IMF, WB to hold stress test for financial sector

Written by Sitanshu Swain | Mumbai | Updated: Jun 14 2011, 07:17am hrs
Multilateral lending agencies International Monetary Fund (IMF) and World Bank (WB) will this week conduct their first test of Indias financial sector under the IMFs Financial Sector Assessment Programme (FSAP).

A 15-member team consisting of senior professionals from IMF and WB will arrive in India on June 15 to conduct a preliminary assessment of the risks to the countrys financial sector stability.

In a bid to put an effective surveillance in place in the aftermath of the global financial crisis, G-20 countries had decided that each of the members would have to undergo a financial stability test every five years.

Sources in the finance ministry said the team would meet top officials in the ministry, Reserve Bank of India, Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority (Irda) and Pension Fund Regulatory and Development Authority (PFRDA).

However, the sources pointed out that the fact that the team had chosen to visit India before other countries indicated the country did not have any problem as far as its financial sector stability was concerned. The fact that India has is at the beginning of their schedule, indicates that it is seen as a much stable country, said a finance ministry official.

In this preliminary visit, the team will examine the existing practices and lacunae in the financial sector and recommend what more can be done to make it comparable with global standards. The team will come back in September for a final check and issue some kind of certificate for the country, apart from telling the government and regulators about the focus areas.

During its fortnight stay in the country, the team will spend a major part of the time with the RBI officials and have elaborate interactions on stress-testing. The team will just spend two or three days with other institutions, the sources said.

The team has already sent a detailed questionnaire to the institutions which it will meet. The finance ministry official explained that the country now had an elaborate system to keep a close watch on its financial stability. The formation of the Financial Stability and Development Council under finance minister Pranab Mukherjee, where all the regulators of the financial sector services are members, and RBIs biannual financial stability report were designed to meet this objective

The new global financial stability programme in the post-crisis period intends to reduce volatility in the system and ensure price stability. However, financial stability is more important than price stability as the later depends on external factors like commodity prices and cannot always be controlled. Financial stability contributes to the GDP growth in much greater way than price stability.