IMF pushes for IFRS 9 adoption to improve credit risk management, says RBI report

In its report published by the Reserve Bank of India (RBI) on March 28, the IMF recommended stronger supervision of individual loans, collateral valuation, connected borrower groups, and related-party transactions.

The Indian Monetary Fund's (IMF) latest Financial System Stability Assessment (FSSA) report highlighted the need for Indian banks to adopt International Financial Reporting Standards (IFRS 9) to improve credit risk management.

In its report published by the Reserve Bank of India (RBI) on March 28, the IMF recommended stronger supervision of individual loans, collateral valuation, connected borrower groups, and related-party transactions.

The IMF acknowledged India’s systematic approach to regulating NBFCs, particularly through the introduction of a scale-based regulatory framework and the implementation of a bank-like Liquidity Coverage Ratio (LCR) for large NBFCs. However, it urged tighter supervision IFRS 9 adoption.

The FSSA, India’s first since 2017, highlighted the financial sector’s recovery from the distress of the 2010s and its ability to weather the COVID-19 pandemic, and said, India’s financial system is resilient amid rapid economic expansion and regulatory reforms.

The report said, the financial sector landscape in India has become more diverse and interconnected, particularly within the non-banking financial intermediary sector.

According to the IMF, both banks and non-banking financial companies (NBFCs) possess adequate aggregate capital to support moderate levels of lending, even in the face of severe macro-financial conditions.

The insurance sector remains strong and is expanding, with a significant presence in both life and general insurance due to improved regulations and digital innovations, it said.

The RBI further stated that India’s transition plans towards a risk-based approach reflect its commitment to aligning with global best practices and ensuring a resilient insurance sector.

The IMF, in its report, also flagged emerging risks such as cybersecurity threats, climate change, and system-wide contagion, emphasizing the need for continued vigilance.

While the financial stability risks from climate change are deemed manageable, the IMF advised enhancing data coverage with greater detail to better assess and monitor climate-related financial risks.

On the cybersecurity front, the report mentioned that Indian authorities have made significant progress in strengthening risk oversight, particularly for banks.

However, the IMF recommended expanding cybersecurity crisis simulations and stress tests to encompass cross-sectoral and market-wide events, which could further enhance the resilience of India’s financial system against cyber threats.