Differing with the downgrade accorded by Moody's, leading ratings company Standard & Poor's (S&P) 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 move by S&P, bigger among the two, could create confusion among those who still look for directions from rating companies. 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.
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).
In the 'Group 6' score on India's economic imbalance was "intermediate risk" which has now been upgraded to "low risk". S&P, however, noted that India's economic resilience is constrained by its weak economic structure. 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 analyst Geeta Chugh and Deepali Seth said in the BICRA report. Other countries in BICRA 'Group 5' are China, Portugal, Thailand and Turkey.
"There is no need for anybody to give a knee-jerk reaction either ways," said KR Kamath, CMD, Punjab National Bank. "The economy is slowing down, which could result in higher bad loans. But it is not a systemic risk. Our prudential norms are conservative to take care of any systemic eventuality. To that extent Indian banks are resilient."
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