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Informist, Monday, Nov. 4, 2024

 

NEW DELHI – The International Monetary Fund has suggested the Reserve Bank of India increase its workforce of the financial stability unit to ease the workload on its staff. This, the IMF said, would allow the central bank staff to better address the multilateral body's recommendations as part of a technical assistance report which evaluated the RBI's stress test model framework.

 

The IMF set up a technical assistance mission in April 2023 at the request of the RBI for the IMF to review and evaluate the central bank's stress test model suite. The report was submitted in September 2023 but was made public on Friday.

 

The report found that the RBI's stress test model suite was well-developed and robust. "...it is commendable that all required data can "flow freely" between the departments that require access to it," the IMF said in the report. The systemic risk analysis of the RBI is also robust as it encompasses a wide range of risks and institutions, including credit, market, interest rate, liquidity, and counterparty risks for derivatives, the report said. 

 

The main recommendations by the IMF were regarding credit risk, market risk, and macro-financial scenario design. The IMF suggested that the RBI revises the credit risk model component of the scenario-based bank solvency risk model to ensure its consistent integration with the modelling of default flows, loss given default, non-performing loan formation, and loan loss provisioning. 

 

The IMF also recommended that the central bank "integrate a market risk component, in particular concerning interest rate risk related to bank security holdings, into the scenario-based solvency stress test model suite". The RBI should also refine the interest rate risk module to better capture the underlying drivers of bank interest expense and income, alongside the spillover effects from default risk for bank interest income, the IMF said. 

 

The IMF team suggested that most recommendations ideally be addressed by 2025. "Addressing them before the beginning of 2025 will be beneficial because a new accounting regime will be instated in India in 2025 and will imply newly arising tasks and analytical development needs," the IMF said.  End

 

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

 

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