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India's Banking System Outlook Revised to 'Stable' from 'Negative'

Standard & Poor's (S&P) Ratings Services on 1st September 2003, has revised the outlook for the Indian banking system to 'Stable' from 'Negative,' although it feels that the industry risks in country remain high relative to other developed banking markets.

Key watershed structural reforms in India so far have improved the health of the banking sector's asset quality, profitability, and capital adequacy. The reforms recently introduced include the Securitization Act, 2002; the establishment of a pilot asset reconstruction company (ARC) to auction nonperforming assets (NPA); initiatives on improving recoveries from NPAs; the coming change in the basis of recognition of nonperforming loans (NPL) to three months (90 days); and the information technology upgrade of the banking industry, hence raising transparency and efficiency.

"The industry still faces a number of key challenges," said Adrian Chee, credit analyst at Standard & Poor's. "One is the overall capitalization 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," 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.

"The ultimate impact of the changes, however, will be reflective of the degree of effective enforcement by the regulators," Mr. Chee said.

The asset quality of India's scheduled commercial banks, as denoted by its regulatory gross NPA to loans (gross NPA ratio; on a six-month basis), has been improving in the past six years to around 9% for the fiscal year ended March 2003, from 15.7% in March 1997.

NOTE: 1. An outlook indicates the possible direction in which a rating may move over the next 2-3 years. A negative outlook means that the rating could be lowered, while a stable outlook means that the rating is unlikely to change.

2. S&P has assigned ‘BB’ to Indian bank for long-term borrowing and ‘B’ for short-term borrowing.

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