The Financial Express

Medium-term outlook for India's growth remains healthy : S & P

| Updated: December 27, 2017 19:10:08

Medium-term  outlook for India's growth remains healthy : S & P

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

foreclosure laws.


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".



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