S&P raises banks’ outlook to stable

The Indian banking system has got a shot-in-the-arm. Standard & Poor’s Ratings Services has revised the outlook for the Indian banking system to ‘stable’ from ‘negative’ despite the industry risks in the country remaining high compared to other developed banking markets. “Key watershed structural reforms in India so far have improved the health of the banking sector’s asset quality, profitability, and capital adequacy,” the rating agency said.

Bank stocks rose after S&P raised the outlook for the banking sector. ICICI Bank jumped 2.5 per cent to Rs 184.05 and Bank of India soared 6.8 per cent to Rs 57.20. SBI touched the 52-week level on Monday. The reforms recently introduced include the Securitisation Act, 2002, the establishment of a pilot asset reconstruction company (ARC) to auction non-performing assets (NPA), initiatives on improving recoveries from NPAs, the change in the basis of recognition of non-performing loans (NPL) to three months (90 days) and the information technology upgrade of the banking industry, hence raising transparency and efficiency. “The industry still faces a number of key challenges,” said Adrian Chee, credit analyst at Standard & Poor’s. “One is the overall capitalisation level of the banking industry, which could face some pressure going forward from higher demand for new credit and additional provisioning needs as it strives towards international standards of net NPA ratios,” he added.

Another challenge is for the industry to sustain the positive trend of improving asset quality, and with stronger powers of foreclosure, banks have to remain focused in their efforts to recover on their NPAs, yet keep a tight lid over any incremental NPAs.