Stress within the Non Banking Finance Companies (NBFCs) may pose threat within the monetary system due to their overexposure to energy and infrastructure sector and interconnectedness with different markets, mentioned IMF in a report.
The International Monetary Fund report titled “India Financial System Stability Assessment” discovered that 63% of the facility sector loans have been from the three largest Infrastructure Financing Companies, a sort of an NBFC in fiscal 2024. This elevated from 55% in 2019-20. Moreover, 56% of their lending was financed by market devices and solely relaxation by financial institution borrowings in second quarter of fiscal 2024. The dependence on financial institution borrowings for financing their lending nonetheless elevated since fiscal 2019. State-owned NBFCs like IREDA are at a better threat, the worldwide establishment discovered.

Besides, spillover of NBFC stress, the IMF additionally studied banks’resilience ifa stagflation have been to happen, a state of affairs when progress slows and inflation soars. In the stress check, IMF discovered that within the occasion of a stagflation, public sector banks (PSBs) may have difficulties sustaining a capital adequacy ratio (CAR)of barely 9%. CAR is the ratio of capital to riskweighted property, used to measure the financial institution’s capacity to take in losses. RBI mandates a 12% and 9% CAR for PSB and Scheduled industrial banks respectively. IMF mentioned that although the chance of stagflation had receded in 2024 there have been“geopolitical risks and monetary policy miscalibration of major central banks could result in an increase in interest rates,” which may gradual financial progress.
“Assuming zero growth to their loan portfolio, PSBs can maintain barely the 9% CAR in the recession scenarios. This means that PSBs should strengthen their capital base, including by retaining their earnings instead of paying dividends to the government as they have been doing in the past few years, to ensure they can support economic recovery in a potential future downturn. PSBs are relatively more vulnerable because they have lower initial CARs and are more sensitive to credit risk,” the report discovered.
The worldwide establishment additionally gave suggestions to mitigate the dangers. State-owned NBFCs ought to have the identical regulatory burden as non-public sector NBFCs to create a degree enjoying area, the report discovered. Further, it additionally underlined the significance of enhanced information sharing concerning to NBFC credit score and publicity. Apart from these, IMF really useful measures like prioritising monetary stability over growth motives of banks amongst others.
Published – March 04, 2025 11:23 pm IST