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Informist, Wednesday, Nov. 26, 2025

 

MUMBAI – Even as Indian banks' non-performing assets continue to decline, an increase in new accumulation of gross NPAs in unsecured personal loans, particularly among private sector banks, warrants continued monitoring, the International Monetary Fund said in its country report titled 'India: 2025 Article IV Consultation'.

 

The credit growth of Indian banks is also expected to recover gradually as monetary and macroprudential policy easing takes effect. "While measures to lower risk weights on microfinance consumer loans and bank credit to NBFCs (non-bank finance companies) may enhance credit conditions, it is crucial that these risk weights accurately reflect the risk profiles of asset classes to ensure banks maintain adequate capital buffers and price risk appropriately," the report said. 

 

The IMF also said that the RBI's recent proposals to adopt an expected credit loss framework for provisioning and a Basel III standardised approach for credit risk are "welcome" moves. The RBI could also consider activating the countercyclical capital buffer, currently set at zero, once cyclical conditions improve. 

 

The RBI should also implement International Financial Reporting Standards-9, with prudential backstops and enforce bank-specific pillar-2 capital add-on charges, which are currently set at zero for all banks, the report said.   

 

India's public sector banks should continue to strengthen their capital base to ensure they can support economic recovery in a potential future downturn, the report said. Public sector banks' regulatory capital adequacy ratio, has been consistently lower than that of private banks and foreign banks, it said. Lower asset quality and accumulated provisions further weigh on the quality of PSBs' capital base. "The 2024 Financial Sector Assessment Program solvency stress test shows that while the overall banking sector appears resilient, PSBs are relatively more vulnerable, and their capital may be insufficient to sustain lending in severe adverse scenarios. Therefore, PSBs should strengthen their capital base, including by retaining a larger share of their earnings," the report said. 

 

NBFCs

According to the report, concentration risks are particularly high for state-owned infrastructure financing companies, which are heavily exposed to the potentially vulnerable power sector, including electricity distribution companies that have contributed to past financial distress. The RBI should align regulations for state-owned and private-sector-owned NBFCs, the report said. 

 

The RBI might contemplate enforcing tighter exposure limits on bank loans to state-owned NBFCs exempt from large exposure regulations to reduce possible negative impacts on the banking sector (such as applying increased risk weights). Considering the liquidity risk encountered by NBFCs due to their dependence on wholesale funding and inadequate liquidity buffers, the RBI ought to strengthen liquidity regulations and oversight for NBFCs while obtaining liquidity coverage ratio submissions and exploring additional measures to more accurately represent the risk profiles of NBFCs, the IMF said. 

 

As the nature of systemic liquidity risks evolves, the RBI should broaden policy options for providing systemic liquidity support and emergency liquidity assistance in a crisis, including expanding eligible collaterals beyond government securities with adequate risk controls. 

 

FINANCIAL INNOVATION

The government ought to encourage financial innovation, while tackling persistent problems related to state intervention and the public sector's presence in the financial system, the report said. Corporate bond issuances continue to focus on higher-rated bonds, reflecting the excessive risk aversion of domestic institutional investors and strict investment regulations. 

 

There is a need to create a framework for issuing covered bonds and securitisation, along with developing mechanisms for credit enhancement. This will help close the financing gap for smaller, lower-rated firms and high-return, high-risk ventures. 

 

Concerning state influence, the IMF appreciates the authorities' actions to decrease government ownership in public sector banks and urges them to hasten this reduction to under 75% for better resource allocation. Regulators' authority over state-owned banks and insurance firms should be enhanced, and their corporate governance must align with that of private financial entities, the IMF said.  End

 

Reported by Kabir Sharma

Edited by Deepshikha Bhardwaj

 

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