Mumbai, Sept. 1: Standard & Poor’s (S&P) today gave Indian banks an upgrade, revising their outlook from negative to stable in an assessment perked up by better asset quality, buoyant profits and capital strength. The eulogies were, however, tempered with warnings about financial risks that the agency said remained high relative to other developed markets.
“Key watershed structural reforms in India have improved the health of the banking sector’s asset quality, profitability, and capital adequacy,” the agency pointed out.
Credit analyst at the agency Adrian Chee said the industry still faces a number of challenges, of which the most important is the overall capitalisation level. “That could face some pressure from higher demand for credit and additional provisioning as banks strive to meet international standards of net NPAs,” he added.
S&P said another challenge is for Indian banks to sustain the positive trend of improving asset quality. This assumes significance since the securitisation law has armed them with stronger powers of foreclosure so that they can recover their non-performing assets (NPAs) and keep a tight lid on fresh increases in bad loans.
The reforms that S&P highlighted were the Securitisation Act, 2002, the new asset reconstruction company that will auction non-performing assets, initiatives to improve loan recoveries, the planned change in recognition of non-performing loans to 90 days and the infotech-driven transparency in operations.
“The ultimate impact of the changes will be reflective of the degree of effective enforcement by regulators,” Chee said.
Back home, Credit Rating Information Services of India (Crisil) echoed S&P when it said public sector banks had sustained their improvement in core profitability in 2002-03, in addition to their impressive profitability.
The evaluation is driven by widening interest spreads, brought about by the decline in deposit costs that has been sharper than the fall in business yields.
Overall profitability growth, on the other hand, was largely due to high treasury income, which was fuelled by the steady decline in interest rates and the consequent profits on sale of investments.
While profits from the sale of investments have risen because of reasons that are extraneous to the banks’ core operations and, hence, not a true reflection of their operating performance, the improvement in their core profitability reflects an improvement in their operating performance, Crisil said.
The agency evaluated banks’ core profitability in terms of their net profitability margin (NPM).