Indian Banks Can Withstand Systematic Stress: CRISIL

Mumbai - August 29, 2006

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CRISIL expects core profitability of the banking sector to remain stable despite the increase in banks' cost of funds. The banking sector has had a largely stable interest spread, between 2.6 and 3.2 per cent, for more than ten years, as banks have successfully passed on increased borrowing costs to their customers. This has happened even when interest rates increased between 1994 and 1996.

"After a decade of improvement, asset quality in India's banking sector is superior to that of other leading Asian economies including China, Malaysia and Indonesia" says Krishnan Sitaraman, Head, Financial Sector Ratings, CRISIL. Gross non-performing assets (NPAs) declined to around 3.5 per cent of advances as on March 31, 2006, from 19.5 per cent as on March 31, 1995 aided by write-offs, recoveries, restructuring, and better health of corporate borrowers. A large retail component has aided portfolio diversification. Even in CRISIL's stress scenario simulation, weak assets (NPAs plus potentially delinquent assets) for the banking system would remain at manageable levels of 8.7 per cent of total assets.

Finally, India's banking sector benefits from stronger capitalisation. The aggregate net worth of scheduled commercial banks has improved sharply from the mid-1990s, increasing to Rs. 1,417 billion as on March 31, 2005, from Rs. 215 billion as on March 31, 1994. CRISIL estimates that if the new capital adequacy framework as proposed by Reserve Bank of India is implemented, capital adequacy for the system would still be comfortable at over 10 per cent, as compared to a regulatory minimum requirement of 9 per cent.

Concluded.

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