In a report on ?Banking System Outlook: India? Moody?s has said that there is a scope for consolidation in the relatively crowded and fragmented banking system which is likely increase as competition intensifies.
?In our view, successful consolidation would result in an efficient system less vulnerable to shocks in the economy with positive rating implications. Neverthe less, consolidation in India has so far been slow, presenting challenges with regard to the rationalisation of branches and staff,? said Moody?s in its report. Some concerns over an overheating economy have prompted RBI to raise rates and take other precautionary measures, which have to a certain degree slowed down the high growth rates in recent months.
The surge in retail loans diversifies the banks? loan portfolio, traditionally dominated by industry credits.
?However we note that these loans are as yet untested in a negative credit cycle. We consider that full credit cycle test of the new loans amid unfavourable economic conditions could be a decisive rating driver for India banks.The deliquency rates for unsecured retail loans appear to be on the rise based on the prelimnary full year FY 2007 results of some banks,? said the report.
According to Moody?s, the Indian banks still relatively undiversified earnings geared towards interest income as well as sizeable portfolios of fixed income securities that bring about elevated interest rate risk.
The other weakness and challenges of the Indian banks include a rigid and inefficient labour force which hampers the competitiveness of the government owned banks.
Also the state owned banks are facing intensified competition from technological advanced private sector banks. On the positive factors for the banking sector, Moody said there is strong liquidity across the system on the back of stringent prudential norms, as well as an improved credit risk profile with a declining level of non-performing loans.
