Plan to grant bank licences to companies poses risks: Standard & Poor's

Written by fe Bureau | Mumbai | Updated: Oct 29 2014, 07:50am hrs
The Reserve Bank of Indias plan to grant new banking licences to companies could increase risks in the banking sector given the chance that new entrants could be lax about loan standards, Standard & Poor's said in a report on Tuesday. The sector's stability or risk appetite could be hit if any of the new players relax their underwriting standards or undercut prices to gain market share, said S&P.

At the same time, the report said Indian banks large deposit base and ability to issue long-term senior bonds to fund infrastructure loans, and a buoyant capital market will continue to support their funding profiles.

In the Banking Industry Country Risk Assessment report on the Indian banking sector, the agency rated the risk factor in the sector as stable and presaged that competition could intensify marginally for low-risk assets amid high-risk and moderate growth.

In our opinion, India's banking sector is largely stable despite being fragmented. Except for banks in the top quartile, Indian banks are predominantly regional and cater to customers closer to their homes, S&P said.

S&P based its economic risk score for India on its assessment of economic resilience, economic imbalances, and credit risk in the economy.

The report also focussed on the emergence of the Corporate Debt Restructuring (CDR) system in India. According to the report, the rating agency expects the pace of creation of stressed assets to slow over the next two to four quarters.

However, any material improvement in asset quality will lag economic recovery, corporate deleveraging, decisive steps to alleviate problem of stressed sectors, and some respite from high interest rates.

We expect gross non-performing assets and security receipts to be 4.5% of total loans by the end of fiscal 2015, said S&P.

(With agency inputs)