Indian banks are reasonably well placed compared with their Asian peers, says a study by international rating agency Standard & Poor''s (S&P). It places India''s banking sector in Group 6 of its banking industry risk assessment parameter, on par with China and Thailand, but lower than Malaysia (Group 4) and Singapore and Hong Kong (Group 2).

But the rating agency also points out that Indian banks have three main weaknesses:

• The sector is fragmented
• Risk management is underdeveloped
  
• A high proportion of unseasoned loans

The report has been written by Ritesh Maheshwari, S&P director and team leader for financial institutions rating in Asia.

Maheshwari wants Indian banks to come together and make hay while the sun shines and advises an urgent consolidation in the Indian banking sector, citing the example of Malaysia, where a government-driven programme merged 50 domestic banks into 10 anchor banking groups in 1999, after the Asian crisis of 1997. He says that Indian banks are going through a good phase, and should not wait for a crisis to consolidate.

The report points out that 53 domestic banks in India account for about 93 per cent of banking assets, while the top 10 banks have 66 per cent (as at March 31, 2006). The remaining 27 per cent of market is shared between 43 banks.

India''s 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 delivery allowing national banks to enter the strongholds of regional banks, the latter have come under threat and their financial profile will eventually weaken.

The other area of worry, the report says, is risk management. "Indian systems have progressed but, with new risks emerging, banks have to raise their standards. There is a lot of work to be done. Decisions during a downturn are difficult - so it''s better to be cautious in good times," Maheshwari advises. He says that despite significant improvements in the past decade, risk management is still a "work in progress for most Asian systems".

With strong credit growth and weak risk management systems, especially in smaller banks, there is high potential for an understatement of problem assets. As of March 31, 2007, Standard & Poor''s estimates that at least 40 per cent of all loans are less than two years old. This raises concerns that when seasoning occurs, a significant amount of new non-performing assets (NPAs) could emerge.

also see : General reports on Banks & Financial Institutions
Other reports by S&P