New Delhi, Sept. 22 (PTI): Economic reforms, which brought about greater operational autonomy for public sector banks, focussed recovery, tightened capital adequacy, trimmed costs, improved technology and larger non-interest income have improved the health and outlook of Indian banking industry, Fitch Ratings said today.
In its special report ‘The Indian Banking System’, the global credit rating agency, however, warned that weakening development financial institutions, vulnerable non-banking finance companies and the inadequately supervised cooperative banks “pose risks” to the financial system.
“Economic reforms initiated by the government in the early nineties have consistently improved the health and outlook of the country’s financial sector,” the report said.
Reforms had led to greater operational autonomy for the public sector banks, entry of new participants in the banking, insurance and mutual funds, and creation of new institutions for trading, clearing and settlements, which, in turn, resulted in greater depths for domestic debt market and encouraged private participation in the derivatives and forex markets, it said.
The benign interest rates had helped the banks to up their profits from trading in government securities, Fitch said, adding that these gains were used for writing off large amounts of non-performing assets (NPAs).
It said the reported net NPAs had drastically improved but RBI’s new NPA classification from March 31, 2004, might double the net bad loans in the next year against 4.5 per cent in 2002-03. But “the industry is well placed to address such key issues,” the rating agency said.
It said with continued sluggishness in corporate credit demand and increased competition continuing to pressure net interest margins, the reduction in deposit rates had begun to have a positive effect on interest margins.