IMF Cautions of Systemic Risks in NBFC Sector

The International Monetary Fund (IMF) has raised concerns about potential financial instability in India due to the concentrated exposure of Non-Banking Financial Companies (NBFCs) to the power and infrastructure sector.

- TDG NETWORK

The report highlights that NBFCs are deeply interconnected with banks, corporate bond markets, and mutual funds, which could amplify systemic stress if vulnerabilities emerge.

The IMF report specifically warns about the high exposure of NBFCs to the power sector, which continues to face structural challenges.

Concentrated lending to this sector increases the risk of financial instability, as any distress in power and infrastructure projects could trigger broader stress across banks, bond markets, and mutual funds.

Furthermore, the co-lending model, where banks partner with NBFCs to extend credit to priority sectors, further intertwines financial institutions, increasing systemic risk.

The IMF suggests closer monitoring of NBFCs' lending patterns and improved risk management frameworks to prevent financial disruptions.