Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

India: Selected Issues

International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2016
  • ShareShare
Information about Asia and the Pacific Asia y el Pacífico
Show Summary Details

Macroprudential Policies in India1

India has employed a wide range of macroprudential policies, targeting the build-up of risks related to cyclical fluctuations in the provision of credit; the interdependence across institutions; and cross-border spillovers. Our analysis shows that, in conjunction with monetary policy, countercyclical policies in the past were effective in reducing credit growth to targeted sectors, but did not arrest the rise in broader corporate sector vulnerabilities more recently.

1. Over the years, the Indian authorities have taken on a multifaceted approach to contain the potential build-up of financial vulnerabilities. The range of applied macroprudential tools have included countercyclical, cross-sectional and cross-border measures to moderate excess credit growth and contain potential spillover of risks across financial institutions and with markets. The measures have been mostly applied to banks, in view of the latter’s critical importance for domestic financial stability (in the aggregate, banks account for about ⅔ of assets and 80 percent of loans in the financial system; see Table 1). Non-banking financial companies (NBFCs) have been targeted directly only to a very limited extent—via limits on the loan-to-value (LTV) ratios that NBFCs can apply to loans secured against gold jewelry.2 However, macroprudential measures have addressed directly the risk of potential spillovers from NBFCs to the banking system.

Table 1.India: Financial Sector Lending1/
(in billions of INR)(in percent of GDP)
Scheduled commercial banks46,86953,89561,23266,97253.
o/w: public sector banks35,61840,71145,98149,28340.340.840.539.3
o/w: SBI group10,46612,48113,90614,80911.812.512.311.8
o/w: nationalized banks25,15228,23032,07534,47428.528.328.327.5
o/w: private sector banks8,86510,53812,21314,33410.010.510.811.4
o/w: foreign banks2,3862,6463,0383,3552.
Regional rural banks1,1641,3591,5891,8481.
Non-Bank Financial Companies7,2348,5009,84411,7848.
o/w: deposit-taking institutions8419191,3741,6011.
o/w: non-deposit-taking institutions6,3927,5818,47110,1837.
Cooperative Institutions6,2946,6886.35.9
o/w: Urban cooperative banks (UCBs)1,8101,9971.81.8
o/w: Scheduled UCBs8409390.80.8
o/w: Unscheduled UCBs9701,0571.00.9
o/w: Rural cooperative institutions3,5814,4834,6914.14.54.1
o/w: Primary Agricultural Credit Societies (PACS)9121,3941,301*
o/w: District Cooperative Central Banks (DCCBs)1,5721,8402,0271.81.81.8
o/w: State Cooperative Banks (StCBs)7769331,0310.90.90.9
o/w: Primary Cooperative Agriculture and Rural Development Banks (PCARDB)1261301290.10.10.1
o/w: State Cooperative Agriculture and Rural Development Banks (SCARDB)1941872040.20.20.2
Source: Reserve Bank of India (RBI); and IMF staff estimates.

Includes outstanding loans & advances working capital, and total overdues.

Source: Reserve Bank of India (RBI); and IMF staff estimates.

Includes outstanding loans & advances working capital, and total overdues.

2. Countercyclical measures have been largely capital-based and have targeted specific sectors subject to strong credit procyclicality. Time-varying risk weights and dynamic provisioning norms on standard assets were applied extensively during the strong economic expansion preceding the global financial crisis (2004 to 2008). They targeted specific sectors deemed to be subject to excessively high credit growth, including commercial real estate (CRE), non-banking financial companies (NBFC), housing, retail loans and capital markets. An LTV cap—differentiated by loan size, and property value and location—was also introduced in November 2010 to dampen potential housing loan-related risks. In addition, a range of policies to constrain interconnectedness among institutions and linkages to markets have set limits on cross-institutional funding and capital holdings, and on banks’ reliance on external funding.

3. In conjunction with concurrent monetary policy steps, the countercyclical policies were effective in dampening credit to the targeted sectors. Between end-2004 and 2008, sector-specific risk weights and provisioning requirements were raised step-wise in tandem with monetary tightening that was meant to curb inflation and aggregate demand more broadly (Figure 1). The growth of credit to the targeted sectors, particularly to the CRE and housing sectors, slowed considerably. The annual change in banks’ advances to the CRE sector, for example, turned negative in FY2009/10 from close to 140 percent at its peak in FY2004/05. The countercyclical measures were unwound, jointly with monetary policy easing, in October 2008 to mitigate the economic downturn in the aftermath of the global financial crisis.

Figure 1.Countercyclical Macroprudential Measures and Sectoral Loan Growth

Sources: Reserve Bank of India; and IMF staff estimates.

4. However, past countercyclical measures were less effective in averting a rise in broader corporate sector vulnerabilities. In recent years, public sector banks (PSBs) have experienced a sharp rise in stressed loans—in particular to the infrastructure, and iron and steel sectors—which now account for about 11 percent of banks’ outstanding loans (Figure 2, left panel).3 The deterioration in corporates’ debt-repayment capacity and PSBs’ asset quality was preceded by high domestic credit growth, with credit expanding by an average of 25 percent a year between FY2005/06 and FY2010/11. No countercyclical macroprudential measures (apart from monetary policy tightening) were applied to arrest broad credit growth. Traditional metrics—including changes in the credit-to-GDP ratio and the credit gap—point to “excessive” credit growth in the mid-2000s and possibly early-2012 (Figure 2, right panel). Exclusive application of credit gap metrics can certainly be punitive for structurally transforming economies with relatively low level of financial deepening, such as India, which require credit-driven development.4 However, it points to the need for expanding the set of systemic risk leading indicators to account both the need for more extensive availability of credit to support economic growth, and the potential for a build-up of vulnerabilities (e.g., a rise in corporate leverage).

Figure 2.Credit Indicators and Bank Asset Quality

Sources: Haver; Reserve Bank of India; and IMF staff estimates.

Notes: NBFCs denotes non-bank financial companies; CRE denotes commercial real estate.

5. The further development of a robust analytical framework for the early identification of risks and better data collection are key for effective countercyclical policy. The Reserve Bank of India (RBI) relies on varied tools for systemic risk monitoring—including macrofinancial stress tests; corporate and banking stability maps and indicators; and expected and unexpected shortfalls.5 In the context of Basel III, it has also expanded the criteria for the potential trigger of banks’ countercyclical buffers (CCCB) beyond the estimated credit gap, taking into account movements in gross nonperforming assets (NPA) (Reserve Bank of India, 2014). Further development of a robust framework of systemic risk analytics would benefit considerably the early identification of risks and inform macroprudential policies. This process is contingent on the build-up of sufficiently long and granular time-series and cross-sectional data. The recent initiative on systematic and extensive data collection via the envisaged Financial Data Management Center (FDMC) should address these challenges, particularly if data collection efforts are linked closely with the requirements of a potential systemic risk monitoring framework.6

6. The use of cross-sectional mechanisms to curb financial system interconnectedness and limit banks’ exposures to external funding has been extensive. Cross-sectional tools have included a broad array of restrictions on banks’: (i) aggregate interbank liabilities; (ii) access to the uncollateralized funding markets; (iii) investments in other financial institutions’ capital; (iv) exposures to NBFCs; (v) capital market exposures; (vi) investments in liquid schemes of debt-oriented mutual funds; (vii) foreign borrowing (except for export funding); and (viii) open FX positions, as well as banks’ ability to recognize immediately profits on securitization-related asset sales (thus limiting banks’ “originate and distribute” activities). Banks are also required to hold a large share (currently 21.5 percent) of their net demand and time liabilities in the form of liquid domestic sovereign securities as part of a statutory liquidity ratio (SLR) requirement. The use of cross-sectional mechanisms is warranted to avert shocks due to interlinkages with financial institutions and markets. However, if too extensive and restrictive, it can impair the capacity of financial sector to expand access to further sources of capital (domestic and foreign), lower funding costs, and intermediate funds toward productive economic activities, with a negative impact on long-term growth prospects.

7. India’s institutional arrangements for macroprudential policy rely on inter-agency coordination across various regulatory bodies. The FSDC, set up in 2010 in the aftermath of the global financial crisis, has an express mandate to safeguard financial stability and play a role in supervising macroprudential policies, while ensuring inter-regulatory coordination. Chaired by the Minister of Finance (MOF), it also comprises the heads of all domestic regulators, including the Reserve Bank of India (RBI), as well as top MOF policymakers.7 A sub-committee of the FSDC—chaired by the Governor of RBI and including separate technical groups on various issues—supports the Council and meets on an ongoing basis. The scope of the Council’s meetings is broad and covers various aspects of macroeconomic and financial policy, including financial inclusion and local markets development. Overall, the institutional framework is evolving, and it will be important to ensure that enhancements to policy coordination continue, and that the effectiveness of the institutional arrangements for implementing policy decisions continues to improve.


    International Monetary Fund2014Staff Guidance Note on Macroprudential Policy”.

    • Search Google Scholar
    • Export Citation

    Reserve Bank of India2015Financial Stability Report,” December 2015.

    • Search Google Scholar
    • Export Citation

    Reserve Bank of India2014Report of the Internal Working Group on Implementation of Countercyclical Capital Buffer,July 2014.

    • Search Google Scholar
    • Export Citation

    Reserve Bank of India2013Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans NBFCs in India,February 2013.

    • Search Google Scholar
    • Export Citation

Prepared by Silvia Iorgova.


NBFCs’ LTV ratios on lending against gold jewelry were most recently reduced to 60 percent in March 2012 to curb excess growth of gold-backed credit (see Reserve Bank of India, 2013).


Stressed loans include non-performing assets (NPAs) and restructured advances (i.e. loans that have been subject to stress and are thus more likely to turn into NPAs).


See chapter on the soundness and resilience of financial institutions (Chapter II) in the RBI’s latest financial stability report (RBI, 2015). Tools for measuring the potential build-up of countercyclical risks are also complemented by an assessment of cross-sectional risks across institutions via network analysis.


The FDMC is expected to function under the Financial Stability and Development Council (FSDC).


Apart from the RBI, the regulatory bodies that are part of FSDC include the Insurance Regulatory and Development Authority (IRDA), the Pension Fund Regulatory and Development Authority (PFRDA), and the Securities and Exchange Board of India (SEBI).

Other Resources Citing This Publication