Asian banks face cyclical risks: S&P

Global rating agency Standard & Poor's (S&P) said banking systems in India and other Asian countries faced medium-to-high economic and industry risks, unexpected shocks, and "the inevitable" future cyclical slowdown.

In its Banking Industry Country Risk Assessment (BICRA), S&P listed persistently high oil prices, rising interest rates and asset repricing among the key risks facing the country and other Asian banking systems.

It said the domestic banking sector had a moderately high-risk profile by global standards. Recent banking reforms have tightened operational, prudential, and accounting standards.

The Securitization Act and the corporate-debt restructuring mechanism aided the recovery of NPLs and have also improved the banks' ability in limiting future non-performing loans (NPLs).

Fragmented industry structure and hurdles in improvement of manpower and infrastructure productivity remain key weaknesses that hinder the sector's ability to leverage on economic growth to sustain improvements in its risk profile, said the report which placed the country in Group six in its rankings of banking systems from Group one (strongest) to Group ten (weakest). China is placed in Group 7.

"The situation in Asia reflects the improved financial profiles of banks across the region," said S&P credit analyst Ritesh Maheshwari.

Nevertheless, Asian banking systems continue to face medium-to-high economic and industry risks, unexpected shocks, and the inevitable future cyclical slowdown, Maheshwari noted.

Despite reaping the benefits from having strong economic activities, regulatory improvements, and more robust banking systems, risks remain, S&P said.

"An economic slowdown would be the litmus test for the banks' credit-risk-management systems, though it should be noted that banking systems will face the potential challenges from a position of strength," said analyst Ping Chew.