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Indian banks retain high-risk profile: S&P

Special Correspondent

Consolidation in PSBs needed, should improve cost structures

MUMBAI: The Indian banking sector retains a high-risk profile by global standards, although its outlook is stable, stated a report jointly published by Standard & Poor's Ratings Services and its Indian subsidiary, Crisil.

"Although", it stated, "the effectiveness of the Securitisation Act and Corporate Debt Restructuring mechanism have yet to be fully tested, these initiatives have improved the recovery of non-performing assets".

However, Indian banks are warned that embarking aggressively on initiatives without adequately enhancing risk-manage- ment systems could negatively impact their asset quality and profitability levels going forward. Indian banks will also need to improve cost structures to be on a par with global banking standards.

According to Standard & Poor's, the key challenges in the Indian banking systems are: The need for banking sector consolidation, particularly the public sector banks; improvements to basic risk-management systems in view of strong growth experienced by banks in their lending portfolios; underlying profitability affected by lower treasury profits amid hardening interest rates; the development of sources of non-interest income to support core interest income.

Although the Indian banking sector's key fundamentals, such as credit quality, pre-provisioning profitability and capitalisation are stronger than those of the Chinese banking sector, the credit ratings on leading Chinese banks are higher. "The ratings differential reflects the readiness of the Chinese Government to provide substantial resources through capital injections and the sale of bank's non-performing assets to government-owned asset management companies. These factors boost the standing of the Chinese banks".

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