There146;re still weaknesses in fragmented banking sector: S038;P

Althou-gh the growth in Indian banking is expected to continue for at least the next several years...

Althou-gh the growth in Indian banking is expected to continue for at least the next several years, there are still weaknesses that need to be addressed, according to a report published by Standard 038; Poor8217;s Ratings.

8220;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,8221; said Standard 038; Poor8217;s credit analyst Ritesh Maheshwari.

Despite the benefits of scale to the banking business, especially with the increasing role of marketing and technology-based systems, the banking sector in India is highly fragmented, with 53 domestic banks accounting for about 93 per cent of the system8217;s assets. Risk management is still largely a work in progress, although significant improvements occurred in the past decade, it said.

8220;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,8221; S038;P said.

8220;India is in an enviable position. Nevertheless, the existing strengths should not stop the banking sector from acknowledging and acting on its weaknesses. These issues will not disappear and, in some cases, will worsen if a well-thought-out action plan is not undertaken soon. Increasing the pace of consolidation and providing the sector with an efficient risk management system, while closely monitoring the potential for increased problematic assets, should form the basis of such a strategy,8221; Maheshwari noted.

Considering that the top 10 banks combined account for 66 per cent of the system as at March 31, 2006, the remaining 27 per cent market is shared between 43 banks. The banking business benefits from scale, especially with the increasing role of marketing and technology based systems. Niche banks can thrive as long as their niches are sustainable. With technology-based distribution and superior customer deliverable allowing national banks to permeate the strongholds of regional banks, the latter8217;s franchise comes under threat and their financial profile will eventually start weakening.

S038;P report

8226; 53 domestic banks account for about 93 of the system8217;s assets

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8226; Strong credit growth and weak risk management systems could lead to understatement of problem assets

8226; Meaningful consolidation not possible without including PSU banks in the process

8226; Banks need efficient risk management systems