India Banks System Face Worsening Asset Quality, IMF Says

India’s financial system has been made vulnerable by a deterioration in bank assets and a lack of capital as the economy slowed, according to the International Monetary Fund.

“The main near-term risks to the financial system are a worsening of bank asset quality and renewed pressures on systemic liquidity,” the Washington-based lender said in a statement today. Stress tests have shown the risks are “manageable” for now, according to the IMF, which concluded its assessment of India’s financial stability in February 2012.

Increasing involvement of the state in the financial industry leaves the government exposed to losses at banks and is acting as a brake on economic growth, the IMF said. India’s economy will expand 6 percent this year, the body said in October, after gross domestic product rose 4.9 percent in 2012, the least since at least 2005.

The IMF urged Indian regulators to loosen a mandatory requirement for banks to hold government securities, saying that it would boost the flow of capital to other industries. India should also foster development of the local corporate bond market to broaden funding sources, according to the statement.

India remains committed to adopting international standards “in a phased manner and calibrated to local conditions,” the Reserve Bank of India said in a statement.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net;

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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