The Gold Standard | S&P lowers Indian bank risk rating


  • We are reviewing our Banking Industry Country Risk Assessments after
  • having published our updated methodology.
  • We are revising our BICRA on India to group ’5′ from group ’6′.
  • We are also revising our economic risk score to ’5′ from ’6′, and
  • assigning an industry risk score of ’5′.

On Nov. 9, 2011, Standard & Poor’s Ratings Services revised its Banking
Industry Country Risk Assessment (BICRA) on India to group ’5′ from group ’6′.
It also revised the economic risk score to ’5′ from ’6′. At the same time,
Standard & Poor’s has assigned an industry risk score of ’5′.

We have reviewed the banking sector of India (unsolicited ratings,
BBB-/Stable/A-3) under our updated BICRA methodology. Our criteria define the
BICRA framework as one “designed to evaluate and compare global banking
systems.” A BICRA analysis for a country covers rated and unrated financial
institutions that take deposits, extend credit, or engage in both activities.
A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk
banking systems (group ’1′) to the highest-risk (group ’10′). Other countries
in BICRA group ’5′ are China, Portugal, Thailand, and Turkey.

Our economic risk score of ’5′ reflects our opinion that India has “high risk”
in “economic resilience,” “low risk” in “economic imbalances,” and “high risk”
in “credit risk in the economy,” as our criteria define those terms.

India’s economic resilience is constrained by its weak economic structure with
very low per capita GDP estimated at US$1,418 in 2011, though that is
partially offset by a well-diversified economy and sustained high economic
growth prospects. We note that a large and persistent fiscal deficit limits
the government’s ability to stimulate growth through fiscal policies.

Our assessment of low risk in economic imbalances is based on low increases in
domestic credit to the private sector as a percentage of GDP (1.48% in the
past four years), although we have noted sharp increases in real estate asset
prices in certain regions (annual national average of 2.7% for the past three
years). We consider India’s external position as resilient.

Our assessment of high credit risks reflects our view that: (1) private sector
credit/GDP (at 51%) is moderate in the context of low income levels, and (2)
India 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.

Our industry risk score of ’5′ for India reflects our “high risk” assessments
on the “institutional framework” and “competitive dynamics,” and “low risk”
regarding “systemwide funding.”

In our view, banking regulations in India are in line with international
standards and the regulator has a moderately successful track record. The
Reserve Bank of India (RBI) continually monitors the macroeconomic
environment. The RBI also has introduced countercyclical measures and
differentiated risk weights to moderate banks’ risk appetite. We consider
governance standards as generally adequate, though disclosures are somewhat

Our assessment of the competitive dynamics reflects: (1) the banks’ moderate
risk appetite; (2) moderately stable, although somewhat fragmented, industry;
and (3) market distortions, such as a high proportion of directed lending (40%
of total loans) and industry domination by government-owned banks. In our
view, while the loan growth 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.

India’s banking system has a high level of stable, core customer deposits,
which limit dependence on external borrowings. Its deposit base is supported
by the Indian banking system’s good franchise, extensive branch networks, and
large, yet growing, domestic savings. However, the banks have limited ability
to borrow from the domestic debt capital markets, which are active for high
investment grade debt but lacking in depth.

We classify the 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. In the past, the government had consistently
supported weaker commercial banks through measures such as extensive
recapitalization and merger of financially distressed banks with stronger
banks. We expect it to continue, given the role of banks in the economy, their
mandatory task to provide funding to priority sectors of the economy, and the
large political constituency that depositors form.

This is the source.

Some competition in the Credit Rating space is really good. So, Indian banking system risk, in the eyes of S&P, is the same as in China, Turkey, Portugal (??) and Thailand. Moody’s puts India worse than that of China’s.

It is really high time that there are credit rating agencies from other parts of the world. The monopoly of American credit rating agencies has to be broken here and now.

Friend Rajesh Sundaresan, ex-Asian banking analyst for Credit Suisse First Boston, suggested that Wikipedia should publish credit ratings – sovereign and corporate  – since most information is publicly available. Very sound idea.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.