Indian economy is facing challenges like deteriorating bank asset quality and resultant stress on the liquidity situation in the country, a report by International Monetary Fund (IMF) has said.
The report says, "The main near-term risks to the financial system are a worsening of bank asset quality and renewed pressures on systemic liquidity. However, stress tests did not reveal near-term stability concerns, suggesting the banking system would be resilient to a range of adverse shocks."
The report further points out that though India has been able to develop a stable financial system it still faces financial sector related risks.
The report also suggests that there is a need of better valuation and solvency issues in insurance sector, in the supervision of large corporates' conformity in processes like preparing financial reports, audits and accounts.
The report also said, "And while there may be some synergies, RBI's role as monetary authority, bank regulator, and Government debt manager may have led it to require banks to hold larger holdings of Government debt than might be needed on prudential grounds. Finally, using the banking system rather than Government programmes in meeting the needs of priority sectors (agriculture loans, small and micro credit, education loans, health insurances) and underserved areas may conflict with RBI's supervisory role,"
The report by IMF adds that the regulatory and supervision standards for banking industry, insurance sector and securities market followed in India is fully developed and in conformity to international standards.