The state must redefine its role in the financial sector and reduce its footprint: The World Bank’s India report

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The 2024 FSAP states that the state must redefine its role in the financial sector and reduce its footprint to increase efficiency and mobilize private capital. Further, exemptions from prudential norms for state-owned NBFCs (non-banking finance companies) should be abolished

The IMF-WB team, which conducted an assessment under the FSAP, 2024, found that total financial sector assets reached 187 percent of GDP, with non-bank financial institutions (NBFIs) and market financing growing at a much faster pace than banks, accounting for 44 percent of financial sector assets in 2024 (compared to 35 percent in 2017).

The IMF-WB team noted that account ownership is high and access to credit, insurance and pensions has improved, supported by public digital infrastructure and government programs. However, account usage remains low compared to peers.

Role of institutions

The team found that state-owned financial institutions (SOFIs), including public sector banks, development financial institutions, regional rural banks, state-owned non-bank financial companies (NBFCs) and public insurers, play an important, albeit declining, role.

In addition to SOFI interventions, public credit support programs such as priority sector lending (PSL) also influence credit allocation. Stress tests show that credit institutions are broadly resilient to macro-financial shocks, despite some weak tails.

The IMF-WB team suggested that achieving India’s 2047 vision of becoming a $30 trillion economy will require further modernization of the financial sector, including comprehensive reforms to boost private capital mobilization.

As systemic risk evolves, reflecting increased diversification and interconnectedness of the financial sector and emerging risks, the IMF-WB emphasized that it is essential to continue to strengthen surveillance and further deploy macroprudential tools.

The team noted that the largest NBFCs have significant exposure to the energy sector.

They warned that stress tests indicate that the problems in the large NBFCs could spill over to the NBFCs’ lenders (banks and mutual funds) and the corporate bond markets.

Therefore, they suggested applying borrower-based measures and introducing debt service to income (DSTI) limits in banks and NBFCs, which would increase the effectiveness of the policy. Countercyclical capital buffers (CCyBs) could now be built up for banks.

The report’s authors emphasized that clarity on the primacy of the regulator’s safety and soundness mandate (and the investor protection mandate for securities regulators) would help manage potential conflicts of interest arising from development mandates.

They noted that the government has control over the senior management and boards of the regulators, while the Ministry of Finance is also the appellate authority for challenged RBI supervisory decisions.

“Regulatory authorities lack powers regarding corporate governance in SOFIs, while governance and internal control requirements of regulated entities need to be strengthened.

“On emerging challenges, including conglomerate supervision, cybersecurity risks and climate-related financial risks, efforts should continue to better coordinate regulators and expand the scope of regulatory and supervisory frameworks,” the authors said.

Given the importance of NBFI (non-banking financial institutions) and market financing, the IMF-WB team suggested that RBI could include corporate bonds, subject to haircuts, as eligible collateral for its crisis facilities. Such inclusion would also support the development of the corporate bond market.

They warned that local climate risks, prolonged shocks to agriculture and a challenging transition to a low-carbon economy could increase financial sector vulnerabilities, requiring detailed data and adaptive measures to mitigate systemic impacts.

Published on November 7, 2025