New bank licenses plan poses risks to banking sector: S&P

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Leading global rating agency Standard & Poor's (S&P) has said that the Reserve Bank of India's (RBI) plan to grant new banking licenses to companies poses risks to the banking sector of Asia's third biggest economy as the new entrants may relax their credit standards to aggressively gain market share as competition intensifies in the banking industry.

"The sector's stability or risk appetite could be hit if any of the new players relax their underwriting standards or undercut prices to gain market share," S&P said in a note, the PTI reported.

However, the rating agency reckons that the overall risk in India's banking sector has decreased with the RBI choosing only two entities to foray into the banking sector. These include infrastructure player IDFC and micro-lender Bandhan that were in February, allowed to open shop, and given an 18-month period to begin banking operations.

"The immediate threat of a large number of new players entering the already competitive banking industry this year has subsided with the RBI granting banking licenses to just two entities," S&P added.

S&P sees the pace of stressed assets in the country's banking system to slow over the next two to four quarters with a significant improvement in asset quality contingent on economic recovery, reduction in interest rates, corporate de-leveraging and decisive measures to eliminate the problem of stressed sectors.

S&P said gross non-performing assets may rise to 4.5 per cent by the end of FY 2014-15, up from 4 per cent at the end of last fiscal.

Story first published: Wednesday, October 29, 2014, 23:00 [IST]
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