Financial stability around the world continues to improve, but rising corporate debt is a risk to growth, says the International Monetary Fund’s (IMF) latest Global Financial Stability Report.

The report says that emerging markets (EMs) are now better equipped to handle headwinds, even as it sounds a cautious note on rising corporate debt.

India’s debt, one of the highest among emerging markets, could worsen further in this 'environment of growing protectionism and risk premiums,' the report says, adding that the debt at risk could increase by as much 6.7 percentage point.

According to a Reserve Bank of India report, corporate debt in emerging markets, including India, has risen to 55 percent of the gross domestic product (GDP). A decade ago, this number was around 49 percent.

The report points out that nearly a fifth of the corporate debt is held by companies that are not making enough profits.

“Emerging markets should focus on strengthening the health of corporates and the banking system,” said Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF in a blog.

Indian banks continue to be under pressure as they struggle with stressed assets worth Rs 7 lakh crore. While the central bank is trying to tackle the situation with various resolution tools, nothing concrete has happened so far.

In case the growth momentum reverses in EMs - on back of sudden risks - debt held by stressed companies could rise by as much as USD 230 million, IMF said.

“In turn, banks in some countries would need to rebuild their buffers of capital and provisions. Those are the banks that are already experiencing a decline in asset quality after a long credit boom,” Adrian said.

According to IMF, one-third of the banking system needs to set aside its earnings of at least three years to provision for the current bad loans.

On the same line, the Reserve Bank of India last week asked the banks to put in place higher provisioning for bad assets and also emphasized on timely and transparent disclosures.

“To protect their economies, emerging market policy makers should improve corporate-restructuring mechanisms, monitor corporate vulnerabilities, and ensure banks maintain healthy buffers,” Adrian said.

The corporate debt warning aside, IMF is estimating good growth for India. The IMF is forecasting global growth at 3.5 percent in 2017 and 3.6 percent in 2018 as against the 3.1 percent uptick seen in 2016.

IMF continues to be fairly positive on India despite revising down its projections last year. “We believe that India is going to continue to grow at a really fast path. I think we have a 7.2 percent forecast for 2017,” IMF chief Christine Lagarde said.

Demonetisation has been remedied about 75 percent., the report said, adding that work on the Goods & Services Tax (GST) lends credence to the growth forecast.

“The rollout of services and goods tax, which is on schedule to enter into force on July 1, is an extremely important step that will create a true unified national market in India,” said Vitor Gaspar, Director, Fiscal Affairs Department, IMF.