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S&P differs with Moody's, upgrades Indian banks!

Last updated on: November 10, 2011 20:03 IST

S&P differs with Moody's, upgrades Indian banks!

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Differing with the downgrade accorded by Moody's, leading ratings agency Standard & Poor's has upgraded the Indian banking sector saying its domestic regulations are in line with international standards.

"In our view, banking regulations in India are in line with international standards and the regulator (RBI) has a moderately successful track record," S&P said while upgrading the risk profile (BICRA) a notch higher to 'Group 5'.

The latest BICRA (Banking Industry Country Risk Assessments) of S&P comes a day after US-based Moody's changed the outlook for the sector to negative from stable, a move which evoked sharp criticism from Indian government and bankers.

The new economic risk score of 'Group 5' by S&P reflects that India has "high risk" in "economic resilience," "low risk" in "economic imbalances," and "high risk" in "credit risk in the economy," S&P said.

In the 'Group 6' score on India's economic imbalance was "intermediate risk" which has now been upgraded to "low risk".

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Photographs: Reuters
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S&P, however, noted that India's economic resilience is constrained by its weak economic structure. "We note that a large and persistent fiscal deficit limits the government's ability to stimulate growth through fiscal policies," it said.

It said the Indian banking system has level of "stable, core customer deposit", which limit dependence on external borrowing.

"We consider governance standards as generally adequate, though disclosures are somewhat inadequate," S&P analysts Geeta Chugh and Deepali Seth said in the BICRA report.

Other countries in BICRA 'Group 5' are China, Portugal, Thailand and Turkey.

A BICRA analysis covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. It is rated on a scale of 1 to 10, ranging from the lowest-risk banking systems (Group 1) to the highest-risk (Group 10).

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Photographs: Reuters
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S&P, which had in September downgraded standalone ratings of State Bank of India, said high credit risks in the Indian banking sector reflects that the country has a weak payment culture and legal system that often result in low recoveries and delayed settlement of foreclosures.

"Nevertheless, we consider the lending and underwriting standards to be moderately conservative, and the sector concentrations as well as the currency risk exposures low," it said.

It further said, while the loan growth in India has been high, banks have a limited share of high-risk lending and a negligible presence of complex and innovative products.

"Banks have a track record of stable profits, but returns are lower than Indian corporates' though," it said.

S&P also classified Indian government as "highly supportive," which reflects "our expectation that the government is likely to provide timely financial support to the banking system, if needed."

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On Wednesday, Moody's downgrade of the banking sector could make overseas borrowings by banks costlier.

FinMin, Moody's to discuss India's sovereign rating on Monday

Credit ratings agency Moody's, which lowered the outlook for Indian banking system, will hold consultations with finance ministry officials next week as part of the exercise to review the country's sovereign rating.

"We are meeting Moody's on Monday (November 14) to discuss India's sovereign credit rating," a senior finance ministry official told PTI.

The meeting is being held at a time when the Indian economy is passing through a rough patch. As per the Reserve Bank of India (RBI), the growth rate during the current fiscal is expected to moderate to 7.6 per cent from 8.5 per cent last year.

The officials are likely to talk about the steps the government has been taking to reduce the fiscal deficit, reform direct and indirect taxation system and recapitalise the banking sector.

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The economy has been braving high inflation and the Centre's fiscal deficit may exceed budget estimate of 4.6 per cent in view of poor tax collection and low realisation from sale of government equity in state-owned companies.

Moody's has assigned Baa3, the lowest investment grading rating, to India.

The rating agency on Wednesday downgraded the outlook for the Indian banking system to "negative" from "stable" saying that economic slowdown would impact asset quality, capitalisation and profitability.

However, differing with the downgrade accorded by Ratings are significant as they help the country and other entities to borrow funds globally at competitive rates.


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