S&P disagrees with Moody's, upgrades the Indian banking sector

The banking sector is among the top sectors that have been watched in the time of crisis. With the Euro zone crisis getting worse, European banks are facing the heat now. The Indian banking sector is also in news, as the International rating agency Moody’s turned bearish, while S&P opined differently, and upgraded the sector.

On 9 November, 2011, Moody's downgraded the Indian banking sector from stable to negative, based on its expectations of the asset quality to deteriorate further. Liquidity in the system is getting tightened, and with an rising interest rate regime, the asset quality of the banks is expected to worsen in the next 12-18 months. This will lead the banks to increase the provisions, affecting their profitability. Last month, Moody’s Investors Service downgraded the State Bank of India’s (SBI) financial strength rating from C- to D+ on account of asset quality concerns and low Capital Adequacy Ratio (CAR).

A day later, on 10^th November, 2011, S&P upgraded the sector, as it felt that the country’s domestic regulations are in line with international standards. S&P’s Banking Industry Country Risk Assessment (BICRA) analysis covers institutions that take deposits, lend credit or are engaged in both activities. It rates these institutions on a scale of 1-10, where Group 1 is the lowest risk banking system while Group 10 represents the highest risk. S&P upgraded the banking rating to Group 5 from the earlier Group 6.

The agency also revised the economic scores to 5 from 6, as they pointed out that the Indian government is highly supportive, and expect the government to provide timely support to banks for their capital requirement. Indian banks have a high dependence on deposits and a limited ability to borrow from domestic capital markets.

The rating agency also said that India’s economic resilience is low due to low annual income per head and a high gap between the government's income and expenditure. It also added that the government's standards are generally adequate, though disclosures are somewhat inadequate.