S&P puts Indian banks in ‘Group 5’ with Italy, Spain, UAE

Mumbai, Dec 27 (IANS) The Indian banking sector has been classified under 'Group 5' along with countries such as Italy, Spain, Ireland, the UAE and South Africa by rating agency Standard & Poor's (S&P) on the basis of their economy and industry risk criteria, the American analysts said on Wednesday.

Noting that the "low-income" Indian economy and the government's limited fiscal flexibility constrain the country's economic resilience, S&P in its "Banking Industry Country Risk Assessment: India", however, said the medium-term outlook for growth remains healthy, which "provide sound development opportunities for Indian banks".

"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 the UAE.

"The anchor for banks operating only in India is 'bbb-'," an S&P Global Ratings release said.

"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 through GST," it said.

Assessing the risk of rising economic imbalances for banks as "low", the report, however, drew attention to the massive non-performing assets (NPAs), or bad loans, in the Indian banking system that have crossed the staggering level of Rs 8.5 lakh crore.

"Banks' asset quality is weak and has been deteriorating in the past four years, accentuated by historically weak foreclosure laws," S&P said.

"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. Nevertheless, directed lending and the dominance of government-owned banks continue to create some market distortion," it said.

"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," it added.

S&P-owned rating agency Crisil has said banks will need to take a "haircut" of up to 60 per cent on their bad loans to resolve the issue of accumulated NPAS, which is holding up higher economic growth.

According to Crisil, tepid investment growth and the high level of NPAs are the two uncertain factors clouding the outlook on India achieving a Gross Domestic Product growth rate of over seven per cent in the next fiscal.

"Banks will need to take a haircut of up to 60 per cent to resolve the issue of NPA," Crisil Chief Analytical Officer Pavan Aggarwal said at an editors meet last week in New Delhi

"The top 50 NPA accounts constitute 50 per cent of all bad loans of banks in the country and account for Rs 4,25,000 crore of NPAs," he said.

In a report released in Washington last week, the International Monetary Fund (IMF) cautioned that the high volume of NPAs and the slow pace of mending corporate balance sheets are holding back investment and growth in India.

The IMF's Financial System Stability Assessment for India said that overall "India's key banks appear resilient, but the system is subject to considerable vulnerabilities".

"Stress tests show that... a group of public sector banks are highly vulnerable to further declines in asset quality and higher provisioning needs," it said.

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