs and PVBs (with market share of 24-36 percent of SCBs total assets, depending on scenarios) would have CAR below 9 percent or CET1 ratio below 5.5 percent in the adverse scenarios. - Most of these banks need additional capital; estimated capital needs are about 0.2 percent of GDP. - Recommendation: PSBs should strengthen capital bases, including by retaining earnings instead of paying dividends to the government, to ensure ability to support economic recovery. - Sensitivity and concentration findings: - Loan concentration risks have declined since 2017 (except for foreign banks); PSBs' largest exposures now below 25 percent of CET1 vs about 40 percent in 2017. - Reclassifying restructured loans to NPL could reduce aggregate capital ratios by approximately 1⅓ percentage point. - Reclassifying past due loans, or one percent of performing loans into NPLs, has a smaller impact. - Private banks are particularly vulnerable to retail loan credit risk. - Hypothetical reclassification of HtM assets to AfS in stagflation would significantly impact PSBs’ capital because over 70 percent of their bonds are HtM; however, most such securities are G-SECs eligible as collateral for RBI liquidity facilities, making actual sales that crystallize losses less likely. ### Banks — liquidity stress tests and findings - Aggregate liquidity metrics (2024): - LCR: 131 percent. - NSFR: 125 percent. - Scenario LCR outcomes: - Mild and adverse scenarios: LCR declines to 111 and 99 percent, respectively. - Severe adverse scenarios: LCRs of a few large PSBs and PVBs (70 percent of the system) fall below 100 percent, but all maintain 80 percent or more LCRs. - Cash-flow resilience: - Cash flow stress test allowing use of all HQLAs shows all SCBs can withstand cash outflows for up to two months. - After one year, 49–97 percent of SCBs by assets can withstand the stress depending on scenarios. - Vulnerabilities: - Reverse stress tests show LCRs are less vulnerable to valuation shocks than to shocks to run-off rates. - PVBs are relatively more vulnerable to higher retail or wholesale funding run-off rates compared to public and foreign banks. ### Urban Cooperative Banks (UCBs) - Aggregate capital: - UCB sector maintains 31 percent CAR on aggregate. - Vulnerabilities: - Some UCBs were undercapitalized as of June 2024; several additional banks become undercapitalized or have negative capital under the baseline. - In adverse scenarios, about 20-22 UCBs (about 10 percent of the UCB sector’s assets) would have CARs falling below minimum requirements. - Loan loss provisions are the main driver of capital impact. ### NBFCs — solvency, concentration, and liquidity - Solvency stress test results: - Sector has high initial capital buffer and is resilient to macrofinancial shocks, though with weak tails. - Most segments maintain comfortable capital buffers above minimum requirements in adverse scenarios to continue lending at the same rate as nominal GDP growth. - Up to 27 NBFCs need additional capital in adverse scenarios; estimated additional capital about 0.4 percent of GDP. - Main drivers of capital needs: capital needs to maintain moderate credit growth (4 percent of RWAs) and credit costs (3 percent of RWAs). - Concentration risks: - IFCs’ largest credit exposures can account for up to 60 percent of IFCs’ Tier 1 capital and 65 percent for government-owned NBFCs’ Tier 1 capital (though these have declined since 2023 following regulatory tightening). - NBFCs have concentrated exposures to health and power generation sectors (data as of June 2024); concentration to vulnerable power sector diminished recently (data as of September 2023). - Exposures concentrated in potentially vulnerable infrastructure companies that are largely state-owned and carry explicit or implicit state guarantees; payout delays on guarantees can reduce present value of recoveries. - Data limitations: - Satellite models for credit risk estimated using 2020:Q1-2023:Q3 data; interest rate risks and net interest income use 2017:Q1-2023:Q3 data. - Excluding the 2018 distress episodes may significantly underestimate impacts. - NBFC liquidity: - NBFC liquid assets are only 5⅓ percent of total assets. - NBFCs appear resilient to short-lived liquidity strains, but loan defaults could trigger liquidity shortages after three months. - Main liquidity risks stem from loan defaults and reduced debt service inflows; funding losses have only moderate impact. - Wholesale funding is mostly term, but creditors may trigger covenants to front-load repayments. ### Systemwide liquidity analysis - Most likely triggering scenario: significant rise in NBFC NPLs reducing cash inflows for a few months, causing inability to repay maturing CPs, bank and other borrowings, prompting bond mutual fund runs and market dislocation. - Systemwide dynamics: - In such a scenario, funds sell bonds or stop rolling over CPs, dislocating markets and intensifying NBFC liquidity stress. - The analysis maps which sectors gain cash (by redeeming investments or cutting lending) and which lose liquidity as their liabilities are others’ liquid assets. - Overall outcome: - Systemwide liquidity stress in India would likely emerge in specific pockets rather than a system-wide loss of liquidity. - Most sectors, except banks, do not experience additional contagion as they gain cash by redeeming investments or cutting lending. - Banks build cash buffers as they stop rolling over NBFC borrowing but also face outflows as NBFCs liquidate bank deposits and activate credit lines; banks overall maintain ample liquid assets and can help bridge liquidity gaps. - A potential limitation: banks may not lend to counterparts without G-SECs acceptable as collateral for RBI facilities. - Mitigating factors: debt markets being mostly closed limits liquidity loss via capital outflows; credibility of central bank money (limited financial dollarization) means investors are willing to hold rupee cash rather than FX. ### Climate change risk analysis - Physical risk: - Extreme cyclones may give localized, though not systemic, capital impacts on SCBs; a once-in-500-year cyclone can notably reduce bank capital ratios although aggregate CARs remain above hurdle rates. - Caveat: macro-level analysis may underestimate collateral damage due to lack of granular loan and collateral location data; smaller localized UCBs and RRBs could experience disproportionally severe impacts. - Agricultural climate shock findings: - In the most severe scenario of climate shocks over three consecutive years: - Agricultural loan default probability could increase by over 30 percentage points. - Expected losses could surpass 25 percent of total SCB agricultural loans. - RRBs with higher exposures to agriculture could face significantly higher impacts. - Caveats: absence of geolocation and loan-level data, unknown future adaptation measures (precision farming, drought-resistant crops), and crop insurance dynamics (premiums could rise and become unaffordable). - Transition risk: - Five transition scenarios up to 2040 aligned with NGFS Phase IV considered: Current Policies, NDC, Below 2°C, Delayed Transition, Net-Zero 2070. - Aggregate growth impact: - India can maintain high GDP growth under all scenarios. - Net-Zero 2070 may lead to a 5 percent loss in GDP by 2040 compared to Current Policies. - Sectoral concentration: - Mining, heavy industry, refining, and electricity sectors see greater output reductions. - SCBs continue to have large exposures to the power sector despite reductions; NBFCs, especially IFCs, could incur extensive losses given sectoral concentration. - Including indirect exposures through NBFCs could increase annual expected losses relative to Current Policies by approximately 50 percent by 2040 under Net-Zero 2070. - Concentration of impact: five banks could account for 60 percent of additional expected losses in 2040. *Source: IMF staff estimates and analysis.* ### 39. The authorities noted that India’s financial system recovered well from past distress ### 1indea2025002-print-pdf - 39. The authorities noted that India’s financial system recovered well from past distress ### Recovery, concentration risks, and climate change - Authorities' assessment: - India’s financial system recovered well from past distress and became resilient, including PSBs, though there are weak tails like UCBs and many mitigating factors. - Risks from the concentration of exposure to the power companies appear overstated because these companies are mainly state-owned and their borrowings accompany explicit and implicit state guarantees. - Climate change risk analysis should explicitly incorporate the role of these companies’ measures to mitigate the impact of climate risks on them. - Agriculture and transition scenarios: - Many losses to the agricultural sector can be addressed through effective adaptation strategies, advanced technologies, government programs, and insurance coverage. - Scenarios with faster transition paths than net zero 2070 will have severer negative impacts. ### Systemwide oversight and macroprudential policy - Changes in the financial system: - Growth of NBFIs and market finance changed financial linkages, making systemwide risk monitoring with cross-sectoral agency collaboration essential (Figure 23). - Key recommendations: - Develop a centralized systemic risk dashboard and systemwide risk assessment tools by refining this FSAP’s sectoral and systemwide analysis. - Periodically discuss results in the Financial Stability and Development Council (FSDC). - Establish a dedicated interagency working group on risks from climate change, integrated within the FSDC Sub-committee. - Data and risk analysis enhancements (¶41): - Closing data gaps and improving data sharing: - Create a central data depository to facilitate automatic sharing and wider use of existing data. - Collect more granular data, especially household surveys and/or a comprehensive credit registry; NBFCs’ LCR and additional liquidity data tailored to their business model; credit data by location and industry for climate risk analysis; and more detailed flow of funds data including maturity and off-balance sheet information using granular supervisory data ideally at the institution levels. - Enhancing risk analysis approaches: - Strengthen macro scenario solvency stress tests of SCBs and develop them for UCBs and NBFCs. - Further improve liquidity stress tests of SCBs, NBFCs, and mutual funds. - Develop systemic liquidity risk assessment tools. - Enhance capacity on climate risk analysis. - Objective prioritization and governance (¶42): - Financial stability should be the primary objective of macroprudential authorities and of the FSDC and/or its subcommittee, clearly anchored in the laws governing the institutional framework. - Within the RBI, a dedicated unit should coordinate and monitor macroprudential policies. - In the near term, publishing a macroprudential strategy clearly outlining the objectives can enhance policy transparency and public communication. - Borrower-based measures and capital buffers: - Consider borrower-based measures (BBMs) for household loans in addition to risk-weight measures; introduce DSTI limits for all household loans (¶43). Note: Microfinance loans are already subject to DSTI limit of 50 percent.10 - Start building more releasable capital buffers before the next credit cycle; India’s CCyB is currently zero, similar to other BRICS (Brazil, Russia, China, and South Africa) (Table 8). Use macro scenario stress tests to help calibrate the (PN)CCyB, ideally with a more moderate adverse scenario than those used in this FSAP (Figure 22) (¶44). ### Sectoral regulation and supervision — common themes - State influence and objective conflicts (¶45): - Long-standing challenges due to state influence and pursuit of developmental objectives; regulators have stability and development objectives without clear prioritization. - Easing constraints by modifying legislation to clearly prioritize financial stability over development objectives will be important. - Strengthen regulators’ powers and independence (¶46): - RBI, Banking Regulation (BR), IRDAI, and SEBI Acts allow the government control over senior managements and the boards of the regulators. - Staff recommend transferring the appellate authority power from the MoF to an independent agency. - State-owned banks and some insurers are governed by their statutes, limiting regulators’ powers over them. - Governance and internal controls (¶47): - Strengthen corporate governance requirements; RBI should issue more guidance on boards’ oversight function, ongoing suitability, roles of independent members, and management of conflicts of interest. - Discontinue placing RBI staff on bank boards to avoid conflicts of interest. - Corporate governance for insurers should separate board roles from executive management to support transition to risk-based supervision. - Conglomerate supervision (¶48): - India has 12 financial conglomerates (FCs). - Inter Regulatory Forum (IRF) is effective for cooperation but lacks legal powers to set and enforce group-level requirements. - Establish legal framework for group-level standards in corporate governance, risk management, and internal control, with enforcement powers over FCs. - Climate-related risk capacity (¶49): - Climate risk analyses are nascent due to insufficient data and guidance. - RBI has mapped climate risk for the banking sector, provided non-binding guidance on governance, strategy, and risk management, and issued a draft disclosure framework. - IRDAI and SEBI included climate and ESG considerations in revised regulations and disclosure requirements. ### Banks - RBI enhancements (¶50): - Unified regulation and supervision departments covering all entity types. - Established an enforcement department to consistently apply fines. - Basel III liquidity requirements are phased in, and large exposure limits have been tightened (Figure 13 and ¶23). - Expanded regulatory authority over UCBs. - Consolidated supervision gaps (¶51): - SPARC is performed on a solo-basis; PCA framework does not specify solo or consolidated triggers. - Need systematic framework to evaluate risks from overall group structure, including parent and affiliated companies. - Credit risk management (¶52): - Improvements in NPL classification through automation. - Concerns: narrow definition of NPLs, exemptions and special treatments for certain exposures, and relatively low minimum provisioning rates. - Implementing IFRS 9 with prudential backstops is critical to avoid large jumps in credit costs in downturns. - RBI should upgrade supervision over individual loans, collateral valuation, connected borrower groups, large exposure limits, and related-party transactions. - Capital surcharges (¶53): - RBI should enforce Basel III Pillar 2 add-on charges; currently capital surcharges are set to zero for all banks. ### Insurers - Progress and strengths (¶54): - Government and IRDAI have taken major steps; graded assessment found an overall sound level of observance of ICPs. - Strengths: robust licensing and certification processes, suitability requirements for key persons and beneficial owners, and strong intervention and enforcement powers. - IRDAI established information-sharing mechanisms with other supervisors; public disclosure requirements are comprehensive. - Several sections of the 1938 Insurance Act do not apply to the largest state-owned life insurer (e.g., remove directors and officers, appoint an administrator, directions concerning reinsurance, apply for full or partial liquidation). - Supervisory approach and solvency (¶55–56): - IRDAI plans to transition to a new risk-based supervisory approach by end 2025. - Solvency-related requirements should be strengthened: consistent valuation on an economic basis, coherent adoption of risk-based capital regime, review directed investment requirements for potential conflict with policyholder protection, and dynamic enterprise risk management requirements including insurers assessing their own solvency risks. ### Non-Banking Financial Companies (NBFCs) - Post-2018 reforms and scale-based regulation (¶57): - RBI introduced scale-based regulation to enhance risk management, transparency, and stability for about 9,500 entities. - Introduced a bank-like LCR and improved the PCA framework. - Ownership-neutral oversight (¶58): - RBI should apply the same rules to state-owned and private NBFCs; state-owned NBFCs are often in the middle supervisory layer and subject to less stringent requirements. - Recent efforts to withdraw some exemptions from large exposure limits helped reduce vulnerability to concentration risks since 2023 (¶27). - Liquidity regulation and supervision (¶59): - Tailor liquidity regulations to NBFC business models; large NBFCs can make optimistic assumptions (e.g., credit line inflows) that become unreliable in distress. - RBI should start collecting LCR returns for NBFCs, analyze them, and recalibrate key behavioral parameters. - Collect information on covenants common with NBFCs’ borrowings and consider additional liquidity indicators suited to NBFCs’ business models. - HFC supervision (¶60): - RBI should assume supervision of HFCs in addition to regulation; supervision remained with the National Housing Bank (NHB) after regulation transfer in 2019. - NHB’s supervisory framework is primarily compliance-based, with limited resources and missing frameworks for supervisory actions, PCA, and stress testing. - Moving supervision to RBI would eliminate conflicts of interest from NHB being promoter, refinancer, and supervisor of HFCs. ### Securities markets - SEBI developments (¶61): - SEBI established the CDMDF and introduced swing pricing and liquidity requirements for bond funds after distress episodes (Box 1). - Expanded regulatory scope over sustainability and enhanced investor protection for equity derivatives products. - Risk-based supervision needs (¶62): - SEBI should establish a risk-based approach for conducting risks and build internal capacity for systemwide risk analysis, collaborating with other agencies. - Undertake own analyses rather than relying excessively on disclosures and industry analyses. - Develop methodology for integrating emerging risks across supervision divisions and focus on sales practices for retail investors. ### Cybersecurity risk - Advances and mapping (¶63): - Authorities have advanced cybersecurity risk oversight, especially for banks; mapped cyber and financial sectors and identified over 100 critical services (information and communication infrastructures and information technology (IT), and service providers). - RBI conducted thematic exercise to assess concentration risk and issued cybersecurity-related circulars to banks starting in 2016; subsequent regulations set rules on IT governance, risk controls, assurance practices, outsourcing, and digital payment security controls. - Regulatory frameworks tailored to smaller cooperative banks because of digital depth and interconnectedness to payment systems. - Further strengthening (¶64): - Extend cybersecurity framework beyond banks to include systemically important NBFIs and FMIs. - Use cyber mapping to analyze technology use, business continuity and disaster recovery, and estimate impacts of cyber-attacks. - Expand extensive cybersecurity crisis simulations and stress tests for cross-sectoral and market-wide events. - RBI and SEBI could suggest key benchmarking metrics, particularly over recovery time, to ensure consistent recovery time objectives for all key banks and FMIs. *Source: 1indea2025002-print-pdf - 39. The authorities noted that India’s financial system recovered well from past distress* ### 65. The 2024 mutual evaluation by the FATF guides reform areas for the future. The report ### 1indea2025002-print-pdf - 65. The 2024 mutual evaluation by the FATF guides reform areas for the future. The report ### FATF 2024 mutual evaluation — key findings and reform areas - Authorities have a good ML and TF risk understanding; engagement by the law enforcement authority; and strength regarding transparency of legal entities, confiscation, and international cooperation. - The financial sector has a generally good understanding of risks and mitigating measures. - Key reform areas identified: - Preventive measures, supervision, and enforcement, in particular regarding reporting obligations for domestic politically exposed persons. - Targeted financial sanctions for TF. - Mitigating the misuse of nonprofit organizations from TF. - Criminals’ participation in key sectors such as dealers of precious metals and stones. - Enhancing supervision, especially for high-risk designated non-financial businesses and professions and the money transfer services schemes. - Improving suspicious transaction reporting by high-risk sectors. - Enhancing the beneficial ownership registry. - Strengthening ML/TF prosecutions, given the current backlog of court cases. ### Authorities’ views on AML/CFT and supervisory reforms - Risk assessment tools shared by the FSAP and preceding technical assistance have helped advance India’s capacity; the RBI adopted the model for its latest Financial Stability Report. - Authorities regard many recommendations as agreeable and report preparatory work underway: - Introducing IFSR 9 for banks. - Tightening NBFC regulations and supervision, especially for state-owned ones. - Implementing risk-based supervision for insurers. - Policy stance and institutional comments: - The financial system should help pursue high economic growth in an EM like India; regulators should be held accountable for their mandates. - State-owned financial institutions have been critical for financial inclusion and development. - Mandates of the FSDC and sectoral regulators are complementary; no observed trade-off. - On positive CCyBs: - Authorities note global views remain divided. - Limited evidence that releasing CCyB can enhance credit growth. - Responses of credit growth to CCyB changes could be asymmetric between build-up and release phases, possibly leading to a net negative impact on long-term growth. - For an EM like India, macrofinancial conditions and timing do not appear conducive to introducing a new buffer. ### Crisis management and financial safety net — resolution of financial institutions - Need to finalize and enact resolution legislation for banks and key NBFIs aligned with the Key Attributes (KAs). - Current resolution powers and tools are limited mostly to compulsory mergers or liquidation, entailing considerably more fiscal risks than well-designed resolution regimes. - The draft Financial Sector Development and Regulation (Resolution) Bill (FSDR) has been under discussion for several years; progress slow due to stakeholder concerns about scope of the Resolution Corporation and tools such as bail-in. - Staff did not have the opportunity to examine the latest draft bill, except for a summary presentation, to compare with the KAs. - Existing supervisory and legal powers: - PCA Frameworks for SCBs, UCBs, and NBFCs were revised and extended. - RBI and BR Acts were amended to extend the RBIs’ crisis intervention powers to UCBs and NBFCs. - RBI can now execute compulsory merger and reconstruction schemes without a moratorium for private sector banks. - RBI established a resolution group within the Department of Regulation (applicable only to financial institutions under RBI’s purview). - These tools are not sufficiently comprehensive as envisaged by the KAs, which include purchase and assumptions (P&A) framework and statutory bail-in power to minimize resolution costs. - Need for explicit triggers and coordination: - Explicit triggers for resolution are needed to ensure an incontestable transition from supervisory corrective actions to bank resolution. - PCA framework should include clear guidance about the timeframe (but not a hard deadline) for taking an entity out of the PCA to avoid regulatory forbearance. - RBI should streamline resolution triggers and consolidate them into a crisis intervention-focused trigger. - Resolution-specific coordination and cooperation mechanisms should have more encompassing memberships, especially including the Deposit Insurance and Credit Guarantee Corporation (DICGC). - Weak tails of small NBFCs and UCBs that are currently undercapitalized underscore the importance of these refinements. - Insurance resolution framework: - Needs overhaul to allow insurers with fundamental business viability challenges to voluntarily exit in an orderly manner with clear and specific criteria to minimize liquidation costs to policyholders. - Supervisor should require insurers to develop recovery and resolution plans and then establish its own plan based on insurers’ inputs. ### Deposit insurance - Deposit insurance framework requires significant refinements: - DICGC should have credible (prearranged, rule-based, and automatic) and sufficient backup funding from the government. - The DICGC can borrow up to INR 50 million (about USD 580,000) from the RBI, which is small compared to the insurance limit of INR 500,0 - Payout process should be streamlined and shortened to align with international guidance with a single customer view and should discontinue disbursing settled claims through a liquidator. - When using deposit insurance funds’ money to support mergers, there should be a limit to the DICGC's power to delay repayment deadlines from the acquiring bank. ### Systemic liquidity and liquidity support - Reforms to make key markets more resilient as the capital market develops: - Legacy SLR should be reduced further as it has been historically a fiscal financing mechanism and limits bond trading volumes by booking all SLR securities in HtM. - Introduction of prudential LCR reduces disruption concerns; LCR alone is likely to maintain demand for G-SECs, as G-SECs dominate debt markets. - Measures to reduce precautionary liquidity demand—due to cyclical government cashflows, the daily RBI reserve requirement, and the transition to 24/7 settlement—could help minimize mechanical systemwide liquidity swings. - RBI should review haircuts for its G-SEC repo, as they are far less than G-SEC repos between private-sector institutions. - Additional daily margining in line with market valuation for the life of longer-term facilities should be implemented. - In scenarios where the sovereign risk premium spikes, market value of G-SECs could deteriorate quickly; adaptation could become critical as India’s capital market opens to more market-sensitive investors such as foreign investors.15 - Broaden policy options as NBFIs and market financing gain prominence: - RBI crisis measures have been implemented indirectly through banks and the G-SEC purchase program. - As systemic liquidity risks evolve, refining crisis-time liquidity management tools is vital. - Expanding eligible collaterals: RBI should establish ex-ante guidelines to accept certain collateral beyond G-SECs in crisis times, such as corporate bonds subject to appropriate haircuts, to support NBFIs and NFCs via banks. - Asset purchase program: RBI should consider asset purchase programs (along with repos) beyond G-SEC market when there is systemic dysfunction in key markets in collaboration with other agencies as needed. - Emergency liquidity assistance (ELA): - RBI Act should be modified to address ambiguity and strengthen legal basis for ELA. - Development of an internal policy clearly separating monetary operations from ELA is beneficial. - Publicly communicating a high-level summary of the ELA framework that differentiates normal operations from ELA would bring clarity. ### Authorities’ views on crisis management and liquidity - Authorities note ongoing work on the new resolution bill but assert existing legislation provides RBI effective resolution powers and tools. - Provisions in the Insolvency and Bankruptcy Code (IBC), the BR, and the DICGC Act allow the RBI to take resolution actions, including mergers, moratoriums, suspension of management, and liquidations. - Recapitalization by existing shareholders played a critical role in some cases. - RBI stance on liquidity frameworks: - RBI strongly feels existing liquidity regulations and support frameworks have served India well; little need for further action. - Little harm in keeping the SLR as it is far less constraining than decades ago; securities held for SLR could be fully used to obtain cash if needed. - Since banks have sufficient G-SECs, RBI feels little need to expand eligible collaterals and is concerned about taking on credit risks by accepting private securities. ### Developmental issues and financial inclusion measures - Priority to enhance PSL flexibility while recognizing opportunity costs of directed lending: - India’s mitigating mechanisms include (i) full autonomy for banks to set lending rates, (ii) PSL certificate trading mechanism (2016), and (iii) history of expanding qualifying sectors (e.g., adding the renewable sector in 2015). - For-profit private banks voluntarily lend to the sector beyond requirements. - Refocusing government role toward building infrastructure to reduce credit constraints (enhancing credit information infrastructure, securitization, and credit enhancement). - MSME financing and credit enhancement: - Only 11 percent of small businesses have bank loans, with high collateralization requirements (185 percent of loan amounts). - Factoring and leasing remain underdeveloped. - Policies should encourage asset- and cashflow-based digital lending. - Authorities should equalize tax treatment between leasing and debt and incentivize large corporate buyers to use platforms like the online trade receivables discounting system (TReDS) for MSMEs. - Factoring and MSME loan securitization could be supported by enriched credit enhancement services from SIDBI and the national housing bank. - Covered bonds and securitization: - Success of covered bond and securitization markets is critical to foster India’s corporate bond markets. - Domestic banks and NBFIs prefer investing in high-rated fixed income assets; securitized products, especially covered bonds backed by law with overcollateralization, could meet such buyers’ investment criteria. - Such instruments could serve as eligible collateral for RBI’s repo facilities with much less credit risk concerns to the RBI. *Source: IMF staff.* ### 83. The 2016 IBC improved collective recovery procedures somewhat, but the process ### 1indea2025002-print-pdf - 83. The 2016 IBC improved collective recovery procedures somewhat, but the process ### Insolvency and Recovery - The 2016 IBC improved collective recovery procedures somewhat, but the process remains time consuming. - The National Company Law Tribunals lack specialized knowledge and face delays and frequent adjournments. - The recovery process remains slow, with only one-third of the original loan amount recovered. - Authorities should make additional efforts to expedite the process by: - strengthening the skill and performance of the Tribunals supported by specialized insolvency rules, a dedicated bench within the Tribunals, and adequate funding; - promoting alternative out-of-court dispute enforcement process; - introducing personal bankruptcy options for small business and individuals. ### Financial System Structure and Depth - India’s financial system is well developed among EMs and provides significant credit to the private sector, though bank credit to the private sector is relatively small among BRICS. - 80 percent of adults have access to financial accounts. - The system and international markets provide 170 percent of GDP in credit, half of which to the public sector. - Banks dominate the financial system, though their share has declined by 9 percentage points since 2017. - PSBs dominate the banking sector, but their share has declined by 11 percentage points since 2017. - Insurance, pensions, and mutual fund sectors are moderately developed among BRICS. ### Capital and Money Markets - Equity markets dominate the domestic financial markets, followed by the G-SEC market. - India’s corporate bond market is relatively underdeveloped compared with peers. - Financial institutions and infrastructures are main issuers of corporate bonds; NBFCs increased their share in CP issuance markets. - With growth of NBFIs, money market structure shifted from bank-only uncollateralized call markets to repos with broader participants. ### Macro Indicators and Fiscal Position - Near-term economic growth is one of the highest globally, with staff-estimated potential growth of 6½ percent. - Inflation, on average, has declined from its peak but remains volatile because of food prices. - External vulnerability is limited: moderate current account deficits, low external debt, and ample international reserves. - Public debt and fiscal deficits remain elevated and are among the highest among major EMs. ### Monetary Policy, Markets, and Yields - In response to high inflation, the RBI has raised the repo rate by a total of 250 bps since mid-2022. - The rupee depreciated moderately in 2024, but volatility was well contained. - Yield curve is almost flat at about 7 percent as shorter-end rates jumped with policy rate hikes in 2022. - Stock market recovery since the pandemic contrasted with other BRICS markets, supported by faster earnings per share growth since 2019. ### Financial Soundness and Bank Resilience - India’s solvency ratio fares well among BRICS but at the lower end among broader EMs. - NPL ratios are relatively high among EMs but are rapidly declining. - Net interest income is the largest contributor to bank income; profitability is relatively lower (though highest among BRICS). - Banks have good liquid asset buffers partly because of SLR; exposures to FX risks are very limited. - Capital levels in banks, especially PSBs, have increased since the last FSAP. - Aggregate LCR has declined since 2020 but remains well above the Basel III requirement. ### Stress Test Results — SCBs, UCBs, NBFCs, Mutual Funds - Macroeconomic scenarios (stagflation and recession) produce similar declines in real GDP growth but opposite inflation dynamics and contrasting monetary policy reactions. - Term premium spike is larger in the stagflation scenario; term premium increases more in the recession scenario because of lower short-term rates. - SCB solvency: PSBs’ solvency is reduced mainly by credit risk and interest rate risk in the stagflation scenario; in the recession scenario PSBs are primarily impacted by credit risk. - Alternative measurement of NPLs could reduce capital ratio by additional ½ -1 percentage points, supporting keeping one percentage point higher minimum capital requirements than Basel III. - Private-sector banks are most active in rapidly growing unsecured retail loans and have incurred the highest credit risks from that segment. - If banks were hypothetically pressed to sell HtM securities, PSBs could incur much more significant losses than private sector banks; repo facilities from the RBI could prevent such valuation losses. - UCBs: overall capitalization remains comfortable under both adverse scenarios, though most capital buffers are Tier 2 capital; a notable number of UCBs see capital fall under the hurdle rate even in the baseline. - NBFC solvency: loan loss provisions and the need for capital to maintain moderate credit growth reduce capitals in both stagflation and recession scenarios. Using alternative NPL measurements reduces capital ratio by an additional one percentage point. - Mutual funds: bond funds in the stress testing sample (about ¾ of all bond funds) invest mostly in money markets and shorter-term bonds; haircuts increase more for longer-duration schemes; all funds can sustain the stress in the analysis. ### Liquidity and Systemwide Analysis - Aggregate NSFR has declined in the past few years but remained comfortably above the Basel III requirement. - Aggregate LCR remains above 100 percent in the mild adverse scenario, but falls to slightly below 100 percent in the severe stress scenario. - SCBs with LCR below 100 percent in severe adverse scenario include large private-sector banks and PSBs, but affected banks have only small shortfalls relative to the 100 percent requirement. - Cashflow stress tests show that if banks can use all HQLAs, all banks can absorb liquidity stress up to 2 months; the sector maintains positive aggregate HQLAs even after a year. Most SCBs can withstand longer-term stress up to 6 months in the severe adverse scenario. - NBFCs have lower liquid asset buffers than banks; bank deposits take substantial share in NBFC liquid assets. NBFCs start experiencing liquidity shortage after three months under the adverse scenarios. - Systemwide: after six months of reduced debt service cash inflows due to higher NPLs, NBFCs experience significant liquidity shortage even after liquidating all liquid assets, while banks can withstand adverse shocks. Banks have capacity to provide liquidity support to address NBFC shortfalls, though willingness may be constrained by counterparty concerns. ### Climate Change Risks - India faces various types of weather-related natural disasters; climate-related disaster frequency (drought, extreme temperature, flood, landslide, storm, wildfires) increased through 2022. - Total GHG emissions grew by 40 percent between 2000 and 2019, mainly from the energy sector; India remains one of the lowest per-capita emitters. - Modern renewables are the fastest-growing energy source, but fossil fuels continue to dominate electricity production capacity. - Under an extreme tropical cyclone scenario, the aggregate capital ratio for all SCBs drops to about 15 percent by 2026 but remains above capital requirements; changes in RWA, interest rate risk, and credit risk drive the decline. - Agricultural sector probability of defaults increases with climate shocks; severe compounding climate shocks lead to large potential losses in agricultural loans, but SCBs are resilient to small-to-moderate climate shocks. - Transition scenarios: Total GHG emissions in Below 2°C/Delayed Transition and Net-Zero 2070 are 44 percent and 53 percent lower by 2040, compared to Current Policies. Mitigation policies have only minor growth impact (analysis limited to figures presented). *Source: 1indea2025002-print-pdf - 83.* ### 2040. Orderly transition has stronger GDP growth than ### 2040. Orderly transition has stronger GDP growth than disorderly transition. ### Climate transition and macrofinancial impact - Impacts on sectoral output vary across scenarios and sectors, influenced by sectoral emission intensities, abatement costs, inter-industry linkages, among others. - Climate-related transition risks are concentrated within a few carbon-intensive sectors, especially the power sector. - PSBs with greater exposure to carbon-intensive sectors are more vulnerable to transition risks. - Expected losses would be considerably higher in the tails and concentrated in a few banks. - Illustration: Benefit of CCyB in Mitigating Macrofinancial Impact of Bank Distress - Overall macroprudential capital buffer needs are estimated as the largest difference of CARs between the baseline and adverse scenarios over the stress test horizon. - Given these illustrative levels, the total buffers (CCB and CCyB) are sufficient to absorb the average capital depletion from FSAP stress tests. ### Financial system structure and key statistics (selected figures from Table 2) - Total (Mar-17): No. of institutions 98,766; Assets in INR billion 246,869; Percent of GDP 160 - Total (Mar-24): No. of institutions 110,167; Assets in INR billion 553,571; Percent of GDP 187 - Banks (Mar-17): No. of institutions 2,113; Assets in INR billion 159,481; Percent of total assets 65; Percent of GDP 104 - Banks (Mar-24): No. of institutions 1,996; Assets in INR billion 308,839; Percent of total assets 56; Percent of GDP 105 - Scheduled Commercial Banks (incl. RRBs) (Mar-17): No. of institutions 156; Assets in INR billion 146,690; Percent of total assets 59; Percent of GDP 95 - Scheduled Commercial Banks (incl. RRBs) (Mar-24): No. of institutions 137; Assets in INR billion 289,207; Percent of total assets 52; Percent of GDP 98 - Public Sector Banks (Mar-17): No. of institutions 27; Assets in INR billion 97,366; Percent of total assets 39; Percent of GDP 63 - Public Sector Banks (Mar-24): No. of institutions 12; Assets in INR billion 154,932; Percent of total assets 28; Percent of GDP 52 - Cooperative Credit Institutions (Mar-17): No. of institutions 98,163; Assets in INR billion 15,778; Percent of total assets 6; Percent of GDP 10 - Cooperative Credit Institutions (Mar-24): No. of institutions 109,433; Assets in INR billion 24,312; Percent of total assets 4; Percent of GDP 8 - Non-bank Financial Institutions (Mar-17): No. of institutions 444; Assets in INR billion 84,393; Percent of total assets 34; Percent of GDP 55 - Non-bank Financial Institutions (Mar-24): No. of institutions 595; Assets in INR billion 240,036; Percent of total assets 43; Percent of GDP 81 - Insurance Companies (Mar-17): No. of institutions 62; Assets in INR billion 30,765; Percent of total assets 12 - Insurance Companies (Mar-24): No. of institutions 73; Assets in INR billion 67,579; Percent of total assets 12; Percent of GDP 23 - Mutual Funds (Mar-17): No. of institutions 45; Assets in INR billion 17,540; Percent of total assets 7; Percent of GDP 11 - Mutual Funds (Mar-24): No. of institutions 45; Assets in INR billion 53,402; Percent of total assets 10; Percent of GDP 18 ### Selected economic indicators and projections (Table 3) - Real GDP growth (%) (FISCAL YEAR 1/): 2023/24 Est. 8.2; 2024/25 6.5; 2025/26 6.5 - Output gap (% of potential output): 2023/24 0.1; 2024/25 0.1; 2025/26 0.1 - Inflation, CPI-Combined (%): 2023/24 5.4; 2024/25 4.8; 2025/26 4.3 - Revenue (% of GDP): 2023/24 20.8; 2024/25 21.3; 2025/26 21.1 - Expenditure (% of GDP): 2023/24 29.0; 2024/25 28.8; 2025/26 28.6 - Fiscal balance (% of GDP): 2023/24 -8.2; 2024/25 -7.6; 2025/26 -7.5 - Public debt (% of GDP): 2023/24 82.7; 2024/25 83.0; 2025/26 82.4 - Broad money (% change): 2023/24 11.1; 2024/25 9.8; 2025/26 10.5 - Domestic Credit (% change): 2023/24 12.0; 2024/25 10.5; 2025/26 11.3 - Credit to the private sector (% change): 2023/24 15.5; 2024/25 11.9; 2025/26 12.7 - Current account (% of GDP): 2023/24 -0.7; 2024/25 -1.1; 2025/26 -1.2 - FDI, Net Inflow (% of GDP): 2023/24 0.3; 2024/25 0.3; 2025/26 0.4 - Reserves (months of imports): 2023/24 8.5; 2024/25 8.3; 2025/26 8.2 - External debt (% of GDP): 2023/24 18.7; 2024/25 18.9; 2025/26 18.7 - Population (2023/24): 1.42 billion - Per capita GDP (2023/24 estimate): 2,534 USD ### Financial soundness indicators (Table 4, selected series) I. Scheduled commercial banks (annual, percent) - Risk-weighted capital adequacy ratio (CAR): 2019/20 14.8; 2020/21 16.3; 2021/22 16.8; 2022/23 17.2; 2023/24 16.8 - Public sector banks: 12.9; 14.0; 14.6; 15.5; 15.5 - Private sector banks: 16.5; 18.4; 18.8; 18.6; 17.8 - Foreign banks: 17.7; 19.5; 19.8; 19.8; 18.5 - Number of institutions not meeting 9 percent CAR: 2019/20 2; 2020/21 0; 2021/22 0; 2022/23 0; 2023/24 0 - Public sector banks: 1; 0; 0; 0; 0 - Private sector banks: 1; 0; 0; 0; 0 - Foreign banks: 0; 0; 0; 0; 0 - Net nonperforming assets (percent of outstanding net advances) 1/: 2019/20 2.8; 2020/21 2.4; 2021/22 1.7; 2022/23 1.0; 2023/24 0.6 - Public sector banks: 3.8; 3.1; 2.2; 1.2; 0.8 - Private sector banks: 1.5; 1.4; 1.0; 0.6; 0.5 - Foreign banks: 0.5; 0.6; 0.7; 0.3; 0.2 - Gross nonperforming assets (percent of outstanding advances): 2019/20 8.2; 2020/21 7.3; 2021/22 5.8; 2022/23 3.9; 2023/24 2.8 - Public sector banks: 10.3; 9.1; 7.3; 5.0; 3.7 - Private sector banks: 5.5; 4.9; 3.8; 2.3; 1.8 - Foreign banks: 2.3; 2.4; 2.9; 1.9; 1.2 - Return on assets 2/: 2019/20 0.1; 2020/21 0.7; 2021/22 0.9; 2022/23 1.2; 2023/24 1.3 - Public sector banks: -0.3; 0.3; 0.5; 0.8; 0.9 - Private sector banks: 0.4; 1.1; 1.4; 1.6; 1.8 - Foreign banks: 1.5; 1.6; 1.4; 2.0; 1.6 - Balance sheet structure of all scheduled commercial banks - Total assets (in percent of GDP): 2019/20 88.6; 2020/21 98.6; 2021/22 91.9; 2022/23 90.2; 2023/24 95.1 - Credit-to-deposit ratio: 78.1; 73.1; 74.3; 77.4; 80.3 - Government securities/total assets: 20.1; 22.6; 22.5; 22.6; 22.4 - Liquid assets/total assets 3/: 22.1; 27.1; 23.7; 24.2; 22.7 - Liquid assets/short-term liabilities 4/: 76.5; 81.1; 68.6; 72.5; 69.4 II. Non-Banking Financial Companies (as of July 31, 2022) 5/ - Total assets (in percent of GDP): 16.6; 17.7; 15.8; 16.2; 17.2 - Risk-weighted capital adequacy ratio (CAR): 23.7; 25.0; 26.8; 27.5; 26.6 - Gross nonperforming assets (percent of outstanding advances): 6.8; 6.4; 6.3; 4.3; 4.0 - Net nonperforming assets (percent of outstanding net advances) 1/: 3.4; 2.7; 2.3; 1.3; 1.1 - Return on assets 2/: 1.3; 1.2; 1.6; 2.4; 3.3 ### Status of key 2017 FSSA recommendations (Table 5, staff assessment—selected items) - Improve governance and financial operations of PSBs and develop a strategic plan for consolidation, divestment, and privatization. - Authorities: Reported improvement in governance and financial operations of PSBs; extension of Banks Board Bureau role; training and development programs; reduction of PSBs. Gaps remain. - Status: Partially implemented - Conduct granular assessments of banks’ capital needs and require additional provisions and swift recapitalization and restructuring. - Authorities: Banks Board Bureau now conducts quarterly assessments of PSB capital requirements and reports to the government and the RBI. - Status: Implemented - Redesign corporate debt restructuring mechanisms to make them more flexible. - Authorities: Flexible Prudential Framework for Resolution of Stressed Assets issued by RBI on June 7, 2019; lays out principles for early recognition, discretion for lenders to design resolution plans, and disincentives for delays. - Status: Partially implemented - Retain regulators’ role in collecting firm-level data; enhance supervision and micro-prudential limits. - Authorities: Enhanced supervision and micro-prudential limits; regulators continue to collect data directly from institutions; systemic risks from interconnectedness and NBFC expansion remain challenges. - Status: Partially implemented - Review loan classification and provisioning rules in the context of IFRS and special loan categories. - Authorities: Discussion paper on Expected Credit Loss Framework for Provisioning released by RBI on January 16, 2023. - Status: In progress - Introduce a risk-based solvency regime and risk-based supervision for insurance. - Authorities: IRDAI established project teams; completed first quantitative impact study (late in 2023); further quantitative impact study planned during 2024; pilot testing for risk-based supervision underway. - Status: In progress. Authorities are planning to implement in 2025 - Transfer legal authority over public listed company reporting to SEBI and introduce a risk-based review of company disclosures. - Authorities: Companies Act 2013 provides minimum requirements; SEBI developed an Early Warning System to aggregate financials and public information. - Status: Implemented - Improve stress testing scenarios and methodologies. - Authorities: Several revisions to the credit stress test model; MCM provided TA on stress testing. - Status: Partially implemented - Resolution legislation and crisis management reforms (draft resolution bill and amendments) - Authorities: Draft resolution bill under development; Deposit Insurance and Credit Guarantee Corporation Act, 1961 amended on August 27, 2021 for time bound interim payment of insured deposits. - Status: No changes / In progress (varies by recommendation) - Market integrity recommendation on PEPs and domestic tax evasion as a predicate offense to money laundering - Status: No changes ### Stress testing - Table 6: India: 2024 FSAP Stress Testing Matrix — Domain: Top-Down Banking Sector Stress Tests — Solvency Risk (matrix referenced) *Source: 1indea2025002-print-pdf - 2040. Orderly transition has stronger GDP growth than* ### 1. Institutionalperimeter ### 1. Institutionalperimeter ### Institutions included and market coverage - 46 SCBs, including 12 PSBs, 20 private sector, and 14 foreign banks (all under standardized approach). - 215 Urban Cooperative Banks (UCBs). - The sample of SCBs covers 94 percent of commercial bank assets; the sample of UCBs covers 68 percent of the assets of the cooperative bank sector. - For liquidity risk (subject to availability of cash-flow data): 46 SCBs; the 46 SCBs account for 94 percent the commercial bank assets. - 197 NBFCs in the upper and middle layers for solvency stress tests; subcategory counts: Business Focus: ICC (167), IFC (5), MFI (22), and IDF (3); Deposit policy: Deposit-taking (16) and non-deposit-taking (181); Ownership: Government-owned (13) and non-government-owned (184); Supervisory Intensity: Upper (8) and Middle (189). - 295 NBFCs in the upper and middle layers for liquidity stress tests; subcategory counts: Business Focus: ICC (262), IFC (7), MFI (23) and IDF (3); Deposit policy: Deposit-taking (19) and non-deposit-taking (276); Ownership: Government-owned (19) and non-government-owned (276); Layers: Upper (7) and Middle (288). - 243 open-end debt-oriented schemes managed by 45 Asset Management Companies (AMCs) for mutual fund liquidity analysis. ### Data sources and baseline dates - Supervisory data provided by the Reserve Bank of India. - Other data sources: Fitch, Haver Analytics, IMF Global Assumptions (GAS), IMF WEO, Bloomberg (for pricing and trading volume), Financial Soundness Indicators. - Main scenario-based stress tests use data as of June 2024; sensitivity analysis uses data as of September 2023. - Liquidity coverage ratios, NSFR and cash flow tables from supervisory data as of September 2023. - Mutual fund data: March 2018 to March 2024 (fund characteristics, cash flows, portfolios, bond market trading). --- ### Channels of risk propagation (methodologies and satellite models) - Balance sheet-based tool developed by the IMF (top-down). - Satellite models developed by the FSAP team (dynamic panel estimate using 2015: Q1-2023: Q3 data for banks; credit risk satellite models for NBFCs estimated using 2020:Q1-2023:Q3 data). - Credit risk: Parameters (default probabilities, NPL ratios, and provisions) projected at the bank/NBFC level and at NBFC level (PDs, NPLs, provisions). - Net Interest Income: Two complementary approaches (structural and empirical); empirical approach uses regressions on individual bank data and pass-through estimates (net interest income, interest income, interest expenses); structural model uses repricing ladders on interest-bearing assets and liabilities. - Net Fees and Commission income and other income/expenses: assumption (growing with total assets). - Market risk: Duration approach for interest rate instruments for SCBs; for UCBs assuming average duration from SCBs. - Profitability for NBFCs: panel regressions and structural repricing ladders; other balance sheet and profitability components grow with total assets. - Mutual funds: standardized IMF framework for assessing price impact from mutual fund sales; Redemption Coverage Ratio as measure of liquidity resilience; redemption shocks calibrated via historical simulation (Value-at-Risk percentiles) and flow-performance approach. - Liquidity cash-flow analysis: net cash balance accounting for available unencumbered assets, contractual and behavioral inflows/outflows; complemented with LCR and NSFR analysis. --- ### Stress test horizons and scope - Bank solvency stress test horizon: 3 years (2024-2026). - NBFC solvency stress test horizon: 3 years (2025 – 2027). - Cash-flow liquidity analysis horizon: up to 12 months; LCR stress test horizon: one month. - Mutual fund test horizon: Instant. --- ### Tail shocks, scenarios, and scenario calibration - Baseline: Spring 2024 WEO. - Two adverse scenarios derived from IMF’s 40-country DSGE Global Macrofinancial Model (GFM): stagflation and recession. - Stagflation scenario: U-shaped path for real GDP growth, tightening global financial conditions, global supply chain disruptions, rise of commodity prices, de-anchoring of inflation expectations, trade-off for monetary policy between unemployment and inflation, and sovereign distress as described in the RAM. - Recession scenario: negative domestic demand shocks and loss of confidence in addition to global shocks but without de-anchoring of inflation expectations domestically or globally. - Adverse scenarios assume extreme tail stress aiming at a 2.8 standard deviation shock over two years cumulative GDP growth relative to the 2024 Spring WEO baseline GDP. - Historical context: 2017 FSAP assumed a 2.1 standard deviation shock (data up to 2017); the 2017 FSAP shock corresponds to a 1.7 standard deviation shock using data up to 2023. Excluding the Covid-shock, the most severe growth decline occurred in 1991 (a 1.1 standard deviation shock relative to baseline). The combination of the 2018-2019 NBFC crisis and the 2020 Covid-shock was about a 4 standard deviation shock relative to 2018 WEO projection. - Scenarios assume a constant credit-to-GDP ratio (banks continue to supply credit at the same rate as nominal GDP growth). - Average yearly growth of credit in the baseline, stagflation and recession scenarios are respectively 11.1 percent, 72. percent and 5.7 percent. - Liquidity scenarios: baseline and various adverse scenarios including reverse-stress testing; LCR adverse scenarios set run-off rates on retail deposits and unsecured wholesale deposits at specified multiples of Basel III run-off rates: - Mild-severe LCR: retail deposits 125 percent and unsecured wholesale deposits 115 percent of Basel III run-off rates. - Severe LCR: retail deposits 150 percent and unsecured wholesale deposits 125 percent of Basel III run-off rates. - NBFC liquidity sensitivity: two government securities classification assumptions and front-loading of outflows; assume zero percent roll over rates on non-performing loans’ cash inflows over the 12-month stress horizon and a rollover rate ranging between 30 and 80 percent for performing loans’ cash inflows. - Mutual fund redemption shock calibration: - Historical simulation approaches: Fund homogeneity, Fund heterogeneity, Fund family. - Asset valuation shock haircuts in line with interest rate shocks from bank liquidity adverse scenarios. - Asset liquidation assumed pro-rata. --- ### Risks assessed and behavioral adjustments - Risks/factors assessed: - Credit risk on loan portfolios (banks, NBFCs). - Interest rate risk in the banking book (IRRBB). - Market risk from fixed income securities (interest rate, spreads). - Concentration risk for NBFCs: Top 1 and Top 10 exposures, borrower and industry concentration. - Funding liquidity risk and market liquidity risk (asset haircuts, potential fire sales). - Behavioral adjustments: - Balance sheet assumptions such that credit growth ensures that credit-to-GDP ratio remains constant. - Cures no/with write-offs and new credit production endogenously consistent with credit growth assumption, based on data availability. - Portfolio composition unchanged over time (banks). - Cash-flow analysis may consider behavioral assumptions about counterparties’ willingness to transact based on banks’ solvency and liquidity conditions. - NBFC behavioral adjustments aligned to bank solvency risk stress test assumptions. - Mutual funds assumed to liquidate assets pro-rata upon redemption. --- ### Regulatory and market-based standards, calibration of risk parameters - Interest Income, Interest Expenses (or Net Interest Income), and other P&L items evolve in line with scenarios, starting point from supervisory data adjusted for potential seasonality patterns. - Dynamics on model-estimated NPLs and/or default rates align with scenarios, starting point from supervisory data adjusted for potential seasonality patterns. - Regulatory hurdle rates for SCBs: 9 percent (capital) and 5.5 percent (CET1). Results with higher hurdle rates of the 2.5 percent CCB are also considered. - UCBs regulatory minima: minimum CAR ratio of 9 percent for UCB classified as Tier 1 and 12 percent for UCB classified as Tier 2 to four (no capital charges for market risks nor CCBs). - Bank-level average risk weights for credit risk from recent bank supervisory data. - NBFC regulatory requirements (Master Direction - Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2024): Tier 1 and Tier 2: 15 percent, Tier 1: 10 percent (12 percent for NBFC-MFI) and Common Equity Tier 1: 9 percent. - Liquidity regulatory standards: LCR hurdle rate set at 100 percent at the aggregate currency level (per Basel III and domestic regulation); NSFR per Basel III limit of 100 percent. - Calibration of stress parameters (run-off rates, roll-over rates, asset haircuts) based on relevant international experiences and supervisory data. --- ### Reporting format and outputs - Bank solvency outputs: - Aggregate results and contributions to evolution of capital ratios. - Distribution of bank-level capital ratio and NPL ratio results in the TN as in the Reserve Bank of India Financial Stability Report. - Bank liquidity outputs: - Changes in the system-wide liquidity position (drivers for cash outflows, cash inflows and counterbalancing capacity). - Distribution of banks’ liquidity positions. - Number of institutions with LCR/NSFR below regulatory limits. - Amount of liquidity shortfall. - NBFC solvency outputs: - Aggregate results on the evolution of the capital adequacy ratio and its driving factors. - NBFC liquidity outputs: - Cumulated net funding gap after counterbalancing capacity. - Number of NBFCs with a negative cumulated net funding gap after counterbalancing capacity. - Changes in the system-wide liquidity position (cash outflows, cash inflows and net inflows). - Mutual fund outputs: - Redemption Coverage Ratio and measures of price impact from mutual fund sales; calibration results from historical and flow-performance approaches; asset valuation haircut impacts and liquidity resilience indicators. *Source: 1indea2025002-print-pdf - 1. Institutionalperimeter* ### 3. Tail shocks ### 3. Tail shocks ### Scenario - Three scenarios: - A baseline scenario uses the historical simulation approach that calibrates the redemption shock based on March 2018 – March 2024 cash flow data. - Two adverse scenarios (recession and stagflation) with exogenous market shock that trigger asset depreciation through interest rate risk and create additional redemption shocks. - Interest Rate Shock (Mutual Fund Liquidity Analysis) — interest rate shock values presented by asset class and scenario: - Government Bond short-term: (0.25) - Government Bond long-term: 1.86 - Recession: 2.10 (short-term), 4.30 (long-term) - Corporate bond: 4.16 (recession), 5.70 (stagflation) ### Output presentation (mutual funds and systemwide liquidity) - Outputs produced: - Redemption Coverage Ratio (RCR, liquid assets/redemption amount) and liquidity shortfalls on fund level. - Number of funds that cannot survive the shocks (with the RCR ratio below one and liquidity shortfall larger than zero). - Total value of assets sold under different scenarios, compared with the fire power of the CDMDF. ### Domain and Institutional perimeter (Interconnectedness / Systemwide Liquidity Analysis) - Institutions included: - Economy-wide flows of fund for aggregate macroeconomic-financial linkages. - Intra-financial sector network: banks, non-bank financial institutions (NBFCs), mutual funds, and flow of funds data for the network analysis within the financial system. - For stress tests, 46 SCBs account for 94 percent of the commercial bank assets and 307 NBFCs in the upper and middle layers, accounting for 86 percent of total NBFC assets. - Data and baseline date: - Data source: sector-aggregate balance sheet for banks, NBFCs, and mutual funds, supplemented by supervisory data (bank, NBFC, mutual funds) and structural liquidity of banks and NBFCs. - Starting position: end 2023. - Data granularity: economic sector aggregate and financial linkages by counterparts and instruments. ### Channels of risk propagation and methodology - Methodological basis: - Based on IMF working paper (Oura, 2022). - Cash-flow based liquidity stress tests for banks and NBFCs and link assumption parameters across these institutions and other counterparts, including mutual funds, non-financial corporations, households, and other financial institutions. - Cash flow analysis is based on sectoral aggregate. - Cash-flow computations for banks and NBFCs: - Post-stressed liquid asset = Counterbalancing capacity (CBC) at month x + net cash flows from operation within x months with the shock parameters – deposit withdrawal (stock concept). - If post-stress liquid asset is less than zero, it means the system experiences aggregate liquidity shortfalls. - The cash-flow stress test analyzes the net cash balance, accounting for available unencumbered assets, contractual cash inflows and outflows, and behavioral flows. - Stress test horizon: - For banks and mutual fund: one month. - For NBFCs: six months. ### Tail shocks: haircuts and sectoral shock parameters - Haircuts to liquid assets: - Cash and banks’ deposit: no haircut. - Other current assets (only applies to mutual fund): 5 percent. - Government securities: 15 percent. - Non-government debt securities: 50 percent. - Equity (mutual fund only): 50 percent. - Silver, gold, and other commodities: 100 percent. - Shocks to NBFCs: - Loans and advances: 10 and 40 percent of no repayment (no shock to other sectors) from households and NFCs, respectively. - Committed line of credit: not called. - Refinancing of NBFCs’ maturing borrowings: 0 percent. - Refinancing of maturing customers’ loans: 40 percent. - Front loading payment (covenants) from the next cashflow bucket: 10 percent. - All other inflows and outflows are materialized as shown in the structural liquidity return. - Shocks to banks: - Term loans: 36 percent of runoff rate (repayment + refinance) only apply to Households and NFCs. - Committed line of credit from other FIs: 100 percent called. - Banks’ committed line of credit (outflow): 20 percent called (assuming 80 percent of total banks’ committed credit line goes to NBFCs). - Deposit withdrawal (applies to stock of all deposits): 7 percent from households, 17 percent from NFCs, 20 percent from other financial institutions, and NBFCs deposit withdrawal (actual liquidation from stress). - Shocks to mutual funds: - Redemption shock 25 percent. - Shock to asset (asset revaluation with the following haircuts) as specified in haircuts above. ### Output presentation (system liquidity and institutions) - Outputs include: - (1) changes in the system-wide liquidity position (possibly including important drivers for cash outflows, cash inflows and counterbalancing capacity), - (2) distribution of banks’ liquidity positions, - (3) number of institutions with LCR/NSFR below regulatory limits, - (4) amount of liquidity shortfall. ### Banking Sector Climate Risk Analysis — Physical Risk (Tropical Cyclone and Agriculture) - Institutional perimeter and data: - Institutions included: 46 SCBs, including 12 PSBs, 21 PVBs, and 13 FBs. The sample of SCBs covers 94 percent of commercial bank assets. - Data and baseline date: individual banks’ loan exposures and NPL by sector from RBI; micro firm-level data for balance sheet and income statement (P&L) for 2013-2023 from Moody’s Orbis; PDs of listed firms for 2017-2023 from Moody’s KMV. Data as of March 2023 (cut-off). - Tropical cyclone methodology: - Catastrophe risk modeling framework components: Hazard (probabilistic cyclone tracks perturbed in the CLIMADA model under RCP 8.5), Exposure (spatially disaggregated capital stock based on LitPop data), Vulnerability (damage functions calibrated for the North India Ocean). - Macro-approach uses the same DSGE model (GFM) as in bank and NBFC solvency stress tests, augmented to include potential damages to physical capital, total factor productivity (TFP), and recuperation period due to climate risks. - Satellite models are the same as those applied in the bank solvency stress test. - Risk analysis horizon is 3 years for tropical cyclone impact on the banking sector. - Scenario used: the extremely severe one-in-500-year return period scenario. - Under the severe one-in-500-year return period event, it may take up to three years to fully recover from the event. - Agriculture methodology and results: - Integrated modeling framework tailored to India-specific climate conditions and agricultural practices: changes in crop yield in hydrological, crop, crop-pest, and economic models; impact on individual firm’s revenues and costs through firm-level P&L and balance sheet modeling; bank-level credit risk modeling. - Risk analysis horizon is 3 years for the agricultural sector analysis. - Aggregate crop output declines by 13 percent, 14 percent, and 30 percent under the 1.5°C, 2°C, and 3.5°C scenarios, respectively. - Five climate scenarios used: small single-year shock; small compound shocks (three consecutive years); small-to-large compound shocks (small, then medium, then large in years 1–3); large single-year shock; large-to-small compound shocks (large, then medium, then small in years 1–3). ### Banking Sector Climate Risk Analysis — Transition Risk - Institutional perimeter and data: - Institutions included: 46 SCBs (12 PSBs, 21 PVBs, 13 FBs) covering 94 percent of commercial bank assets. - Data and baseline date: micro firm-level data for balance sheet and P&L for 2013-2023 from Moody’s Orbis; PDs of listed firms for 2017-2023 from Moody’s KMV; firm-level emissions from SEBI and ICE; individual banks’ loan exposures and NPL by sector from RBI. Data as of March 2023 (cut-off). - Methodology (integrated macro-micro approach): - Step 1: Simulate climate scenarios in CGE model IMF-ENV to derive sectoral impacts and emissions costs under different transition scenarios. - Step 2: Apply scenario and sectoral dependent carbon prices and sectoral impacts to firms’ P&L and balance sheets. - Step 3: Establish relationship between firm-specific default rates and three firm-level balance sheet indicators (interest coverage ratio, current ratio, leverage ratio) via fixed effects panel regression. - Step 4: Use elasticities from Step 3 to infer firms’ stressed default rates. - Step 5: Produce scenario dependent, weighted sectoral PDs based on firm-level PDs and total outstanding debts. - Step 6: Produce bank-level, sectoral specific delta PDs and expected losses between Current Policies and transition scenarios. - Transition risk analysis horizon is up to 2040. - Risks and buffers: - Risks: Credit risk; stranded assets risk from coal power are considered. - Outputs: Measures of credit risk at the sectoral level and system-wide level comparing Current Policies and mitigation scenarios. ### Key risk matrix highlights (selected entries) - Sources of risk, likelihood, and expected impact: - Abrupt global slowdown or recession: Likelihood Medium; Impact: Medium. - Deepening geoeconomic fragmentation and/or intensification of regional conflict(s): Likelihood High. - Monetary policy miscalibration: Likelihood Medium; Impact: Medium-High. - Domestic sovereign debt distress: Likelihood Medium. - Cyberthreats: Likelihood Medium; Impact: Low-High. - Extreme and chronic climate events: Likelihood Medium; Impact: Low-Medium. - Disorderly energy transition: Likelihood Medium; Impact: High. - Loan defaults of large corporate infrastructure projects: Likelihood Medium. *Source: 1indea2025002-print-pdf - 3. Tail shocks* ### Appendix I. Report of the Observance of Standards and Codes— ### Appendix I. Report of the Observance of Standards and Codes— Insurance Core Principles ### A. Introduction and Scope - Assessment carried out as part of the 2024 Financial Sector Assessment Program (FSAP). - Assessment made against the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in November 2019. - Excludes standards of the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) as India has not identify an International Active Insurance Group (IAIG). - Conducted by Charles Michael Grist, Financial Sector Consultant, Finance and Markets Global Practice, the World Bank Group, and Suzette Jeanne Vogelsang, Senior Financial Sector Expert, International Monetary Fund, in March 2024. - Notes progress (since the 2017 FSAP focused review) on recommendations such as risk based-supervision, risk-based capital, and solvency reforms; progress was slow and impacted by the COVID 19 pandemic but is now progressing. ### B. Information and Methodology Used for Assessment - Assessment based solely on laws, regulations, and supervisory practices in place at the time of the assessment in March 2024. - Does not reflect new and on-going regulatory initiatives; key proposals for reforms summarized as additional comments. - IRDAI provided a full and comprehensive self-assessment, supported by examples of actual supervisory practices and assessments. - Assessors consulted with IRDAI, Minister of Finance (MoF), insurance companies, industry representatives, and professional organizations. ### C. Overview — Institutional and Macroprudential Setting H3: Institutional Framework and Arrangements - Five main supervisory authorities with sector-specific responsibilities: - Reserve Bank of India (RBI): monetary policy; regulates/supervises banks, non-banking financial institutions, and other financial intermediaries; governed by the Reserve Bank of India Act, 1934. - Securities and Exchange Board of India (SEBI): regulates capital markets; operates under the Securities and Exchange Board of India Act, 1992. - Insurance Regulatory and Development Authority of India (IRDAI): statutory body for regulating and promoting insurance and reinsurance industries; established under Insurance Regulatory and Development Authority Act 1999 (IRDAI Act). - Pension Fund Regulatory And Development Authority (PFRDA): regulates/promotes pension-related activities; established under the Pension Fund Regulatory & Development Authority Act 2013 (PFRDA Act). Insured private pensions are governed under insurance law. - International Financial Services Centres Authority (IFSCA): regulates offshore financial services within India’s International Financial Services Center; established under the International Financial Services Centres Authority Act, 2019. - Financial Stability and Development Council (FSDC) oversees and coordinates these organizations; Minister of Finance is Chairman; membership includes heads of RBI, IRDAI, SEBI, and PFRDA. - Important general laws impacting the financial sector include: - Companies Act, 2013 - Foreign Exchange Management Act, 1999 - Prevention of Money Laundering Act, 2002 - Consumer Protection Act, 2019 - Motor Vehicles Act, 1988 - Workmen’s Compensation Act, 1923 - Insurance Act (including amendments) is the principal Act governing the insurance sector; supplemented by the IRDA Act. Other specific laws: Marine Insurance Act, 1963; Public Liability Insurance Act, 1991. - IRDAI composition and objectives: - Section 4: ten-member body (a chairperson, five full-time members, four part-time members) appointed by Government of India. - Preamble objective: “To provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.” - Section 14 duties and powers include issuance and modification of certificates of registration; protection of policyholders’ interests; specifying qualifications and codes of conduct for intermediaries; promoting efficiency and professional organizations; levying fees; inspections, enquiries, and audits; regulating investment of funds; regulating maintenance of margin of solvency; adjudication of disputes; supervising Tariff Advisory Committee; specifying percentages of premium income to finance professional organizations; specifying percentage of business in rural or social sectors; exercising other powers as prescribed in regulation. - IRDAI staffing and funding: - Headquartered in Hyderabad, Telangana; regional offices in Mumbai and New Delhi. - Authorized staff complement of approximately 336; approximately 201 actual staff in March 2023. - Approximately 46 staff are female, constituting approximately 23 percent of the actual staff complement. - Average age of all staff is approximately 42 years. - Funded solely by fees and charges on industry in practice (though IRDA Act allows Government grants and industry fees). - Key IRDAI initiatives and timelines: - Implementation of a risk-based capital regime: project team formed; first quantitative impact study (QIS) performed late in 2023; QIS results being analyzed at time of mission; anticipated implementation date is 2025. - Implementation of a risk-based supervisory approach: project team and consultant appointed; significant progress; currently in first phase of pilot examinations; anticipated implementation date is 2025. - Proposed amendments to the Insurance Act and the IRDA Act (in consultation with the Ministry of Finance) to increase confidence, competition, and efficiency. Proposed amendments aim to enhance financial security of policyholders, promote policyholders’ interests, improve returns to policyholders, facilitate entry of more players, enhance operational and financial efficiencies, and enable ease of doing business. - International Financial Services Centre Authority (IFSCA): - Established in 2020 under the International Financial Services Center’s Authority Act, 2019; headquartered at GIFT City, Gandhinagar, Gujarat. - Unified authority for development and regulation of financial products, services, and institutions in the IFSC. - Currently only a small percentage of Indian insurers’ premiums are written within the IFSC and these are offshore business; assessment focuses on domestic market rather than the IFSC. H3: Industry Structure and Recent Trends - Asset and premium growth: - Insurance sector assets grew from 17.8 percent of Gross Domestic Product (GDP) in 2017 to over 22 percent of GDP for the period ending March 31, 2023. - Insurance assets constitute 12 percent of total financial sector assets. - Gross premiums for the life sector grew by 13.0 percent from 2022 to 2023. - Non-life sector gross premiums grew by 16.4 percent per annum from 2022 to 2023. - Between 2017 and 2022, gross premiums written grew at an average annual rate of approximately 11.7 percent; nominal GDP growth during the same period was 6.8 percent. - Gross and Net Premiums showed the same level of growth due to a constant share of reinsurance over the time period. - Market ranking and penetration: - India is one of the world’s ten largest insurance markets and the second largest of the emerging markets and developing economies. - Insurance penetration (ratio of insurance premiums to GDP) is in line with most BRICS countries except South Africa; much higher than neighboring Pakistan; lower than Singapore, Malaysia, or Thailand. - Market composition: - Life sector accounts for approximately 75 percent of insurance premiums written. - Approximately 63 percent of the life sector total is made up of participating and non-participating life insurance products. - Unit linked life insurance products make up approximately 13 percent of the market. - Pension products provided by life insurers account for 19 percent of the life sector total. - Annuity products account for approximately 4 percent of the life sector total. - All other products constitute less than 1 percent of premiums written. - Approximately 61 percent of life business is written by the public sector insurer Life Insurance Corporation of India (LIC), while 39 percent is written by private sector insurers. - The five largest life insurers accounted for 85 percent of premiums written during 2023. - Non-life sector composition and distribution: - Non-life sector accounts for approximately 25 percent of direct premiums written in 2022–23. - Healthcare and personal accident insurance account for 38 percent of the non-life sector total. - Motor insurance constitutes 32 percent of the non-life sector total. - Fire insurance makes up approximately 9 percent of sector premiums. - All other classes constitute 21 percent of the non-life sector total. - More than 98 percent of premiums written by Indian non-life insurers are written within India. - Approximately 39 percent of non-life business is written by public sector insurers; approximately 61 percent is written by private sector insurers. - Ownership and market structure: - Mix of state-owned and private sector insurers and reinsurers. - State-owned life insurer established under The Life Insurance Corporation Act, 1956. - State-owned non-life and reinsurance companies established under the General Insurance Business (Nationalization) Act, 1972. - All private sector insurers are public limited liability companies registered under the Companies Act. - All insurers registered by IRDAI subject to IRDAI (Registration of Insurance Companies) Regulations. - Foreign reinsurers permitted to establish branch operations under 2015 amendments. - State-owned companies wrote approximately 56 percent of gross premiums written in 2023. - State-owned reinsurer wrote approximately 67 percent of Indian reinsurance business in 2023. - Part of reinsurance business derived from a compulsory requirement for Indian non-life insurers to cede 4 percent of the sum assured of each policy (with some limitation and exclusion) to the state-owned reinsurer in 2023 (percentage is annually prescribed by the IRDAI in consultation with the Minister of Finance). - Foreign investment: - Foreign participation limit increased from 26 percent to 49 percent in 2015, and from 49 percent to 74 percent in 2021. - Recent market change mainly increased existing investments rather than many new insurers. - Industry sources indicate difficulty for foreign investors to find local Indian partners with sufficient capital and industry knowledge to take up remaining shareholding. - Market participants and concentration: - Total of 69 registered insurers at end of March 2023: 25 life insurers and 32 non-life insurers. - Seven insurers are state owned (six non-life insurers and one life insurer). - One state-owned domestic reinsurer; ten branches of foreign non-life reinsurers; Lloyds India (registered branch of Lloyds UK) writes reinsurance business. - Eight insurers are listed on Indian Stock Exchanges including some state-owned insurers. - LIC accounted for approximately 61 percent of premiums written by life insurers in 2023 (down from 66 percent in 2019). - LIC was classified as a Domestic Systematically Important Insurer (DSIIs) by IRDAI in September 2021 and is subject to enhanced supervision. - LIC ranked the fourth largest life insurer globally. - LIC is the only life insurer underwriting business outside of India through branches established outside India. - Largest private sector life insurer accounted for approximately 9 percent of premiums underwritten in 2023. - Most private life insurance companies are joint venture partnerships between a foreign life insurance group and a local partner. - Cross-sectoral ownership links between banks and insurers for private sector insurers are common. - Largest non-life market participant New India Insurance Company Limited (state-owned) wrote approximately 15 percent of gross direct premiums for the sector in 2023. - Three other state-owned general insurers accounted for an additional 19 percent of Gross Direct Premiums written. - A group of 21 private sector general insurers accounted for 51 percent of Gross Direct Premiums (up from 47 percent in 2019). - Six stand-alone private sector health insurers wrote 10 percent of Gross Direct Premiums (up from 7.5 percent in 2019). - Two specialized state-owned insurers (export credit and agricultural insurance) accounted for approximately 6 percent of gross premiums written. *Source: Appendix I. Report of the Observance of Standards and Codes— Insurance Core Principles (FSAP assessment material).* ### 26. The interconnectedness of the insurance sector with the rest of the financial sector is ### 26. The interconnectedness of the insurance sector with the rest of the financial sector is limited due to regulatory restrictions ### Interconnectedness and ownership - Ownership of insurance companies by banks is permitted, subject to a maximum shareholding of 30 perfect. The insurers were well within this limit. - Related party transactions are limited per type under the Companies Act. - There have been 11 financial conglomerates with insurance operations identified in the Indian financial sector. - The IRDAI is the lead supervisor of four of these financial conglomerates as most of the business in these four conglomerates are insurance business. - Examples of conglomerates: - LIC, the state-owned life insurer and its subsidiaries, where the state directly owns the insurance company. - State Bank of India and its subsidiaries, which include two insurance companies directly owned by the bank. - The IRDAI has not yet identified any other non-financial insurance groups. The shareholding of insurers is diverse and demonstrates the presence of non-financial insurance groups. ### Reinsurance and compulsory cessions - Reinsurance business, written by authorized reinsurers, totaled approximately 546,775.6 INR million in 2023. - The state-owned reinsurer accounted for approximately 67 percent of this total while private sector foreign branches accounted for 33 percent of the total. - The state-owned reinsurer receives an obligatory cession from all domestic general insurers. ### Market structure and concentration - Market concentration: - Herfindahl-Hirschman Index: greater than 3,800 for the life industry (indicating a highly concentrated industry). - Herfindahl-Hirschman Index: less than 600 for the non-life industry (indicating a highly competitive market). - Market shares: - The five largest life insurers accounted for 85 percent of premiums written in 2023, down from 88 percent in 2019. - The five largest non-life insurers accounted for approximately 42 percent of premiums written in 2023, down from approximately 46 percent in 2019. ### Financial distress history and supervisory actions - Since India’s independence in 1947 there were no instances where insurers failed to meet their policyholder obligations. - IRDAI has taken regulatory action against insurers due to financial distress or governance issues; remedies included requiring a portfolio transfer to another insurer or prohibiting the insurer from engaging in new business. ### Distribution channels and compulsory products - Distribution: - Insurance is mainly distributed through direct sales and agents. - Bancassurance in 2023 accounted for almost 33 percent of individual life premiums and almost 8 percent of group life premiums. - Insurance brokers are largely focused on commercial business and have only a small share of the life insurance market. - Internet-based sales and tele-market insurance sales represent very small but growing channels. - Microinsurance, a growing niche, is sold by agents with special licenses. - Compulsory insurance: - The most significant compulsory product is compulsory third-party motor liability insurance. - Until April 1, 2024, premiums were prescribed and insurers were required to underwrite their pre-determined portion of the market. As of April 1, the prescribed tariff requirement was removed. - Under the legislation, the sum assured is unlimited and currently there is no time barring limits for reporting of claims. - Other compulsory insurances include professional indemnity insurance for several professions and compulsory environmental cover for oil tankers and public liability insurance for hazardous chemicals. ### Catastrophe pooling and social obligations - Major voluntary pooling mechanisms: - Indian Market Terrorism Risk Insurance Pool (IMTRIP), formed in 2002, current membership of 25 insurers. - India Nuclear Insurance Pool (INIP), formed in 2015, current membership of 12 non-life insurance members. - Social and rural obligations: - IRDAI prescribes targets under the Obligations of Insurers to Rural and Social Sectors Regulations, 2015: - (i) percentage of social sector lives in total business: 5 percent - (ii) percentage of number of life insurance policies for life insurers, and percentage of gross premium written direct for general and standalone health insurers, that are from rural areas: 20 percent - All life insurers and non-life insurers exceeded their targets in 2023, with one exception. ### Complaint systems, data sharing, and InsureTech initiatives - Complaints and grievance redressal: - Each insurer must have a designated Grievance Redressal Officer, internal grievance systems, and regular reporting of complaints to the insurer’s board. - Policyholders may escalate complaints to any of 18 regional insurance ombudsmen; the 18 regional ombudsmen are part of a national council and are independent of industry. - Insurance Information Bureau (IIB): - Promoted by IRDAI; joint initiative between IRDAI and the insurance industries. - All insurers submit periodic transaction-level data on policies and claims for life, property, health, and motor business. - IIB publishes an annual report, thematic reports, provides customized information on request, and maintains a “Black-List” of agents and intermediaries who have committed fraud or contraventions of intermediary codes of conduct. - InsureTech: - IRDAI operates a regulatory sandbox under IRDAI (Regulatory Sandbox) Regulations, 2019 (as amended). - First round (2019): 67 applications (life insurance companies: 26; non-life: 23). - Second round (2022): 43 applications (non-life insurers: 24; health companies: 14). - The last year saw 2 applications submitted. - “Open house for InsureTech/FinTech entities” is a monthly dialogue platform for suggestions, demonstrations, and engagement with IRDAI. ### Account Aggregator Framework and supervisory technology engagement - The RBI, in consultation with the FSDC, developed the Account Aggregator Framework. - Account Aggregators are digital platforms through which account holders add their accounts (banking, insurance, investments, and pension fund) to have a single digital view. - FIPs and FIUs are entities registered and regulated by one of the four financial sector regulators (RBI, SEBI, IRDAI, and PFRDA). - IRDAI has issued a circular for participation in the Account Aggregator framework by insurers to ensure onboarding of insurance companies. - IRDAI participates in committees on technology including: - Inter regulatory committee on Digital Payments - Committee to review progress of Account Aggregator Framework - Global Financial Innovation Network (GFIN) - IRDAI has adopted business analytics for supervision that collates regulatory return data and generates standard and ad-hoc reports for offsite supervision. ### Strategic direction - IRDAI strategy: “Insuring India by 2047—new landscape for insurance sector” (2047 strategy). - Objectives include enabling every citizen to have appropriate insurance solutions and making the Indian insurance sector globally attractive. - IRDAI aims to rationalize its regulatory framework to support ease of business and reduce compliance burden, implement “State Insurance Plans”, and encourage and support digitalization. - Strategy developed in support of Government of India’s vision of financial inclusion and accelerating reforms. ### Accounting, performance, assets, and investment profile - Accounting: - IRDAI prescribes valuation bases and accounting matters for registered insurers’ published annual financial statements and regulatory purposes. - Indian accounting standards largely converge with IFRS, but IRDAI requires insurers to value assets at historical cost instead of fair value. - Adoption of IFRS 9 and IFRS 17 has been postponed; IRDAI is considering a pilot project with certain private insurers to implement IFRS 17. - Life insurance profitability: - After tax profits of life insurers grew from 77,510 INR million in 2022 to 427,880 INR million in 2023. - Only 15 of 24 insurers reported after tax profits in 2022, while 17 insurers reported after tax profits in 2023. - Public sector insurers’ after-tax profits increased by 800 percent; private sector insurer profits increased by approximately 72 percent. - Non-life industry profitability: - Net loss in 2023: 25,660 INR million. - Net loss in 2022: 28,570 INR million. - Public sector non-life insurers experienced losses of 106,070 INR million in 2023. - Offsetting profits in 2023 included: - Private sector non-life insurers: 46,650 INR million - Specialized insurers (Agriculture Insurance Co of India Ltd, and Export Credit Guarantee Corporation of India Ltd.): 29,300 INR million - Stand-alone private sector health insurers: 4,470 INR million - Investment income growth (2023 vs 2022): - Public sector life insurer: 7.25 percent growth - Private sector life insurers: (39.86 percent) decline in investment income - Non-life insurers overall: 19.34 percent growth - Growth in investment income by segment: - Public sector insurers: 34.54 percent - Private sector insurers: (6,35 percent) - Standalone health insurers: 21.48 percent - Specialized insurers: 2.06 percent - Assets and growth: - Insurance sector assets grew by 54.2 percent from 2019 to 2023 (average growth of 11.4 percent per annum). - Public sector insurers’ assets grew by 9.5 percent over the same period. - Private sector insurers’ assets grew by 12.72 percent over the same period. - Life insurance sector represents 91 percent of total insurance sector assets and showed a growth of 10.32 percent from 2022. - Private sector insurers’ asset bases increased more than public sector insurers across sectors. - Investment composition (concentration in government and state-government securities): - General insurers (including standalone health, specialized insurers, and reinsurers): 75 percent of total investments comprises government (32.1 percent), state-government (20.9 percent) and housing and infrastructure (21.9 percent) securities. - Life insurers: 70 percent of total investments comprise government securities (39.9 percent), state-government securities (21.2 percent) and housing and infrastructure (6.1 percent) securities. - Note: State-government securities are securities issued by the 28 states in India as subnational governments. ### Solvency, capital regime, and economic capital - Solvency margin requirement: - Insurers must maintain a solvency margin of admitted assets in excess of liabilities of more than 150 percent of the Required Solvency Margin. - Capital regime: - IRDAI has yet to transition to a risk-based capital regime. - Current regulatory capital requirements are a two-factor based calculation. - Key numeric elements: - Minimum capital requirement (MCR): ~ USD 12 million for both Life and Non-life - Minimum solvency ratio (ASM: RSM): 150 percent for both Life and Non-life - Life capital calculation highlights: - RSM components: 1) Total gross technical provisions (best estimate including provision for adverse deviation) multiplied by factors prescribed per line of business and factor for reinsurance recognition (restricted to not less than 85%). 2) Total gross sum at risk multiplied by factors prescribed per line of business and factor for reinsurance recognition (restricted to not less than 50%). - Non-life capital calculation highlights: - Method applies two factors (RSM1 and RSM2) to each line of non-life business; capital requirement is the higher of RSM1 and RSM2. - RSM1 = 20% of the higher of the gross premiums multiplied by factors per line of business and net premiums multiplied by factors per line of business (both gross and net premiums are the 12 months preceding the calculation). - RSM2 = 30% of the higher of the sum of the gross incurred claims multiplied by a factor per line of business and the sum of the net incurred claims multiplied by a factor per line of business. Both gross and net incurred claims are calculated as the greater of the incurred claims of the 12 months preceding the calculation and the average of the incurred claims for the 36 months preceding the calculation. - Solvency outcomes and concerns: - On average the insurance sector (including sub-sectors) is well capitalized and exceeds the minimum solvency ratio. - Reinsurers, on average, maintain a higher solvency ratio than direct life and non-life insurers. - Three state-owned non-life insurers, accounting for approximately 19 percent of premiums written, are operating below the minimum solvency ratio. - Government has injected capital in the past and is expected to do so in the future; allowing insurers to operate in a financially unsound position can lead to underpricing and decay of market confidence. - Economic capital reporting: - Insurers must submit supplementary information annually on an economic capital basis in a prescribed format; the prescribed economic capital calculation is primarily based on stresses/shocks on specified parameters. - Economic capital contributions by risk (life sector): - Market risk: 65 percent - Insurance risk: 13 percent - Credit risk: 8 percent - Economic capital contributions by risk (non-life sector): - Insurance risk: 72 percent - Market risk: 22 percent - Credit and operational risk: 6 percent ### Risks highlighted - Interest rate risk: - Increase in bond yields would not be directly visible due to assets being valued at historic cost; losses will only materialize when bonds are sold. - Losses for life insurers would be more material than non-life insurers because life insurers hold longer-term bonds ranging from 10 to 50 years. - Life insurers incorporate rising bond yields in pricing, liability valuation, and assumptions for surrenders or lapses; asset liability management is critical in the life sector to minimize mismatch risk. - Inflation (section ends with "Inflation" in the source text and no further elaboration provided). *Source: 26. The interconnectedness of the insurance sector with the rest of the financial sector is limited due to regulatory restrictions (extracted from the supplied PDF content).* ### 52. India’s inflation rate is volatile but has not shown as significant increases as many ### 52. India’s inflation rate is volatile but has not shown as significant increases as many other countries globally. ### Inflation and impact on insurance - Non-life insurers are mostly affected by inflation through claims costs (mainly in the motor, property, liability, and health classes of policies) and operating expenses. - Non-life insurers actively monitor and manage inflation risk through: - increases in premiums, - changes to terms and conditions of policies (for example, deductibles or excess payments by policyholders), - risk sharing with the policyholder. ### Climate risk and reinsurance - India is a peninsular country with exposure to natural catastrophe perils like earthquakes, rockslides, landslides, droughts, floods, and cyclones. - Major natural catastrophe events in the last decade included cyclones, floods, and landslides. - Non-life insurers mitigate catastrophe risk by entering into reinsurance arrangements, including: - reinsurance with locally registered reinsurers, - cross border reinsurers where domestic capacity is insufficient. - The overall net retention rate of the non-life insurers was at 72 percent for 2023 and in line with 2022. - The reinsurance arrangements in place so far appears to be adequate considering the underwriting performance. - The Government of India does not provide any support. - The IRDAI has taken steps to enhance supervision of climate risk and to encourage insurers to deliver insurance-based solutions: - carried out a climate risk survey; findings were presented to all Chief Risk Officers of insurers, - established a Climate Risk Assessment, Governance and Disclosure Committee (2023) to propose a framework for climate related disclosures, governance requirements for identifying, managing, assessing, and reporting on climate risk throughout the governance structures of insurers. ### Cyber risk and regulatory actions - The IRDAI has issued several regulatory instructions dealing with cyber risk, including an updated “Information and Cyber security Guidelines” applicable to insurance intermediaries. - Key elements of the guidelines: - governance arrangements that must be established at an insurer or insurance intermediary, - an annual audit requirement. - The IRDAI issued a circular requiring insurers and insurance intermediaries to celebrate the "Cyber Jaagrookta (Awareness) Diwas (CJD)" on the first Wednesday of every month and to prepare an annual plan for these celebrations. - The IRDAI is cooperating with external stakeholders to enhance cyber risk frameworks: - working with other financial sector regulators to develop “Baseline Guidelines for Cyber Security” applicable to all regulated financial services entities, - constituting a Standing Committee on Information and Cyber Security to review threats inherent in existing or emerging technologies and suggest appropriate regulatory responses. ### Covid-19 effects on insurance - India was severely impacted by the Covid-19 pandemic, experiencing one of the highest infectious rates, strictest lockdown rules, and a significant economic impact. - Life insurance sector: - saw a material increase in COVID related death claims during the pandemic, - 2022 saw an increase of 957 percent from 2021. - This resulted in life insurers increasing premiums and provisions, which they now are beginning to release. - The increase in premiums was mainly because of the increase in the cost of reinsurance. - Health insurance sector: - saw a surge in claims, - in the latter part of the pandemic experienced an increase in health insurance business. - The health business reported a growth of 26.27 percent in 2021–22, making it the largest non-life insurance class of business in the market, with a share of about 36 per cent of non-life premiums written. - IRDAI pandemic-era measures to streamline business processes: - encouraged and permitted insurers to digitalize (including electronic policy documentation), - promoted digitalization of business models to support ease of claim settlements, - issued instructions covering safety measures, communication with key stakeholders, business continuity planning and product development and servicing of policies (collection of premiums and simplification of claims reporting), - instituted use and file requirements for policy documents for many types of insurance products. ### Corporate Social Responsibility (CSR) - The Companies Act and the IRDA Act require insurers to engage in CSR activities. - Legislation requires insurers to spend at least 2 percent of their average net profits over the previous three years on CSR activities. - CSR activities undertaken by insurers appear broad, ranging from scholarships and educational initiatives to environmental initiatives. ### Preconditions for effective insurance supervision — macroeconomic and demographic context - India’s macroeconomic and financial sector policies appear to be generally sound. - India was the world's fifth largest economy by nominal GDP in 2023. - Sectoral composition of GDP: - service sector made up approximately 53 percent of total GDP, - industrial sector made up 28 percent of total GDP, - agricultural sector made up 18 percent of total GDP. - Approximately 70 percent of the economy is driven by domestic consumption. - India has a population of approximately 1.4 billion with a median age of 28 years. - Average real annual GDP growth rates have been among the highest in the world in recent years, ranging from 6–7.5 percent. - The financial sector’s performance has been strong and was largely unaffected by global financial stress in early 2023. - High growth rates are expected to continue for at least the next two years. - Inflation was 4.38 percent in 2023 but is expected to further moderate as the governments’ program of price stability measures is fully implemented. - Unemployment Rates in India have averaged 8.22 percent from 2018 until 2023 and are expected to remain steady or further decline. ### Public infrastructure, legal framework, and consumer redress - Governance structure: - federal parliamentary system, - 28 state governments with law-making ability, - eight Union Territories (UTs) administrated by federal government appointees. - Legal system: - well developed, largely follows a common law system based on recorded judicial precedents, - influenced by customary laws and Muslim law, - main sources of law are the constitution, statutory laws, customary laws and case law. - Judicial system: - Supreme Court, High Courts, and subordinate courts at district, municipal and village levels, - high courts supervise magistrates for criminal cases. - Access to justice challenges: - many retail consumers find it difficult to take legal action due to high legal costs and potential for lengthy delay, - lawyers do not work on a contingency basis and there is no institutional legal aid system, - many consumers are not aware of their legal rights. - Insurance Ombudsman system: - established by Ministry of Finance Notification of 11/11/98 to deal with personal lines business disputes of less than INR 5 million, - administered by the Council for Insurance Ombudsmen, - Council appoints 17 ombudsmen working in different parts of the country, - Ombudsmen decisions are binding on all insurance companies, who must honor them within three months, - Ombudsmen’s decisions are not binding on policy holders, who may pursue other forums and the courts if dissatisfied. ### Professional standards: accounting, audit, and actuarial capacity - Institute of Chartered Accountants of India: - established under the Chartered Accountants Act, - regulates and develops the profession of Chartered Accountancy in India, - managed by a 40-member Council and functions under the administrative control of the Ministry of Corporate Affairs. - Auditing standards: - Auditing and Assurance Standard Board (AASB) established by the Council to develop and prepare auditing standards, - under the Companies Act, the AASB issues statements on standard auditing practices and auditing and assurance standards as Council recommendations, which may be prescribed by government after review by the National Financial Reporting Authority. - Specific requirements for audit of insurance companies are prescribed in Insurance Act and further elaborated under the IRDA Act and Guideline on Corporate Governance for Insurance Companies, 2009. - Actuarial profession: - India has approximately 569 registered actuaries, 231 Associate Actuaries and 7,409 actuarial students as at March 31, 2023. - Institute of Actuaries of India (IAI) is a statutory body established under The Actuaries Act, 2006, for regulation and development of the actuarial profession. - IAI affairs are managed by a Council consisting of 12 elected members and 3 people nominated by Central Government; currently, two government nominees are from Department of Financial Services and one from the IRDAI. - The IAI curriculum and examinations are said to be comparable to those found in the United Kingdom and other developed markets. - The IAI has professional conduct standards; it has recognized a shortage of actuaries and is taking steps to grow its membership. - Appointed actuaries: - All insurers must have appointed actuaries. - Procedure and requirements for appointment are set out in the IRDAI (Appointed Actuary) Regulations, 2022 and include approval of the Appointed Actuary by IRDAI. ### Efficient financial markets and regulatory environment - Capital markets: - In December 2023, India’s capital market was the world’s fifth largest with a market capitalization of US$4.3 trillion. - Market growth driven by general economic growth and capital inflows. - Market affected by the COVID 19 pandemic but recovered significantly since 2021. - Main stock exchange: Bombay Stock Exchange (Mumbai), trading a wide range of equity and debt securities. - Bond market: - well-developed, comprised of government (federal and state) and corporate securities, - includes long-term and very long-term (e.g., 40 year) bonds. - India’s insurance companies are major market participants and the biggest purchasers of government securities after India’s commercial banks. - SEBI: - principal regulator of securities law in India, - powers and functions include registration of intermediaries, imposition of penalties for contravention, appellate tribunal requirements, and rulemaking powers to achieve SEBI Act objectives, - certain provisions of the Companies Act are administered by SEBI in relation to issue and transfer of securities, share capital and debenture, and non-payment of dividends by listed companies, - SEBI is a well-respected member of International Organization of Securities Commissions and a permanent member of its governing Board. *Source: 1indea2025002-print-pdf - 52. India’s inflation rate is volatile but has not shown as significant increases as many other countries globally.* ### 71. India does not presently have a policyholder protection fund. Development of a fund for ### India: Insurance sector supervision and IAIS ICP assessment (excerpt) ### Policyholder protection and recent funds - "India does not presently have a policyholder protection fund." - "Development of a fund for the life sector was publicly announced several years ago but has not yet come to fruition." - "In 2022, the government established a Motor Vehicles Accident Fund, which is used for providing compensation in case of hit-and-run accidents and treatment for accident victims." ### Market structure and size - "The government debt market is well developed (35 percent of GDP)." - "The corporate bond market is growing but remains small (16 percent of GDP) and it is dominated by private placements and well-rated financial sector issuers." ### Summary of observance of IAIS Insurance Core Principles (key findings) - ICP 1: There is "a need to clarify and strengthen the stated objectives of insurance supervision in primary legislation, and to extend the powers of the supervisor to allow it to supervise LIC and other state-owned insurers." - ICP 2: "The operational independence and accountability of IRDAI should be strengthened." - ICP 3: "IRDAI obtains information from, and shares information with, relevant supervisors and authorities subject to appropriate confidentiality, purpose and use requirements." - ICP 4: "Appropriate licensing requirements are in place for entities engaged in insurance business." - ICP 5: "IRDAI requires Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer to be and remain suitable to fulfil their respective roles." - ICP 6: "Changes of Control and Portfolio Transfers are appropriately assessed." - ICP 7: Corporate governance shortcomings: - Governance requirements "do not clearly separate the roles and responsibilities between the board, senior management, and control functions." - "The requirements allow the board of directors to be chaired by an executive director i.e. the CEO of an insurer." - Mandatory subcommittees could have "a majority executive members" and "there are also no requirements to ensure the independence of the board of directors." - "The IRDAI also has limited powers over the board appointments of state-owned insurers." - "The IRDAI’s supervision approach is mainly compliance based and limited assessments are done on the effectiveness of the governance structures of insurer." - "As in the case with many of the other ICPs there are also no requirements in place for insurance groups." - ICP 8: "The roles and responsibilities for the head of a control function and the control function itself ... should be clearly articulated." Detailed Actuary requirements exist. - ICP 9: "The existing supervisory framework is compliance based rather than risk based." "It is expected that this may be in place by the end of 2025." - ICP 10: IRDAI has many powers, "however, LIC is not subject to some of the most important legislative provisions" including Sections 34A, 34B, 34C, 52A, 34F and the ability to apply for full or partial liquidation. Similarly, "IRDAI does not have authority to apply for full or partial liquidation of the state-owned general insurers." - ICP 12: Gaps on exit and resolution: - "There is no legal framework for voluntary exit from the market (i.e, run-off)," - "the Insurance Act requirements for involuntary liquidation of insurers does not appear to apply to state-owned insurers." - "The requirements for insurers to engage in possible resolution scenarios and put in place procedures for use during resolution are absent," - "There are no specific criteria requiring authorities to initiate resolution of an insurer or deal with resolution when an insurer is a member of an insurance group." - ICP 13: "At present and considering the current market dynamics all the requirements of the ICP appear to be adequately addressed." - ICP 14: "The valuation requirements do not provide a consistent approach in all areas. In addition, assets and liabilities are not valued on an economic basis for regulatory purpose." - ICP 15: Investment regime: - "Detailed investment limitations and requirements are prescribed." - "Investment requirements related to minimum investments in infrastructure and the housing sector, should be reviewed for potential conflict with the objective of policyholder protection." - "The rules-based requirements may inhibit innovation in investment strategies and may restrain insurers from holding assets most appropriate for meeting their financial objectives." - ICP 16: "As the current regulatory capital regime is not a coherent total balance sheet approach, the Enterprise Risk Management requirements need enhancement ... IRDAI plans on addressing many of these weaknesses through its transition to a new risk-based capital framework." - ICP 17: "The current capital regime contains some risk-based elements but is not a coherent total balance sheet approach, nor is it appropriately calibrated. The implementation of the planned risk-based capital regime will be important." - ICP 18: "The supervisor sets and enforces requirements for the conduct of insurance intermediaries, in order that they conduct business in a professional and transparent manner." - ICP 19: Conduct of business: - "The supervision of IRDAI’s extensive conduct of business requirements should involve a greater range of supervisory tools ..." - "IRDAI should make more information available to the public on conduct of business including cross-sectoral metrics on the handling of complaints such as a comparison of complaint ratios for retail lines of business." - ICP 20: "A comprehensive set of granular information are publicly disclosed by either the IRDAI, the IIB or the insurers." - ICP 21: "Requirements for countering fraud in insurance appear to be strong." - ICP 22: "Requirements for countering money laundering and combating the financing of terrorism appear to be strong." - ICP 23: "There is a lack of comprehensive legal requirements, supervisory mandates and powers and the resulting lack of a supervisory approach over insurance groups." ### Key recommendations to improve observance of ICPs (selected) - ICP 1: - "Amend the primary legislation ... to clarify and consolidate the objectives of the IRDAI and their priority." - "Recognizing the objective of financial stability in IRDAI’s primary legislation and moving the objective of policyholder protection from the preamble ... to its main body." - "Review ... to ensure that IRDAI has adequate powers to supervise LIC and other state-owned insurers." - ICP 2: - "Explore options to improve IRDAI’s independence, and accountability." - Options include: "Repealing or revising Section 18(2) and Section 19 of the IRDA Act, 1999;" and "Instituting a strategic and operational planning process resulting in a publicly available, periodic, strategic and operational plan to complement IRDAI’s Annual Report." - ICP 7: "Review their corporate governance regulations to ensure a clear separation between the role and the functions of the board ... and extend ... to also cover insurance groups." - ICP 8: - "Extend its requirements to also cover insurance groups." - "Transition to a systematic risk-based approach to assess the effectiveness of the control functions." - "Develop more detailed guidance ... on the roles and responsibilities of the head of the control functions (excluding the Appointed Actuary)." - ICP 9: "Continue with the development and implementation of the new risk-based supervisory framework as expeditiously as possible." - ICP 10: "Consider expanding its preventative and corrective powers to include all insurers in the market, including LIC and other state-owned insurers." - ICP 12: Recommended revisions include: - "Confirm the claims priority of policyholders over other creditors in the event of an involuntary liquidation;" - "Establish a legal framework for voluntary exit of insurers from the market;" - "Require insurers to engage in the review of resolution scenarios and put procedures in place for use during resolution;" - "Set specific criteria for the initiation of insurer wind-up and for the application of resolution powers when an insurer belongs to a group as per ICP12.12;" - "Ensure that all insurers are subject to similar liquidation and resolution requirements." - ICP 13: "Develop dedicated liquidity criteria relating to reinsurance arrangements" and "develop processes to assess the supervision of reinsurers where reinsurance arrangements are placed across border." - ICP 14: "As part of its transition to RBC, the IRDAI review its accounting standards ... If IFRS 9 and 17 do not become part of Indian Accounting Standards, the IRDAI should then ensure that the regulatory basis for the valuation of assets and liabilities is aligned with IFRS 9 and 17 to an appropriate extent." - ICP 15: "Reconsider the investment limitations prescribed and consider moving towards creating investment buckets with maximum limits." "Extend its investment requirements to also include requirements for insurance groups." "The government of India and IRDAI should continuously review the requirements on minimum investments in infrastructure and the housing sector ..." - ICP 16: "Develop and implement recovery planning requirements for insurers." "Develop and implement a full set of ORSA requirements." "Develop regulatory and supervisory requirements aligned to ICP 16 at insurance group level." - ICP 17: "Proceed with the development and implementation of their proposed risk-based capital standard as expeditiously as possible." "Develop a ladder of intervention." "Establish capital requirements for insurance groups." - ICP 18: "Consider requiring greater intermediary disclosure on fees and commissions to customers before an insurance contract is entered into" for intermediaries representing more than one insurer. - ICP 19: "Increase the range of supervisory tools ... (targeted examinations, thematic reviews, and the use of mystery shopping)." "Supplement the information ... by providing cross-sectoral metrics on the handling of complaints ..." - ICP 20: "Reconsider their public disclosure requirements with the implementation of their risk-based capital regime and their risk-based supervisory approach." - ICP 23: "Develop a comprehensive set of legal powers to identify all insurance groups ... determine the manner in which an insurance group will be scoped, who the holding company (head) of an insurance group will be, and what information will be required on the insurance group ..." - ICP 24: "Consider redesigning the reporting structure for quantitative and qualitative information ... once it transitions to its risk-based capital regime." "Consider, on at least a quarterly basis, the range of macroprudential risks facing the insurance sector." - ICP 25: "Establish processes and arrangements for supervisory cooperation with relevant foreign supervisors as required by the ICP for a group-wide supervisor." ### Authorities’ responses (select excerpts) - "The Corporate Governance Regulations 2024, which came into effect on April 1, 2024, mandate that only Independent Directors chair critical committees such as the Audit Committee, Risk Management Committee, Nomination and Remuneration Committee, and the Policyholder Protection Grievance Redressal & Claims Monitoring Committee, and the requirement that the Chairman of the Board not be a member of the Audit Committee, represent a substantial strengthening of governance and internal control requirements." - Authorities note: "It may not be justifiable to discount their impact solely because the assessment was conducted before their introduction." *Excerpt from IMF FSAP assessment text.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1indea2025002-print-pdf.pdf_