Though the growth in the Indian economy is expected to continue for at least the next several years backed by a strongly placed banking system, Standard & Poor?s Ratings Services cautioned that there were weaknesses in the banking sector that need to be addressed.

In a report titled ?Indian Banking System, Strongly Placed but Weaknesses Cannot Be Wished Away,? S&P?s said onsolidation in the industry, efficient risk management system and close monitoring of the potential for increased problematic assets, should form the basis of such a strategy for addressing the weaknesses.

?For the past four years, India’s economy expanded at an average of 8.6% per year and S&P?s expects this rate to be close to 7.5% in the medium term,? said S&P’s credit analyst, Ritesh Maheshwari.

?The banking sector has experienced a considerable improvement in credit quality in the past five years. The overall improvement in the past three to four years was supported by good economic prospects and healthy earnings and represents a sustainable trend,? said Maheshwari.

The credit rating major believes that with strong credit growth and weak risk management systems, especially in smaller banks, the potential for an understatement of problem assets increases. These weaknesses could undermine the potential growth of the Indian banking system, if a strategy to address them is not put in place.

Also despite the benefits of scale to the banking business, the banking sector in India is highly fragmented, with 53 domestic banks accounting for about 93% of the system’s assets (top 10 accounting for 66% as March 31, 2006). Maheshwari said ?These issues will not disappear and, in some cases, will worsen if a well-thought-out action plan is not undertaken. Increasing the pace of consolidation and providing the sector with an efficient management system, while closely monitoring the potential for increased problematic assets, should form the basis of such a strategy?.

S&P?s feels that the trend of declining gross non-performing assets of the banking industry is likely to be sustainable and perhaps even improve. It also believes that loan concentration, in general, has not been a risk issue for Indian banks.