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Indian Banking System: Strongly Placed But Weaknesses Cannot Be Wished Away

The Indian banking sector benefits from a supportive institutional and regulatory environment and a healthy and stable financial profile. Although growth 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 today by Standard & Poor's Ratings Services titled "Indian Banking System: Strongly Placed But Weaknesses Cannot Be Wished Away."

"For the past four years, India's economy expanded at an average of 8.6% per year and Standard & Poor's expects this rate to be close to 7.5% in the medium term," said Standard & Poor's credit analyst, Ritesh Maheshwari. "The country's business environment benefits from higher consumption and private investment demand, due to a growing middle class and favorable demographics.

Additionally, India has strengthened its regulatory environment and banking reforms have gradually tightened operational, prudential, and accounting standards, putting them mostly in line with international benchmarks."

"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," said Mr. 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% of the system's assets. Risk management is still largely a work in progress, although significant improvements occurred in the past decade. 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.

"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," Mr. Maheshwari noted.

(This is the press release of Standard & Poor's)

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