SINGAPORE (S&P Global Ratings) Dec. 27--S&P Global Ratings Tuesday
published its "Banking Industry Country Risk Assessment: India."
"We classify the banking sector of India in group '5' under our Banking
Industry Country Risk Assessment (BICRA). The other countries in group '5' are
Spain, Ireland, Italy, Panama, Bermuda, Poland, Peru, Qatar, South Africa, and
United Arab Emirates," a statement of S & P said.
The anchor for banks operating only in
India is 'bbb-'.
"In our opinion, India's low-income economy and the government's limited fiscal
flexibility constrains its economic resilience. However, the medium-term
outlook for India's growth remains healthy due to good demographics, public
and foreign direct investments, private consumption, and reforms such as the
removal of barriers to domestic trade tied to the imposition of GST. These
factors provide sound development opportunities for Indian banks," the statement added.
S & P assesses the risk of rising economic imbalances as low. Nominal credit and
inflation-adjusted residential real estate prices have increased at a moderate
pace in the past few years. Banks' asset quality is weak and has been
deteriorating in the past four years, accentuated by historically weak
In terms of industry risk, the banking system's good franchise, extensive
branch networks, and large domestic savings support a granular and stable
deposit base. In our view, banking regulations are broadly in line with
international standards and the record of regulatory oversight has been
moderately successful. We expect efficient banks with higher profitability,
capitalization and focus on digital banking to gain market share over others.
Nevertheless, directed lending and the dominance of government-owned banks
continue to create some market distortion, in our view.
India's economic risk trend, as it affects the banking sector, is stable, in
our opinion. Although demonetization and teething problems related to GST
implementation have dampened growth in last few quarters, the economy is
forecast to grow robustly. The government's twin steps of establishing a new
bankruptcy process to shorten the time for resolving insolvency and improving
the ability of public sector banks to take haircuts via higher capital
infusions could alleviate asset quality weaknesses, if executed well.
"We view the trend for banking industry risk as stable. The Reserve Bank of
India is strengthening regulations and the supervision of banks and
non-banking finance companies. We expect private sector banks and top-tier
public sector banks with better franchises, profitability, and capitalization
to increase their market share. The increase in growth in India's nominal GDP,
along with a high savings rate, should offer efficient banks room to grow".