Risky biz: S&P puts desi banks in Group 5

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 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 Centre’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 said banks 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.