S&P outlook for Indian banking mixed with optimism and weakness

Singapore, Sep 11 (UNI) The Standard&Poor's ratings services see a weaknesses in the Indian banking sector that needs to be addressed though it has benefit from supportive institutional and regulatory environment and a healthy and stable financial profile.

''For the past four years, India's economy expanded at an average of annual 8.6 per cent and Standard&Poor expects this rate to be close to 7.5 per cent in the medium term," said Standard&Poor credit analyst, Ritesh Maheshwari in a report.

The report titled ''Indian Banking System: Strongly Placed But Weaknesses Cannot Be Wished Away'' was published today.

''The country's business environment benefits from higher consumption and private investment demand, due to a growing middle class and favorable demographics,'' said Mr Maheshwari.

Additionally, India has strengthened its regulatory environment and banking reforms have gradually tightened operational, prudential, and accounting standards, putting them mostly in line with international benchmarks, he added.

According to Mr Maheswari, the banking sector has experienced a considerable improvement in credit quality in the past five years.

The overall improvement in the past three to four years was supported by good economic prospects and healthy earnings and represents a sustainable trend.

Despite the benefits of scale to the banking business, especially with the increasing role of marketing and technology based systems, the banking sector in India is highly fragmented, with 53 domestic banks accounting for about 93 per cent of the system's assets.

Risk management is still largely a work in progress, although significant improvements occurred in the past decade.

With strong credit growth and weak risk management systems, especially in smaller banks, the potential for an understatement of problem assets increases, he pointed out.

These weaknesses could undermine the potential growth of the Indian banking system, if a strategy to address them is not put in place.

''India is in at an enviable position. Nevertheless, the existing strengths should not stop the banking sector from acknowledging and acting on its weaknesses. These issues will not disappear and, in some cases, will worsen if a well-thought-out action plan is not undertaken soon,'' Mr Maheshwari said.

Increasing the pace of consolidation and providing the sector with an efficient risk management system, while closely monitoring the potential for increased problematic assets, should form the basis of such a strategy, Mr Maheshwari added.

UNI