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Informist, Thursday, Feb. 27, 2025

MUMBAI – Though growth in unsecured personal credit has slowed down, there are signs of higher credit risks and increased lending by non-banking finance companies which need "continued" monitoring, according to the International Monetary Fund's report on India released late Thursday.

The report noted that while growth in unsecured personal lending by banks slowed to 12.6% in November, from 24.5% in the financial year 2022-23 (Apr-Mar), unsecured lending by non-banking finance companies remained robust at over 30.0% as of September. "Concentrated lending exposures among some large NBFCs could constitute a pocket of vulnerability," the authors said.

According to the report, non-bank lenders have expanded their footprint in the system and now account for 43% of total assets, up from 34% in 2017. The growing interconnectedness across financial institutions makes systemwide risk monitoring essential, as bank funding accounted for over 40% of non-bank lender borrowing in 2023-24, with additional financing coming through mutual funds. "Improving data collection and sharing, alongside risk assessment toolkits, would help promptly identify any emerging vulnerabilities among a diverse set of institutions," it said.

The Fund suggested that ensuring full compliance among select non-bank lenders with existing liquidity coverage ratio requirements and establishing more tailored guidance on liquidity requirement indicators to suit the diverse range of non-bank entities would strengthen resilience.

While household debt remains manageable at 43% of GDP, delinquencies have risen a little, particularly among small loans, it noted in the report. "Ensuring that financial institutions maintain strong lending standards and risk management is essential for sustainable credit growth," the authors said. "Broadening the use of targeted macroprudential measures, such as applying debt-service-to-income limits, to all household loans would enhance policy effectiveness."

As per the stress tests of the Financial System Stability Assessment, banks and non-bank lenders have demonstrated resilience to macroeconomic stress. However, according to the report, some banks, especially in the public sector, may need to build more capital to continue providing moderate credit in adverse scenarios. The Fund also noted some weakness among select non-bank lenders and urban co-operative banks, but they account for a small section of the country's financial system.

"Ensuring full compliance among selected NBFCs with existing liquidity coverage ratio requirements and establishing more tailored guidance on liquidity requirement indicators to suit the diverse range of NBFCs would also strengthen resilience," the report said.

Broad financial stability metrics appear healthy, and banks' gross non-performing loans ratio fell to a multi-year low of 2.6% in September, it noted. Capital buffers have remained adequate, with capital adequacy ratios in privately owned banks generally stronger than in public-sector banks. Liquidity coverage ratios remain comfortably above the regulatory minimum.

As per the report, financial sector supervision has improved and efforts to strengthen it should continue. "Key areas include enforcing Pillar 2 capital add-ons and finalizing IFRS9 adoption--including the expected credit loss framework--which would enhance loan classification and loss provisioning," it said.

The Fund said the authorities must continue to address long-standing challenges related to the government's role in the financial system. "While it is reasonable for regulators to pursue multiple policy objectives, financial stability should be clearly prioritized in relevant legislation," it said.

On India's laws to combat money laundering and terror financing, the report noted that the Financial Action Task Force had found some shortcomingss. "The authorities should address key shortcomings, including by establishing clear obligations for reporting entities for domestic politically exposed persons, improving targeted financial sanctions for terrorism financing, and enhancing AML/CFT supervision of high-risk non-bank and non-financial businesses and professions," it said.  End

Reported by Kshipra Petkar

Edited by Rajeev Pai

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