S038;P raises banks146; outlook to stable

The Indian banking system has got a shot-in-the-arm. Standard 038; Poor8217;s Ratings Services has revised the outlook for the Indian banking system to 8216;stable8217; from 8216;negative8217; despite the industry risks in the country remaining high compared to other developed banking markets. 8220;Key watershed structural reforms in India so far have improved the health of the banking sector8217;s asset quality, profitability, and capital adequacy,8221; the rating agency said.

Bank stocks rose after S038;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. 8220;The industry still faces a number of key challenges,8221; said Adrian Chee, credit analyst at Standard 038; Poor8217;s. 8220;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,8221; 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.