S&P BICRA puts Indian banks in ‘Group 5’ with Italy, Spain

Ratings agency Standard & Poor’s (S&P), in its Banking Industry Country Risk Assessment (BICRA) for India, has classified the nation’s banking sector under 'Group 5', along with countries such as Italy, Spain, Ireland, the UAE and South Africa. The S&P BICRA categorises banking systems based on a nation’s economic health and industry risk criteria. The S&P BICRA rates banking systems globally, on a scale of ‘1’ to ‘10’, wherein group ‘1’ represents the lowest-risk banking systems and group ‘10’ the highest.

Noting that the "low-income" Indian economy and the government's limited fiscal flexibility constrain the country's economic resilience, S&P, on Wednesday, in its ‘BICRA: India’ report, however, said the mediumterm outlook for growth remains healthy, which "provide sound development opportunities for Indian banks". "We classify the banking sector of India in group '5' under our Banking Industry Country Risk Assessment (BICRA). The other countries in group '5' are Spain, Ireland, Italy, Panama, Bermuda, Poland, Peru, Qatar, South Africa and the UAE. The anchor for banks operating only in India is 'bbb-'," an S&P Global Ratings release said.

"The medium-term outlook for India's growth remains healthy due to good demographics, public and foreign direct investments, private consumption, and reforms such as the removal of barriers to domestic trade through GST," it said. Assessing the risk of rising economic imbalances for banks as "low", the report, however, drew attention to the massive non-performing assets (NPAs), or bad loans, in the Indian banking system that have crossed the staggering level of Rs 8.5 lakh crore. "Banks' asset quality is weak and has been deteriorating in the past four years, accentuated by historically weak foreclosure laws," S&P said. "In terms of industry risk, the banking system's good franchise, extensive branch networks, and large domestic savings support a granular and stable deposit base. Nevertheless, directed lending and the dominance of governmentowned banks continue to create some market distortion," it said. "The government's twin steps of establishing a new bankruptcy process to shorten the time for resolving insolvency and improving the ability of public sector banks to take haircuts via higher capital infusions could alleviate asset quality weaknesses, if executed well," it added. S&P-owned CRISIL has said that Indian banks will need to take a "haircut" of up to 60 per cent on their bad loans to resolve the issue of accumulated NPAs, which is holding-up higher economic growth. CRISIL said that tepid investment growth and the high level of NPAs are the two uncertain factors clouding the outlook on India achieving a GDP growth rate of over seven per cent in the next fiscal. “Banks will need to take a haircut of up to 60 per cent to resolve the issue of NPAs," Crisil Chief Analytical Officer Pavan Aggarwal said last week. "The top 50 NPA accounts constitute 50% of all bad loans of banks in the country and account for Rs 4,25,000 crore of NPAs," he added.

Haircut IMF assessment

In a report published last week, the International Monetary Fund (IMF) cautioned that the high volume of NPAs and the slow pace of mending corporate balance sheets were holding back investment and growth in India. The IMF's Financial System Stability Assessment for India said that overall, "India's key banks appear resilient, but the system is subject to considerable vulnerabilities". "Stress tests show that... a group of public sector banks are highly vulnerable to further declines in asset quality and higher provisioning needs," it added.