Banking sector set to grow further: Report

NEW DELHI: Growth in the country's banking sector is likely to grow for the next several years, with rising economic activities and young population but certain weaknesses in the system need to be addressed, says a Standard & Poor's report.

The growth will be fuelled by rising investment by domestic and foreign corporates and increasing consumer expenditure, the report 'Indian Banking System: Strongly Placed but Weaknesses cannot be Wished Away' said.

The credit portfolio in the banking sector for 2005 to 2007 fiscal, expanded by about 30 per cent per year, driven by consumer and corporate credit. Consumer credit represents more than one-fourth of the system's credit portfolio.

On regulations, the report said, "the regulatory environment in Singapore, Hong Kong, and to an extent in Malaysia, is strong, while in India and Thailand it is adequate."

On financial profile, the report said gross non-performing assets have declined largely due to improved recovery and write-offs in the past 3-4 years.

"This trend is likely to sustain and perhaps even improve as the proportion of healthier retail assets increases and the performance of corporate sector becomes healthier in line with favourable economic conditions," it added.

"The banking sector has experienced a considerable improvement in credit quality in the past five years. The overall improvement in the past three to four years was supported by good economic prospects and healthy earnings and represents a sustainable trend," S&P credit analyst Ritesh Maheshwari said in a statement.

Despite all these positive attributes, the report said, the Indian banking system remains fragmented with 53 domestic banks accounting for about 93 per cent assets. As on March 31, 2006, the top 10 banks accounted for 66 per cent of the assets, the remaining being shared between 43 banks.

The report warned that the financial profile will start weakening once the niche banks start permeating the strongholds of regional banks.

Advocating more consolidation in the sector, the report said about three-fourths of the banking system's assets are in the hands of 29 public sector banks and a meaningful consolidation is not possible until this segment is included in the process.

In Malaysia, the report stated, more than 50 domestic financial institutions have been merged into 9 anchor banking groups. "The clock is ticking for other systems, especially Indonesia, Taiwan and India," it cautioned.

It also said risk management is still largely a work in progress for most Asian systems, despite improvements in the past decade.

With strong credit growth and weak risk management systems, especially in smaller banks, there is high potential for an understatement of problem assets, the report stated.

"These issues will not disappear and, in some cases, will worsen if a well-thought-out action plan is not undertaken soon," it warned.