MUMBAI: Indian banks are healthier than their Chinese counterparts, indicating that their efforts to restructure, notably through reducing non-performing loans (NPLs), are paying off, according to a report by rating agency Standard & Poor's.
But risk management, a traditional weakness at Indian banks, remains a challenge, warns the report on the country's top 20 banks, which account for 85 per cent of banking assets in India.
The report, jointly produced with Crisil, the rating agency's Indian affiliate, covers public sector banks such as State Bank of India, the largest, and private sector rivals ICICI and HDFC which, though smaller, have set the pace of change in banking services since liberalisation a decade ago.
Indian banks have reported healthy trading figures in the past three years, with balance sheet growth of between 20 and 22 per cent on the back of strong and sustained demand for consumer loans.
ICICL for example, says its mortgage book is expanding by one-third each year, including 10 per cent of total home loans coming from Indians living overseas.
Arun Panicker, credit analyst at Crisil in Mumbai, said Indian banks' credit risk-profile of loans books had improved "with a growing shift towards the retail sector".
But he cautioned banks against jumping into the many attractive opportunities for lending in an economy that grew 8.1 per cent in the three months to June.
"Banks that embark on expansion initiatives need to enhance their risk management systems adequately," Mr Panicker said.
S&R/Crisil notes that although Indian banks beat Chinese banks on barometers such as credit quality and profitability, "credit ratings of Chinese banks are higher, reflecting the readiness of the Chinese government to provide substantial resources through capital injections".
In contrast, India's finance ministry is encouraging the main Indian public sector banks to consolidate.
The Reserve Bank of India, the banking regulator, this year published a pathway for reform that allows modest foreign participation in consolidation ahead of 2009, when, it says, full mergers and acquisitions would be allowed.